<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2844 75-2665378
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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7400 E. TIERRA BUENA LANE
SCOTTSDALE, AZ 85260
(480) 609-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SAM L. LEOPOLD
CHIEF EXECUTIVE OFFICER
7400 E. TIERRA BUENA LANE
SCOTTSDALE, AZ 85260
(480) 609-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
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ROBERT S. KANT, ESQ. C. NEEL LEMON III, ESQ.
SCOTT K. WEISS, ESQ. J. HOLT FOSTER III, ESQ.
STEVEN G. FISHBACH, ESQ. THOMPSON & KNIGHT L.L.P.
O'CONNOR, CAVANAGH, ANDERSON 1700 PACIFIC AVENUE
KILLINGSWORTH & BESHEARS, P.A. SUITE 3300
ONE EAST CAMELBACK, SUITE 1100 DALLAS, TEXAS 75201
PHOENIX, ARIZONA 85012 (214) 969-1700
(602) 263-2400
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Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practical after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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(c)
under the Securities Act, check the following box and list the Securities Act
registration statement 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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common stock(2).................... 4,600,000 shares $10.5625 $48,587,500 $13,507.33
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of registration
fee pursuant to Rule 457(c).
(2) Includes an equivalent number of rights to purchase shares of Series A
Junior Participating Preferred Stock issuable upon certain conditions under
the Company's Shareholder Rights Plan. See "Description of
Securities -- Shareholder Rights Plan."
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY UNITED STATES FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES
USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM
UNTIL THE DOCUMENTATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR
OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THAT WOULD NOT BE PERMITTED OR LEGAL.
SUBJECT TO COMPLETION -- AUGUST 13, 1999
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PROSPECTUS
, 1999
[STYLING TECHNOLOGY CORPORATION LOGO]
4,000,000 SHARES OF COMMON STOCK
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THE COMPANY:
- We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon
distribution channels. Our products include hair care, skin and body
care, and nail care products, as well as salon appliances and sundries.
- Styling Technology Corporation
7400 E. Tierra Buena
Scottsdale, Arizona 85260
(480) 609-6000
- NASDAQ SYMBOL: STYL
THE OFFERING:
- - We are offering 4,000,000 shares.
- - The underwriters have an option to purchase an additional 600,000 shares from
us to cover over-allotments.
- - There is an existing trading market for our shares. The reported last sales
price on August 11, 1999 was $10.1875 per share.
- - We plan to use the proceeds from this offering to repay outstanding
indebtedness under our revolving credit facility. We will use the resulting
availability under our revolving credit facility for working capital and
general corporate purposes, including possible acquisitions.
- - Closing: , 1999
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Per Share Total
<S> <C> <C>
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Public offering price: $ $
Underwriting fees:
Proceeds to Company:
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This investment involves risk. See "Risk Factors," beginning on page 5.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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DONALDSON, LUFKIN & JENRETTE
ING BARINGS
U.S. BANCORP PIPER JAFFRAY
FIRST SECURITY VAN KASPER
DLJDIRECT INC.
FRIEDMAN BILLINGS RAMSEY
<PAGE> 3
[Set forth above are photographs of our principal products.]
TABLE OF CONTENTS
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Page
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Prospectus Summary................... 1
Risk Factors......................... 5
Forward-Looking Statements........... 12
Use of Proceeds...................... 13
Dividend Policy...................... 13
Capitalization....................... 14
Price Range of Common Stock.......... 15
Selected Consolidated Financial
Data............................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................. 29
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Page
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Management........................... 40
Certain Relationships and Related
Transactions....................... 48
Principal Stockholders............... 49
Description of Securities............ 51
Underwriting......................... 55
Legal Matters........................ 57
Experts.............................. 57
Where You Can Obtain Additional
Information........................ 57
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
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"ABBA," "ALPHA 9," "AQUATONIC," "BIOGENOL," "BODY DRENCH," "CLEAN + EASY,"
"COSMIC," "EUROPEAN TOUCH," "GENA," "KIZMIT," "MAIKO," "ONE TOUCH," "PRO
FINISH," "REVIVANAIL," "ROFFLER," "SRC," AND "SUNTOPIA" ARE OUR PRINCIPAL
TRADEMARKS. THIS PROSPECTUS ALSO REFERS TO OUR OTHER TRADEMARKS AS WELL AS
TRADEMARKS OF THIRD PARTIES.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. Except as otherwise specified, all information in this
prospectus assumes no exercise of the underwriters' over-allotment option.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" contain a discussion of some of the factors that
could contribute to those differences.
STYLING TECHNOLOGY CORPORATION
We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon distribution
channels. Our products include hair care, skin and body care, and nail care
products, as well as salon appliances and sundries. We believe we are the only
company that develops, produces, and markets products in each category of the
estimated $80 billion worldwide market for professional salon products and
services. We have well-recognized, long-lived brand names, a strong distribution
network, established marketing and salon industry education programs, and
significant production and sourcing capabilities. We plan to leverage our
well-established distribution channels by providing customers with an
increasingly comprehensive array of professional salon brands and products. We
also plan to take advantage of our consumer products marketing expertise and our
well-developed infrastructure to develop and acquire new product lines to sell
through additional consumer product distribution channels. We sell our products
in all 50 states, Canada, Australia, Europe, Latin America, and Asia.
We currently sell more than 500 products under 19 principal brand names.
The table below sets forth a description of our principal products, the brand
names under which the products are sold, and the percentage of net sales for
each product category for the 12 months ended June 30, 1999 on a pro forma basis
for companies acquired as if we acquired those companies at the beginning of
that period.
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PERCENTAGE OF
PRO FORMA
PRODUCT CATEGORY NET SALES PRODUCT DESCRIPTION BRAND NAMES
<S> <C> <C> <C>
Hair Care 45.7% Shampoo, conditioner, hair color, and ABBA,
styling and finishing aids AquaTonic,
Biogenol, Body
Drench,
Framesi, Gena,
Roffler
Skin and Body Care 23.8% Moisturizing lotion, indoor and outdoor Body Drench,
tanning products, personal care products, Clean + Easy,
paraffin waxes, thermo-therapy treatments, Gena, One
and hair removal systems and depilatory Touch, Suntopia
products
Nail Care 17.6% Natural nail care products, acrylic and Alpha 9,
fiberglass nail enhancement products, nail Cosmic,
treatments, nail polish, light-bonded nail European Touch,
systems, and manicure and pedicure Gena, Kizmit,
solutions and accessories Pro Finish,
Revivanail
Salon Appliances and 12.9% Hairdryers, curling irons, salon pedicure European Touch
Sundries spas, salon furniture, and salonwear II, Maiko, SRC
(capes/aprons)
</TABLE>
Our net sales and earnings before interest, taxes, depreciation, and
amortization, or EBITDA, have grown rapidly since our inception. Our net sales
increased from $38.1 million in 1997 to $90.4 million in 1998, a growth rate of
137%. Our EBITDA increased from $11.0 million in 1997 to $23.1 million in 1998,
a growth rate of 110%. We have also enjoyed high profitability, with 56.6% gross
margins and 25.6% EBITDA
1
<PAGE> 5
margins for fiscal 1998. Our net sales increased from $35.3 million during the
six months ended June 30, 1998 to $68.8 million during the six months ended June
30, 1999. This increase in net sales represents a 95% growth rate, including
internal net sales growth of approximately 17%. Our EBITDA, before
centralization and reengineering costs and one-time charges, increased from $9.6
million during the six months ended June 30, 1998 to $16.6 million during the
six months ended June 30, 1999. This increase in EBITDA represents a 73% growth
rate, including internal EBITDA growth of 19%. We attribute our rapid growth and
high profitability to our focus on integrating our acquired businesses,
improving margins within our existing product lines, developing new product
lines and product line extensions, and acquiring businesses and product lines
that complement our portfolio of products.
THE PROFESSIONAL SALON PRODUCTS MARKET
The professional salon products industry has grown significantly during the
last several years. According to industry sources, annual professional salon
industry revenue, which includes revenue from salon services and the sale of
salon products, is approximately $40 billion in the United States and $80
billion worldwide. 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. 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
although a number of larger companies exist in certain product categories.
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. We believe salons typically generate between
10% and 30% of their revenue from retail sales of professional salon products.
As 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 salon professionals prescribe these products and sell
them 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 prices and gross margins than mass-marketed beauty
products.
OUR COMPETITIVE STRENGTHS
We believe the following business strengths provide us with a competitive
advantage in the professional salon products market:
- We offer a variety of well-recognized, long-lived premium brands in
all professional salon product categories.
- Our breadth of product offerings distinguishes us as the only company
with product offerings across all salon product categories and enables
us to offer distributors and other customers a "one-stop shop" for
brand name professional salon products.
- Our strong distribution network enables us to sell our products into
highly fragmented distribution channels consisting of distributors,
beauty supply outlets, and salon chains in the United States and
internationally.
- Our experience gained from successfully acquiring and integrating 11
professional salon products businesses since our initial public
offering in November 1996 positions us to pursue additional
acquisitions.
- Our favorable operating margins result primarily from our purchasing
power; integrated sourcing and distribution capabilities; and
consolidated sales, marketing, and product development.
- Our management team has extensive experience in the consumer and salon
products industry, particularly in the areas of sales, marketing, and
operations.
2
<PAGE> 6
- We have centralized our operations and are implementing new
centralized management and information systems to enhance the
productivity of existing operations and future acquisitions.
OUR STRATEGY
Our objective is to be the leader in the professional salon products
industry. In order to achieve this objective, we are pursuing a strategy of
continued growth through internal business expansion and acquisitions. Key
elements of this strategy include the following:
INTERNAL GROWTH STRATEGY
We intend to increase revenue and improve margins within our existing
product lines and to develop new product lines. Elements of our internal growth
strategy include the following:
- leveraging our well-established distribution channels by providing
customers with an increasingly comprehensive array of products;
- selling directly to salon chains, which we believe are underserved by
distributors and other salon product companies;
- launching new, internally developed brands to leverage our strong
distribution network and leading industry position;
- introducing product line extensions under existing brands;
- introducing new generations of existing product lines with improved
formulations and packaging;
- implementing a new professional-only store marketing and distribution
program to service the growing number of stores operated by large
distributors that sell only to professional stylists;
- expanding distribution of existing products internationally; and
- enhancing the operational efficiencies of acquired businesses.
ACQUISITION STRATEGY
We maintain a disciplined approach to acquisitions and evaluate each
potential acquisition based on the following goals:
- acquiring leading brand names that complement our other brands and
command strong customer loyalty;
- acquiring companies and product lines that diversify and strengthen
our portfolio of brands;
- acquiring companies and product lines that strengthen our
relationships with domestic and international distributors; and
- expanding product offerings to include premium department store,
boutique, catalog, and e-commerce lines through the acquisition of
companies or brand names geared to these distribution channels.
Our future acquisitions increasingly will focus on companies that are
larger than those previously acquired and that enhance our position in the
professional salon products market or enable us to penetrate new consumer
product distribution channels.
OUR OFFICES
Our executive offices are located at 7400 E. Tierra Buena, Scottsdale,
Arizona 85260, and our telephone number is (480) 609-6000. All references to
"we," "our," "us," "Styling," or the "Company" refer to Styling Technology
Corporation and its subsidiaries. Our web site is located at
http://www.styl.com. Information contained on our web site does not constitute
part of this prospectus.
3
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following consolidated financial information should be read in
conjunction with our consolidated financial statements and the notes thereto
contained elsewhere in this prospectus.
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NOVEMBER 27, YEAR ENDED SIX MONTHS ENDED
1996 TO DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------------- -------------------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA AND OTHER
DATA:
Net sales............................. $ 1,083 $38,108 $90,373 $35,299 $68,770
Gross profit.......................... 512 21,352 51,151 19,807 38,913
Selling, general, and administrative
expenses........................... 737 12,201 32,715 11,909 25,775
Centralization and reengineering
costs(a)........................... -- -- 422 -- 1,363
Provision for cancelled
distributors(a).................... -- -- -- -- 5,067
Income (loss) from operations......... (225) 9,151 18,014 7,898 6,708
Interest (income) expense and other,
net................................ (2) 1,847 9,206 2,628 7,874
Income (loss) before extraordinary
item............................... (151) 4,207 5,173 5,270 (1,166)
Extraordinary item, net............... -- (1,377) (1,091) (1,091) (446)
Net income (loss)..................... (151) 2,830 4,082 1,913 (1,160)
Diluted earnings (loss):
Per share income (loss) before
extraordinary item(a)............ $ (0.04) $ 1.02 $ 1.20 $ 0.69 $ (0.18)
Per share extraordinary item,
net.............................. -- (0.33) (0.25) (0.25) (0.11)
Per share net income (loss)........ (0.04) 0.69 0.95 0.44 (0.29)
Weighted average shares............ 3,770 4,113 4,313 4,356 4,068
</TABLE>
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As of June 30, 1999
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ACTUAL As Adjusted(b)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 43,994 $ 43,194
Total assets.............................................. 239,125 239,125
Long-term debt and other, less current portion............ 155,652 118,149
Total stockholders' equity................................ 32,653 70,156
</TABLE>
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(a) The centralization and reengineering costs had a $0.06 impact on diluted
earnings per share during the year ended December 31, 1998, and a $0.20
impact on diluted earnings per share during the six months ended June 30,
1999, net of tax. During the second quarter of 1999, we also incurred a
provision for cancelled distributors of approximately $5.1 million, before
taxes, or $0.76 per diluted share, net of tax, related to the write-down of
certain tanning distributor receivables in connection with our strategic
realignment to exclusive distribution. These per share amounts are not
defined by generally accepted accounting principles and should not be
considered as an alternative to earnings per share.
(b) The "As Adjusted" balance sheet data reflects the completion of this
offering assuming a public offering price of $10.1875 per share, and the
application of the net proceeds therefrom as of June 30, 1999.
4
<PAGE> 8
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider carefully the following risk factors, in addition to the other
information contained in this prospectus, before purchasing any of our common
stock.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. These statements relate to our future plans, objectives,
expectations, and intentions. These statements may be identified by the use of
words such as "believes," "plans," "expects," "may," "will," "should," "seeks,"
"pro forma," or "anticipates," and similar expressions. Our actual results could
differ materially from those discussed in these statements. Factors that could
contribute to these differences include those discussed below and elsewhere in
this prospectus.
RISKS RELATING TO OUR BUSINESS
A VARIETY OF FACTORS COULD ADVERSELY AFFECT OUR OPERATING RESULTS
A wide variety of factors could adversely impact our net sales and
operating results. Many of these factors are beyond our control. These factors
include the following:
- our ability to identify trends in the professional salon products
industry;
- our ability to create and introduce new products on a timely basis that
take advantage of industry trends;
- the continued market acceptance of our products among salon professionals
and their clientele;
- our ability to arrange for timely production and delivery of our
products;
- the level and timing of orders placed by customers; and
- competition and competitive pressures on prices.
The success of our operations depends to an extent upon a number of factors
relating to discretionary consumer spending and continued demand for
professional salon products. 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. General social
trends and economic conditions could adversely affect consumer spending, which
would adversely affect our business, financial condition, and operating results.
WE FACE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
We completed four acquisitions in fiscal 1996, three acquisitions in fiscal
1997, and four acquisitions in fiscal 1998. Our ability to complete acquisitions
successfully will depend upon the availability of adequate cash reserves, our
ability to issue our common stock or other securities in acquisitions, and our
ability to raise additional cash through debt and equity financing. The amount
of securities that we may be required to issue and the terms on which we can
secure debt or equity financing will depend on our operating performance and
financial condition, the trading price of our common stock, and conditions in
the debt and equity markets. 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 full fiscal year.
In addition, we may issue shares of common stock in connection with future
acquisitions. The issuance of shares in acquisitions will result in the dilution
of the voting power of the currently outstanding shares and could have a
dilutive effect on earnings per share.
As a part of our acquisition strategy, we frequently engage in discussions
with various businesses respecting their potential acquisition. In connection
with these discussions, we and each potential acquired business exchange
confidential operational and financial information, conduct due diligence
inquiries, and
5
<PAGE> 9
consider the structure, terms, and conditions of the potential acquisition. In
certain cases, the prospective acquired business agrees not to discuss a
potential acquisition with any other party for a specific period of time, grants
us certain rights in the event the acquisition is not completed, and agrees to
take other actions designed to enhance the possibility of the acquisition.
Potential acquisition discussions frequently take place over a long period of
time, involve difficult business integration and other issues, and require
solutions for numerous family relationship, management succession, and related
matters. As a result of these and other factors, a number of potential
acquisitions that from time to time appear likely to occur do not result in
binding legal agreements and are not consummated.
Our acquisition agreements generally contain purchase price adjustments,
rights of set-off, and other remedies in the event that certain unforeseen
liabilities or issues arise in connection with an acquisition. These remedies,
however, may not be sufficient to compensate us in the event that any unforeseen
liabilities or other issues arise.
Our future acquisitions increasingly will focus on companies that are
larger than those previously acquired and that enhance our position in the
professional salon products market or enable us to penetrate new consumer
product distribution channels. Larger acquisitions may involve greater risks,
and operating in new consumer product distribution channels may result in our
pursuing businesses outside of our core experience.
WE MUST BE ABLE TO INTEGRATE OUR BUSINESS OPERATIONS
Integrating the management, operations, and facilities of acquired
businesses could involve unforeseen difficulties. These difficulties could have
a material adverse effect on our business, financial condition, and operating
results. We could encounter difficulties in
- integrating and managing effectively the operations of acquired
businesses with our operations;
- achieving our operating growth strategies with respect to acquired
businesses;
- obtaining increased revenue opportunities as a result of the anticipated
synergies created by expanded product offerings and additional
distribution channels; and
- reducing the overall selling, general, and administrative expenses
associated with acquired businesses.
Significant uncertainties accompany each business combination. If we
encounter difficulties in integrating an acquisition, we may not achieve the
operating efficiencies or otherwise realize cost savings. The inability to
achieve the anticipated cost savings could have a material adverse effect on our
business, financial condition, and operating results.
WE MUST EFFECTIVELY MANAGE OUR GROWTH
Our growth and expanding operations may place a significant strain on our
management, administrative, operational, and financial resources as well as
increased demands on our systems and controls. Our ability to manage our growth
will require us to
- integrate successfully the operations of acquired businesses with our
operations;
- enhance further our operational, financial, and management systems and
our marketing programs;
- motivate, manage, and retain our current employees; and
- identify, hire, and train additional employees.
The failure to manage effectively our growth could have a material adverse
effect on our business, financial condition, and operating results.
WE MUST RESPOND TO CONSUMER PREFERENCES
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. We
believe that our success depends, in part, on our continued ability to introduce
new and attractive products on a regular basis that anticipate and respond to
changing consumer demands and
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<PAGE> 10
preferences in a timely manner. New products introduced by us may not achieve
any significant degree of market acceptance. Any acceptance that is achieved may
not 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 our business, financial condition, and operating
results.
WE DEPEND ON OUR DISTRIBUTION CHANNELS TO SELL MANY OF OUR PRODUCTS
We sell many of our 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 in the future may consolidate, restructure, or realign their ownership or
affiliations. Some distributors and salons may be thinly capitalized and unable
to withstand changes in business conditions. These circumstances could decrease
the number of distributors and salons that sell our products or increase the
ownership concentration within the professional salon products market.
If a significant distributor or salon chain discontinues selling or using
our products, performs poorly, does not pay for purchased products, or
reorganizes or liquidates and is unable to continue selling our products, our
business, financial condition, and operating results could be materially and
adversely affected. In addition, the laws and regulations of various states may
limit our ability 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 poorly performing distributors could have a material adverse effect on
our business, financial condition, and operating results.
WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS
We depend upon third parties to manufacture most of our products. Although
we own many of the formulations, tools, and molds used in the manufacturing
processes of our products, we have 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 our business, financial condition, and operating
results.
We generally do not have long-term contracts with our third-party
manufacturers. Although we believe we would be able to secure other third-party
manufacturers to produce our products, particularly as a result of our ownership
of many of the formulations, tools, and molds used in the manufacturing process,
our operations would be adversely affected if we lost our relationship with any
of our current suppliers, including particularly two manufacturers of hair
removal appliances in China, or if the operations of our current suppliers or
sea or air transportation with our China-based manufacturers were disrupted or
terminated even for a relatively short period of time. See "Risk Factors -- We
face risks associated with our international operations." Our tools and molds
are located at the facilities of our domestic and offshore third-party
manufacturers. Accordingly, significant damage to these facilities could result
in the loss of or damage to a material portion of our key tools and molds, and
production delays could result while new facilities are being arranged and
replacement tools and molds are being produced.
We do not maintain an inventory of sufficient size to provide protection
for any significant period against an interruption of supply, particularly if we
were required to obtain alternative sources of supply. Although we do not
purchase directly the raw materials used to manufacture the majority of our
products, we are potentially subject to variations in the prices we pay our
third-party manufacturers for products depending on their cost for raw
materials.
WE DEPEND ON FRAMESI S.P.A.
We hold exclusive license rights to sell Framesi brand hair color and hair
care products in the majority of the Western Hemisphere, including the United
States and most of Latin America. We sell these products, which are some of our
most important product offerings, pursuant to an exclusive license with Framesi
S.p.A. that expires in 2036. In addition, we manufacture and sell hair care
products under the Framesi and Biogenol brand names pursuant to the license.
Under our agreement with Framesi S.p.A., we import hair color products
7
<PAGE> 11
manufactured by them. Any difficulties encountered by Framesi S.p.A. 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 could have a material adverse effect on our business, financial
conditions, and operating results.
WE DEPEND ON OUR MAJOR CUSTOMERS
We depend upon salon product and tanning supply distributors, beauty supply
outlets, and salon chains to distribute our products. We currently maintain more
than 5,300 active customer accounts, but do not have long-term contracts with
any of our customers. An adverse change in, or termination of, our relationship
with, or an adverse change in the financial viability of, one or more of our
major customers could have a material adverse effect on our business, financial
condition, and operating results.
WE HAVE SIGNIFICANT BORROWINGS
We have significant borrowings. On June 30, 1999, we had total indebtedness
of approximately $159.1 million and stockholders' equity of approximately $32.7
million. During June 1999, we entered into a new $90 million revolving credit
facility to replace our previous credit facility. At June 30, 1999, there was
approximately $52.2 million outstanding under the new facility. See "Use of
Proceeds." Subject to certain conditions, we will be permitted to incur
additional indebtedness in the future.
Our ability to service, repay, or refinance our indebtedness and to fund
planned capital expenditures and product development expenses will depend on our
future performance. To a certain extent, our performance will be subject to
general economic, financial, competitive, legislative, regulatory, and other
factors that are beyond our control. We may not be able to generate sufficient
cash flow from operations and borrowings may not be available under our credit
facility in an amount sufficient to enable us to service or repay our
indebtedness or to fund our other liquidity needs. In addition, we may not be
able to refinance our indebtedness on commercially reasonable terms or at all if
we desire to do so.
The degree to which we are leveraged could have important consequences. For
example, leverage could:
- make it more difficult for us to raise additional funds to finance
desired acquisitions;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain other funds to finance future working
capital, capital expenditures, product development, and other general
corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
- place us at a competitive disadvantage as compared with less leveraged
competitors.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS
International sales constituted approximately 15% of our pro forma
consolidated net sales during 1997 and approximately 12% of our pro forma
consolidated net sales during 1998. We intend to expand our international sales
through acquisitions and internal growth. In addition, some of our products are
manufactured in China. See "Risk Factors -- We depend on third parties for
manufacturing."
Our international operations require us to maintain equipment and
inventories abroad, manufacture and sell products internationally, and purchase
raw materials and components from foreign suppliers. We also rely on third-party
manufacturers to provide personnel and facilities in China. Our international
operations expose us to certain economic and political risks, including the
following:
- compliance with local laws and regulatory requirements, as well as
changes in such laws and requirements;
- foreign currency rate fluctuations;
- restrictions on the repatriation of funds;
8
<PAGE> 12
- overlap of tax issues;
- political and economic conditions abroad; and
- the possibility of expropriation or nationalization of assets, supply
disruptions, currency controls, and changes in tax laws, tariffs, and
freight rates.
Our relationships with our third-party manufacturers in China are also
subject to risks associated with changes in U.S. legislation and regulations
relating to imports, including quotas, duties, taxes, and other charges or
restrictions on imports. Products that we import 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 has the authority, 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 renewed in 1998 despite opposition by
certain members of Congress. In the future, Congress may encourage the President
to reconsider the renewal of most favored nation status for China. 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 import
duties.
WE DEPEND ON KEY PERSONNEL
Our success depends to a significant degree upon the skills of our current
key employees and our ability to identify, hire, and retain additional sales,
marketing, and financial personnel. We cannot assure you that we will be able to
retain our existing key personnel or attract and retain additional key
personnel. The loss of services of key personnel, particularly Sam Leopold (our
Chairman of the Board, President, and Chief Executive Officer), or the inability
to attract and retain additional qualified personnel could have a material
adverse effect upon our business, financial condition, and operating results. We
have an employment agreement with Mr. Leopold that extends through September
2001.
WE FACE RISKS ASSOCIATED WITH OUR INTELLECTUAL PROPERTY
The market for our products depends to a significant extent upon the
goodwill associated with our trademarks and trade names. Therefore, trademark
protection is important to our business. Although most of our trademarks and
trade names are registered in the United States and in foreign countries, we may
not be successful in asserting trademark or trade name protection for our
trademarks and trade names in the United States or other markets. In addition,
the laws of certain foreign countries may not protect our intellectual property
rights to the same extent as the laws of the United States. The costs required
to protect our trademarks and trade names may be substantial.
While we currently hold several patents, we do not consider any single
patent to be material to the conduct of our business. We rely primarily on trade
secret protection for our proprietary information. We face risks associated with
our intellectual property, including the following:
- our intellectual property rights may be challenged, invalidated, or
circumvented;
- our intellectual property rights may not provide adequate protection;
- we may not have sufficient resources to prosecute infringements of our
intellectual property rights;
- we may not be able to protect our intellectual property; and
- third parties may assert intellectual property infringement claims
against us.
THE PROFESSIONAL SALON PRODUCTS INDUSTRY IS VERY COMPETITIVE
The professional salon products industry is very competitive. Our products
compete directly against professional salon and other similar products sold
through distributors of professional salon products and professional salons. In
addition, our 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
9
<PAGE> 13
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," the Internet, and catalogs. Current and potential competitors
include a number of companies that have substantially greater resources than us,
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 our recognized product lines. In addition,
companies in the professional salon products industry commonly market products
that are similar to products being successfully marketed by competitors.
Increased competition and any reductions in competitors' prices that
require us to implement price reductions in order to remain competitive could
have a material adverse effect on our business, financial condition, and
operating results. See "Business -- Competition."
WE ARE SUBJECT TO GOVERNMENT REGULATION AND POTENTIAL CLAIMS BY OTHERS
Certain of our advertising and product labeling practices are subject to
regulation by the Federal Trade Commission, or FTC, and certain of its
professional salon product production practices are subject to regulation by the
Food and Drug Administration, or FDA, as well as by various other federal,
state, and local regulatory authorities. Compliance with federal, state, and
local laws and regulations has not had a material adverse effect on us 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, if we expand our operations to produce
professional salon products that include over-the-counter drug ingredients (such
as certain sun screen ingredients) we would become subject to additional FDA
regulations as well as a higher degree of inspection and greater burden of
regulatory compliance than currently exist.
Our operations subject us to federal, state, and local governmental
regulations related to the use, storage, discharge, and disposal of hazardous
chemicals. Our failure to comply with current or future environmental
regulations could result in the imposition of fines, suspension of production,
or a cessation of operations. Compliance with such regulations could require us
to acquire costly equipment or to incur other significant expenses. Any failure
by us to control the use, or adequately restrict the discharge, of hazardous
substances could subject us to future liabilities.
The nature and use of professional salon products could give rise to
product liability claims if one or more users of our 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 our control, including
hypoallergenic sensitivity and the possibility of malicious tampering with our
products. In the event of such an occurrence, we could incur substantial
litigation expense, receive adverse publicity, and suffer a loss of sales.
WE FACE RISKS ASSOCIATED WITH "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 the impact the Year 2000 issue will have
on the reporting and operating systems maintained by us, our customers and
suppliers, and other service providers. Although we do not anticipate that the
Year 2000 issue will have a significant impact on our business, any significant
Year 2000 compliance problem of any of us, our customers, or our third-party
contract manufacturers or suppliers could have a material adverse effect on our
business, financial condition, and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
10
<PAGE> 14
RISKS RELATING TO SHARE OWNERSHIP
MANAGEMENT CONTROLS A LARGE PERCENTAGE OF THE OUTSTANDING SHARES
Sam Leopold, our Chairman of the Board, President, and Chief Executive
Officer, beneficially owns approximately 26% of our common stock before this
offering, and will beneficially own approximately 14% of our common stock after
this offering. Consequently, Mr. Leopold has the ability to influence the
election of all of our directors and thereby control our business, affairs, and
management. In addition, Mr. Leopold has the ability to influence most matters
requiring stockholder approval including significant corporate matters, such as
amendments to our certificate of incorporation and any merger, consolidation, or
sale of all or substantially all of our assets. Such a high level of ownership
may have the effect of delaying, deterring, or preventing a change in the
control of our company, even when such a change would be in the best interests
of the other stockholders, and may adversely affect the voting and other rights
of the other holders of our common stock.
CHANGE OF CONTROL PROVISIONS
Our certificate of incorporation, bylaws, and the shareholder rights plan
contain provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of our company, even when these attempts
may be in the best interests of stockholders. See "Description of Securities."
The shareholder rights plan will cause substantial dilution to a person or
group that attempts to acquire our company on terms not approved by our board of
directors, except pursuant to an offer conditioned on a substantial number of
rights being acquired. The rights should not interfere with any merger or other
business combination approved by our board of directors since we may redeem the
rights for $.01 per right at any time before certain events occur that cause the
rights to become exerciseable.
Upon a change of control, we will be required to offer to repurchase all
outstanding senior subordinated notes at 101% of their principal amount plus
accrued and unpaid interest to the date of repurchase. We may not have
sufficient funds available at the time of any change of control to repurchase
the notes tendered. In addition, restrictions in our $90 million revolving
credit facility may not allow us to make such required repurchases.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE
The market price of our common stock has fluctuated significantly since our
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 us. These favorable conditions may not continue.
The trading price of our common stock in the future could be subject to a
variety of factors, including the following:
- wide fluctuations in response to quarterly variations in our operating
results;
- wide fluctuations in response to the impact of acquisitions on our
operating results;
- actual or anticipated announcements of new products by us or our
competitors;
- changes in analysts' estimates of our financial performance;
- general conditions in the markets in which we compete; and
- worldwide economic and financial conditions.
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 our common stock. Any reduction in the trading price
of our common stock could adversely affect our ability to raise capital in the
public market and adversely affect our ability to complete acquisitions. The
market price of our common stock may affect our willingness or ability to use
our common
11
<PAGE> 15
stock to acquire other companies. Declines in the market price of our common
stock may cause acquired companies to seek adjustments to purchase prices or
other remedies to offset any decline in value.
SALES OR ISSUANCES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK
Sales of substantial amounts of common stock by our stockholders, or even
the potential for such sales, are likely to adversely affect the market price of
our common stock and could impair our ability to raise capital by selling equity
securities. Of the 4,067,503 shares of common stock outstanding as of June 30,
1999, approximately 3,203,077 were freely tradeable without restriction or
further registration under the securities laws. Subject to the agreement by our
executive officers and directors and certain of our stockholders, warrant
holders, and option holders not to sell their shares of our common stock during
the 120-day period after the date of this prospectus, an aggregate of 864,426
shares held by certain officers and directors currently are available for sale.
Shares held by these affiliates are subject to the resale limitations of Rule
144 described below following the expiration of such 120-day period.
Generally, under Rule 144, an affiliate of our company or any person who
beneficially owns restricted securities with respect to which at least one year
has elapsed since the later of the date the shares were acquired from us may,
every three months, sell in ordinary brokerage transactions or to market makers
an amount of shares equal to the greater of 1% of our then-outstanding common
stock or our average weekly trading volume for the four weeks prior to the
proposed sale of such shares.
A total of 1,150,000 shares of common stock have been reserved for issuance
upon exercise of options, or which have been or may be granted under our stock
option plans. Options to acquire 814,648 shares of common stock currently are
outstanding, including options to purchase 804,980 shares granted under our
stock option plans. In addition, there are outstanding warrants to acquire
203,000 shares of common stock at an exercise price of $12.00 per share,
warrants to acquire 150,000 shares of common stock at an exercise price of
$10.18 per share, and warrants to acquire 10,000 shares of common stock at an
exercise price of $11.38 per share, in each case subject to adjustment in
accordance with the anti-dilution and other provisions set forth in the
warrants. During the terms of such options and warrants, the holders will have
the opportunity to profit from an increase in the market price of our common
stock. The existence of these stock options and warrants may adversely affect
the terms on which we can obtain additional financing, and the holders of these
options and warrants can be expected to exercise or convert these options and
warrants at a time when we, in all likelihood, would be able to obtain
additional capital by offering shares of our common stock on terms more
favorable to us than those provided by the exercise of these options and
warrants. We have granted registration rights to the holders of our warrants.
Those registration rights require us, at our expense, to register for resale the
shares of our common stock issuable upon the exercise of these warrants.
We also have authority to issue additional shares of common stock and
shares of one or more series of preferred stock. We may issue shares of common
stock or preferred stock for use as a portion of the consideration in future
acquisitions. These shares may be registered under the securities laws, in which
case they generally will be freely tradeable upon their issuance.
FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this prospectus under the
headings "Business," "Risk Factors," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" concerning our future,
proposed, and anticipated activities, certain trends with respect to our
revenue, operating results, capital resources, and liquidity or with respect to
the markets in which we compete or the beauty care industry in general, and
other statements contained in this prospectus regarding matters that are not
historical facts are forward-looking statements, as such term is defined under
the securities laws. Forward-looking statements, by their very nature, include
risks and uncertainties, many of which are beyond our control. Accordingly,
actual results may differ, perhaps materially, from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include those discussed elsewhere under "Risk
Factors."
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to us from the sale of the 4,000,000 shares of common
stock offered hereby, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, are estimated to be $37.5 million
($43.2 million if the underwriters' over-allotment option is exercised in full),
at an assumed public offering price of $10.1875 per share.
We will use the net proceeds from this offering to repay $37.5 million of
the amount outstanding under our $90 million revolving credit facility. The
interest on the facility currently is LIBOR plus 325 basis points.
We will use the resulting availability under our revolving credit facility
for working capital and general corporate purposes, including possible
acquisitions. We have no specific agreements or plans with respect to any
acquisitions. We may not be successful in consummating any acquisitions.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
plan to retain earnings to finance the growth of our business rather than to pay
cash dividends. Payments of any cash dividends in the future will depend on our
financial condition, results of operations, and capital requirements as well as
other factors deemed relevant by the Board of Directors. Our $90 million
revolving credit facility and the agreement covering our senior subordinated
notes contain restrictions on our ability to pay cash dividends, and future
borrowing may contain similar restrictions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
13
<PAGE> 17
CAPITALIZATION
The following table sets forth our actual capitalization as of June 30,
1999, and as adjusted to reflect the sale of the 4,000,000 shares of common
stock offered hereby (at an assumed public offering price of $10.1875 per share)
and the application of the estimated net proceeds therefrom, after deducting
estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------
ACTUAL(1) AS ADJUSTED
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current portion of long-term debt and other................. $ 3,474 $ 3,474
-------- --------
Long-term debt and other(2)................................. 155,652 118,149
-------- --------
Stockholders' equity
Preferred stock, $.0001 par value, 1,000,000 shares
authorized, no shares issued and outstanding.......... -- --
Common stock, $.0001 par value, 10,000,000 shares
authorized, 4,067,503 shares outstanding, actual,
8,067,503 shares outstanding, as adjusted............. 1 1
Additional paid-in capital............................. 29,038 66,541
Retained earnings...................................... 5,414 5,414
Treasury stock......................................... (1,800) (1,800)
-------- --------
Total stockholders' equity........................ 32,653 70,156
-------- --------
Total capitalization........................................ $191,779 $191,779
======== ========
</TABLE>
- -------------------------
(1) Excludes (a) 814,648 shares of common stock reserved for issuance upon
exercise of stock options outstanding as of June 30, 1999, and 363,000
shares reserved for issuance upon exercise of warrants outstanding as of
June 30, 1999, and (b) 344,352 shares reserved for issuance upon the
exercise of stock options that may be granted in the future under our stock
option plans. See "Management -- 1996 Stock Option Plan,"
"Management -- 1998 Employee Stock Option Plan," and "Description of
Securities."
14
<PAGE> 18
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "STYL" since our initial public offering on November 21, 1996 at $10.00
per share. The following table sets forth the high and low sale prices of the
common stock for the calendar quarters indicated as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Fourth quarter (from November 21, 1996)..................... $10 5/8 $ 9 1/4
YEAR ENDED DECEMBER 31, 1997:
First quarter............................................... $12 1/4 $10
Second quarter.............................................. 11 1/2 9
Third quarter............................................... 16 11 3/8
Fourth quarter.............................................. 17 1/2 14 3/4
YEAR ENDED DECEMBER 31, 1998:
First quarter............................................... $24 1/8 $15 3/4
Second quarter.............................................. 26 5/8 22
Third quarter............................................... 23 3/8 10 7/8
Fourth quarter.............................................. 18 7/8 8 3/8
YEAR ENDED DECEMBER 31, 1999:
First quarter............................................... $14 3/4 $ 9 5/8
Second quarter.............................................. 15 1/2 11 3/4
Third quarter (through August 11, 1999)..................... 13 1/2 9 1/8
</TABLE>
On August 11, 1999, the last reported sale price of our common stock, as
quoted on the Nasdaq National Market, was $10.1875 per share. As of August 11,
1999, there were approximately 17 holders of record and approximately 1,100
beneficial owners of our common stock.
15
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data as of
December 31, 1996 and the period from November 27, 1996 to December 31, 1996 and
as of and for the years ended December 31, 1997 and 1998 is derived from our
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected consolidated financial data as
of June 30, 1999 and for the six months ended June 30, 1998 and 1999 have been
derived from our unaudited financial statements which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, which management considers necessary for a fair presentation of the
selected historical financial data shown. The financial data shown for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year ending December 31, 1999. The selected
financial data provided below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes thereto appearing
elsewhere in this prospectus.
The combined selected financial data for Gena Laboratories, Inc. ("Gena")
and the Body Drench Division ("Body Drench") of Designs by Norvell, Inc. ("DBN")
for each of the two years in the periods ended February 29, 1996 and December
31, 1995, respectively, was derived from their financial statements, which have
been audited by Arthur Andersen LLP, independent public accountants. The
combined selected financial data for JDS Manufacturing Co., Inc. ("JDS") for the
two years in the period ended September 30, 1996 was derived from its financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The combined selected financial data for Kotchammer Investments,
Inc. (known as Styling Research Company) ("KII") for the year ended December 31,
1995 was derived from its financial statements, which have been audited by
Arthur Andersen LLP, independent public accountants. The combined selected
financial data for KII for the year ended December 31, 1994 was derived from its
unaudited financial statements. (Gena, Body Drench, JDS, and KII are referred to
as the "Initial Businesses.") In addition, the combined selected financial data
for Gena, Body Drench, JDS, and KII for the periods March 1, 1996 to November
26, 1996; January 1, 1996 to November 26, 1996; October 1, 1996 to November 26,
1996; and January 1, 1996 to November 26, 1996, respectively, was derived from
the financial statements of each of the Initial Businesses, which have been
audited by Arthur Andersen LLP, independent public accountants. See footnotes
(a), (b), (c) below for a description of the combined Predecessor 1, 2, and 3
periods.
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<PAGE> 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
November 27, Years Ended Six Months Ended
Predecessors 1996 to December 31, June 30,
--------------------------- December 31, ------------------ ------------------
1(a) 2(b) 3(c) 1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA AND OTHER
DATA:
Net sales.............................. $24,029 $24,927 $18,211 $ 1,083 $38,108 $ 90,373 $35,299 $ 68,770
Gross profit........................... 10,987 11,562 7,584 512 21,352 51,151 19,807 38,913
Selling, general, and administrative
expenses............................. 9,924 10,422 6,838 737 12,201 32,715 11,909 25,775
Centralization and reengineering
costs(d)............................. -- -- -- -- -- 422 -- 1,363
Provision for cancelled
distributors(d)...................... -- -- -- -- -- -- -- 5,067
Income (loss) from operations.......... 1,063 1,140 746 (225) 9,151 18,014 7,898 6,708
Interest expense (income) and other,
net.................................. 7 172 71 (2) 1,847 9,206 2,628 7,874
Income (loss) before extraordinary
item................................. -- -- -- (151) 4,207 5,173 5,270 (1,166)
Extraordinary item, net................ -- -- -- -- (1,377) (1,091) (1,091) (446)
Net income (loss)...................... 583 545 435 (151) 2,830 4,082 1,913 (1,160)
Diluted earnings (loss):
Per share income (loss) before
extraordinary item................. $ (0.04) $ 1.02 $ 1.20 $ 0.69 $ (0.18)
Extraordinary item, net.............. -- (0.33) (0.25) (0.25) (0.11)
Per share net income (loss).......... (0.04) 0.69 0.95 0.44 (0.29)
Weighted average shares.............. 3,770 4,113 4,313 4,356 4,068
AS OF DECEMBER 31, AS OF
--------------------------------- JUNE 30,
1996 1997 1998 1999
BALANCE SHEET DATA:
Working capital........................ $ 4,459 $14,048 $ 37,712 $ 46,223
Total assets........................... 32,234 92,489 219,198 239,125
Long-term debt and other, less current
portion.............................. 2,316 47,377 140,366 155,652
Total stockholders' equity............. 25,319 28,568 33,813 32,653
</TABLE>
- ---------------
(a) Includes combined financial information for Body Drench and KII for the year
ended December 31, 1994, Gena for the year ended February 28, 1995, and JDS
for the year ended September 30, 1995.
(b) Includes combined financial information for Body Drench and KII for the year
ended December 31, 1995, Gena for the year ended February 29, 1996, and JDS
for the year ended September 30, 1996.
(c) Includes combined financial information for Body Drench and KII for the
period from January 1, 1996 to November 26, 1996, for Gena for the period
from March 1, 1996 to November 26, 1996, and JDS for the period from October
1, 1996 to November 26, 1996.
(d) The centralization and reengineering costs had a $0.06 impact on diluted
earnings per share during the year ended December 31, 1998, and a $0.20
impact on diluted earnings per share during the six months ended June 30,
1999, net of tax. During the second quarter of 1999, we also incurred a
provision for cancelled distributors of approximately $5.1 million, before
taxes, or $0.76 per diluted share, net of tax, related to the write-down of
certain tanning distributor receivables in connection with our strategic
realignment to exclusive distribution. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These per share
amounts are not defined by generally accepted accounting principles and
should not be considered as an alternative to earnings per share.
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<PAGE> 21
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 and our consolidated financial statements
and notes thereto, which are contained elsewhere in this prospectus.
INTRODUCTION
We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon distribution
channels. Our products include hair care, skin and body care, and nail care
products, as well as salon appliances and sundries. We have well-recognized,
long-lived brand names, a strong distribution network, established marketing and
salon industry education programs, and significant production and sourcing
capabilities. We sell our products in all 50 states, Canada, Australia, Europe,
Latin America, and Asia.
We were founded in June 1995 and commenced operations on November 26, 1996.
On that date, we simultaneously completed our initial public offering and
acquired our four initial businesses. Since that time, we have completed seven
additional acquisitions.
The following table sets forth information regarding each of our
acquisitions:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION)
<S> <C> <C>
Gena Laboratories, Inc. November 1996 Gena (professional natural nail
care, pedicure, skin care, and hair
care products)
Body Drench (A Division of Designs November 1996 Body Drench (high-end professional
by Norvell, Inc.) tanning and moisturizing products
and resort, spa, and health and
country club personal care
products)
J.D.S Manufacturing Co., Inc. November 1996 Alpha 9 (acrylic and fiberglass
nail enhancement products)
Kotchammer Investments, Inc. (dba November 1996 SRC (high-end salon appliances and
Styling Research Company) salonwear)
Suntopia Division of Creative March 1997 Suntopia (high-end tanning
Laboratories, Inc. ("Suntopia") products)
U.K. ABBA Products, Inc. ("ABBA") June 1997 ABBA Pure and Natural Hair Care
(aromatherapy-based professional
hair care products)
One Touch and Clean + Easy Division December 1997 Clean + Easy and One Touch (salon
of Inverness Corporation and and retail hair removal products)
Inverness (UK) Limited (together,
"Inverness")
Pro Finish USA, Ltd. ("Pro Finish") May 1998 Pro Finish, Kizmit, and Cosmic
(nail care products)
European Touch Co., Incorporated, June 1998 European Touch (professional nail
and two related Companies enhancement and treatment products)
("European Touch")
European Touch, Ltd. II ("European June 1998 European Touch II (pedicure spa
Touch II") equipment)
Ft. Pitt Acquisition, Inc. and its August 1998 Framesi, Roffler, and Biogenol
90% owned subsidiary Ft. (professional hair care products)
Pitt -- Framesi, Ltd. (together,
"Framesi USA")
</TABLE>
18
<PAGE> 22
The combined purchase price of the acquisitions was approximately $45.0
million in 1997 and $63.0 million in 1998. On a pro forma basis, our total
revenue would have been approximately $111.0 million in 1997 and $115.6 million
in 1998, assuming the acquisitions described above had taken place on January 1.
We accounted for all of the acquisitions under the purchase method of
accounting.
Except for the historical information contained herein, the discussion in
this prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include those
discussed herein, as well as those factors discussed under "Risk Factors"
contained elsewhere in this prospectus. Historical results are not necessarily
indicative of trends in operating results for any future period.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
Net Sales
Net sales amounted to $68.8 million for the six months ended June 30, 1999,
compared to net sales of $35.3 million for the six months ended June 30, 1998.
The $33.5 million, or 95%, increase in sales for the six months ended June 30,
1999 compared to the six months ended June 30, 1998 was due primarily to the
contribution of brands acquired during and subsequent to June 30, 1998 in
addition to strong performance in our exclusive hair care lines, ABBA and
Framesi, and in the appliances and sundries category. On a pro forma basis,
assuming the 1998 acquisitions had taken place on January 1, 1998, net sales
increased by $10.0 million, or 17%, to $68.8 million in the first six months of
1999 from $58.8 million during the first six months of 1998.
Cost of Sales
Cost of sales amounted to $29.9 million, or 43% as a percentage of net
sales, for the six months ended June 30, 1999, compared to $15.5 million, or 44%
as a percentage of net sales, for the six months ended June 30, 1998. As a
result of the foregoing, we realized gross profit for the six months ended June
30, 1999 of $38.9 million, or 57% as a percentage of net sales, compared to
$19.8 million, or 56% as a percentage of net sales, during the corresponding
period in 1998. Our ability to sustain this favorable gross margin percentage is
attributable primarily to the acquisition of businesses that carry similarly
favorable gross margins and our continued efforts to leverage our substantial
purchasing power with third-party suppliers to obtain optimum pricing.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $25.8 million, or 37% of
net sales, for the six months ended June 30, 1999, before recording
centralization and reengineering costs and one-time charges totaling
approximately $6.4 million. Selling, general, and administrative expenses
including the centralization and reengineering costs and one-time charges
amounted to $32.2 million, or 47% of net sales, for the six months ended June
30, 1999 compared with $11.9 million, or 34% of net sales, for the six months
ended June 30, 1998. Selling, general, and administrative expenses exclusive of
centralization and reengineering costs and one-time charges discussed below,
increased on an absolute as well as a percentage basis due primarily to
acquisitions completed during and subsequent to the quarter ended June 30, 1998
and the operating characteristics of those businesses acquired. The
centralization and business process reengineering project, which began in the
fourth quarter of 1998, was substantially complete by June 30, 1999. The
project, which included the centralization of operations in Scottsdale, Arizona
and the outsourcing of segments of our production and warehousing functions,
resulted in total costs of $1.4 million during the six months ended June 30,
1999.
During the second quarter of 1999, we changed the method of distribution of
our products by eliminating a significant number of tanning supply distributors.
Distribution of Body Drench products to the tanning market will now be made
through a limited number of exclusive distributors. We believe that by focusing
on our core business of selling our portfolio of brands to the professional
salon distribution channels and limiting distribution in the tanning supply
channel, the stature of the Body Drench brand will be enhanced, which should
increase gross margins on tanning products, reduce expenses, and capitalize on
our core strategy of offering customers a "one-stop shop" for professional salon
products. This change in our business resulted in a write-off of receivables
from cancelled distributors of approximately $5.1 million for the quarter ended
June 30, 1999. We classified this charge as a provision for cancelled
distributors in the consolidated statement
19
<PAGE> 23
of operations as a separate component of income from operations. Any future
change to the realizability of these tanning supply distributor receivables will
be recorded as a component of the provision for cancelled distributors in the
statement of operations at that time. The normal recurring bad debt charges are
recorded as a component of selling, general and administrative expenses and
amounted to approximately $171,000 and $1,112,000 for the six months ended June
30, 1998 and 1999, respectively.
Interest Expense and Other
Interest expense and other amounted to $7.9 million for the six months
ended June 30, 1999, up 200% from $2.6 million for the six months ended June 30,
1998. The increase was primarily a result of an increase in debt associated with
the completion of the 1998 acquisitions and an increase in our effective
interest rate as a result of the issuance of the senior subordinated notes in
June 1998.
Extraordinary Item
A portion of the proceeds from our current revolving credit facility
discussed under "Liquidity and Capital Resources" below was used to repay our
previous credit facility. We reported an extraordinary, non-cash charge of
approximately $446,000, net of taxes, or $0.11 per diluted share, related to
unamortized financing costs associated with our previous credit facility.
Benefit from Income Taxes
The benefit from income taxes for the six months ended June 30, 1999
amounted to $452,000, which represents an effective tax rate of approximately
38.8%, compared with a provision of $2.3 million, which represents an effective
tax rate of approximately 43% for the six months ended June 30, 1998. Permanent
differences between book and tax amounts decreased over the twelve month period,
resulting in the lower effective tax rate for the three months ended March 31,
1999 and six months ended June 30, 1999.
Income from Operations and Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA)
Income from operations was $13.1 million before centralization and
reengineering costs and one-time charges for the six months ended June 30, 1999,
compared to $7.9 million for the six months ended June 30, 1998. After
centralization and reengineering costs and one-time charges, income from
operations was $6.7 million for the six months ended June 30, 1999. EBITDA was
$16.6 million before centralization and reengineering costs and one-time charges
for the six months ended June 30, 1999, an increase of $7.0 million, or 73%,
over EBITDA of $9.6 million for the six months ended June 30, 1998. EBITDA after
centralization and reengineering costs and one-time charges was $10.2 million
for the six months ended June 30, 1999. On a pro forma basis, assuming the 1998
acquisitions had taken place on January 1, 1998, EBITDA, before centralization
and reengineering costs and one-time charges, increased by $2.7 million, or 19%,
to $16.6 million in the first six months of 1999 from $13.9 million during the
first six months of 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. We believe EBITDA is a measure commonly reported and
widely used by analysts, investors, and other interested parties who monitor
business performance. Accordingly, we have disclosed this information to permit
a more complete comparative analysis of our operating performance.
Net Income
For the six months ended June 30, 1999, we reported a net loss of $714,000,
or $0.18 per diluted share, before the extraordinary item compared to net income
of $3.0 million, or $0.69 per diluted share, for the corresponding period during
1998. After the extraordinary item, the net loss for the six months ended June
30, 1999 was $1.2 million, or $0.29 per diluted share, compared to net income of
$1.9 million for the same period in 1998.
20
<PAGE> 24
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997
Net Sales
Net sales for the year ended December 31, 1998 amounted to $90.4 million
compared to net sales of $38.1 million for the year ended December 31, 1997. The
$52.3 million, or 137%, increase in net sales was due primarily to the addition
of the operating results of the brands acquired during 1998, which included the
results of Pro Finish from May 1, 1998 to December 31, 1998; the European Touch
Companies from June 1, 1998 to December 31, 1998; and Framesi USA from August 1,
1998 to December 31, 1998. The increase in sales also was due to growth in our
existing brands, particularly the ABBA hair care brand, which introduced new
packaging during the third quarter of 1998.
Cost of Sales
Cost of sales amounted to $39.2 million, or 43.4% of net sales, for the
year ended December 31, 1998, down slightly on a percentage basis from cost of
sales of $16.8 million, or 44.0% of net sales, during the year ended December
31, 1997.
Gross Profit
As a result of the foregoing, we realized gross profit of $51.2 million, or
56.6% of net sales, for the year ended December 31, 1998, marking a slight
improvement over gross profit of $21.4 million, or 56.0% of net sales, for the
year ended December 31, 1997.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $32.7 million, or 36.2%
of net sales, for the year ended December 31, 1998, before recording
centralization and reengineering costs of approximately $422,000. Selling,
general, and administrative expenses, including the centralization and
reengineering costs, amounted to $33.1 million, or 36.7% of net sales, for the
year ended December 31, 1998 compared to $12.2 million, or 32.0% of net sales,
for the year ended December 31, 1997. The increase in selling, general, and
administrative expenses resulted in part from the acquisitions completed during
1998 having, on average, a higher percentage of selling, general, and
administrative expenses than our existing business. The increase also was
attributable to the resulting increases in the amortization of goodwill of the
businesses acquired during 1998. In addition, expenses during 1998 included
planned increases in sales and marketing costs in the fourth quarter in
preparation for new products and distribution for 1999.
On November 5, 1998, we announced we would centralize our operations in
Scottsdale, Arizona and outsource segments of our production and warehousing
functions. These initiatives are part of the further integration and
consolidation of our acquired businesses with the goal of obtaining additional
operating efficiencies and positioning us for continued internal growth and
future acquisitions. We also announced that we would take advantage of new
capabilities in computer technologies by combining the reengineering of our
business processes with an enterprise resource planning information technology
transformation, which we expect will drive operating efficiencies and improved
customer service.
These initiatives commenced during the fourth quarter of 1998 and continued
during the first two quarters of 1999. In connection with the centralization and
business process reengineering activities, we incurred approximately $1.8
million, before income taxes, in non-recurring reengineering costs, which are
reflected in our income statement as incurred. Over the same period, we invested
approximately $3.4 million in capital expenditures related to our information
technology transformation. The costs of reengineering and information technology
are accounted for under recently issued accounting pronouncements, Emerging
Issues Task Force Issue No. 97-13, Accounting for Costs Incurred In Connection
With a Consulting Contract or an Internal Project that Combines Business Process
Reengineering and Information Technology Transformation, Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, and Statement of Position 95-3, Recognition of Liabilities In
Connection with a Purchase Business Combination.
21
<PAGE> 25
Interest Expense and Other
Interest expense and other amounted to $9.2 million for the year ended
December 31, 1998, up 411% from $1.8 million for the year ended December 31,
1997. The increase was a result of an increase in debt associated with the
completion of the 1998 acquisitions and an increase in our effective interest
rate as a result of the senior subordinated notes issuance in June 1998.
Extraordinary Item
In June 1998, we issued $100 million of senior subordinated notes. A
portion of the proceeds from the offering was used to repay our $75.0 million
credit facility (the "December 1997 Credit Facility"). We reported an
extraordinary, non-cash charge during the quarter ended June 30, 1998 of
approximately $1.1 million, net of taxes, or $0.25 per diluted share, related to
unamortized financing costs associated with the December 1997 Credit Facility.
Provision for Income Taxes
The provision for income taxes for the year ended December 31, 1998
amounted to $3.6 million, which represented an effective tax rate of
approximately 41%, compared with a provision of $3.1 million, which represented
an effective tax rate of approximately 42% for the year ended December 31, 1997.
Permanent differences between book and tax amounts decreased over the 12-month
period resulting in the lower effective tax rate for the year ended December 31,
1998.
Net Income
We had net income of $5.2 million, or $1.20 per diluted share, for the year
ended December 31, 1998 before the extraordinary item discussed above. After the
extraordinary item, net income for the year ended December 31, 1998 was $4.1
million, or $0.95 per diluted share. Net income for the year ended December 31,
1997 was $4.2 million, or $1.02 per diluted share, before the extraordinary item
discussed below. After the extraordinary item, net income for the year ended
December 31, 1997 was $2.8 million, or $0.69 per diluted share.
Income from Operations and EBITDA
Income from operations was $18.0 million for the year ended December 31,
1998, an increase of $8.8 million, or 96.9%, over income from operations of $9.2
million for the year ended December 31, 1997. EBITDA was $23.1 million for the
year ended December 31, 1998, an increase of $12.1 million, or 110.5%, over
EBITDA of $11.0 million for the year ended December 31, 1997.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE COMBINED
RESULTS OF THE INITIAL BUSINESSES FOR THE PERIOD ENDED
DECEMBER 31, 1996
Net Sales
Net sales amounted to $38.1 million for the year ended December 31, 1997
compared to combined net sales for our four initial businesses of $23.0 million
for the combined period ended December 31, 1996. The $15.1 million, or 65.7%,
increase in net sales was partly the result of increased sales of our Body
Drench and Gena product lines as compared to the sales achieved by the
individual initial 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 and One Touch from December 1, 1997 to December 31, 1997.
Cost of Sales
Cost of sales amounted to $16.8 million, or 44.0% of net sales, for the
year ended December 31, 1997. Cost of sales as a percentage of net sales
substantially decreased from the 52.7% 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 initial businesses
prior to their acquisition by us.
22
<PAGE> 26
Gross Profit
As a result of the foregoing, we realized gross profit for the year ended
December 31, 1997 of $21.4 million, or 56.0% of net sales. This improvement in
gross margin percentage over that reported by the individual initial businesses
prior to their acquisition was attributable primarily to the negotiation of
reduced product costs in December 1996 with the primary supplier of our Body
Drench product line and the consolidation of warehousing and production
functions of the Gena and Alpha 9/Omni product lines at our old facility in
Duncanville, Texas. We also achieved reductions in cost of goods through
negotiation with third party suppliers at ABBA, Clean + Easy, and One Touch.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $12.2 million, or 32.0%
of net sales, for the year ended December 31, 1997, which represented a
significant improvement over the comparable expenses incurred by the individual
initial businesses and other acquired companies prior to their acquisition by
us. This improvement in selling, general, and administrative expenses as a
percentage of net sales was 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 initial businesses and the other acquired
companies. This improvement, however, was 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 December 1997 acquisition of the Clean + Easy and
One Touch product lines discussed above, we entered into the December 1997
Credit Facility, as discussed under "Liquidity and Capital Resources" below. The
December 1997 Credit Facility replaced the previous credit facility negotiated
in connection with the June 1997 acquisition of ABBA (the "June 1997 Credit
Facility"). We 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 the June 1997 Credit
Facility.
Net Income
We had 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 marked significant
improvement over the operating results of the initial businesses prior to their
acquisition. We attribute the improvement in net income during the year ended
December 31, 1997 primarily to the successful implementation of a key component
of our business strategy, the enhancement of operating efficiencies of the
initial businesses, and subsequent acquisitions.
Income from Operations and EBITDA
Income from operations was $9.2 million for the year ended December 31,
1997. EBITDA was $11.0 million for the year ended December 31, 1997.
23
<PAGE> 27
SEASONALITY AND QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited quarterly results of
operations for each of the ten quarters in the fiscal years ended December 31,
1997, 1998, and 1999. All quarterly information was obtained from unaudited
financial statements not otherwise contained herein. We believe that all
necessary adjustments have been made to present fairly the quarterly information
when read in conjunction with our consolidated financial statements and notes
thereto included elsewhere in this prospectus. The operating results for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.................................. $ 7,479 $ 7,437 $10,669 $12,523
Gross profit............................... 4,245 4,191 5,802 7,114
Selling, general, and administrative....... (2,398) (2,333) (3,574) (3,896)
Income from operations..................... 1,847 1,858 2,228 3,218
Interest expense and other, net............ 60 114 777 896
Income before extraordinary item........... 1,054 1,031 828 1,294
Extraordinary item, net.................... -- -- -- (1,377)
Net income (loss).......................... 1,054 1,031 828 (83)
Diluted EPS before extraordinary item...... 0.26 0.25 0.20 0.31
Diluted DPS after extraordinary item....... 0.26 0.25 0.20 (0.02)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1999
--------------------------------------------------- ---------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales................ $16,225 $19,074 $26,539 $28,535 34,252 $34,518
Gross profit............. 9,183 10,624 15,001 16,343 19,407 19,506
Selling, general, and
administrative......... 5,395 6,514 9,689 11,117 13,128 10,778
Centralization and
reengineering costs.... -- -- -- 422 660 703
Provision for cancelled
distributors........... -- -- -- -- -- 5,067
Income from operations... 3,788 4,110 5,312 4,804 5,619 1,089
Interest expense and
other, net............. 1,264 1,364 3,109 3,469 3,928 3,946
Income (loss) before
extraordinary item..... 1,439 2,746 1,243 926 1,691 (1,729)
Extraordinary item,
net.................... -- 1,091 -- -- 676 446
Net income (loss)........ 1,439 474 1,243 926 1,015 (2,175)
Diluted EPS before
extraordinary item..... 0.34 0.36 0.29 0.23 0.24 (0.42)
Diluted EPS after
extraordinary item..... 0.34 0.11 0.29 0.23 0.24 (0.53)
</TABLE>
We have experienced moderate seasonality in quarterly operating results due
mainly to the effect of the seasonality of the indoor tanning season on the
operating results of the Body Drench and Suntopia product lines. We expect the
seasonal effect of Body Drench and Suntopia sales to diminish in the future due
to the substantial acquisition and internal growth of non-tanning brands, which
are less affected by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our working capital position increased to $46.2 million at June 30, 1999
from $39.9 million at December 31, 1998. The increase of $6.3 million was due
primarily to an increased investment in accounts
24
<PAGE> 28
receivable, offset by an increase in accounts payable, as well as our results of
operations for the quarter ended June 30, 1999.
During the six months ended June 30, 1999, we used $8.9 million of cash in
operating activities, which was primarily the result of increased investment in
accounts receivable of $10.9 million, as a result of internal sales growth of
17% increases in prepaid expenses and other assets of $5.1 million, offset by an
increase in accounts payable of $6.3 million.
Our working capital position increased to $37.7 million at December 31,
1998 from $14.0 million at December 31, 1997. The increase of $23.7 million was
primarily due to increases in accounts receivable and inventories as a result of
the completion of the acquisitions during 1998, the issuance of the senior
subordinated notes, and our results of operations for the year ended December
31, 1998.
During the year ended December 31, 1998, we used $6.8 million of cash in
operating activities, which was primarily the result of the increased investment
in accounts receivable of $10.5 million and inventory of $8.4 million, offset by
the increase in accounts payable and accrued liabilities of $1.8 million. The
increased investment in accounts receivable and inventories at December 31, 1998
was primarily related to increased revenue and inventories as a result of the
acquisitions and sales growth in the existing businesses during the fiscal year
ended December 31, 1998. The increases in accounts payable and accrued
liabilities during the period related primarily to the liabilities assumed in
the acquisitions as well as internal growth of our business.
Investing and Financing Activities
Capital expenditures for the six months ended June 30, 1999 totaled
approximately $3.4 million, and for the year ended December 31, 1998 totaled
approximately $2.0 million, primarily related to computer hardware and software
costs which have been substantially completed in connection with our new
centralized management and information systems.
In June 1999, we finalized a five-year, $90 million senior secured
revolving credit facility for which General Electric Capital Corporation acted
as the agent. We have the option of paying a fixed interest rate on all loans
under this credit facility equal to the applicable LIBOR rate plus an applicable
margin for periods of one, two, or three months. Alternatively, we can elect to
pay a floating interest rate equal to the higher of the prime rate, or the
overnight federal funds rate plus 50 basis points, plus an applicable margin.
Initially, the respective applicable margins for LIBOR loans and floating rate
loans are 3.25% and 1.75%. The applicable margins that we will pay throughout
the term of this credit facility will vary depending upon our financial
performance and our ability to meet certain financial ratios and targets,
including leverage ratios. Interest is payable at the end of each applicable
LIBOR period for LIBOR loans, and monthly for all floating rate loans. The
outstanding principal balance is due in June 2004.
We used the proceeds from the revolving credit facility to repay amounts
outstanding under our previous $50.0 million senior credit facility. The
remaining availability will be used for future acquisitions and for working
capital purposes. We recorded an extraordinary, non-cash charge during the three
months ended June 30, 1999 of approximately $446,000, net of tax, related to the
write-off of unamortized financing costs associated with the previous credit
facility. At June 30, 1999, $52.3 million was outstanding under our current
revolving credit facility.
We plan to drive internal growth through the expansion of distribution, new
products, product line extensions, and brand introductions. We also plan to
pursue strategic acquisitions to capitalize on the substantial fragmentation and
growth potential existing in the professional salon and personal care products
industry. We intend to fund our future capital needs through a combination of
current cash resources, expected cash flows from operations, bank financing,
seller notes payable, issuance of our common stock, and additional public or
private debt or equity financing. These capital resources may not be available,
and the availability of such capital depends upon prevailing market conditions,
interest rates, and our financial condition.
25
<PAGE> 29
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 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. As a result, within the next five
months, 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.
Our State of Readiness
We have completed an assessment of our internal systems and processes with
respect to the "Year 2000" issue. Our sales, accounts receivable, inventory
management, accounts payable, general ledger and payroll systems comprise our
critical information technology ("IT") systems. We have assessed our "Year 2000"
readiness with regard to these critical IT systems. Based on internal
assessments and upon vendor representations, we believe that our critical IT
systems currently in place or being implemented as part of the centralization
and business process reengineering plan are or will be "Year 2000" compliant. We
believe that we will complete the implementation of our new processes and
systems associated with the critical IT systems by September 1, 1999. We intend
to assess the potential impact of "Year 2000" failures from vendors, customers,
and outside parties upon our business and are currently taking steps to assess
and minimize the risk of such "Year 2000" failures. Based upon our current state
of readiness and the steps currently being taken, we do not believe that the
"Year 2000" problem will have a material adverse effect on our business,
financial condition, or results of operations.
Software and hardware, such as security and telephone systems, that
facilitate the operations of our warehouses and operating locations that are not
affected by the centralization and reengineering plan comprise our primary
non-IT systems. We are in the process of assessing the "Year 2000" compliance of
these non-IT systems and expect to conclude this assessment by September 1,
1999. We have not incurred, nor do we expect to incur, material costs in
readying our non-IT systems for the Year 2000.
Our Risks of "Year 2000" Issues
We procure a significant amount of raw materials and components from
external suppliers and rely upon third-party contract manufacturers to
manufacture most of our products. As a result, we may be at risk from suppliers
and manufacturers, foreign and domestic, that are not taking adequate measures
to ensure "Year 2000" compliance. The failure of these suppliers and
manufacturers to be "Year 2000" compliant may cause raw material and product
shortages that would adversely impact our operations. As a result, we may be at
risk with respect to suppliers and manufacturers that may not be "Year 2000"
compliant. We believe that the most likely negative effects, if any, could
include disruptions in both shipments and receipts of raw materials, components,
and products by us and our customers. In addition, our customers may experience
"Year 2000" failures, which could result in delays in our receipt of payments
from customers.
Contingency Plans
We are developing contingency plans with respect to significant "Year 2000"
issues. For example, we are in the process of assessing and verifying the "Year
2000" compliance of our international and domestic suppliers and contract
manufacturers. We have sent "Year 2000" readiness inquiries to key suppliers and
manufacturers to verify that these suppliers and manufacturers will be "Year
2000" compliant on a timely basis. We are investigating transferring supplier
and manufacturing relationships to alternate providers if current suppliers and
manufacturers are not "Year 2000" compliant.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
At June 30, 1999, we did not participate in any material derivative
financial instruments, or other financial and commodity instruments for which
fair value disclosure would be required under Statement of Financial Accounting
Standards No. 107. We hold no investment securities that would require
disclosure of market risk.
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<PAGE> 30
Primary Market Risk Exposures
Our primary market risk exposures are in the areas of interest rate risk
and foreign currency exchange rate risk. We incur interest expense on loans made
under the senior subordinated notes at an interest rate, which is fixed, for a
maximum of ten years. At June 30, 1999, our outstanding borrowings on the senior
subordinated notes were $100 million, at an interest rate of 10.875%. We also
incur interest on loans made under our senior secured revolving credit facility
and other debt instruments at variable interest rates ranging from 6.0% to 9.0%.
At June 30, 1999, our total outstanding borrowings on the instruments was
approximately $57.3 million, including approximately $52.2 million outstanding
under a current credit facility and approximately $5.1 million of other debt
instruments. We entered into an interest rate swap agreement and an interest
rate cap agreement to limit the effect of increases in the interest rates on
floating rate debt. The notional amounts of interest rate agreements are used to
measure interest to be paid or received and do not represent the amount of
exposure to credit loss. The net cash amounts paid or received on the agreements
are accrued and recognized as an adjustment to interest expense.
The interest rate swap agreement is a contract to exchange floating rate
for fixed interest payments periodically over the life of the agreement. During
March 1998, we entered into an interest rate swap agreement, which effectively
fixed the interest rate on a $12.5 million notional principal amount under the
our current revolving credit facility at 5.75% plus a credit margin ranging from
150 to 250 basis points, for a period ending March 2000. During April 1998, we
entered into an interest rate cap agreement, which effectively limits our
interest rate exposure on a $12.5 million notional principal amount under our
revolving credit facility at 7.50% plus a credit margin ranging from 250 to 300
basis points, for a period ending in April 2000. The borrowings not subject to
interest rate swap or interest rate cap agreements at June 30, 1999 totaled
$27.2 million.
Substantially all of our business outside the United States is conducted in
U.S. dollar denominated transactions. We have a sales division located in the
United Kingdom. Some of the expenses of this foreign subsidiary are denominated
in the British pound sterling. These expenses include local salaries and wages,
utilities, and some operating supplies. However, we believe that the operating
expenses currently incurred in foreign currency are immaterial, and therefore
any associated market risk is unlikely to have a material adverse effect on our
business, financial condition, or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999 we adopted Statement of Position 98-1, Accounting
for the Costs of Computer Software, ("SOP 98-1"). SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The adoption of SOP 98-1 did not have a material effect on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities which was amended by the issuance of SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement
No. 133. in June 1999. These statements establish accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. These statements are presently
effective for our quarter ending March 31, 2001. We are currently evaluating the
impact that SFAS Nos. 133 and 137 will have on our future results of operations
and financial position.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 Reporting on the Costs of Start-Up Activities ("SOP
98-5"). SOP 98-5 requires costs of start-up activities and organization costs to
be expensed as incurred. The adoption of SOP 98-5 did not have a material effect
on our financial position or results of operations.
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BUSINESS
INTRODUCTION
We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon distribution
channels. Our products include hair care, skin and body care, and nail care
products, as well as salon appliances and sundries. We believe we are the only
company that develops, produces, and markets products in each category of the
estimated $80 billion worldwide market for professional salon products and
services. We have well-recognized, long-lived brand names, a strong distribution
network, established marketing and salon industry education programs, and
significant production and sourcing capabilities. We plan to leverage our
well-established distribution channels by providing customers with an
increasingly comprehensive array of professional salon brands and products. We
also plan to take advantage of our consumer products marketing expertise and our
well developed infrastructure to develop and acquire new product lines to sell
through additional consumer product distribution channels.
We currently sell more than 500 products under 19 principal brand names. In
the United States, we market our product lines through professional salon
industry distribution channels to more than 5,300 customers, consisting
primarily of salon product and tanning supply distributors (which resell to
beauty and tanning salons), beauty supply outlets, and salon chains. We also
market our products directly to more than 3,000 spas, resorts, and health and
country clubs through our in-house sales force. Internationally, we sell our
products primarily through international salon product distributors. We believe
our ability to offer customers a "one-stop shop" for brand-name professional
salon products creates a competitive advantage.
We commenced operations in November 1996, when we simultaneously completed
our initial public offering and acquired four professional salon products
businesses. Since that time, we acquired seven additional professional salon
product businesses. Our net sales and EBITDA have grown rapidly since our
inception. Our net sales increased from $38.1 million in 1997 to $90.4 million
in 1998, a growth rate of 137%. Our EBITDA increased from $11.0 million in 1997
to $23.1 million in 1998, a growth rate of 110%. We also have enjoyed high
profitability, with 56.6% gross margins and 25.6% EBITDA margins for fiscal
1998. Our net sales increased from $35.3 million during the six months ended
June 30, 1998 to $68.8 million during the six months ended June 30, 1999. This
increase in net sales represents a 95% growth rate, including internal net sales
growth of approximately 17%. Our EBITDA, before one-time charges and
centralization and reengineering costs, increased from $9.6 million during the
six months ended June 30, 1998 to $16.6 million during the six months ended June
30, 1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." This increase in EBITDA represents a 73% growth rate. We
attribute our rapid growth and high profitability to our focus on integrating
our acquired businesses, improving margins within our existing product lines,
developing new product lines and product line extensions, and acquiring
businesses and product lines that complement our portfolio of products.
OVERVIEW OF THE PROFESSIONAL SALON PRODUCTS MARKET
Professional salon products consist of hair care, skin and body care, and
nail 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.
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 nail care products include
fiberglass and acrylic nail enhancement solutions applied by the salon
professional when performing nail service and the accessories used by the
professional to apply the solutions; natural nail care
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and pedicure solutions and accessories; and polishes. Professional salon
appliances and sundries include hair dryers, curling irons, brushes, pedicure
spas, furniture, and salonwear such as capes and aprons.
The professional salon products market has grown significantly during the
last several years. According to industry sources, annual professional salon
industry revenue, which includes revenue from salon services and the sale of
salon products, is approximately $40 billion in the United States and $80
billion worldwide. 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. The
professional salon products market 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,
although a number of larger companies exist in certain product categories.
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 from salons for personal use. We believe 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 salon professionals prescribe these
products and sell them primarily in connection with rendering a salon service,
professional salon products typically foster strong brand loyalty and exhibit
relative price insensitivity. Consequently, professional salon products
generally command substantially higher prices and gross margins than
mass-marketed beauty products.
COMPETITIVE STRENGTHS
We believe that the following business strengths provide us with a
competitive advantage in the professional salon products market:
- Premier Brand Names. We offer a variety of well-recognized, long-lived
premium brands in all professional salon product categories, including
ABBA Pure and Natural Hair Care, Alpha 9, Body Drench, Clean + Easy,
Cosmic, European Touch, Gena, Kizmit, Omni P.O. Professionals Only, One
Touch, Pro Finish, Revivanail, SRC, and Suntopia. We believe that the
strength of our brand names is based on the reputation of our products
for quality among salon professionals, the performance of our products,
and our 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
resulting in long brand life. Our portfolio of well-recognized brands is
a significant driver of sales to distributors, beauty supply outlets, and
salon chains. In addition, our premium brands provide opportunities for
us to expand product lines within given product categories and to
reformulate or repackage existing product lines, both of which contribute
to our internal growth.
- Breadth of Product Offerings. We believe that we currently are the only
producer of professional salon products with offerings across all salon
product categories. As we have expanded our product offerings, we have
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. We believe the
breadth of our product offerings provides us with a significant
competitive advantage by allowing our distributors to purchase more
products from fewer vendors and by enabling us to cross-market our brands
and offer tailored lines of products to distributors, beauty supply
outlets, and salon chains. This "one-stop shop" approach also serves to
strengthen our relationships with customers.
- Strong Distribution Network. We have well-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, we sell our products into
highly fragmented distribution channels to 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 our in-house sales force. Our extensive
distribution network creates a strong base from which we can pursue
additional business through cross-marketing of our current and future
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brands and new product introductions. The breadth of our distribution
network also enables us to penetrate every major geographical market in
the United States and to expand our international business.
- Successful Acquisitions. Our experience gained from successfully
acquiring and integrating 11 professional salon products businesses since
our initial public offering in November 1996 positions us to pursue
additional acquisitions. We have integrated these acquired companies and
their respective distribution relationships into our existing operations;
integrated purchasing, production, and marketing efforts; and
consolidated accounting, human resources, and other back-office
functions. We are developing an operating infrastructure to allow us to
support an increasing range of professional salon products as we continue
to acquire additional companies and product lines.
- Favorable Operating Margins. Professional salon products typically
command higher margins and exhibit relative price insensitivity when
compared to their mass-market counterparts, and we believe that we have
been able to achieve operating margins that exceed industry averages. Our
favorable operating margins result primarily from our success in
utilizing our 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. We also are taking advantage of the highly competitive
third-party manufacturing environment to reduce production costs.
- Experienced Management Team. We have an experienced management team with
significant industry experience. Sam Leopold, our Chief Executive
Officer, has more than 13 years of experience in the professional salon
products industry, including as the owner of a chain of mall-based retail
salons. Other members of our 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 will beneficially own approximately 14% of our common stock after
completion of this offering, and each other member of our senior
management team has an equity stake in our company.
- Operational Efficiency. Our new corporate headquarters and centralized
operations as well as the new centralized management and information
systems we are implementing are designed to enhance the productivity of
existing operations and future acquisitions.
STRATEGY
Our objective is to be the leading professional salon products company in
the United States and internationally. In order to achieve this objective, we
are pursuing a strategy of continued growth through internal business expansion
and acquisitions. Key elements of this strategy include the following:
Internal Growth Strategy
We intend to increase revenue and improve margins within our existing
product lines and to develop new product lines. Elements of our internal growth
strategy include the following:
- Leverage Well-Established Distribution Channels. We intend to leverage
our well-established distribution channels by providing customers with an
increasingly comprehensive array of products through acquisitions and
internal development of new brands. Through management's existing
relationships and those of acquired companies, we have developed and
integrated an increasingly extensive distribution network. We believe
that offering a growing array of well-known brands in all salon product
categories will further enhance our position as a key supplier to many of
our customers.
- Expand Distribution to Salon Chains. We are aggressively targeting sales
directly to salon chains, which we believe are underserved by
distributors and other salon product companies. We believe that our
increasingly diverse product offerings will enable us to enhance our
ability to offer salon chains the benefits of one-stop shopping,
centralized single-source ordering, tailored promotional programs, and
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dedicated customer service. We have formed a sales and marketing team
focused exclusively on further penetrating this underserved segment of
the salon products market.
- Introduction of New Products. We intend to introduce new product lines
under new brands and existing brands. We believe that our diverse product
offerings provide us with greater capacity and know-how to develop, test,
and market new products. Strong brand names also provide us the
opportunity to cross-market established and developing brands and
products. We plan to launch new, internally developed brands to leverage
our strong distribution network and leading industry position. In this
regard, we launched a new, internally developed hair care line under the
AquaTonic brand name. We also believe the strong brand name recognition
of our product lines lends itself to product line extensions under
existing brands. 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. We believe 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. In addition, we intend to introduce new
generations of existing product lines with improved formulations and
packaging. For example, we achieved success in repackaging our ABBA hair
product lines in late 1998.
- Professional Only Store Marketing Program. We are implementing a new
professional only store marketing and distribution program to service the
growing market of stores operated by large distributors that sell
directly to professional stylists.
- Expand Distribution of Existing Products Internationally. We believe
significant opportunities exist to increase sales and profits through the
expansion of the international distribution of our products. Currently,
the non-U.S. market for professional salon products represents
approximately 50% of the worldwide market. We, however, generated only
approximately 12% of our pro forma 1998 net sales outside of the United
States. We are expanding our international distribution, which currently
includes 37 countries. We will continue to focus on introducing our
products into our recently expanded international distribution channels,
which provide access to many international beauty markets.
- Enhance Operational Efficiencies. We focus on integrating acquired
businesses. Following each acquisition, we enhance operational efficiency
by (1) eliminating duplicative administrative functions, thereby lowering
overhead expenses, (2) expanding distribution channels, and (3) adding
and disseminating further market and product knowledge throughout our
operations. We plan to enhance operational efficiency further through our
new corporate headquarters and centralized operations center in
Scottsdale, Arizona. We believe that the continued realization of
operational efficiencies through our centralization and business process
reengineering efforts will enhance internal growth and profitability. We
also are implementing new centralized management and information systems,
which we believe will enhance the productivity of our existing operations
and future acquisitions. The systems will permit us to improve economies
of scale through centralized systems for accounting, purchasing,
inventory management, financial reporting, and customer service. We
believe that our investment in our management and information systems
will create a platform for long-term growth. The new systems will assist
us to access real-time information regarding customers, distributors,
purchase orders, inventory availability, and sales order history. The
systems will facilitate our integration of future acquired businesses and
improve operations by allowing us to
-- enhance customer service by providing sales representatives with
product information, promotions, and individual customer purchasing
patterns;
-- improve sales and marketing functions by tracking fast and slow
moving products and creating customized sales reports;
-- facilitate improved inventory management and purchase forecasting;
and
-- transition acquired businesses onto our centralized management and
information systems more efficiently by providing a more flexible
platform for data conversion.
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Acquisition Strategy
We seek 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 growth potential
existing in the professional salon products market. We believe 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.
We maintain a disciplined approach to acquisitions and evaluate each potential
acquisition based on the following goals:
- Continue to Acquire Leading Brands. We plan to continue our strategy of
acquiring leading brand names that complement our portfolio of brands and
command strong customer loyalty, solidify our position as a leading
supplier of professional salon products, and further enhance our
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 Our Portfolio of Brands. We intend to acquire
companies and product lines that diversify and strengthen our portfolio
of brands. In this regard, we seek to acquire complementary products that
will enable us to offer multiple brands in each salon product category
and a broader range of products addressing the various niches within
these categories. We believe that this approach will enable us 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. We intend to acquire companies and
product lines that strengthen our relationships with domestic and
international distributors. Strong distribution networks of acquired
companies will enable us to increase sales by introducing our existing
products into new distribution channels and newly acquired or developed
products into existing distribution channels.
- Expand Product Offerings. We plan to expand our product offerings to
include premium department store, boutique, catalog, and e-commerce lines
through the acquisition of companies or brand names geared to these
distribution channels.
Our future acquisitions increasingly will focus on companies that are
larger than those previously acquired and that enhance our position in the
professional salon product market or enable us to penetrate new consumer product
distribution channels.
PRODUCTS
We offer products in all salon product categories. We sell more than 500
professional salon hair care, skin and body care, natural nail care and nail
enhancement products, and salon accessories and sundries, representing
approximately 1,500 stock keeping units, or SKUs. We believe that the strength
of our brand names is based on the reputation of our products for quality among
salon professionals, the performance of our products, and our focused commitment
to the needs of salon professionals and their clientele. We believe these brand
names are widely recognized by salon product distributors and salon
professionals and their clients as high-quality, effective products. In
addition, we believe that the strength of the brand names of our existing
products and our reputation within the industry will assist us to develop and
market product line extensions and new brands successfully.
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The table below sets forth a description of our principal products, the
brand names under which the products are sold, and our estimate of approximate
percentages 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 SALONS
<S> <C> <C> <C> <C>
Hair Care Shampoo, conditioner, hair color, and ABBA, 40% 60%
styling and finishing aids AquaTonic,
Biogenol, Body
Drench,
Framesi, Gena,
Roffler
Skin and Body Care Moisturizing lotion, indoor and outdoor Body Drench, 35 65
tanning products, personal care Clean + Easy,
products, paraffin waxes, thermo-therapy Gena, One
treatments, and hair removal systems and Touch, Suntopia
depilatory products
Nail Care Natural nail care products, acrylic and Alpha 9, 70 30
fiberglass nail enhancement products, Cosmic,
nail treatments, nail polish, European Touch,
light-bonded nail systems, and manicure Gena, Kizmit,
and pedicure solutions and accessories Pro Finish,
Revivanail
Salon Appliances and Hairdryers, curling irons, salon European Touch 100 --
Sundries pedicure spas, salon furniture, and II, Maiko, SRC
salonwear (capes/aprons)
</TABLE>
Hair Care Products
We offer a variety of hair care products at various price points under the
ABBA, AquaTonic, 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. We recently introduced AquaTonic, our internally developed, pure and
natural hair care line, which is designed to protect hair against the negative
effects of hard and soft water and variances in humidity. Our Framesi product
line features premium quality hair color products marketed exclusively for use
in salons. We also market under the Biogenol brand name a complementary line of
shampoos, conditioners, and styling aids specifically formulated for
color-treated hair. The Roffler line includes high-quality, salon-distributed
shampoos, conditioners, and styling aids designed primarily for men between the
ages of 18 and 40. ABBA, Biogenol, Framesi, and Roffler products are used widely
throughout the hair care industry and generate significant salon retail sales.
See "Risk Factors -- We depend on Framesi S.p.A."
Under the Gena brand name, we offer a line of tea-tree oil hair care
products with anesthetic qualities designed to relieve dry, itching scalp. In
addition, we market hair care products as a part of our Body Drench line of
personal care products, primarily to spas, resorts, and health and country
clubs.
Skin and Body Care Products
We sell a broad range of professional skin and body care and tanning
products, including moisturizers, lotions, depilatories, and hair removal
products, under our 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 and alpha hydroxy
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acids for natural skin exfoliation. Body Drench indoor tanning products replace
moisture lost during tanning and promote faster, darker tanning results. We also
offer 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 our top
selling hair removal products. The One Touch line serves the retail consumer in
the personal care market with products such as roll-on waxers, depilatories, and
electrolysis products.
Nail Care Products
We believe that we have the most complete and diverse line of branded
products for salon professionals in the nail care category. Our 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. We, however, offer a
number of top-selling products across all segments of the nail category,
permitting our customers to select and purchase individual SKUs from among
multiple brands, including Alpha 9, European Touch, Gena, Kizmit, Pro Finish,
and Revivanail. For example, we offer distributors and salon chains the ability
to purchase our Revivanail nail treatments and Alpha 9 acrylic nail enhancement
products without having to purchase the full line of other Revivanail or Alpha 9
products.
Our Alpha 9, European Touch, and Kizmit 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, 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, a collagen-enriched conditioning lotion; Pedi Care
dry skin lotion; and Pedi Soak foot bath. The Gena product line also includes
paraffin therapy products, such as Paraffin Springs Therapy Spa, a paraffin bath
for conditioning heat therapy treatments; the Healthy Hoof nail and skin
treatment line to strengthen, moisturize, and condition nails and cuticles; and
MRX antiseptics and lotions for use by salon professionals.
We offer base coats, top coats, nail glues, and cuticle lotions under our
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
ultraviolet lighting.
Our European Touch brand features nail treatment products, such as
Revivanail and Theracreme. We also offer Momentum, a three-step nail overlay
system that offers simplicity, speed, and strength.
Salon Equipment, Appliances, and Sundries
We sell salon equipment, appliances, and sundries, including pedicure spa
equipment, hairstyling appliances, and salonwear. We market under the European
Touch II name 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 intended
to capitalize on the growing trend among salons to offer services beyond the
basic salon services. The SRC product line of professional curling irons and
blow dryers are recognized within the salon industry as among the finest quality
in salon appliances. The appliances are designed for high usage and durability
and feature quick startup and recovery capabilities.
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All SRC professional curling irons are backed by the industry's only three-year
warranty. Our Maiko salonwear line features capes and aprons for the stylist and
the stylist's clientele.
PRODUCT DEVELOPMENT
We seek to leverage the significant brand-name recognition of our existing
product lines by introducing new products and formulations under our core brand
names as well as under newly developed brands. We believe that our diverse
product offerings provide us with greater capacity and know-how to develop,
test, and market new products in each of our product lines, including the
expanded application of proprietary technologies. We contract with third-party
manufacturers to develop new formulations that meet our specifications and
quality standards. We have not incurred and do not expect to incur significant
capital expenditures in connection with our product development efforts.
Our management, working together with our sales and marketing and product
development personnel, continuously monitors shifts in the salon industry to
identify new product opportunities. Feedback from salon professionals and our
educators also plays a significant role in product development. We believe the
experience of our key managers, their relationships within the industry, and our
product line orientation enable us to quickly recognize and respond to salon
innovations and industry trends.
MARKETING
We sell our 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. We
believe that our strategy of marketing our salon products exclusively for use in
or resale by the salon industry complements the professional image of our
products and fosters a high degree of brand loyalty by distributors of
professional salon products.
Our sales and marketing efforts focus on educating salon professionals and
salon product distributors regarding the high quality and performance benefits
of our products as well as the latest trends and developments in the salon
industry. Our 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. Our 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, our products are advertised in trade and distributor
publications and promoted in national magazines, including Glamour, Good
Housekeeping, InStyle, Marie Claire, McCall's, Mirabella, and Self. We also
produce educational videos and literature for distribution to distributors and
salon professionals.
SALES AND DISTRIBUTION
We believe that we have strong relationships in each of the professional
salon distribution channels, including exclusive and open channels. We depend
upon salon product and tanning supply distributors, beauty supply outlets, and
salon chains to distribute our products. We currently maintain more than 5,300
active customer accounts. We do not, however, have long-term contracts with any
of our customers. Products sold through exclusive channels are available to a
limited number of distributors in each region, while those sold through open
channels are available to all distributors. See "Risk Factors -- We depend on
major customers."
Regional sales managers and a strong educational support team sell the ABBA
line of hair care products on an exclusive basis to approximately 50 salon
product distributors and salon chains throughout the United States, Canada, and
Australia. Regional sales managers and an in-house educational support team sell
our hair color and hair care products under the Framesi, Biogenol, and Roffler
brand names on an exclusive basis to 61 salon product distributors throughout
the United States and Latin America.
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<PAGE> 39
A professional outside sales force sells our nail care product lines
nationally and internationally to salon product distributors. This distribution
base includes Sally Beauty Company, Inc., the largest wholesale supplier of
professional supply products with more than 1,900 supply stores worldwide.
A sales force of marketing representatives, telemarketers, and field sales
personnel as well as independent manufacturer representatives sell Body Drench
products to salon product distributors, tanning supply distributors, and
directly to spas, resorts, and health and country clubs throughout the United
States and in Canada, Europe, Latin America, and Australia.
A sales force of employees and manufacturer representatives sell SRC salon
appliances and salonwear nationally on an exclusive basis to salon product
distributors, beauty schools, and salon chains. A sales manager and manufacturer
representatives sell Clean + Easy products to approximately 1,000 customers.
Sales managers and manufacturer representatives sell One Touch products to
approximately 400 customers. Together, Clean + Easy and One Touch products are
sold internationally to approximately 100 customers by a director of
international sales. An internal sales force of marketing representatives sells
our European Touch II pedicure spa products to salon product distributors and
salon chains.
PRODUCTION
We have developed relationships with third parties to manufacture most of
our products. Two manufacturers in China produce certain of our hair removal
appliances. Although we generally do not have long-term contracts with our
manufacturers, we own most of the formulations, tools, and molds utilized in the
manufacturing processes of our products and believe we could substitute other
manufacturers if necessary. See "Risk Factors -- We depend on third parties to
manufacture our products" and "Risk Factors -- We face risks associated with our
international operations."
We produce certain of our Clean + Easy and One Touch depilatory products at
our 32,000 square foot facility in Fair Lawn, New Jersey. The 8,600 square foot
manufacturing area in our 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. We maintain raw materials and work-in-process
inventories in a 10,000 square foot warehouse and maintain finished goods in the
5,000 square foot shipping and receiving area.
We produce certain of our Biogenol and Roffler hair care products,
including shampoos, conditioners, and styling aids, in our approximately 47,000
square foot facility in Corapolis, Pennsylvania. In addition, we assemble and
upholster our European Touch II salon furniture and appliances in our 15,000
square foot manufacturing and warehousing facility in Butler, Wisconsin.
Raw materials used to produce our 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. We purchase all of these raw materials
from outside sources. The principal raw materials and packaging components for
our products are available from numerous domestic and international suppliers.
Although we do not purchase ourselves the raw materials used to manufacture the
majority of our products, we are potentially subject to variations in the prices
we pay our 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, we believe we will be able to purchase our requirements at
competitive prices. To date, increases in raw material costs have not had a
material effect on our operating results.
We continually monitor the quality of our products. We also carry product
liability insurance at levels we believe to be adequate.
COMPETITION
Our products compete directly against professional salon and other similar
products sold through distributors and professional salons. We compete on the
basis of brand recognition, quality, performance, distribution, and price.
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<PAGE> 40
Our principal competitors in the professional salon hair care products
market include Nexxus Products Co., Paul Mitchell Systems, Matrix, Redken, and
Sebastian International. Our 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. Our competitors in the professional
salon nail care market include Creative Nail Design, Inc., OPI Products Inc.,
Star Nail Products, Inc., and Backscratchers, Inc. Our 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, our professional salon products compete indirectly against hair care,
skin and body care, and nail 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 -- The professional salon
products industry is very competitive."
INTELLECTUAL PROPERTY
We have registered, or have pending applications for registration for, our
principal trademarks and brand names in the United States and in foreign
countries. Our principal trademarks and brand names include ABBA Pure and
Natural Hair Care, Alpha 9, AquaTonic, Biogenol, Body Drench, Clean + Easy,
Cosmic, European Touch, Gena, Kizmit, One Touch, Pro Finish, Revivanail,
Roffler, SRC, and Suntopia.
We believe our position in the marketplace depends to a significant extent
upon the goodwill engendered by our trademarks and brand names and, therefore,
consider trademark protection to be important to our business. We will seek to
register or otherwise protect all significant trademarks and brand names in all
active geographic markets.
While we currently hold certain patents, we do not consider any single
patent to be material to the conduct of our business. We rely on all facets of
intellectual property law to protect our proprietary information. See "Risk
Factors -- We face risks associated with our intellectual property."
GOVERNMENT REGULATION
Certain of our advertising and product labeling practices are subject to
regulation by the FTC, and certain of our professional salon product production
practices are subject to regulation by the FDA as well as by various other
federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
us 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 liability claims, production methods,
product content, labeling, and packaging. In addition, any expansion of our
operations to produce professional salon products that include over-the-counter
drug ingredients, such as certain sun screen ingredients, would result in us
becoming subject to additional FDA regulations as well as a higher degree of
inspection and greater burden of regulatory compliance than currently exist.
Our operations subject us to federal, state, and local governmental
regulations related to the use, storage, discharge, and disposal of hazardous
chemicals. Our failure to comply with current or future environmental
regulations could result in the imposition of fines, suspension of production,
or a cessation of operations. Compliance with such regulations could require us
to acquire costly equipment or to incur other significant expenses. Any failure
by us to control the use, or adequately restrict the discharge, of hazardous
substances could subject us to future liabilities.
The nature and use of professional salon products could give rise to
product liability claims if one or more users of our 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 our control, including
hypoallergenic sensitivity and the possibility of malicious tampering with our
products. In the event of such an occurrence, we could incur substantial
litigation expense, receive adverse publicity, and suffer a loss of sales.
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<PAGE> 41
EMPLOYEES
As of August 11, 1999, we employed 352 persons, consisting of 132
administrative employees, 136 warehouse and production employees, and 84 sales
and marketing employees. Framesi USA, one of our subsidiaries, is a party to a
collective bargaining agreement relating to certain production employees. We
believe that our relations with our employees are good.
PROPERTIES
We lease our corporate headquarters and operations center located in a
66,000 square-foot facility in Scottsdale, Arizona. The facility includes
approximately 43,000 square feet of executive and administrative offices;
approximately 20,000 square feet utilized for warehousing; and approximately
3,000 square feet utilized for a test salon and a retail store. We believe the
facility will be adequate for our needs for the foreseeable future. We also
lease production, administrative, and warehouse space in Fair Lawn, New Jersey;
Butler, Wisconsin; Corapolis, Pennsylvania; and the United Kingdom; as well as
administrative space in Lebanon, Tennessee, and Costa Mesa, California.
LITIGATION
We are, and may in the future be, party to litigation arising in the
ordinary course of our business. We do not consider any current claims to be
material to our business, financial condition, or operating results. Our
insurance coverage may not be adequate to cover all liabilities arising out of
any claims that may be instituted in the future. A lack of insurance coverage
may have an adverse effect on our business, financial condition, and operating
results.
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<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Sam L. Leopold....................... 45 Chairman of the Board, President, and Chief
Executive Officer
Richard R. Ross...................... 32 Executive Vice President, Chief Financial Officer,
Treasurer, and Director
N. Bruce Cowgill..................... 52 Executive Vice President -- Operations
Michael L. Kaplan.................... 30 Executive Vice President, General Counsel, and
Secretary
J. Timothy Montrose.................. 32 Chief Accounting Officer
James A. Brooks...................... 68 Director
Peter W. Burg........................ 43 Director
Michael H. Feinstein................. 62 Director
Sylvan Schefler...................... 61 Director
</TABLE>
SAM L. LEOPOLD, a founder of our company, has served as our Chairman of the
Board and Chief Executive Officer since our incorporation in June 1995 and as
our President since February 1998. Mr. Leopold previously owned and served as
President and Chairman of Beauty Boutique International, which was founded in
1990 and operated three retail beauty salons in Arizona. From 1986 to 1991, Mr.
Leopold served as Executive Vice President of Consumer Beauty Supply, Inc. (dba
Beauty Express), a mall-based retail chain of beauty supply salons. During that
time, Mr. Leopold was responsible for day-to-day operations and oversaw the
growth and development of Beauty Express from fewer than 20 retail salons to
more than 50 retail salons. From 1989 to 1991, Mr. Leopold served as President
of Avanti International, Inc. and developed a line of hair care products.
RICHARD R. ROSS has served as our Chief Financial Officer and Treasurer
since April 1997 and as our Executive Vice President and a director 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 us from
our inception in June 1995, as well as with other acquisition-oriented public
companies, until joining us in April 1997. Mr. Ross is a certified public
accountant.
N. BRUCE COWGILL has served as our Executive Vice President -- Operations
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., the largest beauty supply distributor in
North America, from December 1986 to April 1989. In addition, he served as Vice
President of Global Marketing, Advertising and Education, and International
Sales of Redken Laboratories from July 1978 to August 1983. Mr. Cowgill held
marketing management positions at Proctor and Gamble, Warner Lambert, and R.J.
Reynolds from 1972 to 1978.
MICHAEL L. KAPLAN has served as our Executive Vice President, General
Counsel, and Secretary 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 companies, including us. Mr. Kaplan also was an
attorney with Fennemore Craig, P.C. from September 1993 to August 1995.
J. TIMOTHY MONTROSE has served as our Chief Accounting Officer since May
1997 and has been employed by us since December 1996. From November 1995 to
December 1996, Mr. Montrose served as the
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<PAGE> 43
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 our 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 that 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 our company since February 1997.
Mr. Burg has been a director and shareholder in the law firm of Burg Simpson
Eldredge Hersh & Houliston, P.C. (and its predecessor Burg & Aspinwall, P.C.)
since October 1984.
MICHAEL H. FEINSTEIN has served as a director of our company since June
1997. Mr. Feinstein has served as President and Chief Executive Officer of
Automated Solutions, Inc., a privately held Arizona company, since July 1998.
Mr. Feinstein also serves as a director of Automated Solutions, Inc. Mr.
Feinstein served as a consultant to Samoth Capital Corporation, a publicly owned
real estate company, from April 1998 to July 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 July 1995, Mr. Feinstein served initially as Executive Vice
President and subsequently as acting President and Chief Executive Officer of
American Southwest Financial Corporation, which engages 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 our 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 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 our 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. 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.
We have agreed that, for a period of three years from our initial public
offering in November 1996, the representatives of the underwriters of our
initial public offering will have the right to send an observer to each meeting
of our Board of Directors, or in lieu of such observer, the representatives may
elect to require us to use our best efforts to elect Sylvan Schefler, formerly
Vice Chairman of Prime Charter Ltd., or another mutually acceptable designee, to
our Board of Directors for that three-year period. As a result of this
agreement, Mr. Schefler serves as a member of our 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 our directors or officers.
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<PAGE> 44
KEY EMPLOYEES
The following table sets forth certain information regarding certain of our
key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Allen J. Smith..................... 59 Executive Vice President -- Sales
Charles R. Miller.................. 62 Senior Vice President -- Operations
Paula Malloy....................... 41 Executive Vice President -- Marketing
</TABLE>
ALLEN J. SMITH was named Executive Vice President -- Sales during August
1999. Prior to that, Mr. Smith served as our Senior Vice President -- Operations
from November 1998 to August 1999. Mr. Smith served as Vice President of Company
Owned Distribution at Sebastian International from September 1996 to November
1998, and as General Manager, Northern California of that company during
September 1993 to September 1996.
CHARLES R. MILLER has served as our Senior Vice President -- Operations
since January 1999. Prior to that Mr. Miller served as Vice
President -- Operations of U.K. ABBA Products, Inc. from August 1997 to December
1998 and served as a consultant to executive staff of that company from March
1996 to August 1997. Mr. Miller also served in various positions with JOICO
Laboratories, Inc., including Chief Financial Officer and Chief Operating
Officer from September 1989 to February 1994, and as an independent consultant
to that company from February 1994 to March 1996. Prior to that time, Mr. Miller
served as Chief Financial Officer for Matrix Essentials, and as a consultant to
management of Creative Nail Design Systems.
PAULA MALLOY was named Executive Vice President -- Marketing during August
1999. Prior to that, Ms. Malloy served as our Vice President -- Education and
New Product Development from November 1998 to August 1999. Ms. Malloy has also
served as Senior Director -- Education and Research & Development of Sebastian
International from November 1997 to November 1998, and as Director of Education
of that company from April 1995 to November 1997.
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<PAGE> 45
EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered in all capacities to us for the fiscal years ended December 31, 1996,
1997, and 1998 by our Chief Executive Officer and our other most highly
compensated officer whose aggregate cash compensation exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
AWARDS
ANNUAL COMPENSATION --------------------- ALL OTHER
------------------------------- SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($)(2) BONUS($) OPTIONS(#)(3) ($)(4)
<S> <C> <C> <C> <C> <C>
Sam L. Leopold....................... 1998 $200,000 $280,000 325,000(5) $3,750
Chairman of the Board, Chief 1997 $150,000 -- 200,000 --
Executive Officer, and President 1996 $ 16,538(6) -- -- --
Richard R. Ross...................... 1998 $150,000 $122,500 125,000(7) $1,563
Executive Vice President, Chief 1997 $ 86,667 -- 79,530 --
Financial Officer, Treasurer, and
Director
</TABLE>
- ---------------
(1) We consider Sam L. Leopold, Richard R. Ross, N. Bruce Cowgill, Michael L.
Kaplan, and J. Timothy Montrose to be our executive officers. Messrs.
Cowgill and Kaplan began their employment with us during fiscal 1998. The
cash compensation for Messrs. Cowgill, Kaplan, and Montrose did not exceed
$100,000 during fiscal 1998.
(2) Other annual compensation did not exceed 10% of the total salary and bonus
for any of the Named Executive Officers.
(3) The exercise prices of all stock options granted were equal to the fair
market value of our common stock on the date of grant.
(4) Amounts shown for fiscal 1998 represent matching contributions made by us to
our 401(k) Plan.
(5) Includes 125,000 options that were cancelled in December 1998.
(6) Includes $16,538 in salary earned by Mr. Leopold in fiscal 1996 but deferred
to fiscal 1997.
(7) Includes 50,000 options that were cancelled in December 1998.
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<PAGE> 46
OPTION GRANTS
The following table sets forth certain information regarding options
granted to the Named Executive Officers during the fiscal year ended December
31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
% VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------
GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Sam L. Leopold......... 125,000(3) 18.1% $15.875 1/29/08(3) $1,247,963 $3,162,583
75,000 10.9% $12.375 9/4/08 $585,693 $1,479,192
125,000 18.1% $ 9.750 1/29/08 $766,465 $1,942,374
Richard R. Ross........ 50,000(3) 7.3% $15.875 1/29/08(3) $499,185 $1,265,033
25,000 3.6% $12.375 9/4/08 $194,564 $493,064
50,000 7.3% $ 9.750 1/29/08 $306,586 $776,949
</TABLE>
- ---------------
(1) The options were granted at the fair market value of the shares on the date
of grant and have 10-year terms. One-third of the options vest and become
exercisable on each of the first, second, and third anniversaries of the
date of grant.
(2) Calculated from a base price equal to the exercise price of each option,
which was the fair market value of the common stock on the date of grant.
Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the SEC and do not represent our estimate or
projection of the future price of our common stock. Actual gains, if any, on
stock option exercises will depend upon the future market prices of our
common stock.
(3) These options were cancelled in December 1998.
OPTION EXERCISES AND HOLDINGS
The following table represents information on options exercised in the last
fiscal year by the Named Executive Officers and the value of each such officer's
unexercised options at December 31, 1998.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2)
EXERCISE REALIZED ------------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Sam L. Leopold............. -- -- 233,334 166,666 $-- $--
Richard R. Ross............ 5,000 $66,250 69,386 80,144 $-- $--
</TABLE>
- ---------------
(1) Calculated based on the market price at exercise multiplied by the number of
options exercised less the total exercise price of the options exercised.
(2) The exercise prices of all options held by the Named Executive Officers are
greater than or equal to the closing sales price of the common stock as
quoted on the Nasdaq National Market on December 31, 1998 of $9.25 per
share.
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<PAGE> 47
EMPLOYMENT AGREEMENTS
Our employment agreement with Mr. Leopold provides for Mr. Leopold to serve
as our Chairman of the Board and Chief Executive Officer through September 2001.
Mr. Leopold will receive a base salary of $250,000 per annum for the remainder
of the term of his employment agreement. Mr. Leopold is also entitled to receive
an annual bonus as determined by the board of directors, or a committee
appointed by the board of directors. The employment agreement also contains a
covenant not to compete with us during the term of the employment agreement and
one year following the termination of Mr. Leopold's employment.
Our employment agreement with Mr. Ross provides for Mr. Ross to serve as
our Chief Financial Officer for an initial term of two years ending in June
2001. Mr. Ross will receive a base salary at an annual rate of $175,000 through
December 31, 1999 and $200,000 for the remainder of the term of his employment
agreement. The employment agreement also provides for incentive compensation
based on the performance of Mr. Ross as determined by a committee of our board
of directors. In the event of any "change of control" of our company as defined
in the employment agreement, we will pay Mr. Ross a lump sum of three times his
salary, plus any unpaid fringe benefits through the remaining term of the
employment agreement, and any bonus earned prior to the change of control. The
employment agreement also contains a covenant not to compete with us during the
term of the employment agreement and one year following the termination of Mr.
Ross's employment.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan, as amended, (the "1996 Plan") provides for the
grant of options to purchase shares of our common stock. The 1996 Plan is
intended to promote our interests by providing key employees, members of our
board of directors, consultants, and independent contractors who provide
valuable services to us with the opportunity to acquire, or otherwise increase,
their proprietary interest in our company as an incentive to remain in service
to us.
The 1996 Plan is divided into the discretionary grant program and the
automatic option program. The discretionary grant program provides for the
granting of options to acquire our common stock, the direct granting of our
common stock, the granting of stock appreciation rights, or the granting of
other cash awards. Options and awards under the 1996 Plan may be issued to
executives, key employees, and others providing valuable services to us or our
subsidiaries. Options issued under the 1996 Plan may be incentive stock options
or nonqualified stock options. The automatic option program provides for the
automatic grant of options to acquire our common stock granted to members of our
board of directors who are not employed by us.
An aggregate of 1,000,000 shares of our common stock may be issued under
the 1996 Plan. If any change is made in the stock subject to the 1996 Plan, or
subject to any option or award granted under the 1996 Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, split-up,
combination of shares, exchange of shares, change in corporate structure, or
otherwise), the 1996 Plan provides that appropriate adjustments will be made as
to the maximum number of shares subject to the 1996 Plan and the number of
shares and exercise price per share of stock subject to outstanding options and
awards. As of August 11, 1999, an aggregate of 17,800 shares of common stock had
been issued upon exercise of options granted under the 1996 Plan and there were
730,230 options outstanding under the 1996 Plan. The 1996 Plan will remain in
force until September 2006.
To the extent that granted options are incentive stock options, the terms
and conditions of those options must be consistent with the qualification
requirements set forth in the Internal Revenue Code of 1986. options that are
incentive stock options may be granted only to our key personnel (and our
subsidiaries) who are also our employees (or our subsidiaries). The maximum
number of shares of stock with respect to which options or stock appreciation
rights may be granted to any employee during the term of the 1996 Plan may not
exceed 50% of the shares of stock covered by the 1996 Plan.
To exercise an option, the optionholder will be required to provide us
written notice of his or her election to exercise the option and deliver to us
full payment of the exercise price for the number of shares as to which
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<PAGE> 48
the option is being exercised. Generally, options can be exercised by delivery
of cash, check, or shares of our common stock.
Awards granted in the form of stock appreciation rights entitle the
recipient to receive a payment equal to the appreciation in market value of a
stated number of shares of common stock from the price stated in the award
agreement to the market value of the common stock on the date first exercised or
surrendered. Awards granted in the form of stock awards entitle the recipient to
receive common stock directly. Cash awards entitle the recipient to receive
direct payments of cash depending on the market value or the appreciation of our
common stock or other securities.
Under the automatic option program, each new independent member of our
board of directors automatically will receive an option to acquire 5,000 shares
of common stock on the date of his or her first appointment or election to our
board of directors. In addition, each year at the meeting of our board of
directors held immediately after our annual meeting of stockholders, each
independent member of our board of directors automatically will be granted an
option to acquire an additional 2,500 shares of common stock. Each automatic
option will become exercisable and vest on the first anniversary of the
applicable grant date. An independent member of the board of directors is not
eligible to receive an annual automatic option if the grant date is within 90
days of such independent member receiving an initial automatic option. The
exercise price per share of common stock subject to each automatic option is
equal to 100% of the fair market value per share on the date of the grant. If an
independent director ceases to serve as a director, all automatic options that
are not vested as of the date of cessation will immediately terminate.
1998 EMPLOYEE STOCK OPTION PLAN
The purpose of the 1998 Employee Stock Option Plan (the "1998 Plan") is to
further our interests and our stockholders by encouraging employees associated
with us to acquire shares of our common stock, thereby acquiring a proprietary
interest in its business and an increased personal interest in its continued
success and progress. The 1998 Plan provides for the grant of nonqualified
options to acquire our common stock.
A maximum of 150,000 shares of common stock may be issued under the 1998
Plan. If any option expires or terminates without having been exercised in full,
stock not issued under such option will again be available for the purposes of
the 1998 Plan. If shares of stock are used to pay for the exercise price, those
shares will be added to the shares available under the 1998 Plan. If any change
is made in the stock subject to the 1998 Plan or subject to any option granted
under the 1998 Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, split-up, combination of shares, exchange of
shares, change in corporate structure, or otherwise), the 1998 Plan provides
that appropriate adjustments will be made as to the maximum number of shares
subject to the 1998 Plan and the number of shares and exercise price per share
of stock subject to outstanding options. As of August 11, 1999, no shares of
common stock have been issued upon exercise of options granted under the 1998
Plan and there were 73,250 options outstanding under the 1998 Plan. The 1998
Plan will remain in effect until May 4, 2008.
Options may be granted under the 1998 Plan only to persons who at the time
of grant are our employees or consultants. Any executive officer (as that term
is defined in Rule 16a-1(f) under the Exchange Act) or director, and all persons
who own 10% or more of our issued and outstanding stock are not eligible to
receive options under the 1998 Plan.
To exercise an option, the optionholder will be required to provide us
written notice of his or her election to exercise the option and deliver to us
full payment of the exercise price for the number of shares as to which the
option is being exercised. Generally, options can be exercised by delivery of
cash, check, or shares of our common stock.
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<PAGE> 49
401(k) PROFIT SHARING PLAN
In April 1998, we established a defined contribution plan that qualifies as
a cash or deferred profit sharing plan under Sections 401(a) and 401(k) of the
Internal Revenue Code. Under the 401(k) plan, participating employees may defer
from 1% to 20% of their pre-tax compensation, subject to the maximum allowed
under the Internal Revenue Code. We will contribute $.50 for each dollar
contributed by the employee, up to a maximum contribution of 5% of the
employee's contribution. In addition, the 401(k) plan provides that we may make
an employer profit sharing contribution in such amounts as may be determined by
our board of directors. Our matching contribution vest 25% each year the
employee remains in service, and employees will be fully vested after four years
of service. If the employee terminates service to us, any unvested portion of
our matching contribution will remain in the 401(k) plan.
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<PAGE> 50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sam L. Leopold, our Chairman of the Board, President, and Chief Executive
Officer, previously owned three Beauty Boutique International stores in Arizona,
which he sold during fiscal 1998. Our sales to these Beauty Boutique
International stores approximated $171,000 during 1997 and 1998 during the
period which Mr. Leopold owned the stores. The sales to these Beauty Boutique
International stores were made in the ordinary course of business and on terms
no more favorable than terms extended to our other customers.
We paid James A. Brooks, a member of our Board of Directors, a $150,000 fee
in connection with the acquisition of U.K. ABBA Products, Inc. and the related
financing.
Sylvan Schefler, a member of our Board of Directors, is the Chairman of
Crystal Asset Management, and Chairman of Maxima Group, LLC. We paid Crystal a
$560,000 fee in connection with the acquisitions of ABBA and paid Maxima a
$560,000 fee in connection with the acquisition of certain product lines of
Inverness Corporation and the related financings.
Our initial public offering in November 1996 was co-managed by Friedman,
Billings, Ramsey & Co., Inc., and Prime Charter Ltd. Mr. Schefler was the Vice
Chairman of Prime Charter at the time of the initial public offering, but was
not a director of our company at that time. In connection with the public
offering, Friedman Billings and Prime Charter each received warrants to purchase
101,500 shares of our common stock. Prime Charter subsequently distributed to
Mr. Schefler warrants to purchase 16,240 of these shares. See "Principal
Stockholders" and "Underwriting."
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<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock on August 11, 1999 by (1) each
director; (2) each Named Executive Officer; (3) all our directors and executive
officers as a group; and (4) each person known by us to be the beneficial owner
of more than 5% of our common stock.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER(1) OWNED(1)(2) OFFERING OFFERING
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Sam L. Leopold............................................ 1,141,185(3) 26.2% 13.7%
Richard R. Ross........................................... 86,053(4) 2.1% 1.1%
N. Bruce Cowgill.......................................... 10,000(4) * *
Michael L. Kaplan......................................... 4,667(5) * *
J. Timothy Montrose....................................... 5,835(4) * *
James A. Brooks........................................... 2,500(4) * *
Peter W. Burg............................................. 16,075(6) * *
Michael H. Feinstein...................................... 7,500(4) * *
Sylvan Schefler........................................... 26,240(7) * *
Directors and executive officers as a group (nine
persons)................................................ 1,300,055(8) 28.9% 15.3%
5% STOCKHOLDERS:
Lance Laifer.............................................. 722,800(9) 17.8% 9.0%
Hilltop Partners, L.P..................................... 363,100(9) 8.9% 4.5%
Putnam Investments, Inc................................... 248,963(10) 6.1% 3.1%
Jon D. Gruber............................................. 248,000(11) 6.1% 3.1%
J. Patterson McBaine...................................... 229,300(11) 5.6% 2.8%
Geoffrey Nixon............................................ 206,500(12) 5.1% 2.6%
</TABLE>
- -------------------------
* Less than one percent
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. Except as otherwise indicated, each of such
persons may be reached through our offices at 7400 East Tierra Buena Lane,
Scottsdale, Arizona 85260.
(2) The percentages shown are calculated based upon 4,067,503 shares of common
stock outstanding on August 11, 1999. The numbers and percentages shown
include the shares of common stock actually owned as of August 11, 1999 and
the shares of common stock that the person or group had the right to
acquire within 60 days of August 11, 1999. In calculating the percentage of
ownership, all shares of common stock that the identified person or group
had the right to acquire within 60 days of August 11, 1999 upon the
exercise of options and warrants are deemed to be outstanding for the
purpose of computing the percentage of the shares of common stock owned by
such person or group, but are not deemed to be outstanding for the purpose
of computing the percentage of the shares of common stock owned by any
other person.
(3) Includes 283,334 shares of common stock issuable upon the exercise of stock
options.
(4) Represents shares of common stock issuable upon the exercise of stock
options.
(5) Includes 4,167 shares of common stock issuable upon the exercise of stock
options.
(6) Includes 10,000 shares of common stock issuable upon the exercise of stock
options.
(7) Includes 10,000 shares of common stock issuable upon the exercise of stock
options, and 16,240 shares of common stock issuable upon the exercise of
warrants issued to Mr. Schefler.
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<PAGE> 52
(8) Includes 419,389 shares of common stock issuable upon the exercise of stock
options and 16,240 shares of common stock issuable upon the exercise of
warrants.
(9) Mr. Laifer, as the President, sole director, and principal stockholder of
Laifer Capital Management, Inc., may be deemed to be the beneficial owner
of 363,100 shares of common stock beneficially owned by Laifer Capital
Management, Inc. in its capacity as General Partner and Investment Advisor
to Hilltop Partners, L.P., and 359,700 shares of common stock beneficially
owned by Laifer Capital Management, Inc. in its capacity as Investment
Advisor to various other clients. These clients include (i) various Wolfson
family entities, and (ii) Hilltop Offshore Limited. Laifer Capital
Management, Inc. has sole voting and dispositive power with respect to the
363,100 shares of common stock beneficially owned by Hilltop Partners, L.P.
Laifer Capital Management, Inc. also has sole voting and dispositive power
with respect to 49,200 shares of common stock owned by Hilltop Offshore
Limited and shared voting and dispositive power with respect to 310,500
shares of common stock beneficially owned by the various Wolfson family
entities. The address of Mr. Laifer and Hilltop Partners, L.P. is 45 West
45th Street, New York, NY 10036. Beneficial ownership information is based
upon a Schedule 13D/A filed with the SEC dated as of January 8, 1999.
(10) Represents shares of common stock beneficially owned by Putnam Investments,
Inc. ("PI"), a wholly owned subsidiary of Marsh & McLennan Companies, Inc.
("M&MC"), each of which is a registered investment adviser. All of such
shares are beneficially owned by subsidiaries of PI that are registered
investment advisers. PI has shared dispositive power with respect to all of
such shares, and shared voting power with respect to 10,263 of such shares.
PI and M&MC disclaim beneficial ownership of such shares, and disclaim any
power to vote or dispose of such shares. PI's principal address is One Post
Office Square, Boston, Massachusetts, 02109. Beneficial ownership
information is based upon a Schedule 13G filed with the SEC dated as of
February 11, 1999.
(11) Represents shares of common stock beneficially owned by Jon D. Gruber and
J. Patterson McBaine in their capacities as the sole directors and
executive officers of Gruber and McBaine Capital Management and various
other entities controlled by Messrs. Gruber and McBaine. Mr. Gruber has
shared voting power and shared dispositive power with respect to 217,300 of
such shares, and sole voting power and sole dispositive power with respect
to 30,700 of such shares. Mr. McBaine has shared voting power and shared
dispositive power with respect to 217,300 of such shares, and sole voting
power and sole dispositive power with respect to 12,000 of such shares. The
principal address of Messrs. Gruber and McBaine is 50 Osgood Place,
Penthouse, San Francisco, California, 94133. Beneficial ownership
information is based upon a Schedule 13G filed with the SEC dated as of
December 9, 1997.
(12) Represents 206,500 shares of common stock beneficially owned by Geoffery
Nixon and various entities over which MCM Associates, Ltd. ("MCM") has sole
investment discretion. Mr. Nixon is the sole shareholder, director, and
officer of MCM. Mr. Nixon, through joint ownership with his wife, and MCM,
as sole investment manager, have sole voting power and sole dispositive
power over the shares indicated. Mr. Nixon's principal business address is
11 West 42nd Street, 19th Floor, New York, New York 10036. Beneficial
ownership information is based upon a Schedule 13G filed with the SEC dated
as of January 29, 1999.
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<PAGE> 53
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 10,000,000 shares of common stock,
par value $0.0001 per share, and 1,000,000 shares of serial preferred stock, par
value $0.0001 per share. As of June 30, 1999, there were issued and outstanding
4,067,503 shares of common stock and no shares of serial preferred stock. We
have also reserved 1,000,000 shares of common stock for issuance under the 1996
Plan and 150,000 shares of common stock for issuance under the 1998 Plan.
COMMON STOCK
The holders of common stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of the stock entitled to vote in
any election of directors may elect all of the directors standing for election.
Subject to the preferences that may be applicable to any then outstanding
preferred stock, the holders of common stock will be entitled to receive such
dividends, if any, as may be declared by our board of directors from time to
time out of legally available funds. Upon our liquidation, dissolution, or
winding up, the holders of common stock will be entitled to share ratably in all
our assets that are legally available for distribution, after payment of all
debts and other liabilities and subject to the prior rights of holders of any
preferred stock then outstanding. The holders of common stock have no
preemptive, subscription, redemption, or conversion rights.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by Delaware law, but without further action by our stockholders, to provide for
the issuance of serial preferred stock in one or more series, to establish from
time to time the number of shares to be included in such series, to fix the
designations, powers, preferences, and rights of the shares of each such series
and any qualifications, limitations, or restrictions thereof, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without any further vote or action by
the stockholders. The board of directors may authorize and issue serial
preferred stock with voting or conversion rights that could adversely affect the
voting power or other rights of the holders of common stock. In addition, the
issuance of serial preferred stock may have the effect of delaying, deterring,
or preventing a change in control of our company. We have no current plan to
issue any shares of serial preferred stock although shares of preferred stock
could be issued as a result of our Shareholders' Rights Plan discussed below.
WARRANTS
Underwriter Warrants
In connection with our initial public offering, we issued 203,000 common
stock purchase warrants (the "Underwriter Warrants"). As of August 11, 1999, all
of the Underwriter Warrants remained outstanding. Each Underwriter Warrant
entitles the holder thereof to purchase at any time prior to November 21, 2001,
one share of common stock at an exercise price of $12.00 per share, subject to
adjustment in accordance with the anti-dilution and other provisions referred to
below. The shares of our common stock underlying the Underwriter Warrants (the
"Underwriter Warrant Shares"), when issued upon the exercise thereof and payment
of the purchase price, will be fully paid and nonassessable. The holders of the
Underwriter Warrants do not have the rights or privileges of holders of common
stock.
The exercise price and the number of shares of common stock purchasable
upon the exercise of the Underwriter Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits, and
combinations or reclassification on or of the common stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of common
stock, consolidation or merger of our company with or into another corporation,
or sale of all or substantially all of our assets in order to enable holders of
Underwriter Warrants to acquire the kind and number of shares that might
otherwise have been purchased upon the exercise of the Underwriter Warrants. No
adjustments will be made unless such
50
<PAGE> 54
adjustment, or such adjustment when aggregated with subsequent adjustments,
would require an increase or decrease of at least $.01 in the exercise price of
the Underwriter Warrants.
We have granted certain "piggy-back" registration rights with respect to
the shares of common stock purchasable pursuant to the exercise of the
Underwriter Warrants. Under these registration rights, each holder of common
stock acquired upon the exercise Underwriter Warrants may request us to register
such stock if we propose to register any securities under the securities laws
using the same registration form that would be used to register the Underwriter
Warrant Shares. We have agreed to pay all expenses associated with any
registration of the common stock acquired pursuant to the exercise of the
Underwriter Warrants, except that any fees of legal counsel of the holders and
underwriter's fees, discounts, or commissions relating to the common stock
registered by such holders will be the responsibility of the selling
stockholder. The "piggy-back" registration rights of the Under Warrantholders
expire on November 21, 2003.
We have also granted certain "demand" registration rights with respect to
the shares of common stock purchasable upon the exercise of the Underwriter
Warrants. Under these registration rights, the majority of the holders of the
then outstanding Underwriter Warrants and Underwriter Warrant Shares may request
us to register such stock. We will not be obligated to effect more than two
"demand" registrations. In the event that our registration of common stock is
for a public offering involving an underwriting, the holders of a majority of
the Underwriter Warrants and Underwriter Warrant Shares will have the right to
select the underwriter, subject to our reasonable approval. The "demand"
registration rights of the Underwriter Warrantholders expire on November 21,
2001.
Lender Warrants
In connection with the June 1997 Credit Facility that is no longer
outstanding, we issued 160,000 common stock purchase warrants (the "Lender
Warrants"). As of August 11, 1999, all of the Lender Warrants remained
outstanding. Each Lender Warrant entitles the holder to purchase, at any time
prior to June 25, 2002, with respect to 10,000 Lender Warrants, one share of
common stock at an exercise price of $10.18 per share, and with respect to
150,000 Lender Warrants, one share of common stock at an exercise price of
$11.38 per share. The share amounts and exercise prices are subject to
adjustment in accordance with the anti-dilution and other provisions referred to
below. The shares of our common stock underlying the Lender Warrants (the
"Lender Warrant Shares"), when issued upon the exercise thereof and payment of
the purchase price, will be fully paid and nonassessable. The holders of the
Lender Warrants do not have the rights or privileges of holders of common stock.
The exercise price and the number of shares of common stock purchasable
upon the exercise of the Lender Warrants are subject to adjustment upon the
occurrence of certain events, including cash dividends, stock dividends, stock
splits, and combinations or reclassification on or of the common stock.
Additionally, an adjustment would be made in the case of a reclassification or
exchange of common stock, consolidation or merger of our company with or into
another corporation, or sale of all or substantially all of our assets in order
to enable holders of Lender Warrants to acquire the kind and number of shares
that might otherwise have been purchased upon the exercise of the Lender
Warrants. No adjustments will be made unless such adjustment would require an
increase or decrease of at least 1% in the number of securities then purchasable
under the Lender Warrants.
We have granted certain "incidental" registration rights with respect to
the shares of common stock purchasable pursuant to the exercise of the Lender
Warrants. Under these registration rights, each holder of common stock acquired
pursuant to the exercise of the Lender Warrants may request us to register such
stock if we propose to register any of our equity securities under the
securities laws for sale to the public. We have agreed to pay all expenses
associated with any registration of the common stock acquired pursuant to the
exercise of the Lender Warrants. In the event that our registration of common
stock is for a public offering involving an underwriting, the "incidental"
registration rights described above will entitle the holders of the Lender
Warrants certain preferences to participate in such registration, depending upon
whether we propose the registration, or whether other security holders
possessing similar registration rights propose the registration. The
"incidental" registration rights of the Lender Warrantholders terminate when (1)
such securities have been disposed of in accordance with such an effective
registration statement, (2) our counsel receives a written opinion that such
securities may be sold without registration under the securities laws, (3) the
Lender
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<PAGE> 55
Warrants expire unexercised or are otherwise terminated, or (4) such securities
have been sold through a broker, dealer, or underwriter in a public distribution
or a public securities transaction in which the transferee receives a
certificate without a restrictive legend.
SENIOR SUBORDINATED NOTES DUE JULY 1, 2008
In June 1998, we issued the $100 of senior subordinated notes. We used the
net proceeds of that offering to finance our acquisition of the European Touch
Companies, to repay amounts outstanding under our then existing senior credit
facility, to repay certain other indebtedness, and to provide working capital.
The senior subordinated notes were issued under an Indenture between us,
certain of our subsidiaries as guarantors, and State Street Bank and Trust
Company of California, N.A., as trustee. The following subsidiaries jointly and
severally guarantee the senior subordinated notes: Gena, JDS, ABBA, European
Touch, European Touch II, Beauty Products Inc., Cosmetics International Inc.,
Ft. Pitt Acquisition, Inc., Ft. Pitt-Framesi, Ltd., Styl Institute, Inc., and
Styling Technology Nail Corporation.
The senior subordinated notes will mature on July 1, 2008, unless
previously redeemed by us. Interest on the senior subordinated notes is payable
semiannually on January 1 and July 1, commencing on January 1, 1999. We have the
option to redeem the senior subordinated notes, in whole or in part, at any time
on or after July 1, 2003. If we redeem the senior subordinated notes before July
1, 2006, we will be required to pay a premium over the principal amount. On or
after that date, the redemption price will be equal to the principal amount. In
either event, we must also pay any accrued and unpaid interest to the date of
redemption. Upon a Change of Control as defined in the agreement covering the
notes, we will be required to make an offer to repurchase all outstanding senior
subordinated notes at 101% of the principal amount plus accrued and unpaid
interest to the date of repurchase. We are not required to make mandatory
redemption or sinking fund payments on the senior subordinated notes.
The senior subordinated notes are our general unsecured obligations. The
senior subordinated notes rank subordinate in right of payment to all senior
debt as defined in the agreement covering the notes and senior or pari passu in
right of payment to all our existing and future subordinated debt as defined in
the agreement covering the notes. The subsidiary guarantees are general
unsecured obligations of the guarantors. The guarantees likewise rank
subordinate in right of payment to all senior debt of the guarantors and senior
or pari passu in right of payment to all existing and future subordinated debt
of the guarantors.
SHAREHOLDER RIGHTS PLAN
We have adopted a Shareholder Rights Plan under which holders of shares of
common stock are entitled to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock at a purchase price of $70, subject to
certain antidilution adjustments. The rights will expire 10 years after issuance
and will be exercisable on a stock acquisition date. A "stock acquisition date"
will occur if (1) a person or group becomes the beneficial owner of 15% or more
of our common stock; (2) persons currently holding 15% or more of the common
stock acquire an additional 1% or more of the common stock; or (3) a person or
group commences a tender or exchange offer that would result in the offeror
beneficially owning 15% or more of the common stock. If a stock acquisition date
occurs, each right, unless redeemed by us, entitles the holder to purchase an
amount of our common stock, or in certain circumstances a combination of
securities and/or assets or the common stock of the acquiror, having a market
value of twice the exercise price of the right. Rights held by the acquiring
person will become void and will not be exercisable to purchase shares at the
bargain purchase price.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors, except pursuant to an offer conditioned
on a substantial number of rights being acquired. The rights should not
interfere with any merger or other business combination approved by the board of
directors since the rights may be redeemed by us at $.01 per right at any time
before a stock acquisition date.
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DELAWARE GENERAL CORPORATION LAW AND CERTAIN CHARTER PROVISIONS
The provisions of our First Amended and Restated Certificate of
Incorporation and Bylaws and the Delaware General Corporation Law summarized
below may have the effect of discouraging, delaying, or preventing hostile
takeovers, including those that might result in a premium over the market price,
or discouraging, delaying, or preventing changes in control or management of our
company.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly held Delaware
corporation from engaging, under certain circumstances, in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless (1) prior to the date at which the stockholder became an
interested stockholder, the board of directors approved either the business
combination or the transaction in which the stockholder becomes an interested
stockholder; (2) upon consummation of the transaction in which the stockholder
becomes an interested stockholder, the stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans); or (3) the business
combination is approved by the board of directors and by two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent) held on or subsequent to the date of the business combination. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 15% or
more of the corporation's voting stock. Section 203 defines a "business
combination" to include mergers, consolidations, stock sales and asset based
transactions, and other transactions resulting in a financial benefit to the
interested stockholder.
Our First Amended and Restated Certificate of Incorporation and Bylaws
contain a number of other provisions relating to corporate governance and to the
rights of stockholders. These provisions include (a) the authority of the board
to fill vacancies on the board, and (b) the authority of the board to issue
preferred stock in series with such voting rights and other powers as the board
may determine.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust Inc., Denver, Colorado.
LISTING
Our common stock trades on the Nasdaq National Market under the symbol
"STYL."
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<PAGE> 57
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, ING Barings LLC, U.S.
Bancorp Piper Jaffray Inc., First Security Van Kasper, DLJdirect Inc., and
Friedman, Billings, Ramsey & Co., Inc. have severally agreed to purchase from us
the respective number of shares of our common stock set forth opposite their
names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
ING Barings LLC.............................................
U.S. Bancorp Piper Jaffray Inc..............................
First Security Van Kasper...................................
DLJdirect Inc...............................................
Friedman, Billings, Ramsey & Co., Inc. .....................
----------
Total.................................................. 4,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of our common stock
offered in this prospectus are subject to approval by their counsel of certain
legal matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all of our shares of common stock offered in
this prospectus (other than those shares covered by the over-allotment option
described below) if any are purchased.
The underwriters initially propose to offer our shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers, including the
underwriters, at that price less a concession not in excess of $ per share.
The underwriters may allow, and the dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of our common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
PAID BY US
--------------------
NO FULL
EXERCISE EXERCISE
<S> <C> <C>
Per share................................................... $ $
Total.......................................................
</TABLE>
We will pay the offering expenses, estimated to be $700,000.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 600,000 additional shares of our common stock at
the initial public offering price less underwriting discounts and commissions.
The underwriters may exercise this option solely to cover over-allotments, if
any, made in connection with this offering. To the extent that the underwriters
exercise this option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of the additional shares based on
the underwriter's percentage underwriting commitment as indicated in the
preceding table.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make.
54
<PAGE> 58
We, our executive officers and directors, and certain of our stockholders,
warrant holders, and option holders have agreed, subject to certain exceptions,
not to:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock, or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any of our
common stock
for a period of 120 days after the date of this prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
However, we may:
- grant stock options or stock awards under our existing benefit or
compensation plans, including our 1996 Stock Option Plan and 1998
Employee Stock Option Plan,
- issue shares of our common stock upon the exercise of options, warrants
or rights or the conversion of currently outstanding securities, and
- issue, offer and sell shares of our common stock or securities
convertible into, or exercisable or exchangeable for, our common stock in
transactions not involving a public offering, or in connection with
future acquisitions, as long as each recipient of the securities agrees
in writing to be bound by the restrictions in this paragraph.
In addition, during this 120-day period, we have also agreed not to file
any registration statement with respect to, and each of our executive officers
and directors and certain of our stockholders and option holders have agreed not
to make any demand for, or exercise any right with respect to, the registration
of any shares of our common stock or any securities convertible into or
exercisable or exchangeable for our common stock without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation.
One of the underwriters of this offering, Friedman, Billings, Ramsey & Co.,
Inc., was the managing underwriter of our initial public offering in November
1996. For those services, Friedman, Billings, Ramsey & Co., Inc. received normal
underwriters' compensation and 101,500 common stock purchase warrants. Each
warrant entitles the holder to purchase at any time prior to November 21, 2001,
one share of common stock at an exercise price of $12.00 per share, subject to
adjustment in accordance with anti-dilution provisions. As of August 11, 1999,
all of these warrants remained outstanding. See "Description of
Securities -- Warrants -- Underwriter Warrants."
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock offered in this prospectus in any jurisdiction where action for the
purpose is required. The shares of our common stock offered in this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisements in connection with the offer and
sale of any shares of our common stock be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with the
applicable rules and regulations of the jurisdiction. Persons with this
prospectus should inform themselves about and observe any restrictions relating
to this offering and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of our common stock offered in this prospectus in any jurisdiction in which an
offer or a solicitation of this kind is unlawful.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot, which would involve
syndicate sales in excess of the offering size, creating a syndicate short
position. The underwriters may bid for and stabilize the price of our common
stock. In addition, the underwriting syndicate may reclaim selling concessions
from syndicate members and selected dealers if they repurchase previously
distributed our common stock in syndicate covering transactions, in stabilizing
transactions or otherwise. These activities may stabilize or maintain the market
price of our common stock above independent market levels. The underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
55
<PAGE> 59
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a professional
association, Phoenix, Arizona and for the underwriters by Thompson & Knight
L.L.P., Dallas, Texas.
EXPERTS
The audited financial statements of Styling Technology Corporation and
subsidiaries, Gena Laboratories, Inc., Body Drench (a Division of Designs by
Norvell, Inc.), JDS Manufacturing Co., Inc., Kotchammer Investments, Inc.,
European Touch, Ltd. II, and U.K. ABBA Products, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Ft. Pitt Acquisition, Inc. and
subsidiary as of December 31, 1997 and for the year then ended, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to an agreement for the
sale of a majority of Ft. Pitt Acquisition, Inc.'s outstanding common stock),
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the SEC relating to
the common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. Statements contained in this prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance we refer you to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. For further information with respect to us
and the common stock offered hereby, we refer you to the registration statement,
exhibits and schedules.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and file reports, proxy statements, and other information with the
SEC. These reports, proxy statements, the registration statement, and other
information may be inspected and copied at the public reference facilities
maintained by the SEC 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 SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the prescribed fees. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a
Web site on the Internet that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the SEC. The address of this site on the Internet is http://www.sec.gov.
Our common stock is quoted on the Nasdaq National Market.
56
<PAGE> 60
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
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
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-35
Unaudited Pro Forma Condensed Consolidated Statement of
Operations................................................ F-36
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-37
GENA LABORATORIES, INC.
Report of Independent Public Accountants.................... F-38
Balance Sheets.............................................. F-39
Statements of Operations.................................... F-40
Statements of Stockholders' Equity.......................... F-41
Statements of Cash Flows.................................... F-42
Notes to Financial Statements............................... F-43
BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
Report of Independent Public Accountants.................... F-49
Balance Sheets.............................................. F-50
Statements of Operations.................................... F-51
Statements of Changes in Owner's Investment................. F-52
Statements of Cash Flows.................................... F-53
Notes to Financial Statements............................... F-54
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants.................... F-57
Balance Sheets.............................................. F-58
Statements of Operations.................................... F-59
Statements of Stockholders' Equity.......................... F-60
Statements of Cash Flows.................................... F-61
Notes to Financial Statements............................... F-62
KOTCHAMMER INVESTMENTS, INC.
Report of Independent Public Accountants.................... F-65
Balance Sheet............................................... F-66
Statements of Operations.................................... F-67
Statements of Stockholders' Deficit......................... F-68
Statements of Cash Flows.................................... F-69
Notes to Financial Statements............................... F-70
</TABLE>
F-1
<PAGE> 61
<TABLE>
<S> <C>
U.K. ABBA PRODUCTS, INC.
Report of Independent Public Accountants.................... F-73
Balance Sheets.............................................. F-74
Statements of Operations.................................... F-75
Statements of Stockholders' Equity.......................... F-76
Statements of Cash Flows.................................... F-77
Notes to Financial Statements............................... F-78
EUROPEAN TOUCH, LTD. II
Report of Independent Public Accountants.................... F-83
Balance Sheets.............................................. F-84
Statements of Operations.................................... F-85
Statements of Stockholders' Equity.......................... F-86
Statements of Cash Flows.................................... F-87
Notes to Financial Statements............................... F-88
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
Independent Auditors' Report................................ F-92
Consolidated Balance Sheets................................. F-93
Consolidated Statements of Operations....................... F-94
Consolidated Statements of Stockholders' Equity............. F-95
Consolidated Statements of Cash Flows....................... F-96
Notes to Consolidated Financial Statements.................. F-97
</TABLE>
F-2
<PAGE> 62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1997 and 1998, 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 years ended
December 31, 1997 and 1998, and the related consolidated statements of
stockholders' equity for the years ended December 31, 1996, 1997 and 1998. 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, 1997 and 1998, and the results of its operations and its cash flows for the
period from November 27, 1996 to December 31, 1996 and for the years ended
December 31, 1997 and 1998, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 15, 1999 (except
with respect to the matters
discussed in Note 13,
as to which the
date is June 22, 1999).
F-3
<PAGE> 63
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 3,063,000 $ 4,023,000 $ 1,512,000
Accounts receivable, net of allowance for doubtful
accounts of approximately $1,032,000, $2,882,000,
and $3,138,000 (unaudited)....................... 14,296,000 32,326,000 43,262,000
Inventories, net.................................... 10,951,000 25,375,000 26,948,000
Prepaid expenses and other current assets........... 2,120,000 4,021,000 6,147,000
----------- ------------ ------------
Total current assets........................ 30,430,000 65,745,000 77,869,000
PROPERTY AND EQUIPMENT, net........................... 2,640,000 5,362,000 8,688,000
GOODWILL, INTANGIBLES AND OTHER, net of accumulated
amortization of approximately $1,375,000,
$4,749,000, and $7,617,000 (unaudited).............. 59,419,000 148,091,000 152,568,000
----------- ------------ ------------
$92,489,000 $219,198,000 $239,125,000
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 7,065,000 $ 12,668,000 $ 17,709,000
Accrued liabilities................................. 3,670,000 10,367,000 10,463,000
Current portion of long-term debt and other......... 5,647,000 2,768,000 3,474,000
----------- ------------ ------------
Total current liabilities................... 16,382,000 25,803,000 31,646,000
----------- ------------ ------------
DEFERRED INCOME TAXES................................. 162,000 19,216,000 19,174,000
----------- ------------ ------------
LONG-TERM DEBT AND OTHER, less current portion........ 47,377,000 140,366,000 155,652,000
----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 1,000,000 shares
authorized, no shares issued and outstanding..... -- -- --
Common stock, $.0001 par value, 10,000,000 shares
authorized, 4,757,000 shares issued and 3,949,000
shares outstanding at December 31, 1997; and
4,876,000 shares issued and 4,068,000 shares
outstanding at December 31, 1998 and June 30,
1999 (unaudited)................................. 1,000 1,000 1,000
Additional paid-in capital.......................... 27,875,000 29,038,000 29,038,000
Retained earnings................................... 2,492,000 6,574,000 5,414,000
Treasury stock...................................... (1,800,000) (1,800,000) (1,800,000)
----------- ------------ ------------
Total stockholders' equity.................. 28,568,000 33,813,000 32,653,000
----------- ------------ ------------
$92,489,000 $219,198,000 $239,125,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 64
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
NOVEMBER 27, 1996
(COMMENCEMENT SIX MONTHS SIX MONTHS
OF OPERATIONS) TO YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1999
------------------- ----------------- ----------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES....................... $1,083,000 $38,108,000 $90,373,000 $35,299,000 $68,770,000
COST OF SALES................... 571,000 16,756,000 39,222,000 15,492,000 29,857,000
---------- ----------- ----------- ----------- -----------
Gross profit.......... 512,000 21,352,000 51,151,000 19,807,000 38,913,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....... 737,000 12,201,000 32,715,000 11,909,000 25,775,000
CENTRALIZATION AND REENGINEERING
COSTS......................... -- -- 422,000 -- 1,363,000
PROVISION FOR CANCELLED
DISTRIBUTORS.................. -- -- -- -- 5,067,000
---------- ----------- ----------- ----------- -----------
737,000 12,201,000 33,137,000 11,909,000 32,205,000
---------- ----------- ----------- ----------- -----------
Income (loss) from
operations.......... (225,000) 9,151,000 18,014,000 7,898,000 6,708,000
INTEREST EXPENSE (INCOME) AND
OTHER, net.................... 2,000 (1,847,000) (9,206,000) 2,628,000 7,874,000
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM AND INCOME
TAXES......................... (223,000) 7,304,000 8,808,000 5,270,000 (1,166,000)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES.................. (72,000) 3,097,000 3,635,000 2,266,000 (452,000)
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM............ (151,000) 4,207,000 5,173,000 3,004,000 (714,000)
EXTRAORDINARY ITEM, net of tax
benefit....................... -- (1,377,000) (1,091,000) 1,091,000 446,000
---------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)............... $ (151,000) $ 2,830,000 $ 4,082,000 $ 1,913,000 $(1,160,000)
========== =========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before
extraordinary item......... $ (0.04) $ 1.07 $ 1.28 $ .75 $ (.18)
Extraordinary item, net....... -- (0.35) (.27) (.27) (.11)
---------- ----------- ----------- ----------- -----------
Net income (loss)............. $ (0.04) $ 0.72 $ 1.01 $ .48 $ (.29)
========== =========== =========== =========== ===========
Weighted average shares....... 3,770,000 3,949,000 4,033,000 4,006,000 4,068,000
========== =========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER
SHARE:
Income (loss) before
extraordinary item......... $ (0.04) $ 1.02 $ 1.20 $ .69 $ (.18)
Extraordinary item, net....... -- (0.33) (.25) (.25) (.11)
---------- ----------- ----------- ----------- -----------
Net income (loss)............. $ (0.04) $ 0.69 $ 0.95 $ .44 $ (.29)
========== =========== =========== =========== ===========
Weighted average shares....... 3,770,000 4,113,000 4,313,000 4,356,000 4,068,000
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 65
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
-------------------- ADDITIONAL EARNINGS TOTAL
SHARES COMMON PAID-IN (ACCUMULATED TREASURY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT) STOCK EQUITY
----------- ------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock on
exercise of stock options
and warrants................ 119,000 -- 426,000 -- -- 426,000
Tax benefit from stock options
exercised................... -- -- 737,000 -- -- 737,000
Net income..................... -- -- -- 4,082,000 -- 4,082,000
---------- ------ ----------- ----------- ----------- -----------
BALANCE, December 31, 1998....... 4,068,000 1,000 29,038,000 6,574,000 (1,800,000) 33,813,000
Net loss (unaudited)........... -- -- -- (1,160,000) -- (1,160,000)
---------- ------ ----------- ----------- ----------- -----------
BALANCE, June 30, 1999
(unaudited).................... 4,068,000 $1,000 $29,038,000 $ 5,414,000 $(1,800,000) $32,653,000
========== ====== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 66
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
NOVEMBER 27, SIX MONTHS SIX MONTHS
1996 TO ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1998 1998 1999
-------------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (151,000) $ 2,830,000 $ 4,082,000 $ 1,913,000 $ (1,160,000)
Adjustments to reconcile net income (loss) to
net cash used in operating activities --
Depreciation and amortization................ 97,000 1,846,000 5,187,000 1,856,000 3,492,000
Provision for cancelled distributors......... -- -- -- -- 5,067,000
Interest accretion to note payable........... -- 174,000 159,000 87,000 --
Extraordinary loss on early extinguishment of
debt...................................... -- 1,377,000 1,091,000 -- --
Changes in assets and liabilities --
Accounts receivable, net..................... 532,000 (7,405,000) (10,549,000) (3,665,000) (16,003,000)
Inventories, net............................. (21,000) (2,992,000) (8,364,000) (1,551,000) (1,573,000)
Prepaid expenses and other assets............ (36,000) (1,730,000) (198,000) (363,000) (5,064,000)
Accounts payable and accrued liabilities..... (788,000) 3,520,000 1,807,000 (2,796,000) 6,346,000
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities... (367,000) (2,380,000) (6,785,000) (4,519,000) (8,895,000)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of acquired businesses, net of cash
acquired..................................... (20,523,000) (45,150,000) (62,677,000) (31,469,000) --
Purchases of property and equipment............ (46,000) (582,000) (1,962,000) (668,000) (3,440,000)
Changes in other assets, net................... -- -- (4,251,000) (957,000) (2,883,000)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities... (20,569,000) (45,732,000) (68,890,000) (33,094,000) (6,323,000)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
offering and acquisition costs............... 27,227,000 -- -- -- --
Proceeds from credit facilities, net of
financing costs.............................. -- 71,633,000 47,298,000 10,265,000 72,469,000
Proceeds from bond offering, net of financing
costs........................................ -- -- 96,400,000 96,400,000 --
Exercise of stock options...................... -- -- 1,163,000 197,000 --
Payments on long-term debt..................... -- (24,949,000) (68,226,000) (60,655,000) (59,762,000)
Purchase of treasury stock..................... (1,800,000) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities............................ 25,427,000 46,684,000 76,635,000 46,207,000 12,707,000
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 4,491,000 (1,428,000) 960,000 8,594,000 (2,511,000)
CASH AND CASH EQUIVALENTS, beginning of period... -- 4,491,000 3,063,000 3,063,000 4,023,000
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period......... $ 4,491,000 $ 3,063,000 $ 4,023,000 $ 11,657,000 $ 1,512,000
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes..................... $ -- $ 1,727,000 $ 2,634,000 $ 1,637,000 $ 7,500
============ ============ ============ ============ ============
Cash paid for interest......................... $ -- $ 1,155,000 $ 3,699,000 $ 1,983,000 $ 7,410,000
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 67
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) FORMATION OF THE COMPANY:
Initial Public Offering and the Initial Businesses
Styling Technology Corporation (the "Company") was formed in June 1995.
From June 1995 through November 26, 1996, the Company conducted no operations
and its only activities related to negotiating acquisitions and related
financing. In November 1996, the Company completed an initial public offering
(the "IPO") of 3,116,000 shares of its common stock. Simultaneously with the
consummation of the IPO, the Company acquired in separate transactions four
businesses that develop, produce, and market professional salon products. Prior
to the IPO, 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 reverse split.
Upon consummation of the IPO, the Company acquired all of the outstanding
stock of Gena Laboratories, Inc. and JDS Manufacturing Co., Inc. and certain
assets and liabilities of the Body Drench Division of Designs by Norvell, Inc.
and Kotchammer Investments, Inc. (collectively, the "Initial Businesses"). The
cost of the Initial 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 IPO, 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 consolidated financial statements include all the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. All references to the Company
herein refer to Styling Technology Corporation and its subsidiaries.
Cash and Cash Equivalents and Concentrations of Credit Risk
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents. Financial instruments that
potentially subject the Company to concentrations of credit risk consist of cash
and cash equivalents and trade receivables. The Company believes that it places
its cash and cash equivalents in high quality credit institutions. Concentration
of credit risk is limited due to the large number of customers comprising the
Company's customer base. The Company performs ongoing credit evaluations of its
customers, but does not require collateral to support customer receivables. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventories for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.
F-8
<PAGE> 68
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Raw materials and work-in-process................... $ 2,594,000 $ 8,612,000
Finished goods...................................... 8,357,000 16,763,000
----------- -----------
$10,951,000 $25,375,000
=========== ===========
</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.
Goodwill, Intangibles and Other
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. Other intangible assets include the cost assigned to an exclusive
license, which is being amortized using the straight-line method over its
contractual life of 40 years. The Company continually evaluates whether events
and circumstances have occurred subsequent to acquisitions that indicate the
remaining estimated useful life of goodwill or other intangible assets may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that goodwill or other intangible assets should be evaluated
for possible impairment, the Company uses an estimate of the undiscounted future
cash flows over the remaining life in measuring whether the goodwill or other
intangible assets are recoverable. Goodwill and other intangibles, net of
accumulated amortization, was $56,506,000, $139,566,000, and $139,942,000
(unaudited) at December 31, 1997, December 31, 1998, and June 30, 1999,
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 and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, debt and letters of
credit. The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair values due to the
short-term maturities of these instruments. The carrying amount on the 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. Fair
value estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
F-9
<PAGE> 69
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue from sales upon shipment or when title
passes.
Business Process Reengineering Charges and Exit Costs Of Acquired Businesses
During the third quarter of 1998, the Company implemented a strategic
consolidation initiative, which included the centralization of its operations
into its new primary facility located in Scottsdale, Arizona. This initiative
included the closing of several of its facilities. In addition, the Company is
combining the reengineering of its business processes with an Enterprise
Resource Planning (ERP) information technology transformation. During the year
ended December 31, 1998, the Company recorded a pre-tax charge of $422,000
related to the reengineering of its business processes, as prescribed under EITF
97-13, Accounting for Business Process Reengineering-Consulting Costs. EITF
97-13 requires companies to expense all costs related to business process
reengineering activities, whether done internally or by third parties as they
are incurred. In addition, the Company accrued approximately $3.5 million in
connection with management's plan to close the facilities of certain businesses
acquired during 1998, as prescribed in EITF 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. Under this requirement, the
Company has accrued certain costs as part of the acquisitions during 1998, based
on a specific plan identified by management to close these specific facilities.
During the year, the Company charged approximately $1.5 million against this
accrual related to direct costs paid to exit these activities, which included
employee severance costs, costs associated with the physical closing of the
facilities, and external consulting costs. The balance of this accrual of
approximately $2.0 million is included in accrued liabilities in the
accompanying 1998 consolidated balance sheet.
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 the following: (i) deferred financing
costs associated with the Company completing various financings transactions
(see Note 6) and (ii) deferred tax assets (see Note 8). Deferred financing costs
are amortized over the life of the related obligation. The Company recorded
approximately $170,000 and $333,000 in deferred financing cost amortization for
the years ended December 31, 1997 and 1998, respectively.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Boards ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
The statement is presently effective for the Company's quarter ending March 31,
2000. The Company is currently evaluating the impact that SFAS No. 133 will have
on its future results of operations and financial position.
F-10
<PAGE> 70
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1998, the Company adopted SFAS No. 130 Reporting
Comprehensive Income. This statement requires the Company to classify items of
other comprehensive income, defined to be the change in equity of the Company
during the period from transactions and other events and circumstances from
non-owner sources, in a separate financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital. Adoption of this standard did not have an effect on
the Company's financial statements as the Company has no items of other
comprehensive income for any period presented.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 Reporting on the Costs of Start-Up Activities ("SOP
98-5"). SOP 98-5 requires costs of start-up activities and organization costs to
be expensed as incurred. The adoption of SOP 98-5 did not have a material effect
on the Company's financial position or results of operations (unaudited).
Unaudited Interim Financial Data
The unaudited interim financial data as of June 30, 1999 and for the six
months ended June 30, 1998 and 1999 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, 1998 and 1999 are not necessarily indicative of the results that
will be achieved for the full year.
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.
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 years ended December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------ ----------------------------------- ----------------------
EFFECT OF EFFECT OF EFFECT OF
STOCK STOCK STOCK
OPTIONS OPTIONS OPTIONS
BASIC AND DILUTED BASIC AND DILUTED BASIC AND
EPS WARRANTS EPS EPS WARRANTS EPS EPS WARRANTS
---------- ---------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary item..... $ (151,000) -- $ (151,000) $4,207,000 -- $4,207,000 $5,173,000 --
Extraordinary item,
net.................... -- -- -- 1,377,000 -- 1,377,000 1,091,000 --
---------- ---------- ---------- ---------- ------- ---------- ---------- -------
Net income (loss)
(numerator)............ $ (151,000) -- $ (151,000) $2,830,000 -- $2,830,000 $4,082,000 --
========== ========== ========== ========== ======= ========== ========== =======
Shares (denominator)..... 3,770,000 -- 3,770,000 3,949,000 164,000 4,113,000 4,033,000 280,000
========== ========== ========== ========== ======= ========== ========== =======
Per share amount --income
(loss) before
extraordinary item..... $ (0.04) $ (0.04) $ 1.07 $ 1.02 $ 1.28
Per share amount --
extraordinary item,
net.................... -- -- (0.35) (0.33) (0.27)
---------- ---------- ---------- ---------- ----------
Per share amount -- net
income (loss).......... $ (0.04) $ (0.04) $ 0.72 $ 0.69 $ 1.01
========== ========== ========== ========== ==========
<CAPTION>
1998
----------
DILUTED
EPS
----------
<S> <C>
Income (loss) before
extraordinary item..... $5,173,000
Extraordinary item,
net.................... 1,091,000
----------
Net income (loss)
(numerator)............ $4,082,000
==========
Shares (denominator)..... 4,313,000
==========
Per share amount --income
(loss) before
extraordinary item..... $ 1.20
Per share amount --
extraordinary item,
net.................... (0.25)
----------
Per share amount -- net
income (loss).......... $ 0.95
==========
</TABLE>
F-11
<PAGE> 71
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1999
----------------------------------- -------------------------------------
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........... $3,004,000 -- $3,004,000 $ (714,000) -- $ (714,000)
Extraordinary item, net........................... 1,091,000 -- 1,091,000 446,000 -- 446,000
---------- ------- ---------- ----------- ------- -----------
Net income (loss)................................. $1,913,000 -- $1,913,000 $(1,160,000) -- $(1,160,000)
========== ======= ========== =========== ======= ===========
Shares............................................ 4,006,000 350,000 4,356,000 4,068,000 -- 4,068,000
========== ======= ========== =========== ======= ===========
Per share amount -- income (loss) before
extraordinary item.............................. $ 0.75 $ 0.69 $ (0.18) $ (0.18)
Per share amount -- extraordinary item, net....... (0.27) (0.25) (0.11) (0.11)
---------- ---------- ----------- -----------
Per share amount -- net income (loss)............. $ 0.48 $ 0.44 $ (0.29) $ (0.29)
========== ========== =========== ===========
</TABLE>
For the period from November 27, 1996 to December 31, 1996 and the six
months ended June 30, 1999, 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) 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 U.K. ABBA Products ("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 6). The Company satisfied its obligation with respect to
this facilitation agreement during 1998. The ABBA acquisition was accounted for
under the purchase method of accounting.
On December 10, 1997, the Company acquired certain assets and assumed
certain liabilities of Inverness Corporation and Inverness (UK) Limited
(together "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 was accounted
for under the purchase method of accounting.
In May 1998, the Company acquired substantially all of the assets and
assumed certain operating liabilities of Pro Finish USA, Ltd., a producer of
name-brand professional nail enhancement and nail care products. The Company
paid a purchase price of approximately $5.0 million in cash. The acquisition was
accounted for using the purchase method of accounting.
In June 1998, the Company acquired European Touch Co. and two related
companies (collectively "European Touch") and European Touch, Ltd. II. European
Touch is a developer, producer, and marketer of professional nail enhancement
and treatment products, and European Touch II, Ltd. II is a developer, producer,
and marketer of salon pedicure equipment. These companies were purchased for a
combined purchase price of approximately $25.0 million in cash, using the
purchase method of accounting.
F-12
<PAGE> 72
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1998, the Company acquired a controlling interest in Ft. Pitt
Acquisition, Inc. ("Fort Pitt") 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. The Company paid approximately $33.0 million for the Fort
Pitt stock, in the form of cash and seller carryback financing of approximately
$5.0 million. The acquisition was accounted for using the purchase method of
accounting. As of December 31, 1998, the Company owned approximately 85% of Fort
Pitt. The excess of the purchase price paid over the net assets was allocated to
the exclusive license rights, which is being amortized over its contractual life
of 40 years.
The following table summarizes acquisitions for the two years ended
December 31, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accounts receivable......................................... $ 5,251,000 $ 7,481,000
Inventories................................................. 5,324,000 6,060,000
Other assets................................................ 1,475,000 803,000
Property and equipment...................................... 1,316,000 968,000
Assumed accounts payable and accrued liabilities............ (2,861,000) (9,563,000)
Assumed debt................................................ -- (1,716,000)
----------- -----------
Net assets acquired......................................... 10,505,000 4,033,000
Cash paid at closing for purchase price and acquisition
costs..................................................... 45,150,000 62,677,000
----------- -----------
Goodwill and other intangibles.............................. $34,645,000 $58,644,000
=========== ===========
</TABLE>
Unaudited Pro Forma Consolidated Results of Operations
The following table depicts, for the years ended December 31, 1997 and
1998, unaudited pro forma consolidated information as if all of the companies
acquired in 1997 and 1998 were acquired on January 1, 1997.
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Net sales......................................... $111,033,000 $115,608,000
Income before extraordinary item.................. 3,679,000 3,404,000
Basic earnings per share before extraordinary
item............................................ 0.93 0.84
Diluted earnings per share before extraordinary
item............................................ 0.89 0.79
</TABLE>
The unaudited pro forma financial data is for informational purposes only,
is not necessarily indicative of the results of operations had the acquisitions
occurred on January 1, 1997 and is not necessarily indicative of future
operating results.
F-13
<PAGE> 73
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
USEFUL
LIVES
(YEARS) 1997 1998
------- ---------- -----------
<S> <C> <C> <C>
Land.................................................. -- $ 150,000 $ 150,000
Building and leasehold improvements................... 7-40 594,000 1,065,000
Machinery and equipment............................... 3-7 1,559,000 1,706,000
Furniture and fixtures................................ 7 375,000 1,326,000
Computers, vehicles and other......................... 3-5 356,000 4,216,000
---------- -----------
3,034,000 8,463,000
Less -- accumulated depreciation...................... (394,000) (3,101,000)
---------- -----------
$2,640,000 $ 5,362,000
========== ===========
</TABLE>
The Company recorded approximately $11,000, $383,000 and $1,342,000 in
depreciation expense during the period from November 27, 1996 to December 31,
1996, and for the years ended December 31, 1997 and 1998, respectively, which is
included in selling, general, and administrative expenses in the accompanying
consolidated statements of operations.
(5) ACCRUED LIABILITIES:
Accrued liabilities consist of amounts accrued but unpaid as of December
31, 1997 and 1998. Accrued interest at December 31, 1997 and December 31, 1998
was $291,000 and $5,798,000, respectively. Accrued liabilities also include
commissions, professional fees, taxes, payroll, and other liabilities.
(6) LONG-TERM DEBT AND OTHER:
Long-term debt and other consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Senior subordinated notes (the "Notes"), bearing interest
at 10 7/8%, maturing 2008................................ $ -- $100,000,000
Senior credit facility (the "1998 Credit Facility"),
collateralized by substantially all the assets of the
Company, maturing through June 2003...................... -- 37,033,000
Seller carryback financing, related to the acquisition of
Ft. Pitt Acquisition, Inc., bearing interest at 6%,
maturing through August 2001............................. -- 5,000,000
Unsecured note payable of Ft. Pitt Acquisition, Inc. ...... -- 1,101,000
Senior credit facility (the "December 1997 Credit
Facility"), collateralized by substantially all the
assets of the Company, paid in full in June 1998......... 50,000,000 --
Gena Note, paid in full in November 1998................... 1,841,000 --
Other...................................................... 1,183,000 --
----------- ------------
53,024,000 143,134,000
Less: current portion...................................... (5,647,000) (2,768,000)
----------- ------------
$47,377,000 $140,366,000
=========== ============
</TABLE>
F-14
<PAGE> 74
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate future maturities of long-term debt and other are as follows at
December 31, 1998:
<TABLE>
<S> <C>
1999................................................... $ 2,768,000
2000................................................... 6,304,000
2001................................................... 5,444,000
2002................................................... 3,076,000
2003................................................... 25,542,000
Thereafter............................................. 100,000,000
------------
$143,134,000
============
</TABLE>
Senior Credit Facilities
In December 1997, in connection with the acquisition of Clean & Easy and
One Touch product lines, the Company extinguished a previous credit facility and
entered into the December 1997 Credit Facility. The December 1997 Credit
Facility was a seven-year, $75 million credit facility with a group of banks
with Credit Agricole Indosuez acting as agent. In connection with the
extinguishment of the previous 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.
In connection with the Note Offering as defined below, the Company entered
into the 1998 Credit Facility. The 1998 Credit Facility is a five-year, $50.0
million senior credit facility with a group of banks for whom NationsBank, N.A.
and Bank of Boston, N.A. acted as co-agents. The 1998 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 1998 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 plus (iii) the
Applicable Base Rate Margin or (b) the sum of (i) the Prime Rate 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. If the Company converts to the LIBOR-based interest rate, interest is
paid on the LIBOR-based maturity date, which is generally three months from the
conversion date (see Note 13).
As of December 31, 1998, the Company had borrowed approximately $12.0
million under the revolving line of credit for working capital purposes
including financing the inventory and receivable buildup related to the launch
of the ABBA packaging and funding capital expenditures associated with the
centralization and reengineering project undertaken during the fourth quarter of
1998. In addition, the borrowing was used to repay debt created in conjunction
with the IPO in November 1996 as well as to repay existing debt assumed in the
acquisition of Framesi USA.
Notes
On June 23, 1998, the Company issued the Notes in an offering (the "Note
Offering") exempt from registration under the Securities Act of 1933. Interest
under the Notes is payable semi-annually in arrears commencing January 1, 1999,
and the Notes are not callable until July 2003 subject to the terms of the
Indenture under which the Notes were issued. The Company filed a registration
statement under the Securities Act, relating to an exchange offer for these
Notes, which was declared effective in August 1998. The proceeds from the Note
Offering were used to finance the purchase price and related costs of acquiring
all of the issued and outstanding capital stock of European Touch and European
Touch, Ltd. II, to repay existing indebtedness (including the Company's December
1997 Credit Facility) and for working capital purposes.
F-15
<PAGE> 75
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company reported an extraordinary, non-cash charge of approximately $1.1
million, net of taxes, or $0.25 per diluted share, related to unamortized
financing costs associated with the repayment of the December 1997 Credit
Facility.
Debt Covenants
The 1998 Credit Facility agreement contains provisions that, among other
things, require the Company to comply with certain financial ratios and net
worth requirements and limits the ability of the Company and its subsidiaries to
incur additional indebtedness, pay dividends, sell assets, or engage in certain
mergers or consolidations. At December 31, 1998, the Company was in compliance
with all applicable financial covenants.
The Notes described above are general unsecured obligations of the Company
and are unconditionally guaranteed on a joint and several basis by all of the
Company's wholly owned current and future subsidiaries (see Note 14).
Interest Rate Protection
In connection with the 1998 Credit Facility, the Company maintains certain
interest rate protection instruments. As of December 31, 1998, the Company has
entered into interest rate swap and interest rate cap agreements (the
"Agreements") to reduce the impact of changes in interests rates. The Company is
exposed to a risk of credit loss in the event of nonperformance by financial
institutions that are also party to the Agreements. However, the Company
believes that, based on the high creditworthiness of these counterparties,
nonperformance is unlikely. The following is a summary of the Company's
Agreements as of December 31, 1998:
<TABLE>
<CAPTION>
COMPANY'S NOTIONAL
INSTRUMENT EFFECTIVE RATE AMOUNT
---------- -------------- --------------
<S> <C> <C>
Swap 8.50% $12,500,000
Cap 10.25% 12,500,000
-----------
$25,000,000
===========
</TABLE>
(7) 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 IPO. Accordingly, upon consummation of the IPO, the founder
was no longer a stockholder of the Company.
Initial Public Offering
In November 1996, the Company completed the IPO, selling 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 IPO and over allotment option amounted to approximately
$27.2 million.
Warrants
In connection with a previous credit facility, the Company issued 160,000
five year warrants to lenders with exercise prices between $10.18 and $11.38 per
share. In connection with the IPO, the Company issued 203,000 five-year warrants
to its underwriters with an exercise price of $12.00 per share. These warrants
have
F-16
<PAGE> 76
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been recorded at fair value as additional paid-in capital in the accompanying
consolidated balance sheets. Prior to the IPO, the Company issued 20,000
warrants with an exercise price $12.50 per share. During 1998, this warrant
holder exercised all 20,000 warrants.
Shareholder Rights Plan
During February 1999, the Company's Board of Directors adopted a
shareholder rights plan, which authorized the distribution of one right to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock, at a purchase price of $70, subject to certain antidilution
adjustments. The rights will expire 10 years after issuance and will be
exercisable if (i) a person or group becomes the beneficial owner of 15% or more
of the Company's common stock; (ii) persons currently holding 15% or more of the
common stock acquire an additional 1% or more of the common stock; or (iii) a
person or group commences a tender or exchange offer that would result in the
offeror beneficially owning 15% or more of the common stock (a "Stock
Acquisition Date"). If a Stock Acquisition Date occurs, each right, unless
redeemed by the Company, entitles the holder to purchase an amount of common
stock of the Company, or in certain circumstances a combination of securities
and/or assets or the common stock of the acquiror, having a market value of
twice the exercise price of the right. Rights held by the acquiring person will
become void and will not be exercisable to purchase shares at the bargain
purchase price.
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. During the year ended December 31,
1998, approximately 72,000 stock options were cancelled in connection with the
officer's retirement.
During 1996, the Company adopted the 1996 Stock Option Plan, which was
amended during 1998 to provide up to 750,000 incentive and nonqualified stock
options to acquire common stock of the Company to key personnel and directors of
the Company.
During 1998, the Company adopted the 1998 Employee Stock Option Plan, which
provides for the grant of up to 150,000 nonqualified stock options to acquire
common stock of the Company to employees of the Company. On December 14, 1998,
the Company repriced 246,000 options.
F-17
<PAGE> 77
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of all the Company's stock options at December 31,
1996, 1997 and 1998 and changes during the periods ended is presented in the
following table:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year..................... 162,000 $ .10 250,000 $ 3.58 549,000 $ 7.38
Granted.................. 88,000 10.00 430,000 10.57 694,000 12.83
Exercised................ -- -- -- -- (99,000) 1.87
Canceled................. -- -- (131,000) 10.60 (350,000) 12.09
-------- ------ -------- ------ -------- ------
Outstanding at end of
year..................... 250,000 $ 3.58 549,000 $ 7.38 794,000 $10.76
======== ====== ======== ====== ======== ======
Exercisable at end of
year..................... 18,000 $10.00 136,000 $ 9.71 279,000 $10.10
======== ====== ======== ====== ======== ======
Weighted average fair value
per share of options
granted.................. $ 5.65 $ 4.13 $ 5.44
======== ======== ========
</TABLE>
Options outstanding at December 31, 1998 have exercise prices between $0.10
and $24.00. Of the options, 9,000 options have an exercise price of $0.10 with a
remaining average contractual life of 6.1 years, and are fully vested; 597,000
options have exercise prices between $9.25 and $11.38 with a remaining average
contractual life of 9.03 years, with vesting between one and five years; and
188,000 options have exercise prices between $11.80 and $24.00 with a remaining
average contractual life of 9.57 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, DECEMBER 31,
1996 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
Income (loss) before extraordinary item
As reported........................... $(151,000) $ 4,207,000 $ 5,173,000
Pro forma............................. (226,000) 3,876,000 4,371,000
Diluted EPS -- as reported............ (0.04) 1.02 1.20
Diluted EPS -- pro forma.............. (0.06) 0.94 1.01
Extraordinary item, net
As reported........................... -- (1,337,000) (1,091,000)
Diluted EPS -- as reported............ -- (0.33) (0.25)
Net income (loss)
As reported........................... (151,000) 2,830,000 4,082,000
Pro forma............................. (226,000) 2,539,000 3,280,000
Diluted EPS -- as reported............ (0.04) 0.69 0.95
Diluted EPS -- pro forma.............. (0.06) 0.62 0.76
</TABLE>
F-18
<PAGE> 78
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 weighted average assumptions used for grants in 1998 were as
follows: risk-free interest rates of 4.98%, expected lives of 4.97 years, and a
volatility factor of 43.07%. The assumed dividend yield is zero for 1996, 1997
and 1998.
(8) INCOME TAXES:
The provision for (benefit from) income taxes for the period from November
27, 1996 to December 31, 1996 and for the years ended December 31, 1997, and
1998 consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Current expense......................... $ -- $3,146,000 $ --
Deferred expense (benefit).............. (72,000) (49,000) 3,635,000
-------- ---------- ----------
Net income tax expense (benefit)........ $(72,000) $3,097,000 $3,635,000
======== ========== ==========
</TABLE>
The components of the deferred tax accounts as of December 31, 1997 and
1998, consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ------------
<S> <C> <C>
Current deferred tax assets
Reserves and other accruals.................. $ 232,000 $ 932,000
Inventory capitalization..................... 222,000 1,298,000
Other........................................ 8,000 --
--------- ------------
Total current deferred tax assets................. 462,000 2,230,000
--------- ------------
Long term deferred tax assets
Reserves and accruals........................ -- 2,562,000
--------- ------------
Total long term deferred tax assets............... -- 2,562,000
--------- ------------
Non-current deferred tax liabilities
Accelerated tax deductions, depreciation, and
amortization................................. 162,000 6,118,000
Effect of book basis in excess of tax basis of
licenses..................................... -- 13,098,000
--------- ------------
Total non-current deferred tax liabilities........ 162,000 19,216,000
--------- ------------
Net deferred tax asset (liability)................ $ 300,000 $(14,424,000)
========= ============
</TABLE>
A reconciliation of the U.S. federal statutory income tax rate to the
Company's income before extraordinary item effective tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate............................. (34)% 34% 34%
Effect of state taxes.............................. (5) 4 4
Nondeductible amortization of goodwill............. 7 4 3
--- --- ---
(32)% 42% 41%
=== === ===
</TABLE>
F-19
<PAGE> 79
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED PARTY INFORMATION:
Sam L. Leopold, the Company's Chairman of the Board, President, and Chief
Executive Officer, previously owned three Beauty Boutique International stores
in Arizona, which he sold during fiscal 1998. The Company's sales to these
Beauty Boutique International stores approximated $150,000 during 1997, and
$21,000 during the period of fiscal 1998 which Mr. Leopold owned such stores.
The sales to these Beauty Boutique International stores were made in the
ordinary course of business and in management's opinion on terms no more
favorable than terms extended to the Company's other customers.
The Company's IPO in November 1996 was co-managed by Friedman, Billings,
Ramsey & Co., Inc. ("FBR"), and Prime Charter Ltd. ("Prime Charter"). Mr. Sylvan
Schefler was the Vice Chairman of Prime Charter at the time of the IPO, but was
not a director of the Company at that time. In connection with the public
offering, FBR and Prime Charter each received warrants to purchase 101,500
shares of the Company's common stock.
During 1996, certain founders advanced approximately $112,500 to the
Company to fund various IPO 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 during 1997 in connection with
the ABBA acquisition.
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.
(10) SEGMENT INFORMATION:
The Company monitors its salon distribution operations by the hair-care,
nail-care, skin and body care, and appliances and sundries product categories.
Distribution of the product takes place primarily throughout the United States.
Management monitors and evaluates the financial performance of the
Company's operations by its current four operating segments.
The following operating segment information includes financial information
(in thousands) for all four of the Company's operating segments.
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $34,609 $10,665 $14,712 $ 8,784 $ -- $ -- $ 68,770
Income (loss) from
operations.......... 5,691 1,346 1,404 3,270 (5,003) -- 6,708
Total assets.......... 91,083 30,827 16,400 31,605 188,815 (119,605) 239,125
</TABLE>
F-20
<PAGE> 80
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 8,204 $ 7,450 $17,726 $ 1,919 $ -- $-- $ 35,299
Income (loss) from
operations.......... 1,943 1,302 5,329 681 (1,357) -- 7,898
Total assets.......... 27,815 27,709 43,772 24,358 19,940 0 143,594
</TABLE>
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $29,224 $18,902 $32,937 $ 9,310 $ -- $ -- $ 90,373
Income (loss) from
operations........... 4,385 3,467 8,852 3,489 (2,179) -- 18,014
Depreciation........... 74 150 968 88 62 -- 1,342
Total assets........... 97,571 46,796 87,665 30,326 92,093 (135,253) 219,198
Capital expenditures... 25 134 661 146 996 -- 1,962
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 8,768 $12,545 $15,681 $1,114 $ -- $ -- $38,108
Income (loss) from
operations............ 2,352 2,226 5,914 268 (1,609) -- 9,151
Depreciation............ -- 141 208 14 20 -- 383
Total assets............ 27,180 20,757 50,289 1,842 25,238 (32,817) 92,489
Capital expenditures.... -- 90 275 2 215 -- 582
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
---- ------- --------- ------------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $-- $ 697 $ 337 $ 49 $ -- $ -- $ 1,083
Income (loss) from
operations................ -- 11 5 (19) (222) -- (225)
Depreciation................ -- 4 6 -- 1 -- 11
Total assets................ -- 15,066 12,542 663 6,156 (2,193) 32,234
Capital expenditures........ -- -- -- -- 46 -- 46
</TABLE>
Sales to a major U.S. beauty supply chain as a percentage of total net
sales approximated 25% for the period from November 27, 1996 to December 31,
1996. During 1997, this customer accounted for approximately 13% of the total
net sales of the Company. During 1998 and the six months ended June 30, 1999,
sales to any single customer as a percentage of total net sales did not exceed
10%.
F-21
<PAGE> 81
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) 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, 1998, 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, $313,000 and $1,132,000 for the period from
November 27, 1996 to December 31, 1996 and for the years ended December 31, 1997
and 1998.
Future lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ------------
<S> <C>
1999.................................................. $ 2,330,000
2000.................................................. 2,117,000
2001.................................................. 1,526,000
2002.................................................. 1,261,000
2003.................................................. 950,000
Thereafter............................................ 4,815,000
-----------
$12,999,000
===========
</TABLE>
Retirement Plans
On April 1, 1998, the Company adopted the Styling Technology Corporation
401(k) Plan (the "401(k) Plan"). The 401(k) Plan allows eligible employees to
contribute up to 20% of their annual pre-tax compensation. The Company will make
a matching contribution of 50% of the first 5% of the employee's contribution.
Generally, employees are eligible to participate at the first calendar quarter
following 90 days of continuous service. Collective bargaining units are
excluded from participation. Vesting in the Company's matching contribution is
25% per year of service; the employee would be 100% vested after four years of
service. The Company made payments to this 401(k) Plan in the sum of $98,000
during 1998. An employee's unvested portion of the Company match goes back to
the 401(k) Plan upon a termination distribution. Forfeited amounts are first
applied toward 401(k) Plan expenses and are then applied toward future matching
contributions.
Four of the Company's divisions or subsidiaries had other 401(k) plans in
place at the time of the acquisition. With the April 1, 1998 adoption of the
401(k) Plan, these four plans are no longer active. All participants of these
plans are eligible to participate in the Company's 401(k) Plan. Ultimately,
these plans will be terminated. Active employees who had participated in these
plans may have the opportunity to roll existing balances into the 401(k) Plan or
to their personal IRA. Terminated employees will have the opportunity to
rollover to their IRA or receive a direct distribution.
Another of the Company's Subsidiaries, Ft. Pitt sponsors a 401(k) plan
("Ft. Pitt 401(k) Plan") for its separate employees. All full time Ft. Pitt
employees, except employees covered by a union plan, are eligible to
participate. The Ft. Pitt 401(k) Plan allows employees to contribute up to 20%
of their annual pre-tax compensation. Ft. Pitt will match 20% of the employees'
deferral, subject to a six year vesting schedule. The Ft. Pitt 401(k) Plan also
provides for discretionary profit-sharing contributions. During 1998, Ft. Pitt
made
F-22
<PAGE> 82
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matching contributions of approximately $11,000. Ft. Pitt made a discretionary
profit sharing contribution of $20,000 in 1998.
(12) VENDOR CONCENTRATION:
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. During 1998, purchases from a single supplier as a
percentage of total purchases did not exceed 10%.
(13) SUBSEQUENT EVENTS:
The Company has historically utilized numerous non-exclusive tanning supply
distributors to sell the tanning products of its Body Drench Division in the
tanning market. In June 1999, the Company changed the method of distribution of
its Body Drench products by eliminating a significant number of tanning supply
distributors. Distribution of Body Drench products to the tanning market will
now be sold through a limited number of exclusive distributors. This change in
the Company's business resulted in a write-off of receivables from cancelled
distributors of approximately $5.1 for the quarter ending June 30, 1999. This
charge is classified as a provision for cancelled distributors in the
consolidated statement of operations as a separate component of income from
operations. Any future change to the realizability of these tanning supply
distributor receivables will be recorded as a component of the provision for
cancelled distributors in the statement of operations at that time. In
management's opinion, by focusing on its core business of selling primarily to
distributors that sell products in multiple categories of the professional salon
market and limiting distribution in the tanning supply channel, the stature of
the Body Drench brand will be enhanced, which should increase gross margins on
tanning products, reduce expenses and capitalize on the Company's core strategy
of offering customers a "one-stop shop" for professional salon products. The
normal recurring bad debt charges are recorded as a component of selling,
general and administrative expenses and amounted to approximately $427,000,
$710,000 and $2.7 million for the period from November 27, 1996 to December 31,
1996, and the years ended December 31, 1997 and 1998, respectively, and $171,000
(unaudited) and $1,112,000 (unaudited) for the six months ended June 30, 1998
and 1999, respectively.
On June 22, 1999, the Company finalized a $90 million Senior Secured
Revolving Credit Facility (the "GE Credit Facility") with GE Capital
Corporation. Proceeds from the GE Credit Facility were used to repay amounts
outstanding under the 1998 Credit Facility the remaining availability will be
used for future acquisitions and for working capital purposes. The Company
recorded an extraordinary, non-cash charge during the three months ended June
30, 1999 of approximately $446,000, net of tax, or approximately $0.11 per
diluted share, related to the write-off of unamortized financing costs
associated with the 1998 Credit Facility.
(14) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:
The Notes described in Note 6 are general unsecured obligations of the
Company and are fully and unconditionally guaranteed on a joint and several
basis by all of the Company's wholly owned current and future subsidiaries. In
management's opinion, separate financial statements of the guarantor
subsidiaries ("Guarantors") and the non-guarantors subsidiaries
("Non-Guarantors") are not material to investors.
The financial statements presented below include the combined financial
position as of December 31, 1997 and 1998 and as of June 30, 1999 (unaudited)
and the results of operations and cash flows for the period from November 27,
1996 to December 31, 1996, for the years ended December 31, 1997 and 1998, and
for the six months ended June 30, 1998 (unaudited) and 1999 (unaudited) of
Styling Technology Corporation ("Parent"); Guarantors and the Non-Guarantors.
F-23
<PAGE> 83
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 2,850 $ 213 $-- $ -- $ 3,063
Accounts receivable, net.............. 9,854 4,442 -- -- 14,296
Inventories, net...................... 5,882 5,069 -- -- 10,951
Prepaid expenses and other current
assets............................. 1,581 539 -- -- 2,120
Due to/(from) affiliates.............. (2,321) 2,321 -- -- --
-------- ------- --- --------- --------
Total current assets.......... 17,846 12,584 -- -- 30,430
PROPERTY AND EQUIPMENT, net............. 1,558 1,082 -- -- 2,640
GOODWILL AND OTHER INTANGIBLES, net..... 26,106 30,400 -- -- 56,506
OTHER ASSETS............................ 2,902 11 -- -- 2,913
INVESTMENT IN SUBSIDIARIES, net......... 39,467 -- -- (39,467) --
-------- ------- --- --------- --------
$ 87,879 $44,077 $-- $(39,467) $ 92,489
======== ======= === ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................... $ 4,661 $ 2,404 $-- $ -- $ 7,065
Accrued liabilities................... 1,481 2,189 -- -- 3,670
Current portion of long-term debt and
other.............................. 5,630 17 -- -- 5,647
-------- ------- --- --------- --------
Total current liabilities..... 11,772 4,610 -- -- 16,382
-------- ------- --- --------- --------
DEFERRED INCOME TAXES................... 162 -- -- -- 162
-------- ------- --- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion............................... 47,377 -- -- -- 47,377
-------- ------- --- --------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock....................... -- -- -- -- --
Common stock.......................... 1 -- -- -- 1
Additional paid-in capital............ 27,875 36,768 -- (36,768) 27,875
Retained earnings..................... 2,492 2,699 -- (2,699) 2,492
Treasury stock........................ (1,800) -- -- -- (1,800)
-------- ------- --- --------- --------
Total stockholders' equity.... 28,568 39,467 -- (39,467) 28,568
-------- ------- --- --------- --------
$ 87,879 $44,077 $-- $(39,467) $ 92,489
======== ======= === ========= ========
</TABLE>
F-24
<PAGE> 84
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 (IN THOUSANDS)
----------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 2,867 $ 343 $ 813 $ -- $ 4,023
Accounts receivable, net............. 17,614 8,830 5,882 -- 32,326
Inventories, net..................... 13,232 10,060 2,083 -- 25,375
Prepaid expenses and other current
assets............................ 3,243 695 83 -- 4,021
Due to/(from) affiliates............. 2,314 5,545 (7,859) -- --
--------- ------- ------- --------- --------
Total current assets......... 39,270 25,473 1,002 -- 65,745
PROPERTY AND EQUIPMENT, net............ 3,625 1,626 111 -- 5,362
GOODWILL, INTANGIBLES AND OTHER, net... 45,350 52,627 50,114 -- 148,091
INVESTMENT IN SUBSIDIARIES, net........ 104,386 -- -- (104,386) --
--------- ------- ------- --------- --------
$ 192,631 $79,726 $51,227 $(104,386) $219,198
========= ======= ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 8,784 $ 2,960 $ 924 $ -- $ 12,668
Accrued liabilities.................. 1,884 5,841 2,642 -- 10,367
Current portion of long-term debt and
other............................. 1,309 357 1,102 -- 2,768
--------- ------- ------- --------- --------
Total current liabilities.... 11,977 9,158 4,668 -- 25,803
--------- ------- ------- --------- --------
DEFERRED INCOME TAXES.................. 6,475 -- 12,741 -- 19,216
--------- ------- ------- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion.............................. 140,366 -- -- -- 140,366
--------- ------- ------- --------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock...................... -- -- -- -- --
Common stock......................... 1 -- -- -- 1
Additional paid-in capital........... 29,038 61,770 32,527 (94,297) 29,038
Retained earnings.................... 6,574 8,798 1,291 (10,089) 6,574
Treasury stock....................... (1,800) -- -- -- (1,800)
--------- ------- ------- --------- --------
Total stockholders' equity... 33,813 70,568 33,818 (104,386) 33,813
--------- ------- ------- --------- --------
$ 192,631 $79,726 $51,227 $(104,386) $219,198
========= ======= ======= ========= ========
</TABLE>
F-25
<PAGE> 85
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 198 $ 1,169 $ 145 $ -- $ 1,512
Accounts receivable, net................ 10,637 21,302 11,323 -- 43,262
Inventories, net........................ 11,180 13,221 2,547 -- 26,948
Prepaid expenses and other current
assets............................... 4,385 1,492 270 -- 6,147
Due to/from affiliates.................. 10,055 5,075 (15,130) -- --
-------- -------- -------- --------- --------
Total current assets............ 36,455 42,259 (845) -- 77,869
PROPERTY AND EQUIPMENT, net............... 5,884 2,713 91 -- 8,688
GOODWILL, INTANGIBLES AND OTHER, net...... 44,079 57,408 51,081 -- 152,568
INVESTMENTS IN SUBSIDIARIES............... 119,605 -- -- (119,605) --
-------- -------- -------- --------- --------
Total assets.................... $206,023 $102,380 $ 50,327 $(119,605) $239,125
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 6,998 $ 7,698 $ 3,013 $ -- $ 17,709
Accrued liabilities..................... 1,938 6,284 2,241 -- 10,463
Current portion of long-term debt and
other................................ 2,307 1,167 -- -- 3,474
-------- -------- -------- --------- --------
Total current liabilities....... 11,243 15,149 5,254 -- 31,646
-------- -------- -------- --------- --------
OTHER NON-CURRENT LIABILITIES............. 6,475 (42) 12,741 -- 19,174
-------- -------- -------- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion................................. 155,652 -- -- -- 155,652
-------- -------- -------- --------- --------
COMMITMENTS AND CONTINGENCIES.............
STOCKHOLDERS' EQUITY:
Preferred stock......................... -- -- -- -- --
Common stock............................ 1 -- -- -- 1
Additional paid-in capital.............. 29,038 66,769 32,529 (99,298) 29,038
Retained earnings....................... 5,414 20,504 (197) (20,307) 5,414
Treasury stock.......................... (1,800) -- -- -- (1,800)
-------- -------- -------- --------- --------
Total stockholders' equity...... 32,653 87,273 32,332 (119,605) 32,653
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity.......... $206,023 $102,380 $ 50,327 $(119,605) $239,125
======== ======== ======== ========= ========
</TABLE>
F-26
<PAGE> 86
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 27, 1996 TO DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 386 $697 $ -- $ -- $1,083
Cost of sales........................... 162 409 -- -- 571
------ ---- ------ ---- ------
Gross profit............................ 224 288 -- -- 512
Selling, general and administrative
expenses.............................. 460 277 -- -- 737
------ ---- ------ ---- ------
Income (loss) from operations........... (236) 11 -- -- (225)
Interest expense (income) and other
income, net........................... 2 -- -- -- 2
------ ---- ------ ---- ------
Income before income taxes.............. (234) 11 -- -- (223)
Provision for (benefit from) income
taxes................................. (84) 12 -- -- (72)
Income (loss) from wholly owned
subsidiaries.......................... (1) -- -- 1 --
------ ---- ------ ---- ------
Net loss................................ $ (151) $ (1) $ -- $ 1 $ (151)
====== ==== ====== ==== ======
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................................ $16,796 $21,312 $ -- $ -- $38,108
Cost of sales............................ 6,348 10,408 -- -- 16,756
------- ------- ------ ------- -------
Gross profit............................. 10,448 10,904 -- -- 21,352
Selling, general and administrative
expenses............................... 5,874 6,327 -- -- 12,201
------- ------- ------ ------- -------
Income from operations................... 4,574 4,577 -- -- 9,151
Interest expense and other, net.......... (1,789) (58) -- -- (1,847)
------- ------- ------ ------- -------
Income before extraordinary item and
income taxes........................... 2,785 4,519 -- -- 7,304
Provision for income taxes............... 1,279 1,818 -- -- 3,097
------- ------- ------ ------- -------
Income before extraordinary item......... 1,506 2,701 -- -- 4,207
Extraordinary item, net.................. (1,377) -- -- -- (1,377)
Income from subsidiaries................. 2,701 -- -- (2,701) --
------- ------- ------ ------- -------
Net income............................... $ 2,830 $ 2,701 $ -- $(2,701) $ 2,830
======= ======= ====== ======= =======
</TABLE>
F-27
<PAGE> 87
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
--------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................................ $37,965 $40,326 $12,082 $ -- $90,373
Cost of sales............................ 15,908 18,470 4,844 -- 39,222
------- ------- ------- ------ -------
Gross profit............................. 22,057 21,856 7,238 -- 51,151
Selling, general and administrative
expenses............................... 14,171 11,325 7,219 -- 32,715
Centralization and Reengineering Costs... 422 -- -- -- 422
------- ------- ------- ------ -------
Income from operations................... 7,464 10,531 19 -- 18,014
Interest (expense) and other, net........ (9,302) -- 96 -- (9,206)
------- ------- ------- ------ -------
Income (loss) before extraordinary
item................................... (1,838) 10,531 115 -- 8,808
Provision (benefit) for income taxes..... (816) 4,402 49 -- 3,635
------- ------- ------- ------ -------
Income (loss) before extraordinary
item................................... (1,022) 6,129 66 -- 5,173
Extraordinary item, net.................. (1,091) -- -- -- (1,091)
Income from subsidiaries................. 6,195 -- -- 6,195 --
------- ------- ------- ------ -------
Net income............................... $ 4,082 $ 6,129 $ 66 $6,195 $ 4,082
======= ======= ======= ====== =======
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS) UNAUDITED
-------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales................................ $18,347 $16,952 $ -- $ -- $35,299
------- ------- ------- ------- -------
Cost of sales............................ 7,569 7,923 -- -- 15,492
------- ------- ------- ------- -------
Gross profit............................. 10,778 9,029 -- -- 19,807
Selling, general and administrative
expenses............................... 6,634 5,275 -- -- 11,909
Centralization and reengineering......... -- -- -- -- --
------- ------- ------- ------- -------
Income from operations................... 4,144 3,754 -- -- 7,898
Interest (expense) and other income,
net.................................... (2,628) -- -- (2,628)
------- ------- ------- ------- -------
Income before extraordinary item and
income taxes........................... 1,516 3,754 -- -- 5,270
Provision for income taxes............... 653 1,613 -- -- 2,266
------- ------- ------- ------- -------
Income before extraordinary item......... 863 2,141 -- -- 3,004
Extraordinary Item (Net of taxes)........ (1,091) -- (1,091)
Income from subsidiaries................. 2,141 -- -- (2,141) --
------- ------- ------- ------- -------
Net income............................... $ 1,913 $ 2,141 $ -- $(2,141) $ 1,913
======= ======= ======= ======= =======
</TABLE>
F-28
<PAGE> 88
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 15,216 $35,078 $18,476 $ -- $68,770
Cost of sales..................... 7,411 15,744 6,702 -- 29,857
-------- ------- ------- ------- -------
Gross profit...................... 7,805 19,334 11,774 -- 38,913
Selling, general and
administrative expenses......... 4,905 7,968 12,902 -- 25,775
Centralization and
reengineering................... 1,363 -- -- -- 1,363
Provision for cancelled
distributors.................... 5,067 5,067
-------- ------- ------- ------- -------
Income (loss) from operations..... (3,530) 11,366 (1,128) -- 6,708
Interest (expense) and other
income, net..................... (7,841) 11 (44) -- (7,874)
-------- ------- ------- ------- -------
Income (loss) before extraordinary
item and income taxes........... (11,371) 11,377 (1,172) -- (1,166)
Provision for income taxes........ (4,441) 4,494 (505) -- (452)
-------- ------- ------- ------- -------
Income (loss) before extraordinary
item............................ (6,930) 6,883 (667) -- (714)
Extraordinary Item (Net of
taxes).......................... (446) -- -- -- (446)
Income from subsidiaries.......... 6,216 -- -- (6,216) --
-------- ------- ------- ------- -------
Net income (loss)................. $ (1,160) $ 6,883 $ (667) $(6,216) $(1,160)
======== ======= ======= ======= =======
</TABLE>
F-29
<PAGE> 89
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 27, 1996 TO DECEMBER 31, 1996 (IN THOUSANDS)
--------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
--------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss............................. $ (151) $ (1) $ -- $ 1 $ (151)
Adjustments to reconcile net loss to
net cash provided by (used in) in
operating activities:
Depreciation and amortization..... 93 4 -- -- 97
Change in certain assets and
liabilities --
Accounts receivable, net........ 390 142 -- -- 532
Inventory, net.................. (28) 7 -- -- (21)
Prepaid expenses and other
assets....................... (65) 31 -- -- (34)
Accounts payable and accrued
liabilities.................. (756) (32) -- -- (788)
Due to/from affiliates, net..... 2 (1) -- (1) --
-------- ---- ---- ---- -------
Net cash provided by (used
in) operating activities... (515) 150 -- -- (365)
-------- ---- ---- ---- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of acquired business, net of
cash acquired..................... (20,523) -- -- -- (20,523)
Purchasing of property, and
equipment......................... (46) -- -- -- (46)
Change in other assets, net.......... -- -- -- -- --
-------- ---- ---- ---- -------
Net cash used in investing
activities................. (20,569) -- -- -- (20,569)
-------- ---- ---- ---- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of offering and
acquisition costs................. 27,225 -- -- -- 27,225
Purchase of treasury stock........... (1,800) -- -- -- (1,800)
-------- ---- ---- ---- -------
Net cash provided by
financing activities....... 25,425 -- -- -- 25,425
-------- ---- ---- ---- -------
INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 4,341 150 -- -- 4,491
-------- ---- ---- ---- -------
CASH AND CASH EQUIVALENTS, beginning of
period............................... -- -- -- -- --
-------- ---- ---- ---- -------
CASH AND CASH EQUIVALENTS, end of
period............................... $ 4,341 $150 $ -- $ -- $ 4,491
======== ==== ==== ==== =======
</TABLE>
F-30
<PAGE> 90
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................ $ 2,830 $ 2,701 $-- $(2,701) $ 2,830
Adjustments to reconcile net income to
net cash provided by (used in) in
operating activities:
Depreciation and amortization...... 1,058 788 -- -- 1,846
Interest accretion on note
payable.......................... 6 168 -- -- 174
Extraordinary loss on early
extinguishment of debt........... 1,377 -- -- -- 1,377
Change in certain assets and
liabilities
Accounts receivable, net......... (5,227) (2,178) -- -- (7,405)
Inventories, net................. (2,063) (929) -- -- (2,992)
Prepaid expenses and other
assets........................ (1,825) 95 -- -- (1,730)
Accounts payable and accrued
liabilities................... 1,405 2,115 -- -- 3,520
Due to/from affiliates, net...... (564) (2,137) -- 2,701 --
-------- ------- --- ------- --------
Net cash provided by (used in)
operating activities........ (3,003) 623 -- -- (2,380)
-------- ------- --- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchasing of property and
equipment.......................... (518) (64) -- -- (582)
Purchase of acquired business, net of
cash acquired...................... (45,131) (19) -- -- (45,150)
Change in other assets................ -- -- -- -- --
-------- ------- --- ------- --------
Net cash provided by (used in)
investing activities........ (45,649) (83) -- -- (45,732)
-------- ------- --- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility, net of
financing costs.................... 71,633 -- -- -- 71,633
Payments on long-term debt............ (24,472) (477) -- -- (24,949)
-------- ------- --- ------- --------
Net cash provided by (used in)
financing activities........ 47,161 (477) -- -- 46,684
-------- ------- --- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (1,491) 63 -- -- (1,428)
-------- ------- --- ------- --------
CASH AND CASH EQUIVALENTS, beginning of
period................................ 4,341 150 -- -- 4,491
-------- ------- --- ------- --------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 2,850 $ 213 $-- $ -- $ 3,063
======== ======= === ======= ========
</TABLE>
F-31
<PAGE> 91
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................. $ 4,082 $ 6,129 $ 66 $(6,195) $ 4,082
Adjustments to reconcile net income to
net cash in operating activities:
Depreciation and amortization....... 2,993 1,839 355 -- 5,187
Interest accretion on note
payable........................... 159 -- -- -- 159
Extraordinary loss on early
extinguishment
of debt........................... 1,091 -- -- -- 1,091
Change in certain assets and
liabilities
Accounts receivable, net.......... (6,106) (3,217) (1,226) -- (10,549)
Inventories, net.................. (3,773) (5,329) 738 -- (8,364)
Prepaid expenses and other
assets......................... (471) (51) 324 -- (198)
Accounts payable and accrued
liabilities.................... (2,124) 2,641 1,290 -- 1,807
Due to/from affiliates, net....... (16,100) 821 9,084 6,195 --
-------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities......... (20,249) 2,833 10,631 -- (6,785)
-------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchasing of property, plant and
equipment........................... (1,766) (174) (22) -- (1,962)
Purchasing of acquired business, net of
cash
acquired............................ (62,677) -- -- -- (62,677)
Change in other assets................. 2,978 (2,510) (4,719) -- (4,251)
-------- ------- ------- ------- --------
Net cash provided by (used in)
investing activities......... (61,465) (2,684) (4,741) -- (68,890)
-------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility, net of
financing costs..................... 47,298 -- -- -- 47,298
Proceeds from bond offering, net of
offering costs...................... 96,400 -- -- -- 96,400
Exercise of stock options.............. 1,163 -- -- -- 1,163
Payments on long-term debt............. (63,130) (19) (5,077) -- (68,226)
-------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities......... 81,731 (19) (5,077) -- 76,635
-------- ------- ------- ------- --------
INCREASE IN CASH AND CASH EQUIVALENTS.... 17 130 813 -- 960
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, beginning of
period................................. 2,850 213 -- -- 3,063
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 2,867 $ 343 $ 813 $ -- $ 4,023
======== ======= ======= ======= ========
</TABLE>
F-32
<PAGE> 92
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................. $ 1,913 $ 2,164 $-- $(2,164) $ 1,913
Adjustments to reconcile net income to
net cash in operating activities:
Depreciation and amortization........ 1,102 754 -- -- 1,856
Interest accretion on note payable... 87 -- -- -- 87
Change in certain assets and
liabilities
Accounts receivable, net.......... (2,491) (1,174) -- -- (3,665)
Inventory, net.................... (2,724) 1,173 -- -- (1,551)
Prepaids and other assets......... (1,792) 1,428 -- -- (363)
Accounts payable, accrued
liabilities and deferred income
taxes........................... (3,396) 600 -- -- (2,796)
Due to (from) affiliates, net..... 1,696 (3,859) -- 2,164 0
-------- ------- -- ------- --------
Net cash used in operating
activities................. (5,605) 1,086 -- -- (4,519)
-------- ------- -- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of acquired businesses, net
of cash acquired.................. (31,469) -- (31,469)
Purchasing of property, plant and
equipment......................... (624) (44) -- -- (668)
Change in investments, long term
receivables and other............. (872) (85) -- -- (957)
-------- ------- -- ------- --------
Net cash used in investing
activities................. (32,965) (129) -- -- (33,094)
-------- ------- -- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facility, net of
financing costs................... 10,265 -- -- -- 10,265
Proceeds from bond offering, net of
financing costs................... 96,400 -- 96,400
Exercise of stock options............ 197 -- 197
Repayment of notes payable and Credit
Facility.......................... (60,655) -- -- -- (60,655)
-------- ------- -- ------- --------
Net cash provided by
financing activities....... 46,207 -- -- -- 46,207
-------- ------- -- ------- --------
INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 7,637 957 -- -- 8,594
-------- ------- -- ------- --------
CASH AND CASH EQUIVALENTS,
beginning of period.................. $ 2,850 $ 213 -- $ -- 3,063
-------- ------- -- ------- --------
CASH AND CASH EQUIVALENTS,
end of period........................ $ 10,487 $ 1,170 $-- $ -- $ 11,657
======== ======= == ======= ========
</TABLE>
F-33
<PAGE> 93
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ (1,160) $ 6,883 $ (667) $(6,216) $ (1,160)
Adjustments to reconcile net income (loss)
to net cash in operating activities:
Depreciation and amortization........... 1,677 1,568 247 -- 3,492
Provision for cancelled distributors.... 5,067 -- -- -- 5,067
Change in certain assets and liabilities
Accounts receivable, net............. 107 (10,669) (5,441) -- (16,003)
Inventories, net..................... (1,526) 417 (464) -- (1,573)
Prepaids and other assets............ (3,766) (1,214) (84) -- (5,064)
Accounts payable and accrued
liabilities........................ (363) 5,022 1,687 -- 6,346
Due to (from) affiliates, net........ (12,952) 1,081 5,655 6,216 --
-------- -------- ------- ------- --------
Net cash provided by (used in)
operating activities............ (12,916) 3,088 933 -- (8,895)
-------- -------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchasing of property, plant
and equipment........................ (2,378) (1,046) (16) -- (3,440)
Change in investments, long term
receivables and other................ (384) (1,216) (1,283) -- (2,883)
-------- -------- ------- ------- --------
Net cash provided by (used in)
investing activities............ (2,762) (2,262) (1,299) -- (6,323)
-------- -------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facilities, net of
financing costs...................... 72,469 -- -- -- 72,469
Repayment on line of credit............. (59,460) -- (302) -- (59,762)
-------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities............ 13,009 -- (302) -- 12,707
-------- -------- ------- ------- --------
NET CHANGE IN CASH........................ (2,669) 826 (668) -- (2,511)
-------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, beginning of
period.................................. $ 2,867 $ 343 $ 813 $ -- 4,023
-------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 198 $ 1,169 $ 145 $ -- $ 1,512
======== ======== ======= ======= ========
</TABLE>
F-34
<PAGE> 94
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited 1998 pro forma condensed consolidated financial
information should be read in conjunction with the historical consolidated
financial statements and notes thereto of STC, European Touch II and Ft. Pitt,
contained elsewhere in this prospectus and registration statement. The unaudited
pro forma condensed consolidated pro forma financial information reflects the
results of the Company, which includes all of the Company's acquisitions,
including Pro Finish, European Touch II, European Touch and Ft. Pitt (the
"Recent Acquisitions"). The unaudited pro forma condensed consolidated financial
information also reflects certain pro forma adjustments that are more fully
described in the accompanying notes. The Unaudited Pro Forma Condensed
Consolidated Statement of Operations reflects the historical financial
information of STC, together with the issuance of the Notes (assuming this had
occurred as of January 1, 1998), and the operations of the Recent Acquisitions
during 1998, prior to being acquired by STC (including certain adjustments to
the historical financial statements that are more fully described in the notes
hereto). The Unaudited Pro Forma Condensed Consolidated Statement of Operations
may not be indicative of actual results that would have been achieved if the
issuance of the Notes and the Recent Acquisitions had occurred on the dates
indicated or the results that may be realized in the future. The unaudited pro
forma condensed consolidated financial information contains only certain
adjustments that are directly attributable to the issuance of the Notes, the
Recent Acquisitions and the issuance of common stock described in this
prospectus.
F-35
<PAGE> 95
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS
-------------------------------------------
EUROPEAN EUROPEAN PRO FORMA
STC PRO FINISH TOUCH II TOUCH FT. PITT TOTAL ADJUSTMENTS PRO FORMA
------- ---------- -------- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $90,373 $2,723 $4,152 $2,420 $15,940 $115,608 $ -- $115,608
Cost of sales............. 39,222 1,388 1,615 776 5,860 48,861 -- 48,861
------- ------ ------ ------ ------- -------- -------- --------
Gross Profit.............. 51,151 1,335 2,537 1,644 10,080 66,747 -- 66,747
Selling, general, and
administrative
expenses................ 33,137 1,023 765 991 10,560 46,476 (639)(a) 45,837
------- ------ ------ ------ ------- -------- -------- --------
Income from operations.... 18,014 312 1,772 653 (480) 20,271 639 20,910
Interest (expense)
income.................. (9,206) -- 61 -- (311) (9,456) (4,768)(b) (14,224)
------- ------ ------ ------ ------- -------- -------- --------
Income (loss) from
continuing operations... 8,808 312 1,833 653 (791) 10,815 (4,129) 6,686
Provision for income
taxes................... 3,635 86 -- -- (83) 3,638 (356)(c) 3,282
------- ------ ------ ------ ------- -------- -------- --------
Income before
extraordinary item...... $ 5,173 $ 226 $1,833 $ 653 $ (708) $ 7,177 $ (3,773) $ 3,404
======= ====== ====== ====== ======= ======== ======== ========
Basic earnings per share
before extraordinary
item.................... $ 1.28 $ 0.84
======= ========
Diluted earnings per share
before extraordinary
item.................... $ 1.20 $ 0.79
======= ========
Basic weighted average
shares.................. 4,033 4,033
======= ========
Diluted weighted average
shares.................. 4,313 4,313
======= ========
</TABLE>
F-36
<PAGE> 96
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
(a) Reflects the net impact in selling, general, and administrative
expenses of an aggregate of (i) approximately $1.7 million to reflect
the elimination of salaries and benefits of specific individuals not
continuing with the combined companies, and (ii) approximately $1.1
million to reflect the additional amortization of goodwill associated
with each acquisition.
(b) Represents cash interest expense on the Notes plus amortization of
related financing costs.
(c) 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.
F-37
<PAGE> 97
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-38
<PAGE> 98
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-39
<PAGE> 99
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-40
<PAGE> 100
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-41
<PAGE> 101
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-42
<PAGE> 102
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-43
<PAGE> 103
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-44
<PAGE> 104
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-45
<PAGE> 105
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-46
<PAGE> 106
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-47
<PAGE> 107
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-48
<PAGE> 108
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-49
<PAGE> 109
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-50
<PAGE> 110
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-51
<PAGE> 111
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-52
<PAGE> 112
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-53
<PAGE> 113
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-54
<PAGE> 114
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-55
<PAGE> 115
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-56
<PAGE> 116
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-57
<PAGE> 117
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-58
<PAGE> 118
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-59
<PAGE> 119
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-60
<PAGE> 120
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-61
<PAGE> 121
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-62
<PAGE> 122
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-63
<PAGE> 123
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-64
<PAGE> 124
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-65
<PAGE> 125
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-66
<PAGE> 126
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-67
<PAGE> 127
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-68
<PAGE> 128
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-69
<PAGE> 129
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-70
<PAGE> 130
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-71
<PAGE> 131
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-72
<PAGE> 132
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-73
<PAGE> 133
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-74
<PAGE> 134
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE THREE
ENDED 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-75
<PAGE> 135
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-76
<PAGE> 136
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE THREE MONTHS
ENDED DECEMBER 31, ENDED 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-77
<PAGE> 137
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
F-78
<PAGE> 138
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-79
<PAGE> 139
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.
F-80
<PAGE> 140
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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,
F-81
<PAGE> 141
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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-82
<PAGE> 142
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-83
<PAGE> 143
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-84
<PAGE> 144
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-85
<PAGE> 145
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-86
<PAGE> 146
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-87
<PAGE> 147
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-88
<PAGE> 148
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-89
<PAGE> 149
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-90
<PAGE> 150
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-91
<PAGE> 151
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Ft. Pitt Acquisition, Inc.:
We have audited the accompanying consolidated balance sheet of Ft. Pitt
Acquisition, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Ft. Pitt Acquisition, Inc. and
subsidiary at December 31, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the consolidated financial statements, on August
3, 1998, the Company entered into a Stock Purchase Agreement with its majority
shareholders and Styling Technology Corporation, which provides for the purchase
of a majority of the issued and outstanding common stock of the Company by
Styling Technology Corporation.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 2, 1998 (August 3, 1998 as to Note 10)
F-92
<PAGE> 152
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $58,389 (unaudited) and $156,660........... $ 5,218,020 $4,926,093
Inventories............................................... 2,237,324 2,087,677
Prepaid and other current assets.......................... 179,197 319,586
Deferred tax asset........................................ 250,000 250,000
----------- ----------
Total current assets................................... 7,884,541 7,583,356
----------- ----------
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 752,891 750,887
Office equipment.......................................... 627,392 534,428
Automobiles and trucks.................................... 6,849 6,849
Leasehold improvements.................................... 66,752 66,752
----------- ----------
1,453,884 1,358,916
Less accumulated depreciation............................. 1,294,753 1,225,652
----------- ----------
159,131 133,264
INTANGIBLES:
License agreement......................................... 1,524,942 1,652,142
Goodwill.................................................. 489,235 427,253
----------- ----------
TOTAL ASSETS................................................ $10,057,849 $9,796,015
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts........................................... $ 336,294 $ 429,472
Current maturities of long-term debt...................... 881,294 848,201
Accounts payable.......................................... 363,935 377,285
Accounts payable -- related party......................... 609,037 294,095
Accrued royalty -- related party.......................... 372,348 284,183
Accrued bonuses........................................... 222,343 439,931
Accrued income taxes...................................... 13,992 329,934
Other accrued liabilities................................. 903,126 400,570
----------- ----------
Total current liabilities.............................. 3,702,369 3,403,671
LONG-TERM AND SUBORDINATED DEBT............................. 4,313,452 4,227,013
DEFERRED TAX LIABILITY...................................... 552,000 552,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock; no par value; 315,586 shares authorized;
254,639 shares outstanding, including those held in
treasury............................................... 1,077,114 1,077,114
Warrant................................................... 52,179 52,179
Retained earnings......................................... 660,735 784,038
Treasury stock -- at cost................................. (300,000) (300,000)
----------- ----------
1,490,028 1,613,331
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $10,057,849 $9,796,015
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-93
<PAGE> 153
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------- YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES........................................... $14,166,121 $12,757,683 $26,097,739
COST OF SALES....................................... 5,242,145 4,653,792 9,757,863
----------- ----------- -----------
Gross profit.............................. 8,923,976 8,103,891 16,339,876
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 8,262,084 6,700,382 13,697,245
PROVISION FOR DOUBTFUL ACCOUNTS..................... 26,033 24,835 140,003
ROYALTY EXPENSE -- RELATED PARTY.................... 372,348 323,055 674,709
DEPRECIATION........................................ 69,101 83,365 170,342
AMORTIZATION OF INTANGIBLE ASSETS................... 133,200 133,268 266,400
----------- ----------- -----------
Income from operations before interest
expense and income taxes................ 61,210 838,986 1,391,177
INTEREST EXPENSE.................................... 267,513 259,494 539,327
----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES................... (206,303) 579,492 851,850
INCOME TAX (BENEFIT) PROVISION...................... (83,000) 235,000 346,000
----------- ----------- -----------
NET (LOSS) INCOME................................... $ (123,303) $ 344,492 $ 505,850
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-94
<PAGE> 154
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
COMMON COMMON TREASURY RETAINED
SHARES STOCK STOCK WARRANT EARNINGS TOTAL
--------- ---------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996......... 244,263 $1,076,078 $(300,000) $52,179 $ 278,188 $1,106,445
Common stock issued.............. 10,376 1,036 -- -- -- 1,036
Net income....................... -- -- -- -- 505,850 505,850
------- ---------- --------- ------- --------- ----------
BALANCE, December 31, 1997......... 254,639 1,077,114 (300,000) 52,179 784,038 1,613,331
Net loss (Unaudited)............. -- -- -- -- (123,303) (123,303)
------- ---------- --------- ------- --------- ----------
BALANCE, June 30, 1998
(Unaudited)...................... 254,639 $1,077,114 $(300,000) $52,179 $ 660,735 $1,490,028
======= ========== ========= ======= ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-95
<PAGE> 155
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------- YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income..................................... $(123,303) $ 344,492 $ 505,850
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 202,301 216,633 436,742
Changes in assets and liabilities:
Increase in accounts receivable.................... (291,927) (478,555) (716,290)
Increase in inventories............................ (149,647) (869,422) (206,204)
Decrease (increase) in prepaid and other current
assets........................................... 140,389 48,633 (3,134)
(Decrease) increase in accounts payable............ (13,350) 355,273 (6,195)
Increase in accounts payable -- related party...... 314,942 330,150 51,095
Increase in accrued royalty -- related party....... 88,165 78,933 40,061
(Decrease) increase in accrued liabilities......... (30,974) (227,544) 70,506
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... 136,596 (201,407) 172,431
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (94,968) (41,334) (83,031)
Additions to intangibles.............................. (67,982) (32,873) (80,140)
--------- --------- ---------
Cash used in investing activities............. (162,950) (74,207) (163,171)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit facility........... 535,565 515,644 368,543
(Decrease) increase in bank overdrafts................ (93,178) 146,046 407,922
Principal payments on long-term debt.................. (416,033) (386,076) (786,761)
Proceeds from issuance of common stock................ -- -- 1,036
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... 26,354 275,614 (9,260)
--------- --------- ---------
NET CHANGE IN CASH...................................... -- -- --
--------- --------- ---------
CASH, BEGINNING AND END OF PERIOD....................... $ -- $ -- $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................ $ 544,937
=========
Cash paid for income taxes............................ $ 196,843
=========
</TABLE>
See notes to consolidated financial statements.
F-96
<PAGE> 156
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation -- The consolidated financial statements
include the accounts of Ft. Pitt Acquisition, Inc. and its 90% owned subsidiary,
Ft. Pitt-Framesi, Ltd. (Framesi of USA, Inc.) (collectively, the "Company"). All
intercompany balances and transactions have been eliminated.
b. Nature of Operations -- The Company's primary business is the
distribution, in the Western Hemisphere, and limited production of an Italian
line of hair coloring and hair care products under the "Framesi" brand name and
the manufacture and distribution of hair care products under the "Roffler" and
"Color Plus" Company-owned brand names. The Company performs periodic credit
evaluations of its distributors and maintains the right to rescind the
distributor agreements at any time.
c. Estimates -- The preparation of consolidated 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 and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
d. Unaudited Interim Financial Information -- The interim condensed
consolidated financial statements as of June 30, 1998 and for the six months
ended June 30, 1998 and June 30, 1997, are unaudited. The interim condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments that, in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods indicated. Results of operations for interim periods may
not be indicative of the operating results that may be expected for the full
year. The interim condensed consolidated financial statements do not include all
footnotes which would be required for complete financial statements prepared in
accordance with generally accepted accounting principles.
e. Revenue Recognition -- Sales are recognized when product is shipped.
f. Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out inventory method.
g. Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is provided for on the straight-line method over the estimated
useful lives for financial reporting and on accelerated methods for tax
reporting.
h. Intangibles -- Intangible assets are amortized over their estimated
useful lives using the straight-line method.
i. Income Taxes -- The Company applies the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under the provisions of SFAS No. 109, deferred tax assets and liabilities are
provided for the effects of net operating loss and inventory contribution
carryforwards, and for temporary differences between financial and tax reporting
which are primarily associated with amortization of intangibles, an allowance
for doubtful accounts and the difference between the book and tax basis for
property and equipment and inventories. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
j. Bank Overdrafts -- The Company utilizes a cash management system under
which a book balance cash overdraft exists for the Company's primary
disbursement accounts. This overdraft represents uncleared checks in excess of
cash balances in bank accounts. Drawdowns of the Company's revolving credit
facility are made as checks are presented for clearing.
F-97
<PAGE> 157
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
k. Financial Instruments -- The Company's financial instruments include
long-term debt obligations. The carrying values of all instruments at December
31, 1997 approximated their fair value. The fair value of the instruments were
based on the rate available to the Company for instruments of the same
maturities.
2. INTANGIBLES
The license agreement sets forth the rights and obligations governing the
exclusive manufacture, promotion and sale of the "Framesi" line of products and
the use of the "Framesi" name in most of the Western Hemisphere. This agreement
is with the minority stockholder of the subsidiary. The license will expire in
2036 and for financial statement purposes, six and one-half years remain on the
life of the license at December 31, 1997. Accumulated amortization as of
December 31, 1997 was $2,672,858.
Goodwill represents the excess purchase price over the estimated fair
market value of net asset acquired from the prior owner of the business (the
"Seller"). This amount is being amortized on a straight-line basis over 40 years
and is net of accumulated amortization of $61,373 as of December 31, 1997. The
Company's agreement with the Seller also provides for contingent payments to the
Seller based upon a defined formula, up to a maximum of $500,000 over the
agreement term, which expires in June 2000. Payments made are considered an
increase in the purchase price paid for the business. During the year ended
December 31, 1997, the Company made payments under the terms of the agreement of
$80,140, which were charged to goodwill and are being amortized over the
remaining life of goodwill.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials and work-in-progress............... $ 383,863 $ 318,050
Packaging........................................ 435,551 480,025
Finished goods................................... 1,430,087 1,329,602
---------- ----------
2,249,501 2,127,677
Reserve for obsolete inventory................... (12,177) (40,000)
---------- ----------
$2,237,324 $2,087,677
========== ==========
</TABLE>
F-98
<PAGE> 158
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BORROWING ARRANGEMENTS
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Bank debt:
Revolving credit facility................................. $2,872,272
Term loan................................................. 452,978
Promissory notes:
Promissory note (A)....................................... 1,261,378
Promissory note (B)....................................... 488,586
----------
Total debt.................................................. 5,075,214
Less current maturities..................................... 848,201
----------
Long-term debt.............................................. $4,227,013
==========
</TABLE>
The Company entered into a credit agreement in 1995 which included a
$1,000,000 term loan and a revolving credit facility. Under the terms of the
credit agreement, as amended in 1997, the revolving credit facility expires July
31, 2001 and is limited to the lesser of $5,000,000 or an amount equal to the
sum of 80% of the eligible accounts receivable plus the lesser of $1,700,000 or
60% of eligible finished goods inventories. The available and unused portion of
the credit facilities was $1,160,122 at December 31, 1997. Interest accrues on
the outstanding balance at the bank's prime rate plus 1%, and a fee of .25% is
charged by the bank on the unused portion of the revolving credit facility. The
Company will incur a prepayment penalty of 1% of the sum of $5,000,000 plus the
then outstanding principal balance of the term loan if the revolving credit
facility is terminated before July 31, 2001. The prime rate was 8.5% at December
31, 1997.
The term loan is a three year note payable in monthly installments of
$16,667, including interest at the bank's prime rate plus 1.5% through April
2000.
The bank has a security interest in the accounts receivable, inventories,
machinery and equipment and related proceeds and all other tangible and
intangible assets of the Company. In addition, these obligations are secured by
the outstanding common stock of Framesi and personal guarantees of certain
officers of the Company. The agreements contain various covenants, including
maintenance of certain levels of net income, leverage ratios, debt service
ratios and restrictions on rentals, additional debt, dividends and other
distributions to stockholders.
The Company failed to meet the limit on rentals for the year ended December
31, 1997 required under the credit agreement. The Company's bank waived
maintenance of this covenant requirement for the year ended December 31, 1997
and modified the requirement for future periods.
Promissory note (A) is a ten-year note payable in monthly installments
ranging between $27,750 to $47,695, including interest at 10% through June 15,
2000. Promissory note (B) is a ten-year note payable in monthly installments of
$18,474, including interest at 10% through June 1, 2000. Promissory notes (A)
and (B) are subordinate to the outstanding debt with the bank. Covenants on the
promissory notes require that the Company maintain compliance with the bank debt
agreements. As a result of receipt of the bank waiver, the Company remains in
compliance with the promissory notes covenants.
F-99
<PAGE> 159
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities for principal payments on long-term and subordinated
debt for the years ending December 31, are:
<TABLE>
<S> <C>
1998..................................................... $ 848,201
1999..................................................... 969,056
2000..................................................... 385,685
2001..................................................... 2,872,272
----------
$5,075,214
==========
</TABLE>
5. OPERATING LEASES
The Company has noncancelable operating leases for its operating facilities
and Company vehicles. Rental expense for such leases was $298,940 for the year
ended December 31, 1997. The leases do not provide for contingent rentals,
renewal or purchase options or escalation clauses, and contain no restrictive
covenants. Future minimum lease commitments under operating leases are as
follows:
<TABLE>
<S> <C>
1998...................................................... $244,920
1999...................................................... 143,900
2000...................................................... 126,055
2001...................................................... 114,996
2002...................................................... 114,996
Thereafter................................................ 114,996
--------
Total minimum lease commitment.................. $859,863
========
</TABLE>
6. STOCKHOLDERS' EQUITY
Stock Option Plan -- The Company had a stock option plan that granted
directors, officers and key employees options to purchase shares of common
stock. No options have been granted since 1992. The options expired not more
than ten years after the date of grant and were exercisable only while the
holder was in the employment of the Company. During the year ended December 31,
1997, 10,376 options were exercised at $.10 per option. At December 31, 1997,
there were no options outstanding and the plan was canceled.
Warrant -- The warrant entitles the holder to purchase 5% of the Company's
outstanding stock for $44,000 and is exercisable at any time before July 31,
2000. The warrant has certain antidilution rights, but no voting rights.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current:
Federal............................................... $336,000
State................................................. 10,000
--------
Total current expense......................... $346,000
========
</TABLE>
F-100
<PAGE> 160
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes in the accompanying consolidated balance sheet
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Deferred Tax Assets:
Allowance for doubtful accounts....................... $ 60,000
Reserve for obsolete inventory........................ 15,000
Section 263A costs.................................... 116,000
Inventory contribution carryforwards.................. 120,000
Depreciation.......................................... 14,000
---------
$ 325,000
=========
Deferred Tax Liability:
Intangibles........................................... $(627,000)
=========
Composition of amounts in the consolidated balance
sheet:
Current deferred tax asset............................ $ 250,000
=========
Non-current deferred tax liability.................... $(627,000)
Non-current deferred tax assets....................... 75,000
---------
Net non-current deferred tax liability............. $(552,000)
=========
</TABLE>
The Company's effective tax rate differed from the statutory federal tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Percent of pre-tax earnings............................. 34.0%
Non-deductible expenses................................. 5.4
State income taxes, net of federal benefit.............. 1.2
----
Effective tax rate...................................... 40.6%
====
</TABLE>
8. RETIREMENT PLAN
The Company has a 401(k) plan in which all full-time, nonunion employees
are eligible to participate. The plan provides for the Company to match employee
contributions at its discretion and to make other discretionary contributions.
Total related expense was $20,439 for the year ended December 31, 1997.
The Company participates in a multiemployer pension plan on behalf of its
union employees. The Company contributes $.15 per hour to the plan for all
employees who have completed six months of service. Total related expense
incurred for the year ended December 31, 1997 was $29,260.
9. RELATED PARTIES
The Company has entered into consulting and employment agreements with
certain members of the Board of Directors. Payments totaling $200,000 were made
during the year ended December 31, 1997, under these agreements. One agreement
includes a noncompetition agreement for eight years starting on January 1, 2000
which includes payments of $200,000 a year over the term. Payments, if any,
under the noncompetition agreement are contingent upon the completion of
employment through December 31, 1999.
Framesi's minority stockholder is the supplier of products for the
Company's primary business of distribution and limited production of an Italian
line of hair coloring and hair care products, cosmetics and related products
under the "Framesi" brand name. Total purchases from the minority stockholder
were
F-101
<PAGE> 161
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,562,217 (unaudited) and $2,670,577 (unaudited) for the six months ended June
30, 1998 and 1997, respectively, and $6,063,163 for the year ended December 31,
1997. In addition, a royalty at various percentages on certain net sales of
products acquired from the minority stockholder is payable semiannually to the
minority stockholder.
10. SUBSEQUENT EVENTS
On August 3, 1998, the Company entered into a Stock Purchase Agreement (the
"Agreement") with its majority shareholders and Styling Technology Corporation,
which provides for the purchase of a majority of the issued and outstanding
common stock of the Company by Styling Technology Corporation for approximately
$30,000,000 in cash and a seller note.
As a result of the signing of the Agreement, the warrant described in Note
6 was exercised and the outstanding balance under the revolving credit facility
became due and payable.
F-102
<PAGE> 162
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[STYLING TECHNOLOGY LOGO]
4,000,000 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE
ING BARINGS
U.S. BANCORP PIPER JAFFRAY
FIRST SECURITY VAN KASPER
DLJDIRECT INC.
FRIEDMAN BILLINGS RAMSEY
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Styling
Technology have not changed since the date hereof.
- --------------------------------------------------------------------------------
<PAGE> 163
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with the offering
described in the Registration Statement.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,507
NASD filing fee............................................. 5,359
Nasdaq National Market fees................................. 17,500
Transfer agent and registrar fees........................... 2,000*
Accountants' fees and expenses.............................. 150,000*
Legal fees and expenses..................................... 250,000*
Printing and engraving expenses............................. 225,000*
Miscellaneous fees.......................................... 36,634*
--------
Total....................................................... $700,000
========
</TABLE>
- ---------------
* Estimates
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article IX of the Company's First Amended and Restated 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
II-1
<PAGE> 164
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 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1996, the Company sold to a single foreign investor a
promissory note in the principal amount of $400,000 at an interest rate of 10%
per annum that was repaid in the same year. Upon completion of the Company's
initial public offering, the Company issued to Sylvan Schefler upon his election
as a director of the Company (i) 20,000 shares of common stock, (ii) warrants to
purchase 20,000 shares of common stock at an exercise price of $12.50 per share,
and (iii) options to purchase 5,000 shares of common stock at an exercise price
of $10 per share. The Company issued the note in reliance upon an exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933, as a
transaction not involving a public offering.
In November 1996, in connection with its initial public offering, the
Company issued 203,000 common stock purchase warrants to its underwriters,
Friedman, Billings, Ramsey & Co., Inc. and Prime Charter Ltd. Each warrant
entitles the holder thereof to purchase at any time prior to November 21, 2001,
one share of common stock at an exercise price of $12.00 per share. The Company
issued the warrants in reliance upon an exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933, as a transaction not involving a
public offering. See "Description of Securities -- Warrants."
In June 1997, in connection with its June 1997 Credit Facility that is no
longer outstanding, the Company issued 150,000 common stock purchase warrants to
Credit Agricole Indosuez at an exercise price of $10.18 per share, and 10,000
common stock purchase warrants to Bank Boston, N.A at an exercise price of
$11.38 per share. Each warrant entitles the holder to purchase at any time prior
to June 24, 2002, one share of common stock at the exercise price. The Company
issued the warrants in reliance upon an exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933, as a transaction not involving a
public offering. See "Description of Securities -- Warrants."
In June 1998, the Company completed a $100.0 million senior subordinated
debt offering. The senior subordinated notes due 2008 were priced at 10 7/8% and
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, to repay existing
indebtedness (including the Company's December 1997 Credit Facility), and for
working capital purposes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 First Amended and Restated Certificate of Incorporation of
the Registrant(1)
3.3 Bylaws of the Registrant(2)
4.1 Specimen of Stock Certificate(2)
4.2 Specimen of Redeemable Common Stock Warrant(2)
4.3 Form of Warrant issued to Credit Agricole Indosuez(3)
4.4 Form of Warrant issued to Bank Boston N.A.(4)
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)
4.6 Form of Global Notes(5)
</TABLE>
II-2
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
4.8 Rights Agreement, dated February 23, 1999, between Styling
Technology Corporation and American Securities Transfer &
Trust Inc., as Rights Agent, together with the following
exhibits thereto: Exhibit A-Form of Certificate of
Designation of Series A Junior Participating Preferred Stock
of Styling Technology Corporation; Exhibit B-Form of Right
Certificate; Exhibit C-Summary of Rights to Purchase Shares
of Preferred Stock of Styling Technology Corporation.(6)
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association
10.5 Employment Agreement between Registrant and Sam L.
Leopold(2)
10.11 1996 Stock Option Plan (as amended through April 19, 1999)
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)
10.23 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.(9)
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik(7)
10.26 1998 Employee Stock Option Plan(1)
10.27 First Amendment to Credit Agreement dated as of March 30,
1999 by and among the Company, NationsBank, N.A., and
BankBoston, N.A., as lenders, and NationsBank, N.A., as
administrative agent.(10)
10.28 Credit Agreement dated June 22, 1999 among the Registrant,
the other credit parties signatory thereto from time to
time, the lenders signatory thereto from time to time, and
General Electric Capital Corporation.
10.29 Employment Agreement dated June 22, 1999 by and between the
Registrant and Richard R. Ross.
21 Subsidiaries of Registrant
23.1 Consent of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association (included in Exhibit 5)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Page of the Registration
Statement)
27 Financial Data Schedule(1)(11)
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Commission on March
31, 1999.
(2) 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.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 as filed with the Commission on August
14, 1997.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 as filed with the Commission on
November 14, 1997.
(5) Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-61035) filed August 7, 1998 and declared effective
September 18, 1998.
(6) Incorporated by reference to the Registration Statement on Form 8-A as
filed with the Commission on March 8, 1999
II-3
<PAGE> 166
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
(9) Incorporated by reference to Amendment No. 1 to Form S-4 (Registration No.
333-61035) filed September 17, 1998 and declared effective September 18,
1998.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 as filed with the Commission on May
17, 1999.
(11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 as filed with the Commission on August
13, 1999.
(b) Financial Statements filed as part of this report:
Consolidated Financial Statements as listed in the Index to
Consolidated Financial Statements on page F-1 of this Registration
Statement.
(c) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts.(1)
- ---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 as filed with the Commission on March 31,
1999.
All other schedules have been omitted on the basis of immateriality or
because such schedules are not otherwise applicable.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 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 Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Scottsdale, State of
Arizona, on June 28, 1999.
STYLING TECHNOLOGY CORPORATION
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold, Chairman of the
Board,
President, and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Sam L. Leopold and
Richard R. Ross, and each of them, as his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre-effective and post-effective amendments) to this Registration
Statement, and to sign any Registration Statement and amendments thereto for the
same offering pursuant to Rule 462(b) under the Securities Act of 1933, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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, President, June 28, 1999
- --------------------------------------------------- and Chief Executive Officer
Sam L. Leopold (Principal Executive Officer)
/s/ RICHARD R. ROSS Executive Vice President, Chief June 28, 1999
- --------------------------------------------------- Financial Officer, Treasurer,
Richard R. Ross and Director (Principal
Financial Officer)
/s/ J. TIMOTHY MONTROSE Chief Accounting Officer June 28, 1999
- --------------------------------------------------- (Principal Accounting Officer)
J. Timothy Montrose
/s/ JAMES A. BROOKS Director June 28, 1999
- ---------------------------------------------------
James A. Brooks
/s/ PETER W. BURG Director June 28, 1999
- ---------------------------------------------------
Peter W. Burg
/s/ MICHAEL H. FEINSTEIN Director June 28, 1999
- ---------------------------------------------------
Michael H. Feinstein
/s/ SYLVAN SCHEFLER Director June 28, 1999
- ---------------------------------------------------
Sylvan Schefler
</TABLE>
II-5
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 First Amended and Restated Certificate of Incorporation of
the Registrant(1)
3.3 Bylaws of the Registrant(2)
4.1 Specimen of Stock Certificate(2)
4.2 Specimen of Redeemable Common Stock Warrant(2)
4.3 Form of Warrant issued to Credit Agricole Indosuez(3)
4.4 Form of Warrant issued to Bank Boston N.A.(4)
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)
4.6 Form of Global Notes(5)
4.8 Rights Agreement, dated February 23, 1999, between Styling
Technology Corporation and American Securities Transfer &
Trust Inc., as Rights Agent, together with the following
exhibits thereto: Exhibit A-Form of Certificate of
Designation of Series A Junior Participating Preferred Stock
of Styling Technology Corporation; Exhibit B-Form of Right
Certificate; Exhibit C -- Summary of Rights to Purchase
Shares of Preferred Stock of Styling Technology
Corporation.(6)
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association
10.5 Employment Agreement between Registrant and Sam L.
Leopold(2)
10.11 1996 Stock Option Plan (as amended through April 19, 1999)
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)
10.23 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.(9)
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik(7)
10.26 1998 Employee Stock Option Plan(1)
10.27 First Amendment to Credit Agreement dated as of March 30,
1999 by and among the Company, NationsBank, N.A., and
BankBoston, N.A., as lenders, and NationsBank, N.A., as
administrative agent.(10)
10.28 Credit Agreement dated June 22, 1999 among the Registrant,
the other credit parties signatory thereto from time to
time, the lenders signatory thereto from time to time, and
General Electric Capital Corporation.
10.29 Employment Agreement dated June 22, 1999 by and between the
Registrant and Richard R. Ross.
21 Subsidiaries of Registrant
23.1 Consent of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association (included in Exhibit 5)
23.2 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
23.3 Consent of Deloitte & Touche LLP
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Page of the Registration
Statement)
27 Financial Data Schedule(1)(11)
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Commission on March
31, 1999.
(2) 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.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 as filed with the Commission on August
14, 1997.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 as filed with the Commission on
November 14, 1997.
(5) Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-61035) filed August 7, 1998 and declared effective
September 18, 1998.
(6) Incorporated by reference to the Registration Statement on Form 8-A as
filed with the Commission on March 8, 1999
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
(9) Incorporated by reference to Amendment No. 1 to Form S-4 (Registration No.
333-61035) filed September 17, 1998 and declared effective September 18,
1998.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 as filed with the Commission on May
17, 1999.
(11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 as filed with the Commission on August
13, 1999.
<PAGE> 1
Exhibit 1.1
4,000,000 Shares
STYLING TECHNOLOGY CORPORATION
Common Stock
as filed on 8/12
UNDERWRITING AGREEMENT
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ING BARINGS LLC
U.S. BANCORP PIPER JAFFRAY, INC.
FIRST SECURITY VAN KASPER
DLJdirect INC.
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
STYLING TECHNOLOGY CORPORATION, a Delaware corporation (the "Company"),
proposes to issue and sell to the several underwriters named in Schedule I
hereto (the "Underwriters"), an aggregate of 4,000,000 shares of the Common
Stock, par value $0.0001 per share, of the Company (the "Firm Shares"). The
Company also proposes to issue and sell to the several Underwriters not more
than an additional 600,000 shares of its Common Stock, par value $0.0001 per
share (the "Additional Shares"), if requested by the Underwriters as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
referred to collectively as the "Shares". The shares of Common Stock, par value
$.0001 per share, of the Company to be outstanding after giving effect to the
sales contemplated hereby are hereinafter referred to as the "Common Stock".
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "Registration Statement";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "Prospectus". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"Rule 462(b) Registration Statement"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "Purchase Price") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) set forth opposite the name of such Underwriter in Schedule I hereto.
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<PAGE> 2
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 600,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
The Company hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 120 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plans and (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The Company also agrees
not to file any registration statement with respect to any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock for a period of 120 days after the date of the Prospectus without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. The Company shall, prior to or concurrently with the execution of
this Agreement, deliver an agreement executed by (i) each of the directors and
officers of the Company and (ii) each stockholder, option holder and warrant
holder listed on Annex I hereto to the effect that such person will not, during
the period commencing on the date such person signs such agreement and ending
120 days after the date of the Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Corporation, (A) engage in any of the transactions
described in the first sentence of this paragraph or (B) make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock.
SECTION 3. TERMS OF PUBLIC OFFERING. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. DELIVERY AND PAYMENT. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Company, with any transfer
taxes thereon duly paid by the Company, to Donaldson, Lufkin & Jenrette
Securities Corporation through the facilities of The Depository Trust Company
("DTC"), for the respective accounts of the several Underwriters, against
payment to the Company of the Purchase Price therefore by wire transfer of
Federal or other funds immediately available in New York City. The certificates
representing the Shares shall be made available for inspection not later than
9:30 A.M., New York City time, on the business day prior to the Closing Date or
the applicable Option Closing Date, as the case may be, at the office of DTC or
its designated custodian (the "Designated Office"). The time and date of
delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time,
on ________, 1999 or such other time on the
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<PAGE> 3
same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation
and the Company shall agree in writing. The time and date of delivery and
payment for the Firm Shares are hereinafter referred to as the "CLOSING DATE".
The time and date of delivery and payment for any Additional Shares to be
purchased by the Underwriters shall be 9:00 A.M., New York City time, on the
date specified in the applicable exercise notice given by you pursuant to
Section 2 of this Agreement or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery and payment for any Additional Shares
are hereinafter referred to as the "Option Closing Date".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Thompson & Knight, P.C., located at 1700
Pacific Street, Suite 3300, Dallas, Texas 75201 and the Shares shall be
delivered at the Designated Office, all on the Closing Date or such Option
Closing Date, as the case may be.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you five signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d) above, any event
shall occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if, in the opinion of counsel for the Underwriters, it is necessary to amend
or supplement the Prospectus to comply with applicable law, forthwith to prepare
and file with the Commission an appropriate amendment or supplement to the
Prospectus so that the statements in the Prospectus, as so amended or
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<PAGE> 4
supplemented, will not in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with applicable
law, and to furnish to each Underwriter and to any dealer as many copies thereof
as such Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
September 30, 2000 that shall satisfy the provisions of Section 11(a) of the
Act, and to advise you in writing when such statement has been so made
available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Company's obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel and the Company's accountants in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and the fees and disbursements of counsel for the Underwriters in
connection with the review and clearance of the offering of the Shares by the
National Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on Form
8-A relating to the Common Stock and all costs and expenses incident to the
listing of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company for
which provision is not otherwise made in this Section.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the
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<PAGE> 5
Commission the filing fee for such Rule 462(b) Registration Statement at the
time of the filing thereof or to give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Company) have been duly authorized and
validly issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
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<PAGE> 6
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or is in breach of or default in the
performance of, nor will the selling of the Shares as contemplated by this
Agreement, the Registration Statement and the Prospectus result in, the
violation of or default in, any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, credit agreement or facility,
mortgage, lease or other agreement or instrument that is material to the Company
and its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
their respective property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental actions, suits or proceedings
pending or, to the knowledge of the Company, threatened (i) to which the Company
or any of its subsidiaries is or could be a party, (ii) to which the Company's
or any of its subsidiaries' respective directors, officers, or property is or
could be subject, or (iii) relating to environmental or discrimination matters,
where in any case, that are required to be described in the Registration
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required. No material labor dispute with the employees of the Company or any of
its subsidiaries or with the employees of any principal supplier of the Company,
exists or is threatened or eminent.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such valid permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such
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<PAGE> 7
Authorization is valid and in full force and effect and each of the Company and
its subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other impairment of the rights of
the holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole. The Company and its
subsidiaries have complied, and are in compliance, with all applicable laws
except where the failure to so comply would not have a material adverse effect
on the business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(o) This Agreement has been duly authorized, executed and delivered by
and is a valid and binding agreement of the Company.
(p) Arthur Andersen LLP and, with respect to Ft. Pitt Acquisition, Inc.
for the year ended December 31, 1999, Deloitte and Touche LLP, are independent
public accountants with respect to the Company and its subsidiaries as required
by the Act.
(q) The consolidated, combined or condensed financial statements
included in the Registration Statement and the Prospectus (and any amendment or
supplement thereto), together with related schedules and notes, present fairly
the consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are, in all material respects,
accurately presented and prepared.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "Investment Company" as such term is defined in
the Investment Company Act of 1940, as amended, or a "Holding Company" as such
term is defined in the Public Utility Holding Company Act of 1935, as amended.
(s) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement, except as may be described in
the Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its
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<PAGE> 8
subsidiaries and (iii) neither the Company nor any of its subsidiaries has
incurred any material liability or obligation, direct or contingent.
(u) The Company and its subsidiaries own or possess all necessary
trademarks, trade names, patent rights, copyrights, licenses, approvals, trade
secrets and other similar rights (collectively, "Intellectual Property Rights")
reasonably necessary to conduct their businesses as now conducted; and the
expected expiration of any of such Intellectual Property Rights would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
Neither the Company nor any of its subsidiaries has received any notice of
infringement or conflict with asserted Intellectual Property Rights of others,
which infringement or conflict, if the subject of an unfavorable decision, would
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole.
(v) The Company and each of its subsidiaries has good and marketable
title to all the properties and assets reflected as owned in the financial
statements referred to or elsewhere in the Registration Statement or the
Prospectus, in each case free and clear of any security interests, mortgages,
liens, encumbrances, equities, claims and other defects, except as may be
described in the Registration Statement or such as do not materially and
adversely affect the value of such property and do not materially interfere with
the use made or proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal property
held under lease by the Company or any subsidiary are held under valid and
enforceable leases, with such exceptions as may be described in the
Representation Statement or as are not material and do not materially interfere
with the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company or such subsidiary.
(w) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes
required to be paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 6(q) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its subsidiaries has not been finally
determined.
(x) The Company and its subsidiaries have been advised of the rules and
requirements of the National Association of Securities Dealers, Inc. (the
"NASD"). Except for Sylvan Schefler, neither the Company nor its subsidiaries,
officers, directors or holders of more than 5% of any class of capital stock in
the Company is a member, an affiliate or a person associated with a member or
affiliate, as contemplated by the NASD manual.
(y) Each of the Company and its subsidiaries are insured by recognized,
financially sound institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and
customary for their businesses including, but not limited to, policies covering
real and personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction, acts of vandalism and earthquakes. The
Company has no reason to believe that it or any subsidiary will not be able (i)
to renew its existing insurance coverage as and when such policies expire or
(ii) to obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost that would
not have a material adverse effect on the business, prospects, financial
condition, or results of operation of the Company and its subsidiaries, taken as
a whole. Neither of the Company nor any subsidiary has been denied any insurance
coverage which it has sought or for which it has applied.
(z) The Company has not taken nor will take, directly or indirectly,
any action designed to or that reasonably might be expected to cause or result
in stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(aa) The Company maintains a system of accounting controls sufficient
to provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles as
applied in the United States and to maintain accountability for assets; (iii)
access to assets is permitted only
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<PAGE> 9
in accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(bb) The Company and its subsidiaries and any "EMPLOYEE BENEFIT PLAN"
(as defined under the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as
amended, and the regulations and published interpretations thereunder (the
"Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would have
any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither
the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401 (a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(cc) There are no business relationships or related-party transactions
involving the Company or any subsidiary or any other person that would be
required to be described in the Registration Statement or the Prospectus, which
have not been described as would have been so required.
(dd) No "nationally recognized statistical rating organization" as
such term is defined for purposes of Rule 436(g)(2) under the Act has indicated
to the Company that it is considering (i) the downgrading, suspension or
withdrawal of, or any review for a possible change that does not indicate the
direction of the possible change in, any rating assigned to the Company or any
securities of the Company or (ii) any change in the outlook for any rating of
the Company or any securities of the Company.
(ee) The pro forma financial statements of the Company and its
subsidiaries and the related notes thereto set forth in the Registration
Statement and the Prospectus (and any supplement or amendment thereto) have been
prepared on a basis consistent with the historical financial statements of the
Company and its subsidiaries, give effect to the assumptions used in the
preparation thereof on a reasonable basis and in good faith and present fairly
the historical and proposed transactions contemplated by the Registration
Statement and the Prospectus. Such pro forma financial statements have been
prepared in accordance with the applicable requirements of Rule 11-02 of
Regulation S-X promulgated by the Commission. The other pro forma financial and
statistical information and data set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) are, in all material
respects, accurately presented and prepared on a basis consistent with the pro
forma financial statements.
(ff) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or threatened against the Company
or any of its subsidiaries before the National Labor Relations Board or any
state or local labor relations board, (ii) strike, labor dispute, slowdown or
stoppage pending or threatened against the Company or any of its subsidiaries
or (iii) union representation question existing with respect to the employees
of the Company and its subsidiaries, except for such actions specified in
clause (i), (ii) or (iii) above, which, singly or in the aggregate, would not
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole.
To the best of the Company's knowledge, no collective bargaining organizing
activities are taking place with respect to the Company or any of its
subsidiaries.
(gg) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
Any certificate signed by an officer of the Company and delivered to
the Underwriters or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company, to each Underwriter as to the
matters set forth therein.
SECTION 7. INDEMNIFICATION. (a) The Company, agrees to indemnify and
hold harmless each Underwriter, its directors, its officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented (so long as the Prospectus and any amendment or
supplement thereto was provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date), to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same
extent as the foregoing indemnity from the Company to such Underwriter but only
with reference to information relating to such Underwriter furnished in
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<PAGE> 10
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) of
this Agreement (the "Indemnified Party"), the indemnified party shall promptly
notify the person against whom such indemnity may be sought (the "Indemnifying
Party") in writing and the indemnifying party shall assume the defense of such
action, including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of all fees and expenses of such counsel, as
incurred (except that in the case of any action in respect of which indemnity
may be sought pursuant to both Sections 7(a) and 7(b) of this Agreement, the
Underwriter shall not be required to assume the defense of such action pursuant
to this Section 7(c) of this Agreement, but may employ separate counsel and
participate in the defense thereof, but the fees and expenses of such counsel,
except as provided below, shall be at the expense of such Underwriter). Any
indemnified party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the indemnified party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the indemnifying party, (ii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party, and the indemnified party shall have been advised by such counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for (i) the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all Underwriters, their officers and directors and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act, and (ii) the fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and all persons,
if any, who control the Company within the meaning of either such Section, and
all such fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the Underwriters, their officers and directors and
such control persons of any Underwriters, such firm shall be designated in
writing by Donaldson, Lufkin & Jenrette Securities Corporation. In the case of
any such separate firm for the Company and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the Company.
The indemnifying party shall indemnify and hold harmless the indemnified party
from and against any and all losses, claims, damages, liabilities and judgments
by reason of any settlement of any action (i) effected with its written consent
or (ii) effected without its written consent if the settlement is entered into
more than twenty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the
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Underwriters on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (after deducting underwriting discounts
and commissions, but before deducting expenses) received by the Company, and the
total underwriting discounts and commissions received by the Underwriters, bear
to the total price to the public of the Shares, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Sam L. Leopold and Richard R. Ross, in their capacities
as the Chairman of the Board, Chief Executive Officer and President and
Executive Vice President and Treasurer of the Company, respectively, confirming
the matters set forth in Sections 6(t), 8(a) and 8(b) of this Agreement and that
the Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries
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shall have incurred any liability or obligation, direct or contingent, the
effect of which, in any such case described in clause 8(d)(i), 8(d)(ii) or
8(d)(iii) of this Agreement, in your judgment, is material and adverse and, in
your judgment, makes it impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus.
(e)(1) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of O'Connor, Cavanaugh, Anderson, Killingsworth & Beshears, P.A. counsel for the
Company, to the effect that:
(i) each of the Company and its subsidiaries has been
duly incorporated, is validly existing as a corporation in
good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to
carry on its business as described in the Prospectus and to
own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly
qualified and is in good standing as a foreign corporation
authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the
business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a
whole;
(iii) all the outstanding shares of capital stock of
the Company have been duly authorized and validly issued and
are fully paid, non-assessable and not subject to any
preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company
hereunder have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as
provided by this Agreement, will be validly issued, fully paid
and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights;
(v) all of the outstanding shares of capital stock of
each of the Company's subsidiaries have been duly authorized
and validly issued and are fully paid and non-assessable, and
are owned by the Company, directly or indirectly through one
or more subsidiaries, free and clear of any security interest,
claim, lien, encumbrance or adverse interest of any nature;
(vi) this Agreement has been duly authorized,
executed and delivered by the Company;
(vii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(viii) the Registration Statement has become
effective under the Act, no stop order suspending its
effectiveness has been issued and no proceedings for that
purpose are, to the best of such counsel's knowledge after due
inquiry, pending before or contemplated by the Commission;
(ix) the statements under the captions
"Business--Intellectual Property", "Business--Government
Regulation", "Business--Litigation", "Description of Capital
Stock" and "Underwriting" in the Prospectus and Items 14 and
15 of Part II of the Registration Statement, insofar as such
statements constitute a summary of the legal matters,
documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings;
(x) neither the Company nor any of its subsidiaries
is in violation of its respective charter or by-laws and, to
the best of such counsel's knowledge after due inquiry,
neither the Company nor any of its subsidiaries is in default
in the performance of any obligation, agreement, covenant or
condition contained in any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is
material to the Company and its subsidiaries, taken as a
whole, to which the
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<PAGE> 13
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective
property is bound;
(xi) the execution, delivery and performance of this
Agreement by the Company, the compliance by the Company with
all the provisions hereof and the consummation of the
transactions contemplated hereby will not (A) require any
consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue
Sky laws of the various states), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a
default under, the charter or by-laws of the Company or any of
its subsidiaries or any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the
Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective
property is bound, (C) violate or conflict with any applicable
law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction
over the Company, any of its subsidiaries or their respective
property or (D) result in the suspension, termination or
revocation of any Authorization of the Company or any of its
subsidiaries or any other impairment of the rights of the
holder of any such Authorization;
(xii) after due inquiry, such counsel does not know
of any legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is or could be
a party or to which any of their respective property is or
could be subject that are required to be described in the
Registration Statement or the Prospectus and are not so
described, or of any statutes, regulations, contracts or other
documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so
described or filed as required;
(xiii) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be,
an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended, or a "holding
company" as such term is defined in the Public Utility Holding
Company Act of 1935, as amended;
(xiv) to the best of such counsel's knowledge after
due inquiry, there are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Act with respect to any
securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the
Registration Statement, except as set forth in this
Registration Statement; and
(xv) (A) the Registration Statement and the
Prospectus and any supplement or amendment thereto (except for
the financial statements and other financial data included
therein as to which no opinion need be expressed) comply as to
form with the Act, (B) such counsel has no reason to believe
that at the time the Registration Statement became effective
or on the date of this Agreement, the Registration Statement
and the prospectus included therein (except for the financial
statements and other financial data as to which such counsel
need not express any belief) contained any untrue statement of
a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if
applicable (except for the financial statements and other
financial data, as aforesaid) contains any untrue statement of
a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(2) You also shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Michael L. Kaplan, Esquire, General Counsel of the Company, to the effect
that:
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(i) to the knowledge of such counsel after due
inquiry, neither the Company nor any of its subsidiaries has
violated any Environmental Law, any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or any
provisions of the Foreign Corrupt Practices Act or the rules
and regulations promulgated thereunder, except for such
violations which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its
subsidiaries, taken as a whole;
(ii) to the knowledge of such counsel after due
inquiry, each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices
to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other
tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license
and operate its respective properties and to conduct its
business, except where the failure to have any such
Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on
the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a
whole; each such Authorization is valid and in full force and
effect and each of the Company and its subsidiaries is in
compliance with all the terms and conditions thereof and with
the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event
has occurred (including, without limitation, the receipt of
any notice from any authority or governing body) which allows
or, after notice or lapse of time or both, would allow,
revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or
both, would result in any other impairment of the rights of
the holder of any such Authorization; and such Authorizations
contain no restrictions that are burdensome to the Company or
any of its subsidiaries; except where such failure to be valid
and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its
subsidiaries, taken as a whole; and
(iii) (A) the Registration Statement and the
Prospectus and any supplement or amendment thereto (except for
the financial statements and other financial data included
therein as to which no opinion need be expressed) comply as to
form with the Act, (B) such counsel has no reason to believe
that at the time the Registration Statement became effective
or on the date of this Agreement, the Registration Statement
and the prospectus included therein (except for the financial
statements and other financial data as to which such counsel
need not express any belief) contained any untrue statement of
a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if
applicable (except for the financial statements and other
financial data, as aforesaid) contains any untrue statement of
a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
The opinions of O'Connor, Cavanaugh, Anderson, Killingsworth and
Beshears, P.A. and Michael L. Kaplan, Esquire, described in Section 8(e) above
shall be rendered to you at the request of the Company and shall so state
therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Thompson & Knight L.L.P., counsel for the Underwriters, as to
the matters referred to in Sections 8(e)(1)(iv), 8(e)(1)(vi), 8(e)(1)(ix) (but
only with respect to the statements under the caption "Description of Capital
Stock" and "Underwriting") and 8(e)(1)(xv) of this Agreement.
In giving such opinions with respect to the matters covered by Section
8(e)(1)(xv) of this Agreement, O'Connor, Cavanaugh, Anderson, Killingsworth and
Beshears, P.A. and Thompson & Knight L.L.P., and with respect to the matters
covered by Section 8(e)(2)(iii) of this Agreement, Michael L. Kaplan, Esquire,
may state that their opinion and belief are based upon their participation in
the preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof, but
are without independent check or verification except as specified.
14
<PAGE> 15
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from each of Arthur Andersen LLP and
Deloitte and Touche LLP, independent public accountants, containing the
information and statements of the type ordinarily included in accountants'
"COMFORT LETTERS" to Underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required to
be performed or complied with by the Company, as the case may be, on or prior to
the Closing Date.
(k) On or after the date hereof, (i) there shall not have occurred
any downgrading, suspension or withdrawal of, nor shall any notice have been
given of any potential or intended downgrading, suspension or withdrawal of, or
of any review (or of any potential or intended review) for a possible change
that does not indicate the direction of the possible change in, any rating of
the Company or any securities of the Company (including, without limitation,
the placing of any of the foregoing ratings on credit watch with negative or
developing implications or under review with an uncertain direction) by any
"nationally recognized statistical rating organization" as such term is defined
for purposes of Rule 436(g)(2) under the Act and (ii) there shall not have
occurred any change, nor shall any notice have been given of any potential or
intended change, in the outlook for any rating of the Company or any securities
of the Company by any such rating organization.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 9. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters
15
<PAGE> 16
and arrangements satisfactory to you and the Company for purchase of such Firm
Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
SECTION 10. MISCELLANEOUS. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Styling
Technology Corporation, 7400 E. Tierra Beuna Lane, Scottsdale, Arizona 85260,
and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin &
Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company, or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees, to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the
several Underwriters, their directors and officers and any persons controlling
any of the Underwriters for any and all fees and expenses (including, without
limitation, the fees disbursements of counsel) incurred by them in connection
with enforcing their rights hereunder (including, without limitation, pursuant
to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
[Signature page to follow.]
16
<PAGE> 17
Please confirm that the foregoing correctly sets forth the agreement
among the Company, and the several Underwriters.
Very truly yours,
STYLING TECHNOLOGY CORPORATION
By:
-------------------------------------
Sam L. Leopold,
Chief Executive Officer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ING BARINGS LLC
U.S. BANCORP PIPER JAFFRAY, INC.
FIRST SECURITY VAN KASPER
DLJdirect INC.
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
Acting severally on behalf of themselves and the
several Underwriters named in Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
--------------------------
Name:
--------------------
Title:
-------------------
17
<PAGE> 18
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........................
ING Barings.................................................................
U.S. Bancorp Piper Jaffray, Inc. ...........................................
First Security Van Kasper...................................................
DLJdirect Inc. .............................................................
Friedman, Billings, Ramsey & Co. Inc. ......................................
Total _________
4,000,000
=========
</TABLE>
18
<PAGE> 19
Annex I
Friedman, Billings, Ramsey & Co. Inc.
Credit Agricole Indosuez
Bank Boston, N.A.
Prime Charter, Ltd.
19
<PAGE> 1
Exhibit 5
O'CONNOR CAVANAGH
The Law Offices of
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears
A Professional Association
E-Mail:
Robert S. Kant [email protected]
602-263-2606 August ____, 1999 File No. 31114-806
Styling Technology Corporation
7400 East Tierra Buena Lane
Scottsdale, Arizona 85260
RE: REGISTRATION STATEMENT ON FORM S-1
STYLING TECHNOLOGY CORPORATION
Ladies and Gentlemen:
As legal counsel to Styling Technology Corporation, a Delaware
corporation (the "Company"), we have assisted in the preparation of the
Company's Registration Statement on Form S-1 (the "Registration Statement"), to
be filed with the Securities and Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of 4,000,000 shares
of common stock of the Company covered by the Registration Statement (the
"Shares"). The facts, as we understand them, are set forth in the Registration
Statement.
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The First Amended and Restated Certificate of Incorporation of
the Company;
B. The Bylaws of the Company;
C. The Registration Statement; and
D. The Resolutions of the Board of Directors of the Company
relating to the approval of the filing of the Registration
Statement and the transactions in connection therewith.
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to the further limitations and qualifications set forth
below, it is our opinion that, when (a) the Registration Statement as then
amended shall have been declared effective by the Commission, (b) the
Underwriting Agreement shall have
<PAGE> 2
O'CONNOR CAVANAGH
Styling Technology Corporation
June ____, 1999
Page 2
been duly executed and delivered, and (c) the Shares have been duly issued,
authenticated, paid for, sold, and delivered, by the Company as described in the
Registration Statement and in accordance with the provisions of the Underwriting
Agreement, the Shares will be validly issued, fully paid, and nonassessable.
Please be advised that we are members of the State Bar of
Arizona, and our opinion is limited to the legality of matters under federal
securities laws and the General Corporation Laws of the State of Delaware.
Further, our opinion is based solely upon existing laws, rules, and regulations
and we undertake no obligation to advise you of any changes that may be brought
to our attention after the date hereof.
We hereby expressly consent to any reference to our firm in
the Registration Statement and in any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933 for this same offering, the
inclusion of this opinion as an exhibit to the Registration Statement and the
incorporation by reference into any such additional registration statement, and
to the filing of this opinion with any other appropriate governmental agency.
Very truly yours,
/s/ O'Connor, Cavanagh, Anderson,
---------------------------------
Killingsworth & Beshears, P.A.
RSK/bfg
<PAGE> 1
Exhibit 10.11
STYLING TECHNOLOGY CORPORATION
1996 STOCK OPTION PLAN
(AS AMENDED THROUGH APRIL 19, 1999)
ARTICLE I
GENERAL
1.1 PURPOSE OF PLAN; TERM.
(a) ADOPTION. On September 19, 1996, the Board of Directors
(the "Board") of Styling Technology Corporation (formerly known as Leopold
Styling Products, Inc.), a Delaware corporation (the "Company"), adopted a stock
option plan to be known as the 1996 Stock Option Plan (the "Original Plan"). On
July 3, 1997, the Board adopted a newly Amended and Restated 1996 Stock Option
Plan (the "Revised 1997 Plan") whereby certain technical changes were made. On
February 23, 1998, the Board adopted a newly amended and restated 1996 stock
option plan (the "Revised 1998 Plan") whereby additional shares of Stock were
authorized to be issued under the Plan. The Revised 1998 Plan was approved by
the stockholders of the Company on May 4, 1998. On April 19, 1999, the Board
adopted a newly amended and restated 1996 stock option plan (the "Revised 1999
Plan") whereby additional shares of Stock were authorized to be issued under the
Plan. The Revised 1999 Plan must be approved by the stockholders of the Company
within one year of the date of its adoption by the Board. If not approved by the
stockholders, the Revised 1998 Plan shall continue in effect. If the Revised
1999 Plan is not timely approved by the stockholders, any Options or Awards
issued after the date of the adoption of the Revised 1999 Plan shall remain
valid and unchanged to the extent such Options or Awards contain terms such that
they could have been issued under the Revised 1998 Plan. This Amended and
Restated Stock Option Plan shall be known as the Styling Technology Corporation
1996 Stock Option Plan (the "Plan").
(b) DEFINED TERMS. All initially capitalized terms used hereby
shall have the meaning set forth in Article V hereto.
(c) GENERAL PURPOSE. The Plan shall be divided into two
programs: the Discretionary Grant Program and the Automatic Grant Program.
(i) DISCRETIONARY GRANT PROGRAM. The purpose of the
Discretionary Grant Program is to further the interests of the Company and its
stockholders by encouraging key persons associated with the Company (or Parent
or Subsidiary Corporations) to acquire shares of the Company's Stock, thereby
acquiring a proprietary interest in its business and an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the discretionary granting of options to acquire
the Company's Stock ("Discretionary Options"), the direct granting of the
Company's Stock ("Stock Awards"), the granting of stock appreciation rights
("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards,
SARs and Cash Awards shall be collectively referred to herein as "Awards").
(ii) AUTOMATIC GRANT PROGRAM. The purpose of the Automatic
Grant Program is to promote the interests of the Company by providing
non-employee members of the Company's Board of Directors (the "Board") the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Company and to thereby have an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the automatic grant of options to acquire the
Company's Stock ("Automatic Options").
<PAGE> 2
(d) CHARACTER OF OPTIONS. Discretionary Options granted under
this Plan to employees of the Company (or Parent or Subsidiary Corporations)
that are intended to qualify as "incentive stock options" as defined in Code
section 422 ("Incentive Stock Options") will be specified in the applicable
stock option agreement. All other Options granted under this Plan will be
nonqualified options.
(e) RULE 16B-3 PLAN. If the Company becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the Plan is thereafter intended to comply with all applicable
conditions of Rule 16b-3 (and all subsequent revisions thereof) promulgated
under the 1934 Act. To the extent any provision of the Plan or action by a Plan
Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by such Plan Administrator. In
addition, the Board may amend the Plan from time to time as it deems necessary
in order to meet the requirements of any amendments to Rule 16b-3 without the
consent of the stockholders of the Company.
(f) DURATION OF PLAN. The term of the Plan is 10 years
commencing on the date of adoption of the Plan by the Board as specified in
Section 1.1(a) hereof. No Option or Award shall be granted under the Plan unless
granted within 10 years of the adoption of the Plan by the Board, but Options or
Awards outstanding on that date shall not be terminated or otherwise affected by
virtue of the Plan's expiration.
1.2 STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN.
(a) DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The
shares of stock subject to the provisions of the Plan and issuable upon the
grant of Stock Awards or upon the exercise of SARs or Options granted under the
Plan are shares of the Company's common stock, $.0001 par value per share (the
"Stock"), which may be either unissued or treasury shares, as the Board may from
time to time determine. The Company may not issue more than 1,000,000 shares of
Stock pursuant to the Plan, unless the Plan is amended as provided in Section
1.3 or the maximum number of shares subject to the Plan is adjusted as provided
in Section 4.1.
(b) CALCULATION OF AVAILABLE SHARES. The number of shares of
Stock available under the Plan shall be reduced: (i) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding requirements)
upon exercise of an Option and (ii) by any shares of Stock issued (including any
shares of Stock withheld for tax withholding requirements) upon the grant of a
Stock Award or the exercise of a SAR.
(c) RESTORATION OF UNPURCHASED SHARES. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and before
the term of the Plan expires, the shares of Stock subject to, but not issued
under, such Option or SAR shall, without further action or by or on behalf of
the Company, again be available under the Plan.
1.3 APPROVAL; AMENDMENTS.
(a) APPROVAL BY STOCKHOLDERS. The Plan shall be submitted to
the stockholders of the Company for their approval at a regular or special
meeting to be held within 12 months after the adoption of the Plan by the Board.
Stockholder approval shall be evidenced by the affirmative vote of the holders
of a
2
<PAGE> 3
majority of the shares of the Company's Common Stock present in person or
by proxy and voting at the meeting. The date such stockholder approval has been
obtained shall be referred to herein as the "Effective Date."
(b) COMMENCEMENT OF PROGRAMS. The Automatic Grant Program will
not be effective until the later of the Effective Date or the Registration Date.
The "Registration Date" will be the first date that any equity security of the
Company becomes registered under Section 12 of the 1934 Act. The Discretionary
Grant Program is effective immediately, but if the Plan is not approved by the
stockholders within 12 months after its adoption by the Board, the Plan and all
Discretionary Options and Awards made under the Discretionary Grant Program will
automatically terminate and be forfeited to the same extent and with the same
effect as though the Plan had never been adopted.
(c) AMENDMENTS TO PLAN. The Board may, without action on the
part of the Company's stockholders, make such amendments to, changes in and
additions to the Plan as it may, from time to time, deem necessary or
appropriate and in the best interests of the Company; provided, the Board may
not, without the consent of the applicable Optionholder, take any action which
disqualifies any Discretionary Option previously granted under the Plan for
treatment as an Incentive Stock Option or which adversely affects or impairs the
rights of the Optionholder of any Discretionary Option outstanding under the
Plan, and further provided that, except as provided in Article IV hereof, the
Board may not, without the approval of the Company's stockholders, (i) increase
the aggregate number of shares of Stock subject to the Plan, (ii) reduce the
exercise price at which Discretionary Options may be granted or the exercise
price at which any outstanding Discretionary Option may be exercised, (iii)
extend the term of the Plan, (iv) change the class of persons eligible to
receive Discretionary Options or Awards under the Plan, or (v) materially
increase the benefits accruing to participants under the Plan. Notwithstanding
the foregoing, Discretionary Options or Awards may be granted under this Plan to
purchase shares of Stock in excess of the number of shares then available for
issuance under the Plan if (A) an amendment to increase the maximum number of
shares issuable under the Plan is adopted by the Board prior to the initial
grant of any such Option or Award and within one year thereafter such amendment
is approved by the Company's stockholders and (B) each such Discretionary Option
or Award granted does not become exercisable or vested, in whole or in part, at
any time prior to the obtaining of such stockholder approval.
3
<PAGE> 4
ARTICLE II
DISCRETIONARY GRANT PROGRAM
2.1 PARTICIPANTS; ADMINISTRATION.
(a) ELIGIBILITY AND PARTICIPATION. Discretionary Options and
Awards may be granted only to persons ("Eligible Persons") who at the time of
grant are (i) key personnel (including officers and directors) of the Company or
Parent or Subsidiary Corporations, or (ii) consultants or independent
contractors who provide valuable services to the Company or Parent or Subsidiary
Corporations; provided that (1) Incentive Stock Options may only be granted to
key personnel of the Company (and its Parent or Subsidiary Corporations) who are
also employees of the Company (or its Parent or Subsidiary Corporations); and
(2) the maximum number of shares of stock with respect to which Options or SARs
may be granted to any employee during the term of the Plan shall not exceed 50
percent of the shares of stock covered by the Plan. A Plan Administrator shall
have full authority to determine which Eligible Persons in its administered
group are to receive Discretionary Option grants under the Plan, the number of
shares to be covered by each such grant, whether or not the granted
Discretionary Option is to be an Incentive Stock Option, the time or times at
which each such Discretionary Option is to become exercisable, and the maximum
term for which the Discretionary Option is to be outstanding. A Plan
Administrator shall also have full authority to determine which Eligible Persons
in such group are to receive Awards under the Discretionary Grant Program and
the conditions relating to such Award.
(b) GENERAL ADMINISTRATION. The Eligible Persons under the
Discretionary Grant Program shall be divided into two groups and there shall be
a separate administrator for each group. One group will be comprised of Eligible
Persons that are Affiliates. For purposes of this Plan, the term "Affiliates"
shall mean all "officers" (as that term is defined in Rule 16a-1(f) promulgated
under the 1934 Act) and directors of the Company and all persons who own ten
percent or more of the Company's issued and outstanding equity securities.
Initially, the power to administer the Discretionary Grant Program with respect
to Eligible Persons that are Affiliates shall be vested with the Board. At any
time, however, the Board may vest the power to administer the Discretionary
Grant Program with respect to Persons that are Affiliates exclusively with a
committee (the "Senior Committee") comprised of two or more Non-Employee
Directors which are appointed by the Board. The Senior Committee, in its sole
discretion, may require approval of the Board for specific grants of
Discretionary Options or Awards under the Discretionary Grant Program. The
administration of all Eligible Persons that are not Affiliates
("Non-Affiliates") shall be vested exclusively with the Board. The Board,
however, may at any time appoint a committee (the "Employee Committee") of two
or more persons who are members of the Board and delegate to such Employee
Committee the power to administer the Discretionary Grant Program with respect
to the Non-Affiliates. In addition, the Board may establish an additional
committee or committees of persons who are members of the Board and delegate to
such other committee or committees the power to administer all or a portion of
the Discretionary Grant program with respect to all or a portion of the Eligible
Persons. Members of the Senior Committee, Employee Committee or any other
committee allowed hereunder shall serve for such period of time as the Board may
determine and shall be subject to removal by the Board at any time. The Board
may at any time terminate all or a portion of the functions of the Senior
Committee, the Employee Committee, or any other committee allowed hereunder and
reassume all or a portion of powers and authority previously delegated to such
committee. The Board in its discretion may also require the members of the
Senior Committee, the Employee Committee or any other committee allowed
hereunder to be "outside directors" as that term is defined in any applicable
regulations promulgated under Code section 162(m).
4
<PAGE> 5
(c) PLAN ADMINISTRATORS. The Board, the Employee Committee,
Senior Committee, and/or any other committee allowed hereunder, whichever is
applicable, shall be each referred to herein as a "Plan Administrator." Each
Plan Administrator shall have the authority and discretion, with respect to its
administered group, to select which Eligible Persons shall participate in the
Discretionary Grant Program, to grant Discretionary Options or Awards under the
Discretionary Grant Program, to establish such rules and regulations as they may
deem appropriate with respect to the proper administration of the Discretionary
Grant Program and to make such determinations under, and issue such
interpretations of, the Discretionary Grant Program and any outstanding
Discretionary Option or Award as they may deem necessary or advisable. Unless
otherwise required by law or specified by the Board with respect to any
committee, decisions among the members of a Plan Administrator shall be by
majority vote. Decisions of a Plan Administrator shall be final and binding on
all parties who have an interest in the Discretionary Grant Program or any
outstanding Discretionary Option or Award.
(d) GUIDELINES FOR PARTICIPATION. In designating and selecting
Eligible Persons for participation in the Discretionary Grant Program, a Plan
Administrator shall consult with and give consideration to the recommendations
and criticisms submitted by appropriate managerial and executive officers of the
Company. A Plan Administrator also shall take into account the duties and
responsibilities of the Eligible Persons, their past, present and potential
contributions to the success of the Company and such other factors as a Plan
Administrator shall deem relevant in connection with accomplishing the purpose
of the Plan.
2.2 TERMS AND CONDITIONS OF DISCRETIONARY OPTIONS.
(a) ALLOTMENT OF SHARES. A Plan Administrator shall determine
the number of shares of Stock to be optioned from time to time and the number of
shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant
of a Discretionary Option to a person shall neither entitle such person to, nor
disqualify such person from, participation in any other grant of Options or
Stock Awards under this Plan or any other stock option plan of the Company.
(b) EXERCISE PRICE. Upon the grant of any Discretionary
Option, a Plan Administrator shall specify the option price per share. If the
Discretionary Option is intended to qualify as an Incentive Stock Option under
the Code, the option price per share may not be less than 100 percent of the
fair market value per share of the stock on the date the Discretionary Option is
granted (110 percent if the Discretionary Option is granted to a stockholder who
at the time the Discretionary Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary Corporation). The
determination of the fair market value of the Stock shall be made in accordance
with the valuation provisions of Section 4.5 hereof.
(c) INDIVIDUAL STOCK OPTION AGREEMENTS. Discretionary Options
granted under the Plan shall be evidenced by option agreements in such form and
content as a Plan Administrator from time to time approves, which agreements
shall substantially comply with and be subject to the terms of the Plan,
including the terms and conditions of this Section 2.2. As determined by a Plan
Administrator, each option agreement shall state (i) the total number of shares
to which it pertains, (ii) the exercise price for the shares covered by the
Option, (iii) the time at which the Options vest and become exercisable and (iv)
the Option's scheduled expiration date. The option agreements may contain such
other provisions or conditions as a Plan Administrator deems necessary or
appropriate to effectuate the sense and purpose of the Plan, including
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covenants by the Optionholder not to compete and remedies for the Company in the
event of the breach of any such covenant.
(d) OPTION PERIOD. No Discretionary Option granted under the
Plan that is intended to be an Incentive Stock Option shall be exercisable for a
period in excess of 10 years from the date of its grant (five years if the
Discretionary Option is granted to a stockholder who at the time the
Discretionary Option is granted owns or is deemed to own stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or of any Parent or any Subsidiary Corporation), subject to earlier
termination in the event of termination of employment, retirement or death of
the Optionholder. A Discretionary Option may be exercised in full or in part at
any time or from time to time during the term of the Discretionary Option or
provide for its exercise in stated installments at stated times during the
Option's term.
(e) VESTING; LIMITATIONS. The time at which Optioned Shares
vest with respect to an Optionholder shall be in the discretion of that
Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent
a Discretionary Option is intended to qualify as an Incentive Stock Option, the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its Parent or Subsidiary
Corporations) may for the first time become exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted.
(f) NO FRACTIONAL SHARES. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Discretionary Option granted under the Plan.
(g) METHOD OF EXERCISE. To exercise a Discretionary Option, an
Optionholder (or in the case of an exercise after an Optionholder's death, such
Optionholder's executor, administrator, heir or legatee, as the case may be)
must take the following action:
(i) execute and deliver to the Company a written notice of
exercise signed in writing by the person exercising the Discretionary Option
specifying the number of shares of Stock with respect to which the Discretionary
Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 2.2(h) below; and
(iii) furnish appropriate documentation that the person or
persons exercising the Discretionary Option (if other than the Optionholder) has
the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company will mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising
this Discretionary Option under the Plan) a certificate or certificates
representing the Stock acquired upon exercise of the Discretionary Option. In no
event may any Discretionary Option be exercised for any fractional shares.
(h) PAYMENT OF OPTION PRICE. The aggregate Option Price shall
be payable in one of
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the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order; or
(ii) Full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) If a cashless exercise program has been implemented
by the Board, full payment through a sale and remittance procedure pursuant to
which the Optionholder (A) shall provide irrevocable written instructions to a
designated brokerage firm to effect the immediate sale of the Optioned Shares to
be purchased and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price payable
for the Optioned Shares to be purchased and (B) shall concurrently provide
written directives to the Company to deliver the certificates for the Optioned
Shares to be purchased directly to such brokerage firm in order to complete the
sale transaction.
(i) REPURCHASE RIGHT. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to a Discretionary Option. Any repurchase right of the
Company shall be exercisable by the Company (or its assignees) upon such terms
and conditions as the Plan Administrator may specify in the Stock Repurchase
Agreement evidencing such right. The Plan Administrator may also in its
discretion establish as a term and condition of one or more Discretionary
Options granted under the Plan that the Company shall have a right of first
refusal with respect to any proposed sale or other disposition by the
Optionholder of any shares of Stock issued upon the exercise of such
Discretionary Options. Any such right of first refusal shall be exercisable by
the Company (or its assigns) in accordance with the terms and conditions set
forth in the Stock Repurchase Agreement.
(j) TERMINATION OF INCENTIVE STOCK OPTIONS.
(i) TERMINATION OF SERVICE. If any Optionholder ceases to
be in Service to the Company for a reason other than death, then such
Optionholder must, within 90 days after the date of termination of such Service,
but in no event after the Incentive Stock Option's stated expiration date,
exercise some or all of the Incentive Stock Options that the Optionholder was
entitled to exercise on the date the Optionholder's Service terminated;
provided, that if the Optionholder is discharged for Cause or commits acts
detrimental to the Company's interests after the Service of the Optionholder has
been terminated, then the Incentive Stock Option will thereafter be void for all
purposes. "Cause" shall mean a termination of Service based upon a finding by
the applicable Plan Administrator that the Optionholder: (i) has committed a
felony involving dishonesty, fraud, theft or embezzlement; (ii) after written
notice from the Company has repeatedly failed or refused, in a material respect,
to follow reasonable policies or directives established by the Company; (iii)
after written notice from the Company, has willfully and persistently failed to
attend to material duties or obligations; (iv) has performed an act or failed to
act, which, if he were prosecuted and convicted, would constitute a theft of
money or property of the Company; or (v) has misrepresented or concealed a
material fact for purposes of securing employment with the Company. If any
Optionholder ceases to be in Service to the Company by reason of permanent
disability within the meaning of section 22(e)(3) of the Code (as determined by
the applicable Plan Administrator), the Optionholder will have 12 months after
the date of termination of Service, but in no event after the stated expiration
date of the Optionholder's Incentive Stock Options, to exercise Incentive Stock
Options that the Optionholder was
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entitled to exercise on the date the Optionholder's Service terminated as a
result of the disability.
(ii) DEATH OF OPTIONHOLDER. If an Optionholder dies while
in the Company's Service, the Optionholder's vested Incentive Stock Options on
the date of death will be exercisable within three months after such date or
until the stated expiration date of the Optionholder's Incentive Stock Option,
whichever occurs first, by the person or persons ("successors") to whom the
Optionholder's rights pass under a will or by the laws of descent and
distribution. As soon as practicable after receipt by the Company of the notice
of exercise and of payment in full of the Option Price as specified in Sections
2.2(g) and (h) hereof, a certificate or certificates representing the Optioned
Shares shall be registered in the name or names specified by the successors in
the written notice of exercise and shall be delivered to the successors.
(k) TERMINATION OF NONQUALIFIED OPTIONS. Any Options which are
not Incentive Stock Options and which are outstanding at the time an
Optionholder dies while in Service to the Company or otherwise ceases to be in
Service to the Company shall remain exercisable for such period of time
thereafter as determined by the Plan Administrator at the time of grant and set
forth in the documents evidencing such Options; provided, however, that no
Option shall be exercisable after the Option's stated expiration date, and
provided further, that if the Optionholder is discharged for Cause (as defined
in Section 2.2(j)(i) hereof), then the Option will thereafter be void for all
purposes.
(l) OTHER PLAN PROVISIONS STILL APPLICABLE. If a Discretionary
Option is exercised upon the termination of Service or death of an Optionholder
under this Section 2.2, the other provisions of the Plan shall still be
applicable to such exercise, including the requirement that the Optionholder or
its successor may be required to enter into a Stock Repurchase Agreement.
(m) DEFINITION OF "SERVICE". For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder, the
Optionholder shall be deemed to be in "Service" to the Company so long as such
individual renders continuous services on a periodic basis to the Company (or to
its Parent or Subsidiary Corporations) in the capacity of an employee, director,
or an independent consultant or advisor. In the discretion of the applicable
Plan Administrator, an Optionholder shall be considered to be rendering
continuous services to the Company even if the type of services change, e.g.,
from employee to independent consultant. The Optionholder will be considered to
be an employee for so long as such individual remains in the employ of the
Company or one or more of its Parent or Subsidiary Corporations.
2.3 TERMS AND CONDITIONS OF STOCK AWARDS.
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive Stock Awards. The Plan Administrator of each administered group shall
determine the number of shares of Stock to be awarded from time to time to any
Eligible Person in such group. Except as provided otherwise in this Plan, the
grant of a Stock Award to a person (a "Grantee") shall neither entitle such
person to, nor disqualify such person from participation in, any other grant of
options or awards by the Company, whether under this Plan or under any other
stock option or award plan of the Company.
(b) AWARD FOR SERVICES RENDERED. Stock Awards shall be granted
in recognition of an Eligible Person's services to the Company. The grantee of
any such Stock Award shall not be required to pay any consideration to the
Company upon receipt of such Stock Award, except as may be required to satisfy
any applicable Delaware corporate law, employment tax and/or income tax
withholding
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requirements.
(c) CONDITIONS TO AWARD. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may modify or accelerate the termination of the
restrictions applicable to any Stock Award under the circumstances as it deems
appropriate.
(d) AWARD AGREEMENTS. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
2.4 TERMS AND CONDITIONS OF SARS.
(a) ELIGIBILITY. All Eligible Persons shall be eligible to
receive SARs. The Plan Administrator of each administered group shall determine
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of a SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) AWARD OF SARS. Concurrently with or subsequent to the
grant of any Discretionary Option to purchase one or more shares of Stock, the
Plan Administrator may award to the Optionholder with respect to each share of
Stock underlying the Option, a related SAR permitting the Optionholder to be
paid the appreciation on the Stock underlying the Discretionary Option in lieu
of exercising the Option. In addition, a Plan Administrator may award to any
Eligible Person a SAR permitting the Eligible Person to be paid the appreciation
on a designated number of shares of the Stock, whether or not such Shares are
actually issued.
(c) CONDITIONS TO SAR. All SARs shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR AGREEMENTS. A Plan Administrator may require as a
condition to the grant of a SAR that the recipient of such SAR enter into a SAR
agreement in such form and content as that Plan Administrator from time to time
approves.
(e) EXERCISE. An Eligible Person who has been granted a SAR
may exercise such SAR subject to the conditions specified by the Plan
Administrator in the SAR agreement.
(f) AMOUNT OF PAYMENT. The amount of payment to which the
grantee of a SAR shall be entitled upon the exercise of each SAR shall be equal
to the amount, if any, by which the fair market value of the specified shares of
Stock on the exercise date exceeds the fair market value of the
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specified shares of Stock on the date the Discretionary Option related to the
SAR was granted or became effective, or, if the SAR is not related to any
Option, on the date the SAR was granted or became effective.
(g) FORM OF PAYMENT. The SAR may be paid in either cash or
Stock, as determined in the discretion of the applicable Plan Administrator and
set forth in the SAR agreement. If the payment is in Stock, the number of shares
to be paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.4(f) by the fair market value of a
share of Stock on the exercise date of such SAR. As soon as practical after
exercise, the Company shall deliver to the SAR grantee a certificate or
certificates for such shares of Stock.
(h) TERMINATION OF EMPLOYMENT; DEATH. Section 2.2(j),
applicable to Incentive Stock Options, and Section 2.2(k), applicable to
nonqualified options, shall apply to SARs.
2.5 OTHER CASH AWARDS.
(a) IN GENERAL. The Plan Administrator of each administered
group shall have the discretion to make other awards of cash to Eligible Persons
in such group ("Cash Awards"). Such Cash Awards may relate to existing Options
or to the appreciation in the value of the Stock or other Company securities.
(b) CONDITIONS TO AWARD. All Cash Awards shall be subject to
such terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
ARTICLE III
AUTOMATIC GRANT PROGRAM
3.1 ELIGIBLE DIRECTORS UNDER THE AUTOMATIC GRANT PROGRAM. The
Automatic Grant Program shall commence as of the date set forth in Section
1.3(b) hereof. The persons eligible to participate in the Automatic Grant
Program shall be limited to Board members who are not employed by the Company,
whether or not such persons qualify as Non-Employee Directors as defined herein
("Eligible Directors"). Persons who are eligible under the Automatic Grant
Program may also be eligible to receive Discretionary Options or Awards under
the Discretionary Grant Program or option grants or direct stock issuances under
other plans of the Company.
3.2 TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS.
(a) AMOUNT AND DATE OF GRANT. During the term of this Plan,
grants of Automatic Options shall be made to each Eligible Director
("Optionholder") as follows:
(i) ANNUAL GRANTS. Each year on the Annual Grant Date an
Automatic Option to acquire 2,500 shares of Stock shall be granted to each
Eligible Director for so long as there are shares of Stock available under
Section 1.2 hereof. The "Annual Grant Date" shall be the date of the Company's
annual stockholders meeting commencing as of the next annual meeting occurring
after the Effective Date. Notwithstanding the foregoing, (i) any Eligible
Director whose term ended on the Annual Grant Date and who was not re-elected on
that date shall not be eligible to receive any Automatic Options
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on that Annual Grant Date, and (ii) any Eligible Director that was granted an
Automatic Option under Section 3.2(a)(ii) hereof within 90 days of an Annual
Grant Date shall be ineligible to receive an Automatic Option Grant pursuant to
this Section 3.2(a)(i) on such Annual Grant Date.
(ii) INITIAL NEW DIRECTOR GRANTS. On the Initial Grant
Date, every new member of the Board who is an Eligible Director and has not
previously received an Automatic Option grant under this Section 3.2(a)(ii)
shall be granted an Automatic Option to acquire 5,000 shares of Stock as long as
there are shares of Stock available under Section 1.2 hereof. The "Initial Grant
Date" shall be the date that an Eligible Director is first appointed or elected
to the Board. Any Eligible Director that was granted an Automatic Option on the
Effective Date pursuant to Section 3.2(a)(iii) shall be ineligible to receive an
Automatic Option grant pursuant to this Section 3.2(a)(ii).
(iii) INITIAL EXISTING DIRECTOR GRANTS. On the
commencement date of the Automatic Grant Program, each Eligible Director shall
be granted an Automatic Option to acquire 5,000 shares of Stock.
(b) EXERCISE PRICE. The exercise price per share of Stock (the
"Optioned Shares") subject to each Automatic Option grant shall be equal to 100
percent of the fair market value per share of the Stock on the date the
Automatic Option was granted as determined in accordance with the valuation
provisions of Section 4.5 hereof (the "Option Price").
(c) VESTING. Each Automatic Option grant shall become
exercisable and vest on the first anniversary of the date of such grant. Each
Automatic Option shall only vest and become exercisable if the Optionholder has
not ceased being in Service to the Company as of such anniversary date.
(d) METHOD OF EXERCISE. In order to exercise an Automatic
Option with respect to any vested Optioned Shares, an Optionholder (or in the
case of an exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Company a written notice of
exercise signed in writing by the person exercising the Automatic Option
specifying the number of shares of Stock with respect to which the Automatic
Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 3.2(e) below; and
(iii) furnish appropriate documentation that the person or
persons exercising the Automatic Option (if other than the Optionholder) has the
right to exercise such Option.
As soon as practicable after the Exercise Date, the Company shall mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising the Automatic Option in accordance herewith) a certificate or
certificates representing the Stock for which the Automatic Option has been
exercised in accordance with the provisions of this Plan. In no event may any
Automatic Option be exercised for any fractional shares.
(e) PAYMENT OF OPTION PRICE. The aggregate Option Price shall
be payable in one of the alternative forms specified below:
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(i) full payment in cash or check made payable to the
Company's order; or
(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) if a cashless exercise program has been implemented
by the Board, full payment through a sale and remittance procedure pursuant to
which the Optionholder (A) shall provide irrevocable written instructions to a
designated brokerage firm to effect the immediate sale of the Optioned Shares to
be purchased and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price payable
for the Optioned Shares to be purchased and (B) shall concurrently provide
written directives to the Company to deliver the certificates for the Optioned
Shares to be purchased directly to such brokerage firm in order to complete the
sale transaction.
(f) TERM OF OPTION. Each Automatic Option shall expire on the
tenth anniversary of the date on which an Automatic Option grant was made
("Expiration Date"). Except as provided in Article IV hereof, should an
Optionholder's Service to the Company cease prior to the Expiration Date for any
reason while an Automatic Option remains outstanding and unexercised, then the
Automatic Option term shall immediately end and the Automatic Option shall cease
to be outstanding in accordance with the following provisions:
(i) The Automatic Option shall immediately terminate
and cease to be outstanding for any Optioned Shares of Stock
which were not vested at the time of the Optionholder's
cessation of Service to the Company.
(ii) Should an Optionholder cease, for any reason
other than death, to be in Service to the Company, then the
Optionholder shall have 90 days measured from the date of such
cessation of Service to the Company in which to exercise the
Automatic Options which vested prior to the time of such
cessation of Service to the Company. In no event, however, may
any Automatic Option be exercised after the Expiration Date of
such Automatic Option.
(iii) Should an Optionholder die while in Service to
the Company or within 90 days after cessation of Service to
the Company, then the personal representative of the
Optionholder's estate (or the person or persons to whom the
Automatic Option is transferred pursuant to the Optionholder's
will or in accordance with the laws of descent and
distribution) shall have a 90 day period measured from the
date of the Optionholder's cessation of Service in which to
exercise the Automatic Options which vested prior to the time
of such cessation of Service. In no event, however, may any
Automatic Option be exercised after the Expiration Date of
such Automatic Option.
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ARTICLE IV
MISCELLANEOUS
4.1 CAPITAL ADJUSTMENTS. The aggregate number of shares of Stock
subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards and the price per share stated in such Options and Awards,
and the number of Automatic Options to be granted pursuant to the Automatic
Grant Program shall be proportionately adjusted for any increase or decrease in
the number of outstanding shares of Stock of the Company resulting from a
subdivision or consolidation of shares or any other capital adjustment or the
payment of a stock dividend or any other increase or decrease in the number of
such shares effected without the Company's receipt of consideration therefor in
money, services or property.
4.2 MERGERS, ETC. If the Company is the surviving corporation in
any merger or consolidation (not including a Corporate Transaction), any Option
or Award granted under the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to the Option or Award
would have been entitled prior to the merger or consolidation. Except as
provided in Section 4.3 hereof, a dissolution or liquidation of the Company
shall cause every Option or Award outstanding hereunder to terminate.
4.3 CORPORATE TRANSACTION. In the event of stockholder approval of
a Corporate Transaction, (a) all unvested Automatic Options shall automatically
accelerate and immediately vest so that each outstanding Automatic Option shall,
one week prior to the specified effective date for the Corporate Transaction,
become fully exercisable for all of the Optioned Shares and (b) the Plan
Administrator shall have the discretion and authority, exercisable at any time,
to provide for the automatic acceleration of one or more of the outstanding
Discretionary Options or Awards granted by it under the Plan. Upon the
consummation of the Corporate Transaction, all Options shall, to the extent not
previously exercised, terminate and cease to be outstanding.
4.4 CHANGE IN CONTROL.
(a) AUTOMATIC GRANT PROGRAM. In the event of a Change in
Control, all unvested Automatic Options shall automatically accelerate and
immediately vest so that each outstanding Automatic Option shall, immediately
prior to the effective date of such Change in Control, become fully exercisable
for all of the Optioned Shares. Thereafter, each Automatic Option shall remain
exercisable until the Expiration Date of such Automatic Option.
(b) DISCRETIONARY GRANT PROGRAM. In the event of a Change in
Control, a Plan Administrator shall have the discretion and authority,
exercisable at any time, whether before or after the Change in Control, to
provide for the automatic acceleration of one or more outstanding Discretionary
Options or Awards granted by it under the Plan upon the occurrence of such
Change in Control. A Plan Administrator may also impose limitations upon the
automatic acceleration of such Options or Awards to the extent it deems
appropriate. Any Options or Awards accelerated upon a Change in Control will
remain fully exercisable until the expiration or sooner termination of the
Option term.
(c) INCENTIVE STOCK OPTION LIMITS. The exercisability of any
Discretionary Options which are intended to qualify as Incentive Stock Options
and which are accelerated by the Plan Administrator in connection with a pending
Corporation Transaction or Change in Control shall, except as otherwise provided
in the discretion of the Plan Administrator and the Optionholder, remain subject
to the
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$100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
4.5 CALCULATION OF FAIR MARKET VALUE OF STOCK. The fair market
value of a share of Stock on any relevant date shall be determined in accordance
with the following provisions:
(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) per
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its Nasdaq system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
(b) If the Stock is at the time listed or admitted to trading
on any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no reported sale of Stock on such exchange on the date in question,
then the fair market value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.
(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including one or more
independent professional appraisals.
4.6 USE OF PROCEEDS. The proceeds received by the Company from the
sale of Stock pursuant to the exercise of Options or Awards hereunder, if any,
shall be used for general corporate purposes.
4.7 CANCELLATION OF OPTIONS. Each Plan Administrator shall have
the authority to effect, at any time and from time to time, with the consent of
the affected Optionholders, the cancellation of any or all outstanding
Discretionary Options granted under the Plan by that Plan Administrator and to
grant in substitution therefore new Discretionary Options under the Plan
covering the same or different numbers of shares of Stock as long as such new
Discretionary Options have an exercise price per share of Stock no less than the
minimum exercise price as set forth in Section 2.2(b) hereof on the new grant
date.
4.8 REGULATORY APPROVALS. The implementation of the Plan, the
granting of any Option or Award hereunder, and the issuance of Stock upon the
exercise of any such Option or Award shall be subject to the procurement by the
Company of all approvals and permits required by regulatory authorities having
jurisdiction over the Plan, the Options or Awards granted under it and the Stock
issued pursuant to it.
4.9 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have, the members of a Plan Administrator shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in connection with any action, legal proceeding to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection with the Plan or any rights granted thereunder and against all
amounts paid by them in settlement thereof or paid by them in satisfaction of a
judgment of any such
14
<PAGE> 15
action, suit or proceeding, except a judgment based upon a finding of bad faith.
4.10 PLAN NOT EXCLUSIVE. This Plan is not intended to be the
exclusive means by which the Company may issue options or warrants to acquire
its Stock, stock awards or any other type of award. To the extent permitted by
applicable law, any such other option, warrants or awards may be issued by the
Company other than pursuant to this Plan without stockholder approval.
4.11 COMPANY RIGHTS. The grants of Options shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
4.12 PRIVILEGE OF STOCK OWNERSHIP. An Optionholder shall not have
any of the rights of a stockholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for the
Optioned Shares. No adjustment will be made for dividends or other rights for
which the record date is prior to the date of such exercise and full payment for
such Optioned Shares.
4.13 ASSIGNMENT. The right to acquire Stock or other assets under
the Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. Except as may be
specifically allowed by a Plan Administrator at the time of grant and set forth
in the documents evidencing an Option or Award, no Option or Award granted under
the Plan or any of the rights and privileges conferred thereby shall be
assignable or transferable by an Optionholder or grantee other than by will or
the laws of descent and distribution, and such Option or Award shall be
exercisable during the Optionholder's or grantee's lifetime only by the
Optionholder or grantee. The provisions of the Plan shall inure to the benefit
of, and be binding upon, the Company and its successors or assigns, and the
Optionholders, the legal representatives of their respective estates, their
respective heirs or legatees and their permitted assignees.
4.14 SECURITIES RESTRICTIONS.
(a) LEGEND ON CERTIFICATES. All certificates representing
shares of Stock issued under the Plan shall be endorsed with a legend reading as
follows:
The shares of Common Stock evidenced by this certificate
have been issued to the registered owner in reliance upon
written representations that these shares have been
purchased solely for investment. These shares may not be
sold, transferred or assigned unless in the opinion of the
Company and its legal counsel such sale, transfer or
assignment will not be in violation of the Securities Act
of 1933, as amended, and the rules and regulations
thereunder.
(b) PRIVATE OFFERING FOR INVESTMENT ONLY. The Options and
Awards are and shall be made available only to a limited number of present and
future key personnel who have knowledge of the Company's financial condition,
management and its affairs. The Plan is not intended to provide additional
capital for the Company, but to encourage ownership of Stock among the Company's
key personnel. By the act of accepting an Option or Award, each grantee agrees
(i) that, any shares of Stock acquired will be solely for investment and not
with any intention to resell or redistribute those shares and (ii) such
intention will be confirmed by an appropriate certificate at the time the Stock
is acquired if requested by the
15
<PAGE> 16
Company. The neglect or failure to execute such a certificate, however, shall
not limit or negate the foregoing agreement.
(c) REGISTRATION STATEMENT. If a Registration Statement
covering the shares of Stock issuable upon exercise of Options granted under the
Plan is filed under the Securities Act of 1933, as amended, and is declared
effective by the Securities Exchange Commission, the provisions of Sections
4.14(a) and (b) shall terminate during the period of time that such Registration
Statement, as periodically amended, remains effective.
4.15 TAX WITHHOLDING.
(a) GENERAL. The Company's obligation to deliver Stock under
the Plan shall be subject to the satisfaction of all applicable federal, state
and local income tax withholding requirements.
(b) SHARES TO PAY FOR WITHHOLDING. The Board may, in its
discretion and in accordance with the provisions of this Section 4.15(b) and
such supplemental rules as it may from time to time adopt, or provide any or all
Optionholders or Grantees with the right to use shares of Stock in satisfaction
of all or part of the federal, state and local income tax liabilities incurred
by such Optionholders or Grantees in connection with the receipt of Stock
("Taxes"). Such right may be provided to any such Optionholder or Grantee in
either or both of the following formats:
(i) STOCK WITHHOLDING. An Optionholder or Grantee may be
provided with the election, which may be subject to approval by the Plan
Administrator, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value equal to
the percentage of the applicable Taxes (not to exceed 100 percent) designated by
the Optionholder or Grantee.
(ii) STOCK DELIVERY. The Board may, in its discretion,
provide the Optionholder or Grantee with the election to deliver to the Company,
at the time the Option is exercised or Stock is awarded, one or more shares of
Stock previously acquired by such individual (other than pursuant to the
transaction triggering the Taxes) with an aggregate fair market value equal to
the percentage (not to exceed 100 percent) of the taxes incurred in connection
with such Option exercise or Stock Award designated by the Optionholder or
Grantee.
4.16 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Arizona.
ARTICLE V
DEFINITIONS
The following capitalized terms used in this Plan shall have the
meaning described below:
"AFFILIATES" shall mean all "officers" (as that term is defined in Rule
16a-1(f) promulgated under the 1934 Act) and directors of the Company and all
persons who own ten percent or more of the Company's issued and outstanding
Stock.
"ANNUAL GRANT DATE" shall mean the date of the Company's annual
stockholder meeting.
16
<PAGE> 17
"AUTOMATIC GRANT PROGRAM" shall mean that program set forth in Article
III of this Agreement pursuant to which Eligible Directors, as defined herein,
are automatically granted Options upon certain events.
"AUTOMATIC OPTION GRANT" shall mean those automatic option grants made
on the Annual Grant Date, on the Initial Grant Date, and on the Effective Date.
"AUTOMATIC OPTIONS" shall mean those Options granted pursuant to the
Automatic Grant Program.
"AWARD" shall mean a Stock Award, SAR or Cash Award under the
Discretionary Grant Program.
"BOARD" shall mean the Board of Directors of the Company.
"CASH AWARD" shall mean an award to be paid in cash and granted under
Section 2.5 hereunder.
"CHANGE IN CONTROL" shall mean and include the following transactions
or situations:
(i) A sale, transfer, or other disposition by the Company
through a single transaction or a series of transactions of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or "Unrelated
Persons" acting in concert with one another. For purposes of this definition,
the term "Person" shall mean and include any individual, partnership, joint
venture, association, trust corporation, or other entity (including a "group" as
referred to in Section 13(d)(3) of the 1934 Act). For purposes of this
definition, the term "Unrelated Person" shall mean and include any Person other
than the Company, a wholly-owned subsidiary of the Company, or an employee
benefit plan of the Company.
(ii) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(iii) A change in the ownership of the Company through a
single transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least 30 percent of the combined voting power of the Company's then outstanding
securities. For purposes of this definition, the term "Beneficial Owner" shall
have the same meaning as given to that term in Rule 13d-3 promulgated under the
1934 Act, provided that any pledgee of voting securities shall not be deemed to
be the Beneficial Owner thereof prior to its acquisition of voting rights with
respect to such securities.
(iv) Any consolidation or merger of the Company with or into
an Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the surviving
corporation representing at least 50 percent of the combined voting power of the
surviving corporation's then outstanding securities.
(v) During any period of two years, individuals who, at the
beginning of such period, constituted the Board of Directors of the Company
cease, for any reason, to constitute at least a majority
17
<PAGE> 18
thereof, unless the election or nomination for election of each new director was
approved by the vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period.
(vi) A change in control of the Company of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the 1934 Act, or any successor regulation of
similar import, regardless of whether the Company is subject to such reporting
requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the General
Bankruptcy Code or any successor or other statute of similar import shall not be
deemed to be a Change of Control for purposes of this Plan.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMPANY" shall mean Leopold Styling Products, Inc., a Delaware
corporation.
"CORPORATE TRANSACTION" shall mean (a) a merger or consolidation in
which the Company is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Company is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Company and complete liquidation or
dissolution of the Company, or (c) any reverse merger in which the Company is
the surviving entity but in which the securities possessing more than 50 percent
of the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
"DISCRETIONARY GRANT PROGRAM" shall mean the program described in
Article II of this Plan pursuant to which certain Eligible Persons are granted
Options or Awards in the discretion of the Plan Administrator.
"DISCRETIONARY OPTIONS" shall mean options granted under the
Discretionary Grant Program.
"EFFECTIVE DATE" shall mean the date that the Plan has been approved by
the stockholders as required by Section 1.3(a) hereof.
"ELIGIBLE DIRECTOR" shall mean, with respect to the Automatic Grant
Program, those Board members who are not employed by the Company, whether or not
such members are Non-Employee Directors as defined herein.
"ELIGIBLE PERSONS" shall mean (a) with respect to the Discretionary
Grant Program, those persons who, at the time that the Discretionary Option or
Award is granted, are (i) key personnel (including officers and directors) of
the Company or Parent or Subsidiary Corporations or (ii) consultants or
independent contractors who provide valuable services to the Company or Parent
or Subsidiary Corporations, and (b) with respect to the Automatic Grant Program,
the Eligible Directors.
"EMPLOYEE COMMITTEE" shall mean that committee appointed by the Board
to administer the Plan with respect to the Non-Affiliates and comprised of two
or more persons who are members of the Board.
"EXERCISE DATE" shall be the date on which written notice of the
exercise of an Option is delivered
18
<PAGE> 19
to the Company in accordance with the requirements of the Plan.
"EXPIRATION DATE" shall be the 10-year anniversary of the date on which
an Automatic Option Grant was made.
"GRANTEE" shall mean an Eligible Person or Eligible Director that has
received an Award.
"INCENTIVE STOCK OPTION" shall mean a Discretionary Option that is
intended to qualify as an "incentive stock option" under Code section 422.
"INITIAL GRANT DATE" shall mean the date that an Eligible Director is
first appointed or elected to the Board.
"NON-AFFILIATES" shall mean all persons who are not Affiliates.
"NON-EMPLOYEE DIRECTORS" shall mean those Directors who satisfy the
definition of "Non-Employee Director" under Rule 16b-3(b)(3)(i) promulgated
under the 1934 Act.
"$100,000 LIMITATION" shall mean the limitation pursuant to which the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock Options
during any one calendar year shall not exceed the sum of $100,000.
"OPTIONHOLDER" shall mean an Eligible Person or Eligible Director to
whom Options have been granted.
"OPTIONED SHARES" shall be those shares of Stock to be optioned from
time to time to any Eligible Person or Eligible Director.
"OPTION PRICE" shall mean (i) with respect to Discretionary Options,
the exercise price per share as specified by the Plan Administrator pursuant to
Section 2.2(b) hereof, and (ii) with respect to Automatic Options, the exercise
price per share specified by Section 3.2(b) hereof.
"OPTIONS" shall mean options to acquire Stock granted under the Plan to
acquire Stock.
"PARENT CORPORATION" shall mean any corporation in the unbroken chain
of corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"PLAN" shall mean this stock option plan for Leopold Styling Products,
Inc.
"PLAN ADMINISTRATOR" shall mean (a) either the Board, the Senior
Committee, or any other committee, whichever is applicable, with respect to the
administration of the Discretionary Grant Program as it relates to Affiliates
and (b) either the Board, the Employee Committee, or any other committee,
whichever is applicable, with respect to the administration of the Discretionary
Grant Program as it relates
19
<PAGE> 20
to Non-Affiliates and with respect to the Automatic Grant Program.
"REGISTRATION DATE" shall have the meaning set forth in Section 1.3(b)
hereof.
"SAR" shall mean stock appreciation rights granted pursuant to Section
2.4 hereof.
"SENIOR COMMITTEE" shall mean that committee appointed by the Board to
administer the Discretionary Grant Program with respect to the Affiliates and
comprised of two or more Non-Employee Directors.
"SERVICE" shall have the meaning set forth in Section 2.2(m) hereof.
"STOCK" shall mean shares of the Company's common stock, $.0001 par
value per share, which may be unissued or treasury shares, as the Board may from
time to time determine.
"STOCK AWARDS" shall mean Stock directly granted under the
Discretionary Grant Program.
"SUBSIDIARY CORPORATION" shall mean any corporation in the unbroken
chain of corporations starting with the employer corporation, where, at each
link of the chain, the corporation and the link above owns at least 50 percent
of the combined voting power of all classes of stock in the corporation below.
EXECUTED as of the 19th day of April 1999.
STYLING TECHNOLOGY CORPORATION
By:
-------------------------------
Name: Sam L. Leopold
Its: Chairman of the Board and Chief
Executive Officer
ATTESTED BY:
- ----------------------------
Michael L. Kaplan, Secretary
20
<PAGE> 1
Exhibit 10.28
================================================================================
CREDIT AGREEMENT
Dated as of June 22, 1999,
among
STYLING TECHNOLOGY CORPORATION,
as Borrower,
THE OTHER CREDIT PARTIES SIGNATORY HERETO
FROM TIME TO TIME,
as Credit Parties,
THE LENDERS SIGNATORY HERETO FROM TIME TO TIME,
as Lenders,
and
GENERAL ELECTRIC CAPITAL CORPORATION,
as Agent and a Lender
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. AMOUNT AND TERMS OF CREDIT .................................................... 1
1.1 Credit Facilities ....................................................... 1
1.2 Letters of Credit ....................................................... 4
1.3 Prepayments ............................................................. 4
1.4 Use of Proceeds ......................................................... 6
1.5 Interest and Applicable Margins ......................................... 6
1.6 Eligible Accounts ....................................................... 9
1.7 Eligible Inventory ...................................................... 11
1.8 Cash Management System .................................................. 13
1.9 Fees .................................................................... 13
1.10 Receipt of Payments ..................................................... 13
1.11 Application and Allocation of Payments .................................. 13
1.12 Loan Account and Accounting ............................................. 14
1.13 Indemnity ............................................................... 14
1.14 Access .................................................................. 15
1.15 Taxes ................................................................... 16
1.16 Capital Adequacy; Increased Costs; Illegality ........................... 17
1.17 Single Loan ............................................................. 18
2. CONDITIONS PRECEDENT .......................................................... 18
2.1 Conditions to the Initial Loans ......................................... 18
2.2 Further Conditions to Each Loan ......................................... 19
3. REPRESENTATIONS AND WARRANTIES ................................................ 20
3.1 Corporate Existence; Compliance with Law ................................ 20
3.2 Executive Offices; Collateral Locations; FEIN ........................... 20
3.3 Corporate Power, Authorization, Enforceable Obligations ................. 21
3.4 Financial Statements and Projections .................................... 21
3.5 Material Adverse Effect ................................................. 22
3.6 Ownership of Property; Liens ............................................ 22
3.7 Labor Matters ........................................................... 23
3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness 23
3.9 Government Regulation ................................................... 23
3.10 Margin Regulations ...................................................... 24
3.11 Taxes ................................................................... 24
3.12 ERISA ................................................................... 24
3.13 No Litigation ........................................................... 25
3.14 Brokers ................................................................. 25
3.15 Intellectual Property ................................................... 26
3.16 Full Disclosure ......................................................... 26
3.17 Environmental Matters ................................................... 26
3.18 Insurance ............................................................... 27
3.19 Deposit and Disbursement Accounts ....................................... 27
3.20 Government Contracts .................................................... 27
3.21 Customer and Trade Relations ............................................ 27
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
3.22 Agreements and Other Documents .......................................... 27
3.23 Solvency ................................................................ 27
3.24 Year 2000 Representations ............................................... 28
3.25 Subordinated Debt ....................................................... 28
4. FINANCIAL STATEMENTS AND INFORMATION .......................................... 28
4.1 Reports and Notices ..................................................... 28
4.2 Communication with Accountants .......................................... 28
5. AFFIRMATIVE COVENANTS ......................................................... 29
5.1 Maintenance of Existence and Conduct of Business ........................ 29
5.2 Payment of Obligations .................................................. 29
5.3 Books and Records ....................................................... 29
5.4 Insurance; Damage to or Destruction of Collateral; Condemnation ......... 30
5.5 Compliance with Laws .................................................... 31
5.6 Supplemental Disclosure ................................................. 32
5.7 Intellectual Property ................................................... 32
5.8 Environmental Matters ................................................... 32
5.9 Landlords' Agreements, Mortgagee Agreements and Bailee Letters .......... 33
5.10 Further Assurances ...................................................... 33
5.11 Year 2000 Problems ...................................................... 33
6. NEGATIVE COVENANTS ............................................................ 33
6.1 Mergers, Subsidiaries, Etc .............................................. 34
6.2 Investments; Loans and Advances ......................................... 36
6.3 Indebtedness ............................................................ 37
6.4 Employee Loans and Affiliate Transactions ............................... 38
6.5 Capital Structure and Business .......................................... 39
6.6 Guaranteed Indebtedness ................................................. 39
6.7 Liens ................................................................... 39
6.8 Sale of Stock and Assets ................................................ 40
6.9 ERISA ................................................................... 40
6.10 Financial Covenants ..................................................... 40
6.11 Hazardous Materials ..................................................... 40
6.12 Sale-Leasebacks ......................................................... 40
6.13 Cancellation of Indebtedness ............................................ 40
6.14 Restricted Payments ..................................................... 41
6.15 Change of Corporate Name or Location; Change of Fiscal Year ............. 41
6.16 No Impairment of Intercompany Transfers ................................. 42
6.17 No Speculative Transactions ............................................. 42
6.18 Leases .................................................................. 42
6.19 Changes and Other Matters Relating to Subordinated Debt ................. 42
7. TERM .......................................................................... 43
7.1 Termination ............................................................. 43
7.2 Survival of Obligations Upon Termination of Financing Arrangements ...... 43
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ........................................ 43
8.1 Events of Default ....................................................... 43
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
8.2 Remedies ................................................................ 45
8.3 Waivers by Credit Parties ............................................... 46
9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT ........................... 46
9.1 Assignment and Participations ........................................... 46
9.2 Appointment of Agent .................................................... 48
9.3 Agent's Reliance, Etc ................................................... 48
9.4 GE Capital and Affiliates ............................................... 49
9.5 Lender Credit Decision .................................................. 49
9.6 Indemnification ......................................................... 49
9.7 Successor Agent ......................................................... 50
9.8 Setoff and Sharing of Payments .......................................... 50
9.9 Advances; Non-Funding Lenders; Information; Actions in Concert .......... 51
10.SUCCESSORS AND ASSIGNS ........................................................ 53
11.MISCELLANEOUS ................................................................. 53
11.1 Complete Agreement; Modification of Agreement .......................... 53
11.2 Amendments and Waivers ................................................. 53
11.3 Fees and Expenses ...................................................... 55
11.4 No Waiver .............................................................. 56
11.5 Remedies ............................................................... 57
11.6 Severability ........................................................... 57
11.7 Conflict of Terms ...................................................... 57
11.8 Confidentiality ........................................................ 57
11.9 GOVERNING LAW .......................................................... 57
11.10 Notices ................................................................ 58
11.11 Section Titles ......................................................... 59
11.12 Counterparts ........................................................... 59
11.13 WAIVER OF JURY TRIAL ................................................... 59
11.14 Press Releases ......................................................... 59
11.15 Reinstatement .......................................................... 59
11.16 Advice of Counsel ...................................................... 60
11.17 No Strict Construction ................................................. 60
</TABLE>
iii
<PAGE> 5
INDEX OF APPENDICES
<TABLE>
<S> <C> <C>
Annex A (Recitals) - Definitions
Annex B (Section 1.2) - Letters of Credit
Annex C (Section 1.8) - Cash Management System
Annex D (Section 2.1(a)) - Schedule of Documents
Annex E (Section 4.1(a)) - Financial Statements and Projections -- Reporting
Annex F (Section 4.1(b)) - Collateral Reports
Annex G (Section 6.10) - Financial Covenants
Annex H (Section 9.9(a)) - Lenders' Wire Transfer Information
Annex I (Section 11.10) - Notice Addresses
Annex J (Annex A) - Commitments as of Closing Date
Exhibit 1.1(a)(i) - Form of Notice of Revolving Credit Advance
Exhibit 1.1(a)(ii) - Form of Revolving Note
Exhibit 1.1(b)(ii) - Form of Swing Line Note
Exhibit 1.5(e) - Form of Notice of Conversion/Continuation
Exhibit 4.1(b) - Form of Borrowing Base Certificate
Exhibit 9.1(a) - Form of Assignment Agreement
Schedule (1.1) - Agent Representative
Disclosure Schedule (1.4) - Sources and Uses; Funds Flow Memorandum
Disclosure Schedule (3.2) - Executive Offices; Collateral Locations; FEIN
Disclosure Schedule (3.4(a)) - Financial Statements
Disclosure Schedule (3.4(b)) - Pro Forma
Disclosure Schedule (3.4(c)) - Projections
Disclosure Schedule (3.4(d)) - Fair Salable Balance Sheet
Disclosure Schedule (3.6) - Real Estate and Leases
Disclosure Schedule (3.7) - Labor Matters
Disclosure Schedule (3.8) - Ventures and Affiliates; Stock
Disclosure Schedule (3.11) - Tax Matters
Disclosure Schedule (3.12) - ERISA Plans
Disclosure Schedule (3.13) - Litigation
Disclosure Schedule (3.14) - Brokers
Disclosure Schedule (3.15) - Intellectual Property
Disclosure Schedule (3.17) - Hazardous Materials
Disclosure Schedule (3.18) - Insurance
Disclosure Schedule (3.19) - Deposit and Disbursement Accounts
Disclosure Schedule (3.20) - Government Contracts
Disclosure Schedule (3.22) - Material Agreements
Disclosure Schedule (5.1) - Trade Names
Disclosure Schedule (6.3) - Indebtedness
Disclosure Schedule (6.4(a)) - Transactions with Affiliates
Disclosure Schedule (6.7) - Existing Liens
Disclosure Schedule (8.1(n)) - Material Agreements for Default Purposes
</TABLE>
v
<PAGE> 6
THIS CREDIT AGREEMENT ("Agreement") is entered into as of June 22,
1999, by and among STYLING TECHNOLOGY CORPORATION, a Delaware corporation
("Borrower"); the other Credit Parties signatory hereto from time to time;
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (in its individual
capacity, "GE Capital"), for itself, as a Lender, and as Agent for Lenders; and
the other Lenders signatory hereto from time to time.
RECITALS
A. Borrower has requested that Lenders extend a revolving credit
facility to Borrower of up to Ninety Million Dollars ($90,000,000) in the
aggregate for the purpose of refinancing certain indebtedness of Borrower,
including certain unsecured indebtedness of Borrower assumed by it in connection
with its acquisition of Ft. Pitt Acquisition, Inc., and to provide (i) working
capital financing for Borrower and the other Credit Parties and funds for
capital expenditures and acquisitions permitted herein, (ii) funds for other
general corporate purposes of Borrower and the other Credit Parties, and (iii)
funds for certain fees and expenses in connection with the financing
transactions contemplated herein, and Lenders are willing to make certain loans
and other extensions of credit to Borrower of up to such amount upon the terms
and conditions set forth herein.
B. Borrower desires to secure all of its obligations under the Loan
Documents by granting to Agent, for the benefit of Agent and Lenders, a security
interest in and lien upon all of its existing and after-acquired personal and
real property.
C. Capitalized terms used in this Agreement shall have the meanings
ascribed to them in Annex A and, for purposes of this Agreement and the other
Loan Documents, the rules of construction set forth in Annex A shall govern. All
exhibits, schedules, annexes and other attachments (collectively, "Appendices")
hereto, or expressly identified to this Agreement, are incorporated herein by
reference and, taken together with this Agreement, shall constitute but a single
agreement. These Recitals shall be construed as part of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.1 Credit Facilities.
(a) Revolving Credit Facility.
(i) Subject to the terms and conditions hereof, each Revolving
Lender agrees to make available to Borrower from time to time until the
Commitment Termination Date its Pro Rata Share of advances (each, a "Revolving
Credit Advance"). The Pro Rata Share of the Revolving Loan of any Revolving
Lender shall not at any time exceed its separate Revolving Loan Commitment. The
obligations of each Revolving Lender hereunder shall be several and not joint.
Except to the extent otherwise provided in Section 1.1(a)(iii), the aggregate
amount of Revolving Credit Advances outstanding shall not exceed at any time the
lesser of (A) the
<PAGE> 7
Maximum Amount and (B) the Borrowing Base, in each case less the sum of the
Letter of Credit Obligations and the Swing Line Loan outstanding at such time
("Borrowing Availability"). Until the Commitment Termination Date, Borrower may
from time to time borrow, repay and reborrow under this Section 1.1(a). Each
Revolving Credit Advance shall be made on notice by Borrower to a representative
of Agent identified in Schedule (1.1) at the address specified therein. Any such
notice must be given no later than (1) 10:00 a.m. (California time) on the
Business Day of the proposed Revolving Credit Advance, in the case of an Index
Rate Loan, or (2) 10:00 a.m. (California time) on the date that is three
Business Days prior to the proposed Revolving Credit Advance, in the case of a
LIBOR Loan. Each such notice (a "Notice of Revolving Credit Advance") shall be
given in writing (by telecopy or overnight courier) substantially in the form of
Exhibit 1.1(a)(i), and shall include the information required in such Exhibit
and such other information as may be reasonably required by Agent. If Borrower
desires to have any Revolving Credit Advance bear interest by reference to a
LIBOR Rate, it must comply with Section 1.5(e).
(ii) Borrower shall execute and deliver to each Revolving
Lender a note to evidence the Revolving Loan Commitment of such Revolving
Lender, which note shall be (A) in the principal amount of the Revolving Loan
Commitment of such Revolving Lender, (B) dated the Closing Date and (C)
substantially in the form of Exhibit 1.1(a)(ii) (each a "Revolving Note" and
collectively the "Revolving Notes"). Each Revolving Note shall represent the
obligation of Borrower to pay the amount of the applicable Revolving Lender's
Revolving Loan Commitment or, if less, such Revolving Lender's Pro Rata Share of
the aggregate unpaid principal amount of all Revolving Credit Advances made to
Borrower together with interest thereon as prescribed in Section 1.5. The entire
unpaid balance of the Revolving Loan and all other noncontingent Obligations
shall be immediately due and payable in full in immediately available funds on
the Commitment Termination Date.
(iii) At the request of Borrower, Agent may (but shall have
absolutely no obligation to), in its discretion, make Revolving Credit Advances
to Borrower on behalf of Revolving Lenders in amounts that cause the outstanding
balance of the aggregate Revolving Loan to exceed the Borrowing Base (less the
Swing Line Loan) (any such excess Revolving Credit Advances are herein referred
to collectively as "Overadvances"); provided, that (A) no such event or
occurrence shall cause or constitute a waiver of Agent's, the Swing Line
Lender's or Revolving Lenders' right to refuse to make any further Overadvances,
Swing Line Advances or Revolving Credit Advances, or incur any Letter of Credit
Obligations, as the case may be, at any time that an Overadvance exists or would
result therefrom, and (B) any Overadvances shall not constitute a Default or
Event of Default due to Borrower's failure to comply with Section 1.3(b)(i) for
so long as Agent permits such Overadvance to be outstanding. In addition,
Overadvances may be made even if the conditions to lending set forth in Section
2 have not been met. All Overadvances shall constitute Index Rate Loans, shall
bear interest at the Default Rate and shall be payable on demand. Except as
otherwise provided in Section 1.11(b), the authority of Agent to make
Overadvances (1) is limited to an aggregate amount not to exceed $500,000 at any
time, (2) shall not cause the Revolving Loan to exceed the Maximum Amount, and
(3) may be revoked prospectively by a written notice to Agent signed by
Revolving Lenders holding fifty percent (50%) or more of the Revolving Loan
Commitments.
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<PAGE> 8
(b) Swing Line Facility.
(i) Swing Line Advances. Agent shall notify the Swing Line
Lender upon Agent's receipt of any Notice of Revolving Credit Advance. Subject
to the terms and conditions hereof, the Swing Line Lender may, in its
discretion, make available from time to time until the Commitment Termination
Date advances (each, a "Swing Line Advance") in accordance with any such notice.
The aggregate amount of Swing Line Advances outstanding shall not exceed at any
time the lesser of (A) the Swing Line Commitment and (B) the lesser of (1) the
Maximum Amount and (2) (except for Overadvances) the Borrowing Base, in each
case less the outstanding balance of the Revolving Loan at such time ("Swing
Line Availability"). Until the Commitment Termination Date, Borrower may from
time to time borrow, repay and reborrow under this Section 1.1(b). Each Swing
Line Advance shall be made pursuant to a Notice of Revolving Credit Advance
delivered by Borrower to Agent in accordance with Section 1.1(a). Any such
notice must be given no later than 10:00 a.m. (California time) on the Business
Day of the proposed Swing Line Advance. Notwithstanding any other provision of
this Agreement or the other Loan Documents, the Swing Line Loan shall constitute
an Index Rate Loan. Unless the Swing Line Lender has received at least one
Business Day's prior written notice from Agent or Requisite Revolving Lenders
instructing it not to make any Swing Line Advance, the Swing Line Lender shall,
notwithstanding the failure of any condition precedent set forth in Section 2.2
(other than the condition precedent set forth in Section 2.2(e)) be entitled to
fund such Swing Line Advance and, in connection with such Swing Line Advance, to
have each Revolving Lender make Revolving Credit Advances in accordance with
Section 1.1(b)(iii) and to purchase participating interests in accordance with
Section 1.1(b)(iv). Borrower shall repay the aggregate outstanding principal
amount of the Swing Line Loan upon demand therefor by Agent.
(ii) Swing Line Note. Borrower shall execute and deliver to
the Swing Line Lender a promissory note to evidence the Swing Line Commitment.
Such note shall be (A) in the principal amount of the Swing Line Commitment, (B)
dated the Closing Date, and (C) substantially in the form of Exhibit 1.1(b)(ii)
(the "Swing Line Note"). The Swing Line Note shall represent the obligation of
Borrower to pay the amount of the Swing Line Commitment or, if less, the
aggregate unpaid principal amount of all Swing Line Advances made to Borrower
together with interest thereon as prescribed in Section 1.5. The entire unpaid
balance of the Swing Line Loan and all other noncontingent Obligations shall be
immediately due and payable in full in immediately available funds on the
Commitment Termination Date if not sooner paid in full.
(iii) Refunding of Swing Line Loans. The Swing Line Lender, at
any time and from time to time in its sole and absolute discretion, but no less
frequently than once weekly, shall on behalf of Borrower (and Borrower hereby
irrevocably authorizes the Swing Line Lender to so act on its behalf) request
each Revolving Lender (including the Swing Line Lender) to make a Revolving
Credit Advance to Borrower (which shall be an Index Rate Loan) in an amount
equal to such Revolving Lender's Pro Rata Share of the principal amount of the
Swing Line Loan (the "Refunded Swing Line Loan") outstanding on the date such
notice is given. Unless any of the events described in Sections 8.1(h) or 8.1(i)
shall have occurred (in which event the procedures of Section 1.1(b)(iv) shall
apply) and regardless of whether the conditions precedent set forth in this
Agreement to the making of a Revolving Credit Advance are then
3
<PAGE> 9
satisfied, each Revolving Lender shall disburse directly to Agent its Pro Rata
Share of a Revolving Credit Advance on behalf of the Swing Line Lender prior to
12:00 noon (California time) in immediately available funds on the Business Day
next succeeding the date such notice is given. The proceeds of such Revolving
Credit Advances shall be immediately paid to the Swing Line Lender and applied
to repay the Refunded Swing Line Loan.
(iv) Participation in Swing Line Loans. If, prior to refunding
a Swing Line Loan with a Revolving Credit Advance pursuant to Section
1.1(b)(iii), one of the events described in Sections 8.1(h) or 8.1(i) shall have
occurred, then, subject to the provisions of Section 1.1(b)(v), each Revolving
Lender shall, on the date such Revolving Credit Advance was to have been made
for the benefit of Borrower, purchase from the Swing Line Lender an undivided
participation interest in the Swing Line Loan in an amount equal to its Pro Rata
Share of such Swing Line Loan. Upon request, each Revolving Lender shall
promptly transfer to the Swing Line Lender, in immediately available funds, the
amount of its participation interest.
(v) Revolving Lenders' Obligations Unconditional. Each
Revolving Lender's obligation to make Revolving Credit Advances in accordance
with Section 1.1(b)(iii) and to purchase participating interests in accordance
with Section 1.1(b)(iv) shall be absolute and unconditional and shall not be
affected by any circumstance, including: (A) any setoff, counterclaim,
recoupment, defense or other right that such Revolving Lender may have against
the Swing Line Lender, Borrower or any other Person for any reason whatsoever;
(B) the occurrence or continuance of any Default or Event of Default; (C) any
inability of Borrower to satisfy the conditions precedent to borrowing set forth
in this Agreement on the date upon which such participating interest is to be
purchased; or (D) any other circumstance, happening or event whatsoever, whether
or not similar to any of the foregoing. If any Revolving Lender does not make
available to Agent or the Swing Line Lender, as applicable, the amount required
pursuant to Sections 1.1(b)(iii) or 1.1(b)(iv), as the case may be, the Swing
Line Lender shall be entitled to recover such amount on demand from such
Revolving Lender, together with interest thereon for each day from the date of
non-payment until such amount is paid in full at the Federal Funds Rate for the
first two Business Days and at the Index Rate thereafter.
(c) Reliance on Notices. Agent shall be entitled to rely upon, and
shall be fully protected in relying upon, any Notice of Revolving Credit
Advance, Notice of Conversion/Continuation or similar notice reasonably believed
by Agent to be genuine. Agent may assume that each Person executing and
delivering any such notice was duly authorized, unless the responsible
individual acting thereon for Agent has actual knowledge to the contrary.
1.2 Letters of Credit. Subject to and in accordance with the terms and
conditions contained herein and in Annex B, Borrower shall have the right to
request, and Revolving Lenders agree to incur, or purchase participations in,
Letter of Credit Obligations in respect of Borrower.
1.3 Prepayments.
(a) Voluntary Prepayments. Borrower may at any time on at least five
days' prior written notice to Agent voluntarily prepay all or part of the
Revolving Loan and permanently reduce (but not terminate) the Revolving Loan
Commitment; provided, that (i) any
4
<PAGE> 10
such prepayments or reductions shall be in a minimum amount of $1,000,000 and
integral multiples of $1,000,000 in excess of such amount and (ii) the Revolving
Loan Commitment shall not be reduced to an amount less than $50,000,000.
Borrower may at any time on at least ten days' prior written notice to Agent
terminate the Revolving Loan Commitment; provided, that upon such termination
all Loans and other Obligations shall be immediately due and payable in full and
Borrower shall make arrangements, in accordance with the terms and conditions of
Annex B, for the satisfaction of any outstanding Letter of Credit Obligations.
Any such voluntary prepayment and any such reduction or termination of the
Revolving Loan Commitment must be accompanied by payment of Agent's and each
Lender's reasonable out-of-pocket expenses and payment of any LIBOR funding
breakage costs in accordance with Section 1.13(b). Upon any such prepayment and
reduction or termination of the Revolving Loan Commitment, Borrower's right to
request Revolving Credit Advances or Swing Line Advances, or request that Letter
of Credit Obligations be incurred on its behalf, shall simultaneously be
permanently reduced or terminated, as the case may be; provided, that a
permanent reduction of the Revolving Loan Commitment shall not require a
corresponding pro rata reduction in the L/C Sublimit. Each notice of partial
prepayment shall designate the Loan or other Obligations to which such
prepayment is to be applied.
(b) Mandatory Prepayments.
(i) If at any time the outstanding balance of the Revolving
Loan exceeds the lesser of (A) the Maximum Amount and (B) the Borrowing Base, in
each case less the outstanding Swing Line Loan at such time, then Borrower shall
immediately repay the aggregate outstanding Revolving Credit Advances to the
extent required to eliminate such excess. If any such excess remains after
repayment in full of the aggregate outstanding Revolving Credit Advances,
Borrower shall provide cash collateral for the Letter of Credit Obligations in
the manner set forth in Annex B to the extent required to eliminate such excess.
Notwithstanding the foregoing, any Overadvance made pursuant to Section
1.1(a)(iii) shall be repaid only on demand.
(ii) Immediately upon receipt by any Credit Party of any cash
proceeds of any asset disposition or any sale of Stock of any Subsidiary of any
Credit Party, Borrower shall prepay the Loans in an amount equal to all such
proceeds, net of (A) commissions and other reasonable and customary transaction
costs, fees and expenses properly attributable to such transaction and payable
by any Credit Party in connection therewith (in each case, paid to
non-Affiliates), (B) transfer taxes, (C) amounts payable to holders of senior
Liens (to the extent such Liens constitute Permitted Encumbrances hereunder), if
any, and (D) an appropriate reserve for income taxes in accordance with GAAP in
connection therewith. Any such prepayment shall be applied in accordance with
Section 1.3(c).
(iii) If any Credit Party issues Stock or debt securities, no
later than the Business Day following the date of receipt of any cash proceeds
thereof, Borrower shall prepay the Loans in an amount equal to all such
proceeds, net of underwriting discounts and commissions and other reasonable
costs paid to non-Affiliates in connection therewith. Any such prepayment shall
be applied in accordance with Section 1.3(c).
(c) Application of Certain Mandatory Prepayments. Any prepayments
made
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<PAGE> 11
by Borrower pursuant to Sections 1.3(b)(ii) or (b)(iii) or Section 1.3(d) shall
be applied as follows: first, to Fees and reimbursable expenses of Agent then
due and payable pursuant to any of the Loan Documents; second, to interest then
due and payable on the Swing Line Loan; third, to the principal balance of the
Swing Line Loan until the same shall have been repaid in full; fourth, to
interest then due and payable on the Revolving Credit Advances; fifth, to the
outstanding principal balance of Revolving Credit Advances until the same shall
have been paid in full; and sixth, to any Letter of Credit Obligations, to
provide cash collateral therefor in the manner set forth in Annex B, until all
such Letter of Credit Obligations have been fully cash collateralized in the
manner set forth in Annex B. Neither the Revolving Loan Commitment nor the Swing
Line Commitment shall be permanently reduced by the amount of any such
prepayments.
(d) Application of Prepayments from Insurance and Condemnation
Proceeds. Prepayments from insurance or condemnation proceeds in accordance with
Sections 5.4(c) or 5.4(d), respectively, shall be applied in accordance with
Section 1.3(c).
(e) No Consent to Prohibited Transactions. Nothing in this Section
1.3 shall be construed to constitute Agent's or any Lender's consent to any
transaction that is not permitted by other provisions of this Agreement or the
other Loan Documents.
1.4 Use of Proceeds. Borrower shall utilize the proceeds of the Revolving
Loan and the Swing Line Loan solely for the Refinancing and the other Related
Transactions (and to pay any related transaction expenses), for the financing of
Borrower's and the other Credit Parties' ordinary working capital and general
corporate needs (but excluding in any event the making of any Restricted Payment
not specifically permitted by Section 6.14), and to provide funds for capital
expenditures and Permitted Acquisitions. Disclosure Schedule (1.4) contains a
description of Borrower's sources and uses of funds as of the Closing Date,
including Loans and Letter of Credit Obligations to be made or incurred on such
date, and a funds flow memorandum detailing how funds from each source are to be
transferred to particular uses.
1.5 Interest and Applicable Margins.
(a) Borrower shall pay interest to Agent, for the ratable benefit of
Lenders in accordance with the various Loans being made by each Lender, in
arrears on each applicable Interest Payment Date, at the following rates: (i)
with respect to the Revolving Credit Advances, the Index Rate plus the
Applicable Revolver Index Margin per annum or, at the election of Borrower, the
applicable LIBOR Rate plus the Applicable Revolver LIBOR Margin per annum, based
on the aggregate Revolving Credit Advances outstanding from time to time; and
(ii) with respect to the Swing Line Loan, the Index Rate plus the Applicable
Revolver Index Margin per annum.
The Applicable Margins as of the Closing Date shall be determined by
reference to the following table:
<TABLE>
<CAPTION>
Applicable Margin Per Annum Rate
----------------- --------------
<S> <C>
Applicable Revolver Index Margin 1.75%
</TABLE>
6
<PAGE> 12
<TABLE>
<S> <C>
Applicable Revolver LIBOR Margin 3.25%
Applicable L/C Margin 2.00%
Applicable Unused Line Fee Margin 0.50%
</TABLE>
The Applicable Revolver Index Margin and the Applicable Revolver LIBOR Margin
shall be adjusted (up or down) prospectively on a quarterly basis as determined
by Borrower's consolidated financial performance, which adjustments shall be
implemented commencing on the later of (A) January 1, 2000, and (B) the first
day of the first calendar month that occurs more than five days after delivery
of Borrower's Financial Statements to Agent for the Fiscal Quarter ending
September 30, 1999 (such date hereinafter the "First Adjustment Date").
Adjustments in such Applicable Margins will be determined by reference to the
following grid:
<TABLE>
<CAPTION>
If Total Level of
Leverage Ratio is: Applicable Margins:
- ----------------- ------------------
<S> <C>
Greater than or equal to 0, but < 4.00 Level I
Greater than or equal to 4.00, but < 4.25 Level II
Greater than or equal to 4.25, but < 4.50 Level III
Greater than or equal to 4.50, but < 4.75 Level IV
Greater than or equal to 4.75, but < 5.00 Level V
Greater than or equal to 5.00, but < 5.25 Level VI
< 0, or Greater than or equal to 5.25 Level VII
</TABLE>
<TABLE>
<CAPTION>
Applicable Margins
----------------------------------------------------------------------------------------------
Level I Level II Level III Level IV Level V Level VI Level VII
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Applicable Revolver 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%
Index Margin
- ----------------------------------------------------------------------------------------------------------------------------
Applicable Revolver 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50%
LIBOR Margin
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
All adjustments in such Applicable Margins after the First
Adjustment Date shall be implemented quarterly on a prospective basis,
commencing with the first day of the first calendar month that occurs more than
five days after the date of delivery to Agent of the quarterly unaudited or
annual audited (as applicable) Financial Statements evidencing the need for an
adjustment. Concurrently with the delivery of such Financial Statements,
Borrower shall deliver to Agent a certificate, signed by its chief financial
officer or, in the event such officer is not available, its chief accounting
officer, setting forth in reasonable detail the basis for the continuance of, or
any change in, such Applicable Margins. Failure to timely deliver such Financial
Statements shall, in addition to any other remedy provided for in this
Agreement, result in an increase in such Applicable Margins to the next highest
level set forth in the foregoing grid until the first day of the first calendar
month following the delivery of those Financial Statements demonstrating that
such an increase is not required. If a Default or an Event of Default shall have
occurred and be continuing at the time any
7
<PAGE> 13
reduction in such Applicable Margins is to be implemented, that reduction shall
be deferred until the first day of the first calendar month following the date
on which such Default or Event of Default is waived or cured.
(b) If any payment of any of the Obligations becomes due and payable
on a day other than a Business Day, the maturity thereof will be extended to the
next succeeding Business Day and, with respect to payments of principal,
interest thereon shall be payable at the then applicable rate during such
extension.
(c) All computations of Fees calculated on a per annum basis and
interest shall be made by Agent on the basis of a 360-day year, in each case for
the actual number of days occurring in the period for which such Fees or
interest are payable. Each determination by Agent of an interest rate or Fees
hereunder shall be final, binding and conclusive on Borrower (absent
demonstrable error).
(d) So long as an Event of Default shall have occurred and be
continuing under Sections 8.1(a), 8.1(h) or 8.1(i), or so long as any other
Default or Event of Default shall have occurred and be continuing and at the
election of Agent (or upon the written request of Requisite Revolving Lenders)
confirmed by written notice from Agent to Borrower, the interest rates
applicable to the Loans and the Letter of Credit Fees shall be increased by two
percentage points (2.00%) per annum above the rates of interest or the rate of
such Fees otherwise applicable hereunder (the "Default Rate"), and all
outstanding Obligations shall bear interest at the Default Rate applicable to
such Obligations. Interest and Letter of Credit Fees at the Default Rate shall
accrue from the initial date of such Default or Event of Default until that
Default or Event of Default is cured or waived and shall be payable upon demand.
(e) Subject to the conditions precedent set forth in Section 2.2,
Borrower shall have the option to (i) request that any Revolving Credit Advance
be made as a LIBOR Loan, (ii) convert at any time all or any part of outstanding
Loans (other than the Swing Line Loan) from Index Rate Loans to LIBOR Loans,
(iii) convert any LIBOR Loan to an Index Rate Loan, subject to payment of LIBOR
breakage costs in accordance with Section 1.13(b) if such conversion is made
prior to the expiration of the LIBOR Period applicable thereto, or (iv) continue
all or any portion of any Loan (other than the Swing Line Loan) as a LIBOR Loan
upon the expiration of the applicable LIBOR Period and the succeeding LIBOR
Period of that continued Loan shall commence on the last day of the LIBOR Period
of the Loan to be continued. Any Loan to be made or continued as, or converted
into, a LIBOR Loan must be in a minimum amount of $2,000,000 and integral
multiples of $500,000 in excess of such amount. Any such election must be made
by 10:00 a.m. (California time) on the third Business Day prior to (A) the date
of any proposed Advance that is to bear interest at the LIBOR Rate, (B) the end
of each LIBOR Period with respect to any LIBOR Loans to be continued as such, or
(C) the date on which Borrower wishes to convert any Index Rate Loan to a LIBOR
Loan for a LIBOR Period designated by Borrower in such election. If no election
is received with respect to a LIBOR Loan by 10:00 a.m. (California time) on the
third Business Day prior to the end of the LIBOR Period with respect thereto (or
if a Default or an Event of Default shall have occurred and be continuing or the
additional conditions precedent set forth in Section 2.2 shall not have been
satisfied), that LIBOR Loan shall be converted to an Index Rate Loan at the end
of its LIBOR Period. Borrower must make such election by notice to Agent in
writing, by telecopy or overnight courier. In the case of any conversion or
continuation, such election must be made pursuant to a written notice (a "Notice
of Conversion/Continuation") in the form of Exhibit 1.5(e). No Loan may be made
as or converted into a LIBOR Loan until the earlier of 45 days after the Closing
Date or completion of the
8
<PAGE> 14
syndication.
(f) Notwithstanding anything to the contrary set forth in this
Section 1.5, if a court of competent jurisdiction determines in a final order
that the rate of interest payable hereunder exceeds the highest rate of interest
permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum
Lawful Rate would be so exceeded, the rate of interest payable hereunder shall
be equal to the Maximum Lawful Rate; provided, that if at any time thereafter
the rate of interest payable hereunder is less than the Maximum Lawful Rate,
Borrower shall continue to pay interest hereunder at the Maximum Lawful Rate
until such time as the total interest received by Agent, on behalf of Lenders,
is equal to the total interest that would have been received had the interest
rate payable hereunder been (but for the operation of this paragraph) the
interest rate payable since the Closing Date as otherwise provided in this
Agreement. Thereafter, interest hereunder shall be paid at the rate(s) of
interest and in the manner provided in Sections 1.5(a) through (e), unless and
until the rate of interest again exceeds the Maximum Lawful Rate, and at that
time this paragraph shall again apply. In no event shall the total interest
received by any Lender pursuant to the terms hereof exceed the amount that such
Lender could lawfully have received had the interest due hereunder been
calculated for the full term hereof at the Maximum Lawful Rate. If the Maximum
Lawful Rate is calculated pursuant to this paragraph, such interest shall be
calculated at a daily rate equal to the Maximum Lawful Rate divided by the
number of days in the year in which such calculation is made. If,
notwithstanding the provisions of this Section 1.5(f), a court of competent
jurisdiction shall finally determine that a Lender has received interest
hereunder in excess of the Maximum Lawful Rate, then Agent shall, to the extent
permitted by applicable law, promptly apply such excess in the order specified
in Section 1.11 and thereafter shall refund any excess to Borrower or as a court
of competent jurisdiction may otherwise order.
1.6 Eligible Accounts. Based on the most recent Borrowing Base Certificate
delivered by Borrower to Agent and on any other information available to Agent,
Agent shall in its reasonable credit judgment determine which Accounts of any
Credit Party shall be "Eligible Accounts" for purposes of this Agreement. In
determining whether a particular Account constitutes an Eligible Account, Agent
shall not include any such Account to which any of the exclusionary criteria set
forth below applies. Agent reserves the right, at any time and from time to time
after the Closing Date in its reasonable credit judgment, to adjust any such
criteria, to establish new criteria, to adjust advance rates, and to establish
and modify Reserves with respect to Eligible Accounts, in each case subject to
the approval of Supermajority Revolving Lenders in the event any such
adjustments or the establishment of such new criteria or Reserves have the
effect of making more credit available. Eligible Accounts shall not include any
Account of any Credit Party:
(a) that does not arise from the sale of goods or the performance of
services by such Credit Party in the ordinary course of its business;
(b) upon which such Credit Party's right to receive payment is not
absolute or is contingent upon the fulfillment of any condition whatsoever or
(i) as to which such Credit Party is not able to bring suit or otherwise enforce
its remedies against the Account Debtor through judicial process, or (ii) if the
Account represents a progress billing consisting of an invoice for goods sold or
used or services rendered pursuant to a contract under which the Account
Debtor's obligation to pay that invoice is subject to such Credit Party's
completion of further performance under such contract or is subject to the
equitable lien of a surety bond issuer;
(c) to the extent that any defense, counterclaim, setoff or dispute
is asserted as to
9
<PAGE> 15
such Account;
(d) that is not a true and correct statement of bona fide
indebtedness incurred in the amount of the Account for merchandise sold to or
services rendered and accepted by the applicable Account Debtor;
(e) with respect to which an invoice, reasonably acceptable to Agent
in form and substance, has not been sent to the applicable Account Debtor;
(f) that (i) is not owned by such Credit Party or (ii) is subject to
any right, claim, security interest or other interest of any other Person, other
than Liens in favor of Agent, on behalf of itself and Lenders;
(g) that arises from a sale to any director, officer, other employee
or Affiliate of any Credit Party or to any entity that has any common officer or
director with any Credit Party;
(h) that is the obligation of an Account Debtor that is the United
States government or a political subdivision thereof, or any state or
municipality or department, agency or instrumentality thereof unless Agent, in
its sole discretion, has agreed to the contrary in writing and Borrower, if
necessary or desirable, has complied with the Federal Assignment of Claims Act
of 1940 or any applicable state statute or municipal ordinance of similar
purpose and effect with respect to such obligation;
(i) that is the obligation of an Account Debtor located in a foreign
country unless (A) payment thereof is assured by a letter of credit assigned and
delivered to Agent, reasonably satisfactory to Agent as to form, amount and
issuer or (B) such Account Debtor is otherwise acceptable to Agent in its sole
discretion and then only to the extent that the Dollar amount of such Account,
when added to the Dollar amount of all other foreign Accounts that constitute
Eligible Accounts pursuant to this clause (B), does not exceed the lesser of (1)
$2,000,000 and (2) 5% of the Dollar amount of all Eligible Accounts;
(j) to the extent such Credit Party is liable for goods sold or
services rendered by the applicable Account Debtor to any Credit Party but only
to the extent of the potential offset;
(k) that arises with respect to goods that are delivered on a
bill-and-hold, cash-on-delivery basis or placed on consignment, guaranteed sale
or other terms by reason of which the payment by the Account Debtor is or may be
conditional;
(l) that is in default; provided, that without limiting the
generality of the foregoing, an Account shall be deemed in default upon the
occurrence of any of the following:
(i) (A) if the invoice for such Account provides that payment
is due within 60 days following the date thereof, such Account is not paid
within the earlier of 60 days following its due date or 90 days following
its original invoice date and (B) if the invoice for such Account provides
that payment is due more than 60 days following the date thereof, such
Account is not paid within 30 days following the due date thereof;
(ii) the Account Debtor obligated upon such Account suspends
business, makes a general assignment for the benefit of creditors or fails
to pay its debts generally as
10
<PAGE> 16
they come due; or
(iii) a petition is filed by or against any Account Debtor
obligated upon such Account under any bankruptcy law or any other federal,
state or foreign (including any provincial) receivership, insolvency
relief or other law or laws for the relief of debtors;
(m) if the invoice for such Account provides that payment is due
more than 60 days but not more than 120 days following the date thereof, to the
extent the Dollar amount of such Account, when added to the Dollar amount of all
such Accounts, exceeds the lesser of (i) $2,000,000 or (ii) 5% of the Dollar
amount of all Eligible Accounts;
(n) if the invoice for such Account provides that payment is due
more than 120 days following the date thereof;
(o) that is an obligation of an Account Debtor with respect to which
fifty percent (50%) or more of the Dollar amount of all Accounts owing by such
Account Debtor are ineligible under the other criteria set forth in this Section
1.6;
(p) as to which Agent's Lien thereon, on behalf of itself and
Lenders, is not a first priority perfected Lien;
(q) as to which any of the representations or warranties pertaining
to Accounts in the Loan Documents is untrue;
(r) to the extent such Account is evidenced by a judgment,
Instrument or Chattel Paper;
(s) to the extent such Account exceeds any credit limit established
by Agent in its reasonable credit judgment;
(t) to the extent that such Account, together with all other
Accounts owing by such Account Debtor and its Affiliates as of any date of
determination, exceeds ten percent (10%) of all Eligible Accounts, but only to
the extent of such excess;
(u) that is payable in any currency other than Dollars; or
(v) that is otherwise unacceptable to Agent in its reasonable credit
judgment.
1.7 Eligible Inventory. Based on the most recent Borrowing Base
Certificate delivered by Borrower to Agent and on any other information
available to Agent, Agent shall in its reasonable credit judgment determine
which Inventory of any Credit Party shall be "Eligible Inventory" for purposes
of this Agreement. In determining whether any particular Inventory constitutes
Eligible Inventory, Agent shall not include any such Inventory to which any of
the exclusionary criteria set forth below applies. Agent reserves the right, at
any time and from time to time after the Closing Date in its reasonable credit
judgment, to adjust any such criteria, to establish new criteria, to adjust
advance rates, and to establish and modify Reserves with respect to Eligible
Inventory, in each case subject to the approval of Supermajority Revolving
Lenders in the event any such adjustments or the establishment of such new
criteria or Reserves have the effect of making more credit available. Eligible
Inventory shall not include any Inventory of any Credit Party that:
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(a) is not owned by such Credit Party free and clear of all Liens
and rights of any other Person (including the rights of a purchaser that has
made progress payments and the rights of a surety that has issued a bond to
assure such Credit Party's performance with respect to such Inventory), except
the Liens in favor of Agent, on behalf of itself and Lenders, and Permitted
Encumbrances that are subordinate thereto;
(b) (i) is not located on premises owned or leased by or at a public
warehouse or outside processing facility used by a Credit Party, in each case
located within the United States of America and referenced in Disclosure
Schedule (3.2); provided, that Inventory located in the United Kingdom shall not
be deemed ineligible solely pursuant to this clause (i) (A) if such Inventory is
located on premises leased by a Credit Party and (B) to the extent that the
aggregate book value of such Inventory does not exceed $2,000,000 at any time,
(ii) is located at a public warehouse or outside processing facility, unless (A)
the warehouseman or processor has executed a bailee letter or access agreement
in form and substance reasonably acceptable to Agent or (B) Agent has determined
the amount of, and is maintaining, a Reserve against the Borrowing Base with
respect to the Inventory located at such public warehouse or outside processing
facility, (iii) is located at one of a Credit Party's owned or leased locations,
unless either (A) the mortgagee or landlord, as applicable, has executed a
mortgagee's waiver or a landlord's waiver, as the case may be, in form and
substance reasonably acceptable to Agent or (B) Agent has determined the amount
of, and is maintaining, a Reserve against the Borrowing Base with respect to the
Inventory located at such owned or leased location, or (iv) is located at any
site if the aggregate book value of Inventory at any such location is less than
$50,000;
(c) is placed on consignment or is in transit;
(d) is covered by a negotiable document of title, unless such
document has been delivered to Agent with all necessary endorsements, free and
clear of all Liens except those in favor of Agent, on behalf of itself and
Lenders, and Permitted Encumbrances that are subordinate thereto;
(e) in Agent's reasonable determination is excess, obsolete,
unsalable, shopworn, seconds, damaged or unfit for sale;
(f) consists of display items or packing or shipping materials,
manufacturing supplies or replacement parts;
(g) consists of goods that have been returned by the buyer unless
such goods can be resold on pricing terms consistent with sales of new goods of
the same type;
(h) is not of a type held for sale in the ordinary course of such
Credit Party's business;
(i) is not subject to a first priority perfected Lien in favor of
Agent, on behalf of itself and Lenders;
(j) does not comply with any of the representations or warranties
pertaining to Inventory set forth in the Loan Documents;
(k) consists of any costs associated with "freight-in" charges;
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(l) consists of Hazardous Materials or goods that can be transported
or sold only with licenses that are not readily available;
(m) is not covered by casualty insurance reasonably acceptable to
Agent; or
(n) is otherwise unacceptable to Agent in its reasonable credit
judgment.
1.8 Cash Management System. On or prior to the Closing Date, Borrower will
establish and will maintain until the Termination Date, the cash management
system described in Annex C (the "Cash Management System").
1.9 Fees.
(a) Borrower shall pay to GE Capital, individually, the Fees
specified in that certain fee letter of even date herewith between Borrower and
GE Capital (the "GE Capital Fee Letter") at the times specified for payment
therein.
(b) As additional compensation for the Revolving Lenders, Borrower
shall pay to Agent, for the ratable benefit of such Lenders, in arrears, on the
first Business Day of each month prior to the Commitment Termination Date and on
the Commitment Termination Date, a Fee for Borrower's non-use of available funds
in an amount equal to (i) the Applicable Unused Line Fee Margin (calculated on
the basis of a 360-day year for actual days elapsed) multiplied by (ii) (A) the
Maximum Amount (as it may be reduced from time to time) minus (B) the average
for the period of the daily closing balances of the Revolving Loan and the Swing
Line Loan outstanding during the period for which such Fee is due.
(c) Borrower shall pay to Agent, for the ratable benefit of
Revolving Lenders, the Letter of Credit Fee as provided in Annex B.
1.10 Receipt of Payments. Borrower shall make each payment under this
Agreement not later than 11:00 a.m. (California time) on the day when due in
immediately available funds in Dollars to the Collection Account. For purposes
of computing interest and Fees and determining Borrowing Availability or Net
Borrowing Availability as of any date, all payments shall be deemed received on
the Business Day of receipt of immediately available funds therefor in the
Collection Account prior to 11:00 a.m. (California time). Payments received
after 11:00 a.m. (California time) on any Business Day or on a day that is not a
Business Day shall be deemed to have been received on the following Business
Day.
1.11 Application and Allocation of Payments.
(a) So long as no Default or Event of Default shall have occurred
and be continuing: (i) payments consisting of proceeds of Accounts received in
the ordinary course of business shall be applied first to the Swing Line Loan
and second to the Revolving Loan; (ii) voluntary prepayments shall be applied as
determined by Borrower, subject to the provisions of Section 1.3(a); and (iii)
mandatory prepayments shall be applied as set forth in Sections 1.3(c) and
1.3(d). All payments and prepayments applied to a particular Loan shall be
applied ratably to the portion thereof held by each Lender as determined by its
Pro Rata Share. As to each other payment, and as to all payments made when a
Default or Event or Default shall have occurred and be
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continuing or following the Commitment Termination Date, Borrower hereby
irrevocably waives the right to direct the application of any and all payments
received from or on behalf of Borrower, and Borrower hereby irrevocably agrees
that Agent shall have the continuing exclusive right to apply any and all such
payments against the Obligations as Agent may deem advisable notwithstanding any
previous entry by Agent in the Loan Account or any other books and records. In
the absence of a specific determination by Agent with respect thereto, payments
shall be applied to amounts then due and payable in the following order: (A) to
Fees and Agent's expenses reimbursable hereunder; (B) to interest on the Swing
Line Loan; (C) to principal payments on the Swing Line Loan; (D) to interest on
the Revolving Credit Advances; (E) to principal payments on the Revolving Credit
Advances and to provide cash collateral for Letter of Credit Obligations in the
manner described in Annex B, ratably to the aggregate, combined principal
balance of the outstanding Revolving Credit Advances and Letter of Credit
Obligations; and (F) to all other Obligations, including expenses of Lenders to
the extent reimbursable under Section 11.3.
(b) Agent is authorized to, and may, at its sole election, charge to
the Revolving Loan balance on behalf of Borrower and cause to be paid all Fees,
expenses, Charges, costs (including insurance premiums in accordance with
Section 5.4(a)) and interest and principal, other than principal of the
Revolving Loan, owing by Borrower under this Agreement or any of the other Loan
Documents if and to the extent Borrower fails to pay promptly any such amounts
as and when due, even if such charges would cause the aggregate amount of
Revolving Credit Advances and Swing Line Advances outstanding after giving
effect to such charges to exceed Borrowing Availability. At Agent's option and
to the extent permitted by law, any charges so made shall constitute part of the
Revolving Loan hereunder.
1.12 Loan Account and Accounting. Agent shall maintain a loan account (the
"Loan Account") on its books to record: (a) all Advances; (b) all payments made
by Borrower; and (c) all other debits and credits as provided in this Agreement
with respect to the Loans or any other Obligations. All entries in the Loan
Account shall be made in accordance with Agent's customary accounting practices
as in effect from time to time. The balance in the Loan Account, as recorded on
Agent's most recent printout or other written statement, shall, absent
demonstrable error, be presumptive evidence of the amounts due and owing to
Agent and Lenders by Borrower; provided, that any failure to so record or any
error in so recording shall not limit or otherwise affect Borrower's duty to pay
the Obligations. Agent shall render to Borrower a monthly accounting of
transactions with respect to the Loans setting forth the balance of the Loan
Account for the immediately preceding month. Unless Borrower notifies Agent in
writing of any objection to any such accounting (specifically describing the
basis for such objection) within 30 days after receipt by Borrower thereof, each
and every such accounting shall be deemed final, binding and conclusive on
Borrower (absent demonstrable error) in all respects as to all matters reflected
therein. Only those items expressly objected to in such notice shall be deemed
to be disputed by Borrower. Notwithstanding any provision herein contained to
the contrary, any Lender may elect (which election may be revoked) to dispense
with the issuance of Notes to that Lender and may rely on the Loan Account as
evidence of the amount of Obligations from time to time owing to it.
1.13 Indemnity.
(a) Each Credit Party shall jointly and severally indemnify and hold
harmless each of Agent, Lenders and their respective Affiliates, and each such
Person's respective officers, directors, employees, attorneys, agents and
representatives (each, an "Indemnified Person"), from and against any and all
suits, actions, proceedings, claims, damages, losses, liabilities and reasonable
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expenses (including reasonable attorneys' fees and reasonable disbursements and
other reasonable costs of investigation or defense, including those incurred
upon any appeal) that may be instituted or asserted against or incurred by any
such Indemnified Person as the result of credit having been extended, suspended
or terminated under this Agreement and the other Loan Documents and the
administration of such credit, and in connection with or arising out of the
transactions contemplated hereunder and thereunder and any actions or failures
to act in connection therewith, including any and all Environmental Liabilities
and reasonable legal costs and reasonable expenses arising out of or incurred in
connection with disputes between or among any parties to any of the Loan
Documents (collectively, "Indemnified Liabilities"); provided, that no such
Credit Party shall be liable for any indemnification to an Indemnified Person to
the extent that any such suit, action, proceeding, claim, damage, loss,
liability or expense results solely from such Indemnified Person's gross
negligence or willful misconduct, as finally determined by a court of competent
jurisdiction; provided further, that no such Credit Party shall be liable for
any indemnification to an Indemnified Person to the extent that any such suit,
action, proceeding, claim, damage, loss, liability or expense arises in
connection with a dispute between or among Indemnified Persons or a claim made
by an Indemnified Person against another Indemnified Person that in either case
is not caused by any action or inaction of any Credit Party. NO INDEMNIFIED
PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY LOAN DOCUMENT,
ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES THAT MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY LOAN DOCUMENT OR AS A
RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
(b) To induce Lenders to provide the LIBOR Rate option on the terms
provided herein, if: (i) any LIBOR Loans are repaid in whole or in part prior to
the last day of any applicable LIBOR Period (whether such repayment is made
pursuant to any provision of this Agreement or any other Loan Document or occurs
as a result of acceleration, by operation of law or otherwise); (ii) Borrower
shall default in payment when due of the principal amount of or interest on any
LIBOR Loan; (iii) Borrower shall default in making any borrowing of, conversion
into or continuation of LIBOR Loans after Borrower has given notice requesting
the same in accordance herewith; or (iv) Borrower shall fail to make any
prepayment of a LIBOR Loan after Borrower has given a notice thereof in
accordance herewith, then Borrower shall indemnify and hold harmless each Lender
from and against all losses, costs and expenses resulting from or arising from
any of the foregoing. Such indemnification shall include any loss (including
loss of margin) or expense arising from the reemployment of funds obtained by it
or from fees payable to terminate deposits from which such funds were obtained.
For the purpose of calculating amounts payable to a Lender under this
subsection, each Lender shall be deemed to have actually funded its relevant
LIBOR Loan through the purchase of a deposit bearing interest at the LIBOR Rate
in an amount equal to the amount of such LIBOR Loan and having a maturity
comparable to the relevant LIBOR Period; provided, that each Lender may fund
each of its LIBOR Loans in any manner it sees fit, and the foregoing assumption
shall be utilized only for the calculation of amounts payable under this
subsection. This covenant shall survive the termination of this Agreement and
the payment of the Notes and all other amounts payable hereunder. As promptly as
practicable under the circumstances, each Lender shall provide Borrower with its
written calculation of all amounts payable pursuant to this Section 1.13(b), and
such calculation shall be binding on the parties hereto unless Borrower shall
object in writing within ten Business Days of receipt thereof, specifying the
basis for such objection in reasonable detail.
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1.14 Access. Each Credit Party that is a party hereto shall, during normal
business hours, from time to time upon one Business Day's prior notice as
frequently as Agent determines to be appropriate: (a) provide Agent and any of
Agent's officers, employees and agents access to its properties, facilities,
advisors and employees (including officers) of each Credit Party and to the
Collateral; (b) permit Agent and any of its officers, employees and agents to
inspect, audit and make extracts from any Credit Party's books and records; and
(c) permit Agent and its officers, employees and agents to inspect, review,
evaluate and make test verifications and counts of the Accounts, Inventory and
other Collateral of any Credit Party. If a Default or an Event of Default shall
have occurred and be continuing or if access is necessary to preserve or protect
the Collateral as determined by Agent, each such Credit Party shall provide such
access to Agent and each Lender at all times and without advance notice.
Furthermore, so long as any Event of Default shall have occurred and be
continuing, Borrower shall take reasonable actions to provide Agent and each
Lender with access to its suppliers and customers. Each Credit Party shall make
available to Agent and its counsel, as quickly as is reasonably possible under
the circumstances, originals or copies of all books and records that Agent may
request. Each Credit Party shall deliver any document or instrument necessary
for Agent, as it may from time to time reasonably request, to obtain records
from any service bureau or other Person that maintains records for such Credit
Party, and shall maintain duplicate records or supporting documentation on
media, including computer tapes and discs owned by such Credit Party. Agent will
give Lenders at least ten days' prior written notice of regularly scheduled
audits. Representatives of any Lender may accompany Agent's representatives on
regularly scheduled audits at no charge to Borrower.
1.15 Taxes.
(a) Any and all payments by Borrower hereunder or under the Notes
shall be made, in accordance with this Section 1.15, free and clear of and
without deduction for any and all present or future Taxes. If Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under the Notes, (i) the sum payable shall be increased as much as
shall be necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 1.15) Agent
or Lenders, as applicable, receive an amount equal to the sum they would have
received had no such deductions been made, (ii) Borrower shall make such
deductions, and (iii) Borrower shall pay the full amount deducted to the
relevant taxing or other authority in accordance with applicable law. Within 30
days after the date of any payment of Taxes, Borrower shall furnish to Agent the
original or a certified copy of a receipt evidencing payment thereof.
(b) Each Credit Party shall indemnify and, within ten days of demand
therefor, pay Agent and each Lender for the full amount of Taxes (including any
Taxes imposed by any jurisdiction on amounts payable under this Section 1.15)
paid by Agent or such Lender, as appropriate, and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes were correctly or legally asserted.
(c) Each Lender organized under the laws of a jurisdiction outside
the United States (a "Foreign Lender") as to which payments to be made under
this Agreement or under the Notes are exempt from United States withholding tax
under an applicable statute or tax treaty shall provide to Borrower and Agent a
properly completed and executed IRS Forms 4224 (or IRS Forms W-8ECI) or IRS
Forms 1001 (or IRS Forms W-8BEN), or other applicable form, certificate or
document prescribed by the IRS or the United States certifying as to such
Foreign Lender's entitlement to such exemption (a "Certificate of Exemption").
Any foreign Person that seeks to
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become a Lender under this Agreement shall provide a Certificate of Exemption to
Borrower and Agent prior to becoming a Lender hereunder. No foreign Person may
become a Lender hereunder if such Person is unable to deliver a Certificate of
Exemption.
1.16 Capital Adequacy; Increased Costs; Illegality.
(a) If any Lender shall have determined that the adoption after the
date hereof of any law, treaty, governmental (or quasi-governmental) rule,
regulation, guideline or order regarding capital adequacy, reserve requirements
or similar requirements or compliance by any Lender with any request or
directive regarding capital adequacy, reserve requirements or similar
requirements (whether or not having the force of law) from any central bank or
other Governmental Authority increases or would have the effect of increasing
the amount of capital, reserves or other funds required to be maintained by such
Lender and thereby reducing the rate of return on such Lender's capital as a
consequence of its obligations hereunder, then Borrower shall from time to time
upon written demand by such Lender (with a copy of such demand to Agent) pay to
Agent, for the account of such Lender, additional amounts sufficient to
compensate such Lender for such reduction. A certificate as to the amount of
that reduction and showing the basis of the computation thereof submitted by
such Lender to Borrower and to Agent shall be final, binding and conclusive on
Borrower (absent demonstrable error) for all purposes.
(b) If, due to either (i) the introduction of or any change in any
law or regulation (or any change in the interpretation thereof) or (ii) the
compliance with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law), in each case
adopted after the Closing Date, there shall be any increase in the cost to any
Lender of agreeing to make or making, funding or maintaining any Loan, then
Borrower shall, from time to time upon written demand by such Lender (with a
copy of such demand to Agent), pay to Agent for the account of such Lender
additional amounts sufficient to compensate such Lender for such increased cost.
A certificate as to the amount of such increased cost, submitted to Borrower and
to Agent by such Lender, shall be final, binding and conclusive on Borrower
(absent demonstrable error) for all purposes. Each Lender agrees that, as
promptly as practicable after it becomes aware of any circumstances referred to
above that would result in any such increased cost, the affected Lender shall,
to the extent not inconsistent with such Lender's internal policies of general
application, use reasonable commercial efforts to minimize costs and expenses
incurred by it and payable to it by Borrower pursuant to this Section 1.16(b).
(c) Notwithstanding anything to the contrary contained herein, if
the introduction of or any change in any law or regulation (or any change in the
interpretation thereof) shall make it unlawful, or any central bank or other
Governmental Authority shall assert that it is unlawful, for any Lender to agree
to make or to make or to continue to fund or maintain any LIBOR Loan, then,
unless that Lender is able to make or to continue to fund or to maintain such
LIBOR Loan at another branch or office of that Lender without, in that Lender's
opinion, adversely affecting it or its Loans or the income obtained therefrom,
on written notice thereof and written demand therefor by such Lender to Borrower
through Agent, (i) the obligation of such Lender to agree to make or to make or
to continue to fund or maintain LIBOR Loans shall terminate, and (ii) Borrower
shall forthwith prepay in full all outstanding LIBOR Loans owing to such Lender,
together with interest accrued thereon, unless Borrower, within ten Business
Days after the delivery of such notice and demand, converts all such LIBOR Loans
into Index Rate Loans.
(d) (i) Within 15 days after receipt by Borrower of written notice
and
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demand from any Lender (an "Affected Lender") for payment of additional amounts
or increased costs as provided in Sections 1.15(a), 1.16(a) or 1.16(b), Borrower
may, at its option, notify Agent and such Affected Lender of its intention to
replace the Affected Lender. So long as no Default or Event of Default shall
have occurred and be continuing, Borrower, with the consent of Agent, may
obtain, at Borrower's expense, a replacement Lender ("Replacement Lender") for
the Affected Lender, which Replacement Lender must be reasonably satisfactory to
Agent. If Borrower obtains a Replacement Lender within 90 days following notice
of its intention to do so, the Affected Lender must sell and assign its Loans
and Commitments to such Replacement Lender for an amount equal to the principal
balance of all Loans held by the Affected Lender and all accrued interest and
Fees with respect thereto through the date of such sale; provided, that Borrower
shall have reimbursed such Affected Lender for the additional amounts or
increased costs that it is entitled to receive under this Agreement through the
date of such sale and assignment.
(ii) Notwithstanding the foregoing, Borrower shall not have
the right to obtain a Replacement Lender if the Affected Lender rescinds its
demand for increased costs or additional amounts within 15 days following its
receipt of Borrower's notice of intention to replace such Affected Lender.
Furthermore, if Borrower gives a notice of intention to replace and does not so
replace such Affected Lender within 90 days thereafter, Borrower's rights under
this Section 1.16(d) shall terminate and Borrower shall promptly pay all
increased costs or additional amounts demanded by such Affected Lender pursuant
to Sections 1.15(a), 1.16(a) and 1.16(b).
1.17 Single Loan. All Loans to Borrower and all of the other Obligations
of Borrower arising under this Agreement and the other Loan Documents shall
constitute one general obligation of Borrower secured, until the Termination
Date, by all of the Collateral.
2. CONDITIONS PRECEDENT
2.1 Conditions to the Initial Loans. No Lender shall be obligated to make
any Loan or incur any Letter of Credit Obligations on the Closing Date, or to
take, fulfill, or perform any other action hereunder, until the following
conditions have been satisfied or provided for in a manner satisfactory to
Agent, or waived in writing by Agent and Lenders:
(a) Credit Agreement; Loan Documents. This Agreement or counterparts
hereof shall have been duly executed by and delivered to Borrower, each other
Credit Party party thereto, Agent and Lenders, and Agent shall have received
such documents, instruments, agreements and legal opinions as Agent shall
reasonably request in connection with the transactions contemplated by this
Agreement and the other Loan Documents, including all those listed in the
Schedule of Documents that are required to be delivered on or prior to the
Closing Date, each in form and substance reasonably satisfactory to Agent.
(b) Repayment of Prior Lender Obligations; Satisfaction of
Outstanding L/Cs. (i) Agent shall have received a fully executed original of a
pay-off letter satisfactory to Agent confirming that all of the Prior Lender
Obligations will be repaid in full from the proceeds of the initial Revolving
Credit Advance and that all Liens upon any of the property of Borrower or any of
its Subsidiaries in favor of any Prior Lender shall be terminated immediately
upon such payment; and (ii) all letters of credit issued or guaranteed by any
Prior Lender shall have been cash collateralized, supported by a guaranty of
Agent or supported by a Letter of Credit issued pursuant to Annex B, in each
case as mutually agreed upon by Agent, Borrower and Prior
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Lenders.
(c) Approvals. Agent shall have received (i) reasonably satisfactory
evidence that the Credit Parties have obtained all required consents and
approvals of all Persons, including all requisite Governmental Authorities, to
the execution, delivery and performance of this Agreement and the other Loan
Documents and the consummation of the Related Transactions, or (ii) an officer's
certificate in form and substance reasonably satisfactory to Agent affirming
that no such consents or approvals are required.
(d) Opening Availability. Borrower shall have Net Borrowing
Availability, after giving effect to the initial Revolving Credit Advance, the
incurrence of any initial Letter of Credit Obligations and the consummation of
the Related Transactions (on a pro forma basis, with trade payables being paid
currently, and expenses and liabilities being paid in the ordinary course of
business and without acceleration of sales) of at least $7,000,000.
(e) Payment of Fees. Borrower shall have paid the Fees required to
be paid on the Closing Date in the respective amounts specified in Section 1.9
(including the Fees specified in the GE Capital Fee Letter), and shall have
reimbursed Agent for all reasonable fees, costs and expenses of closing
presented as of the Closing Date.
(f) Capital Structure; Other Indebtedness. The capital structure of
each Credit Party and the terms and conditions of all Indebtedness of each
Credit Party shall be acceptable to Agent in its sole discretion. Without
limiting the generality of the foregoing, the total Indebtedness of Borrower on
a consolidated basis as of the Closing Date (including the Loans) shall not
exceed $162,000,000.
(g) Due Diligence. Agent shall have completed its business and legal
due diligence with results satisfactory to Agent.
2.2 Further Conditions to Each Loan. Except as otherwise expressly
provided herein, no Lender shall be obligated to fund any Loan, convert or
continue any Loan as a LIBOR Loan or incur any Letter of Credit Obligation, if,
as of the date thereof:
(a) any representation or warranty by any Credit Party contained
herein or in any other Loan Document shall be untrue or incorrect as of such
date, except to the extent that such representation or warranty expressly
relates to an earlier date and except for changes therein expressly permitted or
expressly contemplated by this Agreement, and Agent or Requisite Revolving
Lenders shall have determined not to make any Loan or incur any Letter of Credit
Obligation so long as such representation or warranty continues to be untrue or
incorrect;
(b) any event or circumstance having a Material Adverse Effect shall
have occurred since the date hereof as determined by Agent or Requisite
Revolving Lenders;
(c) any Default or Event of Default shall have occurred and be
continuing or would result after giving effect to any Loan or the incurrence of
any Letter of Credit Obligation and Agent or Requisite Revolving Lenders shall
have determined not to make any Loan or incur any Letter of Credit Obligation so
long as such Default or Event of Default is continuing;
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(d) Except to the extent Agent has elected to make Overadvances
pursuant to Section 1.1(a)(iii), after giving effect to any Advance (or the
incurrence of any Letter of Credit Obligation), the outstanding principal amount
of the Revolving Loan would exceed the lesser of the Borrowing Base and the
Maximum Amount, in each case less the then outstanding principal amount of the
Swing Line Loan; or
(e) after giving effect to any Swing Line Advance, the outstanding
principal amount of the Swing Line Loan would exceed Swing Line Availability.
The request and acceptance by Borrower of the proceeds of any Loan, the
incurrence of any Letter of Credit Obligations or the conversion or continuation
of any Loan into, or as, a LIBOR Loan, as the case may be, shall be deemed to
constitute, as of the date of such request, acceptance or incurrence, (i) a
representation and warranty by Borrower that the conditions in this Section 2.2
have been satisfied and (ii) a reaffirmation by Borrower of the granting and
continuance of Agent's Liens, on behalf of itself and Lenders, pursuant to the
Collateral Documents.
3. REPRESENTATIONS AND WARRANTIES
To induce Lenders to make Revolving Credit Advances and Swing Line
Advances and to incur Letter of Credit Obligations, the Credit Parties executing
this Agreement, jointly and severally, make the following representations and
warranties to Agent and each Lender with respect to all Credit Parties, each and
all of which shall survive the execution and delivery of this Agreement.
3.1 Corporate Existence; Compliance with Law. Each Credit Party: (a) is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation; (b) is duly qualified to conduct business
and is in good standing in each other jurisdiction where its ownership or lease
of property or the conduct of its business requires such qualification, except
where the failure to be so qualified, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect; (c) has the
requisite corporate power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the property
it operates under lease and to conduct its business as now, heretofore and
proposed to be conducted; (d) subject to specific representations regarding
Environmental Laws, has all licenses, permits, consents or approvals from or by,
and has made all filings with, and has given all notices to, all Governmental
Authorities having jurisdiction, to the extent required for such ownership,
operation and conduct, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect;
(e) is in compliance with its charter and bylaws in all material respects; and
(f) subject to specific representations set forth herein regarding ERISA,
Environmental Laws, tax and other laws, is in compliance with all applicable
provisions of law, except where the failure to comply, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
3.2 Executive Offices; Collateral Locations; FEIN. As of the Closing Date,
the current location of each Credit Party's chief executive office and the
warehouses and premises within which any Collateral is stored or located are set
forth in Disclosure Schedule (3.2), and,
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except as set forth therein, none of such locations has changed within the 12
months preceding the Closing Date. In addition, Disclosure Schedule (3.2) lists
the federal employer identification number of each Credit Party.
3.3 Corporate Power, Authorization, Enforceable Obligations. The
execution, delivery and performance by each Credit Party of the Loan Documents
to which it is a party and the creation of all Liens provided for therein: (a)
are within such Credit Party's corporate power; (b) have been duly authorized by
all necessary or proper corporate and shareholder action; (c) do not contravene
any provision of such Credit Party's charter or bylaws; (d) do not violate any
law or regulation, or any order or decree of any court or Governmental
Authority; (e) do not conflict with or result in the breach or termination of,
constitute a default under or accelerate or permit the acceleration of any
performance required by, any material indenture (including the Senior
Subordinated Note Indenture), mortgage, deed of trust, lease, agreement or other
instrument to which such Credit Party is a party or by which such Credit Party
or any of its property is bound; (f) do not result in the creation or imposition
of any Lien upon any of the property of such Credit Party other than those in
favor of Agent, on behalf of itself and Lenders, pursuant to the Loan Documents;
and (g) do not require the consent or approval of any Governmental Authority or
any other Person, except those referred to in Section 2.1(c), all of which will
have been duly obtained, made or complied with prior to the Closing Date. On or
prior to the Closing Date, each of the Loan Documents shall have been duly
executed and delivered by each Credit Party that is a party thereto and each
such Loan Document shall then constitute a legal, valid and binding obligation
of such Credit Party enforceable against it in accordance with its terms,
subject, as to enforceability, to applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws affecting creditors' rights
generally, and to general principles of equity.
3.4 Financial Statements and Projections. Except for the Projections and
the Fair Salable Balance Sheet, all Financial Statements concerning Borrower and
its Subsidiaries that are referenced below have been prepared in accordance with
GAAP consistently applied throughout the periods covered (except as disclosed
therein and except, with respect to unaudited Financial Statements, for the
absence of footnotes and normal year-end audit adjustments) and present fairly
in all material respects the financial position of the Persons covered thereby
as at the dates thereof and the results of their operations and cash flows for
the periods then ended.
(a) Financial Statements. The following Financial Statements
attached hereto as Disclosure Schedule (3.4(a)) have been delivered on the date
hereof:
(i) The audited consolidated and consolidating balance sheets
at December 31, 1997, and December 31, 1998, and the related statements of
income and cash flows of Borrower and its Subsidiaries for the Fiscal
Years then ended, certified by Arthur Andersen LLP.
(ii) The unaudited balance sheet(s) at April 30, 1999, and the
related statement(s) of income and cash flows of Borrower and its
Subsidiaries for the four Fiscal Months then ended.
(b) Pro Forma. The Pro Forma delivered on the date hereof and
attached hereto as Disclosure Schedule (3.4(b)) was prepared by Borrower giving
pro forma effect to the
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Related Transactions, was based on the unaudited consolidated and consolidating
balance sheets of Borrower and its Subsidiaries dated April 30, 1999, and was
prepared in accordance with GAAP, with only such adjustments thereto as would be
required in accordance with GAAP.
(c) Projections. The Projections delivered on the date hereof and
attached hereto as Disclosure Schedule (3.4(c)) have been prepared by Borrower
in light of the past operations of its businesses, but including future payments
of known contingent liabilities reflected on the Fair Salable Balance Sheet, and
reflect projections for the five-year period beginning on January 1, 1999, on a
month-by-month basis for the first year and on a year-by-year basis thereafter.
The Projections are based upon estimates and assumptions stated therein, all of
which Borrower believes to be reasonable and fair in light of current conditions
and current facts known to Borrower and, as of the Closing Date, reflect
Borrower's good faith and reasonable estimates of the future financial
performance of Borrower and of the other information projected therein for the
period set forth therein.
(d) Fair Salable Balance Sheet. The Fair Salable Balance Sheet
delivered on the date hereof and attached hereto as Disclosure Schedule (3.4(d))
was prepared by Borrower on the same basis as the Pro Forma, except that
Borrower's assets are set forth therein at their fair salable values on a going
concern basis and the liabilities set forth therein include all contingent
liabilities of Borrower stated at the reasonably estimated present values
thereof.
3.5 Material Adverse Effect. Between December 31, 1998, and the Closing
Date: (a) no Credit Party has incurred any obligations, contingent or
noncontingent liabilities, liabilities for Charges, long-term leases or unusual
forward or long-term commitments that are not reflected in the Pro Forma and
that, alone or in the aggregate, could reasonably be expected to have a Material
Adverse Effect; (b) no contract, lease or other agreement or instrument has been
entered into by any Credit Party or has become binding upon any Credit Party's
assets and no law or regulation applicable to any Credit Party has been adopted
that has had or could reasonably be expected to have a Material Adverse Effect;
and (c) no Credit Party is in default and to the best of Borrower's knowledge no
third party is in default under any material contract, lease or other agreement
or instrument to which such Credit Party is a party that alone or in the
aggregate could reasonably be expected to have a Material Adverse Effect.
Between December 31, 1998, and the Closing Date, no event has occurred that
alone or together with other events could reasonably be expected to have a
Material Adverse Effect.
3.6 Ownership of Property; Liens. As of the Closing Date, the real estate
("Real Estate") listed in Disclosure Schedule (3.6) constitutes all of the real
property owned, leased, subleased, or used by any Credit Party. Each Credit
Party owns good and marketable fee simple title to all of its owned Real Estate,
and valid leasehold interests in all of its leased Real Estate, all as described
in Disclosure Schedule (3.6), and copies of all such leases or a summary of
terms thereof satisfactory to Agent have been delivered to Agent. Disclosure
Schedule (3.6) further describes any Real Estate with respect to which any
Credit Party is a lessor, sublessor or assignor as of the Closing Date. Each
Credit Party also has good and marketable title to, or valid leasehold interests
in, all of its personal property and assets, except where the failure to have
such title or interests, individually or in the aggregate, could not reasonably
be expected to have a Material Adverse Effect. As of the Closing Date, none of
the properties and assets of any Credit Party are subject to any Liens other
than Permitted Encumbrances, and there are no facts,
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circumstances or conditions known to any Credit Party that may result in any
Liens (including Liens arising under Environmental Laws) other than Permitted
Encumbrances. Each Credit Party has received all deeds, assignments, waivers,
consents, nondisturbance and attornment or similar agreements, bills of sale and
other documents, and has duly effected all recordings, filings and other actions
necessary to establish, protect and perfect such Credit Party's right, title and
interest in and to all such Real Estate and other properties and assets, except
where the failure to receive such agreements or documents or take such actions,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect. Disclosure Schedule (3.6) also describes any material
purchase options, rights of first refusal or other similar contractual rights
pertaining to any Real Estate. As of the Closing Date, no portion of any Credit
Party's Real Estate has suffered any material damage by fire or other casualty
loss that has not heretofore been repaired and restored in all material respects
to its original condition or otherwise remedied. As of the Closing Date, all
material permits required to have been issued or appropriate to enable the Real
Estate to be lawfully occupied and used for all of the purposes for which it is
currently occupied and used have been lawfully issued and are in full force and
effect.
3.7 Labor Matters. As of the Closing Date: (a) no strikes or other
material labor disputes against any Credit Party are pending or, to any Credit
Party's knowledge, threatened; (b) hours worked by and payment made to employees
of each Credit Party comply with the Fair Labor Standards Act and each other
federal, state, local or foreign law applicable to such matters in all material
respects; (c) all material payments due from any Credit Party for employee
health and welfare insurance have been paid or accrued as a liability on the
books of such Credit Party; (d) except as set forth in Disclosure Schedule
(3.7), no Credit Party is a party to or bound by any material collective
bargaining agreement, management agreement, consulting agreement, employment
agreement, bonus plan or agreement or stock option, restricted stock, stock
appreciation right or any similar plan, agreement or arrangement (and true and
complete copies of any agreements described in Disclosure Schedule (3.7) have
been delivered to Agent or its counsel); (e) there is no organizing activity
involving any Credit Party pending or, to any Credit Party's knowledge,
threatened by any labor union or group of employees; (f) there are no
representation proceedings pending or, to any Credit Party's knowledge,
threatened with the National Labor Relations Board, and no labor organization or
group of employees of any Credit Party has made a pending demand for
recognition; and (g) except as set forth in Disclosure Schedule (3.7), there are
no complaints or charges against any Credit Party pending or, to the knowledge
of any Credit Party, threatened to be filed with any Governmental Authority or
arbitrator based on, arising out of, in connection with, or otherwise relating
to the employment or termination of employment by any Credit Party of any
individual, except for matters that could not reasonably be expected to have a
Material Adverse Effect.
3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and
Indebtedness. Except as set forth in Disclosure Schedule (3.8), no Credit Party
has any Subsidiaries, is engaged in any joint venture or partnership with any
other Person, or is an Affiliate of any other Person. All of the issued and
outstanding Stock of each Credit Party is owned by each of the Stockholders and
in the amounts set forth in Disclosure Schedule (3.8). Except as set forth in
Disclosure Schedule (3.8), there are no outstanding rights to purchase, options,
warrants or similar rights or agreements pursuant to which any Credit Party may
be required to issue, sell, repurchase or redeem any of its Stock or other
equity securities or any Stock or other equity securities of its Subsidiaries.
All outstanding Indebtedness of each Credit Party as of the Closing
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Date is described in Section 6.3 (including Disclosure Schedule (6.3)).
3.9 Government Regulation. No Credit Party is an "investment company" or
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940. No Credit Party is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, or any other federal or state
statute that restricts or limits its ability to incur Indebtedness or to perform
its obligations hereunder. The making of the Loans by Lenders to Borrower, the
incurrence of the Letter of Credit Obligations on behalf of Borrower, the
application of the proceeds thereof and repayment thereof and the consummation
of the Related Transactions will not violate any provision of any such statute
or any rule, regulation or order issued by the Securities and Exchange
Commission.
3.10 Margin Regulations. No Credit Party is engaged, nor will it engage,
principally or as one of its important activities, in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin security" as
such terms are defined in Regulation U of the Federal Reserve Board as now and
from time to time hereafter in effect (such securities being referred to herein
as "Margin Stock"). No Credit Party owns any Margin Stock, and none of the
proceeds of the Loans or other extensions of credit under this Agreement will be
used, directly or indirectly, for the purpose of purchasing or carrying any
Margin Stock, for the purpose of reducing or retiring any Indebtedness that was
originally incurred to purchase or carry any Margin Stock or for any other
purpose that might cause any of the Loans or other extensions of credit under
this Agreement to be considered a "purpose credit" within the meaning of
Regulations T, U or X of the Federal Reserve Board. No Credit Party will take or
permit to be taken any action that might cause any Loan Document to violate any
regulation of the Federal Reserve Board.
3.11 Taxes. All material tax returns, reports and statements, including
information returns, required by any Governmental Authority to be filed by any
Credit Party have been filed with the appropriate Governmental Authority (or
extensions obtained) and all Charges have been paid prior to the date on which
any fine, penalty, interest or late charge may be added thereto for nonpayment
thereof (or any such fine, penalty, interest, late charge or loss has been
paid), excluding Charges or other amounts being contested in accordance with
Section 5.2(b). Proper and accurate amounts have been withheld by each Credit
Party from its respective employees for all periods in material compliance with
all applicable federal, state, local and foreign laws and such withholdings have
been timely paid to the respective Governmental Authorities. Disclosure Schedule
(3.11) sets forth as of the Closing Date those taxable years for which any
Credit Party's tax returns are currently being audited by the IRS or any other
applicable Governmental Authority, and any assessments or threatened assessments
in connection with such audit, or otherwise currently outstanding. Except as
described in Disclosure Schedule (3.11), no Credit Party has executed or filed
with the IRS or any other Governmental Authority any agreement or other document
extending, or having the effect of extending, the period for assessment or
collection of any Charges. None of the Credit Parties or their respective
predecessors are liable for any Charges: (a) under any agreement (including any
tax sharing agreements); or (b) to each Credit Party's knowledge, as a
transferee. As of the Closing Date, no Credit Party has agreed or been requested
to make any adjustment under IRC Section 481(a), by reason of a change in
accounting method or otherwise, that would have a Material Adverse Effect.
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3.12 ERISA.
(a) Disclosure Schedule (3.12) lists (i) for each Multiemployer
Plan, as of its last valuation date, the amount of potential withdrawal
liability of each Credit Party or ERISA Affiliate, calculated according to
information made available pursuant to Section 4221(e) of ERISA, and (ii) all
Plans and separately identifies all Pension Plans, including all Title IV Plans,
Multiemployer Plans, ESOPs and Welfare Plans, including all Retiree Welfare
Plans. Copies of all such listed Plans, together with a copy of the latest
IRS/DOL 5500-series form for each such Plan, have been delivered to Agent.
Except with respect to Multiemployer Plans, each Qualified Plan has been
determined by the IRS to qualify under Section 401 of the IRC, the trusts
created thereunder have been determined to be exempt from tax under the
provisions of Section 501 of the IRC, and nothing has occurred that would cause
the loss of such qualification or tax-exempt status. Each Plan is in material
compliance with the applicable provisions of ERISA and the IRC, including the
timely filing of all reports required under the IRC or ERISA. Neither any Credit
Party nor any ERISA Affiliate has failed to make any material contribution or
pay any material amount due as required by either Section 412 of the IRC or
Section 302 of ERISA or the terms of any such Plan. Neither any Credit Party nor
any ERISA Affiliate has engaged in a "prohibited transaction," as defined in
Section 4975 of the IRC, in connection with any Plan, that would subject any
Credit Party to a material tax on prohibited transactions imposed by Section
4975 of the IRC.
(b) Except as set forth in Disclosure Schedule (3.12): (i) no Title
IV Plan has any Unfunded Pension Liability; (ii) no ERISA Event or event
described in Section 4062(e) of ERISA with respect to any Title IV Plan has
occurred or is reasonably expected to occur; (iii) there are no pending, or to
the knowledge of any Credit Party, threatened claims (other than claims for
benefits in the normal course), sanctions, actions or lawsuits, asserted or
instituted against any Plan or any Person as fiduciary or sponsor of any Plan;
(iv) no Credit Party or ERISA Affiliate has incurred or reasonably expects to
incur any liability as a result of a complete or partial withdrawal from a
Multiemployer Plan; (v) within the last five years no Title IV Plan of any
Credit Party or any ERISA Affiliate (determined at any time within the last five
years) has been terminated, whether or not in a "standard termination" as that
term is used in Section 4041(b)(1) of ERISA, nor has any Title IV Plan of any
Credit Party or any ERISA Affiliate (determined at any time within the last five
years) with Unfunded Pension Liabilities been transferred outside of the
"controlled group" (within the meaning of Section 4001(a)(14) of ERISA) of any
Credit Party or ERISA Affiliate (determined at such time); (vi) except in the
case of any ESOP, Stock of all Credit Parties and their ERISA Affiliates makes
up, in the aggregate, no more than 10% of the assets of any Plan, measured on
the basis of fair market value as of the latest valuation date of any Plan; and
(vii) no liability under any Title IV Plan has been satisfied with the purchase
of a contract from an insurance company that is not rated AAA by the Standard &
Poor's Corporation or an equivalent rating by another nationally recognized
rating agency.
3.13 No Litigation. No action, claim, lawsuit, demand, investigation or
proceeding is now pending or, to the knowledge of any Credit Party, threatened
against any Credit Party before any Governmental Authority or before any
arbitrator or panel of arbitrators (collectively, "Litigation") that (a)
challenges any Credit Party's right or power to enter into or perform any of its
obligations under the Loan Documents to which it is a party, or the validity or
enforceability
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of any Loan Document or any action taken thereunder, or (b) has a reasonable
risk of being determined adversely to any Credit Party and that, if so
determined, could reasonably be expected to have a Material Adverse Effect.
Except as set forth in Disclosure Schedule (3.13), as of the Closing Date there
is no Litigation pending or threatened that seeks damages in excess of $250,000
or injunctive relief against, or alleges criminal misconduct by, any Credit
Party.
3.14 Brokers. Except as set forth in Disclosure Schedule (3.14), no broker
or finder acting on behalf of any Person brought about the obtaining, making or
closing of the Loans or the Related Transactions, and no Credit Party has any
obligation to any Person in respect of any finder's or brokerage fees in
connection therewith.
3.15 Intellectual Property. As of the Closing Date, each Credit Party owns
or has rights to use all Intellectual Property necessary to continue to conduct
its business as now or heretofore conducted by it or proposed to be conducted by
it, and each Patent, Trademark, Copyright and License owned by any Credit Party
is listed, together with application or registration numbers, as applicable, in
Disclosure Schedule (3.15). Each Credit Party conducts its business and affairs
without infringement of or interference with any Intellectual Property of any
other Person, except for matters that could not reasonably be expected to have a
Material Adverse Effect. Except as set forth in Disclosure Schedule (3.15), no
Credit Party is aware of any infringement or claim of infringement by others of
any Intellectual Property Collateral.
3.16 Full Disclosure. No information contained in this Agreement, any of
the other Loan Documents, any Projections, Financial Statements or Collateral
Reports or other reports from time to time delivered hereunder or any written
statement furnished by or on behalf of any Credit Party to Agent or any Lender
pursuant to the terms of this Agreement contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein not misleading in
light of the circumstances under which they were made. The Liens granted to
Agent, on behalf of itself and Lenders, pursuant to the Collateral Documents
will at all times be fully perfected first priority Liens in and to the
Collateral described therein, subject, as to priority, only to Permitted
Encumbrances.
3.17 Environmental Matters.
(a) Except as set forth in Disclosure Schedule (3.17), as of the
Closing Date: (i) to the knowledge of any Credit Party, the Real Estate is free
of contamination from any Hazardous Material except for such contamination that
would not adversely impact the value or marketability of such Real Estate and
that would not result in Environmental Liabilities that could reasonably be
expected to exceed $250,000; (ii) no Credit Party has caused or suffered to
occur any Release of Hazardous Materials on, at, in, under, above, to, from or
about any of its Real Estate; (iii) the Credit Parties are and have been in
compliance with all Environmental Laws, except for such noncompliance that would
not result in Environmental Liabilities that could reasonably be expected to
exceed $250,000; (iv) the Credit Parties have obtained, and are in compliance
with, all Environmental Permits required by Environmental Laws for the
operations of their respective businesses as presently conducted or as proposed
to be conducted, except where the failure to so obtain or comply with such
Environmental Permits would not result in Environmental Liabilities that could
reasonably be expected to exceed $250,000, and all
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such Environmental Permits are valid, uncontested and in good standing; (v) no
Credit Party is involved in operations or knows of any facts, circumstances or
conditions, including any Releases of Hazardous Materials, that are likely to
result in any Environmental Liabilities of such Credit Party that could
reasonably be expected to exceed $250,000, and no Credit Party has permitted any
current or former tenant or occupant of the Real Estate to engage in any such
operations; (vi) there is no Litigation arising under or related to any
Environmental Laws, Environmental Permits or Hazardous Material that seeks
damages, penalties, fines, costs or expenses in excess of $50,000 or injunctive
relief against, or that alleges criminal misconduct by, any Credit Party; (vii)
no notice has been received by any Credit Party identifying it as a "potentially
responsible party" or requesting information under CERCLA or analogous state
statutes, and to the knowledge of the Credit Parties, there are no facts,
circumstances or conditions that may result in any Credit Party being identified
as a "potentially responsible party" under CERCLA or analogous state statutes;
and (viii) the Credit Parties have provided to Agent copies of all existing
environmental reports, reviews and audits and all written information pertaining
to actual or potential Environmental Liabilities, in each case relating to any
Credit Party.
(b) Each Credit Party hereby acknowledges and agrees that Agent (i)
is not now, and has not ever been, in control of any of the Real Estate or any
Credit Party's affairs, and (ii) does not have the capacity through the
provisions of the Loan Documents or otherwise to influence any Credit Party's
conduct with respect to the ownership, operation or management of any of its
Real Estate or compliance with Environmental Laws or Environmental Permits.
3.18 Insurance. Disclosure Schedule (3.18) lists all insurance policies of
any nature maintained, as of the Closing Date, for current occurrences by each
Credit Party, as well as a summary of the terms of each such policy.
3.19 Deposit and Disbursement Accounts. Disclosure Schedule (3.19) lists
all banks and other financial institutions at which any Credit Party maintains
deposit or other accounts as of the Closing Date, including any Disbursement
Accounts, and such Schedule correctly identifies the name, address and telephone
number of each depository, the name in which the account is held, a description
of the purpose of the account, and the complete account number therefor.
3.20 Government Contracts. Except as set forth in Disclosure Schedule
(3.20), as of the Closing Date, no Credit Party is a party to any contract or
agreement with any Governmental Authority and no Credit Party's Accounts are
subject to the Federal Assignment of Claims Act (31 U.S.C. Section 3727) or any
similar state or local law.
3.21 Customer and Trade Relations. As of the Closing Date, there exists no
actual or, to the knowledge of any Credit Party, threatened termination or
cancellation of, or any material adverse modification or change in: (a) the
business relationship of any Credit Party with any customer or group of
customers whose purchases during the preceding 12 months caused them to be
ranked among the five largest customers of such Credit Party; or (b) the
business relationship of any Credit Party with any supplier material to its
operations.
3.22 Agreements and Other Documents. As of the Closing Date, each Credit
Party has
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provided to Agent or its counsel, on behalf of Lenders, accurate and complete
copies (or summaries) of all of the following agreements or documents to which
any of them are subject, each of which is listed in Disclosure Schedule (3.22):
(a) purchase agreements not terminable by such Credit Party within 60 days
following written notice issued by such Credit Party and involving transactions
in excess of $1,000,000 per annum and forms of chain salon agreements, exclusive
distribution agreements and distributor store agreements; (b) leases of
Equipment having a remaining term of one year or longer and requiring aggregate
rental and other payments in excess of $500,000 per annum; (c) licenses and
permits held by the Credit Parties, the absence of which could be reasonably
likely to have a Material Adverse Effect; (d) instruments and documents
evidencing Indebtedness of such Credit Party the principal amount of which
exceeds $100,000 and any Lien granted by such Credit Party with respect thereto;
and (e) instruments and agreements evidencing the issuance of any equity
securities, warrants, rights or options to purchase equity securities of such
Credit Party.
3.23 Solvency. Both before and after giving effect to: (a) the Loans and
Letter of Credit Obligations to be made or incurred on the Closing Date or such
other date as Loans and Letter of Credit Obligations requested hereunder are
made or incurred; (b) the disbursement of the proceeds of such Loans pursuant to
the instructions of Borrower; (c) the Refinancing and the consummation of the
other Related Transactions; and (d) the payment and accrual of all transaction
costs in connection with the foregoing, each Credit Party is and will be
Solvent; provided, that Credit Parties that, in the aggregate, (i) have less
than $2,000,000 in tangible assets or (ii) contribute less than 5% to the Pro
Forma EBITDA of Borrower for the four full Fiscal Quarters immediately preceding
the date any such solvency determination is to be made shall be excluded from
the scope of the foregoing representation and warranty.
3.24 Year 2000 Representations. Each Credit Party has completed a Year
2000 Assessment and a Year 2000 Corrective Plan, copies of which have been
delivered to Agent.
3.25 Subordinated Debt. As of the Closing Date, Borrower has delivered to
Agent complete and correct copies of the Senior Subordinated Debt Documents. At
the time each Credit Party incurred any Senior Subordinated Debt, such Credit
Party had the corporate power and authority to incur such Indebtedness. The
subordination provisions of the Senior Subordinated Debt Documents are
enforceable against the holders of the Senior Subordinated Notes and the trustee
under the Senior Subordinated Note Indenture by Agent and Lenders. All
Obligations, including the Obligations to pay principal of and interest on the
Loans, constitute "Designated Senior Debt," as that term is defined in the
Senior Subordinated Note Indenture, entitled to the benefits of the
subordination provisions contained in the Senior Subordinated Debt Documents,
and no other Indebtedness of any Credit Party constitutes "Designated Senior
Debt," as that term is defined in the Senior Subordinated Note Indenture. The
principal of and interest on the Notes, all Letter of Credit Obligations and all
other Obligations will constitute "senior debt" as that or any similar term is
or may be used in any other instrument evidencing or applicable to any other
Subordinated Debt. Borrower acknowledges that Agent and each Lender are entering
into this Agreement and are extending the Commitments in reliance upon the
subordination provisions of the Senior Subordinated Debt Documents and this
Section 3.25.
4. FINANCIAL STATEMENTS AND INFORMATION
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4.1 Reports and Notices.
(a) Each Credit Party executing this Agreement hereby agrees that,
from and after the Closing Date and until the Termination Date, it shall deliver
to Agent or Lenders, as required, the Financial Statements, notices, Projections
and other information at the times, to the Persons and in the manner set forth
in Annex E.
(b) Each Credit Party executing this Agreement hereby agrees that,
from and after the Closing Date and until the Termination Date, it shall deliver
to Agent or Lenders, as required, the various Collateral Reports (including
Borrowing Base Certificates in the form of Exhibit 4.1(b)) at the times, to the
Persons and in the manner set forth in Annex F.
4.2 Communication with Accountants. Each Credit Party executing this
Agreement authorizes Agent and, so long as a Default or an Event of Default
shall have occurred and be continuing, each Lender, to communicate directly with
its independent certified public accountants, including Arthur Andersen LLP, and
authorizes and shall instruct those accountants and advisors to disclose and
make available to Agent and each Lender any and all Financial Statements and
other supporting financial documents, schedules and information relating to any
Credit Party (including copies of any issued management letters) with respect to
the business, financial condition and other affairs of any Credit Party.
5. AFFIRMATIVE COVENANTS
Each Credit Party executing this Agreement jointly and severally agrees as
to all Credit Parties that from and after the date hereof and until the
Termination Date:
5.1 Maintenance of Existence and Conduct of Business. Each Credit Party
shall: (a) do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence and its material rights and
franchises; (b) continue to conduct its business substantially as now conducted
or as otherwise permitted hereunder; (c) at all times maintain, preserve and
protect all of its assets and properties used or useful in the conduct of its
business, and keep the same in good repair, working order and condition in all
material respects (taking into consideration ordinary wear and tear) and from
time to time make, or cause to be made, all necessary or appropriate repairs,
replacements and improvements thereto consistent with industry practices; and
(d) transact business only in such corporate and trade names as are set forth in
Disclosure Schedule (5.1).
5.2 Payment of Obligations.
(a) Subject to Section 5.2(b), each Credit Party shall pay and
discharge or cause to be paid and discharged promptly (i) all Charges payable by
it, including Charges imposed upon it, its income and profits, or any of its
property (real, personal or mixed) and all Charges with respect to tax, social
security and unemployment withholding with respect to its employees, and (ii)
lawful claims for labor, materials, supplies and services or otherwise, in each
case before any thereof shall become past due.
(b) Each Credit Party may in good faith contest, by appropriate
proceedings,
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the validity or amount of any Charges, Taxes or claims described in Section
5.2(a); provided, that: (i) adequate reserves with respect to such contest are
maintained on the books of such Credit Party, in accordance with GAAP; (ii) no
Lien shall be imposed to secure payment of such Charges, Taxes or claims that is
superior to any of the Liens securing payment of the Obligations and such
contest is maintained and prosecuted continuously and with diligence and
operates to suspend collection or enforcement of such Charges or claims; (iii)
none of the Collateral becomes subject to forfeiture or loss as a result of such
contest; (iv) such Credit Party shall promptly pay or discharge such contested
Charges, Taxes or claims and all additional charges, interest, penalties and
expenses, if any, and shall deliver to Agent evidence acceptable to Agent of
such compliance, payment or discharge, if such contest is terminated or
discontinued adversely to such Credit Party or the conditions set forth in this
Section 5.2(b) are no longer met; and (v) Agent has not advised Borrower in
writing that Agent reasonably believes that nonpayment or nondischarge thereof
could have or result in a Material Adverse Effect.
5.3 Books and Records. Each Credit Party shall keep adequate books and
records with respect to its business activities in which proper entries,
reflecting all financial transactions, are made in accordance with GAAP and on a
basis consistent with the Financial Statements attached as Disclosure Schedule
(3.4(a)).
5.4 Insurance; Damage to or Destruction of Collateral; Condemnation.
(a) The Credit Parties shall, at their sole cost and expense,
maintain the policies of insurance described in Disclosure Schedule (3.18) as in
effect on the date hereof, including the key man life insurance policy insuring
the life of Sam L. Leopold in the amount of $1,000,000, or such other policies
of insurance in form and in amounts and with insurers reasonably acceptable to
Agent. If any Credit Party at any time or times hereafter shall fail to obtain
or maintain any of the policies of insurance required above, or to pay all
premiums relating thereto, Agent may at any time or times thereafter obtain and
maintain such policies of insurance and pay such premiums and take any other
action with respect thereto that Agent reasonably deems advisable. Agent shall
have no obligation to obtain insurance for any Credit Party or pay any premiums
therefor. By doing so, Agent shall not be deemed to have waived any Default or
Event of Default arising from any Credit Party's failure to maintain such
insurance or pay any premiums therefor. All sums so disbursed, including
reasonable attorneys' fees, court costs and other charges related thereto, shall
be payable on demand by Borrower to Agent and shall be additional Obligations
hereunder secured by the Collateral.
(b) Agent reserves the right at any time upon any change in any
Credit Party's risk profile (including any change in the product mix maintained
by any Credit Party or any laws affecting the potential liability of such Credit
Party) to require additional forms and limits of insurance to, in Agent's
reasonable opinion, adequately protect both Agent's and Lenders' interests in
all or any portion of the Collateral and to ensure that each Credit Party is
protected by insurance in amounts and with coverage customary for its industry.
If requested by Agent, each Credit Party shall deliver to Agent from time to
time a report of a reputable insurance broker, reasonably satisfactory to Agent,
with respect to its insurance policies.
(c) Each Credit Party shall deliver to Agent, in form and substance
reasonably
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satisfactory to Agent, endorsements to (i) all "All Risk" and business
interruption insurance naming Agent, on behalf of itself and Lenders, as loss
payee, and (ii) all general liability and other liability policies naming Agent,
on behalf of itself and Lenders, as additional insured. Each Credit Party
irrevocably makes, constitutes and appoints Agent (and all officers, employees
or agents designated by Agent), so long as any Default or Event of Default shall
have occurred and be continuing or the anticipated insurance proceeds exceed
$500,000, as such Credit Party's true and lawful agent and attorney-in-fact
(which power is coupled with an interest) for the purpose of making, settling
and adjusting claims under such "All Risk" policies of insurance, endorsing the
name of such Credit Party on any check or other item of payment for the proceeds
of such "All Risk" policies of insurance and for making all determinations and
decisions with respect to such "All Risk" policies of insurance. Agent shall
have no duty to exercise any rights or powers granted to it pursuant to the
foregoing power-of-attorney. Borrower shall promptly notify Agent of any loss,
damage, or destruction to the Collateral in the amount of $500,000 or more,
whether or not covered by insurance. After deducting from such proceeds the
expenses, if any, incurred by Agent in the collection or handling thereof, Agent
may, at its option, (A) apply such proceeds to the reduction of the Obligations
in accordance with Section 1.3(d); provided, that in the case of insurance
proceeds pertaining to any Credit Party other than Borrower, such insurance
proceeds shall be applied to the Loans owing by Borrower, or (B) permit or
require such Credit Party to use such money, or any part thereof, to replace,
repair, restore or rebuild the Collateral in a diligent and expeditious manner
with materials and workmanship of substantially the same quality as existed
before the loss, damage or destruction. Notwithstanding the foregoing, if the
casualty giving rise to such insurance proceeds could not reasonably be expected
to have a Material Adverse Effect and such insurance proceeds do not exceed
$1,000,000 in the aggregate, Agent shall permit the applicable Credit Party to
replace, restore, repair or rebuild the property; provided, that if such Credit
Party has not completed or entered into binding agreements to complete such
replacement, restoration, repair or rebuilding within 180 days of such casualty,
Agent may apply such insurance proceeds to the Obligations in accordance with
Section 1.3(d); provided further, that in the case of insurance proceeds
pertaining to any Credit Party other than Borrower, such insurance proceeds
shall be applied to the Loans owing by Borrower. All insurance proceeds that are
to be made available to Borrower to replace, repair, restore or rebuild the
Collateral shall be applied by Agent to reduce the outstanding principal balance
of the Revolving Loan (which application shall not result in a permanent
reduction of the Revolving Loan Commitment) and upon such application, Agent
shall establish a Reserve against the Borrowing Base in an amount equal to the
amount of such proceeds so applied. All insurance proceeds made available to any
Credit Party other than Borrower to replace, repair, restore or rebuild
Collateral shall be deposited in a cash collateral account. Thereafter, such
funds shall be made available to such Credit Party to provide funds to replace,
repair, restore or rebuild the Collateral as follows: (1) Borrower shall request
a Revolving Credit Advance or release from the cash collateral account to be
made to such Credit Party in the amount requested to be released; (2) so long as
the conditions set forth in Section 2.2 have been met, Revolving Lenders shall
make such Revolving Credit Advance or Agent shall release funds from the cash
collateral account; and (3) in the case of insurance proceeds applied against
the Revolving Loan, the Reserve established with respect to such insurance
proceeds shall be reduced by the amount of such Revolving Credit Advance. To the
extent not used to replace, repair, restore or rebuild the Collateral, such
insurance proceeds shall be applied in accordance with Section 1.3(d); provided,
that in the case of insurance proceeds pertaining to any Credit Party other than
Borrower, such insurance proceeds shall be applied to the Loans owing by
Borrower.
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(d) Each Credit Party shall, immediately upon learning of the
institution of any proceeding for the condemnation or other taking of any of its
property, notify Agent of the pendency of such proceeding, and agrees that Agent
may participate in any such proceeding, and such Credit Party from time to time
will deliver to Agent all instruments reasonably requested by Agent to permit
such participation. Agent is authorized to collect the proceeds of any
condemnation claim or award and apply them, at the direction of Requisite
Revolving Lenders, to the reduction of the Obligations; provided, that if the
amount of any condemnation is less than $1,000,000, Agent shall permit such
Credit Party to replace, restore, repair or rebuild the property so long as no
Default or Event of Default shall have occurred and be continuing at the time of
any requested release of funds. If the condemned property is to be replaced,
repaired, restored or rebuilt, such replacement, repair, restoration or
rebuilding shall be done with materials and workmanship of substantially as good
a quality as existed before such condemnation or taking. The applicable Credit
Party shall commence the work of replacement, repair, restoration or rebuilding
as soon as practicable and proceed diligently with it until completion. Plans
and specifications for any such repair or restoration shall be reasonably
satisfactory to Agent and shall be submitted to Agent prior to commencement of
the work and shall be subject to the reasonable approval of Agent, which
approval shall not be unreasonably delayed.
5.5 Compliance with Laws. Each Credit Party shall comply with all federal,
state, local and foreign laws and regulations applicable to it, including those
relating to ERISA and labor matters and Environmental Laws and Environmental
Permits, and those promulgated by the Federal Trade Commission and the Food and
Drug Administration, except to the extent that the failure to comply,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
5.6 Supplemental Disclosure. From time to time as may be requested by
Agent (which request will not be made more frequently than once each year absent
the occurrence and continuance of a Default or an Event of Default), the Credit
Parties shall supplement each Disclosure Schedule hereto, or any representation
herein or in any other Loan Document, with respect to any matter hereafter
arising that, if existing or occurring at the date of this Agreement, would have
been required to be set forth or described in such Disclosure Schedule or as an
exception to such representation or that is necessary to correct any information
in such Disclosure Schedule or representation that has been rendered inaccurate
thereby (and, in the case of any supplements to any Disclosure Schedule, such
Disclosure Schedule shall be appropriately marked to show the changes made
therein); provided, that (a) no such supplement to any such Disclosure Schedule
or representation shall be or be deemed a waiver of any Default or Event of
Default resulting from the matters disclosed therein, except as consented to by
Agent and Requisite Revolving Lenders in writing, and (b) no supplement shall be
required as to representations and warranties that relate solely to the Closing
Date.
5.7 Intellectual Property. Each Credit Party shall conduct its business
and affairs without infringement of or interference with any Intellectual
Property of any other Person, except to the extent that the failure to so
conduct its business, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
5.8 Environmental Matters. Each Credit Party shall and shall cause each
Person within its control to: (a) conduct its operations and keep and maintain
its Real Estate in
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compliance with all Environmental Laws and Environmental Permits other than
noncompliance that could not reasonably be expected to have a Material Adverse
Effect; (b) implement any and all investigation, remediation, removal and
response actions that are reasonably appropriate or necessary to maintain the
value and marketability of the Real Estate or to otherwise comply with
Environmental Laws and Environmental Permits pertaining to the presence,
generation, treatment, storage, use, disposal, transportation or Release of any
Hazardous Material on, at, in, under, above, to, from or about any of its Real
Estate; (c) notify Agent promptly after such Credit Party becomes aware of any
violation of Environmental Laws or Environmental Permits or any Release on, at,
in, under, above, to, from or about any Real Estate that is reasonably likely to
result in Environmental Liabilities in excess of $50,000; and (d) promptly
forward to Agent a copy of any order, notice, request for information or any
communication or report received by such Credit Party in connection with any
such violation or Release or any other matter relating to any Environmental Laws
or Environmental Permits that could reasonably be expected to result in
Environmental Liabilities in excess of $250,000, in each case whether or not the
Environmental Protection Agency or any Governmental Authority has taken or
threatened any action in connection with any such violation, Release or other
matter. If Agent at any time has a reasonable basis to believe that there may be
a violation of any Environmental Laws or Environmental Permits by any Credit
Party or any Environmental Liability arising thereunder, or a Release of
Hazardous Materials on, at, in, under, above, to, from or about any of its Real
Estate, that, in each case, could reasonably be expected to have a Material
Adverse Effect, then each Credit Party shall, upon Agent's written request and
subject to any applicable restrictions in any leases covering any leased Real
Estate, (i) cause the performance of such environmental audits, including
subsurface sampling of soil and groundwater, and preparation of such
environmental reports, in each case at Borrower's expense, as Agent may from
time to time reasonably request, all of which shall be conducted by reputable
environmental consulting firms reasonably acceptable to Agent and shall be in
form and substance reasonably acceptable to Agent, and (ii) permit Agent or its
representatives to have access to all Real Estate for the purpose of conducting
such environmental audits and testing as Agent deems reasonably appropriate,
including subsurface sampling of soil and groundwater. Borrower shall reimburse
Agent for the reasonable costs of such audits and tests and the same will
constitute a part of the Obligations secured hereunder.
5.9 Landlords' Agreements, Mortgagee Agreements and Bailee Letters. Each
Credit Party shall use its best efforts to obtain a landlord's agreement,
mortgagee agreement or bailee letter, as applicable, from the lessor of each
leased property, mortgagee of owned property or bailee with respect to any
warehouse, processor or converter facility or other location where Collateral
with a fair market value in excess of $50,000 is stored or located, which
agreement or letter shall contain a waiver or subordination of all Liens or
claims that the landlord, mortgagee or bailee may assert against the Collateral
at that location, and shall otherwise be reasonably satisfactory in form and
substance to Agent. With respect to such locations or warehouse space leased,
owned or used as of the Closing Date and thereafter, if Agent has not received a
landlord or mortgagee agreement or bailee letter as of the Closing Date (or, if
later, as of the date such location is leased, acquired or used), the Eligible
Inventory at that location shall, in Agent's reasonable discretion, be excluded
from the Borrowing Base or be subject to such Reserves as may be established by
Agent in its reasonable credit judgment. After the Closing Date, no real
property or warehouse space shall be leased or acquired by any Credit Party and
no Inventory of any Credit Party shall be shipped to a processor or converter
under arrangements established after
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the Closing Date without the prior written consent of Agent (which consent, in
Agent's discretion, may be conditioned upon the exclusion from the Borrowing
Base of Eligible Inventory at that location or the establishment of Reserves
reasonably acceptable to Agent) or, unless and until a satisfactory landlord or
mortgagee agreement or bailee letter, as appropriate, shall first have been
obtained with respect to such location. Each Credit Party shall timely and fully
pay and perform its material obligations under all leases and other agreements
with respect to each leased location or public warehouse where any Collateral is
or may be located.
5.10 Further Assurances. Each Credit Party executing this Agreement agrees
that it shall and shall cause each other Credit Party to, at such Credit Party's
reasonable expense and upon reasonable request of Agent, duly execute and
deliver, or cause to be duly executed and delivered, to Agent such further
instruments and do and cause to be done such further acts as may be necessary or
proper in the reasonable opinion of Agent to carry out more effectively the
provisions and purposes of this Agreement or any other Loan Document.
5.11 Year 2000 Problems. On or prior to September 30, 1999, each Credit
Party shall complete Year 2000 Corrective Actions. On or before October 31,
1999, each Credit Party shall complete Year 2000 Implementation Testing. On or
before November 15, 1999, each Credit Party shall eliminate all Year 2000
Problems, except where the failure to correct the same could not reasonably be
expected to have a Material Adverse Effect, individually or in the aggregate.
6. NEGATIVE COVENANTS
Each Credit Party executing this Agreement jointly and severally agrees as
to all Credit Parties that, without the prior written consent of Agent and
Requisite Revolving Lenders, from and after the date hereof until the
Termination Date:
6.1 Mergers, Subsidiaries, Etc. No Credit Party shall directly or
indirectly, by operation of law or otherwise, (a) form or acquire any
Subsidiary; provided, that Borrower may form wholly-owned Domestic Subsidiaries
solely for the purpose of acquiring assets pursuant to a Permitted Acquisition
or serving as a vehicle into which existing Subsidiaries of Borrower may be
merged, in each case subject to satisfaction of each of the following
conditions: (i) Agent shall receive at least 10 Business Days' prior written
notice of the proposed formation of any such Domestic Subsidiary, which notice
shall include a reasonably detailed description of the purposes therefor; (ii)
on or prior to the date of formation of any such Domestic Subsidiary, (A) Agent
will be granted a first priority perfected Lien in the capital Stock of such
Domestic Subsidiary, and Borrower and such Domestic Subsidiary shall have
executed such documents and taken such actions as may be reasonably required by
Agent in connection therewith, (B) such Domestic Subsidiary shall become a
Guarantor under the Subsidiary Guaranty and shall have executed such other
Collateral Documents as may be reasonably required by Agent to evidence the
grant by such Domestic Subsidiary of a first priority perfected Lien in its
assets, subject only to Permitted Encumbrances, and (C) Agent shall have
received, in form and substance reasonably satisfactory to Agent, copies of the
formation documents and all opinions, certificates, and other documents
reasonably requested by Agent; and (iii) at the time of formation of any such
Domestic Subsidiary and after giving effect thereto, no Default or Event of
Default shall have occurred and be continuing, or (b) merge with, consolidate
with, acquire all or substantially all of the assets or capital Stock of, or
otherwise combine with or acquire, any Person; provided, that (i) any
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Subsidiary of Borrower may be merged into Borrower so long as Borrower is the
survivor and (ii) any Subsidiary of Borrower may be merged into any Guarantor so
long as such Guarantor is the survivor. Notwithstanding the foregoing, any
Credit Party may acquire all or substantially all of the assets or capital Stock
of any Person (the "Target") (in each case, a "Permitted Acquisition") subject
to the satisfaction of each of the following conditions:
(i) Agent shall receive at least 10 Business Days' prior
written notice of such proposed Permitted Acquisition, which notice shall
include a reasonably detailed description of such proposed Permitted
Acquisition;
(ii) at least 85% of the assets involved in such Permitted
Acquisition (determined on an aggregate fair market value basis) shall be
located within the United States or Canada and such Permitted Acquisition shall
only involve assets comprising a business, or those assets of a business, of the
type engaged in by Borrower and its Subsidiaries as of the Closing Date (which,
for purposes hereof, consists of the manufacture and distribution of personal
care or salon products and businesses or activities directly related thereto),
and which business would not subject Agent or any Lender to regulatory or third
party approvals in connection with the exercise of its rights and remedies under
this Agreement or any other Loan Documents other than approvals applicable to
the exercise of such rights and remedies with respect to such Credit Party prior
to such Permitted Acquisition;
(iii) such Permitted Acquisition shall be consensual and shall
have been approved by the Target's board of directors;
(iv) no additional Indebtedness, Guaranteed Indebtedness,
contingent obligations or other liabilities shall be incurred, assumed or
otherwise be reflected on a consolidated balance sheet of Borrower after giving
effect to such Permitted Acquisition, except (A) Loans made hereunder in
connection with such Permitted Acquisition, (B) Indebtedness secured by Liens
consisting of purchase money security interests or Capital Leases encumbering
assets of the Target involved in such Permitted Acquisition and permitted in
clause (k) of the definition of Permitted Encumbrances, (C) unsecured
indemnification obligations customarily provided in connection with transactions
of the type represented by such Permitted Acquisition, (D) ordinary course trade
payables, accrued expenses and other unsecured Indebtedness of the Target, and
(E) unsecured seller carry-back financing incurred in connection with such
Permitted Acquisition;
(v) the sum of all amounts payable in connection with all
Permitted Acquisitions (including all transaction costs and all Indebtedness,
liabilities and contingent obligations incurred or assumed in connection
therewith or otherwise reflected on a consolidated balance sheet of Borrower
after giving effect thereto, but excluding ordinary course trade payables and
other current liabilities incurred in the ordinary course by the Targets the
subject thereof to the extent that such trade payables and other current
liabilities reflect normal payment terms and do not, in the aggregate, exceed
the aggregate fair market value of the current assets of such Targets involved
in such Permitted Acquisitions) shall not in the aggregate exceed $10,000,000
during any Fiscal Year;
(vi) the Target shall not have incurred an operating loss for
the trailing
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12-month period preceding the date of the Permitted Acquisition, as
determined based upon the Target's financial statements for its most recently
completed fiscal year and its most recent interim financial period completed
within 60 days prior to the date of consummation of such Permitted Acquisition;
provided, that the aggregate compensation expense incurred by the Target for
such 12- month period with respect to (A) principal Stockholder-employees of the
Target and (B) family members of such Stockholder-employees who are employees of
the Target, in each case to be terminated in connection with such Permitted
Acquisition, shall be excluded for purposes of making such determination;
(vii) the business and assets acquired in such Permitted
Acquisition shall be free and clear of all Liens (other than Permitted
Encumbrances);
(viii)at or prior to the closing of any Permitted Acquisition,
Agent will be granted a first priority perfected Lien (subject to Permitted
Encumbrances) in all assets acquired pursuant thereto or in the assets and
capital Stock of the Target, as applicable, and such Credit Party and the Target
shall have executed such documents and taken such actions as may be required by
Agent in connection therewith;
(ix) concurrently with delivery of the notice referred to in
clause (i) above, Borrower shall have delivered to Agent, in form and substance
satisfactory to Agent:
(A) a pro forma consolidated balance sheet, income
statement and cash flow statements of Borrower and its Subsidiaries (the
"Acquisition Pro Forma"), based on recent financial statements, that shall be
complete and shall fairly present in all material respects the assets,
liabilities, financial condition and results of operations of Borrower and its
Subsidiaries in accordance with GAAP consistently applied, but taking into
account such Permitted Acquisition and the funding of all Loans in connection
therewith, and such Acquisition Pro Forma shall reflect that (1) average daily
Net Borrowing Availability for the 30-day period preceding the consummation of
such Permitted Acquisition would have exceeded $9,000,000 on a pro forma basis
(after giving effect to such Permitted Acquisition and all Loans funded in
connection therewith as if made on the first day of such period) and (2) on a
pro forma basis, no Event of Default shall have occurred and be continuing or
would result after giving effect to such Permitted Acquisition and Borrower
would have been in compliance with the financial covenants set forth in Annex G
for the four quarter period reflected in the Compliance Certificate most
recently delivered to Agent pursuant to Annex E prior to the consummation of
such Permitted Acquisition (after giving effect to such Permitted Acquisition
and all Loans funded in connection therewith as if made on the first day of such
period);
(B) updated versions of the most recently delivered
Projections covering the one year period commencing on the date of such
Permitted Acquisition and otherwise prepared in accordance with the Projections
(the "Acquisition Projections") and based upon financial data for the four full
Fiscal Quarters most recently ended, taking into account such Permitted
Acquisition; and
(C) a certificate of the chief financial officer of
Borrower or, in the event such officer is not available, chief accounting
officer of Borrower, to the effect that: (1) Borrower (after taking into
consideration all rights of contribution and indemnity Borrower
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has against each of its Subsidiaries) will be Solvent upon the consummation of
the Permitted Acquisition; (2) the Acquisition Pro Forma presents fairly in all
material respects the financial condition of Borrower (on a consolidated basis)
as of the date thereof after giving effect to the Permitted Acquisition; (3) the
Acquisition Projections are reasonable estimates of the future financial
performance of Borrower subsequent to the date thereof based upon the historical
performance of Borrower and the Target and show that Borrower shall continue to
be in compliance with the financial covenants set forth in Annex G for the three
year period thereafter; and (4) Borrower has completed its due diligence
investigation with respect to the Target and such Permitted Acquisition, which
investigation was conducted in a manner similar to that which would have been
conducted by a prudent purchaser of a comparable business and the results of
which investigation were delivered to Agent;
(x) within 15 days following consummation of such Permitted
Acquisition, Agent shall have received copies of the acquisition agreement and
related agreements and instruments, and all opinions, certificates, Lien search
results and other documents reasonably requested by Agent; and
(xi) at the time of such Permitted Acquisition and after
giving effect thereto, no Default or Event of Default shall have occurred and be
continuing.
Notwithstanding the foregoing, the Accounts and Inventory of the
Target acquired in any such Permitted Acquisition shall not be included in
Eligible Accounts and Eligible Inventory without the prior written consent of
Agent and Requisite Revolving Lenders.
6.2 Investments; Loans and Advances. Except as otherwise expressly
permitted by this Section 6, no Credit Party shall make or permit to exist any
investment in, or make, accrue or permit to exist loans or advances of money to,
any Person, through the direct or indirect lending of money, holding of
securities or otherwise, except that: (a) each Credit Party may hold investments
comprised of notes payable, or stock or other securities issued by Account
Debtors to such Credit Party pursuant to negotiated agreements with respect to
settlement of such Account Debtor's Accounts in the ordinary course of business,
so long as the aggregate amount of such Accounts so settled by all Credit
Parties does not exceed $1,000,000; (b) each Credit Party may maintain its
existing investments in its Subsidiaries as of the Closing Date; (c) so long as
no Default or Event of Default shall have occurred and be continuing and no
Advances are outstanding, Borrower may make investments up to $25,000,000 in the
aggregate, subject to Control Letters in favor of Agent, for the benefit of
Agent and Lenders, or otherwise subject to a perfected security interest in
favor of Agent, for the benefit of Agent and Lenders, in (i) marketable direct
obligations issued or unconditionally guaranteed by the United States of America
or any agency thereof maturing within one year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Rating Group or Moody's Investors Service, Inc., (iii)
certificates of deposit maturing no more than one year from the date of creation
thereof issued by commercial banks incorporated under the laws of the United
States of America, each having combined capital, surplus and undivided profits
of not less than $300,000,000 and having a senior unsecured rating of "A" or
better by a nationally recognized rating agency (an "A Rated Bank"), (iv) time
deposits maturing no more than 30 days from the date of creation thereof with A
Rated Banks, and (v) mutual funds that invest solely in
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one or more of the investments described in clauses (i) through (iv) above; (d)
the Credit Parties collectively may make other investments not exceeding
$750,000 in the aggregate at any time outstanding; (e) accounts receivable that
arise in the ordinary course of business and are payable on standard terms; (f)
deposits for utilities, security deposits, leases and similar prepaid expenses
incurred in the ordinary course of business; (g) investments consisting of
non-cash consideration received in connection with sales of assets permitted
under Section 6.8; and (h) Borrower may make investments consisting of minority
interests in corporations in an amount not to exceed $2,000,000 at any one time;
provided, that (i) no Default or Event of Default shall have occurred and be
continuing or would result after giving effect to any such investment and (ii)
average daily Net Borrowing Availability for the 30-day period immediately
preceding any such investment would have exceeded $9,000,000 (after giving
effect to any such investment as if made on the first day of such period).
Without limiting the generality of the foregoing, Agent may, on an ad hoc basis,
permit investments in joint ventures in an aggregate amount not to exceed
$2,000,000 subject to such terms and conditions as it may, in its sole
discretion, require.
6.3 Indebtedness.
(a) Except as otherwise expressly permitted by this Section 6, no
Credit Party shall create, incur, assume or permit to exist any Indebtedness,
except (without duplication) (i) Indebtedness secured by purchase money security
interests or Capital Leases permitted in clause (k) of the definition of
Permitted Encumbrances, (ii) the Loans and the other Obligations, (iii) unfunded
pension fund and other employee benefit plan obligations and liabilities to the
extent they are permitted to remain unfunded under applicable law, (iv) existing
Indebtedness described in Disclosure Schedule (6.3) and refinancings thereof or
amendments or modifications thereof that do not have the effect of increasing
the principal amount thereof or changing the amortization thereof (other than to
extend the same) and that are otherwise on terms and conditions no less
favorable to any Credit Party, Agent or any Lender, as reasonably determined by
Agent, than the terms of the Indebtedness being refinanced, amended or modified,
(v) Subordinated Debt; provided, that Borrower may not incur Subordinated Debt
in the form of Indebtedness evidenced by Additional Notes unless (A) no Default
or Event of Default, and no "Default" or "Event of Default" under and as defined
in the Senior Subordinated Note Indenture, shall have occurred and be continuing
or would result after giving effect to the issuance of any Additional Notes, and
(B) not less than 1 Business Day prior to the incurrence of any such
Subordinated Debt, Borrower has delivered to Agent projections in form and
substance acceptable to Agent demonstrating same, (vi) Indebtedness consisting
of unsecured intercompany loans and advances made by Borrower to any other
Credit Party that is a Guarantor or by any such Guarantor to Borrower; provided,
that: (A) Borrower shall have executed and delivered to each such Guarantor, and
each such Guarantor shall have executed and delivered to Borrower, on the
Closing Date, a demand note (collectively, the "Intercompany Notes") to evidence
any such intercompany Indebtedness owing at any time by Borrower to such
Guarantor or by such Guarantor to Borrower, which Intercompany Notes shall be in
form and substance reasonably satisfactory to Agent and shall be pledged and
delivered to Agent pursuant to the applicable Pledge Agreement or Security
Agreement as additional collateral security for the Obligations; (B) each Credit
Party shall record all intercompany transactions on its books and records in a
manner reasonably satisfactory to Agent; (C) the obligations of Borrower under
any such Intercompany Notes shall be subordinated to the Obligations of Borrower
hereunder as provided in the Subsidiary Guaranty and the obligations of each
other Credit Party under any such
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Intercompany Notes shall, at the request of Agent, be subordinated to the
Obligations of such Credit Party hereunder in a manner reasonably satisfactory
to Agent; and (D) in the case of any such intercompany loan or advance made by
Borrower, (1) Borrower shall be Solvent, both before and after giving effect to
such intercompany loan or advance, (2) no Default or Event of Default shall have
occurred and be continuing or would result after giving effect to any such
proposed intercompany loan or advance, (3) Borrower shall have Net Borrowing
Availability of not less than (a) 10% multiplied by (b) the average daily
Borrowing Availability for the 30-day period immediately preceding the date of
such intercompany loan or advance, both before and after giving effect to such
intercompany loan or advance, and (4) the aggregate balance of all such
intercompany loans or advances shall not exceed $25,210,000 at any time, and
(vii) other unsecured Indebtedness not to exceed $500,000 in aggregate principal
amount at any one time outstanding.
(b) No Credit Party shall, directly or indirectly, voluntarily
purchase, redeem, defease or prepay any principal of, premium, if any, interest
or other amount payable in respect of any Indebtedness, other than: (i) the
Obligations; and (ii) Indebtedness secured by a Permitted Encumbrance if the
asset securing such Indebtedness has been sold or otherwise disposed of in
accordance with Sections 6.8(b) or (c).
(c) Notwithstanding the foregoing, if any restrictions contained in
this Section 6.3 would cause Borrower to violate Section 4.08 of the Senior
Subordinated Note Indenture as in effect on the Closing Date, then such
restriction shall be deemed amended to the extent necessary to avoid such
violation.
6.4 Employee Loans and Affiliate Transactions.
(a) Except as otherwise expressly permitted in this Section 6 with
respect to Affiliates, no Credit Party shall enter into or be a party to any
transaction with any other Credit Party or any Affiliate thereof except in the
ordinary course of business and pursuant to the reasonable requirements of such
Credit Party's business and upon fair and reasonable terms that are no less
favorable to such Credit Party than would be obtained in a comparable arm's
length transaction with a Person not an Affiliate of such Credit Party. In
addition, if any such transaction or series of related transactions involves
payments in excess of $500,000 in the aggregate, the terms of these transactions
must be disclosed in advance to Agent and Lenders. All such transactions
existing as of the date hereof are described in Disclosure Schedule (6.4(a)).
(b) No Credit Party shall enter into any lending or borrowing
transaction with any employees of any Credit Party, except loans to its
employees on an arm's length basis in the ordinary course of business consistent
with past practices for travel expenses, relocation costs and similar purposes
and stock option financing up to a maximum of $100,000 to any employee and up to
a maximum of $500,000 in the aggregate at any one time outstanding; provided,
that for purposes of computing the foregoing amounts in this clause (b), loans
by Borrower to Sam L. Leopold in the form of premiums advanced pursuant to
split-dollar agreements with Sam L. Leopold under compensation arrangements
between Borrower and Sam L. Leopold shall be excluded.
(c) No Credit Party shall modify any employment agreements set forth
in
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Disclosure Schedule (6.4(a)) in any material respect or pay compensation to
any of its employees party to any such employment agreements not provided for
therein without the prior written consent of Agent and Requisite Revolving
Lenders, which consent shall not be unreasonably withheld.
6.5 Capital Structure and Business. No Credit Party shall (a) make any
changes in any of its business objectives, purposes or operations that could in
any way materially adversely affect the repayment of the Loans or any of the
other Obligations or could reasonably be expected to have or result in a
Material Adverse Effect, (b) make any change in its capital structure as
described in Disclosure Schedule (3.8), including the issuance of any shares of
Stock, warrants or other securities convertible into Stock or any revision of
the terms of its outstanding Stock; provided, that Borrower may issue (i) any
options to acquire shares of its common Stock pursuant to its stock option
plans, (ii) shares of its common Stock pursuant to the exercise of rights under
its stock option plans, (iii) shares of its common Stock pursuant to the
exercise of rights under warrants, and (iv) shares of its Series A Junior
Participating Preferred Stock pursuant to the terms of the Shareholder Rights
Plan adopted by it in February 1999, in each case as in effect as of the Closing
Date and set forth in Disclosure Schedule (3.8), and (v) shares of its Stock,
warrants or other securities convertible into Stock subject to the requirements
of Section 1.3(b)(iii) , or (c) amend its charter or bylaws in a manner that
would materially adversely affect Agent or Lenders or such Credit Party's duty
or ability to repay the Obligations; provided, that any Credit Party may change
its jurisdiction of incorporation or organization to the State of Arizona on 15
days' prior written notice to Agent and after Agent's written acknowledgment
that any reasonable action requested by Agent in connection therewith, including
to continue the perfection of any Liens in favor of Agent, on behalf of Agent
and Lenders, in any Collateral, has been completed or taken. No Credit Party
shall engage in any business other than the businesses currently engaged in by
it (which, for purposes hereof, consists of the manufacture and distribution of
personal care or salon products and businesses or activities directly related
thereto).
6.6 Guaranteed Indebtedness. No Credit Party shall create, incur, assume
or permit to exist any Guaranteed Indebtedness except (a) by endorsement of
instruments or items of payment for deposit to the general account of any Credit
Party, and (b) for Guaranteed Indebtedness incurred for the benefit of any other
Credit Party if the primary obligation is expressly permitted by this Agreement.
6.7 Liens. No Credit Party shall create, incur, assume or permit to exist
any Lien on or with respect to its Accounts or any of its other properties or
assets (whether now owned or hereafter acquired) except for Liens in existence
on the date hereof and summarized on Disclosure Schedule (6.7) and other
Permitted Encumbrances. In addition, no Credit Party shall become a party to any
agreement, note, indenture or instrument or take any other action that would
prohibit the creation of a Lien on any of its properties or other assets in
favor of Agent, on behalf of itself and Lenders, as additional collateral for
the Obligations, except operating leases, Capital Leases or Licenses that
prohibit Liens upon the assets that are subject thereto.
6.8 Sale of Stock and Assets. No Credit Party shall sell, transfer,
convey, assign or otherwise dispose of any of its properties or other assets,
including the capital Stock of any of its Subsidiaries (whether in a public or a
private offering or otherwise) or any of its Accounts, other
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than: (a) the sale of Inventory in the ordinary course of business; (b) the
sale, transfer, conveyance or other disposition by a Credit Party of Equipment,
Fixtures or Real Estate that is obsolete or no longer used or useful in such
Credit Party's business and having a value not exceeding $500,000 in any single
transaction or $1,000,000 in the aggregate in any Fiscal Year; (c) other
Equipment and Fixtures having a value not exceeding $500,000 in any single
transaction or $1,000,000 in the aggregate in any Fiscal Year; (d) the sale by
Ft. Pitt Acquisition, Inc. of its interest in and to the Roffler trademark for
not less than $300,000; (e) the sale by Borrower of its fee-owned interest in
the Real Estate located in Duncanville, Texas in an arm's length transaction for
cash consideration; and (f) sales, transfers or other dispositions of assets
pursuant to which assets are transferred between Guarantors or from any
Guarantor to Borrower. With respect to any disposition of assets or other
properties permitted pursuant to clauses (b), (c) and (d) above, Agent agrees on
reasonable prior written notice to release its Lien on such assets or other
properties in order to permit the applicable Credit Party to effect such
disposition and shall execute and deliver to Borrower, at Borrower's expense,
appropriate UCC-3 termination statements and other releases as reasonably
requested by Borrower.
6.9 ERISA. No Credit Party shall, or shall cause or permit any ERISA
Affiliate to, cause or permit to occur an event that could result in the
imposition of a Lien under Section 412 of the IRC or Section 302 or 4068 of
ERISA or cause or permit to occur an ERISA Event to the extent such ERISA Event
could reasonably be expected to have a Material Adverse Effect.
6.10 Financial Covenants. Borrower shall not breach or fail to comply with
any of the financial covenants set forth in Annex G (the "Financial Covenants").
6.11 Hazardous Materials. No Credit Party shall cause or permit a Release
of any Hazardous Material on, at, in, under, above, to, from or about any of the
Real Estate where such Release would (a) violate in any respect, or form the
basis for any Environmental Liabilities under, any Environmental Laws or
Environmental Permits, or (b) otherwise adversely impact the value or
marketability of any of the Real Estate or any of the Collateral, other than
such violations or Environmental Liabilities that could not reasonably be
expected to have a Material Adverse Effect.
6.12 Sale-Leasebacks. No Credit Party shall engage in any sale-leaseback,
synthetic lease or similar transaction involving any of its assets if the
aggregate of all payments payable in any Fiscal Year for all Credit Parties in
connection with any such transaction on a consolidated basis would exceed
$150,000.
6.13 Cancellation of Indebtedness. No Credit Party shall cancel any claim
or debt owing to it, except for reasonable consideration negotiated on an arm's
length basis and (a) in the ordinary course of its business consistent with past
practices or (b) in connection with the settlement of litigation to which it is
a party or other good faith disputes in which it is directly involved.
6.14 Restricted Payments. No Credit Party shall make any Restricted
Payment, except (a) intercompany loans and advances between Borrower and
Guarantors to the extent permitted by Section 6.3, (b) dividends and
distributions by Subsidiaries of Borrower paid to Borrower, (c) employee loans
permitted under Section 6.4(b), (d) scheduled payments of interest with
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respect to the Senior Subordinated Notes to the extent permitted pursuant to the
subordination provisions of the Senior Subordinated Debt Documents, (e) payments
with respect to other Subordinated Debt to the extent permitted pursuant to the
subordination provisions governing such Subordinated Debt, (f) purchases,
redemptions, retirements or acquisitions of shares of capital Stock of Borrower,
or options or warrants to purchase shares of such capital Stock, held by
officers, directors or employees of Borrower or any of its Subsidiaries pursuant
to compensation plans or arrangements as in effect as of the Closing Date and
set forth in Disclosure Schedule (3.8) in connection with the death, disability
or termination of employment of any such officer, director or employee, and (g)
other purchases, redemptions, retirements or acquisitions of shares of capital
Stock of Borrower; provided, that (i) no Default or Event of Default shall have
occurred and be continuing or would result after giving effect to any purchase,
redemption, retirement or acquisition pursuant to clause (f) or (g) above, (ii)
average daily Net Borrowing Availability for the 30-day period immediately
preceding any purchase, redemption, retirement or acquisition pursuant to clause
(f) or (g) above would have exceeded $9,000,000 (after giving effect to any such
purchase, redemption, retirement or acquisition as if made on the first day of
such period), and (iii) the sum of all amounts payable in connection with any
purchase, redemption, retirement or acquisition pursuant to clause (g) above
shall not in the aggregate exceed $3,000,000 at any time. Notwithstanding the
foregoing, if any restrictions contained in this Section 6.14 would cause
Borrower to violate Section 4.08 of the Senior Subordinated Note Indenture as in
effect on the Closing Date, then such restriction shall be deemed amended to the
extent necessary to avoid such violation.
6.15 Change of Corporate Name or Location; Change of Fiscal Year. No
Credit Party shall (a) change its corporate name or (b) change its chief
executive office, principal place of business, corporate offices or warehouses
or locations at which Collateral is held or stored, or the location of its
records concerning the Collateral, in each case without at least 30 days' prior
written notice to Agent and after Agent's written acknowledgment that any
reasonable action requested by Agent in connection therewith, including to
continue the perfection of any Liens in favor of Agent, on behalf of Agent and
Lenders, in any Collateral and to provide access and other rights as against
third parties in accordance with the requirements of Section 5.9, has been
completed or taken; provided, that (i) with respect to a change in location of
such Credit Party's chief executive office, principal place of business,
corporate office or location of its records concerning the Collateral, any such
new location shall be in the continental United States of America, and (ii) with
respect to a change in location at which any Collateral is held or stored, any
such new location may only be located outside of the continental United States
of America if the aggregate fair market value of all Collateral located outside
of the continental United States of America after giving effect to any such
change in location (excluding, for purposes of this clause (ii), assets located
outside of the continental United States of America that are acquired pursuant
to a Permitted Acquisition or Eligible Inventory located in the United Kingdom)
would not exceed $500,000. Without limiting the generality of the foregoing, no
Credit Party shall change its name, identity or corporate structure in any
manner that might make any financing or continuation statement filed in
connection herewith seriously misleading within the meaning of Section 9-402(7)
of the Code or any other then applicable provision of the Code except upon prior
written notice to Agent and after Agent's written acknowledgment that any
reasonable action requested by Agent in connection therewith, including to
continue the perfection of any Liens in favor of Agent, on behalf of Agent and
Lenders, in any Collateral, has been completed or taken. No Credit Party shall
change its Fiscal Year unless approved by Agent in writing,
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which approval shall not be unreasonably withheld or delayed.
6.16 No Impairment of Intercompany Transfers. No Credit Party shall
directly or indirectly enter into or become bound by any agreement, instrument,
indenture or other obligation (other than this Agreement and the other Loan
Documents and the Senior Subordinated Debt Documents) that could directly or
indirectly restrict, prohibit or require the consent of any Person with respect
to the payment of dividends or distributions or the making or repayment of
intercompany loans by a Subsidiary of Borrower to Borrower.
6.17 No Speculative Transactions. No Credit Party shall engage in any
transaction involving commodity options, futures contracts or similar
transactions, except solely to hedge against fluctuations in the prices of
commodities owned or purchased by it and the values of foreign currencies
receivable or payable by it and interest swaps, caps or collars.
6.18 Leases. During any Fiscal Year, no Credit Party shall enter into any
operating lease for Equipment or Real Estate if the aggregate annual rental
payments payable in any given Fiscal Year (each such Fiscal Year, a "Reference
Year") under any such operating lease, when taken together with the aggregate
annual rental payments payable in the same Reference Year under all other such
operating leases entered into by any Credit Party during such Fiscal Year, would
exceed $750,000 on a consolidated basis; provided, that (a) any such lease
existing as of the Closing Date, together with any extension, modification, or
amendment thereof, and any lease replacing any such lease if the replacement
lease contains substantially the same terms as the lease being replaced, and (b)
a third party distribution/logistics/warehousing agreement to be entered into by
Borrower in furtherance of its strategic centralization efforts as announced by
Borrower in connection with the release of its financial results for the Fiscal
Quarter ending September 30, 1998, which agreement shall be in form and
substance reasonably satisfactory to Agent, shall not be included for purposes
of making the foregoing determination.
6.19 Changes and Other Matters Relating to Subordinated Debt. No Credit
Party shall change or amend the terms of any Subordinated Debt, including the
Senior Subordinated Debt, or any indenture or agreement in connection therewith,
if the effect of such amendment is to: (a) increase the interest rate on such
Subordinated Debt; (b) change the dates upon which payments of principal or
interest are due on such Subordinated Debt other than to extend such dates; (c)
change any default or event of default other than to delete or make less
restrictive any default provision therein, or add any covenant with respect to
such Subordinated Debt; (d) change the redemption or prepayment provisions of
such Subordinated Debt other than to extend the dates therefor or to reduce the
premiums payable in connection therewith; (e) grant any security or collateral
to secure payment of such Subordinated Debt; or (f) change or amend any other
term if such change or amendment would materially increase the obligations of
such Credit Party thereunder or confer additional material rights on the holder
of such Subordinated Debt in a manner adverse to any Credit Party, Agent or any
Lender. In addition, Borrower will not designate any Indebtedness other than the
Obligations as "Designated Senior Debt," as that term is defined in the Senior
Subordinated Note Indenture. Notwithstanding anything to the contrary in this
Section 6.19 or in any other provision of this Agreement or any other Loan
Document, Borrower shall be entitled to issue the Additional Notes pursuant to,
and subject to all the requirements of, the Senior Subordinated Note Indenture
and the other Senior Subordinated Debt Documents, the proceeds of which shall be
used by Borrower to prepay the Loans in
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accordance with Section 1.3(b)(iii).
7. TERM
7.1 Termination. The financing arrangements contemplated hereby shall be
in effect until the Commitment Termination Date, and the Loans and all other
Obligations shall be automatically due and payable in full on such date.
7.2 Survival of Obligations Upon Termination of Financing Arrangements.
Except as otherwise expressly provided in the Loan Documents, no termination or
cancellation (regardless of cause or procedure) of any financing arrangement
under this Agreement shall in any way affect or impair the obligations, duties
and liabilities of the Credit Parties or the rights of Agent and Lenders
relating to any unpaid portion of the Loans or any other Obligations, due or not
due, liquidated, contingent or unliquidated, or any transaction or event
occurring prior to such termination, or any transaction or event, the
performance of which is required after the Commitment Termination Date. Except
as otherwise expressly provided herein or in any other Loan Document, all
undertakings, agreements, covenants, warranties and representations of or
binding upon the Credit Parties, and all rights of Agent and each Lender, all as
contained in the Loan Documents, shall not terminate or expire, but rather shall
survive any such termination or cancellation and shall continue in full force
and effect until the Termination Date; provided, that the provisions of Section
11, the payment obligations under Sections 1.15 and 1.16, and the indemnities
contained in the Loan Documents shall survive the Termination Date.
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
8.1 Events of Default. The occurrence of any one or more of the following
events (regardless of the reason therefor) shall constitute an "Event of
Default" hereunder:
(a) Borrower (i) shall fail to make any payment of principal of, or
interest on, or Fees owing in respect of, the Loans or any of the other
Obligations when due and payable, or (ii) shall fail to pay or reimburse Agent
or Lenders for any expense reimbursable hereunder or under any other Loan
Document within ten days following Agent's demand for such reimbursement or
payment of expenses.
(b) Any Credit Party shall fail or neglect to perform, keep or
observe any of the provisions of Sections 1.4, 1.8, 5.4 or 6, or any of the
provisions set forth in Annexes C or G, respectively.
(c) Borrower shall fail or neglect to perform, keep or observe any
of the provisions of Section 4 or any provisions set forth in Annexes E or F,
respectively, and the same shall remain unremedied for ten days or more.
(d) Any Credit Party shall fail or neglect to perform, keep or
observe any other provision of this Agreement or of any of the other Loan
Documents (other than any provision embodied in or covered by any other clause
of this Section 8.1) and the same shall remain unremedied for 30 days or more
following the earlier of (i) receipt by such Credit Party of written notice of
such failure or (ii) such Credit Party's knowledge of such failure.
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(e) A default or breach shall occur under any other agreement,
document or instrument to which any Credit Party is a party that is not cured
within any applicable grace period therefor, and such default or breach (i)
involves the failure to make any payment when due in respect of any Indebtedness
(other than the Obligations) of any Credit Party in excess of $1,500,000 in the
aggregate, including the Senior Subordinated Notes or (ii) causes, or permits
any holder of such Indebtedness or a trustee to cause, Indebtedness or a portion
thereof in excess of $1,500,000 in the aggregate to become due prior to its
stated maturity or prior to its regularly scheduled dates of payment, regardless
of whether such default is waived, or such right is exercised, by such holder or
trustee.
(f) (i) Any information contained in any Borrowing Base Certificate
shall be untrue or incorrect in any material respect, or (ii) any representation
or warranty herein or in any Loan Document or in any written statement, report,
financial statement or certificate (other than a Borrowing Base Certificate)
made or delivered to Agent or any Lender by any Credit Party is untrue or
incorrect in any material respect as of the date when made or deemed made;
provided, that for purposes of clause (i) above and without limiting the same,
any misstatement or error contained in any Borrowing Base Certificate that, if
corrected, would cause the actual Net Borrowing Availability as of the date of
such Borrowing Base Certificate to be (A) less than zero or (B) more than
$50,000 below the Net Borrowing Availability as represented therein shall be
deemed to be material.
(g) Assets of any Credit Party with a fair market value of $500,000
or more shall be attached, seized, levied upon or subjected to a writ or
distress warrant, or come within the possession of any receiver, trustee,
custodian or assignee for the benefit of creditors of any Credit Party and such
condition continues for 60 days or more.
(h) A case or proceeding shall have been commenced against any
Credit Party seeking a decree or order in respect of such Credit Party (i) under
the Bankruptcy Code or any other applicable federal, state or foreign bankruptcy
or other similar law, (ii) appointing a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) for such Credit Party or
for any substantial part of such Credit Party's assets, or (iii) ordering the
winding-up or liquidation of the affairs of such Credit Party, and such case or
proceeding shall remain undismissed or unstayed for 60 days or more or a final
and non-appealable decree or order granting the relief sought in such case or
proceeding shall be entered by a court of competent jurisdiction over such case
or proceeding.
(i) Any Credit Party shall (i) file a petition seeking relief under
the Bankruptcy Code or any other applicable federal, state or foreign bankruptcy
or other similar law, (ii) consent to or fail to contest in a timely and
appropriate manner the institution of proceedings thereunder or the filing of
any such petition or the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee or sequestrator (or similar official)
for such Credit Party or for any substantial part of such Credit Party's assets,
(iii) make an assignment for the benefit of creditors, (iv) take any corporate
action in furtherance of any of the foregoing, or (v) admit in writing its
inability to, or shall be generally unable to, pay its debts as such debts
become due.
(j) A final judgment or judgments for the payment of money in excess
of
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$1,000,000 in the aggregate at any time outstanding shall be rendered against
any Credit Party and the same (i) shall not have been discharged or execution
thereof stayed or bonded pending appeal within 60 days after the entry thereof,
or (ii) shall not have been discharged prior to the expiration of any such stay;
provided, that if (A) the liability of such Credit Party under any such judgment
is adequately insured against under a policy of insurance satisfying the
requirements of Section 5.4, (B) the insurer thereunder has accepted tender of
such Credit Party's claim with respect thereto without any reservation of
rights, and (C) the failure to discharge such judgment or obtain such a stay or
bond within such time period could not reasonably be expected to have or result
in a Material Adverse Effect, then no Event of Default shall be deemed to have
occurred hereunder until such time as the failure to discharge such judgment or
obtain such a stay could reasonably be expected to have or result in a Material
Adverse Effect.
(k) Any material provision of any Loan Document shall for any reason
cease to be valid, binding and enforceable in accordance with its terms (or any
Credit Party shall challenge the enforceability of any Loan Document or shall
assert in writing, or engage in any action or inaction based on any such
assertion, that any provision of any of the Loan Documents has ceased to be or
otherwise is not valid, binding and enforceable in accordance with its terms),
or any Lien created under any Loan Document shall cease to be a valid and
perfected first priority Lien (except as otherwise permitted herein or therein)
in any of the Collateral purported to be covered thereby except, with respect to
the loss of perfection or priority only, to the extent any such loss results
from the negligence of Agent, any Lender, or any of their respective agents or
representatives.
(l) Any Change of Control shall occur.
(m) Any event shall occur, whether or not insured or insurable, as a
result of which revenue-producing activities cease or are substantially
curtailed at any facility of any Credit Party generating more than 20% of
Borrower's consolidated revenues for the Fiscal Year preceding such event and
such cessation or curtailment continues for more than 60 days.
(n) Any material default or breach by any Credit Party shall occur
and be continuing under any agreement set forth in Disclosure Schedule (8.1(n))
or any such agreement shall be terminated for any reason.
8.2 Remedies.
(a) If any Default or Event of Default shall have occurred and be
continuing, Agent may (and at the written request of Requisite Revolving
Lenders, shall), without notice, suspend the Revolving Loan facility with
respect to further Advances or the incurrence of further Letter of Credit
Obligations, whereupon any further Advances and the incurrence of further Letter
of Credit Obligations shall be made or incurred in Agent's sole discretion (or
in the sole discretion of Requisite Revolving Lenders, if such suspension
occurred at their direction) so long as such Default or Event of Default is
continuing. If any Default or Event of Default shall have occurred and be
continuing, Agent may (and at the written request of Requisite Revolving Lenders
shall), without notice except as otherwise expressly provided herein, increase
the rate of interest applicable to the Loans and the Letter of Credit Fees to
the Default Rate.
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(b) If any Event of Default shall have occurred and be continuing,
Agent may (and at the written request of Requisite Revolving Lenders shall),
without notice: (i) terminate the Revolving Loan facility with respect to
further Advances or the incurrence of further Letter of Credit Obligations; (ii)
declare all or any portion of the Obligations, including all or any portion of
any Loan, to be forthwith due and payable, and require that the Letter of Credit
Obligations be cash collateralized as provided in Annex B, all without
presentment, demand, protest or further notice of any kind, all of which are
expressly waived by Borrower and each other Credit Party; or (iii) exercise any
rights and remedies provided to Agent under the Loan Documents or at law or in
equity, including all remedies provided under the Code; provided, that upon the
occurrence of an Event of Default specified in Sections 8.1(g), (h) or (i), the
Revolving Loan facility shall be immediately terminated and all of the
Obligations, including the Revolving Loan, shall become immediately due and
payable without declaration, notice or demand by any Person.
8.3 Waivers by Credit Parties. Except as otherwise provided for in this
Agreement or by applicable law, each Credit Party waives: (a) presentment,
demand and protest and notice of presentment, dishonor, notice of intent to
accelerate, notice of acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension or renewal of any or all commercial
paper, accounts, contract rights, documents, instruments, chattel paper and
guaranties at any time held by Agent on which any Credit Party may in any way be
liable, and hereby ratifies and confirms whatever Agent may do in this regard;
(b) all rights to notice and a hearing prior to Agent's taking possession or
control of, or Agent's replevy, attachment or levy upon, the Collateral or any
bond or security that might be required by any court prior to allowing Agent to
exercise any of its remedies; and (c) the benefit of all valuation, appraisal,
marshaling and exemption laws.
9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT
9.1 Assignment and Participations.
(a) The Credit Parties consent to any Lender's assignment of, or
sale of participations in, at any time or times, the Loan Documents, Loans,
Letter of Credit Obligations or any Commitment or of any portion thereof or
interest therein, including any Lender's rights, title, interests, remedies,
powers or duties thereunder, whether evidenced by a writing or not. Any
assignment by a Lender shall: (i) require the consent of Agent and the execution
of an assignment agreement (an "Assignment Agreement" substantially in the form
attached hereto as Exhibit 9.1(a) and otherwise in form and substance
satisfactory to, and acknowledged by, Agent; (ii) be conditioned on such
assignee Lender representing to the assigning Lender and Agent that it is
purchasing the applicable Loans to be assigned to it for its own account, for
investment purposes and not with a view to the distribution thereof; (iii) if a
partial assignment, be in an amount at least equal to $5,000,000 and, after
giving effect to any such partial assignment, the assigning Lender shall have
retained Commitments in an amount at least equal to $5,000,000; and (iv) include
a payment by the assigning Lender to Agent of an assignment fee of $3,500. In
the case of an assignment by a Lender under this Section 9.1, the assignee shall
have, to the extent of such assignment, the same rights, benefits and
obligations of all other Lenders hereunder. The assigning Lender shall be
relieved of its obligations hereunder with respect to its Commitments or
assigned portion thereof from and after the date of such assignment. Borrower
hereby acknowledges and agrees that any assignment shall give rise to a direct
obligation of
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Borrower to the assignee and that the assignee shall be a "Lender." In all
instances, each Lender's liability to make Loans hereunder shall be several and
not joint and shall be limited to such Lender's Pro Rata Share of the applicable
Commitment. In the event Agent or any Lender assigns or otherwise transfers all
or any part of the Obligations, Agent or any such Lender shall so notify
Borrower and Borrower shall, upon the request of Agent or such Lender, execute
new Notes, if any, in exchange for the Notes being assigned. Notwithstanding the
foregoing provisions of this Section 9.1(a), any Lender may at any time pledge
the Obligations held by it and such Lender's rights under this Agreement and the
other Loan Documents to a Federal Reserve Bank, and any Lender that is an
investment fund may assign the Obligations held by it and such Lender's rights
under this Agreement and the other Loan Documents to another investment fund
managed by the same investment advisor; provided, that no such pledge to a
Federal Reserve Bank shall release such Lender from such Lender's obligations
hereunder or under any other Loan Document.
(b) Any participation by a Lender of all or any part of its
Commitments shall be made with the understanding that all amounts payable by
Borrower hereunder shall be determined as if that Lender had not sold such
participation, and that the holder of any such participation shall not be
entitled to require such Lender to take or omit to take any action hereunder
except actions directly affecting (i) any reduction in the principal amount of,
or interest rate or Fees payable with respect to, any Loan in which such holder
participates, (ii) any extension of the scheduled amortization of the principal
amount of any Loan in which such holder participates or the final maturity date
thereof, and (iii) any release of all or substantially all of the Collateral
(other than in accordance with the terms of this Agreement, the Collateral
Documents or the other Loan Documents or pursuant to applicable law). Solely for
purposes of Sections 1.13, 1.15, 1.16 and 9.8, Borrower acknowledges and agrees
that a participation shall give rise to a direct obligation of Borrower to the
participant and the participant shall be considered to be a "Lender." Except as
set forth in the preceding sentence neither Borrower nor any other Credit Party
shall have any obligation or duty to any participant. Neither Agent nor any
Lender (other than the Lender selling a participation) shall have any duty to
any participant and may continue to deal solely with the Lender selling a
participation as if no such sale had occurred.
(c) Except as expressly provided in this Section 9.1, no Lender
shall, as between Borrower and that Lender, or Agent and that Lender, be
relieved of any of its obligations hereunder as a result of any sale,
assignment, transfer or negotiation of, or granting of participation in, all or
any part of the Loans, the Notes or other Obligations owed to such Lender.
(d) Each Credit Party executing this Agreement shall assist any
Lender permitted to sell assignments or participations under this Section 9.1 as
reasonably required to enable the assigning or selling Lender to effect any such
assignment or participation, including the execution and delivery of any and all
agreements, notes and other documents and instruments as shall be requested and
the preparation of informational materials for, and the participation of
management in meetings with, potential assignees or participants. Each Credit
Party executing this Agreement shall certify the correctness, completeness and
accuracy of all descriptions of the Credit Parties and their respective affairs
contained in any selling materials provided by it and all other information
provided by it and included in such materials, except that any Projections
delivered by Borrower shall only be certified by Borrower as having been
prepared by Borrower
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in compliance with the representations contained in Section 3.4(c).
(e) Any Lender may furnish any information concerning Credit Parties
in the possession of such Lender from time to time to assignees and participants
(including prospective assignees and participants); provided, that such Lender
shall obtain from assignees or participants confidentiality covenants
substantially equivalent to those contained in Section 11.8.
(f) So long as no Event of Default shall have occurred and be
continuing, no Lender shall assign or sell participations in any portion of its
Loans or Commitments to a potential Lender or participant if, as of the date of
the proposed assignment or sale, the assignee Lender or participant would be
subject to capital adequacy or similar requirements under Section 1.16(a),
increased costs under Section 1.16(b), an inability to fund LIBOR Loans under
Section 1.16(c), or withholding taxes in accordance with Section 1.15(a).
9.2 Appointment of Agent.
(a) GE Capital is hereby appointed to act on behalf of all Lenders
as Agent under this Agreement and the other Loan Documents. The provisions of
this Section 9.2 are solely for the benefit of Agent and Lenders and no Credit
Party nor any other Person shall have any rights as a third party beneficiary of
any of the provisions hereof. In performing its functions and duties under this
Agreement and the other Loan Documents, Agent shall act solely as an agent of
Lenders and does not assume and shall not be deemed to have assumed any
obligation toward or relationship of agency or trust with or for any Credit
Party or any other Person. Agent shall have no duties or responsibilities except
for those expressly set forth in this Agreement and the other Loan Documents.
The duties of Agent shall be mechanical and administrative in nature and Agent
shall not have, or be deemed to have, by reason of this Agreement, any other
Loan Document or otherwise a fiduciary relationship in respect of any Lender.
Neither Agent nor any of its Affiliates nor any of their respective officers,
directors, employees, agents or representatives shall be liable to any Lender
for any action taken or omitted to be taken by it hereunder or under any other
Loan Document, or in connection herewith or therewith, except for damages caused
by its or their own gross negligence or willful misconduct.
(b) If Agent shall request instructions from Requisite Revolving
Lenders, Supermajority Revolving Lenders or all affected Lenders with respect to
any act or action (including failure to act) in connection with this Agreement
or any other Loan Document, then Agent shall be entitled to refrain from such
act or taking such action unless and until Agent shall have received
instructions from Requisite Revolving Lenders, Supermajority Revolving Lenders,
or all affected Lenders, as the case may be, and Agent shall not incur liability
to any Person by reason of so refraining. Agent shall be fully justified in
failing or refusing to take any action hereunder or under any other Loan
Document (i) if such action would, in the opinion of Agent, be contrary to law
or the terms of this Agreement or any other Loan Document, (ii) if such action
would, in the opinion of Agent, expose Agent to Environmental Liabilities or
(iii) if Agent shall not first be indemnified to its satisfaction against any
and all liability and expense that may be incurred by it by reason of taking or
continuing to take any such action. Without limiting the foregoing, no Lender
shall have any right of action whatsoever against Agent as a result of Agent
acting or refraining from acting hereunder or under any other Loan Document in
accordance with the instructions of Requisite Revolving Lenders, Supermajority
Revolving Lenders or all affected Lenders, as applicable.
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9.3 Agent's Reliance, Etc. Neither Agent nor any of its Affiliates nor any
of their respective directors, officers, agents or employees shall be liable for
any action taken or omitted to be taken by it or them under or in connection
with this Agreement or the other Loan Documents, except for damages caused by
its or their own gross negligence or willful misconduct. Without limiting the
generality of the foregoing, Agent: (a) may treat the payee of any Note as the
holder thereof until Agent receives written notice of the assignment or transfer
thereof signed by such payee and in form satisfactory to Agent; (b) may consult
with legal counsel, independent public accountants and other experts selected by
it and shall not be liable for any action taken or omitted to be taken by it in
good faith in accordance with the advice of such counsel, accountants or
experts; (c) makes no warranty or representation to any Lender and shall not be
responsible to any Lender for any statements, warranties or representations made
in or in connection with this Agreement or the other Loan Documents; (d) shall
not have any duty to ascertain or to inquire as to the performance or observance
of any of the terms, covenants or conditions of this Agreement or the other Loan
Documents on the part of any Credit Party or to inspect the Collateral
(including the books and records) of any Credit Party; (e) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or the other
Loan Documents or any other instrument or document furnished pursuant hereto or
thereto; and (f) shall incur no liability under or in respect of this Agreement
or the other Loan Documents by acting upon any notice, consent, certificate or
other instrument or writing (which may be by telecopy, telegram, cable or telex)
believed by it to be genuine and signed or sent by the proper party or parties.
9.4 GE Capital and Affiliates. With respect to its Commitments hereunder,
GE Capital shall have the same rights and powers under this Agreement and the
other Loan Documents as any other Lender and may exercise the same as though it
were not Agent, and the term "Lender" or "Lenders" shall, unless otherwise
expressly indicated, include GE Capital in its individual capacity. GE Capital
and its Affiliates may lend money to, invest in, and generally engage in any
kind of business with, any Credit Party, any of their Affiliates and any Person
who may do business with or own securities of any Credit Party or any such
Affiliate, all as if GE Capital were not Agent and without any duty to account
therefor to Lenders. GE Capital and its Affiliates may accept fees and other
consideration from any Credit Party for services in connection with this
Agreement or otherwise without having to account for the same to Lenders. Each
Lender acknowledges the potential conflict of interest between GE Capital as a
Lender holding disproportionate interests in the Loans and GE Capital as Agent.
9.5 Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon Agent or any other Lender and based on
the Financial Statements referred to in Section 3.4(a) and such other documents
and information as it has deemed appropriate, made its own credit and financial
analysis of the Credit Parties and its own decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and without
reliance upon Agent or any other Lender and based on 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. Each
Lender acknowledges the potential conflict of interest of each other Lender as a
result of Lenders holding disproportionate interests in the Loans, and expressly
consents to, and waives any claim based upon, such conflict of interest.
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9.6 Indemnification. Lenders agree to indemnify Agent (to the extent not
reimbursed by Credit Parties and without limiting the obligations of Credit
Parties hereunder), ratably according to their respective Pro Rata Shares, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever that may be imposed on, incurred by, or asserted against Agent
in any way relating to or arising out of this Agreement or any other Loan
Document or any action taken or omitted to be taken by Agent in connection
therewith; provided, that no Lender shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from Agent's gross negligence or
wilful misconduct. Without limiting the foregoing, each Lender agrees to
reimburse Agent promptly upon demand for its ratable share of any out-of-pocket
expenses (including counsel fees) incurred by Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement
and each other Loan Document, to the extent that Agent is not reimbursed for
such expenses by Credit Parties.
9.7 Successor Agent. Agent may resign at any time by giving not less than
30 days' prior written notice thereof to Lenders and Borrower. Upon any such
resignation, Requisite Revolving Lenders shall have the right to appoint a
successor Agent. If no successor Agent shall have been so appointed by Requisite
Revolving Lenders and shall have accepted such appointment within 30 days after
the resigning Agent's giving notice of resignation, then the resigning Agent
may, on behalf of Lenders, appoint a successor Agent, which shall be a Lender if
a Lender is willing to accept such appointment, or otherwise shall be a
commercial bank or financial institution or a subsidiary of a commercial bank or
financial institution if such commercial bank or financial institution is
organized under the laws of the United States of America or of any State thereof
and has a combined capital and surplus of at least $300,000,000. If no successor
Agent has been appointed pursuant to the foregoing within 30 days after the date
such notice of resignation was given by the resigning Agent, such resignation
shall become effective and Requisite Revolving Lenders shall thereafter perform
all the duties of Agent hereunder until such time, if any, as Requisite
Revolving Lenders appoint a successor Agent as provided above. Any successor
Agent appointed by Requisite Revolving Lenders hereunder shall be subject to the
approval of Borrower, such approval not to be unreasonably withheld or delayed;
provided, that such approval shall not be required if a Default or an Event of
Default shall have occurred and be continuing. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
succeed to and become vested with all the rights, powers, privileges and duties
of the resigning Agent. Upon the earlier of the acceptance of any appointment as
Agent hereunder by a successor Agent or the effective date of the resigning
Agent's resignation, the resigning Agent shall be discharged from its duties and
obligations under this Agreement and the other Loan Documents, except that any
indemnity rights or other rights in favor of such resigning Agent shall
continue. After any resigning Agent's resignation hereunder, the provisions of
this Section 9 shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was acting as Agent under this Agreement and the other
Loan Documents. Agent may be removed at the written direction of the holders
(other than Agent) of 80% or more of the Commitments (excluding Agent's
Commitment); provided, that in so doing, such Lenders shall be deemed to have
waived and released any and all claims they may have against Agent.
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9.8 Setoff and Sharing of Payments. In addition to any rights now or
hereafter granted under applicable law and not by way of limitation of any such
rights, and subject to the provisions of Section 9.9(f), upon the occurrence and
during the continuance of any Event of Default, each Lender and each holder of
any Note is hereby authorized at any time or from time to time, without notice
to any Credit Party or to any other Person, any such notice being hereby
expressly waived, to offset and to appropriate and to apply any and all balances
held by it at any of its offices for the account of Borrower or any Guarantor
(regardless of whether such balances are then due to Borrower or any Guarantor)
and any other properties or assets at any time held or owing by that Lender or
that holder to or for the credit or for the account of Borrower or any Guarantor
against and on account of any of the Obligations that are not paid when due. Any
Lender or holder of any Note exercising a right to offset or otherwise receiving
any payment on account of the Obligations in excess of its Pro Rata Share
thereof shall purchase for cash (and the other Lenders or holders shall sell)
such participations in each such other Lender's or holder's Pro Rata Share of
the Obligations as would be necessary to cause such Lender to share the amount
so offset or otherwise received with each other Lender or holder in accordance
with their respective Pro Rata Shares. Each Lender's obligation under this
Section 9.8 shall be in addition to and not in limitation of its obligations to
purchase a participation in an amount equal to its Pro Rata Share of the Swing
Line Loans under Section 1.1. Borrower and each Guarantor agrees, to the fullest
extent permitted by law, that (a) any Lender or holder may exercise its right to
offset with respect to amounts in excess of its Pro Rata Share of the
Obligations and may sell participations in such amounts so offset to other
Lenders and holders and (b) any Lender or holders so purchasing a participation
in the Loans made or other Obligations held by other Lenders or holders may
exercise all rights of setoff, bankers' lien, counterclaim or similar rights
with respect to such participation as fully as if such Lender or holder were a
direct holder of the Loans and the other Obligations in the amount of such
participation. Notwithstanding the foregoing, if all or any portion of the
setoff amount or payment otherwise received is thereafter recovered from the
Lender that has exercised the right of setoff, the purchase of participations by
that Lender shall be rescinded and the purchase price restored without interest.
9.9 Advances; Non-Funding Lenders; Information; Actions in Concert.
(a) Advances; Payments.
(i) Revolving Lenders shall refund or participate in the Swing
Line Loan in accordance with clauses (iii) and (iv) of Section 1.1(b). If the
Swing Line Lender declines to make a Swing Line Loan or if Swing Line
Availability is zero, Agent shall notify Revolving Lenders promptly after
receipt of a Notice of Revolving Credit Advance and in any event prior to 11:00
a.m. (California time) on the date such Notice of Revolving Credit Advance is
received, by telecopy, telephone or other similar form of transmission. Each
Revolving Lender shall make the amount of such Lender's Pro Rata Share of such
Revolving Credit Advance available to Agent in same day funds by wire transfer
to Agent's account as set forth in Annex H not later than 1:00 p.m. (California
time) on the requested funding date, in the case of an Index Rate Loan, and not
later than 10:00 a.m. (California time) on the requested funding date, in the
case of a LIBOR Loan. After receipt of such wire transfers (or, in the Agent's
sole discretion, before receipt of such wire transfers), subject to the terms
hereof, Agent shall make the requested Revolving
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Credit Advance to Borrower. All payments by each Revolving Lender shall be made
without setoff, counterclaim or deduction of any kind.
(ii) On the second Business Day of each calendar week or more
frequently as aggregate cumulative payments in excess of $2,000,000 are received
with respect to the Loans (other than the Swing Line Loan) (each, a "Settlement
Date"), Agent shall advise each Lender by telephone or telecopy of the amount of
such Lender's Pro Rata Share of principal, interest and Fees paid for the
benefit of Lenders with respect to each applicable Loan. Provided that such
Lender has funded all payments and Advances required to be made by it and
purchased all participations required to be purchased by it under this Agreement
and the other Loan Documents as of such Settlement Date, Agent shall pay to each
Lender such Lender's Pro Rata Share of principal, interest and Fees paid by
Borrower since the previous Settlement Date for the benefit of that Lender on
the Loans held by it. To the extent that any Lender (a "Non-Funding Lender") has
failed to fund all such payments and Advances or failed to fund the purchase of
all such participations, Agent shall be entitled to set off the funding
short-fall against that Non-Funding Lender's Pro Rata Share of all payments
received from Borrower. Such payments shall be made by wire transfer to such
Lender's account (as specified by such Lender in Annex H or the applicable
Assignment Agreement) not later than 11:00 a.m. (California time) on the next
Business Day following each Settlement Date.
(b) Availability of Lender's Pro Rata Share. Agent may assume that
each Revolving Lender will make its Pro Rata Share of each Revolving Credit
Advance available to Agent on each funding date. If such Pro Rata Share is not,
in fact, paid to Agent by such Revolving Lender when due, Agent will be entitled
to recover such amount on demand from such Revolving Lender without setoff,
counterclaim or deduction of any kind. If any Revolving Lender fails to pay the
amount of its Pro Rata Share forthwith upon Agent's demand, Agent shall promptly
notify Borrower and Borrower shall immediately repay such amount to Agent.
Nothing in this Section 9.9(b) or elsewhere in this Agreement or the other Loan
Documents shall be deemed to require Agent to advance funds on behalf of any
Revolving Lender or to relieve any Revolving Lender from its obligation to
fulfill its Commitments hereunder or to prejudice any rights that Borrower may
have against any Revolving Lender as a result of any default by such Revolving
Lender hereunder. To the extent that Agent advances funds to Borrower on behalf
of any Revolving Lender and is not reimbursed therefor on the same Business Day
as such Advance is made, Agent shall be entitled to retain for its account all
interest accrued on such Advance until reimbursed by the applicable Revolving
Lender.
(c) Return of Payments.
(i) If Agent pays an amount to a Lender under this Agreement
in the belief or expectation that a related payment has been or will be received
by Agent from Borrower and such related payment is not received by Agent, then
Agent will be entitled to recover such amount from such Lender on demand without
setoff, counterclaim or deduction of any kind.
(ii) If Agent determines at any time that any amount received
by Agent under this Agreement must be returned to Borrower or paid to any other
Person pursuant to any insolvency law or otherwise, then, notwithstanding any
other term or condition of this Agreement or any other Loan Document, Agent will
not be required to distribute any portion thereof to any
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Lender. In addition, each Lender will repay to Agent on demand any portion of
such amount that Agent has distributed to such Lender, together with interest at
such rate, if any, as Agent is required to pay to Borrower or such other Person
without setoff, counterclaim or deduction of any kind.
(d) Non-Funding Lenders. The failure of any Non-Funding Lender to
make any Revolving Credit Advance or any payment required by it hereunder, or to
purchase any participation in any Swing Line Loan to be made or purchased by it
on the date specified therefor shall not relieve any other Revolving Lender
(each such other Revolving Lender, an "Other Lender") of its obligations to make
such Advance or purchase such participation on such date, but neither any Other
Lender nor Agent shall be responsible for the failure of any Non-Funding Lender
to make an Advance, or to purchase a participation required hereunder.
Notwithstanding anything set forth herein to the contrary, a Non-Funding Lender
shall not have any voting or consent rights under or with respect to any Loan
Document or constitute a "Lender" or a "Revolving Lender" (or be included in the
calculation of "Requisite Revolving Lenders" or "Supermajority Revolving
Lenders" hereunder) for any voting or consent rights under or with respect to
any Loan Document.
(e) Dissemination of Information. Agent shall use reasonable efforts
to provide Lenders with any notice of Default or Event of Default received by
Agent from, or delivered by Agent to, any Credit Party, with notice of any Event
of Default of which Agent has actually become aware and with notice of any
action taken by Agent following any Event of Default; provided, that Agent shall
not be liable to any Lender for any failure to do so, except to the extent that
such failure is attributable to Agent's gross negligence or willful misconduct.
Lenders acknowledge that Borrower is required to provide Financial Statements
and Collateral Reports to Lenders in accordance with Annexes E and F hereto and
agree that Agent shall have no duty to provide the same to Lenders.
(f) Actions in Concert. Anything in this Agreement to the contrary
notwithstanding, each Lender hereby agrees with each other Lender that no Lender
shall take any action to protect or enforce its rights arising out of this
Agreement or the Notes (including exercising any rights of setoff) without first
obtaining the prior written consent of Agent and Requisite Revolving Lenders, it
being the intent of Lenders that any such action to protect or enforce rights
under this Agreement and the Notes shall be taken in concert and at the
direction or with the consent of Agent.
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10. SUCCESSORS AND ASSIGNS
This Agreement and the other Loan Documents shall be binding on and shall
inure to the benefit of each Credit Party, Agent, Lenders and their respective
successors and assigns (including, in the case of any Credit Party, a
debtor-in-possession on behalf of such Credit Party), except as otherwise
provided herein or therein. No Credit Party may assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties hereunder or under
any of the other Loan Documents without the prior express written consent of
Agent and Lenders. Any such purported assignment, transfer, hypothecation or
other conveyance by any Credit Party without the prior express written consent
of Agent and Lenders shall be void. The terms and provisions of this Agreement
are for the purpose of defining the relative rights and obligations of each
Credit Party, Agent and Lenders with respect to the transactions contemplated
hereby and no Person shall be a third party beneficiary of any of the terms and
provisions of this Agreement or any of the other Loan Documents.
1. MISCELLANEOUS
1.1 Complete Agreement; Modification of Agreement. The Loan Documents
constitute the complete agreement between the parties with respect to the
subject matter thereof and may not be modified, altered or amended except as set
forth in Section 11.2. Any letter of interest, commitment letter, fee letter
(other than the GE Capital Fee Letter) or confidentiality agreement between any
Credit Party and Agent or any Lender or any of their respective Affiliates
predating this Agreement and relating to a financing of substantially similar
form, purpose or effect shall be superseded by this Agreement.
1.2 Amendments and Waivers.
(a) Except for actions expressly permitted to be taken by Agent, no
amendment, modification, termination or waiver of any provision of this
Agreement, any of the Notes or any other Loan Document, or any consent to any
departure by any Credit Party therefrom, shall in any event be effective unless
the same shall be in writing and signed by Agent and Borrower, and by Requisite
Revolving Lenders, Supermajority Revolving Lenders or all affected Lenders, as
applicable. Except as set forth in clauses (b) and (c) below, all such
amendments, modifications, terminations or waivers requiring the consent of any
Lenders shall require the written consent of Requisite Revolving Lenders.
(b) No amendment, modification, termination or waiver of or consent
with respect to any provision of this Agreement that (i) increases the
percentage advance rates set forth in the definition of the Borrowing Base, (ii)
makes less restrictive the nondiscretionary criteria for exclusion from Eligible
Accounts and Eligible Inventory set forth in Sections 1.6 and 1.7 or (iii)
amends the definitions of "Applicable EBITDA Multiple" or "Pro Forma EBITDA" if
the result of any such amendment has the effect of making more credit available
shall be effective unless the same shall be in writing and signed by Agent,
Supermajority Revolving Lenders, and Borrower. No amendment, modification,
termination or waiver of or consent with respect to any provision of this
Agreement that waives compliance with the conditions precedent set forth in
Section 2.2 to the making of any Loan or the incurrence of any Letter of Credit
Obligations shall be effective unless the same shall be in writing and signed by
Agent, Requisite
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Revolving Lenders and Borrower. Notwithstanding anything contained in this
Agreement to the contrary, no waiver or consent with respect to any Default (if
in connection therewith Agent or Requisite Revolving Lenders, as the case may
be, have exercised its or their right to suspend the making or incurrence of
further Advances or Letter of Credit Obligations pursuant to Section 8.2(a)) or
any Event of Default shall be effective for purposes of the conditions precedent
to the making of Loans or the incurrence of Letter of Credit Obligations set
forth in Section 2.2 unless the same shall be in writing and signed by Agent,
Requisite Revolving Lenders and Borrower.
(c) No amendment, modification, termination or waiver shall, unless
in writing and signed by Agent and each Lender directly affected thereby: (i)
increase the principal amount of any Lender's Commitment (which action shall be
deemed to directly affect all Lenders); (ii) reduce the principal of, rate of
interest on or Fees payable with respect to any Loan or Letter of Credit
Obligations of any affected Lender; (iii) extend any scheduled payment date or
final maturity date of the principal amount of any Loan of any affected Lender;
(iv) waive, forgive, defer, extend or postpone any payment of interest or Fees
as to any affected Lender; (v) release any Guaranty or, except as otherwise
permitted herein or in the other Loan Documents, release, or permit any Credit
Party to sell or otherwise dispose of any Collateral with a value exceeding
$5,000,000 in the aggregate (which action shall be deemed to directly affect all
Lenders); (vi) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans that shall be required for Lenders or any
of them to take any action hereunder; and (vii) amend or waive this Section 11.2
or the definitions of the terms "Requisite Revolving Lenders" or "Supermajority
Revolving Lenders" insofar as such definitions affect the substance of this
Section 11.2. Furthermore, no amendment, modification, termination or waiver
affecting the rights or duties of Agent under this Agreement or any other Loan
Document shall be effective unless in writing and signed by Agent, in addition
to Lenders required hereinabove to take such action. Each amendment,
modification, termination or waiver shall be effective only in the specific
instance and for the specific purpose for which it was given. No amendment,
modification, termination or waiver shall be required for Agent to take
additional Collateral pursuant to any Loan Document. No amendment, modification,
termination or waiver of any provision of any Note shall be effective without
the written concurrence of the holder of that Note. No notice to or demand on
any Credit Party in any case shall entitle such Credit Party or any other Credit
Party to any other or further notice or demand in similar or other
circumstances. Any amendment, modification, termination, waiver or consent
effected in accordance with this Section 11.2 shall be binding upon each holder
of the Notes at the time outstanding and each future holder of the Notes.
(d) If, in connection with any proposed amendment, modification,
waiver or termination (a "Proposed Change"):
(i) requiring the consent of all affected Lenders, the consent
of Requisite Revolving Lenders is obtained, but the consent of other Lenders
whose consent is required is not obtained (any such Lender whose consent is not
obtained as described in this clause (i) and in clauses (ii) and (iii) below
being referred to as a "Non-Consenting Lender"),
(ii) requiring the consent of Supermajority Revolving Lenders,
the consent of Requisite Revolving Lenders is obtained, but the consent of
Supermajority Revolving Lenders is not obtained, or
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(iii) requiring the consent of Requisite Revolving Lenders,
the consent of Revolving Lenders holding 51% or more of the aggregate Revolving
Loan Commitments is obtained, but the consent of Requisite Revolving Lenders is
not obtained,
then, so long as Agent is not a Non-Consenting Lender, at Borrower's request
Agent, or a Person acceptable to Agent, shall have the right with Agent's
consent and in Agent's sole discretion (but shall have no obligation) to
purchase from such Non-Consenting Lenders, and such Non-Consenting Lenders agree
that they shall, upon Agent's request, sell and assign to Agent or such Person,
all of the Commitments of such Non-Consenting Lenders for an amount equal to the
principal balance of all Loans held by such Non-Consenting Lenders and all
accrued interest and Fees with respect thereto through the date of sale, such
purchase and sale to be consummated pursuant to an executed Assignment
Agreement.
(e) Upon indefeasible payment in full in cash and performance of all
of the Obligations (other than indemnification Obligations under Section 1.13),
termination of the Commitments and a release of all claims against Agent and
Lenders, and so long as no suits, actions, proceedings or claims are pending or
threatened against any Indemnified Person asserting any damages, losses or
liabilities that are Indemnified Liabilities, Agent shall deliver to Borrower
termination statements, mortgage releases and other documents necessary or
appropriate to evidence the termination of the Liens securing payment of the
Obligations.
1.3 Fees and Expenses. Borrower shall reimburse Agent and, with respect
to syndication expenses, GE Capital, for all reasonable out-of-pocket expenses
incurred in connection with the negotiation, preparation and syndication of the
Loan Documents (including the reasonable fees and expenses of all of its special
loan counsel, advisors, consultants and auditors retained in connection with the
Loan Documents and the Related Transactions and advice in connection therewith).
Borrower shall reimburse Agent (and, with respect to clauses (c) and (d) below,
all Lenders) for all reasonable fees, costs and expenses, including the
reasonable fees, costs and expenses of counsel or other advisors (including
environmental and management consultants and appraisers) for advice, assistance,
or other representation in connection with:
(a) the forwarding to Borrower or any other Person on behalf of
Borrower by Agent of the proceeds of the Loans;
(b) any amendment, modification or waiver of, consent with respect
to, or termination of, any of the Loan Documents or Related Transactions
Documents or advice in connection with the administration of the Loans made
pursuant hereto or its rights hereunder or thereunder;
(c) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by Agent, any Lender, Borrower or any other Person, and
whether as a party, witness or otherwise) in any way relating to the Collateral,
any of the Loan Documents or any other agreement to be executed or delivered in
connection herewith or therewith, including any litigation, contest, dispute,
suit, case, proceeding or action, and any appeal or review thereof, in
connection with a case commenced by or against Borrower or any other Person that
may be
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obligated to Agent by virtue of the Loan Documents, including any such
litigation, contest, dispute, suit, proceeding or action arising in connection
with any work-out or restructuring of the Loans during the pendency of one or
more Events of Default; provided, that in the case of reimbursement of counsel
for Lenders other than Agent, such reimbursement shall be limited to one counsel
for all such Lenders; provided further, that Borrower shall not be required to
so reimburse Agent or any Lender in connection with any action (i) between any
Credit Party and Agent or any Lender on this Agreement or any other Loan
Document pending before a court of competent jurisdiction, (ii) that has not
been voluntarily dismissed or dismissed pursuant to a settlement thereof, and
(iii) in which a final, non-appealable judgment or order shall have been entered
in favor of such Credit Party containing an express finding that such Credit
Party is the prevailing party;
(d) any attempt to enforce any remedies of Agent or any Lender
against any or all of the Credit Parties or any other Person that may be
obligated to Agent or any Lender by virtue of any of the Loan Documents,
including any such attempt to enforce any such remedies in the course of any
work-out or restructuring of the Loans during the pendency of one or more Events
of Default; provided, that in the case of reimbursement of counsel for Lenders
other than Agent, such reimbursement shall be limited to one counsel for all
such Lenders;
(e) any work-out or restructuring of the Loans during the pendency
of one or more Events of Default; and
(f) efforts to (i) monitor the Loans or any of the other
Obligations, (ii) evaluate, observe or assess any of the Credit Parties or their
respective affairs, and (iii) verify, protect, evaluate, assess, appraise,
collect, sell, liquidate or otherwise dispose of any of the Collateral;
including, as to each of clauses (a) through (f) above, all reasonable
attorneys' and other reasonable professional and service providers' fees arising
from such services, including those in connection with any appellate
proceedings, and all expenses, costs, charges and other fees incurred by such
counsel and others in connection with or relating to any of the events or
actions described in this Section 11.3, all of which shall be payable, on
demand, by Borrower to Agent. Without limiting the generality of the foregoing,
such reasonable expenses, costs, charges and fees may include: fees, costs and
expenses of accountants, environmental advisors, appraisers, investment bankers,
management and other consultants and paralegals; court costs and expenses;
photocopying and duplication expenses; court reporter fees, costs and expenses;
long distance telephone charges; air express charges; telegram or telecopy
charges; secretarial overtime charges; and expenses for travel, lodging and food
paid or incurred in connection with the performance of such legal or other
advisory services.
1.4 No Waiver. Agent's or any Lender's failure, at any time or times, to
require strict performance by the Credit Parties of any provision of this
Agreement or any other Loan Document shall not waive, affect or diminish any
right of Agent or such Lender thereafter to demand strict compliance and
performance herewith or therewith. Any suspension or waiver of an Event of
Default shall not suspend, waive or affect any other Event of Default whether
the same is prior or subsequent thereto and whether the same or of a different
type. Subject to the provisions of Section 11.2, none of the undertakings,
agreements, warranties, covenants and
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representations of any Credit Party contained in this Agreement or any of the
other Loan Documents and no Default or Event of Default by any Credit Party
shall be deemed to have been suspended or waived by Agent or any Lender, unless
such waiver or suspension is by an instrument in writing signed by an officer of
or other authorized employee of Agent and the applicable required Lenders and
directed to Borrower specifying such suspension or waiver.
1.5 Remedies. Agent's and Lenders' rights and remedies under this
Agreement shall be cumulative and nonexclusive of any other rights and remedies
that Agent or any Lender may have under any other agreement, including the other
Loan Documents, by operation of law or otherwise.
Recourse to the Collateral shall not be required.
1.6 Severability. Wherever possible, each provision of this Agreement and
the other Loan Documents shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
or any other Loan Document shall be prohibited by or invalid under applicable
law, such provision shall be ineffective only to the extent of such prohibition
or invalidity without invalidating the remainder of such provision or the
remaining provisions of this Agreement or such other Loan Document.
1.7 Conflict of Terms. Except as otherwise provided in this Agreement or
any of the other Loan Documents by specific reference to the applicable
provisions of this Agreement, if any provision contained in this Agreement is in
conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern and control.
1.8 Confidentiality. Agent and each Lender agree to use commercially
reasonable efforts (equivalent to the efforts Agent or such Lender applies to
maintain the confidentiality of its own confidential information) to maintain as
confidential all confidential information provided to them by the Credit Parties
and designated as confidential for a period of two years following receipt
thereof, except that Agent and each Lender may disclose such information: (a) to
Persons employed or engaged by Agent or such Lender in evaluating, approving,
structuring or administering the Loans and the Commitments; (b) to any bona fide
assignee or participant or potential assignee or participant that has agreed to
comply with the covenant contained in this Section 11.8 (and any such bona fide
assignee or participant or potential assignee or participant may disclose such
information to Persons employed or engaged by them as described in clause (a)
above); (c) as required or requested by any Governmental Authority or reasonably
believed by Agent or such Lender to be compelled by any court decree, subpoena
or legal or administrative order or process; (d) as, on the advice of Agent's or
such Lender's counsel, is required by law; (e) in connection with the exercise
of any right or remedy under the Loan Documents or in connection with any
Litigation to which Agent or such Lender is a party; or (f) that ceases to be
confidential through no fault of Agent or any Lender.
1.9 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE
LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO CONTRACTS MADE AND
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PERFORMED IN THAT STATE (WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS
THEREOF) AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH CREDIT
PARTY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN NEW
YORK COUNTY, CITY OF NEW YORK, NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE CREDIT PARTIES, AGENT AND
LENDERS PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO
ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS; PROVIDED, THAT AGENT, LENDERS AND THE CREDIT PARTIES ACKNOWLEDGE THAT
ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
NEW YORK COUNTY, CITY OF NEW YORK, NEW YORK; PROVIDED FURTHER, THAT NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION (INCLUDING ANY
JURISDICTION IN WHICH THE COLLATERAL IS LOCATED) TO REALIZE ON THE COLLATERAL OR
ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF AGENT. EACH CREDIT PARTY AND EACH LENDER EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND EACH SUCH PERSON HEREBY WAIVES ANY OBJECTION THAT SUCH PERSON
MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF
AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH CREDIT PARTY HEREBY WAIVES PERSONAL
SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR
SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE
MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH CREDIT PARTY AT THE
ADDRESS SET FORTH IN ANNEX I OF THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE
DEEMED COMPLETED UPON THE EARLIER OF SUCH CREDIT PARTY'S ACTUAL RECEIPT THEREOF
OR THREE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL, PROPER POSTAGE PREPAID.
1.10 Notices. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by any other parties, or whenever any of the parties desires to give or
serve upon any other parties any communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be deemed to have been validly
served, given or delivered: (a) upon the earlier of actual receipt and three
Business Days after deposit in the United States Mail, registered or certified
mail, return receipt requested, with proper postage prepaid; (b) upon
transmission, when sent by telecopy or other similar facsimile transmission
(with such telecopy or facsimile promptly confirmed by delivery of a copy by
personal delivery or United States Mail as otherwise provided in this Section
11.10); (c) one Business Day after deposit with a reputable overnight courier
with all charges prepaid; or (d) when delivered, if
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hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address or facsimile number indicated in Annex I or to
such other address (or facsimile number) as may be substituted by notice given
as herein provided. The giving of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Failure or delay in
delivering copies of any notice, demand, request, consent, approval, declaration
or other communication to any Person (other than Borrower or Agent) designated
in Annex I to receive copies shall in no way adversely affect the effectiveness
of such notice, demand, request, consent, approval, declaration or other
communication.
1.11 Section Titles. The Section titles and Table of Contents contained
in this Agreement are and shall be without substantive meaning or content of any
kind whatsoever and are not a part of the agreement between the parties hereto.
1.12 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement.
1.13 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT OR OTHERWISE, AMONG AGENT, LENDERS AND ANY CREDIT PARTY ARISING
OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO.
1.14 Press Releases. Each Credit Party executing this Agreement agrees
that neither it nor its Affiliates will in the future issue any press releases
or other public disclosure using the name of GE Capital or its affiliates or
referring to this Agreement, the other Loan Documents or the Related
Transactions Documents without at least two Business Days' prior notice to GE
Capital and without the prior written consent of GE Capital unless (and only to
the extent that) such Credit Party or Affiliate is required to do so under law
and then, in any event, such Credit Party or Affiliate will consult with GE
Capital before issuing such press release or other public disclosure. Each
Credit Party consents to the publication by Agent or any Lender of a tombstone
or similar advertising material relating to the financing transactions
contemplated by this Agreement. Agent or such Lender shall provide a draft of
any such tombstone or similar advertising material to each Credit Party for
review and comment prior to the publication thereof. Agent reserves the right to
provide to industry trade organizations information necessary and customary for
inclusion in league table measurements with Borrower's consent, which shall not
be unreasonably withheld or delayed.
1.15 Reinstatement. This Agreement shall remain in full force and effect
and continue
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to be effective should any petition be filed by or against Borrower for
liquidation or reorganization, should Borrower become insolvent or make an
assignment for the benefit of any creditor or creditors or should a receiver or
trustee be appointed for all or any significant part of Borrower's assets, and
shall continue to be effective or to be reinstated, as the case may be, if at
any time payment and performance of the Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee of the Obligations, whether as a "voidable
preference," "fraudulent conveyance," or otherwise, all as though such payment
or performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned.
1.16 Advice of Counsel. Each of the parties represents to each other
party hereto that it has discussed this Agreement and, specifically, the
provisions of Sections 11.9 and 11.13, with its counsel.
1.17 No Strict Construction. The parties hereto have participated jointly
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, this Agreement has been duly executed as of the
date first written above.
"Borrower"
STYLING TECHNOLOGY CORPORATION
By:_____________________________________
Richard R. Ross
Executive Vice President, Chief Financial
Officer and Treasurer
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent and a Lender
By:_____________________________________
Timothy J. Rafanello
Duly Authorized Signatory
Revolving Loan
Commitment (including
a Swing Line Commitment
of $10,000,000):
$90,000,000
[Remainder of Page Intentionally Left Blank]
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The following Persons are signatories to this Agreement in their
capacity as Credit Parties and not as Borrowers.
U.K. ABBA PRODUCTS, INC.
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
EUROPEAN TOUCH, LTD. II
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
BEAUTY PRODUCTS INC.
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
COSMETICS INTERNATIONAL INC.
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
FT. PITT ACQUISITION, INC.
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
FT. PITT-FRAMESI, LTD.
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
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[Signatures Continued]
STYLING TECHNOLOGY NAIL CORPORATION
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
STYL INSTITUTE, INC.
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
STYLING TECHNOLOGY (UK) LIMITED
By:_____________________________________
Richard R. Ross
Secretary
STYLING TECHNOLOGY EXPORT CORPORATION
By:_____________________________________
Richard R. Ross
Vice President and Treasurer
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ANNEX A (RECITALS)
TO
CREDIT AGREEMENT
DEFINITIONS
Capitalized terms used in the Loan Documents shall have (unless
otherwise provided elsewhere in the Loan Documents) the following respective
meanings, and all references in the following definitions to Sections, Exhibits,
Schedules or Annexes shall refer to Sections, Exhibits, Schedules or Annexes of
the Agreement:
"Account Debtor" shall mean any Person who may become obligated to
any other Person under, with respect to, or on account of, an Account.
"Accounting Changes" shall have the meaning assigned to it in Annex
G.
"Accounts" shall mean all "accounts," as such term is defined in the
Code, now owned or hereafter acquired by any Person, including (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper, Documents or Instruments),
whether arising out of goods sold or services rendered by it or from any other
transaction (including any such obligations that may be characterized as an
account or contract right under the Code), (b) all of such Person's rights in,
to and under all purchase orders or receipts for goods or services, (c) all of
such Person's rights to any goods represented by any of the foregoing (including
unpaid sellers' rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods), (d) all monies
due or to become due to such Person under all purchase orders and contracts for
the sale of goods or the performance of services or both by such Person or in
connection with any other transaction (whether or not yet earned by performance
on the part of such Person), including the right to receive the proceeds of said
purchase orders and contracts, and (e) all collateral security and guaranties of
any kind given by any other Person with respect to any of the foregoing.
"Additional Notes" shall have the meaning assigned to it in the
Senior Subordinated Note Indenture.
"Advance" shall mean any Revolving Credit Advance or Swing Line
Advance, as the context may require.
"Affiliate" shall mean, with respect to any Person, (a) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, ten percent (10%) or more of the Stock
having ordinary voting power in the election of directors of such Person, (b)
each Person that controls, is controlled by or is under common control with such
Person, (c) each of such Person's officers, directors, joint venturers and
partners or (d) in the case of Borrower, the immediate family members, spouses
and lineal descendants of individuals who are Affiliates of Borrower. For the
purposes of this definition, "control" of a Person shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of its
management or policies, whether through the ownership of voting securities, by
contract or
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otherwise; provided, that the term "Affiliate" shall specifically exclude Agent
and each Lender.
"Agent" shall mean GE Capital, in its capacity as Agent for Lenders,
or its successor appointed pursuant to Section 9.7.
"Agreement" shall mean the Credit Agreement by and among Borrower,
the other Credit Parties party thereto, GE Capital, as Agent and a Lender, and
the other Lenders from time to time party thereto, as the same may be amended,
supplemented, restated or otherwise modified from time to time in accordance
with the terms thereof.
"Appendices" shall have the meaning assigned to it in the recitals
to the Agreement.
"Applicable EBITDA Multiple" shall mean 1.25.
"Applicable L/C Margin" shall mean the per annum fee payable with
respect to outstanding Letter of Credit Obligations as determined by reference
to Section 1.5(a).
"Applicable Margins" shall mean, collectively, the Applicable L/C
Margin, the Applicable Unused Line Fee Margin, the Applicable Revolver Index
Margin, and the Applicable Revolver LIBOR Margin.
"Applicable Revolver Index Margin" shall mean the per annum interest
rate margin from time to time in effect and payable in addition to the Index
Rate applicable to the Revolving Loan, as determined by reference to Section
1.5(a).
"Applicable Revolver LIBOR Margin" shall mean the per annum interest
rate from time to time in effect and payable in addition to the LIBOR Rate
applicable to the Revolving Loan, as determined by reference to Section 1.5(a).
"Applicable Senior Leverage Multiple" shall mean, as of any date of
determination, the maximum Senior Leverage Ratio covenant level for Borrower and
its Subsidiaries set forth in Annex G as of such date.
"Applicable Total Leverage Multiple" shall mean, as of any date of
determination, the maximum Total Leverage Ratio covenant level for Borrower and
its Subsidiaries set forth in Annex G as of such date.
"Applicable Unused Line Fee Margin" shall mean the per annum fee
payable in respect of Borrower's non-use of available funds pursuant to Section
1.9(b), as determined by reference to Section 1.5(a).
"Assignment Agreement" shall have the meaning assigned to it in
Section 9.1(a).
"Bankruptcy Code" shall mean the provisions of title 11 of the
United States Code, 11 U.S.C. Sections 101 et seq.
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"Borrower" shall have the meaning assigned to it in the preamble to
the Agreement.
"Borrower Accounts" shall have the meaning assigned to it in Annex
C.
"Borrowing Availability" shall have the meaning assigned to it in
Section 1.1(a)(i).
"Borrowing Base" shall mean, as of any date of determination by
Agent, from time to time, an amount equal to the lowest of:
(a) (i) 80% of the book value of Eligible Accounts; plus
(ii) 65% of the book value of Eligible Inventory valued at the
lower of cost (determined on a first-in, first-out basis) or market; plus
(iii) the Applicable EBITDA Multiple multiplied by Pro Forma
EBITDA of Borrower for the four full Fiscal Quarters immediately preceding such
date;
(b) the Applicable Senior Leverage Multiple multiplied by Pro Forma
EBITDA of Borrower for the four full Fiscal Quarters immediately preceding such
date; and
(c) (i) (A) the Applicable Total Leverage Multiple multiplied by (B)
Pro Forma EBITDA of Borrower for the four full Fiscal Quarters immediately
preceding such date, minus (ii) (A) the Funded Debt of Borrower on a
consolidated basis as of such date of determination minus (B) the outstanding
balance of the Obligations as of such date of determination;
with respect to each of clauses (a) through (c) above, less any Reserves
established by Agent at such time in its reasonable credit judgment.
"Borrowing Base Certificate" shall mean a certificate to be executed
and delivered from time to time by Borrower in the form attached to the
Agreement as Exhibit 4.1(b).
"Business Day" shall mean any day that is not a Saturday, a Sunday
or a day on which banks are required or permitted to be closed in the States of
California or New York and in reference to LIBOR Loans shall mean any such day
that is also a LIBOR Business Day.
"Capital Expenditures" shall mean, with respect to any Person, all
expenditures (by the expenditure of cash or the incurrence of Indebtedness) by
such Person during any measuring period for any fixed assets or improvements or
for replacements, substitutions or additions thereto that have a useful life of
more than one year and that are required to be capitalized under GAAP.
"Capital Lease" shall mean, with respect to any Person, any lease of
any property (whether real, personal or mixed) by such Person as lessee that, in
accordance with GAAP, would be required to be classified and accounted for as a
capital lease on a balance sheet of such
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Person.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease of any Person, the amount of the obligation of the lessee thereunder that,
in accordance with GAAP, would appear on a balance sheet of such lessee in
respect of such Capital Lease.
"Cash Collateral Account" shall have the meaning assigned to it in
Annex B.
"Cash Equivalents" shall have the meaning assigned to it in Annex B.
"Cash Management System" shall have the meaning assigned to it in
Section 1.8.
"Change of Control" means any of the following: (a) any Person
(other than Sam L. Leopold) or group of Persons (within the meaning of the
Securities Exchange Act) shall have acquired beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act) of 50% or more of the issued and outstanding
shares of capital Stock of Borrower having the right to vote for the election of
directors of Borrower under ordinary circumstances; (b) a majority of
individuals who as of the Closing Date constituted the board of directors of
Borrower (together with any new directors whose election by the board of
directors of Borrower or whose nomination for election by the Stockholders of
Borrower was approved by a vote of at least a majority of the directors then
still in office who either were directors as of the Closing Date or whose
election or nomination for election were previously so approved) cease for any
reason other than death or disability to be members of the board of directors of
Borrower; or (c) any "Change of Control," as that term is defined in the Senior
Subordinated Note Indenture.
"Charges" shall mean all federal, state, county, city, municipal,
local, foreign or other governmental taxes (including taxes owed to the PBGC at
the time due and payable), levies, assessments, charges, liens, claims or
encumbrances upon or relating to (a) the Collateral, (b) the Obligations, (c)
the employees, payroll, income or gross receipts of any Person, (d) any Person's
ownership or use of any properties or other assets, or (e) any other aspect of
any Person's business.
"Chattel Paper" shall mean any "chattel paper," as such term is
defined in the Code, now owned or hereafter acquired by any Person, wherever
located.
"Closing Date" shall mean June 22, 1999.
"Code" shall mean the Uniform Commercial Code as the same may, from
time to time, be enacted and in effect in the State of New York; provided, that
in the event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of, or remedies with respect to, Agent's or
any Lender's Lien on any Collateral is governed by the Uniform Commercial Code
as enacted and in effect in a jurisdiction other than the State of New York, the
term "Code" shall mean the Uniform Commercial Code as enacted and in effect in
such other jurisdiction solely for purposes of the provisions thereof relating
to such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions.
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"Collateral" shall mean the property covered by the Security
Agreement, the Mortgages and the other Collateral Documents and any other
property, real or personal, tangible or intangible, now existing or hereafter
acquired, that may at any time be or become subject to a security interest or
Lien in favor of Agent, on behalf of Agent and Lenders, to secure the
Obligations.
"Collateral Documents" shall mean the Security Agreement, the Pledge
Agreement, the Guaranties, the Patent, Trademark and Copyright Security
Agreement and all similar agreements entered into guaranteeing payment of, or
granting a Lien upon property as security for payment of, the Obligations, as
each such agreement may be amended, supplemented, restated or otherwise modified
from time to time in accordance with the terms thereof.
"Collateral Reports" shall mean the reports with respect to the
Collateral referred to in Annex F.
"Collection Account" shall mean that certain account of Agent,
account number 502-328-54 in the name of Agent at Bankers Trust Company in New
York, New York, ABA No. 021 001 033, or such other account as may be designated
in writing by Agent as the "Collection Account."
"Commitments" shall mean (a) as to any Lender, such Lender's
Revolving Loan Commitment (including without duplication the Swing Line Lender's
Swing Line Commitment as a subset of its Revolving Loan Commitment) as set forth
on Annex J to the Agreement or in the most recent Assignment Agreement executed
by such Lender and (b) as to all Lenders, the aggregate of all Lenders'
Revolving Loan Commitments (including without duplication the Swing Line
Lender's Swing Line Commitment as a subset of its Revolving Loan Commitment),
which aggregate commitment shall be Ninety Million Dollars ($90,000,000) on the
Closing Date, and, with respect to each of clauses (a) and (b), as such
Commitments may be adjusted from time to time in accordance with the Agreement.
"Commitment Termination Date" shall mean the earliest of (a) June
22, 2004, (b) the date of termination of Lenders' obligations to make Advances
and to incur Letter of Credit Obligations or permit existing Loans to remain
outstanding pursuant to Section 8.2(b), and (c) the date of indefeasible
prepayment in full by Borrower of the Loans, the cancellation and return (or
stand-by guarantee) of all Letters of Credit or the cash collateralization of
all Letter of Credit Obligations pursuant to Annex B, and the termination of the
Revolving Loan Commitment and the Swing Line Commitment, in each case in
accordance with the provisions of Section 1.3(a).
"Compliance Certificate" shall have the meaning assigned to it in
Annex E.
"Contracts" shall mean all contracts, undertakings, or agreements
(other than rights evidenced by Chattel Paper, Documents or Instruments) in or
under which such Person may now or hereafter have any right, title or interest,
including any agreement relating to the terms of payment or the terms of
performance of any Account.
"Control Letter" shall mean a letter agreement between Agent and (a)
the issuer of
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uncertificated securities with respect to uncertificated securities in the name
of any Credit Party, (b) a securities intermediary with respect to securities,
whether certificated or uncertificated, securities entitlements and other
financial assets held in a securities account in the name of any Credit Party,
(c) a futures commission merchant or clearing house with respect to commodity
accounts and commodity contracts held by any Credit Party, whereby, among other
things, the issuer, securities intermediary or futures commission merchant, as
applicable, disclaims or subordinates any security interest in the applicable
financial assets, acknowledges the Lien of Agent, on behalf of Agent and
Lenders, on such financial assets, and agrees to follow the instructions or
entitlement orders of Agent without further consent by the affected Credit
Party.
"Copyright License" shall mean any and all rights now owned or
hereafter acquired by any Person under any written agreement granting any right
to use any Copyright or Copyright registration.
"Copyrights" shall mean all of the following property now owned or
existing or hereafter adopted or acquired by any Person: (a) all copyrights and
General Intangibles of like nature (whether registered or unregistered), all
registrations and recordings thereof, and all applications in connection
therewith, including all registrations, recordings and applications in the
United States Copyright Office or in any similar office or agency of the United
States, or any territory thereof, or any other country or any political
subdivision thereof; and (b) all extensions or renewals thereof.
"Credit Parties" shall mean Borrower and each of its Subsidiaries
and each other Person that may from time to time become a party to the Agreement
in such capacity.
"Default" shall mean any event that, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Default Rate" shall have the meaning assigned to it in Section
1.5(d).
"Disbursement Account" shall have the meaning assigned to it in
Annex C.
"Disclosure Schedules" shall mean the Schedules prepared by Borrower
and denominated as Disclosure Schedules (1.4) through (8.1(n)) in the Index to
the Agreement.
"Documents" shall mean any "documents," as such term is defined in
the Code, now owned or hereafter acquired by any Person, wherever located.
"Dollars" or "$" shall mean lawful currency of the United States of
America.
"Domestic Subsidiary" shall mean, with respect to any Person, any
Subsidiary of such Person other than a Foreign Subsidiary of such Person.
"EBITDA" shall mean, with respect to any Person for any fiscal
period, without duplication, an amount equal to (a) consolidated net income of
such Person for such period, minus (b) the sum of (i) income tax credits, (ii)
interest income, (iii) gain from extraordinary items for such period, (iv) any
aggregate net gain during such period arising from the sale,
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exchange or other disposition of assets by such Person outside of the ordinary
course of business (including any fixed assets, whether tangible or intangible,
all inventory sold in conjunction with the disposition of fixed assets and all
securities), and (v) any other non-cash gains that have been added in
determining consolidated net income, in each case to the extent included in the
calculation of consolidated net income of such Person for such period in
accordance with GAAP, plus (c) the sum of (i) any provision for income taxes,
(ii) Interest Expense, (iii) loss from extraordinary items for such period, (iv)
any aggregate net loss during such period arising from the sale, exchange or
other disposition of assets by such Person outside of the ordinary course of
business (including any fixed assets, whether tangible or intangible, all
inventory sold in conjunction with the disposition of fixed assets and all
securities), (v) the amount of non-cash charges (including depreciation and
amortization) for such period, (vi) amortized debt discount for such period, and
(vii) the amount of any deduction to consolidated net income as the result of
any grant to any members of the management of such Person of any Stock, in each
case to the extent included in the calculation of consolidated net income of
such Person for such period in accordance with GAAP. For purposes of this
definition, the following items shall be excluded in determining consolidated
net income of a Person: (A) the income (or deficit) of any other Person accrued
prior to the date it became a Subsidiary of, or was merged or consolidated into,
such Person or any of such Person's Subsidiaries; (B) the income (or deficit) of
any other Person (other than a Subsidiary) in which such Person has an ownership
interest, except to the extent any such income has actually been received by
such Person in the form of cash dividends or distributions; (C) the
undistributed earnings of any Subsidiary of such Person to the extent that the
declaration or payment of dividends or similar distributions by such Subsidiary
is not at the time permitted by the terms of any contractual obligation or
requirement of law applicable to such Subsidiary; (D) any restoration to income
of any contingency reserve, except to the extent that provision for such reserve
was made out of income accrued during such period; (E) any write-up of any
asset; (F) any net gain from the collection of the proceeds of life insurance
policies; (G) any net gain arising from the acquisition of any securities, or
the extinguishment, under GAAP, of any Indebtedness, of such Person; (H) in the
case of a successor to such Person by consolidation or merger or as a transferee
of its assets, any earnings of such successor prior to such consolidation,
merger or transfer of assets; and (I) any deferred credit representing the
excess of equity in any Subsidiary of such Person at the date of acquisition of
such Subsidiary over the cost to such Person of the investment in such
Subsidiary.
"Eligible Accounts" shall have the meaning assigned to it in Section
1.6.
"Eligible Inventory" shall have the meaning assigned to it in
Section 1.7.
"Environmental Laws" shall mean all applicable federal, state, local
and foreign laws, statutes, ordinances, codes, rules, standards and regulations,
now or hereafter in effect, and any applicable judicial or administrative
interpretation thereof, including any applicable judicial or administrative
order, consent decree, order or judgment, imposing liability or standards of
conduct for or relating to the regulation and protection of human health,
safety, the environment and natural resources (including ambient air, surface
water, groundwater, wetlands, land surface or subsurface strata, wildlife,
aquatic species and vegetation). Environmental Laws include the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C.
Sections 9601 et seq.) ("CERCLA"); the Hazardous Materials Transportation
Authorization Act of 1994 (49 U.S.C. Sections 5101 et seq.); the Federal
Insecticide, Fungicide, and Rodenticide Act (7
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U.S.C. Sections 136 et seq.); the Solid Waste Disposal Act (42 U.S.C.
Sections 6901 et seq.); the Toxic Substance Control Act (15 U.S.C.
Sections 2601 et seq.); the Clean Air Act (42 U.S.C. Sections 7401
et seq.); the Federal Water Pollution Control Act (33 U.S.C. Sections 1251
et seq.); the Occupational Safety and Health Act (29 U.S.C. Sections 651
et seq.); and the Safe Drinking Water Act (42 U.S.C. Sections 300(f) et
seq.); and any and all regulations promulgated thereunder, and all analogous
state, local and foreign counterparts or equivalents and any transfer of
ownership notification or approval statutes.
"Environmental Liabilities" shall mean, with respect to any Person,
all liabilities, obligations, responsibilities, response, remedial and removal
costs, investigation and feasibility study costs, capital costs, operation and
maintenance costs, losses, damages, punitive damages, property damages, natural
resource damages, consequential damages, treble damages, costs and expenses
(including all fees, disbursements and expenses of counsel, experts and
consultants), fines, penalties, sanctions and interest incurred as a result of
or related to any claim, suit, action, investigation, proceeding or demand by
any Person, whether based in contract, tort, implied or express warranty, strict
liability, criminal or civil statute or common law, including any arising under
or related to any Environmental Laws, Environmental Permits, or in connection
with any Release or threatened Release or presence of a Hazardous Material
whether on, at, in, under, from or about or in the vicinity of any real or
personal property.
"Environmental Permits" shall mean all permits, licenses,
authorizations, certificates, approvals or registrations required by any
Governmental Authority under any Environmental Laws.
"Equipment" shall mean all "equipment," as such term is defined in
the Code, now owned or hereafter acquired by any Person, wherever located,
including all such Person's machinery and equipment, including processing
equipment, conveyors, machine tools, data processing and computer equipment with
software and peripheral equipment, and all engineering, processing and
manufacturing equipment, office machinery, furniture, materials handling
equipment, tools, attachments, accessories, automotive equipment, trailers,
trucks, forklifts, molds, dies, stamps, motor vehicles, rolling stock and other
equipment of every kind and nature, trade fixtures and fixtures, together with
all additions and accessions thereto, replacements therefor, all parts therefor,
all substitutes for any of the foregoing, fuel therefor, and all manuals,
drawings, instructions, warranties and rights with respect thereto, and all
products and proceeds thereof and condemnation awards and insurance proceeds
with respect thereto.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, and any regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to any Credit Party, any
trade or business (whether or not incorporated) that, together with such Credit
Party, are treated as a single employer within the meaning of Sections 414(b),
(c), (m) or (o) of the IRC.
"ERISA Event" shall mean, with respect to any Credit Party or any
ERISA Affiliate: (a) any event described in Section 4043(c) of ERISA with
respect to a Title IV Plan; (b) the withdrawal of any Credit Party or ERISA
Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan
year in which it was a "substantial employer," as defined in
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Section 4001(a)(2) of ERISA; (c) the complete or partial withdrawal of any
Credit Party or any ERISA Affiliate from any Multiemployer Plan; (d) the filing
of a notice of intent to terminate a Title IV Plan or the treatment of a plan
amendment as a termination under Section 4041 of ERISA; (e) the institution of
proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (f)
the failure by any Credit Party or ERISA Affiliate to make when due required
contributions to a Multiemployer Plan or Title IV Plan unless such failure is
cured within 30 days; (g) any other event or condition that might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Title IV Plan or
Multiemployer Plan or for the imposition of liability under Section 4069 or
4212(c) of ERISA; (h) the termination of a Multiemployer Plan under Section
4041A of ERISA or the reorganization or insolvency of a Multiemployer Plan under
Section 4241 of ERISA; (i) the loss of a Qualified Plan's qualification or tax
exempt status; or (j) the termination of a Plan described in Section 4064 of
ERISA.
"ESOP" shall mean a Plan that is intended to satisfy the
requirements of Section 4975(e)(7) of the IRC.
"Event of Default" shall have the meaning assigned to it in Section
8.1.
"Fair Labor Standards Act" shall mean the provisions of the Fair
Labor Standards Act, 29 U.S.C. Sections 201 et seq.
"Fair Salable Balance Sheet" shall mean a balance sheet of Borrower
prepared in accordance with Section 3.4(d).
"Federal Funds Rate" shall mean, for any day, a floating rate equal
to the weighted average of the rates on overnight federal funds transactions
among members of the Federal Reserve System, as determined by Agent in its sole
discretion, which determination shall be final, binding and conclusive (absent
manifest error).
"Federal Reserve Board" shall mean the Board of Governors of the
Federal Reserve System.
"Fees" shall mean any and all fees payable to Agent or any Lender
pursuant to the Agreement or any of the other Loan Documents.
"Financial Covenants" shall have the meaning assigned to it in
Section 6.10.
"Financial Statements" shall mean the consolidated and consolidating
income statements, statements of cash flows and balance sheets of Borrower
delivered in accordance with Section 3.4 and Annex E.
"First Adjustment Date" shall have the meaning assigned to it in
Section 1.5(a).
"Fiscal Month" shall mean any of the monthly accounting periods of
Borrower.
"Fiscal Quarter" shall mean any of the quarterly accounting periods
of Borrower
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ending on March 31, June 30, September 30 and December 31 of each year.
"Fiscal Year" shall mean any of the annual accounting periods of
Borrower ending on December 31 of each year.
"Fixed Charge Coverage Ratio" shall mean, with respect to any Person
for any fiscal period, the ratio of (a) (i) Pro Forma EBITDA minus (ii) Capital
Expenditures paid by such Person in cash minus (iii) Taxes paid in cash or
accrued by such Person to (b) Fixed Charges, in each case for such period. In
computing Fixed Charges for any fiscal period, interest and principal payments
that are due within one week after the end of that fiscal period, without
duplication, shall be deemed to have been paid on the last day of that fiscal
period.
"Fixed Charges" shall mean, with respect to any Person for any
fiscal period, (a) the aggregate of all Interest Expense paid or accrued during
such period, plus (b) regularly scheduled payments of principal paid or payable
with respect to Indebtedness during such period.
"Fixtures" shall mean all "fixtures," as such term is defined in the
Code, now owned or hereafter acquired by any Person, wherever located.
"Foreign Subsidiary" shall mean, with respect to any Person, any
Subsidiary of such Person that is not organized under the laws of the United
States of America or the District of Columbia.
"Fuhrer Debt" shall mean the Indebtedness evidenced by (a) that
certain Promissory Note dated June 5, 1990, made by Ft. Pitt Acquisition, Inc.
and Ft. Pitt-Framesi, Ltd., collectively, as makers, in favor of Frank Fuhrer
International, Inc. and Framesi of U.S.A., Inc., collectively, as payee, in the
original principal amount of $2,986,010.03 and (b) that certain Promissory Note
dated June 5, 1990, made by Ft. Pitt Acquisition, Inc. and Ft. Pitt-Framesi,
Ltd., collectively, as makers, in favor of Frank Fuhrer International, Inc. and
Framesi of U.S.A., Inc., collectively, as payee, in the original principal
amount of $1,400,000.
"Funded Debt" shall mean, with respect to any Person, without
duplication, all Indebtedness of such Person for borrowed money evidenced by
notes, bonds, debentures or similar evidences of Indebtedness that by its terms
matures more than one year from, or is directly or indirectly renewable or
extendible at such Person's option under a revolving credit or similar agreement
obligating the lender or lenders to extend credit over a period of more than one
year from the date of creation thereof, and specifically including Capital Lease
Obligations, current maturities of long-term debt, revolving credit and
short-term debt extendible beyond one year at the option of the debtor, and also
including, in the case of Borrower, the Obligations and, without duplication,
Guaranteed Indebtedness consisting of guaranties of Funded Debt of other
Persons.
"GAAP" shall mean generally accepted accounting principles in the
United States of America, consistently applied, as such term is further defined
in Annex G to the Agreement.
"GE Capital" shall mean General Electric Capital Corporation, a New
York corporation.
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"GE Capital Fee Letter" shall have the meaning assigned to it in
Section 1.9(a).
"General Intangibles" shall mean all "general intangibles," as such
term is defined in the Code, now owned or hereafter acquired by any Person,
including all right, title and interest that such Person may now or hereafter
have in or under any Contracts, Licenses, Copyrights, Trademarks and Patents and
all applications therefor and reissues, extensions or renewals thereof,
interests in partnerships, joint ventures and other business associations,
permits, inventions (whether or not patented or patentable), knowledge,
know-how, software, data bases, data, skill, expertise, experience, processes,
models, drawings, materials and records, Goodwill (including the goodwill
associated with any Trademark or Trademark License), all rights and claims in or
under insurance policies (including insurance for fire, damage, loss and
casualty, whether covering personal property, real property, tangible rights or
intangible rights, all liability, life, key man and business interruption
insurance, and all unearned premiums), uncertificated and certificated
securities, chooses in action, deposit, checking and other bank accounts, rights
to receive tax refunds and other payments, rights to receive dividends,
distributions, cash, instruments and other property in respect of or in exchange
for pledged shares or other equity interests, rights of indemnification, all
books and records, correspondence, credit files, invoices and other papers,
including all tapes, cards, computer runs and other papers and documents in the
possession or under the control of such Person or any computer bureau or service
company from time to time acting for such Person.
"Goods" shall mean any "goods," as such term is defined in the Code,
now owned or hereafter acquired by any Person.
"Goodwill" shall mean all goodwill, trade secrets, proprietary or
confidential information, technical information, procedures, formulae, quality
control standards, designs, operating and training manuals, customer lists, and
other General Intangibles now or hereafter owned or acquired by any Person.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guaranteed Indebtedness" shall mean, as to any Person, any
obligation of such Person guaranteeing any indebtedness, lease, dividend, or
other obligation ("primary obligation") of any other Person (the "primary
obligor") in any manner, including any obligation or arrangement of such Person
to (a) purchase or repurchase any such primary obligation, (b) advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet condition of the
primary obligor, (c) purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation, or (d) indemnify
the owner of such primary obligation against loss in respect thereof. The amount
of any Guaranteed Indebtedness at any time shall be deemed to be an amount equal
to the lesser at such time of (x) the stated or determinable amount of the
primary obligation in
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respect of which such Guaranteed Indebtedness is incurred and (y) the maximum
amount for which such Person may be liable pursuant to the terms of the
instrument embodying such Guaranteed Indebtedness or, if not stated or
determinable, the maximum reasonably anticipated liability (assuming full
performance) in respect thereof.
"Guaranties" shall mean, collectively, the Subsidiary Guaranty and
any other guaranty executed by any Guarantor in favor of Agent, for the benefit
of Agent and Lenders, in respect of the Obligations.
"Guarantors" shall mean each Domestic Subsidiary of Borrower and
each other Person, if any, that executes a guaranty or other similar agreement
in favor of Agent, for the benefit of Agent and Lenders, in connection with the
transactions contemplated by the Agreement and the other Loan Documents.
"Hazardous Material" shall mean any substance, material or waste
that is regulated by, or forms the basis of liability now or hereafter under,
any Environmental Laws, including any material or substance that is (a) defined
as a "solid waste," "hazardous waste," "hazardous material," "hazardous
substance," "extremely hazardous waste," "restricted hazardous waste,"
"pollutant," "contaminant," "hazardous constituent," "special waste," "toxic
substance" or other similar term or phrase under any Environmental Laws, or (b)
petroleum or any fraction or by-product thereof, asbestos, polychlorinated
biphenyls (PCB's), or any radioactive substance.
"Indebtedness" shall mean, with respect to any Person, without
duplication, (a) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property payment for which is deferred six months or
more, but excluding obligations to trade creditors incurred in the ordinary
course of business that are not overdue by more than six months unless being
contested in good faith, (b) all reimbursement and other obligations with
respect to letters of credit, bankers' acceptances and surety bonds, whether or
not matured, (c) all obligations evidenced by notes, bonds, debentures or
similar instruments, (d) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (e) all Capital Lease Obligations and the present
value (discounted at the Index Rate as in effect on the Closing Date) of future
rental payments under all synthetic leases, (f) all obligations of such Person
under commodity purchase or option agreements or other commodity price hedging
arrangements, in each case whether contingent or matured, (g) all obligations of
such Person under any foreign exchange contract, currency swap agreement,
interest rate swap, cap or collar agreement or other similar agreement or
arrangement designed to alter the risks of that Person arising from fluctuations
in currency values or interest rates, in each case whether contingent or
matured, (h) all Indebtedness referred to above secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon or in property or other assets (including accounts
and contract rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness, and (i) the
Obligations.
"Indemnified Liabilities" shall have the meaning assigned to it in
Section 1.13.
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"Index Rate" shall mean, for any day, a floating rate equal to the
higher of (a) the rate publicly quoted from time to time by The Wall Street
Journal as the "base rate on corporate loans at large U.S. money center
commercial banks" (or, if The Wall Street Journal ceases quoting a base rate of
the type described, the highest per annum rate of interest published by the
Federal Reserve Board in Federal Reserve statistical release H.15 (519) entitled
"Selected Interest Rates" as the Bank prime loan rate or its equivalent), and
(b) the Federal Funds Rate plus 50 basis points per annum. Each change in any
interest rate provided for in the Agreement based upon the Index Rate shall take
effect at the time of such change in the Index Rate.
"Index Rate Loan" shall mean a Loan or any portion thereof bearing
interest by reference to the Index Rate.
"Initial Notes" shall have the meaning assigned to it in the Senior
Subordinated Note Indenture.
"Instruments" shall mean any "instrument," as such term is defined
in the Code, now owned or hereafter acquired by any Person, wherever located,
including all certificated securities, all certificates of deposit, and all
notes and other evidences of indebtedness, other than instruments that
constitute, or are a part of a group of writings that constitute, Chattel Paper.
"Intellectual Property" shall mean any and all Licenses, Patents,
Copyrights, Trademarks and the Goodwill associated with any of the foregoing.
"Intellectual Property Collateral" shall mean all of the right,
title and interest of any Credit Party, whether presently existing or hereafter
arising or acquired, in, to and under the following:
(a) each Patent owned and Patent application filed by such Person;
(b) each Patent License to which such Person is a party (or the
assignee of a party);
(c) each Trademark owned and Trademark application filed by such
Person;
(d) each Trademark License to which such Person is a party (or the
assignee of a party);
(e) each Copyright owned and Copyright application filed by such
Person;
(f) each Copyright License to which such Person is a party;
(g) the Goodwill associated with each Trademark and Trademark
application, and each of such Person's Trademarks licensed under any Trademark
License; and
(h) all Proceeds of the foregoing, including (i) any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to any Person
from time to time with respect to any of the foregoing, (ii) any and all
payments (in any form whatsoever) made or due and
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payable to any Person from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
foregoing by any Governmental Authority (or any Person acting under color of
Governmental Authority), (iii) any claim of any Person against third parties for
(A) past, present or future infringement of any Patent or Patent License, (B)
past, present or future infringement of any Copyright, Copyright License, (C)
past, present or future infringement or dilution of any Trademark or Trademark
License, or (D) injury to the Goodwill associated with any Trademark or
Trademark License, (iv) any recoveries by any Person against third parties with
respect to any litigation or dispute concerning any of the foregoing, and (v)
any and all other amounts from time to time paid or payable under or in
connection with any of the foregoing, upon disposition or otherwise.
"Intercompany Notes" shall have the meaning assigned to it in
Section 6.3.
"Interest Expense" shall mean, with respect to any Person for any
fiscal period, interest expense (whether cash or non-cash) of such Person
determined in accordance with GAAP for the relevant period ended on such date,
including interest expense with respect to any Funded Debt of such Person and
interest expense for the relevant period that has been capitalized on the
balance sheet of such Person.
"Interest Payment Date" shall mean (a) as to any Index Rate Loan,
the first Business Day of each month to occur while such Loan is outstanding,
and (b) as to any LIBOR Loan, the last day of the applicable LIBOR Period;
provided that, in addition to the foregoing, each of (x) the date upon which all
of the Commitments have been terminated and the Loans have been paid in full and
(y) the Commitment Termination Date shall be deemed to be an "Interest Payment
Date" with respect to any interest that has then accrued under the Agreement.
"Inventory" shall mean any "inventory," as such term is defined in
the Code, now owned or hereafter acquired by any Person, wherever located,
including inventory, merchandise, goods and other personal property that are
held by or on behalf of such Person for sale or lease or are furnished or are to
be furnished under a contract of service, or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any
kind, nature or description used or consumed or to be used or consumed in such
Person's business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including other supplies.
"Investment Property" shall mean all "investment property," as such
term is defined in Section 9-115 of the Code in those jurisdictions in which
such definition has been adopted, now owned or hereafter acquired by any Person,
wherever located, including (a) all securities, whether certificated or
uncertificated, including stocks, bonds, interests in limited liability
companies, partnership interests, treasuries, certificates of deposit, and
mutual fund shares, (b) all securities entitlements of such Person, including
the rights of such Person to any securities account and the financial assets
held by a securities intermediary in such securities account and any free credit
balance or other money owing by any securities intermediary with respect to such
account, (c) all securities accounts of such Person, (d) all commodity contracts
held by such Person, and (e) all commodity accounts held by such Person.
"IRC" shall mean the Internal Revenue Code of 1986 and any
regulations
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promulgated thereunder.
"IRS" shall mean the Internal Revenue Service.
"L/C Issuer" shall have the meaning assigned to it in Annex B.
"L/C Sublimit" shall have the meaning assigned to it in Annex B.
"Lenders" shall mean GE Capital, the other Lenders named on the
signature pages of the Agreement and, if any such Lender shall decide to assign
all or any portion of the Obligations, any assignee of such Lender.
"Letter of Credit Fee" shall have the meaning assigned to it in
Annex B.
"Letter of Credit Obligations" shall mean all outstanding
obligations incurred by Agent and Lenders at the request of Borrower, whether
direct or indirect, contingent or otherwise, due or not due, in connection with
the issuance of a reimbursement agreement or guaranty by Agent or purchase of a
participation as set forth in Annex B with respect to any Letter of Credit. The
amount of such Letter of Credit Obligations shall equal the maximum amount that
may be payable by Agent or Lenders thereupon or pursuant thereto.
"Letters of Credit" shall mean commercial or standby letters of
credit issued for the account of Borrower by any L/C Issuer, and bankers'
acceptances issued by Borrower, for which Agent and Lenders have incurred Letter
of Credit Obligations.
"LIBOR Business Day" shall mean a Business Day on which banks in the
City of London are generally open for interbank or foreign exchange
transactions.
"LIBOR Loan" shall mean a Loan or any portion thereof bearing
interest by reference to the LIBOR Rate.
"LIBOR Period" shall mean, with respect to any LIBOR Loan, each
period commencing on a LIBOR Business Day selected by Borrower pursuant to the
Agreement and ending one, two or three months thereafter, as selected by
Borrower's irrevocable notice to Agent as set forth in Section 1.5(e); provided,
that the foregoing provision relating to LIBOR Periods is subject to the
following:
(a) if any LIBOR Period would otherwise end on a day that is not a
LIBOR Business Day, such LIBOR Period shall be extended to the next succeeding
LIBOR Business Day unless the result of such extension would be to carry such
LIBOR Period into another calendar month in which event such LIBOR Period shall
end on the immediately preceding LIBOR Business Day;
(b) any LIBOR Period that would otherwise extend beyond the
Commitment Termination Date shall end two LIBOR Business Days prior to such
date;
(c) any LIBOR Period that begins on the last LIBOR Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar
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month at the end of such LIBOR Period) shall end on the last LIBOR Business Day
of a calendar month;
(d) Borrower shall select LIBOR Periods so as not to require a
payment or prepayment of any LIBOR Loan during a LIBOR Period for such Loan; and
(e) Borrower shall select LIBOR Periods so that there shall be no
more than five separate LIBOR Loans in existence at any one time.
"LIBOR Rate" shall mean for each LIBOR Period, a rate of interest
determined by Agent equal to:
(a) the offered rate for deposits in United States Dollars for the
applicable LIBOR Period that appears on Telerate Page 3750 as of 11:00 a.m.
(London time) on the second full LIBOR Business Day preceding the first day of
such LIBOR Period; divided by
(b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day that is two LIBOR Business Days prior to the
beginning of such LIBOR Period (including basic, supplemental, marginal and
emergency reserves under any regulations of the Federal Reserve Board or other
Governmental Authority having jurisdiction with respect thereto, as now and from
time to time in effect) for Eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Federal Reserve Board) that
are required to be maintained by a member bank of the Federal Reserve System.
If such interest rates shall cease to be available from Telerate News Service,
the LIBOR Rate shall be determined from such financial reporting service or
other information as shall be mutually acceptable to Agent and Borrower.
"License" shall mean any Copyright License, Patent License,
Trademark License or other license of rights or interests now held or hereafter
acquired by any Person.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security interest
under the Code or comparable law of any jurisdiction).
"Litigation" shall have the meaning assigned to it in Section 3.13.
"Loan Account" shall have the meaning assigned to it in Section
1.12.
"Loan Documents" shall mean the Agreement, the Notes, the Collateral
Documents and all other agreements, instruments, documents and certificates
identified in the Schedule of Documents executed and delivered to, or in favor
of, Agent or any Lender and
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including all other pledges, powers of attorney, consents, assignments,
contracts, notices, and all other written matter whether heretofore, now or
hereafter executed by or on behalf of any Credit Party, or any employee of any
Credit Party, and delivered to Agent or any Lender in connection with the
Agreement or the transactions contemplated thereby. Any reference in the
Agreement or any other Loan Document to a Loan Document shall include all
appendices, exhibits or schedules thereto, and all amendments, restatements,
supplements or other modifications thereto, and shall refer to such Agreement or
Loan Document as the same may be in effect at any and all times such reference
becomes operative.
"Loans" shall mean the Revolving Loan and the Swing Line Loan.
"Lock Boxes" shall have the meaning assigned to it in Annex C.
"Margin Stock" shall have the meaning assigned to it in Section
3.10.
"Material Adverse Effect" shall mean a material adverse effect on
(a) the business, assets, operations, prospects or financial or other condition
of the Credit Parties considered as a whole, (b) Borrower's ability to pay any
of the Loans or any of the other Obligations in accordance with the terms of the
Agreement, (c) the Guarantors' ability, taken as a whole, to pay their
respective Obligations under the Guaranties, (d) the Collateral or Agent's
Liens, for the benefit of Agent and Lenders, on the Collateral or the priority
of such Liens, or (e) Agent's or any Lender's rights and remedies under the
Agreement and the other Loan Documents. Without limiting the generality of the
foregoing, any event or occurrence adverse to one or more Credit Parties that,
as of any date of determination, results or could reasonably be expected to
result in costs or liabilities or loss of revenues on a consolidated basis in
any quarterly period in excess of 25% of the average pro forma quarterly
revenues for the four full Fiscal Quarters immediately preceding such date of
determination shall be deemed to constitute a Material Adverse Effect.
"Maximum Amount" shall mean, at the time any determination thereof
is to be made, the amount at such time equal to the Revolving Loan Commitment of
all Lenders.
"Maximum Lawful Rate" shall have the meaning assigned to it in
Section 1.5(f).
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA and to which any Credit Party or ERISA Affiliate is
making, is obligated to make, or has made or been obligated to make,
contributions on behalf of participants who are or were employed by any of them.
"Net Borrowing Availability" shall mean as of any date of
determination, the lesser of (a) the Maximum Amount and (b) the Borrowing Base,
in each case less the sum of the Revolving Loan and Swing Line Loan then
outstanding.
"Non-Funding Lender" shall have the meaning assigned to it in
Section 9.9(a)(ii).
"Notes" shall mean, collectively, the Revolving Notes and the Swing
Line Note.
"Notice of Conversion/Continuation" shall have the meaning assigned
to it in
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Section 1.5(e).
"Notice of Revolving Credit Advance" shall have the meaning assigned
to it in Section 1.1(a).
"Obligations" shall mean all loans, advances, debts, liabilities and
obligations for the performance of covenants, tasks or duties or for payment of
monetary amounts (whether or not such performance is then required or
contingent, or such amounts are liquidated or determinable) owing by any Credit
Party to Agent or any Lender, and all covenants and duties regarding such
amounts, of any kind or nature, present or future, whether or not evidenced by
any note, agreement or other instrument, arising under the Agreement or any of
the other Loan Documents. This term includes all principal, interest (including
all interest that accrues after the commencement of any case or proceeding by or
against any Credit Party in bankruptcy, whether or not allowed in such case or
proceeding), Fees, Charges, expenses, attorneys' fees and any other sum
chargeable to any Credit Party under the Agreement or any of the other Loan
Documents.
"Overadvance" shall have the meaning assigned to it in Section
1.1(a)(iii).
"Patent License" shall mean rights under any written agreement now
owned or hereafter acquired by any Person granting any right with respect to any
invention on which a Patent is in existence.
"Patents" shall mean all of the following property in which any
Person now holds or hereafter acquires any interest: (a) all letters patent of
the United States or of any other country, all registrations and recordings
thereof, and all applications for letters patent of the United States or any
other country, including registrations, recordings and applications in the
United States Patent and Trademark Office or in any similar office or agency of
the United States or any territory thereof, or any other country, and (b) all
reissues, continuations, continuations-in-part, divisions or extensions thereof.
"Patent, Trademark and Copyright Security Agreement" shall mean the
Patent, Trademark and Copyright Security Agreement of even date herewith made in
favor of Agent, for the benefit of Agent and Lenders, by each Credit Party
signatory thereto, as the same may be amended, supplemented, restated or
otherwise modified from time to time in accordance with the terms thereof.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pension Plan" shall mean a Plan described in Section 3(2) of ERISA.
"Permitted Acquisition" shall have the meaning assigned to it in
Section 6.1.
"Permitted Encumbrances" shall mean the following encumbrances: (a)
Liens for taxes or assessments or other governmental Charges not yet due and
payable or that are being contested in accordance with Section 5.2(b) of the
Agreement; (b) pledges or deposits of money securing statutory obligations under
workmen's compensation, unemployment insurance, social security or public
liability laws or similar legislation (excluding Liens under ERISA); (c) pledges
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or deposits of money securing bids, tenders, contracts (other than contracts for
the payment of money) or leases to which any Credit Party is a party as lessee
made in the ordinary course of business; (d) inchoate and unperfected workers',
mechanics' or similar liens arising in the ordinary course of business, so long
as such Liens attach only to Equipment, Fixtures or Real Estate; (e) carriers',
warehousemen's, suppliers' or other similar possessory liens arising in the
ordinary course of business and securing liabilities in an outstanding aggregate
amount not in excess of $250,000 at any time, so long as such Liens attach only
to Inventory; (f) deposits securing, or in lieu of, surety, appeal or customs
bonds in proceedings to which any Credit Party is a party; (g) any attachment or
judgment lien not constituting an Event of Default under Section 8.1(j); (h)
zoning restrictions, easements, licenses, or other restrictions on the use of
any Real Estate or other minor irregularities in title (including leasehold
title) thereto, so long as the same do not materially impair the use, value, or
marketability of such Real Estate; (i) Liens existing on the Closing Date and
listed in Disclosure Schedule (6.7) and Liens securing any refinancings of the
Indebtedness secured by any such Closing Date Liens so long as such refinancings
are permitted under the Agreement and such Liens do not encumber any assets not
encumbered by such Closing Date Liens; (j) presently existing or hereafter
created Liens in favor of Agent, for the benefit of Agent and Lenders; (k) Liens
(i) created after the Closing Date by conditional sale or other title retention
agreements (including Capital Leases) or in connection with purchase money
Indebtedness with respect to Equipment and Fixtures acquired by any Credit Party
in the ordinary course of business, or (ii) consisting of purchase money
security interests or Capital Leases encumbering assets of a Target involved in
a Permitted Acquisition, involving the incurrence of an aggregate amount of
purchase money Indebtedness and Capital Lease Obligations of not more than
$2,000,000 outstanding at any one time for all such Liens (provided that such
Liens attach only to the assets subject to such purchase money debt and the
proceeds thereof and such Indebtedness is incurred within 20 days following such
purchase and does not exceed 100% of the purchase price of the subject assets);
(l) Liens arising from precautionary filings of financing statements
contemplated by Section 9-408 of the Code made by lessors against any Credit
Party, as a lessee, with respect to leases of personal property permitted by the
Agreement; (m) leases or subleases under which any Credit Party is a lessee that
are permitted by the Agreement; and (n) Liens in favor of the "Trustee," as that
term is defined under the Senior Subordinated Note Indenture, pursuant to
Section 7.07 of the Senior Subordinated Note Indenture.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, public benefit corporation,
other entity or government (whether federal, state, county, city, municipal,
local, foreign, or otherwise, including any instrumentality, division, agency,
body or department thereof).
"Plan" shall mean, at any time, an "employee benefit plan," as
defined in Section 3(3) of ERISA, that any Credit Party or any ERISA Affiliate
maintains, contributes to or has an obligation to contribute to on behalf of
participants who are or were employed by any Credit Party.
"Pledge Agreement" shall mean the Pledge Agreement of even date
herewith executed by each Credit Party signatory thereto in favor of Agent, for
the benefit of Agent and Lenders, pledging all Stock owned or held by it and all
Intercompany Notes owing to or held by
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it, as the same may be amended, supplemented, restated or otherwise modified
from time to time in accordance with the terms thereof.
"Prior Lender Agreement" shall mean that certain Credit Agreement
dated as of June 30, 1998, by and among Borrower, the lenders party thereto,
NationsBank, N.A., as administrative agent, and BankBoston, N.A., as
documentation agent, as the same may have been amended, restated, supplemented
or otherwise modified from time to time.
"Prior Lenders" shall mean, collectively, NationsBank, N.A.,
BankBoston, N.A., and each other lender party to the Prior Lender Agreement.
"Prior Lender Obligations" shall mean all obligations of the Credit
Parties to any Prior Lender pursuant to the Prior Lender Agreement and all other
agreements, instruments or documents executed and delivered to, or in favor of,
any Prior Lender in connection therewith or the transactions contemplated
thereby, in each case as the same may have been amended, restated, supplemented
or otherwise modified from time to time.
"Proceeds" shall mean "proceeds," as such term is defined in the
Code, including (a) any and all proceeds of any insurance, indemnity, warranty
or guaranty payable to any Person from time to time with respect to any of the
Collateral, (b) any and all payments (in any form whatsoever) made or due and
payable to any Person from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any Person acting under color of
governmental authority), (c) any claim of any Person against third parties (i)
for past, present or future infringement of any Patent or Patent License, or
(ii) for past, present or future infringement or dilution of any Copyright,
Copyright License, Trademark or Trademark License, or for injury to the Goodwill
associated with any Trademark or Trademark License, (d) any recoveries by any
Person against third parties with respect to any litigation or dispute
concerning any of the Collateral, and (e) any and all other amounts from time to
time paid or payable under or in connection with any of the Collateral, upon
disposition or otherwise.
"Pro Forma" shall mean the financial statements attached as
Disclosure Schedule (3.4(b)) to the Agreement.
"Pro Forma EBITDA" shall mean, with respect to any Person for any
fiscal period, EBITDA of such Person, adjusted to (a) include the pro forma
EBITDA of any business acquired by such Person during such period as if acquired
at the beginning of such period after giving effect to adjustments for any
expenses that have been or will be eliminated under ownership by such Person or
any of its Subsidiaries of such acquired business, as determined by such Person
and approved by Requisite Revolving Lenders in their reasonable credit judgment;
provided, that the approval of Requisite Revolving Lenders shall not be required
(i) for inclusion in the Borrowing Base of the pro forma EBITDA of any Target
acquired pursuant to a Permitted Acquisition or (ii) with respect to adjustments
thereto for aggregate compensation expense with respect to (A) principal
Stockholder-employees of any Target and (B) family members of such
Stockholder-employees who are employees of such Target, in each case to be
terminated in connection with a Permitted Acquisition, and expenses directly
related thereto, (b) exclude the pro forma EBITDA of any business disposed of
during such period as if disposed of at the beginning of
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such period, and (c) exclude specific one-time cash expenses related to
Borrower's strategic centralization and reengineering plan as announced by
Borrower in connection with the release of its financial results for the Fiscal
Quarter ending September 30, 1998.
"Projections" shall mean Borrower's forecasted consolidated and
consolidating: (a) balance sheets; (b) profit and loss statements; (c) cash flow
statements; and (d) capitalization statements, all prepared on a
Subsidiary-by-Subsidiary or division-by-division basis, if applicable, and
otherwise consistent with the historical Financial Statements of Borrower,
together with appropriate supporting details and a statement of underlying
assumptions.
"Pro Rata Share" shall mean, with respect to all matters relating to
any Lender, (a) with respect to the Revolving Loan (including the Swing Line
Loan as a subset of the Swing Line Lender's Revolving Loan), the percentage
obtained by dividing (i) the Revolving Loan Commitment (including the Swing Line
Commitment as a subset of the Swing Line Lender's Revolving Loan Commitment) of
such Lender, by (ii) the aggregate Revolving Loan Commitments of all Lenders,
and (b) with respect to all Loans on and after the Commitment Termination Date,
the percentage obtained by dividing (i) the aggregate outstanding principal
balance of the Loans held by such Lender, by (ii) the outstanding principal
balance of the Loans held by all Lenders, in each case as such percentages may
be adjusted by assignments permitted pursuant to Section 9.1.
"Qualified Plan" shall mean a Pension Plan that is intended to be
tax-qualified under Section 401(a) of the IRC.
"Real Estate" shall have the meaning assigned to it in Section 3.6.
"Refinancing" shall mean the repayment in full by Borrower of the
Prior Lender Obligations and the Fuhrer Debt on the Closing Date.
"Refunded Swing Line Loan" shall have the meaning assigned to it in
Section 1.1(b)(iii).
"Related Transactions" shall mean the initial borrowing under the
Revolving Loan on the Closing Date, the Refinancing, the payment of all fees,
costs and expenses associated with all of the foregoing and the execution and
delivery of all of the Related Transactions Documents.
"Related Transactions Documents" shall mean the Loan Documents and
all other documents executed in connection with the Related Transactions.
"Release" shall mean any release, threatened release, spill,
emission, leaking, pumping, pouring, emitting, emptying, escape, injection,
deposit, disposal, discharge, dispersal, dumping, leaching or migration of
Hazardous Material in the indoor or outdoor environment, including the movement
of Hazardous Material through or in the air, soil, surface water, ground water
or property.
"Requisite Revolving Lenders" shall mean (a) Lenders having more
than sixty-six and two-thirds percent (66 2/3%) of the Revolving Loan
Commitments of all Lenders, or (b) if the Revolving Loan Commitments have been
terminated, more than sixty-six and two-thirds percent (66 2/3%) of the
aggregate outstanding amount of the Revolving Loan (with the Swing Line Loan
being attributed to the Lender making such Loan) and Letter of Credit
Obligations.
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"Reserves" shall mean (a) reserves established by Agent from time to
time against Eligible Inventory pursuant to Section 5.9, (b) reserves
established pursuant to Section 5.4(c), and (c) such other reserves against the
Borrowing Base or Borrowing Availability that Agent may, in its reasonable
credit judgment, establish from time to time. Without limiting the generality of
the foregoing, Reserves established to ensure the payment of accrued Interest
Expenses or Indebtedness shall be deemed to be a reasonable exercise of Agent's
credit judgment.
"Restricted Payment" shall mean, with respect to any Person and
without duplication: (a) the declaration or payment of any dividend or the
incurrence of any liability to make any other payment or distribution of cash or
other property or assets in respect of such Person's Stock; (b) any payment on
account of the purchase, redemption, defeasance, sinking fund or other
retirement of such Person's Stock or any other payment or distribution made in
respect thereof, either directly or indirectly; (c) any payment or prepayment of
principal of, premium, if any, or interest, fees or other charges on or with
respect to, and any redemption, purchase, retirement, defeasance, sinking fund
or similar payment and any claim for rescission with respect to, any
Subordinated Debt of such Person; (d) any payment made to redeem, purchase,
repurchase or retire, or to obtain the surrender of, any outstanding warrants,
options or other rights to acquire Stock of such Person now or hereafter
outstanding; (e) any payment of a claim for the rescission of the purchase or
sale of, or for material damages arising from the purchase or sale of, any
shares of such Person's Stock or of a claim for reimbursement, indemnification
or contribution arising out of or related to any such claim for damages or
rescission; (f) any payment, loan, contribution, or other transfer of funds or
other property to any Stockholder of such Person other than payment of
compensation in the ordinary course and consistent with customary business
practices to Stockholders who are employees of such Person; and (g) any payment
of management fees (or other fees of a similar nature) by such Person to any
Stockholder of such Person or its Affiliates.
"Retiree Welfare Plan" shall mean, at any time, a Welfare Plan that
provides for continuing coverage or benefits for any participant or any
beneficiary of a participant after such participant's termination of employment,
other than continuation coverage provided pursuant to Section 4980B of the IRC
and at the sole expense of the participant or the beneficiary of the
participant.
"Revolving Credit Advance" shall have the meaning assigned to it in
Section 1.1(a)(i).
"Revolving Lenders" shall mean, as of any date of determination,
Lenders having a Revolving Loan Commitment.
"Revolving Loan" shall mean, at any time, (a) the aggregate amount
of Revolving Credit Advances outstanding to Borrower plus (b) the aggregate
Letter of Credit Obligations incurred on behalf of Borrower. Unless the context
otherwise requires, references to the outstanding principal balance of the
Revolving Loan shall include the outstanding balance of Letter of Credit
Obligations.
"Revolving Loan Commitment" shall mean (a) as to any Revolving
Lender, the aggregate commitment of such Revolving Lender to make Revolving
Credit Advances (including without duplication Swing Line Advances as a subset
of the Swing Line Lender's Revolving Loan Commitment) or incur Letter of Credit
Obligations as set forth in Annex J or in the most recent Assignment Agreement
executed by such Revolving Lender and (b) as to all Revolving Lenders, the
aggregate commitment of all Revolving Lenders to make Revolving Credit Advances
(including without duplication Swing Line Advances as a subset of the Swing Line
Lender's Revolving Loan
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Commitment) or incur Letter of Credit Obligations, which aggregate commitment
shall be Ninety Million Dollars ($90,000,000) on the Closing Date, as such
amount may be adjusted, if at all, from time to time in accordance with the
Agreement.
"Revolving Note" shall have the meaning assigned to it in Section
1.1(a)(ii).
"Schedule of Documents" shall mean the schedule, including all
appendices, exhibits or schedules thereto, listing certain documents and
information to be delivered in connection with the Agreement, the other Loan
Documents and the transactions contemplated thereunder, substantially in the
form attached hereto as Annex D.
"Securities Act" shall mean the provisions of the Securities Act of
1933, 15 U.S.C. Sections 77a et seq.
"Securities Exchange Act" shall mean the provisions of the
Securities Exchange Act of 1934, 15 U.S.C. Sections 78a et seq.
"Security Agreement" shall mean the Security Agreement of even date
herewith entered into by and among Agent, for the benefit of Agent and Lenders,
and each Credit Party signatory thereto, as the same may be amended,
supplemented, restated or otherwise modified from time to time in accordance
with the terms thereof.
"Senior Leverage Ratio" shall mean, with respect to any Person as of
any date of determination, on a consolidated basis, the ratio of (a) the
outstanding balance of the Obligations as of such date of determination to (b)
Pro Forma EBITDA for the four full Fiscal Quarters immediately preceding such
date of determination.
"Senior Subordinated Debt" shall mean all Indebtedness of any Credit
Party incurred pursuant to the Senior Subordinated Debt Documents.
"Senior Subordinated Debt Documents" shall mean the Senior
Subordinated Notes, the Senior Subordinated Note Indenture, and all other
agreements, instruments or documents executed and delivered in connection
therewith or the transactions contemplated thereby, in each case as the same may
have been amended, restated, supplemented or otherwise modified from time to
time.
"Senior Subordinated Note Indenture" shall mean that certain
Indenture dated as of June 23, 1998, by and among Borrower, as issuer, the
Subsidiaries of Borrower party thereto, as guarantors, and State Street Bank and
Trust Company of California, N.A., as trustee, as the same may have been
amended, restated, supplemented or otherwise modified from time to time.
"Senior Subordinated Notes" shall mean those certain 10 7/8% Senior
Subordinated Notes due 2008 issued or to be issued by Borrower pursuant to the
Senior Subordinated Note Indenture in the maximum aggregate principal amount of
up to $125,000,000, consisting of the Initial Notes issued thereunder on June
23, 1998, in the aggregate principal amount of $100,000,000 and any Additional
Notes to be issued thereunder in the maximum aggregate principal amount of up to
$25,000,000.
"Solvent" shall mean, with respect to any Person on a particular
date, that on such date: (a) the fair value of the property of such Person is
greater than the total amount of liabilities,
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including contingent liabilities, of such Person; (b) the present fair salable
value of the assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured; (c) such Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person's ability to
pay as such debts and liabilities mature; and (d) such Person is not engaged in
a business or transaction, and is not about to engage in a business or
transaction, for which such Person's property would constitute an unreasonably
small capital. The amount of contingent liabilities (such as litigation,
guaranties and pension plan liabilities) at any time shall be computed as the
amount that, in light of all the facts and circumstances existing at the time,
represents the amount that can be reasonably be expected to become an actual or
matured liability.
"Stock" shall mean all shares, options, warrants, general or limited
partnership interests, membership interests, investments in joint ventures or
other equivalents (regardless of how designated) of or in a corporation,
partnership, limited liability company or equivalent entity whether voting or
nonvoting, including common stock, preferred stock or any other "equity
security" (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act).
"Stockholder" shall mean, with respect to any Person, each holder of
Stock of such Person.
"Subordinated Debt" shall mean the Senior Subordinated Debt and any
other Indebtedness of any Credit Party subordinated to the Obligations in a
manner and form satisfactory to Agent and Lenders in their sole discretion, as
to right and time of payment and as to any other rights and remedies thereunder.
"Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than 50% of the outstanding Stock
having ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether, at the time, Stock of any other class
or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time, directly or indirectly,
owned legally or beneficially by such Person or one or more Subsidiaries of such
Person, or with respect to which any such Person has the right to vote or
designate the vote of 50% or more of such Stock whether by proxy, agreement,
operation of law or otherwise, and (b) any partnership or limited liability
company in which such Person or one or more Subsidiaries of such Person shall
have an interest (whether in the form of voting or participation in profits or
capital contribution) of more than 50% or of which any such Person is a general
partner or may exercise the powers of a general partner.
"Subsidiary Guaranty" shall mean the Continuing Guaranty of even
date herewith executed by each Domestic Subsidiary of Borrower in favor of
Agent, for the benefit of Agent and Lenders, as the same may be amended,
supplemented, restated or otherwise modified from time to time in accordance
with the terms thereof.
"Supermajority Revolving Lenders" shall mean Lenders having (a) 80%
or more of the Revolving Loan Commitments of all Lenders, or (b) if the
Revolving Loan Commitments have been terminated, 80% or more of the aggregate
outstanding amount of the Revolving Loan (with the Swing Line Loan being
attributed to the Lender making such Loan) and Letter of Credit Obligations.
"Swing Line Advance" shall have the meaning assigned to it in
Section 1.1(b)(i).
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"Swing Line Availability" shall have the meaning assigned to it in
Section 1.1(b)(i).
"Swing Line Commitment" shall mean, as to the Swing Line Lender, the
commitment of the Swing Line Lender to make Swing Line Advances as set forth in
Annex J, which commitment constitutes a subfacility of the Revolving Loan
Commitment of the Swing Line Lender.
"Swing Line Lender" shall mean GE Capital.
"Swing Line Loan" shall mean at any time, the aggregate amount of
Swing Line Advances outstanding to Borrower.
"Swing Line Note" shall have the meaning assigned to it in Section
1.1(b)(ii).
"Taxes" shall mean taxes, levies, imposts, deductions, Charges or
withholdings, and all liabilities with respect thereto, excluding taxes imposed
on or measured by the net income of Agent or a Lender by the jurisdictions under
the laws of which Agent and Lenders are organized or by any political
subdivision thereof.
"Termination Date" shall mean the date on which (a) the Loans have
been indefeasibly repaid in full, (b) all other Obligations under the Agreement
and the other Loan Documents have been completely discharged, (c) Letter of
Credit Obligations have been terminated, replaced, guaranteed or cash
collateralized in accordance with Annex B, and (d) Borrower shall not have any
further right to borrow any monies under the Agreement.
"Third Party Interactives" shall mean all Persons with whom any
Credit Party exchanges data electronically in the ordinary course of business,
including customers, suppliers, third-party vendors, subcontractors,
processors-converters, shippers and warehousemen.
"Title IV Plan" shall mean a Pension Plan (other than a
Multiemployer Plan) that is covered by Title IV of ERISA and that any Credit
Party or ERISA Affiliate maintains, contributes to or has an obligation to
contribute to on behalf of participants who are or were employed by any of them.
"Total Leverage Ratio" shall mean, with respect to any Person as of
any date of determination, on a consolidated basis, the ratio of (a) Funded Debt
as of such date of determination to (b) Pro Forma EBITDA for the four full
Fiscal Quarters immediately preceding such date of determination.
"Trademark License" shall mean rights under any written agreement
now owned or hereafter acquired by any Person granting any right to use any
Trademark.
"Trademarks" shall mean all of the following property now owned or
existing or hereafter adopted or acquired by any Person: (a) all trademarks,
trade names, corporate names, business names, trade styles, service marks,
logos, other source or business identifiers, prints and labels on which any of
the foregoing have appeared or appear, designs and general intangibles of like
nature (whether registered or unregistered), all registrations and recordings
thereof, and all applications in connection therewith, including registrations,
recordings and applications in the United States Patent and Trademark Office or
in any similar office or agency of the United States, any state
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or territory thereof, or any other country or any political subdivision thereof;
(b) all extensions or renewals thereof; and (c) all goodwill associated with or
symbolized by any of the foregoing.
"Unfunded Pension Liability" shall mean, at any time, the aggregate
amount, if any, of the sum of (a) the amount by which the present value of all
accrued benefits under each Title IV Plan exceeds the fair market value of all
assets of such Title IV Plan allocable to such benefits in accordance with Title
IV of ERISA, all determined as of the most recent valuation date for each such
Title IV Plan using the actuarial assumptions for funding purposes in effect
under such Title IV Plan, and (b) for a period of five years following a
transaction that might reasonably be expected to be covered by Section 4069 of
ERISA, the liabilities (whether or not accrued) that could be avoided by any
Credit Party or any ERISA Affiliate as a result of such transaction.
"Welfare Plan" shall mean a Plan described in Section 3(1) of ERISA.
"Year 2000 Assessment" shall mean a comprehensive written assessment
of the nature and extent of each Credit Party's Year 2000 Problems and Year 2000
Date-Sensitive Systems/Components, including Year 2000 Problems regarding data
exchanges with Third Party Interactives.
"Year 2000 Corrective Actions" shall mean, as to each Credit Party,
all actions necessary to eliminate such Person's Year 2000 Problems, including
computer code enhancements and revisions, upgrades and replacements of Year 2000
Date-Sensitive Systems/Components, and coordination of such enhancements,
revisions, upgrades and replacements with Third Party Interactives.
"Year 2000 Corrective Plan" shall mean, with respect to each Credit
Party, a comprehensive plan to eliminate all of its Year 2000 Problems,
including (a) computer code enhancements or revisions, (b) upgrades or
replacements of Year 2000 Date-Sensitive Systems/Components, (c) test and
validation procedures, (d) an implementation time line and budget, and (e)
designation of specific employees who will be responsible for planning,
coordinating and implementing each phase or subpart of the Year 2000 Corrective
Plan.
"Year 2000 Date-Sensitive System/Component" shall mean, as to any
Person, any system software, network software, applications software, data base,
computer file, embedded microchip, firmware or hardware that accepts, creates,
manipulates, sorts, sequences, calculates, compares or outputs calendar-related
data accurately; such systems and components shall include mainframe computers,
file server/client systems, computer workstations, routers, hubs, other
network-related hardware, and other computer-related software, firmware or
hardware and information processing and delivery systems of any kind and
telecommunications systems and other communications processors, security
systems, alarms, elevators and HVAC systems.
"Year 2000 Implementation Testing" shall mean, as to each Credit
Party, (a) the performance of test and validation procedures regarding Year 2000
Corrective Actions on a unit basis and on a systemwide basis, (b) the
performance of test and validation procedures regarding data exchanges among the
Credit Parties' Year 2000 Date-Sensitive Systems/Components and data exchanges
with Third Party Interactives, and (c) the design and implementation of
additional Year 2000 Corrective Actions, the need for which has been
demonstrated by test and validation procedures.
"Year 2000 Problems" shall mean, with respect to each Credit Party,
limitations on the
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capacity or readiness of any such Credit Party's Year 2000 Date-Sensitive
Systems/Components to accurately accept, create, manipulate, sort, sequence,
calculate, compare or output calendar date information with respect to calendar
year 1999 or any subsequent calendar year beginning on or after January 1, 2000
(including leap year computations), including exchanges of information among
Year 2000 Date-Sensitive Systems/Components of the Credit Parties and exchanges
of information among the Credit Parties and Year 2000 Date-Sensitive
Systems/Components of Third Party Interactives and functionality of peripheral
interfaces, firmware and embedded microchips.
Rules of construction with respect to accounting terms used in the
Agreement or any of the other Loan Documents shall be as set forth in Annex G.
All other undefined terms contained in any of the Loan Documents shall, unless
the context indicates otherwise, have the meanings provided for by the Code as
in effect in the State of New York to the extent the same are used or defined
therein. Unless otherwise specified, references in the Agreement or any of the
Appendices to a section, subsection or clause refer to such section, subsection
or clause as contained in the Agreement. The words "herein," "hereof" and
"hereunder" and other words of similar import refer to the Agreement as a whole,
including all Annexes, Exhibits and Schedules, as the same may from time to time
be amended, restated, modified or supplemented, and not to any particular
section, subsection or clause contained in the Agreement or any such Annex,
Exhibit or Schedule.
Wherever from the context it appears appropriate, each term stated
in either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, feminine and neuter genders. The words "including," "includes" and
"include" shall be deemed to be followed by the words "without limitation"; the
word "or" is not exclusive; references to Persons include their respective
successors and assigns (to the extent and only to the extent permitted by the
Loan Documents) or, in the case of governmental Persons, Persons succeeding to
the relevant functions of such Persons; and all references to statutes and
related regulations shall include any amendments of the same and any successor
statutes and regulations. Whenever any provision in any Loan Document refers to
the knowledge (or an analogous phrase) of any Credit Party, such words are
intended to signify that such Credit Party has actual knowledge or awareness of
a particular fact or circumstance or that such Credit Party, if it had exercised
reasonable diligence, would have known or been aware of such fact or
circumstance.
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ANNEX B (SECTION 1.2)
TO
CREDIT AGREEMENT
LETTERS OF CREDIT
(a) Issuance. Subject to the terms and conditions of the Agreement,
Agent and Revolving Lenders agree to incur, from time to time prior to the
Commitment Termination Date, upon the request of Borrower and for Borrower's
account, Letter of Credit Obligations by causing Letters of Credit to be issued
(by a bank or other legally authorized Person selected by or acceptable to Agent
in its sole discretion (each, an "L/C Issuer")) for Borrower's account and
guaranteed by Agent; provided, that if the L/C Issuer is a Revolving Lender,
then such Letters of Credit shall not be guaranteed by Agent but rather each
Revolving Lender shall, subject to the terms and conditions hereinafter set
forth, purchase (or be deemed to have purchased) risk participations in all such
Letters of Credit issued with the written consent of Agent, as more fully
described in paragraph (b)(ii) below. The aggregate amount of all such Letter of
Credit Obligations shall not at any time exceed the least of (i) $5,000,000 (the
"L/C Sublimit"), (ii) the Maximum Amount less the aggregate outstanding
principal balance of the Revolving Credit Advances and the Swing Line Loan, and
(iii) the Borrowing Base less the aggregate outstanding principal balance of the
Revolving Credit Advances and the Swing Line Loan. No such Letter of Credit
shall have an expiry date that is more than one year following the date of
issuance thereof, and neither Agent nor Revolving Lenders shall be under any
obligation to incur Letter of Credit Obligations in respect of, or purchase risk
participations in, any Letter of Credit having an expiry date that is later than
the Commitment Termination Date.
(b) Advances Automatic; Participations.
(i) In the event that Agent or any Revolving Lender shall make
any payment on or pursuant to any Letter of Credit Obligation, such payment
shall then be deemed automatically to constitute a Revolving Credit Advance
under Section 1.1(a) regardless of whether a Default or Event of Default shall
have occurred and be continuing and notwithstanding Borrower's failure to
satisfy the conditions precedent set forth in Section 2, and each Revolving
Lender shall be obligated to pay its Pro Rata Share thereof in accordance with
the Agreement. The failure of any Revolving Lender to make available to Agent
for Agent's own account its Pro Rata Share of any such Revolving Credit Advance
or payment by Agent under or in respect of a Letter of Credit shall not relieve
any other Revolving Lender of its obligation hereunder to make available to
Agent its Pro Rata Share thereof, but no Revolving Lender shall be responsible
for the failure of any other Revolving Lender to make available such other
Revolving Lender's Pro Rata Share of any such payment.
(ii) If it shall be illegal or unlawful for Borrower to incur
Revolving Credit Advances as contemplated by paragraph (b)(i) above because of
an Event of Default described in Sections 8.1(h) or (i) or otherwise or if it
shall be illegal or unlawful for any Revolving Lender to be deemed to have
assumed a ratable share of the reimbursement obligations owed to an L/C Issuer,
or if the L/C Issuer is a Revolving Lender, then (A) immediately and without
further action whatsoever, each Revolving Lender shall be deemed to have
irrevocably and unconditionally purchased from Agent (or such L/C Issuer, as the
case may be) an undivided interest and participation equal to such Revolving
Lender's Pro Rata Share (based on the Revolving Loan Commitments) of the Letter
of Credit Obligations in respect of all Letters of Credit then outstanding and
(B) thereafter, immediately upon issuance of any Letter of Credit, each
Revolving Lender shall be deemed to have irrevocably and unconditionally
purchased from Agent (or such L/C Issuer, as the case may be) an
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undivided interest and participation in such Revolving Lender's Pro Rata Share
(based on the Revolving Loan Commitments) of the Letter of Credit Obligations
with respect to such Letter of Credit on the date of such issuance. Each
Revolving Lender shall fund its participation in all payments or disbursements
made under the Letters of Credit in the same manner as provided in the Agreement
with respect to Revolving Credit Advances.
(c) Cash Collateral.
(i) If Borrower is required to provide cash collateral for any
Letter of Credit Obligations pursuant to the Agreement prior to the Commitment
Termination Date, Borrower will pay to Agent, for the benefit of Agent and
Revolving Lenders, cash or cash equivalents acceptable to Agent ("Cash
Equivalents") in an amount equal to 105% of the maximum amount then available to
be drawn under each applicable Letter of Credit outstanding. Such funds or Cash
Equivalents shall be held by Agent in a cash collateral account (the "Cash
Collateral Account") maintained at a bank or financial institution acceptable to
Agent. The Cash Collateral Account shall be in the name of Borrower and shall be
pledged to, and subject to the control of, Agent, for the benefit of Agent and
Lenders, in a manner satisfactory to Agent. Borrower hereby pledges and grants
to Agent, for the benefit of Agent and Lenders, a security interest in all such
funds and Cash Equivalents held in the Cash Collateral Account from time to time
and all proceeds thereof as security for the payment of all amounts due in
respect of the Letter of Credit Obligations and other Obligations, whether or
not then due. The Agreement, including this Annex B, shall constitute a security
agreement under applicable law.
(ii) If any Letter of Credit Obligations, whether or not then
due and payable, shall for any reason be outstanding on the Commitment
Termination Date, Borrower shall either (A) provide cash collateral therefor in
the manner described above, (B) cause all such Letters of Credit and guaranties
thereof to be canceled and returned, or (C) deliver a stand-by letter (or
letters) of credit in guarantee of such Letter of Credit Obligations, which
stand-by letter (or letters) of credit shall be of like tenor and duration (plus
30 additional days) as, and in an amount equal to 105% of the aggregate maximum
amount then available to be drawn under, the Letters of Credit to which such
outstanding Letter of Credit Obligations relate and shall be issued by a Person,
and shall be subject to such terms and conditions, as are be satisfactory to
Agent in its sole discretion.
(iii) From time to time after funds are deposited in the Cash
Collateral Account by Borrower, whether before or after the Commitment
Termination Date, Agent may apply such funds or Cash Equivalents then held in
the Cash Collateral Account to the payment of any amounts, and in such order as
Agent may elect, as shall be or shall become due and payable by Borrower to
Lenders with respect to such Letter of Credit Obligations of Borrower and, upon
the satisfaction in full of all Letter of Credit Obligations of Borrower, to any
other Obligations then due and payable.
(iv) Neither Borrower nor any Person claiming on behalf of or
through Borrower shall have any right to withdraw any of the funds or Cash
Equivalents held in the Cash Collateral Account, except that upon the
termination of all Letter of Credit Obligations and the payment of all amounts
payable by Borrower to Agent or Lenders in respect thereof, any funds remaining
in the Cash Collateral Account shall be applied to other Obligations then due
and owing and upon payment in full of such Obligations, any remaining amount
shall be paid to Borrower or as otherwise required by law.
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(d) Fees and Expenses. Borrower agrees to pay (i) to Agent, for the
benefit of Agent and Revolving Lenders, as compensation to such Lenders for
Letter of Credit Obligations incurred hereunder, (A) all reasonable costs and
expenses incurred by Agent or any Revolving Lender on account of such Letter of
Credit Obligations, and (B) for each month during which any Letter of Credit
Obligation shall remain outstanding, a Fee (the "Letter of Credit Fee") in an
amount equal to the Applicable L/C Margin from time to time in effect multiplied
by the daily average of the maximum amount available from time to time to be
drawn under the applicable Letter of Credit during such month, which Fee shall
be paid to Agent, for the benefit of Agent and Revolving Lenders, in arrears, on
the first day of each month and on the Commitment Termination Date, and (ii) to
any L/C Issuer, on demand, such reasonable fees (including all per annum fees),
charges and expenses of such L/C Issuer in respect of the issuance, negotiation,
acceptance, amendment, transfer and payment of such Letter of Credit or
otherwise payable pursuant to the application and related documentation under
which such Letter of Credit is issued.
(e) Request for Incurrence of Letter of Credit Obligations. Borrower
shall give Agent at least two Business Days' prior written notice requesting the
incurrence of any Letter of Credit Obligation, specifying the date such Letter
of Credit Obligation is to be incurred, identifying the beneficiary to which
such Letter of Credit Obligation relates and describing the nature of the
transactions proposed to be supported thereby. The notice shall be accompanied
by the form of the Letter of Credit (which shall be acceptable to the L/C
Issuer) to be guaranteed and, to the extent not previously delivered to Agent,
copies of all agreements between Borrower and the L/C Issuer pertaining to the
issuance of Letters of Credit. Notwithstanding anything contained herein to the
contrary, Letter of Credit applications by Borrower and approvals by Agent and
the L/C Issuer may be made and transmitted pursuant to electronic codes and
security measures mutually agreed upon and established by and among Borrower,
Agent and the L/C Issuer.
(f) Obligation Absolute. The obligation of Borrower to reimburse
Agent and Revolving Lenders for payments made with respect to any Letter of
Credit Obligation shall be absolute, unconditional and irrevocable, without
necessity of presentment, demand, protest or other formalities, and the
obligations of each Revolving Lender to make payments to Agent with respect to
Letters of Credit shall be unconditional and irrevocable. Such obligations of
Borrower and Revolving Lenders shall be paid strictly in accordance with the
terms hereof under all circumstances, including the following:
(i) any lack of validity or enforceability of any Letter of
Credit or the Agreement or the other Loan Documents or any other agreement;
(ii) the existence of any claim, setoff, defense or other
right that Borrower or any of its Affiliates or any Lender may at any time have
against a beneficiary or any transferee of any Letter of Credit (or any Persons
or entities for whom any such transferee may be acting), Agent, any Lender, or
any other Person, whether in connection with the Agreement, the Letter of
Credit, the transactions contemplated herein or therein or any unrelated
transaction (including any underlying transaction between Borrower or any of its
Affiliates and the beneficiary for which the Letter of Credit was procured);
(iii) any draft, demand, certificate or any other document
presented under any 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;
(iv) payment by Agent (except as otherwise expressly provided
in
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paragraph (g)(ii)(C) below) or any L/C Issuer under any Letter of Credit or
guaranty thereof against presentation of a demand, draft or certificate or other
document that does not comply with the terms of such Letter of Credit or such
guaranty;
(v) any other circumstance or event whatsoever that is similar
to any of the foregoing; or
(vi) the fact that a Default or an Event of Default shall have
occurred and be continuing.
(g) Indemnification; Nature of Lenders' Duties.
(i) In addition to amounts payable as elsewhere provided in
the Agreement, Borrower hereby agrees to pay and to protect, indemnify, and save
harmless Agent and each Lender from and against any and all claims, demands,
liabilities, damages, losses, reasonable costs, charges and expenses (including
reasonable attorneys' fees and allocated costs of internal counsel) that Agent
or any Lender may incur or be subject to as a consequence, direct or indirect,
of (A) the issuance of any Letter of Credit or guaranty thereof, or (B) the
failure of Agent or any Lender seeking indemnification or of any L/C Issuer to
honor a demand for payment under any Letter of Credit or guaranty thereof as a
result of any act or omission, whether rightful or wrongful, of any present or
future de jure or de facto government or Governmental Authority, in each case
other than to the extent solely as a result of the gross negligence or willful
misconduct of Agent or such Lender (as finally determined by a court of
competent jurisdiction).
(ii) As between Agent and any Lender and Borrower, Borrower assumes
all risks of the acts and omissions of, or misuse of any Letter of Credit by,
beneficiaries of any Letter of Credit. In furtherance and not in limitation of
the foregoing, to the fullest extent permitted by law, neither Agent nor any
Lender shall be responsible for: (A) the form, validity, sufficiency, accuracy,
genuineness or legal effect of any document issued by any party in connection
with the application for and issuance of any Letter of Credit, even if it should
in fact prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (B) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any Letter of
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part, that may prove to be invalid or ineffective for any reason; (C) failure of
the beneficiary of any Letter of Credit to comply fully with conditions required
in order to demand payment under such Letter of Credit; provided, that in the
case of any payment by Agent under any Letter of Credit or guaranty thereof,
Agent shall be liable to the extent such payment was made solely as a result of
its gross negligence or willful misconduct (as finally determined by a court of
competent jurisdiction) in determining that the demand for payment under such
Letter of Credit or guaranty thereof complies on its face with any applicable
requirements for a demand for payment under such Letter of Credit or guaranty
thereof; (D) errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether
or not they may be in cipher; (E) errors in interpretation of technical terms;
(F) any loss or delay in the transmission or otherwise of any document required
in order to make a payment under any Letter of Credit or guaranty thereof or of
the proceeds thereof; (G) the credit of the proceeds of any drawing under any
Letter of Credit or guaranty thereof; and (H) any consequences arising from
causes beyond the control of Agent or any Lender. None of the above shall
affect, impair, or prevent the vesting of any of Agent's or any Lender's rights
or powers hereunder or under the Agreement.
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(iii) Nothing contained herein shall be deemed to limit or to
expand any waivers, covenants or indemnities made by Borrower in favor of any
L/C Issuer in any letter of credit application, reimbursement agreement or
similar document, instrument or agreement between Borrower and such L/C Issuer.
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ANNEX C (SECTION 1.8)
TO
CREDIT AGREEMENT
CASH MANAGEMENT SYSTEM
Borrower shall, and shall cause its Subsidiaries to, establish and
maintain the cash management system described below:
(a) On or before the Closing Date and until the Termination Date,
Borrower shall (i) establish lock boxes ("Lock Boxes") at a United States Post
Office postal station with one or more of the banks set forth in Disclosure
Schedule (3.19), and shall request in writing and otherwise take such reasonable
steps to ensure that all Account Debtors forward payment directly to such Lock
Boxes, and (ii) deposit and cause its Subsidiaries to deposit or cause to be
deposited promptly, and in any event no later than the second Business Day after
the date of receipt thereof, all cash, checks, drafts or other similar items of
payment relating to or constituting payments made in respect of any and all
Collateral (whether or not otherwise delivered to a Lock Box) into one or more
bank accounts in Borrower's name or any such Subsidiary's name (each, a
"Borrower Account" and collectively, the "Borrower Accounts") at a bank
identified in Disclosure Schedule (3.19) as a bank at which such Borrower
Accounts are maintained (each, a "Relationship Bank").
(b) Borrower shall establish, in its name, an account (the "Master
Disbursement Account") at a bank reasonably acceptable to Agent into which Agent
shall, from time to time, deposit proceeds of Revolving Credit Advances and
Swing Line Advances made to Borrower pursuant to Section 1.1 for use by Borrower
solely in accordance with the provisions of Section 1.4. Borrower shall transfer
amounts received in the Master Disbursement Account into (i) one or more
accounts (collectively, the "Disbursement Accounts") established by the
applicable Credit Party, in its name, at the banks identified in Disclosure
Schedule (3.19) as maintaining such Disbursement Accounts, which banks shall be
reasonably acceptable to Agent, or (ii) the Collection Account. Borrower shall
not, and shall not cause or permit any Subsidiary thereof to, accumulate or
maintain cash in the Master Disbursement Account, any Disbursement Account or
any payroll account as of any date of determination in excess of checks
outstanding against such account as of such date, amounts necessary to meet
minimum balance requirements and amounts necessary to support anticipated
operating expenses for the one week period immediately following such date
consistent with historical operating needs.
(c) On or before the Closing Date (or such later date as Agent shall
consent to in writing), each bank where the Master Disbursement Account or a
Disbursement Account is maintained and all other Relationship Banks shall have
entered into tri-party blocked account agreements with Agent, for the benefit of
Agent and Lenders, and Borrower and Subsidiaries thereof, as applicable, in form
and substance reasonably acceptable to Agent, which shall become operative on or
prior to the Closing Date. Each such blocked account agreement shall provide,
among other things, that (i) all items of payment deposited in such account are
held by such bank as agent or bailee-in-possession for Agent, on behalf of
itself and Lenders, (ii) the bank executing such agreement has no rights of
setoff or recoupment or any other claim against such account, as the case may
be, other than for payment of its service fees and other charges directly
related to the administration of such account and for returned checks or other
items of payment, and (iii) from and after the Closing Date, with respect to
banks at which a Borrower Account is maintained, such bank agrees to forward all
amounts in each Borrower Account to the Collection Account through daily
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sweeps from such Borrower Account into the Collection Account.
(d) So long as no Default or Event of Default shall have occurred
and be continuing, Borrower may amend Disclosure Schedule (3.19) to add or
replace a Relationship Bank, Lock Box or Borrower Account or to replace the
Master Disbursement Account or a Disbursement Account; provided, that (i) Agent
shall have consented in writing (which consent shall not be unreasonably
withheld or delayed) in advance to the opening of such account or Lock Box with
the relevant bank and (ii) prior to the time of the opening of such account or
Lock Box, Borrower or its Subsidiaries, as applicable, and such bank shall have
executed and delivered to Agent a tri-party blocked account agreement, in form
and substance reasonably satisfactory to Agent. Borrower shall close any of its
accounts (and establish replacement accounts in accordance with the foregoing
sentence) promptly and in any event within 30 days following notice from Agent
that the creditworthiness of any bank maintaining an account is no longer
acceptable in Agent's reasonable judgment, or as promptly as practicable and in
any event within 60 days following notice from Agent that the operating
performance, funds transfer or availability procedures or performance with
respect to accounts or Lock Boxes of the bank maintaining such accounts or
Agent's liability under any tri-party blocked account agreement with such bank
is no longer acceptable in Agent's reasonable judgment.
(e) The Lock Boxes, Borrower Accounts, Master Disbursement Account
and Disbursement Accounts shall be cash collateral accounts, with all cash,
checks and other similar items of payment in such accounts securing payment of
the Loans and all other Obligations, and in which Borrower and each Subsidiary
thereof shall have granted a Lien to Agent, on behalf of itself and Lenders,
pursuant to the Security Agreement.
(f) All amounts deposited in the Collection Account shall be deemed
received by Agent in accordance with Section 1.10 and shall be applied (and
allocated) by Agent in accordance with Section 1.11. In no event shall any
amount be so applied unless and until such amount shall have been credited in
immediately available funds to the Collection Account.
(g) Borrower shall and shall cause its Affiliates, officers,
employees, agents, directors or other Persons acting for or in concert with
Borrower (each a "Related Person") to (i) hold in trust for Agent, for the
benefit of Agent and Lenders, all checks, cash and other items of payment
received by Borrower or any such Related Person, and (ii) within two Business
Day after receipt by Borrower or any such Related Person of any checks, cash or
other items of payment, deposit the same into a Borrower Account. Borrower and
each Related Person acknowledges and agrees that all cash, checks or other items
of payment constituting proceeds of Collateral are the property of Agent and
Lenders. All proceeds of the sale or other disposition of any Collateral shall
be deposited directly into Borrower Accounts.
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ANNEX D (SECTION 2.1(a))
TO
CREDIT AGREEMENT
SCHEDULE OF DOCUMENTS
[See attached]
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ANNEX E (SECTION 4.1(a))
TO
CREDIT AGREEMENT
FINANCIAL STATEMENTS AND PROJECTIONS -- REPORTING
Borrower shall deliver or cause to be delivered to Agent the
following:
(a) Monthly Financials. Within (i) 45 days after the end of each
Fiscal Month (other than a Fiscal Month ending as of the end of any Fiscal
Quarter) during the period from the Closing Date through January 31, 2000, and
(ii) 30 days after the end of each Fiscal Month (other than a Fiscal Month
ending as of the end of any Fiscal Quarter) during the period from February 1,
2000, and thereafter, financial information regarding Borrower and its
Subsidiaries, certified by the Chief Financial Officer of Borrower, or, in the
event such officer is not available, the Chief Accounting Officer of Borrower,
consisting of consolidated and consolidating: (A) unaudited balance sheets as of
the close of such Fiscal Month and the related statements of income and cash
flows for that portion of the Fiscal Year ending as of the close of such Fiscal
Month; (B) unaudited statements of income and cash flows for such Fiscal Month,
setting forth in comparative form the figures for the corresponding period in
the prior year and the figures contained in the Projections for such Fiscal
Year, all prepared in accordance with GAAP (subject to normal year-end
adjustments); and (C) a summary of the outstanding balance of all Intercompany
Notes as of the last day of such Fiscal Month. Such financial information shall
be accompanied by (1) a statement in reasonable detail (each, a "Compliance
Certificate") showing the calculations used in determining compliance with each
financial covenant set forth in Annex G that is tested on a monthly basis, and
(2) the certification of the Chief Financial Officer of Borrower or, in the
event such officer is not available, the Chief Accounting Officer of Borrower,
that (a) such financial information presents fairly in all material respects in
accordance with GAAP (subject to normal year-end adjustments) the financial
position and results of operations of Borrower and its Subsidiaries, on a
consolidated and consolidating basis, in each case as at the end of such Fiscal
Month and for that portion of the Fiscal Year ending as of the end of such
Fiscal Month and (b) any other information presented is true, correct and
complete in all material respects and that, to such officer's knowledge, there
was no Default or Event of Default in existence as of such time or, if a Default
or Event of Default shall have occurred and be continuing, describing the nature
thereof and all efforts undertaken to cure such Default or Event of Default.
(b) Quarterly Financials. Within 45 days after the end of each
Fiscal Quarter, consolidated and consolidating financial information regarding
Borrower and its Subsidiaries, certified by the Chief Financial Officer of
Borrower, or, in the event such officer is not available, the Chief Accounting
Officer of Borrower, including (i) unaudited balance sheets as of the close of
such Fiscal Quarter and the related statements of income and cash flows for that
portion of the Fiscal Year ending as of the close of such Fiscal Quarter and
(ii) unaudited statements of income and cash flows for such Fiscal Quarter and
for the Fiscal Month ending as of the end of such Fiscal Quarter, in each case
setting forth in comparative form the figures for the corresponding period in
the prior year and the figures contained in the Projections for such Fiscal
Year, all prepared in accordance with GAAP (subject to normal year-end
adjustments). Such financial information shall be accompanied by (A) a
Compliance Certificate in respect of each of the financial covenants set forth
in Annex G that is tested on a quarterly basis and (B) the certification of the
Chief Financial Officer of Borrower or, in the event such officer is not
available, the Chief Accounting Officer of Borrower, that (1) such financial
information presents fairly in all material respects in accordance with GAAP
(subject to normal year-end adjustments) the financial position, results of
operations and statements of cash flows of
E-1
<PAGE> 107
Borrower and its Subsidiaries, on both a consolidated and consolidating basis,
as at the end of such Fiscal Quarter and for that portion of the Fiscal Year
ending as of the end of such Fiscal Quarter, (2) any other information presented
is true, correct and complete in all material respects and that, to such
officer's knowledge, there was no Default or Event of Default in existence as of
such time or, if a Default or Event of Default shall have occurred and be
continuing, describing the nature thereof and all efforts undertaken to cure
such Default or Event of Default.
(c) Operating Plan. As soon as available, but not later than 45 days
after the end of each Fiscal Year, an annual operating plan for Borrower,
approved by the Board of Directors of Borrower, for the following year, which
will be prepared on a consolidated basis and will (i) include a statement of all
of the material assumptions on which such plan is based, (ii) include monthly
balance sheets and a monthly budget for the following Fiscal Year and (iii)
integrate sales, gross profits, operating expenses, operating profit, cash flow
projections and Borrowing Availability projections, all prepared on the same
basis and in similar detail as that on which operating results are reported (and
in the case of cash flow projections, representing management's good faith
estimates of future financial performance based on historical performance), and
including plans for personnel, Capital Expenditures and facilities.
(d) Annual Audited Financials. Within 90 days after the end of each
Fiscal Year, audited Financial Statements for Borrower and its Subsidiaries on a
consolidated and consolidating basis, consisting of balance sheets and
statements of income and retained earnings and cash flows, setting forth in
comparative form in each case the figures for the previous Fiscal Year, which
Financial Statements shall be prepared in accordance with GAAP and certified
without qualification by an independent certified public accounting firm of
national standing or otherwise reasonably acceptable to Agent. Such Financial
Statements shall be accompanied by (i) a statement prepared in reasonable detail
showing the calculations used in determining compliance with each of the
Financial Covenants, (ii) a report from such accounting firm to the effect that,
in connection with their audit examination, nothing has come to their attention
to cause them to believe that a Default or Event of Default has occurred (or
specifying those Defaults and Events of Default that they became aware of), it
being understood that such audit examination extended only to accounting matters
and that no special investigation was made with respect to the existence of
Defaults or Events of Default, (iii) a letter addressed to Agent, on behalf of
itself and Lenders, in form and substance reasonably satisfactory to Agent and
subject to standard qualifications adopted by nationally recognized accounting
firms, signed by such accounting firm acknowledging that Agent and Lenders are
entitled to rely upon such accounting firm's certification of such audited
Financial Statements, (iv) the annual letters to such accountants in connection
with their audit examination detailing contingent liabilities and material
litigation matters, and (v) the certification of the Chief Executive Officer or
Chief Financial Officer of Borrower that all such Financial Statements present
fairly in all material respects in accordance with GAAP the financial position,
results of operations and statements of cash flows of Borrower and its
Subsidiaries on a consolidated and consolidating basis, as at the end of such
Fiscal Year and for the period then ended, and that, to such officer's
knowledge, there was no Default or Event of Default in existence as of such time
or, if a Default or Event of Default shall have occurred and be continuing,
describing the nature thereof and all efforts undertaken to cure such Default or
Event of Default.
(e) Management Letters. Within five Business Days after receipt
thereof by any Credit Party, copies of all management letters, exception reports
or similar letters or reports received by such Credit Party from its independent
certified public accountants.
E-2
<PAGE> 108
(f) Default Notices. Except as otherwise provided in paragraph (h)
below, as soon as practicable, and in any event within five Business Days after
an executive officer of Borrower has actual knowledge of the existence of any
Default, Event of Default or other event that has had a Material Adverse Effect,
telephonic or telecopied notice specifying the nature of such Default or Event
of Default or other event, including the anticipated effect thereof, which
notice, if given telephonically, shall be promptly confirmed in writing on the
next Business Day.
(g) SEC Filings and Press Releases. Promptly upon their becoming
available, copies of: (i) all Financial Statements, reports, notices and proxy
statements made publicly available by any Credit Party to its security holders;
(ii) all regular and periodic reports and all registration statements and
prospectuses, if any, filed by any Credit Party with any securities exchange or
with the Securities and Exchange Commission or any governmental or private
regulatory authority; and (iii) all press releases and other statements made
available by any Credit Party to the public concerning material adverse changes
or developments in the business of any such Person.
(h) Subordinated Debt and Equity Notices. As soon as practicable,
copies of all material written notices given or received by any Credit Party
with respect to any Subordinated Debt or Stock of such Person, and, within two
Business Days after any Credit Party obtains knowledge of any matured or
unmatured event of default with respect to any Subordinated Debt, notice of such
event of default.
(i) Supplemental Schedules. Supplemental disclosures, if any,
required by Section 5.6.
(j) Litigation. Promptly upon learning thereof, written notice of
any Litigation commenced or threatened against any Credit Party that (i) seeks
damages in excess of $500,000, (ii) seeks injunctive relief, (iii) is asserted
or instituted against any Plan, its fiduciaries or its assets or against any
Credit Party or ERISA Affiliate in connection with any Plan, (iv) alleges
criminal misconduct by any Credit Party, (v) alleges the violation of any law
regarding, or seeks remedies in connection with, any Environmental Liabilities,
or (vi) involves any product recall.
(k) Insurance Notices. Disclosure of losses or casualties required
by Section 5.4.
(l) Lease Default Notices. Copies of (i) any and all default notices
received under or with respect to any leased location or public warehouse where
Collateral with a fair market value in excess of $50,000 in the aggregate is
located, and (ii) such other notices or documents as Agent may request in
writing in its reasonable discretion.
(m) Lease Amendments. Copies of all material amendments to real
estate leases for any leased premises of any Credit Party.
(n) Other Documents. Such other financial and other information
respecting any Credit Party's business or financial condition as Agent or any
Lender shall, from time to time, reasonably request in writing.
ANNEX F (SECTION 4.1(b))
TO
CREDIT AGREEMENT
COLLATERAL REPORTS
E-3
<PAGE> 109
Borrower shall deliver or cause to be delivered the following:
(a) To Agent, as soon as available and in any event no later than
(i) during the period from the Closing Date through January 31, 2000, the last
Business Day of each Fiscal Month and (ii) during the period from February 1,
2000, and thereafter, the fifteenth calendar day of each Fiscal Month (together
with a copy of all or any part of the following reports requested by any Lender
in writing after the Closing Date), the following reports, each of which shall
be prepared by Borrower as of the last day of the immediately preceding Fiscal
Month; provided, that if (A) a Default or an Event of Default shall have
occurred and be continuing, (B) as of any date of determination, average daily
Net Borrowing Availability for the 30-day period immediately preceding such date
shall be less than $5,000,000, or (C) Agent in good faith believes that a
Default or an Event of Default is imminent or deems its rights or interests in
the Collateral insecure, then such reports shall be delivered for such periods
and as frequently as Agent shall request:
(1) a Borrowing Base Certificate with respect to Borrower,
accompanied by such supporting detail and documentation as shall be requested in
writing by Agent in its reasonable discretion;
(2) with respect to each Credit Party, a summary of Inventory
by location and type with a supporting perpetual Inventory report, in each case
accompanied by such supporting detail and documentation as shall be requested in
writing by Agent in its reasonable discretion;
(3) with respect to each Credit Party, a monthly trial balance
showing Accounts outstanding aged from invoice due date as follows: 1 to 30
days, 31 to 60 days, 61 to 90 days and 91 days or more, accompanied by such
supporting detail and documentation as shall be requested in writing by Agent in
its reasonable discretion; and
(4) a rollforward of the Accounts of each Credit Party,
accompanied by such supporting detail and documentation as shall be requested in
writing by Agent in its reasonable discretion.
(b) To Agent, at the time of delivery of each of the monthly
Financial Statements delivered pursuant to Annex E, a reconciliation of the
Accounts trial balance and month-end Inventory reports of Borrower to Borrower's
general ledger and monthly Financial Statements delivered pursuant to Annex E,
in each case accompanied by such supporting detail and documentation as shall be
requested in writing by Agent in its reasonable discretion.
(c) To Agent, at the time of delivery of each of the quarterly or
annual Financial Statements delivered pursuant to Annex E, (i) a listing of
material government contracts of any Credit Party subject to the Federal
Assignment of Claims Act of 1940; and (ii) a list of any applications for the
registration of any Patent, Trademark or Copyright filed by any Credit Party
with the United States Patent and Trademark Office, the United States Copyright
Office or any similar office or agency in the prior Fiscal Quarter.
(d) Borrower, at its own expense, shall deliver to Agent the results
of each physical verification, if any, that Borrower or any of its Subsidiaries
may in their discretion have made, or caused any other Person to have made on
their behalf, of all or any portion of their Inventory (and, if a Default or an
Event of Default shall have occurred and be continuing, Borrower shall, upon
F-1
<PAGE> 110
the written request of Agent, conduct, and deliver the results of, such physical
verifications as Agent may require).
(e) Borrower, at its own expense, shall deliver to Agent such
appraisals of its consolidated assets as Agent may request in writing at any
time after the occurrence and during the continuance of a Default or an Event of
Default, such appraisals to be conducted by an appraiser, and in form and
substance, reasonably satisfactory to Agent.
(f) Such other reports, statements and reconciliations with respect
to the Borrowing Base or Collateral of any or all Credit Parties as Agent shall
from time to time request in writing in its reasonable discretion.
F-2
<PAGE> 111
ANNEX G (SECTION 6.10)
TO
CREDIT AGREEMENT
FINANCIAL COVENANTS
Borrower shall not breach or fail to comply with any of the
following financial covenants, each of which shall be calculated in accordance
with GAAP consistently applied:
(a) Maximum Capital Expenditures. Borrower and its Subsidiaries on a
consolidated basis shall not make Capital Expenditures during the following
periods that exceed in the aggregate the amounts set forth opposite each of such
periods:
<TABLE>
<CAPTION>
Fiscal Year Ending Capital Expenditures
------------------ --------------------
<S> <C>
December 31, 1999 $4,900,000
December 31, 2000,
and thereafter $3,000,000
</TABLE>
(b) Minimum Fixed Charge Coverage Ratio. Borrower and its
Subsidiaries shall have on a consolidated basis at the end of each Fiscal
Quarter set forth below a Fixed Charge Coverage Ratio for the four full Fiscal
Quarters then ended (or with respect to the Fiscal Quarters ending on or before
September 30, 1999, the period commencing on January 1, 1999, and ending on the
last day of such Fiscal Quarter) of not less than the following:
1.35 for each of the Fiscal Quarters ending in the Fiscal Year
ending December 31, 1999;
1.50 for each of the Fiscal Quarters ending in the Fiscal Year
ending December 31, 2000;
1.75 for each of the Fiscal Quarters ending in the Fiscal Year
ending December 31, 2001;
2.00 for each of the Fiscal Quarters ending in the Fiscal Year
ending December 31, 2002; and
2.25 for each Fiscal Quarter thereafter.
(c) Maximum Senior Leverage Ratio. Borrower and its Subsidiaries
shall have on a consolidated basis at the end of each Fiscal Quarter ending
during the periods set forth below a Senior Leverage Ratio as of the last day of
such Fiscal Quarter and for the four full Fiscal Quarters then ended of not more
than the following:
2.75 during the period from the Closing Date through December
30, 1999;
2.50 during the period from December 31, 1999, through
December 30, 2000;
2.25 during the period from December 31, 2000, through
December 30, 2001;
G-1
<PAGE> 112
and
2.00 from December 31, 2001, and thereafter.
(d) Maximum Total Leverage Ratio. Borrower and its Subsidiaries
shall have on a consolidated basis at the end of each Fiscal Quarter ending
during the periods set forth below, a Total Leverage Ratio as of the last day of
such Fiscal Quarter and for the four full Fiscal Quarters then ended of not more
than the following:
5.75 during the period from the Closing Date through December
30, 1999;
5.25 during the period from December 31, 1999, through
December 30, 2000;
4.75 during the period from December 31, 2000, through
December 30, 2001;
4.25 during the period from December 31, 2001, through
December 30, 2002; and
3.75 from December 31, 2002, and thereafter.
(e) Maximum Accounts Payable to Inventory Ratio. Borrower and its
Subsidiaries shall have on a consolidated basis at the end of each Fiscal Month,
a ratio of accounts payable to Inventory of not more than 0.50.
Unless otherwise specifically provided herein, any accounting term
used in the Agreement shall have the meaning customarily given such term in
accordance with GAAP, and all financial computations hereunder shall be computed
in accordance with GAAP consistently applied. That certain items or computations
are explicitly modified by the phrase "in accordance with GAAP" shall in no way
be construed to limit the foregoing. If any "Accounting Changes" (as defined
below) occur and such changes result in a change in the calculation of the
financial covenants, standards or terms used in the Agreement or any other Loan
Document, then Borrower, Agent and Lenders agree to enter into negotiations in
order to amend such provisions of the Agreement so as to equitably reflect such
Accounting Changes with the desired result that the criteria for evaluating
Borrower's and its Subsidiaries' financial condition shall be the same after
such Accounting Changes as if such Accounting Changes had not been made;
provided, that the agreement of Requisite Revolving Lenders to any required
amendments of such provisions shall be sufficient to bind all Lenders.
"Accounting Changes" means (i) changes in accounting principles required by the
promulgation of any rule, regulation, pronouncement or opinion of the Financial
Accounting Standards Board of the American Institute of Certified Public
Accountants (or any successor thereto or any agency with similar functions);
(ii) changes in accounting principles concurred in by Borrower's certified
public accountants; (iii) purchase accounting adjustments under A.P.B. 16 or 17
and EITF 88-16, and the application of the accounting principles set forth in
FASB 109, including the establishment of reserves pursuant thereto and any
subsequent reversal (in whole or in part) of such reserves; and (iv) the
reversal of any reserves established as a result of purchase accounting
adjustments. All such adjustments resulting from expenditures made subsequent to
the Closing Date (including capitalization of costs and expenses or payment of
pre-Closing Date liabilities) shall be treated as expenses in the period the
expenditures are made and deducted as part of the calculation of EBITDA in such
period. If Agent, Borrower and Requisite Revolving Lenders agree upon the
required amendments, then after appropriate amendments have been executed and
the underlying Accounting
G-2
<PAGE> 113
Change with respect thereto has been implemented, any reference to GAAP
contained in the Agreement or in any other Loan Document shall, only to the
extent of such Accounting Change, refer to GAAP consistently applied after
giving effect to the implementation of such Accounting Change. If Agent,
Borrower and Requisite Revolving Lenders cannot agree upon the required
amendments within 30 days following the date of implementation of any Accounting
Change, then all Financial Statements delivered and all calculations of
financial covenants and other standards and terms in accordance with the
Agreement and the other Loan Documents shall be prepared, delivered and made
without regard to the underlying Accounting Change.
G-3
<PAGE> 114
ANNEX H (SECTION 1.1(d))
TO
CREDIT AGREEMENT
LENDERS' WIRE TRANSFER INFORMATION
H-1
<PAGE> 115
ANNEX I (SECTION 11.10)
TO
CREDIT AGREEMENT
NOTICE ADDRESSES
(A) If to Agent or GE Capital, at
General Electric Capital Corporation
350 South Beverly Drive, Suite 200
Beverly Hills, California 90212
Attention: Account Manager (Styling Technology Corporation)
Mr. Timothy J. Rafanello
Mr. Scott B. Kaplan
Facsimile: (310) 284-8068
Telephone: (310) 203-0335
with copies to:
General Electric Capital Corporation Murphy Sheneman Julian & Rogers
201 High Ridge Road 101 California Street, Suite 3900
Stamford, Connecticut 06927-5100 San Francisco, California 94111
Attention: Corporate Counsel Attention: Dick M. Okada, Esq.
Facsimile: (203) 316-7889 Facsimile: (415) 421-7879
Telephone: (203) 316-7552 Telephone: (415) 398-4700
(B) If to Borrower, at
Styling Technology Corporation
7400 East Tierra Buena Lane
Scottsdale, Arizona 85260
Attention: Mr. Richard R. Ross
Mr. Michael L. Kaplan, Esq.
Facsimile: (602) 609-6004
Telephone: (602) 609-6000
With copies to:
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
Karl Freeburg, Esq.
Facsimile: (602) 263-2900
Telephone: (602) 263-2400
I-1
<PAGE> 116
ANNEX J (ANNEX A - "COMMITMENTS")
TO
CREDIT AGREEMENT
COMMITMENTS AS OF THE CLOSING DATE
<TABLE>
<CAPTION>
Commitments Lender(s)
<S> <C>
Revolving Loan Commitment
(including a Swing Line Commitment
of $10,000,000):
$90,000,000 GE Capital
</TABLE>
J-1
<PAGE> 117
SCHEDULE (1.1)
TO
CREDIT AGREEMENT
AGENT REPRESENTATIVE
Mr. Timothy J. Rafanello/Mr. Scott B. Kaplan
General Electric Capital Corporation
350 South Beverly Drive, Suite 200
Beverly Hills, California 90212
Facsimile: (310) 284-8068
<PAGE> 1
Exhibit 10.29
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of the ___ day of June 1999, by and
between STYLING TECHNOLOGY CORPORATION, a Delaware corporation ("Employer"), and
RICHARD R. ROSS ("Employee").
WHEREAS, Employer desires to confirm the terms of Employee's continued
employment, and Employee desires to continue such employment, upon the terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. EMPLOYMENT.
Employer hereby employs Employee, and Employee hereby accepts such
employment, as Executive Vice President and Chief Financial Officer and in such
other capacities and for such other duties and services as shall from time to
time be mutually agreed upon by Employer and Employee.
2. FULL TIME OCCUPATION.
Employee shall devote Employee's entire business time, attention, and
efforts to the performance of Employee's duties under this Agreement, shall
serve Employer faithfully and diligently, and shall not engage in any other
employment while employed by Employer.
3. COMPENSATION AND OTHER BENEFITS.
(a) SALARY. Employer shall pay to Employee, as compensation
for the services rendered by Employee during Employee's employment under this
Agreement, a salary at a rate of $175,000 per annum to be paid in equal monthly
installments, or in such other periodic installments upon which Employer and
Employee shall mutually agree. Commencing on January 1, 2000, Employee's salary
shall increase to a rate of $200,000 per annum.
(b) BONUS. Employee shall be eligible to receive an annual
bonus in such an amount, if any, to be determined by a committee of the Board of
Directors of Employer based upon such factors as may be deemed relevant by the
directors, including the performance of Employee.
(c) FRINGE BENEFITS. Employee shall be entitled to participate
in any stock option, group insurance, pension, retirement, vacation, expense
reimbursement or other plans, programs, or benefits made available from time to
time to executive officers of Employer generally during the term of Employee's
employment hereunder.
(d) REIMBURSEMENT. Employer shall reimburse Employee for all
reasonable travel and entertainment expenses and other ordinary and necessary
business
<PAGE> 2
expenses incurred by Employee in connection with the business of
Employer and Employee's duties under this Agreement. To obtain reimbursement,
Employee shall submit to Employer receipts, bills or sales slips for the
expenses incurred. Reimbursements shall be made by Employer monthly within 14
days of presentation by Employee of evidence of the expenses incurred.
(e) AUTOMOBILE. Employer shall provide employee with the use
of an automobile of equal or greater value than the automobile currently
provided by Employer to Employee.
4. TERM OF EMPLOYMENT.
(a) EMPLOYMENT TERM. The term of this Agreement shall be for a
period of two years commencing as of the date hereof and for successive two-year
periods thereafter, unless and until terminated by either party giving written
notice to the other not less than 60 days prior to the end of the then-current
term.
(b) TERMINATION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
anything to the contrary herein contained:
(i) DEATH. Employee's employment shall be
automatically terminated, without notice, effective upon the date of Employee's
death.
(ii) DISABILITY. If Employee shall fail, for a period
of more than 90 consecutive days, or for 90 days within any 180 day period, to
perform any of Employee's duties under this Agreement as the result of illness
or other incapacity, Employer may, at its option and upon notice to Employee,
terminate Employee's employment effective on the date of that notice.
(iii) UNILATERAL DECISION OF EMPLOYER. Employer may,
at its option, upon notice to Employee, terminate Employee's employment
effective on the date of that notice.
(iv) UNILATERAL DECISION BY EMPLOYEE. Employee may,
at his option and upon notice to Employer, terminate Employee's employment
effective on the date of that notice.
(v) CERTAIN ACTS. If Employee engages in a crime
against Employer involving fraud, or dishonesty, Employer may, at its option and
upon notice to Employee, terminate Employee's employment effective on the date
of that notice.
(vi) CHANGE IN CONTROL. Employee may, at his option
and upon notice to Employer, terminate Employee's employment effective on the
date of the notice in the event of a "Change in Control" of Employer, as defined
below.
(c) RESULT OF TERMINATION. In the event of the termination of
Employee's employment pursuant to Sections 4(b)(i) or (ii) above, Employee's
estate or Employee, as the case may be, shall be entitled to receive an amount
equal to Employee's fixed salary as provided
2
<PAGE> 3
in Section 3(a) above for a period of one year after the date of such
termination. In the event of the termination of Employee's employment pursuant
to Section 4(b)(iii) above without good cause, Employee shall receive an amount
equal to Employee's fixed salary as provided in Section 3(a) above for a period
of one year after the date of such termination. In the event of the termination
of Employee's employment pursuant to Section 4(b)(iii) above with good cause,
Employee shall receive an amount equal to Employee's fixed salary as provided in
Section 3(a) above for a period of six months after the date of such
termination. In the event of the termination of Employee pursuant to Section
4(b) (iv) above, Employee shall receive no further compensation under this
Agreement; provided, however, that if Employee shall give Employer six months or
more written notice of termination, Employee shall receive an amount equal to
Employee's fixed salary as provided in Section 3(a) above for a period of six
months after the date of such termination. In the event of the termination of
Employee pursuant to Section 4(b) (v) above, Employee shall receive no further
compensation under this Agreement. In the event of termination of Employee's
employment pursuant to Section 4(b)(vi) above, Employer shall pay Employee a
lump sum payment equal to Employee's fixed salary for three years, any unpaid
fringe benefits for the balance of the term of this Agreement, and such bonus as
may have been earned prior to the Change in Control, all within 10 days after
the termination of employment.
(d) CHANGE IN CONTROL. The term "Change in Control" of
Employer shall mean a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934 as in effect on the date of this
Agreement or, if Item 6(e) is no longer in effect, any regulations issued by the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 which serve similar purposes; provided that, without limitation, such a
Change in Control shall be deemed to have occurred if and when (i) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) directly or indirectly of equity securities of
Employer representing 30 percent or more of the combined voting power of
Employer's then-outstanding equity securities; (ii) during the period of this
Agreement, individuals who, at the beginning of such period, constituted the
Board of Directors of Employer (the "Original Directors"), cease for any reason
to constitute at least a majority thereof unless the election or nomination for
election of each new director was approved (an "Approved Director") by the
unanimous vote of a Board of Directors constituted entirely of Existing
Directors and/or Approved Directors; (iii) a tender offer or exchange offer is
made whereby the effect of such offer is to take over and control Employer, and
such offer is consummated for the equity securities of Employer representing 30
percent or more of the combined voting power of Employer's then-outstanding
voting securities; (iv) Employer is merged, consolidated, or enters into a
reorganization transaction with another person and, as the result of such
merger, consolidation, or reorganization, less than 75 percent of the
outstanding equity securities of the surviving or resulting person shall then be
owned in the aggregate by the former stockholders of Employer; or (v) Employer
transfers substantially all of its assets to another person or entity which is
not a wholly owned subsidiary of Employer. Sales of Employer's Common Stock
beneficially owned or controlled by Employee shall not be considered in
determining whether a Change in Control has occurred.
(e) LOCATION. Employee shall not be required to relocate his
primary place of employment outside Maricopa County, Arizona. Any breach of this
provision shall be
3
<PAGE> 4
treated as a termination of Employee's employment by Employer without good cause
under Section 4(b)(iii).
5. COMPETITION AND CONFIDENTIAL INFORMATION.
(a) INTERESTS TO BE PROTECTED. The parties acknowledge that
Employee will perform essential services for Employer, its employees, and its
stockholders during the term of Employee's employment with Employer. Employee
will be exposed to, have access to, and work with, a considerable amount of
Confidential Information (as defined below). The parties also expressly
recognize and acknowledge that the personnel of Employer have been trained by,
and are valuable to, Employer and that Employer will incur substantial
recruiting and training expenses if Employer must hire new personnel or retrain
existing personnel to fill vacancies. The parties expressly recognize that it
could seriously impair the goodwill and diminish the value of Employer's
business should Employee compete with Employer in any manner whatsoever. The
parties acknowledge that this covenant has an extended duration; however, they
agree that this covenant is reasonable and it is necessary for the protection of
Employer, its stockholders, and employees. For these and other reasons, and the
fact that there are many other employment opportunities available to Employee if
he should terminate his employment, the parties are in full and complete
agreement that the following restrictive covenants are fair and reasonable and
are entered into freely, voluntarily, and knowingly. Furthermore, each party was
given the opportunity to consult with independent legal counsel before entering
into this Agreement.
(b) NON-COMPETITION. During the term of Employee's employment
with Employer and for the period ending 12 months after the termination of
Employee's employment with Employer, regardless of the reason therefor, Employee
shall not (whether directly or indirectly, as owner, principal, agent,
stockholder, director, officer, manager, employee, partner, participant, or in
any other capacity) engage or become financially interested in any competitive
business conducted within the Restricted Territory (as defined below). As used
herein, the term "competitive business" shall mean any business that (a) sells
or provides or attempts to sell or provide products or services the same as or
substantially similar to the products or services sold or provided by Employer
during Employee's employment hereunder or (b) that pursues a "roll-up" or
consolidation business strategy involving salon products; and the term
"Restricted Territory" shall mean any state in which Employer sells products or
provides services during Employee's employment hereunder.
(c) NON-SOLICITATION OF EMPLOYEES. Provided Employer is not in
breach of its obligations under this Agreement, during the term of Employee's
employment and for a period of 12 months after the termination of Employee's
employment with Employee, regardless of the reason therefor, Employee shall not
directly or indirectly, for himself, or on behalf of, or in conjunction with,
any other person, company, partnership, corporation, or governmental entity,
seek to hire or hire any of Employer's personnel or employees for the purpose of
having any such employee engage in services that are the same as or similar or
related to the services that such employee provided for Employer.
(d) CONFIDENTIAL INFORMATION. Employee shall maintain in
strict secrecy all confidential or trade secret information relating to the
business of Employer (the "Confidential Information") obtained by Employee in
the course of Employee's employment, and
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Employee shall not, unless first authorized in writing by Employer, disclose to,
or use for Employee's benefit or for the benefit of, any person, firm, or entity
at any time either during or subsequent to the term of Employee's employment,
any Confidential Information, except as required in the performance of
Employee's duties on behalf of Employer. For purposes hereof, Confidential
Information shall include without limitation any materials, trade secrets,
knowledge, or information with respect to management, operational, or investment
policies and practices of Employer; any business methods or forms; any names or
addresses of customers or data on customers or suppliers; and any business
policies or other information relating to or dealing with the management,
operational, or investment policies or practices of Employer.
(e) RETURN OF BOOKS AND PAPERS. Upon the termination of
Employee's employment with Employer for any reason, Employee shall deliver
promptly to Employer all files, lists, books, records, manuals, memoranda,
drawings, and specifications; all cost, pricing, and other financial data; all
other written or printed materials that are the property of Employer (and any
copies of them); and all other materials that may contain Confidential
Information relating to the business of Employer, which Employee may then have
in Employee's possession, whether prepared by Employee or not.
(f) DISCLOSURE OF INFORMATION. Employee shall disclose
promptly to Employer, or its nominee, any and all ideas, designs, processes, and
improvements of any kind relating to the business of Employer, whether
patentable or not, conceived or made by Employee, either alone or jointly with
others, during working hours or otherwise, during the entire period of
Employee's employment with Employer or within six months thereafter.
(g) ASSIGNMENT. Employee hereby assigns to Employer or its
nominee, the entire right, title, and interest in and to all inventions,
discoveries, and improvements, whether patentable or not, that Employee may
conceive or make during Employee's employment with Employer, or within six
months thereafter, and which relate to the business of Employer.
(h) EQUITABLE RELIEF. In the event a violation of any of the
restrictions contained in this Section is established, Employer shall be
entitled to preliminary and permanent injunctive relief as well as damages and
an equitable accounting of all earnings, profits, and other benefits arising
from such violation, which right shall be cumulative and in addition to any
other rights or remedies to which Employer may be entitled. In the event of a
violation of any provision of subsection (b), (c), (f), or (g) of this Section,
the period for which those provisions would remain in effect shall be extended
for a period of time equal to that period beginning when such violation
commenced and ending when the activities constituting such violation shall have
been finally terminated in good faith.
(i) RESTRICTIONS SEPARABLE. If the scope of any provision of
this Agreement (whether in this Section 5 or otherwise) is found by a Court to
be too broad to permit enforcement to its full extent, then such provision shall
be enforced to the maximum extent permitted by law. The parties agree that the
scope of any provision of this Agreement may be modified by a judge in any
proceeding to enforce this Agreement, so that such provision can be enforced to
the maximum extent permitted by law. Each and every restriction set forth in
this Section 5 is independent and severable from the others, and no such
restriction shall be rendered
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unenforceable by virtue of the fact that, for any reason, any other or others of
them may be unenforceable in whole or in part.
6. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands, and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made, and received (i) if
personally delivered, on the date of delivery, (ii) if by facsimile
transmission, upon receipt, (iii) if mailed, three days after deposit in the
United States mail, registered or certified, return receipt requested, postage
prepaid, and addressed as provided below, or (iv) if by a courier delivery
service providing overnight or "next-day" delivery, on the next business day
after deposit with such service addressed as follows:
(1) If to Employer:
Styling Technology Corporation
7400 East Tierra Buena Lane
Scottsdale, Arizona 85260
Attention: President
with a copy given in the manner
prescribed above, to:
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback Road
Phoenix, Arizona 85012
Attention: Robert S. Kant, Esq.
(2) If to Employee:
Richard R. Ross
1613 East Glenhaven
Phoenix, Arizona 85048
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this Section 6 for the giving of notice.
(b) INDULGENCES; WAIVERS. Neither any failure nor any delay on
the part of either party to exercise any right, remedy, power, or privilege
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power, or privilege preclude any other or
further exercise of the same or of any other right, remedy, power, or privilege,
nor shall any waiver of any right, remedy, power, or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power, or
privilege with respect to any other occurrence. No waiver shall be binding
unless executed in writing by the party making the waiver.
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(c) CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the state of Arizona,
notwithstanding any Arizona or other conflict-of-interest provisions to the
contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors, and assigns, except that no party
may assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
(e) EXECUTION IN COUNTERPART. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine, or
neuter, as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays, and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday, or /holiday, then the final day shall be
deemed to be the next day that is not a Saturday, Sunday, or holiday.
7. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto; provided that because the
obligations of Employee hereunder involve the performance of personal services,
such obligations shall not be delegated by Employee. For purposes of this
Agreement successors and assigns shall include, but not be limited to, any
individual, corporation, trust, partnership, or other entity that acquires a
majority
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of the stock or assets of Employer by sale, merger, consolidation, liquidation,
or other form of transfer. Employer will require any successor (whether direct
or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of Employer to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that Employer would be required to perform it if no such succession had taken
place. Without limiting the foregoing, unless the context otherwise requires,
the term "Employer" includes all subsidiaries of Employer.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
STYLING TECHNOLOGY CORPORATION
By:____________________________________
Name: Sam Leopold
Its: Chairman, President and CEO
_______________________________________
Richard R. Ross, individually
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Exhibit 21
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
NAME STATE OF INCORPORATION
- ---- ----------------------
U.K. ABBA Products, Inc. California
Styling (UK) Limited England
European Touch, Ltd. II Wisconsin
Beauty Products Inc. Wisconsin
Cosmetics International Inc. Wisconsin
Ft. Pitt Acquisition, Inc. Pennsylvania
Styling Technology Nail Corporation Arizona
STYL Institute, Inc. Arizona
Styling Technology Export Corporation Barbados
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports covering Styling Technology Corporation, Gena Laboratories, Inc., Body
Drench (a Division of Designs by Norvell, Inc.), JDS Manufacturing Co., Inc.,
Kotchammer Investments, Inc., European Touch, Ltd. II, and U.K. ABBA Products,
Inc., dated March 15, 1999 (except with respect to the matters discussed in Note
14, as to which the date is June 23, 1999), March 21, 1997, March 21, 1997,
March 21, 1997, March 21, 1997, May 1, 1998, and June 20, 1997, respectively,
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
August 9, 1999
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Styling Technology
Corporation on Form S-1 of our report dated March 2, 1998 (August 3, 1998 as to
Note 10) (which expresses an unqualified opinion and includes an explanatory
paragraph relating to an agreement for the sale of a majority of Ft. Pitt
Acquisition, Inc.'s outstanding common stock), relating to the consolidated
financial statements of Ft. Pitt Acquisition, Inc. and subsidiary appearing in
the Prospectus, which is part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 9, 1999
