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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11969
MEHL/BIOPHILE INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2408186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4127 N.W. 27th Lane
Gainesville, Florida 32606
(Address or principal executive offices)
Registrant's telephone number, including area code: (352) 373-2565
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for the most recent fiscal year. $3,594,899
The approximate aggregate market value of the voting stock of the Registrant
held by nonaffiliates of the Registrant as of August 22, 1997 (based upon the
closing sale prices as reported by the Nasdaq Stock Market, Inc.) was
approximately $60,711,771.
The number of shares outstanding of the Registrant's class of common stock, as
of August 22, 1997 is 43,993,301.
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PART I
ITEM 1. BUSINESS
A. OVERVIEW
Mehl/Biophile International Corporation (the "Company") is a technology transfer
company presently concentrating on patented hair removal and cosmetic
dermatological products . The Company also makes early stage investments in core
technologies and companies that management believes are strategic to the
Company's business. The Company's initial focus is on removal of unwanted hair
through use of cosmetic lasers and consumable multiple hair removal systems.
The Company's short term goals focus on removal of unwanted hair in revenue
sharing licenses with physicians worldwide. The Company's medium term focus will
be to license other laser cosmetic applications to the Company's licensed
partners for treatment of skin resurfacing, wrinkles, leg veins, pigmented
lesions, port wine stains and other cosmetic procedures. In addition, the
Company desires to become the dominant company with both professional laser hair
removal as well as consumer hair removal technologies on a worldwide basis,
providing multiple options for consumers. Longer term goals involve industrial
laser applications and other related technologies.
HISTORICAL DEVELOPMENT
The Company, formerly Selvac Corporation ("Selvac"), is the result of the merger
on June 4, 1996 of Classy Lady by Mehl of Puerto Rico, Inc., a privately-held
Puerto Rico company ("Classy Lady"), with a subsidiary of Selvac (the "Merger").
In consideration for the Merger, the Company issued an aggregate of 25,000,000
shares of Common Stock, $.01 par value per share, to the shareholders of Classy
Lady. As a result of the Merger, the former Classy Lady shareholders owned a
majority of the outstanding Common Stock of the Company, thereby resulting in a
change of control of the Company.
In exchange for the issuance of the shares of the Company issued pursuant to the
Merger, the Company obtained all of the stock of Classy Lady, which owns the
exclusive licensing rights granted to Classy Lady by Dr. Nardo Zaias for a laser
hair removal technology and by Thomas L. Mehl, Sr. for a radio frequency and
direct current multiple hair removal technology. Upon completion of the Merger,
all of the assets and liabilities of Classy Lady became the property of the
Company's wholly owned subsidiary (now named Mehl Technologies, Inc.), and the
separate corporate existence of Classy Lady ceased.
The Merger was completed in accordance with the terms of the Second Amended and
Restated Agreement and Plan of Merger dated as of June 4, 1996 (the "Merger
Agreement"). Pursuant to the Merger Agreement, (i) the name of the Company was
changed to MEHL/Biophile International Corporation, (ii) Thomas L. Mehl, Sr.
("Mehl"), the president and a principal shareholder of Classy Lady, was elected
as Chairman of the Board of Directors, President and Chief Executive Officer of
the Company, and (iii) the Board of Directors of the Company was expanded to
seven members, five of whom were designated by Mehl.
On June 4, 1996 the Company completed the purchase of capital stock representing
in the aggregate of 81% interest in SLS (Wales) Limited, a privately held Welsh
company which has been renamed SLS Biophile Limited ("SLS"), engaged in
developing, manufacturing and selling lasers for dermatologic use, including
hair removal. The consideration for the acquisition of the SLS shares consisted
of a cash payment of 1,255,000 pounds sterling (approximately $1.9 million) and
the issuance of 25,044 shares of the Company's Common Stock. The consideration
paid was based upon arms-length negotiations between the Company and the holders
of the SLS shares. SLS holds patents pending, invented by Marc Clement, Ph.D,
which are compatible with the Zaias patent exclusively licensed to the Company's
wholly owned subsidiary in the field of laser depilation. SLS has been
developing and clinically evaluating laser
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depilation technology since 1993 and presently manufactures its CHROMOS 694
"long pulse" ruby laser depilation system.
On March 13, 1997 the Company completed the purchase of capital stock
representing in the aggregate of 75% interest in Integrated Technologies
Research Limited, a privately held Welsh company which will be renamed ITR
Biophile Limited ("ITR"). ITR engages in the research and development of
software and related hardware in the following areas: 1) laser scanning systems,
2) laser marking systems, 3) adaptive "Smart Card" read/write technologies, and
4) other highly sophisticated related technological areas. ITR was the
originator of the present scanning system and smart card technologies utilized
in the CHROMOS 694 Ruby Laser. The shareholders of ITR received 250,000 shares
of the common stock of the Company for the 75% interest in ITR.
Prior to the Merger and the SLS and ITR acquisitions, the Company's principal
activities consisted of the manufacturing and distribution of the Finally Free
hair removal system.
LASER TECHNOLOGY
In December 1995, Classy Lady entered into a License Agreement with Dr. Nardo
Zaias (the "Zaias License") pursuant to which Dr. Zaias granted to Classy Lady
an exclusive license to make, use and sell products incorporating the laser
method of hair removal invented by Dr. Zaias and which is represented by U.S.
Patent No. 5,059,192 dated October 22, 1991 (the "Zaias Patent").
The Zaias Patent is directed to a method of hair depilation using a laser to
substantially destroy hair follicles. The method uses a pulse of laser energy of
a wavelength that is readily absorbed by melanin, a pigment found within the
hair in the papilla at the base of the hair follicle and the stem cells. The
laser energy is applied substantially vertical over the hair follicle opening,
and has a radiant exposure dose of sufficient energy and duration to damage the
papilla to prevent hair regrowth while avoiding scarring surrounding skin.
In consideration for granting the exclusive license, Classy Lady agreed to issue
Dr. Zaias 5,000 shares of Classy Lady Common Stock, pay to Dr. Zaias $100,000
prior to June 3, 1996 and pay to Dr. Zaias a royalty of $1,000 on each laser
placed in the United States in connection with the laser hair removal invention
covered by the above patent. Classy Lady also agreed to pay Dr. Zaias a minimum
royalty of $50,000 per year.
The Zaias Patent is compatible with the SLS patents pending, invented by Marc
Clement, Ph.D. in the field of laser depilation. SLS designs, develops,
manufactures and distributes opto-electronic based solutions to problems in
healthcare and industry. Its core discipline is that of opto-electronics, the
application of light to solve problems. SLS has developed several highly complex
machines for healthcare applications which contain advanced hardware and
software control systems, and sophisticated thermal, mechanical and optical
design. SLS believes that these technologies may be utilized for other
industrial sectors.
SLS has focused primarily on the application of lasers in plastic surgery,
dermatology and cosmetic applications. Its current focus is the area of hair
depilation, the removal of unwanted body hair. SLS was formed in 1992 to
complete the management buy-out in May 1992 of Shanning Laser Systems Limited
("Shanning"). After its acquisition by the Company in June 1996, SLS changed its
name to SLS Biophile Limited in August 1996.
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Shanning entered the healthcare market in 1988, when it developed its SIRIUS
range of carbon dioxide lasers. The product range was successful and received
numerous design awards including the Prince of Wales Award for Innovation. In
August of 1990, at the request of the United Kingdom's Secretary of State for
Health, Shanning developed a dye laser to treat vascular lesions, known as the
CHROMOS 585, which was fully developed and tested by the first quarter of 1992.
The CHROMOS 585 has full approval for sale in the European markets and SLS has
sold 68 CHROMOS 585 lasers to date. Dye lasers utilize complex chemicals in a
liquid state as the laser medium. Dye lasers are considered one of the most
complex laser technologies, incorporating sophisticated mechanical, optical and
chemical design, together with the advanced hardware and software demand. The
CHROMOS 585 is covered by two United Kingdom patents pending protecting the
concept of using the sharp pulse and multiple beam thermolysis. These patents
pending provide coverage in all countries which are party to the Patent
Convention Treaty ("PCT").
In 1992 SLS decided to develop technology capable of depilation. In 1993,
following extensive mathematical and computer modeling, system design and
clinical trials, SLS filed its first laser depilation patent, which is
compatible with the Zaias Patent exclusively licensed to the Company.
SLS has been developing and clinically evaluating laser depilation technology
since 1993 and presently manufactures its CHROMOS 694 "long-pulse" ruby laser
depilation system. The CHROMOS 694 long pulse ruby laser is designed to remove
unwanted hair on any part of the body using a relatively pain free process. This
is undertaken over a course of treatments and initial tests suggest permanency
can be achieved. Laser energy is deposited in hair and then converted to thermal
energy, i.e. heat. The optical parameters of the laser (wavelengths, energy,
energy density and, importantly, pulse duration) have been carefully selected to
destroy, in a controlled manner, the stem cells which control hair growth. SLS
has filed a patent to protect the concept of illuminating tissue with a range of
wavelengths which penetrate the surface of the skin and target the melanin in
the hair deep beneath the surface. Protection is throughout the PCT and other
countries. The Company believes that the SLS patent, if granted, will give the
Company a very strong commercial position in this substantial market.
The Company was informed in May, 1997 that the patent application had been
accepted by the New Zealand Patent Office and that the application would proceed
to grant in August 1997.
SLS has entered into an exclusive manufacturing agreement to provide the CHROMOS
694 ruby laser and has granted an exclusive license to market the CHROMOS 694
ruby laser to the Company. The Company has granted a sublicense to market the
CHROMOS 694 ruby laser to its wholly owned subsidiary, Mehl Group Marketing,
Inc. ("MGMI"), a Puerto Rico corporation formed on November 15, 1996. MGMI was
formed to market and distribute the CHROMOS 694 ruby laser. In addition, the
Company's wholly owned subsidiary, Mehl Technologies, Inc., has granted a
license to market products incorporating the laser method of hair removal
invented by Dr. Zaias to MGMI. MGMI enters into licensing arrangements with
physicians, clinics and hospitals in exchange for coordinating all aspects of
marketing, deployment, training and service for the CHROMOS 694 ruby lasers.
The Company intends to significantly expand its development, manufacturing and
deployment of laser systems throughout the world. The Company, either directly
or through its subsidiaries, intends to continue distributing its products
through licensing arrangements with physicians, clinics and hospitals which will
provide ongoing revenues to the Company and the opportunity to provide new
technology developed by SLS to its licensees. As of May 31, 1997 MGMI had 31
lasers under licensing agreements worldwide. These lasers generated $816,000 of
total revenue during the fourth quarter of 1997, of which MGMI's portion was
$228,000. As of August 7, 1997, MGMI had placed an additional 32 lasers under
licensing agreements, including 18 lasers in the United States. In addition, as
of August 7, 1997 MGMI had a backlog of 27 lasers to place under signed
licensing agreements with installation scheduled upon completion of appropriate
training sessions, including 24 lasers for installation in the United States. As
of August 7, 1997, the Company had in excess of 2,000 applications for potential
licensing agreements.
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The method utilized by the Company's laser hair removal technologies differs
from other techniques for hair removal in both convenience and simplicity. It
offers an alternative to the sometimes painful and time consuming process of
electrolysis which reportedly accounts for over $1 billion in revenues annually.
Unlike other techniques, the Company's method using the CHROMOS 694 laser does
not require pre-treatments such as waxing or the use of messy lotions. The
Company believes that physicians who are seeking alternative sources of revenue
due to the cost containment policies of managed care organizations provide a
market opportunity for the Company's products. The Company is forming alliances
with physicians in licensing arrangements whereby the physicians will oversee
the provision of hair removal services in doctors offices, clinics and hospitals
while the Company will employ marketing strategies to increase awareness about
this service and its available locations. The Company believes that its
arrangements with physicians providing wide access to consumers coupled with the
simplicity of the method will allow for expansion of the hair removal market.
CONSUMER PRODUCTS
FINALLY FREE
Prior to the Merger and subsequent acquisitions, the Company's principal
activities consisted of the manufacturing and distribution of the Finally Free
hair removal system.
On April 22, 1985, the Company acquired all of the outstanding capital stock of
(a) The Mehl International Corporation ("MIC") and (b) Nutrolysis International
Corporation ("Nutrolysis") for 1,000,000 and 100,000 shares, respectively, of
common stock of the Company. Certain additional cash payments were
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made, and royalty payments of 2% of net Finally Free Hair Remover ("Finally
Free") worldwide sales collections were, until November 1996, made to the stock
holders of MIC. As part of the acquisition, the Company was assigned the rights
to an exclusive Licensing Agreement with Thomas L. Mehl, Sr., the inventor of
Finally Free, for the licensed patent rights to his invention. The agreement
calls for payments of $1.50 per unit royalty for the first 500,000 units and
$1.00 per Finally Free unit thereafter for the life of the patents, which
expired in November 1996. All royalties are based on net unit sales. Royalty
expense paid to the shareholders of MIC under the agreements for fiscal years
ended May 31, 1997, 1996, 1995, was approximately $92,345, $39,000 and $53,000,
respectively. An additional 100,000 shares of common stock of the Company were
issued by the Company to an investment banker for services in connection with
the acquisition. MIC was the owner of the Finally Free hair removal appliance
described below.
The Company entered the personal care appliance business in 1985 with its
acquisition of MIC and Nutrolysis, which were merged into the Company in 1988.
MIC owned the rights to a proprietary patented method of hair removal that uses
directed radio frequency waves. This technology is employed in two products - a
consumer appliance sold under the trade name Finally Free and a professional
appliance sold under the trade name NU-Trolysis.
Both Finally Free and NU-Trolysis use the same energy and radio frequency. The
unit's patented plated tips grasp the unwanted hair above the skin line. There
is no needle, no head, and no pain. The radio frequency is transmitted from the
unit to the hair where it works to weaken the chemical structure of the hair so
that it can be easily removed.
Finally Free has represented the single largest part of the Company's sales
since its acquisition. The uncertainty raised by the FDA situation caused the
Company to look toward its foreign markets for new marketing opportunities. Hair
removal is practiced worldwide, and the Company moved aggressively to open new
markets, distributors, and sources of supply. The Finally Free sales base has
shifted to international distribution primarily in Canada, England, Japan,
Australia, Spain, and Korea. Production of the Finally Free is through a single
manufacturer in the United Kingdom. The Company filed a 510(k) application for
the Finally Free product on July 17, 1997. Currently, the Company is awaiting a
response from the FDA.
Total consumer products sales, entirely export sales, amounted to $2,087,909,
$2,351,945 and $2,744,620 in 1997, 1996 and 1995, respectively. Finally Free
sales represented 98%, 97% and 99% of total consumer products sales in 1997,
1996 and 1995 respectively. The 1997 export sales were $1,796,000 to Japan and
$166,000 to Europe. The 1996 export sales were $2,083,000 to Japan and $184,000
to Europe. The 1995 export sales were $2,090,000 to Japan and $322,000 to
Europe.
Sales to major customers as a percentage of total sales for the Company's
consumer products division were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Ikeda Corporation 86% 89% 76%
Impromedia S.L. 10%
</TABLE>
Although the Company anticipates that income from laser hair removal
technologies will comprise the principal source of the Company's revenues, at
present any substantial decrease in sales to Ikeda Corporation would have a
significant detrimental impact on the Company's operations and financial
condition.
The consumer products division has elected not to manufacture its products
directly. The Company owns molds from which the plastic parts are produced as
well as some of the production equipment and uses one primary vendor for the
actual assembly work. This vendor is not under contract and numerous alternative
vendors are available to produce the Company's products. No unusual quality
control, production or delivery problems have been encountered with the current
supplier.
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The sales order backlog for the consumer products division at any point in time
is negligible. Orders are shipped from inventory as received and are based upon
purchase orders.
CLASSY LADY
In December 1995, Classy Lady also entered into a License Agreement with Thomas
L. Mehl, Sr. ("Mehl License") pursuant to which Mr. Mehl granted to Classy Lady
an exclusive license to make, use and sell the following products:
- a method and system for the removal of multiple hairs invented by
Mr. Mehl represented by U.S. Patent No. 5,470,332 dated November 28,
1995 ("Mehl Patent");
- a consumer radio frequency hair removal tweezer device invented by
Mr. Mehl and represented by U.S. Patent No. 5,049,149 dated November
17, 1991; and
- a consumer hair removal conductive solution to be used to provide
for improved conductivity when used in conjunction with the tweezer
device which was invented by Mr. Mehl and is represented by U.S.
Patent No. 5,364,394 on November 15, 1994.
The Mehl Patent is directed to devices for multiple hair removal using radio
frequency and direct current. The Mehl Patent describes several embodiments,
including a multi-layer device. The multi-layer device is comprised of a
non-conductive adhesive wax layer, a structural layer, and a conductive adhesive
layer between the non-conductive and structural layers. In use, the device is
pressed against the skin surface with the non-conductive layer in contact with
the skin. Hair to be removed extends through the non-conductive layer and
contacts the conductive layer. The conductive layer is connected to a power
source, which is turned on for a predetermined time period. The hairs serve as
paths by which power is transmitted to the root areas of the hairs, which are
thereby damaged. The non-conductive layer guards against discomfort when the
device is in use. The adhesive layers adhere to the treated hairs to thereafter
facilitate their removal from the skin.
The hair removal system licensed by Classy Lady from Thomas L. Mehl, Sr. has
also received patent protection in the European Community and a Canadian patent
for such system was granted in February 1996. These patent rights are also
exclusively licensed by Classy Lady together with the U.S. patents described
above. Patent applications are pending in approximately 50 additional foreign
countries.
In consideration for the grant of the exclusive license, Classy Lady agreed to
pay Mehl a royalty of 5% of the wholesale price of all products covered by the
above patents sold by Classy Lady or its distributors worldwide. Under the Mehl
License, Classy Lady agreed to pay Mehl a minimum annual royalty of $50,000. 10%
of all royalty payments due to Mehl are to be paid to Classy Lady's patent law
firm of Schlesinger, Arkwright & Garvey (SA&G") until the aggregate of such
payments to SA&G reaches $1 Million.
Mr. Mehl and Dr. Zaias have each agreed to share with the other a portion of the
royalty revenues derived from the License Agreements described above.
Accordingly, 25% of all payments to be made to Mr. Mehl under his license
agreement are to be paid to Dr. Zaias until such time as Dr. Zaias notifies
Classy Lady that Mr. Mehl is no longer obligated to make such payments and 50%
of all royalty payments due to Dr. Zaias are to be paid to Mr. Mehl.
The Company is currently in the process of developing the consumer multiple hair
removal patch for commercial introduction.
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FINALLY FIRM
After several unsuccessful marketing attempts for the Finally Firm Facial Toning
System ("Finally Firm"), the Company discontinued this product line during 1997.
Sales of Finally Firm accounted for less than 5% of total revenues for each of
the past three years.
LIL JOINT VENTURE
On December 19, 1995, Classy Lady executed a Joint Venture Formation Agreement
with Laser Industries ("LIL"), an Israeli corporation engaged in the development
and sale of lasers for medical purposes. Under the terms of this agreement,
Classy Lady and LIL formed a new corporation, Sharplan 2000, Inc. ("Sharplan"),
owned 50% by Classy Lady and 50% by LIL but having all directors appointed by
LIL. The purpose of the joint venture is to obtain FDA approval for the
marketing of the laser hair removal invention covered by the Zaias patent and to
develop, market and sell products and services derived therefrom. Classy Lady
agreed to contribute a sublicense of the Zaias License to Sharplan and agreed
that it will issue no more than one other sublicense of the Zaias License. In
June 1996, LIL announced that it had filed a 510(k) application with the FDA for
clearance to market through Sharplan Lasers, Inc., a separate subsidiary of LIL,
the EpiTouch ruby laser in the United States for hair removal. On March 7, 1997
the FDA granted clearance for Sharplan Lasers, Inc. to market the EpiTouch ruby
laser in the United States for hair removal.
On December 5, 1996, the Company commenced an arbitration with the American
Arbitration Association in New York, New York to terminate the joint venture.
The Company is basing this action on a dispute concerning the nature of
technological and financial contributions to be made to the joint venture by LIL
and an additional dispute concerning whether LIL utilized technology within the
joint venture which was in fact developed by SLS prior to the purchase by the
Company of a controlling interest in SLS in June, 1996. See "Item 3. Legal
Proceedings."
COMPETITION
MARKET
It is estimated that approximately 80 million women in the United States use
alternative methods of hair removal. The market may be divided into three
different hair removal categories based upon the length of time for reappearance
of hair. Short term methods may employ shaving, chemical depilation liquids and
creams, which are low cost but require frequent use. Moderate term methods, i.e.
plucking or waxing, may last several weeks but may cost more and be painful. The
most common method used for long term hair removal is electrolysis. This
technique requires a needle-like probe to be inserted into each individual hair
follicle to deliver an electric pulse of energy, which can be a painful,
time-consuming and costly process.
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Re-treatments may be required as permanent hair removal may be achieved in as
few as 40% of disabled hair follicles after the first treatment. Given this
situation, electrolysis typically is limited to small body area locations. The
American Electrology Association estimates that in the United States
approximately one million people per year use electrolysis and that the market
generates approximately $1 billion annually. The Company believes the market for
removal of unwanted hair may substantially increase with the introduction of a
less painful, more efficient process for hair removal.
LASER TECHNOLOGY
The Company is aware of at least two other companies in the United States
engaged in laser hair removal, Thermolase Corporation ("Thermolase") and Palomar
Medical Technologies, Inc. ("Palomar"). Thermolase has received 510(k) clearance
form the FDA to market services using its laser technologies. Palomar has
received 510(k) clearance for its Epilaser(TM) technology for dermatological
uses, but not including use of the laser hair removal application, and the
Company is not aware of Palomar's current plans to commercialize its laser hair
removal technology. Both Thermolase and Palomar are substantially larger than
the Company in terms of financial, marketing and research and development
resources. The Company believes, however, that its technology is superior to
that of both Thermolase and Palomar in terms of effectiveness, reduced pain and
permanency. The Company further believes it has extremely strong patent rights
under the Zaias Patent and the SLS patent pending which will substantially
increase its ability to compete with these companies.
The Company's laser hair removal technology will also be competitive with
conventional hair removal providers such as electrolysis and other temporary
hair removal products such as waxes, creams and depilatories.
CONSUMER PRODUCTS
The Company's consumable multiple hair removal patch and Finally Free tweezers
will also compete with laser hair removal technologies and conventional hair
removal methods. The Company believes that its multiple hair removal method,
when commercially developed, will offer substantial advantages in terms of ease
of use and permanency to enable the Company to compete effectively in the hair
removal market. The Company believes that its consumer multiple hair removal
patch and Finally Free tweezer will complement and expand the Company's share of
the depilation market.
UNITED STATES GOVERNMENT REGULATION
LASER TECHNOLOGY
As with any manufacturer of medical devices, the testing, manufacture and sale
of the Company's products are subject to regulation by numerous governmental
authorities, principally the United States Food and Drug Administration ("FDA")
and corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug and Cosmetic Act ("FDCA"), and the regulations promulgated
thereunder, the FDA regulates the preclinical and clinical testing, manufacture,
labeling, distribution and promotion of medical devices. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request recall,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
In the United States, medical devices are classified into one of three classes
(i.e. class I, II, or III) on the basis of the controls deemed necessary by the
FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g. labeling, premarket notification and adherence
to good manufacturing practices ("GMP")) and class II devices are subject to
general and specific controls (e.g. performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, class
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III devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g. life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices).
Before a new device can be introduced in the market in the United States, the
manufacturer must generally obtain FDA clearance or approval through either
clearance of a notification filed under section 510(k) of the FDCA or approval
of a premarket approval ("PMA") application. A PMA application must be filed if
a proposed device is not substantially equivalent to a legally marketed class I
or class II device, or if it is a class III device for which the FDA has called
for PMA's. A PMA application must be supported by valid scientific evidence to
demonstrate the safety and effectiveness of the device, typically including the
results of clinical trials, bench tests and laboratory and animal studies. The
PMA process can be expensive, uncertain and lengthy, and a number of devices for
which FDA approval has been sought by other companies have never been approved
for marketing.
A 510(k) clearance will be granted if the submitted information establishes that
the proposed device is "substantially equivalent" to a legally marketed class I
or class II medical device or a class III medical device for which the FDA has
not called for PMAs. The FDA has recently required more rigorous demonstration
of substantial equivalence than it has done in the past, including in some cases
requiring submission of clinical data. For some devices, the FDA may determine
that the proposed device is not substantially equivalent to a predicate device,
or that additional information (i.e. more scientific data) is needed before a
substantial equivalence determination can be made. It generally takes from four
to twelve months from submission to obtain 510(k) premarket clearance, but it
may take longer. A not substantially equivalent determination, or a request for
additional information could prevent or delay the market introduction of new
products that fall into this category. Modifications or enhancements of devices
that have been cleared through the 510(k) process that could significantly
affect safety or effectiveness, or that constitute a major change in the
intended use of the device, will require new 510(k) submissions.
If human clinical trials of a device are required, whether for a 510(k)
submission or a PMA, and the device presents a significant risk, the sponsor of
the trial ( usually the manufacturer or the distributor of the device) will be
required to file an investigational device exemption ("IDE") application prior
to commencing human trials. The IDE application assures the safety and adequacy
of the clinical trial and therefore must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and one or more appropriate Institutional Review Boards
("IRB"), human clinical trials may begin at a specific number of investigational
sites with a specific number of patients, as approved by the FDA. If the device
presents an insignificant risk to the patient, a sponsor may begin the clinical
trial after obtaining approval for the study by one or more appropriate IRBs
without the need for FDA approval. Submission of an IDE application does not
give assurance that the FDA will approve the IDE application and, if it is
approved, there can be no assurance that the FDA will determine that the data
derived from these studies support the safety and efficacy of the device or
warrant the continuation of clinical studies.
Manufacturers of medical devices for marketing in the United States are required
to adhere to applicable regulations setting forth detailed Good Manufacturing
Practices ("GMP") requirements, which include testing, control and documentation
requirements. They must register their facilities with the FDA so that the
agency can perform periodic inspections and quality audits. Manufacturers must
also comply with Medical Device Reporting ("MDR") requirements that a firm
report to the FDA any incident in which its products may have caused or
contributed to a death or serious injury, or in which its products malfunctioned
and, if the malfunction were to recur, whether it would be likely to cause or
contribute to a death or serious injury. Labeling and promotional activities are
subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. Current FDA enforcement policy prohibits the marketing of
approved medical devices for unapproved uses.
In May 1996, The Company applied for 510(k) clearance for the CHROMOS 694
depilation laser system distributed by SLS. On March 13, 1997 the Company
received marketing clearance from the FDA to market the CHROMOS 694 depilation
laser system in the United States. The FDA decision was based
10
<PAGE> 11
upon safety and efficacy data from two European studies, one Danish and one
English, involving a total of 200 patients with nearly 250 skin sites tested. As
part of those studies it was noted that, after an average of two treatments,
approximately 80% of facial hair did not return after a period of 190 days.
Although a minority of patients reported minor temporary itch, swelling or
redness, no serious adverse effects were reported.
CONSUMER PRODUCTS
The FDA determined that the Company did not have the appropriate marketing
approval to sell Finally Free domestically. The Company filed a number of
appeals as well as developed and submitted new data in an attempt to gain
marketing approval. On June 28, 1991, the United States District Court for the
Eastern district of Pennsylvania approved a settlement, in which the Company
denied allegations of the complaint but agreed, among other things, that the
Company would not manufacture, process, pack, label, promote, advertise,
distribute or sell Finally Free unless and until it received marketing clearance
from FDA. On December 6, 1991, FDA requested that the Company provide additional
information for its 510(k) filing as part of the marketing authorization
process. In February of 1992, the Company received export approval for existing
domestic units of Finally Free to Canada from the FDA. In July 1994, the FDA
determined that Finally Free shall be considered a Class III device under the
Food, Drug and Cosmetic Act and accordingly, will require premarket approval
before it is sold or distributed in the U.S. The Company filed a 510(k)
application for the Finally Free product on July 17, 1997. Currently, the
Company is awaiting a response from the FDA.
EUROPEAN COMMUNITY REGULATION
LASER TECHNOLOGY
Sales of the Company's products in Europe are subject to voluntary standards and
regulations, including directives adopted by the European Community. A key
voluntary standard provides, among other things, that the Company comply by 1998
with International Standard ISO 9001 ( European Standard EN 29001) entitled
"Model for Quality Assurance in Design, Development, Production, Installation
and Servicing." In August 1997, SLS obtained ISO 9001 registration.
In addition, since January 1, 1996, in order to receive Community European
Marking ("CE Marking"), laser manufacturers must comply with the Electro
Magnetic Compatibility ("EMC") standards. All of the Company's current products
meet the EMC standards, and thus have been cleared for CE Marking.
Commencing in June, 1998, laser manufacturers who market their products in the
European Community will be required to comply with the Medical Devices Directive
("MDD"). The Company expects to meet the requirements in early 1998.
CONSUMER PRODUCTS
Regulatory approval to market the electronic components employed by the Classy
Lady hair removal system licensed from Thomas L. Mehl, Sr. was granted in
September 1993 by the German Verband Deutscher Electrotechniker ("VDE") which
enables such products to be marketed and sold in the European Community. The
Company believes that no further VDE or other regulatory approvals are required
in the European Community to market the Company's products which are used with
such electronic components. Accordingly, the Company believes it can currently
market its multiple hair removal products in the European Community under its
existing VDE license.
RESEARCH AND DEVELOPMENT
Research and development expense was $2,265,984 in 1997 compared to virtually no
research and development expense for 1996.
11
<PAGE> 12
EMPLOYEES
The company employed 89 total employees and 81 full-time employees at May 31,
1997.
ITEM 2. DESCRIPTION OF PROPERTY
The Company utilizes the following facilities:
<TABLE>
<CAPTION>
Square Owned/ Lease
Location Footage Leased Expires Use
- -------- ------- ------ ------- ---
<S> <C> <C> <C> <C>
4127 NW 27th Lane 4,150 Leased 10/31/98 Office
Gainesville, FL
4140 NW 27th Lane 1,175 Leased 12/30/97 Office
Gainesville, FL
2127 NW 43rd Street 1,092 Leased 06/30/98 Office
Gainesville, FL
100 Alexandria Blvd 1,120 Leased 10/31/97 Clinic/Office
Oviedo, FL
401 Hackensack Ave 1,500 Leased 05/31/00 Office
Hackensack, NJ
270 Munoz Rivera Ave 450 Leased 03/30/98 Office
Hato Rey, PR
221 Boston Post Rd 2,500 Leased 09/30/97 Office
Marlboro, MA
Heol Rhosyn, Dafen Park 10,000 Leased 05/31/17 Factory/Office
Llanelli, Wales
Heol Aur, Dafen Park 5,000 Leased 08/31/97 Warehouse
Llanelli, Wales
Tawe Business Village 600 Leased 03/22/01 Office
Swansea, Wales
</TABLE>
The Company believes its current facilities are in good operating condition and
repair and are sufficient to meet the short-term needs of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company holds an exclusive license with Thomas L. Mehl, Sr. for certain
enumerated patents as well as Mehl's new inventions in the hair removal field. A
dispute arose as to the Company's compliance with the terms of that license and
as to the termination of the license. On March 20, 1991, the Company filed a
complaint in the Federal District Court in Massachusetts (Civil Action No.
91-10868-Z) against Mr. Mehl. After consummation of the Merger, each of Mehl and
the Company entered into full settlement and release on June 14, 1996 with
respect to the litigation and dismissed all claims against each other. Neither
party was or will be paid any money or other consideration from the other in
connection with such settlement
12
<PAGE> 13
and release.
On December 5, 1996 the Company commenced an arbitration with the American
Arbitration Association in New York, New York to terminate a joint venture with
Laser Industries Limited ("Laser"). The joint venture was formed in December,
1995, when Laser and Classy Lady executed a Joint Venture Formation Agreement to
exploit patented laser hair removal technology exclusively licensed to Classy
Lady. Under the terms of the agreement, Classy Lady and Laser formed a new
corporation, Sharplan 2000, Inc. ("Sharplan"), owned 50% by Classy Lady and 50%
by Laser but managed exclusively by Laser and having a majority of directors
appointed by Laser. The Company commenced the arbitration to terminate the
license granted to Sharplan and unwind the joint venture. The Company is basing
this action on a dispute concerning the nature of technological and financial
contributions to be made to the joint venture by Laser and an additional dispute
concerning whether Laser utilized technology within the joint venture which was
in fact developed by SLS prior to the purchase by the Company of a controlling
interest in SLS in June, 1996.
On December 23, 1996, Laser asserted two counterclaims in the arbitration
proceedings, claiming that the Company has breached an alleged fiduciary duty
owed to Laser and Sharplan and seeking a declaration that the Company may not
grant a sublicense of certain patent rights to SLS. The Company has filed a
response to these counterclaims requesting dismissal on the grounds that neither
claim is arbitrable. On April 7, 1997, LIL filed an amendment to its original
counterclaim to permanently enjoin the Company and SLS from selling lasers for
hair removal in the United States.
In a separate action filed in England in October, 1996, SLS commenced an action
against Laser, a laser manufacturer Spectron Laser Systems Limited ("Spectron")
and related parties, for orders preventing Laser from using SLS's technology and
stopping Spectron from supplying SLS's technology to Laser.
In March, 1997, the Company filed suit against Palomar Medical Technologies,
Inc. ("Palomar") and its subsidiaries, Spectrum Medical Technologies, Inc.,
Spectrum Financial Services, LLC, and a New Jersey dermatologist for patent
infringement and unfair competition. The suit was filed in the United States
District Court for the District of New Jersey and alleges that the defendants
infringe on the patented method of laser hair removal owned by Dr. Nardo Zaias
and exclusively licensed to the Company and that the defendants have improperly
marketed laser hair removal products before receiving FDA approval. The Company
is seeking monetary damages and injunctive relief to restrain Palomar from
marketing its laser hair removal products in the United States. While management
is confident that the actions brought against the above defendants are
well-founded the litigation is only in its initial stages. In March, 1997,
Palomar served the Company with a lawsuit it filed in the United States District
Court in Massachusetts seeking to declare the patent embodying the laser hair
removal technology exclusively licensed to the Company to be declared invalid.
Further amendments to this action have also been sought by Palomar. The Company
has moved to dismiss the Massachusetts action and counsel for Palomar has agreed
to its dismissal. It is likely however that the assertion of invalidity will be
raised in the Company's New Jersey action against Palomar. Management of the
Company is confident that the validity of its patent will be upheld.
On August 11, 1997, the Federal District Court in New Jersey rejected Palomar's
attempt to prevent the Company from pursuing unfair competition claims under New
Jersey law relating to allegations of improper promotions of Palomar's
Epilaser(TM) for hair removal usage.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS:
None
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The Company's Common Stock has been traded over-the-counter since December 6,
1983 and is currently listed for quotation on the Small Cap Market of the Nasdaq
Stock Market, Inc. under the symbol MEHL, and the bid prices are reported on the
Nasdaq Stock Market, Inc.'s Small Cap Market.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS*
PERIOD HIGH LOW HIGH LOW
------ ---- --- ---- ---
<S> <C> <C> <C> <C>
Year Ended May 31, 1997
Quarter Ended May 31, 1997 5 17/32 2 21/32
Quarter Ended February 28, 1997 4 7/8 2 3/16 5/8 5/8
Quarter Ended November 30, 1996 4 13/16 2 3/8 2 3/4 3/4
Quarter Ended August 31, 1996 9 11/16 3 7/16 3 1/8 3 1/8
Year Ended May 31, 1996
Quarter Ended May 31, 1996 10 2 1/8 7 3/4 1 1/4
Quarter Ended February 29, 1996 2 7/8 1 3/16 1 7/16 5/8
Quarter Ended November 30, 1995 1 15/16 3/16
Quarter Ended August 31, 1995 7/32 3/16
</TABLE>
* All outstanding warrants expired on December 27, 1996. Due to the decline
of the market value of the common stock, there were no available
quoted bid prices for periods prior to the quarter ending February
29, 1996, based upon the assumption that warrants will not be
exercised or purchased for the periods presented.
The source for the price quotes of the Common Stock is as reported by the
National Association of Securities Dealers and does not include retail mark-ups,
mark-downs, commissions or other adjustments and does not represent actual
transactions.
As of August 6, 1997, there were approximately 5,400 holders of the Company's
common shares.
The Company has never paid any common stock cash dividends, and no common stock
dividends are anticipated at the present time.
14
<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
GENERAL OPERATING COMMENTS
During the year, the Company has gone from being essentially a single consumer
product company with declining sales to a multifaceted technology company
engaged in laser hair removal on a global basis. This change has necessitated an
increase in administrative employees, legal expenses, patent fees and travel
expense. Additionally, the Company is increasing its sales and marketing
capabilities in order to support the global introduction of the hair removal
lasers. At the same time the Company has commenced a program to license its
lasers to revenue sharing partners wherein physicians will oversee the hair
removal services. The licensing program began internationally in October 1996
but could not begin in the United States until marketing clearance was received
from the Food and Drug Administration. The market clearance was received March
13, 1997. Under these licensing arrangements, the Company will provide its
partners with the use of a laser, training and maintenance and will receive a
percentage of the gross revenue generated by the laser hair removal treatments.
The Company has had significant losses to date and expects these losses to
continue for the near future. Therefore, the Company must continue to secure
additional financing to commercialize its current laser hair removal plan and
fund ongoing operations. The Company continues to investigate several financing
alternatives, including strategic partnerships, bank financing, private debt and
equity financing and other sources. The Company believes it will be successful
in obtaining additional financing in order to fund current operations in the
future.
ACQUISITIONS
On June 4, 1996, Classy Lady merged with and into a subsidiary of the Company.
The Merger has been accounted for as a non-monetary exchange. In consideration
for the Merger, the Company issued an aggregate of 25,000,000 shares of Common
Stock, $.01 par value per share, to the shareholders of Classy Lady. As a result
of the Merger, the former Classy Lady shareholders own a majority of the
outstanding Common Stock of the Company, thereby resulting in a change of
control of the Company.
On June 4, 1996, in a transaction accounted for as a purchase, the Company
completed the purchase of capital stock representing in the aggregate of 81%
interest in SLS (Wales) Limited, a privately held Welsh company which has been
renamed SLS BiophileLimited ("SLS"), engaged in developing, manufacturing and
selling lasers for dermatologic use, including hair removal. The consideration
for the acquisition of the SLS shares consisted of a cash payment of 1,255,000
pounds sterling (approximately $1.9 million) and the issuance of 25,044 shares
of the Company's Common Stock.
On March 13, 1997, in a transaction accounted for as a purchase, the Company
completed the purchase of capital stock representing in the aggregate of 75%
interest in Integrated Technologies Research (Wales) Limited, a privately held
Welsh company which will be renamed ITR Biophile Limited ("ITR").The
shareholders of ITR received 250,000 shares of the common stock of the Company
for the 75% interest in ITR.
RESULTS OF OPERATIONS
15
<PAGE> 16
Total net sales in 1997 were $3,594,899, an increase of 52.85% from the
$2,351,945 in 1996. Net sales for the consumer products division were
$2,087,909, a decrease of 11.23% from the $2,351,945 in 1996. All of the
increase in total net sales can be attributed to the Merger, the acquisitions of
SLS and ITR and the resulting licensing agreements with physicians for the
CHROMOS 694 laser. The decrease in net sales for the consumer products division
is due to a decline in sales to its major customer.
The total gross margin percentage decreased to 31.14% in 1997 from 43.42% in
1996. The gross margin percentage for the consumer products division decreased
to 36.92% in 1997 from 43.42% in 1996. The total 1997 decrease resulted from the
replacement of lasers originally sold by SLS prior to being acquired by the
Company and price reductions in the consumer products division necessitated by
increased competition. The Company does not anticipate any future charges to
income for the replacement of lasers sold by SLS prior to the acquisition.
Selling, general and administrative expense for 1997 was $11,670,241 compared to
$1,586,300 in 1996. Selling, general and administrative expense in 1997 for the
consumer products division was $921,074 compared to $1,586,300 in 1996. The
increased selling, general and administrative was due to the merger with Classy
Lady and the acquisitions of SLS and ITR, which required the Company to increase
its expenditures on administrative staff, legal expense, patent fees, travel,
and increased depreciation and amortization which does not present a meaningful
comparison to the prior period. The decreased expense in the consumer products
division resulted from the establishment of separate administrative
headquarters.
Charges for inventory write-downs increased to $219,940 in 1997 from $186,675 in
1996. This increase was the result of a complete write-off of a discontinued
product line of the
Company's consumer products division.
Research and development costs for 1997 were $2,265,984 compared to virtually no
costs for the corresponding period in 1996. This is a result of a change in the
Company's strategy from a consumer products orientation to a technology company
that will continue to incur research and development costs in order to insure
that it maintains technological superiority in its market.
Investment income for the year ended May 31, 1997 was $446,887 compared to
investment income of $120,700 for the corresponding period in 1996. The
increased income can be attributed to the investment of funds from the Series C
and Series D preferred stock placements until needed for operational cash flow.
Other expenses of $737,921 in 1997, compared to other income of $72,728 can be
attributed to the complete write down of the Company's investment of $750,000 in
preferred and $39,000 common stock of Roadrunner Video Enterprises, Inc. in
1997. Other income in 1996 is attributable to the amount by which insurance
proceeds exceeded the cost basis of inventory in connection with the insurance
claim for the theft of this inventory.
Net loss for 1997 was $13,349,455 compared to a net loss of $1,623,872 in 1996.
The increased loss resulted from the factors discussed above.
No provision for income tax recovery has been provided for 1997 or 1996 due to
the uncertainty concerning the Company's ability to utilize the future tax
benefits of net operating losses generated during those periods.
FINANCIAL CONDITION
At May 31, 1997 the Company's cash balance of $4,689,307 represented a decrease
of $5,149,691 from the $9,838,998 at May 31, 1996.
Cash was used to finance the Company's operations, preferred stock dividend
payments, the purchase of equipment (primarily for the production of lasers to
be placed under licensing agreements), notes payable
16
<PAGE> 17
repayments and advances to prospective acquisition candidates. The cash used was
offset by a private placement of convertible preferred stock which generated
$10,000,000, proceeds from the sale of marketable securities and notes
receivable repayments.
Management anticipates increased production of the SLS laser products and a
corresponding increase in its inventory. Production facilities in Wales are
considered adequate to meet short term production needs. The Company will
continue to utilize its resources to finance the expected increase in production
and inventory and may be looking to finance the growth through other means of
financing.
The Company completed a loan agreement with Clearwater Fund IV, LLC allowing the
Company to borrow up to $7 million to be used in connection with the manufacture
and delivery of laser hair removal systems and for general working capital
purposes. The loan bears interest at 15% per annum payable in arrears on a
monthly basis and is due on January 15, 1998. Although the Company anticipates
that income from laser hair removal technologies will continue to increase,
currently the Company is not generating sufficient revenue from operations to
provide the facility to repay the loan. The Company must secure additional
financing to enable it to repay the loan and carry out its near and mid-range
plans. The Company plans to achieve its objectives through either private or
public offering of equity or debt. The Company is also investigating long term
financing for the purchase and subsequent placement of its lasers
During the past year 7,769 shares of the Company's 5% cumulative convertible,
Series C preferred shares were converted into 2,562,621 of common shares. In
addition, the holders of the remaining convertible debentures exercised their
right to convert and the Company issued 261,583 shares of its common stock and
retired the debt and related accrued interest. Also, warrants to purchase
236,496 shares of common shares were exercised, resulting in gross proceeds to
the Company of $295,620.
SUBSEQUENT FINANCING
On August 5, 1997, the Company completed a loan agreement with Clearwater Fund
IV, LLC ("Clearwater"), allowing the Company to borrow up to $7 million to be
used in connection with the manufacture and delivery of laser hair removal
systems and for general working capital purposes. The loan is executable in two
steps, with $4 million borrowed upon execution of the loan documents and the
remaining $3 million to be borrowed at any time after the Company has delivered
fifty (50) lasers under effective license agreements with a third party
physician, clinic or hospital. To qualify these lasers must have been delivered
after July 15, 1997. The loan bears interest at 15% per annum payable in arrears
on a monthly basis and is due on January 15, 1998. The loan is secured by all of
the Company's assets and approval must be obtained from Clearwater for all
expenditures made with the loan proceeds. As additional consideration for the
loan, the Company agreed to issue common stock purchase warrants according to
the following schedule:
<TABLE>
<CAPTION>
Date Shares Price Expiration
---- ------ ----- ----------
<S> <C> <C> <C>
08/05/97 750,000 $2.50 08/05/02
Date of second 750,000 $2.50 5 years from date of
borrowing second borrowing
10/02/97 1,000,000 $2.50 07/15/02
12/02/97 500,000 $2.50 07/15/02
</TABLE>
Included as part of the loan agreement, the Company agreed to exchange all 2,231
shares of $1,000 stated value Series C, 5% cumulative preferred stock and all
10,000 shares of $1,000 stated value Series D, 5% cumulative convertible
preferred stock for 12,231 shares of $1,000 stated value Series E, 5% cumulative
convertible preferred stock.
Each share of Series E stock is convertible into common stock of the Company at
80% of the average market price on the five trading days prior to conversion
with no minimum conversion price, but in no event shall the
17
<PAGE> 18
conversion price be greater than $3.125. The Company agreed to file a
registration statement covering the public sale of the shares of common stock
receivable upon conversion of the Series E stock and the holders agreed not to
sell or transfer any such shares on or before February 28, 1998. Dividends are
to be paid quarterly beginning August 31, 1997.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-KSB contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21B of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward looking statements. Factors that might cause such
a difference include those discussed below.
The Company's future results of operations initially depend to a substantial
degree on the ability of the Company to license parties worldwide to utilize the
CHROMOS 694 Ruby Laser manufactured by SLS and for such licenses to successfully
sell hair removal services utilizing this product. The ability of such licensees
to market such services will in part depend on the public's acceptance of the
use of lasers to remove hair, as to which there can be no assurance, and the
strength of the Company's competitors. The Company's existing or potential
competitors have or may have substantially greater research and development
capabilities, clinical, manufacturing, regulatory and marketing experience and
financial and managerial resources than the Company. The Company may be required
to find alternative means for marketing and selling its laser hair removal
services, and thereby experience substantial delays and costs. No assurance can
be given that the Company would be able to find an acceptable alternative means
of marketing and selling its laser hair removal systems, or if such an
alternative means was found, that it would be successful.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT:
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
On June 23, 1997 the Company dismissed Bond, Andiola & Company as the Company's
independent accountants and engaged Joseph Decosimo and Company as the Company's
independent accountants. During the year ended May 31, 1997, the Company had no
disagreements with its accountants on accounting and financial disclosure.
PART III
18
<PAGE> 19
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
Name Age Since Position with the Company
- ---- --- ----- -------------------------
<S> <C> <C> <C>
Thomas L. Mehl, Sr. 59 1996 Chairman of the Board, President
and Chief Executive Officer
Nardo Zaias 65 1996 Director
AnnMarie Mehl 55 1996 Director and Secretary
Pichit Suvanprakorn 55 1996 Director
Antonius H. Clemens 68 1996 Director
Robert Marc Clement 43 1996 Director
Paul W. Hartloff, Jr. 64 1989 Director
Timothy J. Chapple 38 1997 Chief Financial Officer
Robert Figliozzi 59 1997 Executive Vice President
</TABLE>
Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until his or her successor is duly elected by
the stockholders. Officers are elected by, and serve at the discretion of the
Board of Directors. No director receives any compensation for services as a
director other than reimbursement of expenses for attendance of meetings of the
Board.
Thomas L. Mehl, Sr. and AnnMarie Mehl are husband and wife.
The background of each director and executive officer is as follows:
Thomas L. Mehl, Sr. has been a successful inventor and entrepreneur in the
health and beauty field for the past thirty years. From January, 1991 to the
present, Mr. Mehl has been working on filing for new patents in the United
States and abroad for several inventions in the health and beauty field. In the
field of hair depilation for the consumer, Mr. Mehl was granted three patents
which have been licensed exclusively to the Company and has additional patent
applications in the field of hair depilation pending.
From March 1991 to 1993, Mr. Mehl was the principal of His or Her Products by
Mehl, Inc. a private Florida corporation started by Mr. Mehl to assist him in
the research and development of his new technologies in the skincare field. From
January 1992 to 1994, Mr. Mehl was the principal of Classy Lady by Mehl, Inc., a
private Florida corporation started by Mr. Mehl to assist him in the research
and development of his consumer hair removal technology. From February 1993 to
the present, Mr. Mehl has been President and Chairman of M.C.M. Group, Inc., a
private Florida corporation, which works primarily with inventors and
entrepreneurs in the area of marketing, consulting and manufacturing of new
technology and products. From November 1993 to the present, Mr. Mehl has been
President and Chairman of His or Her Products of Puerto Rico, Inc., a private
Puerto Rico corporation, which has developed and is marketing a hand-held steam
facial product.
Nardo Zaias, M.D. is a well known dermatologist specializing in diseases of the
skin and skin cancer. From 1991 to the present, Dr. Zaias has maintained a
private medical practice at the Greater Miami Skin & Laser Center located in
Miami Beach, Florida. Dr. Zaias has published over fifty research papers to his
credit including his report on "Hair Root Damage with Mehl Method of Depilation"
and has served on three FDA Advisory Committees. Dr. Zaias is also the inventor
of a patented laser hair depilation invention, United States Patent No.
5,059,192 issued on October 11, 1991, which was licensed exclusively to the
Company.
AnnMarie Mehl is wife of Thomas L. Mehl, Sr. and has twenty years experience in
both the professional and consumer hair depilation fields working with Mr.
Mehl's patented hair removal method and products.
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<PAGE> 20
Mrs. Mehl worked with Mr. Mehl in their chain of beauty salons located within
Britts Department Stores from 1965-1974, served from 1977 to 1981 as an officer
of NU-Trolysis, Inc. which originally manufactured and marketed Mr. Mehl's
original professional hair removal products, and served from 1983 to 1985 as an
officer of Mehl International, Inc. which developed the permanent hair removal
device. From 1991 to the present, Mrs. Mehl worked closely with both Mr. Mehl
and Dr. Zaias in testing the new consumer hair removal products.
Pichit Suvanprakorn is the President of Biophile Corporation, a manufacturer and
medical service company in Bangkok, Thailand. Biophile owns and operates
hospitals, dermatological clinics and a pharmaceutical company and has extensive
real estate holdings and development activities.
Antonius H. (Tom) Clemens, MScEE, has managed science based business, product
innovation and marketing with multinational corporations, including Miles
Laboratories/Bayer Corp. (22 years) and British Oxygen Corporation. Since 1991
Mr. Clemens has, as an independent consultant, provided engineering and
marketing expertise for the product and business development of medical devices
and high quality consumer appliances. He holds more than 30 patents and is the
inventor of many medical diagnostic and therapeutic methods and devices,
including non-invasive Blood Pressure Monitoring, Blood Glucose Monitoring,
Artificial Pancreas, Nucleic Acid Probes, Nuclear Medical Systems and Safety
Needles. From 1992 to present, Mr. Clemens has also worked as a consultant for
His or Her Products by Mehl of Puerto Rico, Inc. on Mr. Mehl's hand-held steam
facial product. From 1993 to June 4, 1996, Mr. Clemens worked as a consultant
for Classy Lady by Mehl of Puerto Rico, Inc. on Mr. Mehl's patented consumer
hair removal inventions.
Robert Marc Clement, Ph.D., is a laser physicist and the inventor of the CHROMOS
694 laser depilation system manufactured by SLS. From 1986 to June 4, 1996,
Professor Clement served as the Technical Director of SLS. On June 4, 1996,
Professor Clement became Chairman of SLS. Professor Clement has been the Dean of
Faculty at the Swansea Institute of Higher Education ("Swansea Institute")
located in Swansea, Wales since 1988. As the Dean of Faculty of the Swansea
Institute, Professor Clement helped to secure the financing to establish the
Product Development Centre ("PDC") in 1994 within the institute to supply
industry with high quality design and product engineering services to support
the growth of existing companies and the development of new ones. Through
Professor Clement's efforts, the PDC has been supported financially by the Welsh
Development Agency and the Welsh Office. Professor Clement has received numerous
awards for innovation and has distinguished himself as a leader in laser based
technology both in the United Kingdom and abroad.
Paul W. Hartloff, Jr., an attorney, served as Secretary of the Company from 1993
through June 1996. Until June 1996, for more than the past five years, he has
been engaged in the full time practice of law as a senior partner of the law
firm of Schramm Raddue and since June 1996 has been a senior partner of the law
firm of Jarvis, Hartloff & Simon, LLP. Mr. Hartloff is a director of the Circon
Corporation.
Timothy J. Chapple has served as Chief Financial Officer of the Company since
June 1997. From February 1997 to June 1997, he served as Managing Director of
SLS. In August 1996, Mr. Chapple became Finance Director of SLS, a position he
continues to hold. From January 1994 to July 1996, he was a partner of Pannell
Kerr Foster, an accounting and consulting firm. From 1990 to December 1993, he
was a partner of Solomon Hare, an accounting firm.
Robert J. Figliozzi has served as Executive Vice President of the Company since
March 1997. From August 1994 to March 1997, he was Vice President of World Fuel
Corporation, an aviation and fueling services corporation listed on the New
York Stock Exchange. From 1991 to June 1993, he was Senior Managing Director
and Director of Research of Stamford Securities Corporation, a brokerage firm
and member of the New York Stock Exchange.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the executive
officers and directors of the Company and persons who own more than ten percent
of the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Such executive officers,
directors, and greater than ten-percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on the review of the copies of such forms furnished to the Company
and other information which has been made available to the Company, the Company
believes that during the year ended May 31, 1997, the following directors failed
to file on a timely basis a required Form 3 reporting their status as directors
of the Company and their initial statement of beneficial ownership of securities
of the Company: Thomas L. Mehl, Sr., AnnMarie Mehl, Nardo Zaias, Pichit
Suvanprakorn, Marc Clement and Anton H. Clemens. All of such persons became
directors of the Company on June 4, 1996 and filed Form 3 Initial
20
<PAGE> 21
Statement of Beneficial Ownership of Securities on July 18, 1996. In addition,
Clearwater Fund IV, LLC failed to file on a timely basis a required Form 3
reporting their status as beneficial owners of more than ten percent of the
Company's Common Stock. The required Form 3 was filed August 27, 1997.
The following individuals failed during such year to file on a timely basis a
Form 4 reporting changes in beneficial ownership of securities: Thomas L. Mehl,
Sr. and AnnMarie Mehl failed to file two such reports on a timely basis during
the year ended May 31, 1997 involving a total of three transactions. Nardo Zaias
failed to file one such report on a timely basis involving one transaction.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth information with respect to the Chief Executive
Officer and the other most highly compensated personnel of the Company as to
whom the total annual salary and bonus for the year ended May 31, 1997, exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Other Other
Annual Annual Stock Options/LTIP LTIP All Other
Name and Salary Bonus Compensation Award(s) SAR's Payouts Compensation
Principal Position ($) ($) ($) ($) (#) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas L. Mehl, Sr 189,009 -- -- -- -- -- --
President and Chief
Executive Officer
Raymond J. Wilson 45,039 136,500 1,846 -- 300,000 -- --
Chief Financial Officer
Robert J. Figliozzi 11,042 91,000 -- -- 500,000 -- --
Executive Vice President
Martin Kass 101,153 -- -- -- -- -- --
Advisor to the President
Timothy Chapple 100,606 -- 29,781 -- -- -- --
Managing Director - SLS
Allan Borkowski 150,000 -- -- -- -- -- --
Former Director
</TABLE>
The Company entered into an Employment Agreement with Raymond J. Wilson
effective January 20, 1997 for a period of three years, continuing on a
year-to-year basis thereafter. The Employment Agreement provides for a base
salary of $165,000 per year, a signing bonus of $182,000, eligibility for an
annual bonus each year of the agreement and a stock option agreement to acquire
300,000 shares of the Company's common stock. In addition, Mr. Wilson entered
into a non-compete agreement with the Company whereby during the term of his
employment and for a period of two years after termination, he will not serve in
an executive capacity with any company involved in hair removal products,
services or systems. Mr. Wilson resigned effective June 25, 1997.
21
<PAGE> 22
The Company entered into an Employment Agreement with Robert J. Figliozzi
effective March 18, 1997 for a period of three years, continuing on a
year-to-year basis thereafter. The Employment Agreement provides for a base
salary of $185,000 per year, a signing bonus of $182,000, eligibility for an
annual bonus each year of the agreement and a stock option agreement to acquire
500,000 shares of the Company's common stock. In addition, Mr. Figliozzi entered
into a non-compete agreement with the Company whereby during the term of his
employment and for a period of two years after termination, he will not serve in
an executive capacity with any company involved in hair removal products,
services or systems.
Other than reimbursement of expenses to attend meetings, the Board of Directors
does not receive any other form of compensation from the Company.
OPTIONS GRANTED DURING 1997
The following table sets forth as to each of the named executive officers
certain information with respect to options granted during the year ended May
31, 1997 as follows: (i) the number of shares of Common Stock underlying options
granted, (ii) the percentage that such options represent of all options granted
to officers and employees during the year, (iii) the exercise price and (iv) the
expiration date.
<TABLE>
<CAPTION>
% of
Number Total Exercise
Options Options Price Per Expiration
Name Granted Granted Share Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Raymond J. Wilson 100,000 12.50% $2.875 01/18/07
100,000 12.50% $2.875 01/18/07
100,000 12.50% $2.875 01/18/07
Robert J. Figliozzi 200,000 25.00% $2.940 04/28/07
150,000 18.75% $2.940 04/28/07
150,000 18.75% $2.940 04/28/07
</TABLE>
Mr. Wilson resigned effective June, 25, 1997 and his related options were
therefore canceled.
Mr. Figliozzi was originally granted options on March 18, 1997 with an exercise
price of $2.68 per share. These options were exchanged on April 28, 1997 for
options with an exercise price of $2.94 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The following table sets forth, as of August 22, 1997, the number of shares of
the Company's Common Stock owned by each director, by all directors and
officers as a group, and by any persons (including any "group" as used in
Section 13(d)(3) of the Securities Exchange Act of 1934), known by the Company
to own beneficially 5% or more of the outstanding Common Stock. Except as
otherwise indicated, the stockholders listed in the table below have sole voting
and investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned of Class
- ---------------- ---------------- ----------
<S> <C> <C>
Thomas L. Mehl, Sr. 8,525,000 19.38%
And AnnMarie Mehl
4020 Member of Road
Gainesville, Florida 32607
Nardo Zaias 8,410,000 19.12%
Mount Sinai Hospital
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C>
4302 Alton Road
Miami Beach, Florida 33140
Pichit Suvanprakorn 4,275,000 9.72%
Biophile Corporation
888/41-48 Mahatun Road
Ploenchit Road
Bangkok 10330, Thailand
Antonius H. Clemens 260,400 *
584 Schumann Drive
Madison, Wisconsin 53711
Robert Marc Clement 25,044 *
11 Plas Road
Phos, Pontardawe
Swansea, Wales
Paul W. Hartloff, Jr. 147,000(1) *
15 West Carrillo Street
Santa Barbara, California 93102
All officers and directors 21,642,444 49.19%
as a group (seven persons)
Clearwater Fund IV, LLC 7,600,174(2) 15.36%
611 Druid Road East
Suite 200
Clearwater, FL 34616
</TABLE>
* Less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
In consideration for the grant of the MEHL License, Classy Lady agreed to pay
Thomas L. Mehl, Sr. a royalty of 5% of the wholesale price of all products
covered by the Mehl patents sold by Classy Lady or its distributors
worldwide. Classy Lady also agreed to pay Mehl a minimum annual royalty of
$50,000. 10% of all royalty payments are to be made to Classy Lady's
patent law firm of Schlesinger, Arkwright & Garvey ("SA&G") until the
aggregate of such payments to SA&G reaches $1 million.
- --------
1 Includes 32,000 shares held by a trust in which Mr. Hartloff has
voting power but no other beneficial interest.
2 The Company has been informed that Clearwater Fund IV Ltd is wholly owned by
Clearwater Fund IV, LLC and therefore the shares owned by Clearwater Fund IV Ltd
have been included with Clearwater Fund IV, LLC. Clearwater Fund IV Ltd owns
2,000,000 shares of Common Stock and beneficially owns 1,032,870 shares of
Common Stock issuable upon conversion of 2,231 shares of Series E 5% Cumulative
Convertible Preferred Stock. Clearwater Fund IV, LLC owns 113,600 shares of
Common Stock and beneficially owns 3,703,704 shares of Common Stock issuable
upon conversion of 8,000 shares of Series E 5% Cumulative Convertible Preferred
Stock and 750,000 shares of Common Stock upon exercise of outstanding warrants.
23
<PAGE> 24
In consideration for granting the exclusive license, Classy Lady agreed to issue
Dr. Zaias 5,000 shares of Classy Lady Common Stock, pay to Dr. Zaias
$100,000 prior to June 3, 1996 and pay to Dr. Zaias a royalty of $1,000 on
each laser placed in the United States in connection with the laser hair
removal invention covered by the above patent. Classy Lady also agreed to
pay Dr. Zaias a minimum royalty of $50,000 per year.
Mr. Mehl and Dr. Zaias have each agreed to share with the other a portion of
the royalty revenue derived form the License Agreements described above.
Accordingly, 25% of all payments to be made to Mr. Mehl under his license
agreement are to be paid to Dr. Zaias until such time as Dr. Zaias
notifies Classy Lady that Mehl is no longer obligated to make such
payments, and 50% of all royalty payments due to Dr. Zaias are to be paid
to Mr. Mehl.
Under the terms of the Merger agreement, in the event that the Company's
interest in either the LIL joint venture or any other business combination
agreement with a partner able to commercialize the Zaias Patent is sold,
the proceeds from such sale shall be apportioned as follows:
<TABLE>
<S> <C>
All amounts up to $50 million Payable to the Company
Amounts in excess of $50 million 75% to the Company
up to $100 million 25% to Thomas L. Mehl, Sr. and
Dr. Nardo Zaias
Amounts in excess of $100 million 50% to the Company
50% to Thomas L. Mehl, Sr. and
Dr. Nardo Zaias
</TABLE>
The Company has made advances to Marc Clement, a director of the Company, during
1997 in the amount of $250,000. Mr. Clement has issued a promissory note
to the Company for the repayment of the advance together with accrued
interest at the rate of ten percent (10%) per annum, payable on demand
until fully paid. In addition, this amount is partially secured by shares
owned by Mr. Clement.
The Company has made advances to His or Her Products of Puerto Rico, Inc., ("His
or Her") a Puerto Rico corporation, totaling $291,231 during 1997. Thomas
L. Mehl, Sr. is the President, Chairman and shareholder of His or Her.
Thomas L. Mehl, Sr. has obligated himself to the Board of Directors to
divest himself of this outside interest and is currently considering
alternative methods by which His or Her may become an integral part of the
future strategic plan. The Company has fully reserved for these advances.
The Company has made advances to the M.C.M. Group, Inc., a Florida corporation,
totaling $89,581 during 1997. Thomas L. Mehl, Sr. is the President,
Chairman and sole shareholder of the M.C.M. Group, Inc. Thomas L. Mehl,
Sr. has obligated himself to the Board of Directors to divest himself of
this outside interest and is currently considering alternative methods by
which M.C.M. Group, Inc. may become an integral part of the future
strategic plan. The Company has fully reserved for these advances.
On July 12, 1996 the Company entered into a Letter of Intent with Anton
H. Clemens ("Clemens"), a director of the Company, and Victor H. Haughton,
M.D. ("Haughton"). The intent of the parties, subject to a definitive
agreement, is to have the Company form a new subsidiary, of which Clemens
will be president, having the exclusive worldwide license rights for the
development,
24
<PAGE> 25
manufacturing and marketing of a new and novel retractable needle and
catheter technology for the medical field protected by issued United
States and International Patents and by patents pending. As consideration
for the Company entering into the Letter of Intent, the Company agreed to
1) pay the sum of sixty-three thousand nine hundred dollars ($63,900) to
cover related patent fees for the intellectual property, 2) have the
subsidiary pay Clemens and Haughton additional compensation in the form of
license fees or other moneys to be set forth in the definitive agreement
and 3) invest such additional funds necessary for the development,
manufacture and marketing of the intellectual property as set forth in the
definitive agreement. As of May 31, 1997 the Company had advanced a total
of $28,125 in furtherance of its commitments and objectives under the
Letter of Intent.
On July 25, 1996 the Company entered into a Letter of Intent with GKS
Technologies, Inc. ("GKS"), a Puerto Rico corporation together with Gunnar
K. Svanberg ("Svanberg"), a director of GKS. Svanberg holds several
patents and patents pending worldwide for a new dental curret and curret
sharpening machine. The intent of the parties, subject to a definitive
agreement, is to develop, manufacture and market Svanberg's new curret
devices within the worldwide dental market. As consideration for the
Company entering into this Letter of Intent with Svanberg and GKS, the
Company agreed to 1) subscribe to one hundred thousand shares (100,000) of
GKS common stock at $.50 per share for the sum of Fifty Thousand Dollars
($50,000) upon the execution of the Letter of Intent and 2) invest such
additional funds necessary for the development, manufacture and marketing
of the Patent Applications according to the terms set forth in the
definitive agreement. Through May 31, 1997, the Company had advanced
$111,026, including $50,000 to be applied towards the purchase of GKS
common stock under the terms outlined above. Thomas L. Mehl, Sr.
personally owns twelve and one-half percent (12.5%) of GKS as a result of
his working with Svanberg on patent applications over the past two years
without any prior compensation. M.C.M. Group, Inc., a Florida corporation
owned by Thomas L. Mehl, Sr., also owns twelve and one-half percent
(12.5%) of GKS as a result of providing management and consulting services
to GKS and Svanberg over the past two years without prior compensation.
The Company has fully reserved for these advances.
In connection with the Loan Agreement dated as of August 5, 1997 between the
Company and Clearwater Fund IV, LLC ("Clearwater"), Thomas L. Mehl, Sr.,
the Company's President and Chairman, guaranteed the repayment to
Clearwater of all amounts borrowed by the Company and pledged all of the
shares of Common Stock of the Company owned by him as security for
repayment of such borrowed amounts.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Exhibit 3.1 Restated Certificate of Incorporation of the Corporation
(incorporated by reference to Information Statement on
Schedule 14C dated October 28, 1996).
Exhibit 3.2 Certificate of Designation of 5% Cumulative Convertible
Preferred Stock, Series D (incorporated by reference to
Registration Statement on Form S-3 dated March 31,
1997).
Exhibit 3.3 Certificate of Designation of 5% Cumulative Convertible
Preferred Stock,Series E.
Exhibit 3.4 By-laws of the Corporation, as amended (incorporated by
reference to Annual Report on Form 10-KSB for year ended
May 31, 1996).
25
<PAGE> 26
Exhibit 4 Form of Warrant to purchase 750,000 shares of Common
Stock issued to Clearwater Fund IV, LLC dated August 5,
1997.
Exhibit 10.1 Second Amended and Restated Agreement and Plan of Merger
with Classy Lady by Mehl of Puerto Rico, Inc. dated June
4, 1996 (incorporated by reference to Current Report on
Form 8-K dated June 4, 1996).
Exhibit 10.2 Sale and Purchase Agreement dated June 4, 1996 by and
among B. Mair and others, and Selvac Corporation
(incorporated by reference to Current Report on Form 8-K
dated June 4, 1996).
Exhibit 10.3 Sale and Purchase Agreement dated June 4, 1996 by and
among Robert Marc Clement and Selvac Corporation
(incorporated by reference to Current Report on Form 8-K
dated June 4, 1996).
Exhibit 10.4 Amended Exclusive License Agreement for Patented Laser
Hair Removal Invention dated December 5, 1995 by and
between Classy Lady by Mehl of Puerto Rico, Inc. and
Nardo Zaias, M.D. (incorporated by reference to Annual
Report on Form 10-KSB for year ended May 31, 1996).
Exhibit 10.5 Exclusive License Agreement for Patented Consumer Hair
Removal Products dated December 5, 1995 by and between
Classy Lady by Mehl of Puerto Rico, Inc. and Thomas L.
Mehl, Sr. (incorporated by reference to Annual Report on
Form 10-KSB for year ended May 31, 1996).
Exhibit 10.6 Joint Venture Formation Agreement between Laser
Industries Limited and Classy Lady by Mehl of Puerto
Rico, Inc. dated as of December 19, 1995 (incorporated
by reference to Annual Report on Form 10-KSB for year
ended May 31, 1996).
Exhibit 10.7 Securities Purchase Agreement with GFL Performance Fund
Limited dated May 15, 1996 (incorporated by reference to
Registration Statement on Form S-3 dated July 1, 1996).
Exhibit 10.8 Registration Rights Agreement with GFL Performance Fund
Limited dated May 15, 1996 (incorporated by reference to
Registration Statement on Form S-3 dated July 1, 1996).
Exhibit 10.9 Securities Purchase Agreement dated as of February 28,
1997 by and between the Registrant and Clearwater Fund
IV, LLC and Clearwater Offshore Fund Ltd. (incorporated
by reference to Registration Statement on Form S-3 dated
March 31, 1996).
Exhibit 10.10 Registration Rights Agreement dated as of May 31, 1996
by and between the Registrant and Clearwater Fund IV,
LLC and Clearwater Offshore Fund Ltd. (incorporated by
reference to Registration Statement on Form S-3 dated
March 31, 1996).
Exhibit 10.11 1997 Incentive Plan.
Exhibit 10.12 Loan Agreement dated August 5, 1997 with Clearwater Fund
IV, LLC.
Exhibit 10.13 Sublicense Agreement dated as of March 11, 1997 between
Selvac Acquisition Corp. and Mehl Group Marketing, Inc.
Exhibit 10.14 From of Sublicensing Agreement entered into by Mehl
Group Marketing, Inc. and providers of laser hair
removal services.
26
<PAGE> 27
Exhibit 10.15 Employment Agreement between the Company and Robert
Figliozzi dated March 18, 1997.
Exhibit 21 Subsidiaries.
Exhibit 23.1 Consent of Joseph Decosimo and Company.
Exhibit 23.2 Consent of Bond, Andiola and Company.
(b) Reports on Form 8-K
The Company filed the following Current Report on Form 8-K during the
first quarter of 1998:
Current report on Form 8-K dated June 23, 1997.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on August 27, 1997.
MEHL/BIOPHILE INTERNATIONAL CORPORATION
(REGISTRANT)
BY: /S/ THOMAS L. MEHL, SR.
------------------------------------
THOMAS L. MEHL, SR.
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature and Title Date
- ------------------- ----
<S> <C>
/s/ Thomas L. Mehl, Sr. August 27, 1997
- ------------------------------
Thomas L. Mehl, Sr.
Chairman of the Board,
President and Chief Executive
Officer
/s/ Timothy Chapple August 27, 1997
- ------------------------------
Timothy Chapple, Principal
Financial and Accounting Officer
/s/ AnnMarie Mehl August 27, 1997
- ------------------------------
AnnMarie Mehl
Director and Secretary
/s/ Nardo Zaias August 27, 1997
- ------------------------------
Nardo Zaias
Director
/s/ Pichit Suvanprakorn August 27, 1997
- ------------------------------
Pichit Suvanprakorn
Director
/s/ Marc Clement August 27, 1997
- ------------------------------
Marc Clement
Director
/s/ Tom Clemens August 27, 1997
- ------------------------------
Tom Clemens
Director
/s/ Paul W. Hartloff, Jr. August 27, 1997
- ------------------------------
Paul W. Hartloff, Jr.
Director
</TABLE>
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Mehl/Biophile International Corporation
Gainesville, Florida
We have audited the accompanying consolidated balance sheet of Mehl/Biophile
International Corporation and subsidiaries as of May 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 did
not audit the financial statements of SLS Biophile Limited, majority owned
subsidiary, which statement reflects total assets of $5,574,955 as of May 31,
1997, and total revenues of $972,777 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion insofar as it relates to the amounts included for SLS Biophile Limited
is based solely on the report of the other auditors. The consolidated
statements of operations, stockholders' equity and cash flows for the year
ended May 31, 1996, were audited by other auditors whose report dated July 11,
1996, expressed an unqualified opinion on those statements.
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 consolidated 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 our audit provides a reasonable basis for
our opinion.
In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mehl/Biophile International
Corporation and subsidiaries as of May 31, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the company will continue as a going concern. As discussed in note 20 to the
consolidated financial statements, the company has sustained recurring losses
from operations which raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to this matter are also described
in note 20 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
JOSEPH DECOSIMO AND COMPANY
A TENNESSEE REGISTERED LIMITED LIABILITY PARTNERSHIP
Chattanooga, Tennessee
July 10, 1997, except for note 18,
as to which the date is August 5, 1997
F-1
<PAGE> 30
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
of Mehl/Biophile International Corporation:
We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity, and cash flows of MEHL/Biophile International
Corporation (formerly Selvac Corporation) and subsidiary for the year ended May
31, 1996. 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 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all
material respects, the results of the Companies' operations and their cash
flows for the year ended May 31, 1996, in conformity with generally accepted
accounting principles.
/s/ BOND, ANDIOLA & CO.
Raritan, New Jersey
July 11, 1996
F-2
<PAGE> 31
SLS BIOPHILE LIMITED
Report of the auditors to the members of
SLS BIOPHILE LIMITED
We have audited the financial statements on pages 5 to 21.
Respective responsibilities of directors and auditors
As described on page 3 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements made
by the directors in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs at 31 May 1997 and of its loss and total recognised
losses for the year then ended and have been properly prepared in accordance
with the Companies Act 1985, applicable to small companies.
Coopers & Lybrands
Chartered Accountants and Registered Auditors
Swansea, 26 August 1997
F-3
<PAGE> 32
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 4,689,307
Accounts Receivable, net of allowance for doubtful accounts of $670,697 353,138
Inventories 557,182
Current portion of note receivable 205,228
Other current assets 837,317
------------
Total current assets 6,642,172
PROPERTY AND EQUIPMENT, NET 7,438,432
PATENTS AND PATENT RIGHTS, NET 4,983,399
NOTES AND LOANS RECEIVABLE 400,000
OTHER ASSETS 49,842
------------
$ 19,513,845
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,735,204
Accrued expenses 1,512,979
------------
Total current liabilities 5,248,183
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value, $1,000 stated value,
authorized - 200,000 shares:
Series C, 5% cumulative convertible;
issued and outstanding - 2,231 shares 2,231,000
Series D, 5% cumulative convertible;
issued and outstanding - 10,000 shares 10,000,000
Common stock, $.01 par value, 60,000,000 shares
authorized, 46,468,260 shares issued 464,683
Additional paid-in-capital 25,167,212
Accumulated deficit (22,640,205)
Foreign currency translation adjustment (1,429)
------------
15,221,261
Treasury stock, at cost, 2,474,959 common shares (955,599)
------------
Total stockholders' equity 14,265,662
$ 19,513,845
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE> 33
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1997 1996
(AS RESTATED)
------------ -----------
<S> <C> <C>
REVENUES $ 3,594,899 $ 2,351,945
COST OF REVENUES 2,475,333 1,330,726
------------ -----------
GROSS MARGIN 1,119,566 1,021,219
------------ -----------
OPERATING EXPENSES:
Selling, general and administrative 11,670,241 1,586,300
Charge for inventory write-down 219,940 186,675
Research and development 2,265,984 --
------------ -----------
TOTAL OPERATING EXPENSES 14,156,165 1,772,975
OPERATING LOSS (13,036,599) (751,756)
------------ -----------
OTHER INCOME (EXPENSES)
Investment income 446,887 120,700
Other (737,921) 72,728
Interest Expense (21,822) (1,065,544)
NET LOSS $(13,349,455) $(1,623,872)
NET LOSS PER COMMON SHARE $ (.35) $ (.21)
LOSS APPLICABLE TO COMMON STOCK $(14,469,626) $(2,896,705)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 34
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------------------------------------
SERIES C SERIES D COMMON STOCK
1985 -------------------- ------------------ ----------------------
SERIES A SERIES SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- --------- ----------- ------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1995...... $240,000 $245,000 -- $ -- -- $ -- 16,256,485 $162,565
Cash dividends on
Preferred stock.........
Treasury stock
acquisitions............
Common stock issued:
Conversion of preferred
stock................. (240,000) (245,000) 776,000 7,760
Exercise of warrants.... 584,572 5,846
Conversion of debt...... 353,459 3,534
Debt acquisition
costs................. 90,000 900
Private placement of
preferred stock......... 10,000 10,000,000 72,000 720
Unrealized loss on
marketable securities...
Implied dividend equal to
intrinsic value of
preferred stock
conversion..............
Intrinsic value of
debenture conversion
features................
Net loss..................
-------- -------- -------- ------------ ------ ------------ ------------ --------
Balance May 31, 1996
(As Restated)........... -- -- 10,000 10,000,000 -- -- 18,132,516 181,325
Cash dividends on
preferred stock.........
Common stock issued:
Exercise of warrants.... 236,496 2,366
Conversion of debt...... 255,973 2,560
Debt interest........... 5,610 56
Business acquisitions:
Classy Lady........... 25,000,000 250,000
SLS................... 25,044 250
ITR................... 250,000 2,500
Conversion of preferred
stock................. (7,769) (7,769,000) 2,562,621 25,626
Unamortized debt costs....
Private placement of
preferred stock......... 10,000 10,000,000
Unrealized loss on
marketable securities...
Implied dividend equal to
intrinsic value of
preferred stock
conversion..............
Net loss..................
Translation Adjustment....
-------- -------- -------- ------------ ------ ------------ ------------ --------
Balance May 31, 1997...... $ -- $ -- 2,231 $ 2,231,000 10,000 $ 10,000,000 46,468,260 $464,683
======== ======== ======== ============ ====== ============ ============ ========
<CAPTION>
UNREALIZED
ADDITIONAL TREASURY TREASURY LOSS ON
PAID-IN ACCUMULATED STOCK STOCK MARKETABLE TRANSLATION
CAPITAL DEFICIT SHARES AT COST SECURITIES ADJUSTMENT
------------ ----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance May 31, 1995...... $ 8,813,998 $(5,294,707) 2,263,359 $ (915,798) $ -- $ --
Cash dividends on
Preferred stock......... (24,000)
Treasury stock
acquisitions............ 211,600 (39,801)
Common stock issued:
Conversion of preferred
stock................. 477,240
Exercise of warrants.... 657,869
Conversion of debt...... 2,148,442
Debt acquisition
costs................. 188,100
Private placement of
preferred stock......... (230,720)
Unrealized loss on
marketable securities... (3,152)
Implied dividend equal to
intrinsic value of
preferred stock
conversion.............. 1,228,000 (1,228,000)
Intrinsic value of
debenture conversion
features................ 1,033,000
Net loss.................. (1,623,872)
------------ ----------- ---------- ---------- -------- --------
Balance May 31, 1996 (As
Restated)............... 14,315,929 (8,170,579) 2,474,959 (955,599) (3,152) --
Cash dividends on
preferred stock......... (495,171)
Common stock issued:
Exercise of warrants.... 293,254
Conversion of debt...... 747,440
Debt interest........... 16,383
Business acquisitions:
Classy Lady........... 94,292
SLS................... 198,750
ITR................... 1,167,813
Conversion of preferred
stock................. 7,743,374
Unamortized debt costs.... (35,023)
Private placement of
preferred stock.........
Unrealized loss on
marketable securities... 3,152
Implied dividend equal to
intrinsic value of
preferred stock
conversion.............. 625,000 (625,000)
Net loss.................. (13,349,455)
Translation Adjustment.... (1,429)
------------ ------------ ---------- ---------- -------- --------
Balance May 31, 1997...... $ 25,167,212 $(22,640,205) $2,474,959 $ (955,599) $ -- $ (1,429)
============ ============ ========== ========== ======== ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 35
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1997 1996
(AS RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,349,455) $ (1,623,872)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Provision for bad debts 327,281 258,588
Provision for obsolete inventory 219,940 186,675
Provision for notes and loans receivable 1,305,271 --
Depreciation and amortization 1,010,012 308,045
Write-off of non-marketable securities 792,127 --
Marketable securities received in payment of preferred
stock dividends and accounts receivable -- (42,127)
Interest paid with issuance of common stock -- 24,160
Interest expense equal to intrinsic value of debt conversion features -- 1,033,000
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 380,885 (111,173)
Inventories (124,998) (38,420)
Other operating assets (704,760) (8,959)
Accounts payable 2,935,003 124,155
Accrued expenses 1,047,638 23,583
Other operating liabilities (97,832) 350
------------ ------------
Net cash provided (used) by operating activities (6,258,888) 134,005
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 477,690 --
Notes receivable repayments 50,000 171,500
Increase in notes and loans receivable (1,810,500) (4,050,000)
Property and equipment acquisitions (7,361,040) (579)
Purchase of held to maturity marketable securities -- (473,951)
------------ ------------
Net cash used by investing activities (8,643,850) (4,353,030)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of :
Convertible debentures -- 3,000,000
Series C preferred stock, net of issuance costs -- 9,800,000
Series D preferred stock, net of issuance costs 10,000,000 --
Common stock, net of issuance costs 295,620 663,715
Note repayments (100,898) --
Preferred stock dividends paid (495,171) (36,900)
Treasury stock acquisitions -- (2,301)
------------ ------------
Net cash provided by financing activities 9,699,551 13,424,514
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH 53,496 --
------------ ------------
INCREASE (DECREASE) IN CASH FOR THE YEAR (5,149,691) 9,205,489
CASH AND EQUIVALENTS, beginning of the year 9,838,998 633,509
CASH AND EQUIVALENTS, end of year 4,689,307 9,838,998
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE> 36
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1997 1996
(AS RESTATED)
<S> <C> <C>
SUPPLEMENTAL SCHEDULES OF NON-CASH ACTIVITIES
EXISTING BUSINESS ACQUISITION COSTS:
Issuance of common stock $ 1,713,605 $ --
Loans and advances applied toward purchase price 1,946,380 --
----------- ----------
$ 3,659,985 $ --
----------- ----------
COMPONENTS OF ACQUIRED BUSINESSES,
IN AGGREGATE, ARE AS FOLLOWS:
Accounts receivable $ 546,312 --
Inventories 252,737 --
Property and equipment 237,177 --
Patents and patent rights 5,732,559 --
Other assets 24,291 --
Accounts payable and accrued expenses (1,125,235) --
Current portion of notes and loans (1,119,838) --
Long-term debt (804,885) --
Other liabilities (83,133) --
----------- ----------
$ 3,659,985 $ --
NOTES, LOANS AND ADVANCES USED TO RETIRE
DEBT OF ACQUIRED BUSINESS $ 1,253,620 $ --
ISSUANCE OF COMMON STOCK:
Conversion of debt, net of unamortized
issue costs $ 714,978 $2,250,000
Payment of accrued interest 16,439 24,160
Conversion of preferred stock 7,769,000 485,000
Debt and equity acquisition costs -- 491,400
----------- ----------
$ 8,500,417 $3,250,560
MARKETABLE SECURITIES RECEIVED IN PAYMENT OF:
Accounts receivable $ -- $ 702
Preferred stock dividends -- 41,425
----------- ----------
$ -- $ 42,127
RECEIPT OF NON-MARKETABLE SECURITIES AS
PAYMENT OF NOTES RECEIVABLE $ -- $ 750,000
RECEIPT OF STOCK INTO TREASURY IN PAYMENT
OF NOTE RECEIVABLE $ -- $ 37,500
PREFERRED STOCK DIVIDEND EQUAL TO INTRINSIC VALUE
OF BENEFICIAL CONVERSION FEATURES $ 625,000 $1,228,000
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE> 37
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND CONSOLIDATION - The consolidated financial statements include those
of Mehl/Biophile International Corporation and its subsidiaries (the
"Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation. The Company operates as a two-segment
business engaged in the sale and distribution of consumer personal care
products and professional laser hair removal through revenue sharing
licenses with physicians worldwide.
REVENUE RECOGNITION - Sales and related cost of goods sold for consumer products
are recognized upon shipment to customers. Sales and related cost of goods
sold for professional laser hair removal is recognized upon completion of
services by revenue sharing physicians according to the terms of the
license agreements.
CASH EQUIVALENTS - For the purposes of the Statement of Cash Flows, the Company
considers all highly liquid instruments purchased with a maturity of 90
days or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK - During the normal course of business, the Company
maintains cash balances in excess of FDIC insurance coverage limits. The
Company has not experienced any losses related to these investments.
INVENTORIES - Inventories are valued at the lower of cost or market. Cost is
determined principally on the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and
depreciated on the straight-line method over the assets' estimated useful
lives, ranging from 3 to 5 years. Maintenance, repairs and minor renewals
are charged to expense as incurred. Additions, replacements and
improvements are capitalized. Gains and losses from sales or other
disposals of property and equipment are included in other income.
PATENT AND PATENT RIGHTS - The patents and patent rights are recorded at cost
and are amortized on the straight-line method over periods ranging from 6
to 17 years.
MARKETABLE SECURITIES - The Company classifies its marketable debt securities as
"held to maturity if it has the positive intent and ability to hold the
securities to maturity. All other marketable securities are classified as
"available for sale". Securities classified as "available for sale" are
carried in the financial statements at fair value. Realized gains and
losses, determined using the first-in, first-out (FIFO) method, are
included in earnings; unrealized holding gains and losses are reported as
a separate component of stockholders' equity. Securities classified as
"held to maturity" are carried at amortized cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of these
instruments. Based on the interest rates available for similar financial
instruments, the fair value of notes receivable approximates carrying
value as of May 31, 1997.
INCOME TAXES - In accordance with the Financial Accounting Standards Board's
statement on
F-9
<PAGE> 38
Accounting for Income Taxes ("SFAS 109"), deferred income taxes are
recorded to reflect the tax consequences on future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end. The tax benefit related to operating
loss and tax credit carryforwards are recognized if management believes,
based on available evidence, that it is more likely than not that they
will be realized.
STOCK-BASED COMPENSATION - Effective June 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue to account for
stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
pro forma net income and earnings per share information has been presented
in Note 9 as required under SFAS No. 123.
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 and 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. Material estimates that are particularly susceptible to
significant change in the near-tern relate to the determination of the
allowance for doubtful accounts receivable and notes receivable, the
allowance for obsolete inventory, the useful life of property and
equipment and patents, and the deferred tax asset valuation allowance.
CHANGES IN ACCOUNTING PRINCIPLES - In 1997, the Financial Accounting Standards
Board (FASB) issued the following Statements of Financial Standards:
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (SFAS 125). The Company's required adoption date is June
1, 1997.
"Earnings per Share" (SFAS 128). The Company's required adoption date is June 1,
1997.
"Reporting Comprehensive Income" (SFAS 130). The Company's required adoption
date is June 1, 1997.
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). The Company's required adoption date is June 1, 1998.
The Company anticipates the adoption of the above Statements of Financial
Accounting Standards will not have a material impact on its results of
operation or financial position.
2. INVENTORIES
Inventories as of May 31, 1997 were comprised entirely of personal care
appliance finished goods.
3. NOTES AND LOANS RECEIVABLE
Notes and loans receivable as of May 31, 1997 was comprised of the
following:
<TABLE>
<S> <C>
Advance to director 250,000
Advance to consultant 103,000
CDF Acquisition Corp. ("CDF") 100,000
Advance on royalties 100,000
Other miscellaneous advances 52,228
-------
</TABLE>
F-10
<PAGE> 39
<TABLE>
<S> <C>
$ 605,228
Less current portion:
Advance to consultant (103,000)
CDF (50,000)
Other miscellaneous advances (52,228)
------------
$ (205,228)
Net long-term portion $ 400,000
</TABLE>
Two former officers and directors of the Company are
stockholders in CDF. The note receivable from CDF was obtained as
consideration when the Company sold the stock of its former wholly owned
subsidiary Beauty Resources, Inc. ("BRI") to CDF in May 1991. In June
1995, the note was renegotiated. Under the new agreement, the remaining
outstanding principal balance is payable in two installments of $50,000 in
December 1997 and June 1998. Interest on the unamortized principal
balance, at 9% through June 1996 and 7% thereafter, is payable with each
principal installment. Interest accrued prior to the refinancing, is
payable at $50,000 in December 1996 and $47,948 in December 1997.
4. OTHER CURRENT ASSETS
Other current assets as of May 31, 1997 were comprised as follows:
<TABLE>
<S> <C>
Tax refunds due $ 444,018
Prepaid tradeshow expenses 147,800
Prepayment of inventory 131,250
Interest receivable - CDF note 50,865
Prepaid insurance 31,250
Other miscellaneous 32,134
----------
$ 837,317
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment as of May 31, 1997 was comprised as follows:
<TABLE>
<S> <C>
Machinery and equipment $ 1,695,304
Furniture and fixtures 374,936
CHROMOS 694 ruby lasers 2,124,805
CHROMOS 694 ruby lasers in process 4,416,128
-----------
$ 8,611,173
Less accumulated depreciation and amortization (1,172,741)
-----------
$ 7,438,432
</TABLE>
Depreciation expense was $186,346 in 1997 and $108,229 in 1996.
Machinery and equipment of $687,026, furniture and fixtures of $69,562 and
accumulated depreciation of $745,422 was attributable to the Consumer
Products Division. Depreciation expense of $3,952 in
F-11
<PAGE> 40
1997 and $108,229 in 1996 was attributable to the Consumer Products
Division.
All significant property and equipment purchases were related to laser
technology.
6. PATENTS AND PATENT RIGHTS
Patents and patent rights as of May 31, 1997 were comprised as follows:
<TABLE>
<S> <C>
Zaias patent $ 660,000
Mehl patents 1,562,005
SLS patents pending 3,213,375
ITR patents pending 1,172,851
-----------
$ 6,608,231
Less accumulated amortization (1,624,832)
-----------
$ 4,983,399
</TABLE>
The Zaias patent pertains to the license granted to the Company by Dr. Nardo
Zaias to make, use and sell products incorporating the laser method of
hair removal invented by Dr. Zaias and which is represented by U.S. Patent
No. 5,059,192 dated October 22, 1991.
The Mehl patents pertain to the license granted to the Company by Thomas L.
Mehl, Sr. to make, use and sell the following products:
- a method and system for the removal of multiple hairs invented by
Mr. Mehl represented by U.S. Patent No. 5,470,332 dated November 28,
1995 ("Mehl Patent");
- a consumer radio frequency hair removal tweezer device invented by
Mr. Mehl and represented by U.S. Patent No. 5,049,149 dated November
17, 1991; and
- a consumer hair removal conductive solution to be used to provide
for improved conductivity when used in conjunction with the tweezer
device which was invented by Mr. Mehl and is represented by U.S.
Patent No. 5,364,394 on November 15, 1994.
The SLS patents pending pertain to the license granted to the Company by Marc
Clement related to patents pending which are compatible with the Zaias
patent in the field of laser depilation.
The ITR patent pertains to the license granted to the Company for surface
irradiation represented by U.K. Patent Application No. 9625281.2.
Amortization expense was $823,666 in 1997 and $199,816 in 1996.
Patents and patent rights of $902,005 and accumulated amortization of $847,901
was attributable to the Consumer Products Division. Amortization expense
of $46,734 in 1997 and $199,816 in 1996 was attributable to the Consumer
Products Division.
F-12
<PAGE> 41
7. ACCRUED EXPENSES
Accrued expenses as of May 31, 1997 consist of the following:
<TABLE>
<S> <C>
Payroll and related $ 355,674
Professional fees 289,370
Royalty 256,097
Due on tradeshow booth 164,586
Due to director 150,000
Other 297,252
----------
$1,512,979
</TABLE>
8. CONVERTIBLE DEBENTURES
During the year ended May 31, 1996, the Company issued, in aggregate $3,000,000
in convertible debentures which bear interest at 8% per annum, were due
March 31, 1997 and are convertible into common stock of the Company at a
conversion price equal to the lessor of 80% of the average market price of
the common stock, on the five trading days prior to conversion or $10.00.
The debt agreement also provides conversion privileges to the debt holder
for any unpaid interest amounts. As of May 31, 1996, $2,250,000 of these
debentures and unpaid interest of $24,160 were converted into an aggregate
of 353,459 shares of common stock. On July 19, 1996 the remaining $750,000
of debt and unpaid interest were converted into 261,583 shares of common
stock. The intrinsic value of the conversion feature, determined to be
$1,033,000, was charged to paid-in-capital and interest expense for the
year ended May 31, 1996.
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
$1,000 stated value Series C, 5% cumulative convertible preferred stock.
Each share of Series C stock is convertible into common stock of the Company at
the lessor of 80% of the average market price of the common stock, for the
five days prior to conversion, with a minimum and maximum conversion price
of $3.00 and $7.50 respectively. The shares of common stock to be issued
upon conversion is determined by dividing the stated value of the
preferred shares by the conversion price. Dividends are paid quarterly.
During the year ended May 31, 1997, $367,774 of dividends were paid on the
Series C shares. During the year ended May 31, 1997, 7,769 Series C shares
were converted into 2,562,621 shares of common stock. The intrinsic value
of the conversion feature, determined to be $1,228,000, was charged to
paid-in-capital and recorded as an implied dividend for the year ended May
31, 1996.
In connection with the Loan Agreement dated as of August 5, 1997 between the
Company and Clearwater Fund IV, LLC, the Company agreed to exchange all
2,231 Series C shares for 2,231 shares of $1,000 stated value Series E, 5%
cumulative convertible preferred stock. See Note 17 "Subsequent
Financing."
$1,000 stated value Series D, 5% cumulative convertible preferred stock.
Each share of Series D stock is convertible into common stock of the Company at
80% of the average market price on the five trading days prior to
conversion but in no event shall the conversion price
F-13
<PAGE> 42
be below $4.00 or greater than the average market price on the five
trading days prior to February 28, 1997. On March 31, 1997 the Company
filed a registration statement covering the public sale of the shares of
common stock receivable upon conversion of the Series D stock. The Series
D stock may not be converted until the earlier of (i) the 120th day
following issuance and (ii) the date on which the aforementioned
registration statement is declared effective by the Securities and
Exchange Commission. The purchasers of the Series D stock agreed not to
sell or transfer the common stock received upon conversion on or before
February 28, 1998. Dividends are paid quarterly. During the year ended May
31, 1997, $127,397 of dividends were paid on the Series D shares. The
intrinsic value of the conversion feature, determined to be $625,000, was
charged to paid-in-capital and recorded as an implied dividend for the
year ended May 31, 1997.
In connection with the Loan Agreement dated as of August 5, 1997 between the
Company and Clearwater Fund IV, LLC, the Company agreed to exchange all
10,000 Series D shares for 10,000 shares of $1,000 stated value Series E,
5% cumulative convertible preferred stock. See Note 17 "Subsequent
Financing."
COMMON STOCK
In conjunction with the Merger, the number of $.01 par value common shares which
the Company is authorized to issue was increased from 20,000,000 to
60,00,000.
In addition to the common shares issued related to the Series C preferred share
conversion, discussed above, and business acquisitions (see Note 14) the
Company issued 261,583 common shares upon the retirement of $750,000
convertible debenture and related accrued interest of $16,383. Unamortized
debt issue costs of $35,022 were charged to paid in capital. Also, 236,496
common shares were issued during the year at $1.25 per share ($295,620 in
aggregate) upon the exercise of outstanding stock purchase warrants.
As of May 31, 1997, warrants to purchase 50,000 common shares at $4.25 per share
were outstanding. The expiration date of these common stock warrants is
February 28, 1998.
STOCK OPTIONS
The terms of the Company's 1997 Incentive Plan allows for the granting of up to
4,000,000 shares of the Company's Common Stock under (i) Incentive Stock
Options or (ii) Non-Qualified Stock Options. Incentive options to purchase
common shares may be granted to employees at a price to be fixed by the
Board of Directors or Stock Option Committee, but not less than the fair
value on the date of grant (110% if the optionee owns or would own 10% of
the outstanding shares if the options were exercised). Nonqualified
options may be granted at prices less than fair value. Incentive options
have a duration of ten years from the date granted. The plan was approved
by the Board of Directors on March 23, 1997 and is subject to the approval
by a majority of the votes cast by the holders of the Company's Common
Stock at the next annual shareholders' meeting in 1997. As of August 20,
1997, no grants have been issued under this plan
The Company entered into a Nonstatutory Stock Option Agreement with Raymond J.
Wilson and Robert J. Figgliozzi in conjunction with their entering into
Employment Agreements with the Company. All options granted during 1997
were nonqualified. The following table sets forth information regarding
the options granted during 1997:
F-14
<PAGE> 43
<TABLE>
<CAPTION>
Number Exercise
Options Vesting Price Per Expiration
Name Granted Date Share Date
---- ------- ---- ----- ----
<S> <C> <C> <C> <C>
Raymond J. Wilson 100,000 06/04/97 $2.875 01/18/07
100,000 06/04/98 $2.875 01/18/07
100,000 06/04/99 $2.875 01/18/07
Robert J. Figliozzi 200,000 06/04/97 $2.940 04/28/07
150,000 06/04/98 $2.940 04/28/07
150,000 06/04/99 $2.940 04/28/07
</TABLE>
Mr. Wilson resigned effective June, 25, 1997 and his related options were
therefore canceled.
Mr. Figliozzi was originally granted options on March 18, 1997 with an
exercise price of $2.68 per share. These options were exchanged on April
28, 1997 for options with an exercise price of $2.94 per share.
The following schedule summarizes the activity under these Nonstatutory Stock
Option Agreements during 1997.
NONQUALIFIED
<TABLE>
<CAPTION>
Year granted 1997
<S> <C>
Option price per share $2.875 - $2.94
Balance outstanding May 31, 1996: 0
Granted 1997 800,000
Exercised 1997 0
Canceled 1997 0
Balance outstanding May 31, 1997 800,000
</TABLE>
Effective June 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
As a result, the Company has elected to continue to account for
stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and
will provide additional pro forma disclosures required by SFAS 123. The
adoption of this standard will not have an impact on the Company's
financial position or results of operations.
In accordance with APB 25, no compensation cost has been recognized in the
Consolidated Statements of Operations for the Company's stock option plan.
Had compensation cost for the Company's stock option plan been determined
consistent with the fair value method contained in SFAS 123, the Company's
net loss, net loss per common share and loss applicable to common stock
for 1997 and 1996 would have been the pro forma amounts indicated below:
F-15
<PAGE> 44
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET LOSS
As reported $13,349,455 $1,623,872
Pro forma $14,096,188 $1,623,872
NET LOSS PER COMMON SHARE
As reported $ .35 $ .21
Pro forma $ .37 $ .21
NET LOSS APPLICABLE TO COMMON STOCK
As reported $14,469,626 $2,896,705
Pro forma $15,216,359 $2,896,705
</TABLE>
The fair value of each option grant included in the pro forma net loss shown
above is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in 1997: expected volatility of 50%; risk-free interest rate of
6.0%; and an expected life of 10 years. The compensation cost generated by
the Black-Scholes model, may not be indicative of the future benefit, if
any, that may be received by the option holder.
10. SALES TO SIGNIFICANT CUSTOMERS AND EXPORT SALES
The Company had sales to one major international customer accounting for 50%
of total net sales and 86% of consumer products net sales for the year
ended May 31, 1997 and 89% of total and consumer product net sales for the
year ended May 31, 1996.
Approximately 100% of consolidated sales in 1997 and 1996 were to foreign
customers, located principally in Asia and Europe. The 1997 consumer
products export sales included $1,796,000 to Japan and $166,000 to Europe.
The 1996 consumer products export sales included $2,083,000 to Japan and
$184,000 to Europe. The 1997 laser technology export sales included
$1,205,210 to Europe and $236,918 to Australia. Sales which were
denominated in currencies other than U.S. dollars amounted to $979,000 in
1997 and were not significant in 1996. Foreign currency transaction gains
or losses were immaterial in either year.
Operating loss for the consumer products division was $150,252 in 1997 compared
to an operating loss of $ 751,756 for 1996. Operating loss for laser
technology was $12,556,734 in 1997.
11. OTHER INCOME (EXPENSE)
In November 1996, Roadrunner Video Group, Inc. ("Roadrunner") filed for
protection under Chapter 11 of the US Bankruptcy Code. The Company
realized losses of $789,000 during the year ended May 31, 1997 due to the
complete write-down of its investment in preferred and common stock of
Roadrunner.
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the tax bases of those assets and liabilities.
Significant components of the Company's deferred tax assets are as
follows:
F-16
<PAGE> 45
<TABLE>
<CAPTION>
Deferred tax assets
<S> <C>
Net operating loss $4,720,000
Bad debt reserve 253,000
Inventory 153,000
Write-off of notes receivable 370,000
Property and equipment 834,000
Amortization of patents 195,000
----------
$6,525,000
Valuation allowance 6,525,000
----------
Net deferred tax assets and liabilities $ 0
</TABLE>
As of May 31, 1997, the Company had net operating loss carryforwards of
approximately $12,500,000 available to offset future taxable income which
will expire in various years through 2012. A valuation allowance of
$6,525,000 has been recognized primarily to offset the related deferred
tax assets due to the uncertainty of realizing the benefit of the loss
carryforwards.
A reconciliation of the statutory U.S. federal income tax rate and the
effective income tax rate for the years ended May 31, 1997 and May 31,
1996 is as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Statutory Federal Income Tax Rate (34.0%) (34.0%)
Increases (decreases) resulting from:
Increase in federal deferred tax valuation allowance 36.0% 25.7%
State income taxes, net of federal tax benefit (2.0%) --
Amortization of intangible assets -- 8.3%
------ ------
Effective tax rate 0.0% 0.0%
</TABLE>
13. NET LOSS PER COMMON SHARE
Net loss per common share is computed based on net loss for the period after
providing for preferred stock dividend requirements. The number of shares
used in the computation is the weighted average number of common shares
and, when their effect would be dilutive, common equivalent shares
outstanding during the period. Weighted average number of shares during
the periods are 41,306,434 in 1997 and 14,075,207 in 1996.
14. COMMITMENTS
ROYALTIES:
The Company has entered into agreements which provide for royalty payments
based on a percentage of net sales or units sold of its principal
products. Royalty expense under the agreements for fiscal years ended May
31, 1997 and 1996 was $228,563 and $64,000, respectively.
OPERATING LEASES:
F-17
<PAGE> 46
The Company leases facilities under operating leases. At May 31, 1997,
future annual minimum lease payments under these agreements are:
<TABLE>
<CAPTION>
Year Ending May 31,
<S> <C>
1998 $ 241,549
1999 143,585
2000 120,970
2001 75,917
2002 74,084
Thereafter 1,111,253
-----------
Total $ 1,767,358
</TABLE>
Facilities rent expense for the years ended May 31, 1997 and 1996, was $297,963
and $55,922, respectively.
INVENTORY:
The Company has committed to purchase inventory in the normal course of
business. As of May 31, 1997, the Company has signed contracts requiring
future payments of $4,095,000 once the inventory is delivered according to
the terms of the contract. All inventory purchase commitments are expected
to be paid during fiscal 1998.
15. RELATED PARTY TRANSACTIONS
In consideration for the grant of the MEHL License, Classy Lady agreed to pay
Thomas L. Mehl, Sr. a royalty of 5% of the wholesale price of all products
covered by the Mehl patents sold by Classy Lady or its distributors
worldwide. Classy Lady also agreed to pay Mehl a minimum annual royalty of
$50,000. 10% of all royalty payments are to be made to Classy Lady's
patent law firm of Schlesinger, Arkwright & Garvey ("SA&G") until the
aggregate of such payments to SA&G reaches $1 million.
In consideration for granting the Zaias license, Classy Lady agreed to issue
Dr. Zaias 5,000 shares of Classy Lady common stock, pay to Dr. Zaias
$100,000 and pay to Dr. Zaias a royalty of 5% on all revenues derived by
Classy lady in connection with the laser hair removal invention covered by
the above patent. Classy Lady also agreed to pay to Dr. Zaias a minimum
royalty of $50,000 per year.
Mr. Mehl and Dr. Zaias have each agreed to share with the other a portion of
the royalty revenue derived form the License Agreements described above.
Accordingly, 25% of all payments to be made to Mr. Mehl under his license
agreement are to be paid to Dr. Zaias until such time as Dr. Zaias
notifies Classy Lady that Mehl is no longer obligated to make such
payments, and 50% of all royalty payments due to Dr. Zaias are to be paid
to Mr. Mehl.
Under the terms of the Merger agreement, in the event that the Company's
interest in either the LIL joint venture or any other business combination
agreement with a partner able to commercialize the Zaias Patent is sold,
the proceeds from such sale shall be apportioned as follows:
<TABLE>
<S> <C>
All amounts up to $50 million Payable to the Company
</TABLE>
F-18
<PAGE> 47
<TABLE>
<S> <C>
Amounts in excess of $50 million 75% to the Company
up to $100 million 25% to Thomas L. Mehl, Sr. and
Dr. Nardo Zaias
Amounts in excess of $100 million 50% to the Company
50% to Thomas L. Mehl, Sr. and
Dr. Nardo Zaias
</TABLE>
The Company has made advances to Marc Clement, a director of the Company,
during 1997 in the amount of $250,000. Mr. Clement has issued a promissory
note to the Company for the repayment of the advance together with accrued
interest at the rate of ten percent (10%) per annum, payable on demand
until fully paid. In addition, this amount is partially secured by shares
owned by Mr. Clement.
The Company has made advances to His or Her Products of Puerto Rico, Inc.,
("His or Her") a Puerto Rico corporation, totaling $291,231 during 1997.
Thomas L. Mehl, Sr. is the President, Chairman and shareholder of His or
Her. Thomas L. Mehl, Sr. has obligated himself to the Board of Directors
to divest himself of this outside interest and is currently considering
alternative methods by which His or Her may become an integral part of the
future strategic plan. The Company has fully reserved for these advances.
The Company has made advances to the M.C.M. Group, Inc., a Florida
corporation, totaling $89,581 during 1997. Thomas L. Mehl, Sr. is the
President, Chairman and sole shareholder of the M.C.M. Group, Inc. Thomas
L. Mehl, Sr. has obligated himself to the Board of Directors to divest
himself of this outside interest and is currently considering alternative
methods by which M.C.M. Group, Inc. may become an integral part of the
future strategic plan. The Company has fully reserved for these advances.
On July 12, 1996 the Company entered into a Letter of Intent with Anton H.
Clemens ("Clemens"), a director of the Company, and Victor H. Haughton,
M.D. ("Haughton"). The intent of the parties, subject to a definitive
agreement, is to have the Company form a new subsidiary, of which Clemens
will be president, having the exclusive worldwide license rights for the
development, manufacturing and marketing of a new and novel retractable
needle and catheter technology for the medical field protected by issued
United States and International Patents and by patents pending. As
consideration for the Company entering into the Letter of Intent, the
Company agreed to 1) pay the sum of sixty-three thousand nine hundred
dollars ($63,900) to cover related patent fees for the intellectual
property, 2) have the subsidiary pay Clemens and Haughton additional
compensation in the form of license fees or other moneys to be set forth
in the definitive agreement and 3) invest such additional funds necessary
for the development, manufacture and marketing of the intellectual
property as set forth in the definitive agreement. As of May 31, 1997 the
Company had advanced a total of $28,125 in furtherance of its commitments
and objectives under the Letter of Intent.
On July 25, 1996 the Company entered into a Letter of Intent with GKS
Technologies, Inc. ("GKS"), a Puerto Rico corporation together with Gunnar
K. Svanberg ("Svanberg"), a director of GKS. Svanberg holds several
patents and patents pending worldwide for a new dental curret and curret
sharpening machine. The intent of the parties, subject to a definitive
agreement, is to develop, manufacture and market Svanberg's new curret
devices within the worldwide dental market. As consideration for the
Company entering into this Letter of Intent with Svanberg and GKS, the
Company agreed to 1) subscribe to on hundred thousand shares (100,000) of
GKS common stock at $.50 per share for the sum of Fifty Thousand Dollars
($50,000) upon the execution of the Letter of Intent and 2) invest such
additional funds necessary for the development, manufacture and marketing
of the Patent Applications according to the terms set forth in the
definitive agreement.
F-19
<PAGE> 48
Through May 31, 1997, the Company had advanced $111,026, including $50,000
to be applied towards the purchase of GKS common stock under the terms
outlined above. Thomas L. Mehl, Sr. personally owns twelve and one-half
percent (12.5%) of GKS as a result of his working with Svanberg on patent
applications over the past two years without any prior compensation.
M.C.M. Group, Inc., a Florida corporation owned by Thomas L. Mehl, Sr.,
also owns twelve and one-half percent (12.5%) of GKS as a result of
providing management and consulting services to GKS and Svanberg over the
past two years without prior compensation. The Company has fully reserved
for these advances.
In connection with the Loan Agreement dated as of August 5, 1997 between the
Company and Clearwater Fund IV, LLC ("Clearwater"), Thomas L. Mehl, Sr.,
the Company's President and Chairman, guaranteed the repayment to
Clearwater of all amounts borrowed by the Company and pledged all of the
shares of Common Stock of the Company owned by him as security for
repayment of such borrowed amounts.
16. ACQUISITIONS
On June 4, 1996, Classy Lady merged with and into a subsidiary of the
Company. The Merger has been accounted for as a non-monetary exchange. In
consideration for the Merger, the Company issued an aggregate of
25,000,000 shares of Common Stock, $.01 par value per share, to the
shareholders of Classy Lady. As a result of the Merger, the former Classy
Lady shareholders own, in the aggregate 55.2% of the outstanding Common
Stock of the Company, thereby resulting in a change of control of the
Company. In addition, in contemplation of the Merger, the Company made
advances of $850,000, in aggregate to Classy Lady.
In exchange for the issuance of the shares of the Company issued pursuant to
the Merger, the Company obtained all of the stock of Classy Lady, which
owns the exclusive licensing rights granted to Classy Lady by Dr. Nardo
Zaias for a laser hair removal technology and by Thomas L. Mehl, Sr. for a
radio frequency and direct current multiple hair removal technology.
Valuation of the acquired patent rights, which was based on the value of
the stock issued as it was determined to be more clearly evident, was
$1,320,000. The acquired patent rights had no carrying value in Classy
Lady's financial statements. Upon completion of the Merger, all of the
assets and liabilities of Classy Lady became the property of the Company's
wholly owned subsidiary and the separate corporate existence of Classy
Lady ceased.
The Merger was completed in accordance with the Merger Agreement. Pursuant to
the Merger Agreement, (I) the name of the Company was changed to
MEHL/Biophile International Corporation, (II) Thomas L. Mehl, Sr.
("Mehl"), the president and a principal shareholder of Classy Lady, was
elected as Chairman of the Board of Directors, President and Chief
Executive Officer of the Company, and (III) the Board of Directors of the
Company was expanded to seven members, five of whom were designated by
Mehl.
On June 4, 1996, in a transaction accounted for as a purchase, the Company
completed the purchase of capital stock representing in the aggregate of
81% interest in SLS (Wales) Limited, a privately held Welsh company which
has been renamed SLS Biophile Limited ("SLS"). SLS engages in developing,
manufacturing and selling lasers for dermatologic use, including hair
removal. The consideration for the acquisition of the SLS shares consisted
of a cash payment of 1,255,000 pounds sterling (approximately $1.9
million) and the issuance of 25,044 shares of the Company's Common Stock.
The Company also paid approximately $1.3 million to retire SLS debt. The
consideration paid was based upon arms-length negotiations between the
Company and the holders of the SLS shares. SLS holds patents pending,
invented by Marc Clement, Ph.D, which are compatible with the Zaias patent
exclusively licensed to the Company in the field of laser depilation. SLS
has been developing and clinically evaluating laser depilation technology
since 1993 and presently manufactures its CHROMOS 694 "long pulse" ruby
laser depilation system.
F-20
<PAGE> 49
On March 13, 1997, in a transaction accounted for as a purchase, the Company
completed the purchase of capital stock representing in the aggregate of
75% interest in Integrated Technologies Research Limited, a privately held
Welsh company which will be renamed ITR Biophile Limited ("ITR"). ITR
engages in the research and development of software and related hardware
in the following areas: 1) laser scanning systems, 2) laser marking
systems, 3) adaptive "Smart Card" read/write technologies, and 4) other
highly sophisticated related technological areas. ITR was the originator
of the present scanning system and smart card technologies utilized in the
CHROMOS 694 Ruby Laser. The shareholders of ITR received 250,000 shares of
the common stock of the Company for the 75% interest in ITR.
The Company has entered into a letter of intent to purchase capital stock
representing in the aggregate of 81% interest in Converting Laboratories,
Inc. ("CLI"), a Wisconsin corporation. CLI is a manufacturing company
which will produce the Bandeze and some of the other radio frequency hair
removal products for the Company. The Company has paid to CLI a total of
$813,000 over the past year which has been included in research and
development expense in the current year.
Due to the fact that the SLS acquisition and the Classy Lady Merger occurred
at approximately the beginning of 1997, proforma information is not
presented as it does not differ materially from actual results.
The following proforma information give effect to the SLS transaction
accounted for as a purchase acquisition, and the Classy Lady Merger
accounted for as a non-monetary exchange, as if they had occurred on June
1, 1995:
<TABLE>
<CAPTION>
Year Ended
May 31, 1996
(Unaudited)
<S> <C>
Revenues $ 4,808,945
Net loss $(3,497,872)
Net loss per common share $ (.12)
Loss applicable to common stock $(4,770,705)
</TABLE>
The SLS acquisition and the Classy Lady Merger contributed $979,377 and
$527,613 to 1997 revenue respectively and $3,281,957 and 9,210,336 of net
loss, respectively to the results for 1997.
17. LEGAL MATTERS
The Company holds an exclusive license with Thomas L. Mehl, Sr. for certain
enumerated patents as well as Mehl's new inventions in the hair removal
field. A dispute arose as to the Company's compliance with the terms of
that license and as to the termination of the license. On March 20, 1991,
the Company filed a complaint in the Federal District Court in
Massachusetts (Civil Action No. 91-10868-Z) against Mr. Mehl. After
consummation of the Merger, each of Mehl and the Company entered into full
settlement and release on June 14, 1996 with respect to the litigation and
dismissed all claims against each other. Neither party was or will be paid
any money or other consideration from the other in connection with such
settlement and release.
On December 5, 1996 the Company commenced an arbitration with the American
Arbitration Association in New York, New York to terminate a joint venture
with Laser Industries Limited ("Laser"). The
F-21
<PAGE> 50
joint venture was formed in December, 1995, when Laser and Classy Lady
executed a Joint Venture Formation Agreement to exploit patented laser
hair removal technology exclusively licensed to Classy Lady. Under the
terms of the agreement, Classy Lady and Laser formed a new corporation,
Sharplan 2000, Inc. ("Sharplan"), owned 50% by Classy Lady and 50% by
Laser but managed exclusively by Laser and having a majority of directors
appointed by Laser. The Company commenced the arbitration to terminate the
license granted to Sharplan and unwind the joint venture. The Company is
basing this action on a dispute concerning the nature of technological and
financial contributions to be made to the joint venture by Laser and an
additional dispute concerning whether Laser utilized technology within the
joint venture which was in fact developed by SLS prior to the purchase by
the Company of a controlling interest in SLS in June, 1996.
On December 23, 1996, Laser asserted two counterclaims in the arbitration
proceedings, claiming that the Company has breached an alleged fiduciary
duty owed to Laser and Sharplan and seeking a declaration that the Company
may not grant a sublicense of certain patent rights to SLS. The Company
has filed a response to these counterclaims requesting dismissal on the
grounds that neither claim is arbitrable. On April 7, 1997, LIL filed an
amendment to its original counterclaim to permanently enjoin the Company
and SLS from selling lasers for hair removal in the United States.
In a separate action filed in England in October, 1996, SLS commenced an
action against Laser, a laser manufacturer Spectron Laser Systems Limited
("Spectron") and related parties, for orders preventing Laser from using
SLS's technology and stopping Spectron from supplying SLS's technology to
Laser.
In March, 1997, the Company filed suit against Palomar Medical Technologies,
Inc. ("Palomar") and its subsidiaries, Spectrum Medical Technologies,
Inc., Spectrum Financial Services, LLC, and a New Jersey dermatologist for
patent infringement and unfair competition. The suit was filed in the
United States District Court for the District of New Jersey and alleges
that the defendants infringe on the patented method of laser hair removal
owned by Dr. Nardo Zaias and exclusively licensed to the Company and that
the defendants have improperly marketed laser hair removal products before
receiving FDA approval. The Company is seeking monetary damages and
injunctive relief to restrain Palomar from marketing its laser hair
removal products in the United States. The litigation is only in its
initial stages. In March, 1997, Palomar served the Company with a lawsuit
it filed in the United States District Court in Massachusetts seeking to
declare the patent embodying the laser hair removal technology exclusively
licensed to the Company to be invalid. Further amendments to this action
have also been sought by Palomar. The Company has moved to dismiss the
Massachusetts action and counsel for Palomar has agreed to its dismissal.
It is likely however that the assertion of invalidity will be raised in
the Company's New Jersey action against Palomar.
On August 11, 1997, the Federal District Court in New Jersey rejected
Palomar's attempt to prevent the Company from pursuing unfair competition
claims under New Jersey law relating to allegations of improper promotions
of Palomar's Epilaser(TM) for hair removal usage.
18. SUBSEQUENT FINANCING
On August 5, 1997, the Company completed a loan agreement with Clearwater
Fund IV, LLC allowing the Company to borrow up to $7 million to be used in
connection with the manufacture and delivery of laser hair removal systems
and for general working capital purposes. The loan is executable in
F-22
<PAGE> 51
two steps, with $4 million borrowed upon execution of the loan documents
and the remaining $3 million to be borrowed at any time after the Company
has delivered fifty (50) lasers under effective license agreements with a
third party physician, clinic or hospital. To qualify these lasers must
have been delivered after July 15, 1997. The loan bears interest at 15%
per annum payable in arrears on a monthly basis and is due on January 15,
1998. The loan is secured by all of the Company's assets and approval must
be obtained from Clearwater for all expenditures made with the loan
proceeds. As additional consideration for the loan, the Company issued
common stock purchase warrants according to the following schedule:
<TABLE>
<CAPTION>
Date Shares Price Expiration
---- ------ ----- ----------
<S> <C> <C> <C>
08/05/97 750,000 $2.50 08/05/02
Date of second 750,000 $2.50 5 years from date of
borrowing second borrowing
10/02/97 1,000,000 $2.50 07/15/02
12/02/97 500,000 $2.50 07/15/02
</TABLE>
Included as part of the loan agreement, the Company agreed, with shareholder
approval, to exchange all 2,231 shares of $1,000 stated value Series C, 5%
cumulative preferred stock and all 10,000 shares of $1,000 stated value
Series D, 5% cumulative convertible preferred stock for 12,231 shares of
$1,000 stated value Series E, 5% cumulative convertible preferred stock.
Each share of Series E stock is convertible into common stock of the Company at
80% of the average market price on the five trading days prior to
conversion but in no event shall the conversion price be greater than
$3.125. The Company agreed to file a registration statement covering the
public sale of the shares of common stock receivable upon conversion of
the Series E stock and the holders agreed not to sell or transfer any such
shares on or before February 28, 1998. Dividends are to be paid quarterly
beginning August 31, 1997.
19. RESTATEMENT OF FINANCIAL STATEMENTS
In May 1997, the Company was notified by the Securities and Exchange
Commission ("SEC") that the manner with which the Company had accounted
for its issuance of convertible preferred stock and debentures was
inconsistent with the views of the SEC's accounting staff. In a letter to
the Emerging Issues Task Force of the Financial Accounting Standards Board
in March of 1997, the SEC had formalized their interpretation of the
application of generally accepted accounting principals with regard to
accounting for the issuance of securities with "beneficial conversion
features".
The financial statements for 1996 have been restated to conform to the SEC
position in this regard. As a result of the restatement, interest expense
and preferred stock dividends increased by $1,033,000 and $1,228,000,
respectively. Additional paid-in-capital has been increased by $2,261,000
to reflect the intrinsic value of the beneficial conversion features of
Series C convertible preferred stock and convertible debentures (see Notes
8 and 9).
The Company's net loss, loss per common share and loss applicable to common
stock for the year ended May 31, 1996, originally reported and as restated
are as follows:
F-23
<PAGE> 52
<TABLE>
<CAPTION>
Increase
Resulting
As Originally From As
Reported Restatement Restated
-------- ----------- --------
<S> <C> <C> <C>
Net loss $(590,872) $(1,033,000) $(1,623,872)
Net loss per common share $ (.05) $ (.16) $ (.21)
Loss applicable to common stock $(635,705) $(2,261,000) $(2,896,705)
</TABLE>
20. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
As shown in the accompanying financial statements, the Company has incurred
substantial losses from operations and, as a result, has had to obtain
financing to fund operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern.
The Company's future results of operations initially depend to a substantial
degree on the ability of the Company to license parties worldwide to
utilize the CHROMOS 694 Ruby Laser manufactured by SLS and for such
licenses to successfully sell hair removal services utilizing this
product. The ability of such licensees to market such services will in
part depend on the public's acceptance of the use of lasers to remove
hair, as to which there can be no assurance, and the strength of the
Company's competitors. The Company's existing or potential competitors
have or may have substantially greater research and development
capabilities, clinical, manufacturing, regulatory and marketing experience
and financial and managerial resources than the Company. The Company may
be required to find alternative means for marketing and selling its laser
hair removal services, and thereby experience substantial delays and
costs. No assurance can be given that the Company would be able to find an
acceptable alternative means of marketing and selling its laser hair
removal systems, or if such an alternative means was found, that it would
be successful.
The Company completed a loan agreement as of August 5, 1997 with Clearwater
Fund IV, LLC allowing the Company to borrow up to $7 million to be used in
connection with the manufacture and delivery of laser hair removal systems
and for general working capital purposes. The loan bears interest at 15%
per annum payable in arrears on a monthly basis and is due on January 15,
1998. Although the Company anticipates that income from laser hair removal
technologies will continue to increase, currently the Company is not
generating sufficient revenue from operations to provide the facility to
repay the loan. The Company must secure additional financing to enable it
to repay the loan and carry out its near and mid-range plans. The Company
plans to achieve its objectives through either private or public offering
of equity or debt. The Company is also investigating long term financing
for the purchase and subsequent placement of its lasers
F-24
<PAGE> 53
MEHL/BIOPHILE INTERNATIONAL CORPORATION
COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
1997 1996
------------ ------------
<S> <C> <C>
Weighted average number of shares outstanding:
Primary 41,306,434 14,075,207
Fully diluted 41,306,434 14,075,207
Primary:
Net loss $(13,349,455) $ (1,623,872)
Paid and cumulative undeclared preferred
stock dividends (495,171) (44,833)
Implied dividend equal to intrinsic value of
preferred stock conversion feature (625,000) (1,228,000)
------------ ------------
$(14,469,626) $ (2,896,705)
Net loss applicable to common stock $ (.35) $ (.21)
</TABLE>
For the above years, earnings per share, assuming full dilution, has not been
presented since the effect would be antidiluting.
F-25
<PAGE> 54
Exhibit Index
<TABLE>
<S> <C>
Exhibit 3.1 Restated Certificate of Incorporation of the Corporation
(incorporated by reference to Information Statement on
Schedule 14C dated October 28, 1996).
Exhibit 3.2 Certificate of Designation of 5% Cumulative Convertible
Preferred Stock, Series D (incorporated by reference to
Registration Statement on Form S-3 dated March 31, 1997).
Exhibit 3.3 Certificate of Designation of 5% Cumulative Convertible
Preferred Stock, Series E.
Exhibit 3.4 By-laws of the Corporation, as amended (incorporated by
reference to Annual Report on Form 10-KSB for year ended May
31, 1996).
Exhibit 4 Form of Warrant to purchase 750,000 shares of Common Stock
issued to Clearwater Fund IV, LLC dated August 5, 1997.
Exhibit 10.1 Second Amended and Restated Agreement and Plan of Merger with
Classy Lady by Mehl of Puerto Rico, Inc. dated June 4, 1996
(incorporated by reference to Current Report on Form 8-K dated
June 4, 1996).
Exhibit 10.2 Sale and Purchase Agreement dated June 4, 1996 by and among B.
Mair and others, and Selvac Corporation (incorporated by
reference to Current Report on Form 8-K dated June 4, 1996).
Exhibit 10.3 Sale and Purchase Agreement dated June 4, 1996 by and among
Robert Marc Clement and Selvac Corporation (incorporated by
reference to Current Report on Form 8-K dated June 4, 1996).
Exhibit 10.4 Amended Exclusive License Agreement for Patented Laser Hair
Removal Invention dated December 5, 1995 by and between Classy
Lady by Mehl of Puerto Rico, Inc. and Nardo Zaias, M.D.
(incorporated by reference to Annual Report on Form 10-KSB for
year ended May 31, 1996).
Exhibit 10.5 Exclusive License Agreement for Patented Consumer Hair Removal
Products dated December 5, 1995 by and between Classy Lady by
Mehl of Puerto Rico, Inc. and Thomas L. Mehl, Sr.
(incorporated by reference to Annual Report on Form 10-KSB for
year ended May 31, 1996).
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
Exhibit 10.6 Joint Venture Formation Agreement between Laser Industries
Limited and Classy Lady by Mehl of Puerto Rico, Inc. dated as
of December 19, 1995 (incorporated by reference to Annual
Report on Form 10-KSB for year ended May 31, 1996).
Exhibit 10.7 Securities Purchase Agreement with GFL Performance Fund
Limited dated May 15, 1996 (incorporated by reference to
Registration Statement on Form S-3 dated July 1, 1996).
Exhibit 10.8 Registration Rights Agreement with GFL Performance Fund
Limited dated May 15, 1996 (incorporated by reference to
Registration Statement on Form S-3 dated July 1, 1996).
Exhibit 10.9 Securities Purchase Agreement dated as of February 28, 1997 by
and between the Registrant and Clearwater Fund IV, LLC and
Clearwater Offshore Fund Ltd. (incorporated by reference to
Registration Statement on Form S-3 dated March 31, 1996).
Exhibit 10.10 Registration Rights Agreement dated as of May 31, 1996 by and
between the Registrant and Clearwater Fund IV, LLC and
Clearwater Offshore Fund Ltd. (incorporated by reference to
Registration Statement on Form S-3 dated March 31, 1996).
Exhibit 10.11 1997 Incentive Plan.
Exhibit 10.12 Loan Agreement dated August 5, 1997 with Clearwater Fund IV,
LLC.
Exhibit 10.13 Licensing Agreement dated as of March 13, 1997 between Selvac
Acquisition Corp. and Mehl Group Marketing, Inc.
Exhibit 10.14 Form of Laser Services Agreement entered into by Mehl Group
Marketing, Inc. and providers of laser hair removal services.
Exhibit 10.15 Employment Agreement between the Company and Robert Figliozzi
dated as of March 18, 1997.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 23.1 Consent of Joseph Decosimo & Company.
Exhibit 23.2 Consent of Bond, Andiola & Company.
</TABLE>
<PAGE> 1
Exhibit 3.3
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES E
OF
MEHL/BIOPHILE INTERNATIONAL CORPORATION
MEHL/Biophile International Corporation (the "CORPORATION"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify that, pursuant to authority conferred
upon the Board of Directors of the Corporation by the Certificate of
Incorporation, as amended, of the Corporation, and pursuant to Section 151 of
the General Corporation Law of the State of Delaware, the Board of Directors of
the Corporation on July 17, 1997, adopted resolutions providing for the
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions thereof, of twelve-thousand
two-hundred and thirty-one (12,231) shares of 5% Cumulative Convertible
Preferred Stock, Series E, of the Corporation, as follows:
RESOLVED, that the Corporation is authorized to issue 12,231
shares of 5% Cumulative Convertible Preferred Stock, Series E,
$10 par value (the "PREFERRED SHARES"), which shall have the
following powers, designations, preferences and other special
rights:
1. Dividends. The holders of the Preferred Shares
shall be entitled to a dividend of five percent (5%) per annum
of the Stated Value (as defined below), payable in cash, on a
cumulative basis with quarterly compounding (prorated for any
portion of the applicable period during which the Preferred
Shares are outstanding). Dividends shall accrue from the date
of issuance of the Preferred Shares and shall be payable
quarterly commencing August 31, 1997, through and including
the date on which the Preferred Shares are no longer
outstanding.
<PAGE> 2
2. Conversion of Preferred Shares. The holders of the
Preferred Shares shall have the right, at their option, to
convert the Preferred Shares into shares of Common Stock on
the following terms and conditions:
a. Conversion Right. Each Preferred Share
shall be convertible at any time into fully paid and
nonassessable shares (calculated to the nearest whole share)
of Common Stock, at the conversion price per share (the
"CONVERSION PRICE"), as defined in Section 2(b), below, in
effect at the time of conversion determined as hereinafter
provided. Each Preferred Share shall have a value of One
Thousand Dollars ($1,000) (the "STATED VALUE") for the purpose
of such conversion and the number of shares of Common Stock
issuable upon conversion of each of the Preferred Shares shall
be determined by dividing the Stated Value thereof by the
Conversion Price then in effect. Every reference herein to the
Common Stock of the Corporation (unless a different intention
is expressed) shall be to the shares of the Common Stock of
the Corporation, $.01 par value, as such stock exists
immediately after the issuance of the Preferred Shares
provided for hereunder, or to stock into which such Common
Stock may be changed from time to time thereafter.
b. Conversion Price. Subject to adjustment
pursuant to Sections 2(c) and 2(e), below, and subject to the
"Ceiling Price," as defined below, the Conversion Price shall
be eighty percent (80%) (the "CONVERSION PERCENTAGE") of the
Average Market Price (as defined below) for the Common Stock
for the five (5) consecutive trading days ending one trading
day prior to the date of the Conversion Notice (as defined
below); provided, however, that subject to adjustment pursuant
to Sections 2(c) and 2(e), below, in no event shall the
Conversion Price be greater than the product of the Conversion
Percentage times $3.125 (the "CEILING PRICE").
c. Adjustment to Conversion Percentage. (i)
If either (A) the Amended Registration Statement (the "AMENDED
REGISTRATION STATEMENT") which the Corporation is required to
file pursuant to Section 3 of the Exchange Agreement by and
among the Corporation and the "PREFERRED SHAREHOLDERS" named
therein (the "EXCHANGE AGREEMENT") has not been filed in
accordance with the Exchange Agreement on or before August 31,
1997; or (B) the Amended Registraton Statement has not been
declared effective by the Securities and Exchange Commission
(the "SEC") on or before October 15, 1997 (the date the
Amended Registration Statement is declared effective by the
SEC herein referred to as the "EFFECTIVE DATE") or if, after
the Amended Registration Statement has been declared effective
by the SEC, sales cannot be made pursuant to the Amended
Registration Statement by reason of stop order, the
Corporation's failure to update the Amended Registration
Statement in accordance with the rules and regulations of the
SEC or otherwise, or if the Common Stock is not listed or
included for quotation on the National Market of the National
Association of
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<PAGE> 3
Securities Dealers Automated Quotation System ("NASDAQ-NM"),
the New York Stock Exchange (the "NYSE"), the American Stock
Exchange (the "AMEX"), or the NASDAQ SmallCap Market ("NASDAQ
SMALLCAP") then, (ii) as partial relief for the damages to the
holder by reason of any such delay in or reduction of its
ability to sell the underlying shares of Common Stock (which
remedy shall not be exclusive of any other remedies available
at law or in equity): the Conversion Percentage shall be
reduced by a number of basis points equal to two hundred (200)
basis points multiplied by the sum of: (A) the number of
months (prorated for partial months) after August 31, 1997
prior to the date the Amended Registration Statement is so
filed by the Company; (B) the number of months (prorated for
partial months) after October 15, 1997 and prior to the date
the Amended Registration Statement is declared effective by
the SEC; (C) the number of months (prorated for partial
months) that sales cannot be made pursuant to the Amended
Registration Statement (by reason of stop order, the
Corporation's failure to update the Amended Registration
Statement or otherwise) after the Amended Registration
Statement has been declared effective; and (D) the number of
months (prorated for partial months) that the Common Stock is
not listed or included for quotation on the NASDAQ-NM, NYSE,
AMEX, or NASDAQ SmallCap after the Amended Registration
Statement has been declared effective. If the holder converts
Preferred Shares into Common Stock and an adjustment to the
Conversion Percentage is required subsequent to such
conversion, but prior to the sale of such Common Stock by such
holder, the Corporation shall pay to such holder, within five
(5) days after receipt of a notice of the sale of such Common
Stock from such holder, an amount equal to the Average Market
Price of the Common Stock obtained upon conversion of such
Preferred Shares for the five (5) trading days ending one (1)
trading day prior to the date of conversion multiplied by a
fraction, the numerator of which shall two (2) and the
denominator of which shall be one hundred (100), multiplied by
the number of months (prorated for partial months) for which
an adjustment was required. Such amount shall be paid, at the
option of the holder, in cash or in Common Stock ("DAMAGE
SHARES"), whose value shall be the Conversion Price, as
adjusted pursuant to this subsection 2(c).
"AVERAGE MARKET PRICE" of any security for any period
shall be computed as the arithmetic average of the closing bid
prices for such security for each trading day in such period
on the NASDAQ SmallCap, or, if the NASDAQ SmallCap is not the
principal trading market for such security, on the principal
trading market for such security, or, if market value cannot
be calculated for such period on any of the foregoing bases,
the average fair market value during such period as reasonably
determined in good faith by the Board of Directors of the
Corporation (all as appropriately adjusted for any stock
dividend, stock split, or other similar transaction during
such period or between the end of such period or between the
end of such period and the date of conversion or dividend
payment, as applicable).
-3-
<PAGE> 4
d. Conversion Notice. On presentation and
surrender to the Corporation (or at any office or agency
maintained for the transfer of the Preferred Shares) of the
certificates of Preferred Shares so to be converted, duly
endorsed in blank for transfer or accompanied by proper
instruments of assignment or transfer in blank (a "CONVERSION
NOTICE"), the holder of such Preferred Shares shall be
entitled, subject to the limitations herein contained, to
receive in exchange therefor a certificate or certificates for
fully paid and nonassessable shares, which certificates shall
be delivered by the second trading day after the date of
delivery of the Conversion Notice, and cash for fractional
shares, of Common Stock on the foregoing basis. The Preferred
Shares shall be deemed to have been converted, and the person
converting the same to have become the holder of record of
Common Stock, for all purposes as of the date of delivery of
the Conversion Notice.
e. (i) Adjustments for Dividends,
Subdivisions or Combinations. If the Corporation shall at any
time subdivide the outstanding shares of Common Stock or shall
issue a stock dividend on its outstanding shares of Common
Stock, the Conversion Price shall be appropriately decreased
so that the number of shares of Common Stock issuable upon
conversion of the Preferred Shares shall be increased by the
same percentage as the percentage increase in the number of
outstanding shares of Common Stock as a result of the
subdivision or stock dividend, effective at the close of
business on the date of such subdivision or stock dividend. If
the Corporation shall at any time combine the shares of
outstanding Common Stock, the Conversion Price shall be
appropriately increased so that the number of shares of Common
Stock issuable upon conversion of the Preferred Shares shall
be decreased by the same percentage as the percentage decrease
in the number of shares of outstanding Common Stock as a
result of the combination, effective at the close of business
on the date of such combination.
(ii) Adjustments for Reorganizations and
Reclassifications. In case, at any time after the date hereof,
of any capital reorganization (other than a merger or other
reorganization in which the Corporation is the continuing
entity and that does not result in any change in the Common
Stock) or any reclassification of the Common Stock of the
Corporation (other than as a result of a stock dividend or
subdivision, split or combination of shares), the Preferred
Shares shall thereafter be convertible into the number of
shares of stock or other securities or property to which a
holder of the number of shares of Common Stock of the
Corporation deliverable upon conversion of the Preferred
Shares immediately prior to such reorganization or
recapitalization would have been entitled upon such
reorganization or reclassification; and, in any such case,
appropriate adjustment (including, without limitation,
adjustment to the Conversion Price) shall be made in the
application of the provisions herein set
-4-
<PAGE> 5
forth with respect to the rights and interests thereafter of
the holders of Preferred Shares, to the end that the
provisions set forth herein shall thereafter be applicable, as
nearly as reasonably may be, in relation to any share of stock
or other property thereafter deliverable upon the conversion.
(iii) Adjustments of Conversion Price
for Dilutive Issuances. Upon the issuance by the Corporation
of Common Stock, or any right or option to purchase Common
Stock, or any obligation or any shares of stock convertible
into or exchangeable for Common Stock for a consideration per
share less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then forthwith upon
such issue or sale, the Conversion Price shall be reduced to a
price calculated (to the nearest cent) by dividing:
(A) an amount equal to the sum of (1) the
number of shares of Common Stock outstanding prior to
such issuance or sale plus shares of Common Stock
issuable upon conversion or exercise of any evidence
of indebtedness, shares, options, warrants or other
securities or obligations of the Corporation
outstanding immediately prior to such issuance or
sale multiplied by the then existing Conversion
Price, and (2) the aggregate amount of consideration
received by the Corporation upon such issuance or
sale, by
(B) the sum of (1) the number of shares of
Common Stock outstanding prior to such issuance or
sale plus shares of Common Stock issuable upon
conversion or exercise of any evidence of
indebtedness, shares, options, warrants or other
securities or obligations of the Corporation
outstanding immediately prior to such issuance or
sale and (2) the number of shares of Common Stock
issued or deemed to be issued pursuant to Section
2(e)(iv), below, in such issuance or sale.
Expressed as an arithmetic formula, the new Conversion Price
would be calculated as follows:
-5-
<PAGE> 6
CP(1) = (CP(0)*CS) + C
----------------
CS + AS
where:
CP(1) = the Conversion Price as adjusted pursuant to
this Section 2(e)(iii);
CP(0) = the Conversion Price in effect immediately
prior to such issue or sale;
CS = the number of shares of Common Stock
outstanding immediately prior to such issue
or sale plus shares of Common Stock issuable
upon conversion or exercise of any evidences
of indebtedness, shares, options, warrants
or other securities or obligations of the
Corporation outstanding immediately prior to
such issue or sale;
C = the aggregate amount of consideration
received by the Corporation upon such issue
or sale;
AS the number of shares of Common Stock
issued or deemed to be issued pursuant to
Section 2(e)(iv), below in such issue or
sale.
* = the arithmetic function of multiplication.
(iv) Calculation of Issuance Price. For
purposes of Section 2(e)(iii) hereof the following provisions
shall be applicable:
(A) In the case of an issue or sale
for cash of shares of Common Stock, the consideration received
by the Corporation therefor shall be deemed to be the amount
of cash received, before deducting therefrom any commissions
or expenses paid or incurred by the Corporation.
(B) In case of the issuance
(otherwise than upon conversion or exchange of obligations or
shares of stock of the Corporation) of additional shares of
Common Stock for a consideration other than cash or a
consideration partly other than cash, the amount of the
consideration other than cash received by the Corporation for
such shares shall be deemed to be the value of such
consideration as reasonably determined by the Board of
Directors.
(C) In case of the issuance by the
Corporation in any manner of any rights to subscribe for or
options to purchase shares of Common Stock, at a consideration
per share (as computed below) less
-6-
<PAGE> 7
than the Conversion Price for in effect immediately prior to
the date of the offering of such rights or the granting of
such options, as the case may be, the maximum number of shares
of Common Stock to which the holders of such rights or options
shall be entitled to subscribe for or purchase pursuant to
such rights or options shall be deemed to be issued or sold as
of the date of the offering of such rights or the granting of
such options, as the case may be, and the minimum aggregate
consideration named in such rights or options for the shares
of Common Stock covered thereby, plus the consideration, if
any, received by the Corporation for such rights or options,
shall be deemed to be the consideration actually received by
the Corporation (as of the date of the offering of such rights
or the granting of such options, as the case may be) for the
issuance of such shares.
(D) In case of the issuance or
issuances by the Corporation in any manner of any obligations
or of any shares of stock of the Corporation that shall be
convertible into or exchangeable for Common Stock, at a
consideration per share (as computed below) less than the
Conversion Price in effect immediately prior to the date such
obligation or shares are issued, the maximum number of shares
of Common Stock issuable upon the conversion or exchange of
such obligations or shares shall be deemed issued as of the
date such obligations or shares are issued, and the amount of
the consideration received by the Corporation for such
additional shares of Common Stock shall be deemed to be the
total of (i) the amount of consideration received by the
Corporation upon the issuance of such obligations or shares,
as the case may be, plus (ii) the minimum aggregate
consideration, if any, other than such obligations or shares,
receivable by the Corporation upon such conversion or
exchange, except in adjustment of dividends.
(E) The amount of the consideration
received by the Corporation upon the issuance of any rights or
options referred to in Section 2(e)(iv)(C) hereof or upon the
issuance of any obligations or shares which are convertible or
exchangeable as described in Section 2(e)(iv)(D) hereof, and
the amount of the consideration, if any, other than such
obligations or shares so convertible or exchangeable,
receivable by the Corporation upon the exercise, conversion or
exchange thereof shall be determined in the same manner
provided in Section 2(e)(iv)(A) and 2(e)(iv)(B) hereof with
respect to the consideration received by the Corporation in
case of the issuance of additional shares of Common Stock. On
the expiration of any rights or options referred to in Section
2(e)(iv)(C) hereof, or the termination of any right of
conversion or exchange referred to in Section 2(e)(iv)(D)
hereof, the Conversion Price then in effect shall forthwith be
readjusted to such Conversion Price as
-7-
<PAGE> 8
would have obtained had the adjustments made upon the issuance
of such option, right or convertible or exchangeable
securities been made upon the basis of the delivery of only
the number of shares of Common Stock actually delivered upon
the exercise of such rights or options or upon the conversion
or exchange of such securities.
(F) The foregoing notwithstanding, no
adjustment of the Conversion Price shall be made pursuant to
Section 2(e)(iii) or Section 2(e)(iv) as a result of the
issuance after the date hereof of (1) up to an aggregate of
517,000 shares of Common Stock issued or issuable with the
approval of the Board of Directors pursuant to options granted
by the Company prior to February 26, 1997; and (2) up to an
aggregate of 2,305,000 shares of Common Stock (or any options,
warrants or rights to purchase such shares of Common Stock)
issued or issuable under grants by the Board of Directors of
the Corporation pursuant to the Company's employee stock
option plan in the form approved by the Board of Directors of
the Corporation prior to the date of this Agreement.
f. Fractional Shares. The Corporation shall
not issue any fraction of a share of Common Stock upon any
conversion, but shall pay in cash therefor at the Conversion
Price then in effect multiplied by such fraction.
g. Reservation of Shares. The Corporation
shall, so long as any of the Preferred Shares are outstanding,
reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the
conversion of the Preferred Shares, such number of shares of
Common Stock as shall from time to time be sufficient to
effect the conversion of all of the Preferred Shares then
outstanding.
h. Taxes. The Corporation shall pay any and
all taxes which may be imposed upon it with respect to the
issuance and delivery of Common Stock upon the conversion of
the Preferred Shares as herein provided. The Corporation shall
not be required in any event to pay any transfer or other
taxes by reason of the issuance of such Common Stock in names
other than those in which the Preferred Shares surrendered for
conversion are registered on the Corporation's records, and no
such conversion or issuance of Common Stock shall be made
unless and until the person requesting such issuance has paid
to the Corporation the amount of any such tax, or has
established to the satisfaction of the Corporation and its
transfer agent, if any, that such tax has been paid.
3. Voting Rights. Holders of Preferred Shares shall
have no voting rights, except as required by law and by
Section 7 hereof.
-8-
<PAGE> 9
4. Redemption. Subject to the following terms and
conditions, the Corporation, at any time after the Effective
Date, at its option, may redeem from time to time all or any
portion of the then outstanding Preferred Shares:
a. The Corporation may, at any time or times
after the Effective Date, redeem such Preferred Shares at the
Redemption Price, as defined in Section 4(b) below, payable in
cash; provided, however, that at the option of the holders of
Preferred Shares, such holders shall have the right to convert
all or any portion of such Preferred Shares to Common Stock
pursuant to Section 2 at any time prior to the Redemption
Date, as defined below. With respect to any redemption of such
shares, the Corporation must give written notice (the
"REDEMPTION NOTICE") by certified mail (postage prepaid,
return receipt requested) or by overnight courier to the
holders of the Preferred Shares to be redeemed at least thirty
(30) days prior to the scheduled date of redemption (the
"REDEMPTION DATE"). The Redemption Notice shall be addressed
to each such shareholder at the address of such holder
appearing on the books of the Corporation or given by such
holder to the Corporation for the purpose of notice. The
Redemption Notice shall state the Redemption Date, the
Redemption Price (as hereinafter defined), and the number of
Preferred Shares of such holders to be redeemed and shall call
upon such holder to surrender to the Corporation on the
Redemption Date at the place designated in the Redemption
Notice such holder's certificate or certificates representing
the shares to be redeemed. On or after the Redemption Date,
each holder of Preferred Shares called for redemption shall
surrender the certificate evidencing such Preferred Shares to
the Corporation (except that, if fewer Preferred Shares are
outstanding on the Redemption Date than were called for
redemption due to the Holder's conversion of some or all of
its outstanding Preferred Shares into Common Stock between the
date of the Redemption Notice and the Redemption Date, then
such number of Preferred Shares shall be reduced to the number
of such Preferred Shares which are still outstanding) at the
place designated in such notice and shall thereupon be
entitled to receive payment of the Redemption Price. If less
than all of the outstanding Preferred Shares are to be
redeemed for any reason, then the Corporation shall redeem a
pro rata portion from each holder of Preferred Shares
according to the respective number of Preferred Shares held by
such holder.
b. The Preferred Shares shall be redeemed at
a cash price (the "REDEMPTION PRICE") equal to sum of (i) the
Conversion Price in effect on the Redemption Date multiplied
by the number of Preferred Shares actually redeemed, and (ii)
all accrued but unpaid dividends on the Preferred Shares being
redeemed through the Redemption Date. In the event fails to
pay the Redemption Price in full on the Redemption Date,
interest shall accrue on the unpaid portion at the rate of ten
percent (10%) per annum, compounded daily.
-9-
<PAGE> 10
c. From and after the Redemption Date
(unless default shall be made by the Corporation in duly
paying the Redemption Price, in which case all the rights of
the holders of such shares shall continue) the holders of the
shares of the Preferred Shares called for redemption shall
cease to have any rights as shareholders of the Corporation
relating to such shares, except (i) the right to receive,
without interest other than as payable under Section 4(b),
above, the Redemption Price and (ii) if less than all of the
Preferred Shares represented by the certificate(s) surrendered
by the holder for redemption are actually redeemed, the right
to receive forthwith from the Corporation a new certificate
for the unredeemed shares, and the redeemed shares shall not
thereafter be transferred (except with the written consent of
the Corporation) on the books of the Corporation and shall not
be deemed outstanding for any purpose whatsoever. The
Preferred Shares not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein.
d. There shall be no redemption of any
Preferred Shares of the Corporation where such action would be
in violation of applicable law.
e. Upon any redemption of Preferred Shares
pursuant to this Section 4, the Preferred Shares which are so
redeemed shall not be reissued and, upon such redemption, the
number of authorized shares of the series to which the shares
of such Preferred Shares belonged shall be reduced by the
number of shares so redeemed.
5. Liquidation, Dissolution, Winding Up. In the event
of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the holders of the Preferred
Shares shall be entitled to receive in cash out of the assets
of the Corporation, whether from capital or from earnings
available for distribution to its stockholders (the "PREFERRED
FUNDS"), before any amount shall be paid to the holders of the
Common Stock, an amount equal to the Stated Value per
Preferred Share plus any accrued and unpaid dividends,
provided that, if the Preferred Funds are insufficient to pay
the full amount due to the holders of Preferred Shares and
holders of shares of other classes or series of preferred
stock of the Corporation that are of equal rank with the
Preferred Shares as to payments of Preferred Funds (the "PARI
PASSU SHARES"), then each holder of Preferred Shares and Pari
Passu Shares shall receive a percentage of the Preferred Funds
equal to the full amount of Preferred Funds payable to such
holder as a percentage of the full amount of Preferred Funds
payable to all holders of Preferred Shares and Pari Passu
Shares. The purchase or redemption by the Corporation of stock
of any class, in any manner permitted by law, shall not, for
the purposes hereof, be regarded as a liquidation, dissolution
or winding up of the Corporation. Neither the consolidation
nor merger of the Corporation with or into any other
corporation or corporations, nor the sale or transfer by the
Corporation of less than substantially all of its assets,
shall, for the purposes
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<PAGE> 11
hereof, be deemed to be a liquidation, dissolution or winding
up of the Corporation. No holder of Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Corporation
other than the amounts provided for herein.
6. Preferred Rank. All shares of Common Stock and any
series of preferred stock as may be issued after the date
hereof by the Corporation shall be of junior rank to all
Preferred Shares in respect to the preferences as to payments
of dividends and/or other distributions, including, without
limitation, distributions and payments upon the liquidation,
dissolution or winding up of the Corporation. The rights of
the holders of shares of Common Stock shall be subject to the
preferences and relative rights of the Preferred Shares.
7. Vote to Change the Terms of Preferred Shares. The
affirmative vote at a meeting duly called for such purpose or
the written consent without a meeting of the holders of not
less than two-thirds (2/3) of the then outstanding Preferred
Shares shall be required to:
a. amend, alter, change or repeal any of
the powers, preferences, privileges or rights of the Preferred
Shares; or
b. create any new class or series of shares
having preferences prior to the Preferred Shares as to
dividends or assets; or
c. amend the provisions of this Section 7;
or
d. alter or change any of the powers,
preferences, privileges or rights of the Common Stock.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the Corporation has caused this
certificate to be signed by its President and
-------------------------
its Secretary, this day of July 1997.
- ----------------------------- -----
MEHL/BIOPHILE INTERNATIONAL
CORPORATION
By:
--------------------------------
President
Attest:
---------------------------
Secretary
-12-
<PAGE> 1
Exhibit 4
FORM OF WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES
ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION
PROVISIONS OF SAID ACT OR APPLICABLE STATE LAW HAVE BEEN
COMPLIED WITH OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
ITS COUNSEL OR AN OPINION OF OTHER COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
MEHL/BIOPHILE INTERNATIONAL CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE
No. 1 750,000 Shares
THIS CERTIFIES that, for receipt in hand of $10.00 and other
value received, Clearwater Fund IV, LLC, 611 Druid Road East, Suite 200,
Clearwater, Florida 34616 (the "Holder"), is entitled to subscribe for and
purchase from MEHL/Biophile International Corporation, a Delaware corporation
(the "Company"), upon the terms and conditions set forth herein, at any time or
from time to time on or after the date hereof and before 5:00 P.M. on August 5,
2002, New York City time (the "Exercise Period"), 750,000 shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock"), at a
price of $2.50 per share (the "Exercise Price"). This Warrant (together with any
warrants issued upon the exercise or transfer of this Warrant in whole or in
part, the "Warrants") is being issued pursuant to the Loan Agreement, dated
August 5, 1997 (the "Loan Agreement"), between the Company and the Holder. The
Company may also issue additional warrants to the Holder from time to time
pursuant to the terms of the Loan Agreement (the "Other Warrants").
<PAGE> 2
The number of shares of Common Stock issuable upon exercise of
the Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period,
as to the whole or any lesser number of whole Warrant Shares, by the surrender
of this Warrant (with the form of election attached hereto duly executed) to the
Company at its office at 4127 NW 27th Lane, Suite A, Gainesville, Florida 32606,
or at such other place as is designated in writing by the Company, together with
a certified or bank cashier's check payable to the order of the Company in an
amount equal to the Exercise Price multiplied by the number of Warrant Shares
for which this Warrant is being exercised (the "Aggregate Exercise Price").
2. Upon each exercise of the Holder's rights to purchase
Warrant Shares, the Holder shall be deemed to be the holder of record of the
Warrant Shares issuable upon such exercise, notwithstanding that the transfer
books of the Company shall then be closed or certificates representing such
Warrant Shares shall not then have been actually delivered to the Holder. As
soon as practicable after each such exercise of this Warrant, the Company shall
issue and deliver to the Holder a certificate or certificates for the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. Any Warrants issued upon the transfer or exercise in part
of this Warrant shall be numbered and shall be registered in a warrant register
(the "Warrant Register") as they are issued. The Company shall be entitled to
treat the registered holder of any Warrant on the Warrant Register as the owner
in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any other
person, and shall not be liable for any registration or transfer of Warrants
which are registered or to be registered in the name of a fiduciary or the
nominee of a fiduciary unless made with the actual knowledge that a fiduciary or
nominee is committing a breach of trust in requesting such registration or
transfer, or with the knowledge of such facts that its participation therein
amounts to bad faith. This Warrant shall be transferable only on the books of
the Company upon delivery thereof duly endorsed by the Holder or by his or its
duly authorized attorney or representative, or accompanied by proper evidence of
succession, assignment, or authority to transfer. In all cases of transfer by an
attorney, executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Warrant or Warrants to
the person entitled thereto. This Warrant may be exchanged, at the option of the
Holder thereof, for another Warrant, or other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares (or portions thereof), upon surrender
to the Company or its duly authorized agent. Notwithstanding the foregoing, the
Company shall have no obligation
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<PAGE> 3
to cause Warrants to be transferred on its books to any person if, in the
opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
4. The Company shall at all times reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
providing for the exercise of the rights to purchase all Warrant Shares granted
pursuant to the Warrants, such number of shares of Common Stock as shall, from
time to time, be sufficient therefor. The Company covenants that all shares of
Common Stock issuable upon exercise of this Warrant, upon receipt by the Company
of the full Exercise Price therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. (a) In case the Company shall at any time after the date
the Warrants were first issued (i) declare a dividend on the outstanding Common
Stock payable in shares of its capital stock, (ii) subdivide the outstanding
Common Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue any shares of its capital stock by reclassification of
the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price, and the number of Warrant Shares
issuable upon exercise of this Warrant, in effect at the time of the record date
for such dividend or of the effective date of such subdivision, combination, or
reclassification, shall be proportionately adjusted so that the Holder after
such time shall be entitled to receive the aggregate number and kind of shares
which, if such Warrant had been exercised immediately prior to such time, he
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date
for the issuance to all holders of Common Stock of rights, options, or warrants
to subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Current Market Price per share of Common Stock (as
defined in Section 5(e) hereof) on such record date, then, in each case, the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on such record date
plus the number of shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so to be offered (or the aggregate
initial conversion or exchange price of the convertible or exchangeable
securities so to be offered) would purchase at such Current Market Price and the
denominator of which shall be the number of shares of Common Stock outstanding
on such record date plus the number of additional shares of Common Stock to be
offered for subscription or purchase (or into which the convertible or
exchangeable securities so to be offered are initially convertible or
exchangeable). Such adjustment shall become effective at the close of business
on such record date; provided, however, that, to the extent
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<PAGE> 4
the shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) are not delivered, the Exercise Price shall be
readjusted after the expiration of such rights, options, or warrants (but only
with respect to Warrants exercised after such expiration), to the Exercise Price
which would then be in effect had the adjustments made upon the issuance of such
rights, options, or warrants been made upon the basis of delivery of only the
number of shares of Common Stock (or securities convertible into or exchangeable
for shares of Common Stock) actually issued. In case any subscription price may
be paid in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be as determined in good faith by
the board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the account
of the Company or any majority-owned subsidiary shall not be deemed outstanding
for the purpose of any such computation.
(c) In case the Company shall distribute to all
holders of Common Stock (including any such distribution made to the
stockholders of the Company in connection with a consolidation or merger in
which the Company is the continuing corporation) evidences of its indebtedness
or assets (other than cash dividends or distributions and dividends payable in
shares of Common Stock), or rights, options, or warrants to subscribe for or
purchase Common Stock, or securities convertible into or exchangeable for shares
of Common Stock (excluding those with respect to the issuance of which an
adjustment of the Exercise Price is provided pursuant to Section 5(b) hereof),
then, in each case, the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date for the
determination of stockholders entitled to receive such distribution by a
fraction, the numerator of which shall be the Current Market Price per share of
Common Stock on such record date, less the fair market value (as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error) of the portion of the evidences of
indebtedness or assets so to be distributed, or of such rights, options, or
warrants or convertible or exchangeable securities, applicable to one share, and
the denominator of which shall be such Current Market Price per share of Common
Stock. Such adjustment shall be made whenever any such distribution is made, and
shall become effective on the record date for the determination of shareholders
entitled to receive such distribution.
(d) In case the Company shall issue shares of Common
Stock or rights, options, or warrants to subscribe for or purchase Common Stock,
or securities convertible into or exchangeable for Common Stock (excluding
shares, rights, options, warrants, or convertible or exchangeable securities
issued or issuable (i) in any of the transactions with respect to which an
adjustment of the Exercise Price is provided pursuant to Sections 5(a), 5(b), or
5(c) above or (ii) upon exercise of the Warrants), at a price per share
(determined, in the case of such rights, options, warrants, or convertible or
exchangeable securities, by dividing (x) the total amount received or receivable
by the Company in consideration of the sale and issuance of such rights,
options, warrants, or convertible or exchangeable securities, plus the minimum
aggregate consideration payable to the Company upon exercise, conversion, or
exchange thereof, by (y) the maximum number of shares
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<PAGE> 5
covered by such rights, options, warrants, or convertible or exchangeable
securities) lower than the Current Market Price per share of Common Stock in
effect immediately prior to such issuance, then the Exercise Price shall be
reduced on the date of such issuance to a price (calculated to the nearest cent)
determined by multiplying the Exercise Price in effect immediately prior to such
issuance by a fraction, the numerator of which shall be an amount equal to the
sum of (A) the number of shares of Common Stock outstanding immediately prior to
such issuance plus (B) the quotient obtained by dividing the consideration
received by the Company upon such issuance by such Current Market Price, and
(iv) the denominator of which shall be the total number of shares of Common
Stock outstanding immediately after such issuance. For the purposes of such
adjustments, the maximum number of shares which the holders of any such rights,
options, warrants, or convertible or exchangeable securities shall be entitled
to initially subscribe for or purchase or convert or exchange such securities
into shall be deemed to be issued and outstanding as of the date of such
issuance, and the consideration received by the Company therefor shall be deemed
to be the consideration received by the Company for such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum aggregate
consideration or premiums stated in such rights, options, warrants, or
convertible or exchangeable securities to be paid for the shares covered
thereby. No further adjustment of the Exercise Price shall be made as a result
of the actual issuance of shares of Common Stock on exercise of such rights,
options, or warrants or on conversion or exchange of such convertible or
exchangeable securities. On the expiration or the termination of such rights,
options, or warrants, or the termination of such right to convert or exchange,
the Exercise Price shall be readjusted (but only with respect to Warrants
exercised after such expiration or termination) to such Exercise Price as would
have obtained had the adjustments made upon the issuance of such rights,
options, warrants, or convertible or exchangeable securities been made upon the
basis of the delivery of only the number of shares of Common Stock actually
delivered upon the exercise of such rights, options, or warrants or upon the
conversion or exchange of any such securities; and on any change of the number
of shares of Common Stock deliverable upon the exercise of any such rights,
options, or warrants or conversion or exchange of such convertible or
exchangeable securities or any change in the consideration to be received by the
Company upon such exercise, conversion, or exchange, including, but not limited
to, a change resulting from the antidilution provisions thereof, the Exercise
Price, as then in effect, shall forthwith be readjusted (but only with respect
to Warrants exercised after such change) to such Exercise Price as would have
been obtained had an adjustment been made upon the issuance of such rights,
options, or warrants not exercised prior to such change, or securities not
converted or exchanged prior to such change, on the basis of such change. In
case the Company shall issue shares of Common Stock or any such rights, options,
warrants, or convertible or exchangeable securities for a consideration
consisting, in whole or in part, of property other than cash or its equivalent,
then the "price per share" and the "consideration received by the Company" for
purposes of the first sentence of this Section 5(d) shall be as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error. Shares of Common Stock owned by or held for
the account of the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
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<PAGE> 6
(e) For the purpose of any computation under this
Section 5, the Current Market Price per share of Common Stock on any date shall
be deemed to be the average of the daily closing prices for the thirty
consecutive trading days immediately preceding the date in question. The closing
price for each day shall be the last reported sales price regular way or, in
case no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange
(including, for purposes hereof, the Nasdaq National Market) on which the Common
Stock is listed or admitted to trading or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the highest reported
bid price for the Common Stock as furnished by the National Association of
Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq is
no longer reporting such information. If on any such date the Common Stock is
not listed or admitted to trading on any national securities exchange and is not
quoted by Nasdaq or any similar organization, the fair value of a share of
Common Stock on such date, as determined in good faith by the board of directors
of the Company, whose determination shall be conclusive absent manifest error,
shall be used.
(f) No adjustment in the Exercise Price shall be
required if such adjustment is less than $.05; provided, however, that any
adjustments which by reason of this Section 5 are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 5 shall be made to the nearest cent or to the
nearest one-thousandth of a share, as the case may be.
(g) In any case in which this Section 5 shall require
that an adjustment in the Exercise Price be made effective as of a record date
for a specified event, the Company may elect to defer, until the occurrence of
such event, issuing to the Holder, if the Holder exercised this Warrant after
such record date, the shares of Common Stock, if any, issuable upon such
exercise over and above the shares of Common Stock, if any, issuable upon such
exercise on the basis of the Exercise Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to the Holder a due bill or
other appropriate instrument evidencing the Holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
(h) Upon each adjustment of the Exercise Price as a
result of the calculations made in Sections 5(b), 5(c), or 5(d) hereof, this
Warrant shall thereafter evidence the right to purchase, at the adjusted
Exercise Price, that number of shares (calculated to the nearest thousandth)
obtained by dividing (A) the product obtained by multiplying the number of
shares purchasable upon exercise of this Warrant prior to adjustment of the
number of shares by the Exercise Price in effect prior to adjustment of the
Exercise Price by (B) the Exercise Price in effect after such adjustment of the
Exercise Price.
(i) Whenever there shall be an adjustment as provided
in this Section 5, the Company shall promptly cause written notice thereof to be
sent by registered mail, postage prepaid, to the Holder, at its address as it
shall appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of
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<PAGE> 7
Warrant Shares purchasable upon the exercise of this Warrant and the Exercise
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment and the computation thereof, which officer's
certificate shall be conclusive evidence of the correctness of any such
adjustment absent manifest error.
(j) The Company shall not be required to issue
fractions of shares of Common Stock or other capital stock of the Company upon
the exercise of this Warrant. If any fraction of a share would be issuable on
the exercise of this Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
Current Market Price of such share of Common Stock on the date of exercise of
this Warrant.
6. (a) In case of any consolidation with or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the surviving or continuing corporation), or in case of
any sale, lease, or conveyance to another corporation of the property and assets
of any nature of the Company as an entirety or substantially as an entirety,
such successor, leasing, or purchasing corporation, as the case may be, shall
(i) execute with the Holder an agreement providing that the Holder shall have
the right thereafter to receive upon exercise of this Warrant solely the kind
and amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5.
(b) In case of any reclassification or change of the
shares of Common Stock issuable upon exercise of this Warrant (other than a
change in par value or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), or in case of any consolidation
or merger of another corporation into the Company in which the Company is the
continuing corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from no par value
to a specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the Holder shall have the right thereafter to receive upon exercise of
this Warrant solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
shares of Common Stock for which this Warrant might have been exercised
immediately prior to such reclassification, change, consolidation, or merger.
Thereafter, appropriate provision shall be made for adjustments which shall be
as nearly equivalent as practicable to the adjustments in Section 5.
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(c) The above provisions of this Section 6 shall
similarly apply to successive reclassifications and changes of shares of Common
Stock and to successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on
shares of Common Stock in shares of Common Stock or make any other
distribution (other than regularly scheduled cash dividends which are
not in a greater amount per share than such most recent cash dividend)
to all holders of Common Stock; or
(b) to issue any rights, warrants, or other
securities to all holders of Common Stock entitling them to purchase
any additional shares of Common Stock or any other rights, warrants, or
other securities; or
(c) to effect any reclassification or change of
outstanding shares of Common Stock, or any consolidation, merger, sale,
lease, or conveyance of property, described in Section 6; or
(d) to effect any liquidation, dissolution, or
winding-up of the Company; or
(e) to take any other action which would cause an
adjustment to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least
fifteen days prior to (i) the date as of which the holders of record of shares
of Common Stock to be entitled to receive any such dividend, distribution,
rights, warrants, or other securities are to be determined, (ii) the date on
which any such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
8. The issuance of any shares of Common Stock or other
securities upon the exercise of this Warrant, and the delivery of certificates
or other instruments representing such shares or other securities, shall be made
without charge to the Holder for any tax or other charge in respect of such
issuance. The Company shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issue and
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<PAGE> 9
delivery of any certificate in a name other than that of the Holder and the
Company shall not be required to issue or deliver any such certificate unless
and until the person or persons requesting the issue thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
9. (a) If, at any time during the Exercise Period, the
Company shall receive a written request from the Holder to register the sale of
all or part of the Warrant Shares, the Company shall, as promptly as
practicable, at the Company's sole cost and expense (other than the fees and
disbursements of counsel for the Holder and underwriting discounts, if any,
payable in respect of the Warrant Shares sold by the Holder), prepare and file
with the Securities and Exchange Commission (the "Commission") a registration
statement sufficient to permit the public offering and sale of the Warrant
Shares through the facilities of all appropriate securities exchanges on which
the Common Stock is listed for trading or the over-the-counter market, and will
use its best efforts through its officers, directors, auditors, and counsel to
cause such registration statement to become effective as promptly as
practicable; provided, however, that the Company shall only be obligated to file
two registration statements pursuant to requests from the Holder under this
Warrant or the Other Warrants (provided that each such registration statement is
declared effective by the Commission); and provided, further, that such
registration statements shall cover all shares of Common Stock underlying this
Warrant and the Other Warrants as shall be requested in each such request. The
Company shall have the right to register and sell shares of Common Stock (at its
sole cost and expense) in any such registrations statements.
(b) In the event of a registration pursuant to the
provisions of this Section 9, the Company shall use its best efforts to cause
the Warrant Shares so registered to be registered or qualified for sale under
the securities or blue sky laws of such jurisdictions as the Holder may
reasonably request; provided, however, that the Company shall not be required to
qualify to do business in any state by reason of this Section 9(b) in which it
is not otherwise required to qualify to do business.
(c) The Company shall keep effective any registration
or qualification contemplated by this Section 9 and shall from time to time
amend or supplement each applicable registration statement, preliminary
prospectus, final prospectus, application, document, and communication for such
period of time as shall be required to permit the Holder to complete the offer
and sale of the Warrant Shares covered thereby. The Company shall in no event be
required to keep any such registration or qualification in effect for a period
in excess of twenty-four months from the date on which the Holder is first free
to sell such Warrant Shares; provided, however, that, if the Company is required
to keep any such registration or qualification in effect with respect to
securities other than the Warrant Shares beyond such period, the Company shall
keep such registration or qualification in effect as it relates to the Warrant
Shares for so long as such registration or qualification remains or is required
to remain in effect in respect of such other securities.
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<PAGE> 10
(d) In the event of a registration pursuant to the
provisions of this Section 9, the Company shall furnish to the Holder such
number of copies of the registration statement and of each amendment and
supplement thereto (in each case, including all exhibits), such reasonable
number of copies of each prospectus contained in such registration statement and
each supplement or amendment thereto (including each preliminary prospectus),
all of which shall conform to the requirements of the Act and the rules and
regulations thereunder, and such other documents, as the Holder may reasonably
request to facilitate the disposition of the Warrant Shares included in such
registration.
(e) In the event of a registration pursuant to the
provisions of this Section 9, the Company shall furnish the Holder of any
Warrant Shares so registered with an opinion of its counsel (reasonably
acceptable to the Holder) to the effect that (i) the registration statement has
become effective under the Act and no order suspending the effectiveness of the
registration statement, preventing or suspending the use of the registration
statement, any preliminary prospectus, any final prospectus, or any amendment or
supplement thereto has been issued, nor has the Commission or any securities or
blue sky authority of any jurisdiction instituted or threatened to institute any
proceedings with respect to such an order and (ii) the registration statement
and each prospectus forming a part thereof (including each preliminary
prospectus), and any amendment or supplement thereto, complies as to form with
the Act and the rules and regulations thereunder. Such opinion shall also state
the jurisdictions in which the Warrant Shares have been registered or qualified
for sale pursuant to the provisions of Section 9(b).
(f) In the event of a registration pursuant to the
provisions of this Section 9, the Company shall enter into a cross-indemnity
agreement and a contribution agreement, each in customary form, with each
underwriter, if any, and, if requested, enter into an underwriting agreement
containing customary representations, warranties, allocation of expenses, and
closing conditions, including, but not limited to, opinions of counsel and
accountants' cold comfort letters, with any underwriter who acquires any Warrant
Shares.
(g) In the event of a registration pursuant to the
provisions of this Section 9:
(i) The Holder shall furnish to the Company
in writing such appropriate information (relating to the Holder and the
intention of the Holder as to proposed methods of sale or other disposition of
their shares of Common Stock) and the identity of and compensation to be paid to
any proposed underwriters to be employed in connection therewith as the Company,
any underwriter, or the Commission or any other regulatory authority may
request;
(ii) the Holder shall enter into the usual
and customary form of underwriting agreement agreed to by the Company and any
underwriter with respect to any such offering, if required, and such
underwriting agreement shall contain the customary rights of indemnity between
the Company, the underwriters, and the Holder;
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<PAGE> 11
(iii) the Holder shall execute, deliver
and/or file with or supply the Company, any underwriters, the Commission and/or
any state or other regulatory authority such information, documentation,
representations, undertakings and/or agreements necessary to carry out the
provisions of the registration covenants contained in this Section 9 and/or to
effect the registration or qualification of its Warrant Shares under the Act
and/or any of the laws and regulations of any state of governmental
instrumentality;
(iv) the Company's obligation to include any
Warrant Shares in a registration statement shall be subject to the written
agreement of the Holder to offer such securities in the same manner and on the
same terms and conditions as the other securities of the same class are being
offered pursuant to the registration statement, if such shares are being
underwritten;
(v) in the event that all the Warrant Shares
have not been sold on or prior to the expiration of the period specified in
Section 9(c) above, the Company may deregister by post-effective amendment any
Warrant Shares covered by the registration statement, but not sold on or prior
to such date. The Company agrees that it will notify the Holder of Warrant
Shares of the filing and effective date of such post-effective amendment; and
(vi) the Holder agrees that upon
notification by the Company that the prospectus in respect to any public
offering covered by the provisions hereof is in need of revision, the Holder
shall immediately upon receipt of such notification (x) cease to offer or sell
any securities of the Company which must be accompanied by such prospectus, (y)
return all such prospectuses in the Holder's hands to the Company, and (z) not
offer or sell any securities of the Company until the Holder has been provided
with a current prospectus and the Company has given the Holder notification
permitting the Holder to resume offers and sales.
(h) The Company agrees that until all the Warrant Shares
have been sold under a registration statement or pursuant to Rule 144 under the
Act, it shall keep current in filing all reports, statements and other materials
required to be filed with the Commission to permit the Holder of the Warrant
Shares to sell such securities under Rule 144.
10. (a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not be
limited to, attorneys' fees and any and all reasonable expenses whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation),
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<PAGE> 12
as and when incurred, arising out of, based upon, or in connection with (i) any
untrue statement or alleged untrue statement of a material fact contained (A) in
any registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
relating to the sale of any of the Warrant Shares or (B) in any application or
other document or communication (in this Section 10 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Warrant Shares under the securities
or blue sky laws thereof or filed with the Commission or any securities
exchange; or any omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to the Holder by
or on behalf of such person expressly for inclusion in any registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or in any application, as the case may be, or (ii) any
breach of any representation, warranty, covenant, or agreement of the Company
contained in this Warrant. The foregoing agreement to indemnify shall be in
addition to any liability the Company may otherwise have, including liabilities
arising under this Warrant.
If any action is brought against the Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10(a)) and the
Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have promptly employed counsel reasonably satisfactory to such
indemnified party or parties to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded that there may
be one or more legal defenses available to it or them or to other indemnified
parties which are different from or additional to those available to the
Company, in any of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this Section
10 to the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld. The Company shall not, without the
prior written consent of each indemnified party that is not released as
described in this sentence, settle or compromise any action, or permit a default
or consent to the entry of judgment in or otherwise seek to terminate any
pending or threatened action, in respect of which indemnity may be sought
hereunder
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<PAGE> 13
(whether or not any indemnified party is a party thereto), unless such
settlement, compromise, consent, or termination includes an unconditional
release of each indemnified party from all liability in respect of such action.
The Company agrees promptly to notify the Holder of the commencement of any
litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of any Warrant Shares or any preliminary
prospectus, prospectus, registration statement, or amendment or supplement
thereto, or any application relating to any sale of any Warrant Shares.
(b) The Holder agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Warrant Shares held by the
Holder, each other person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Holder in Section 10(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 10(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Holder of the Warrant Shares
included in such registration in the aggregate (including for this purpose any
contribution by or on behalf of an indemnified party), as a second entity, shall
contribute to the losses, liabilities, claims, damages, and expenses whatsoever
to which any of them may be subject, on the basis of relevant equitable
considerations such as the relative fault of the Company and the Holder in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or
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<PAGE> 14
alleged omission, shall be determined by, among other things, whether such
statement, alleged statement, omission, or alleged omission relates to
information supplied by the Company or by the Holder, and the parties' relative
intent, knowledge, access to information, and opportunity to correct or prevent
such statement, alleged statement, omission, or alleged omission. The Company
and the Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Holder were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Holder and the other indemnified parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 10(c). No
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section 10(c),
each person, if any, who controls the Holder within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act and each officer, director,
partner, employee, agent, and counsel of the Holder or control person shall have
the same rights to contribution as the Holder or control person and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed any such registration statement, each director of the Company, and its or
their respective counsel shall have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 10(c). Anything
in this Section 10(c) to the contrary notwithstanding, no party shall be liable
for contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 10(c) is intended to supersede any
right to contribution under the Act, the Exchange Act or otherwise.
11. Unless registered pursuant to the provisions of Section 9
hereof, the Warrant Shares issued upon exercise of the Warrants shall be subject
to a stop transfer order and the certificate or certificates evidencing such
Warrant Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS THE REGISTRATION PROVISIONS OF SAID ACT OR APPLICABLE
STATE LAW HAVE BEEN COMPLIED WITH OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF ITS COUNSEL OR AN OPINION OF OTHER
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED."
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<PAGE> 15
12. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction, or mutilation of any Warrant (and upon surrender
of any Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Warrant of like date, tenor, and denomination.
13. The Holder of any Warrant shall not have, solely on
account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Warrant.
14. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested or sent by Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex, or similar telecommunications equipment) against receipt to the party to
whom it is to be given, if sent to the Company, at: MEHL/Biophile International
Corporation, 4127 NW 27th Lane, Suite A, Gainesville, Florida 32606, Attention:
Thomas L. Mehl; or if sent to the Holder, at the Holder's address as it shall
appear on the Warrant Register; or to such other address as the parties shall
have furnished in writing in accordance with the provisions of this Section 14.
Any notice or other communication given by certified mail shall be deemed given
at the time of certification thereof, except for a notice changing a party's
address which will be deemed given at the time of receipt thereof. Any notice
given by other means permitted by this Section 14 shall be deemed given at the
time of receipt thereof.
15. This Warrant shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of the Holder and its
successors and assigns.
16. This Warrant shall be construed in accordance with the
laws of the State of New York applicable to contracts made and performed within
such State, without regard to principles of conflicts of law.
17. The Company irrevocably consents to the jurisdiction of
the courts of the State of New York and of any federal court located in such
State in connection with any action or proceeding arising out of or relating to
this Warrant, any document or instrument delivered pursuant to, in connection
with or simultaneously with this Warrant, or a breach of this Warrant or any
such document or instrument. In any such action or proceeding, the Company
waives personal service of any summons, complaint or other process and agrees
that service thereof may be made in accordance with Section 14 hereof. Within
thirty days after such service, or such other time as may be mutually agreed
upon in writing by the attorneys for the parties to such action or proceeding,
the Company shall appear to answer such summons, complaint or other process.
Should the Company so served fail to appear or answer within such thirty-day
period or such extended period, as the case may be, the
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<PAGE> 16
Company shall be deemed in default and judgment may be entered against the
Company for the amount as demanded in any summons, complaint or other process so
served.
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<PAGE> 17
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its President under its corporate seal and attested by its
Secretary on the day and year first written below.
Dated: August 5, 1997
MEHL/BIOPHILE INTERNATIONAL CORPORATION
By:
---------------------------------
Name: Thomas L. Mehl, Sr.
Title: Chairman & CEO
[Seal]
ATTEST:
- ------------------------------
Secretary
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<PAGE> 18
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, _____________________________ hereby
sells, assigns, and transfers unto _______________________________ a Warrant to
purchase __________ shares of Common Stock, par value $.01 per share, of
MEHL/Biophile International Corporation (the "Company"), together with all
right, title, and interest therein, and does hereby irrevocably constitute and
appoint ____________________________ attorney to transfer such Warrant on the
books of the Company, with full power of substitution.
Dated: ______________
Signature_____________________________
NOTICE
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Warrant in every particular, without alteration
or enlargement or any change whatsoever.
<PAGE> 19
To: MEHL/Biophile International Corporation
4127 NW 27th Lane, Suite A
Gainesville, Florida 32606
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
Warrant Shares covered by the within Warrant and tenders payment
- -------------
herewith in the amount of $ in accordance with the terms thereof,
--------------
and requests that certificates for such securities be issued in the name of, and
delivered to:
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: Name
-------------------------- --------------------------------------
(Print)
Address:
--------------------------------------------------
---------------------------------
(Signature)
<PAGE> 1
Exhibit 10.11
MEHL/BIOPHILE INTERNATIONAL CORPORATION
1997 INCENTIVE PLAN
Section 1. Purpose; Definitions
The purpose of the MEHL/Biophile International Corporation
1997 Incentive Plan (the "Plan") is to enable MEHL/Biophile International
Corporation (the "Company") to attract, retain and reward key employees of the
Company and its Subsidiaries and Affiliates, and strengthen the mutuality of
interests between such key employees and the Company's stockholders, by offering
such key employees performance-based stock incentives and/or other equity
interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash.
For purposes of the Plan, the following terms shall be defined
as set forth below:
(a) "Affiliate" means any entity other than the
Company and its Subsidiaries that is designated by the Board as a participating
employer under the Plan, provided that the Company directly or indirectly owns
at least 20% of the combined voting power of all classes of stock of such entity
or at least 20% of the ownership interests in such entity.
(b) "Board" means the Board of Directors of the
Company.
(c) "Book Value" means, as of any given date, on
a per share basis (i) the stockholders' Equity in the Company as of the end of
the immediately preceding fiscal year as reflected
<PAGE> 2
in the Company's consolidated balance sheet, subject to such adjustments as the
Committee shall specify at or after grant, divided by (ii) the number of then
outstanding shares of Stock as of such year-end date (as adjusted by the
Committee for subsequent events).
(d) "Code" means the Internal Revenue Code of
1986, as amended from time to time, and any successor thereto.
(e) "Committee" means the Committee referred to
in Section 2 of the Plan. If at any time no Committee shall be in office, then
the functions of the Committee specified in the Plan shall be exercised by the
Board.
(f) "Company" means MEHL/Biophile International
Corporation, a corporation organized under the laws of the State of Delaware, or
any successor corporation.
(g) "Deferred Stock" means an award made
pursuant to Section 8 below of the right to receive Stock at the end of a
specified deferral period.
(h) "Disability" means disability as determined
under procedures established by the Committee for purposes of this Plan.
(i) "Fair Market Value" means, as of any given
date, unless otherwise determined by the Committee in good faith, the mean
between the highest and lowest quoted bid price, regular way, of the Stock on
the Nasdaq Stock Market or, if no such sale of Stock occurs on such date, the
fair market value of the Stock as determined by the Committee in good faith.
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<PAGE> 3
(j) "Incentive Stock Option" means any Stock
Option intended to be and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
(k) "Non-Qualified Stock Option" means any Stock
Option that is not an Incentive Stock Option.
(l) "Other Stock-Based Award" means an award
under Section 10 below that is valued in whole or in part by reference to, or is
otherwise based on, Stock.
(m) "Restricted Stock" means an award of shares
of Stock that is subject to restrictions under Section 7 below.
(n) "Stock" means the Common Stock, $.01 par
value per share, of the Company.
(o) "Stock Appreciation Right" means the right
pursuant to an award granted under Section 6 below to surrender to the Company
all (or a portion) of a Stock Option in exchange for an amount equal to the
difference between (i) the Fair Market Value, as of the date such Stock Option
(or such portion thereof) is surrendered, of the shares of Stock covered by such
Stock Option (or such portion thereof), subject, where applicable, to the
pricing provisions in Section 6(b)(ii) and (ii) the aggregate exercise price of
such Stock Option (or such portion thereof).
(p) "Stock Option" or "Option" means any option
to purchase shares of Stock (including Restricted Stock and Deferred Stock, if
the Committee so determines) granted pursuant to Section 5 below.
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<PAGE> 4
(q) "Stock Purchase Right" means the right to
purchase Stock pursuant to Section 9.
(r) "Subsidiary" means any corporation (other
than the Company) in an unbroken chain of corporations beginning with the
Company if the corporation (other than the last corporation in the unbroken
chain) owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in the chain.
In addition, the terms "Change in Control" and "Change in
Control Price" shall have the meanings set forth, respectively, in Sections
11(b), (c) and (d) below and the term "Cause" shall have the meaning set forth
in Section 5(i) below.
SECTION 2. Administration
The Plan shall be administered by a Committee of no fewer than three
persons, who shall be appointed by the Board and who shall serve at the pleasure
of the Board. The functions of the Committee specified in the Plan shall be
exercised by the Board, if and to the extent that no Committee exists which has
the authority to so administer the Plan.
The Committee shall have full authority to grant, pursuant to
the terms of the Plan, to officers and other key employees eligible under
Section 4: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted
Stock, (iv) Deferred Stock, (v) Stock Purchase Rights and/or (vi) Other
Stock-Based Awards.
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<PAGE> 5
In particular, the Committee shall have the authority:
(a) to select the officers and other key
employees of the Company and its Subsidiaries and Affiliates to whom Stock
Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock
Purchase Rights and/or Other Stock-Based Awards may from time to time be granted
hereunder;
(b) to determine whether and to what extent
Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based
Awards, or any combination thereof, are to be granted hereunder to one or more
eligible employees;
(c) to determine the number of shares to be
covered by each such award granted hereunder;
(d) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture restrictions
regarding any Stock Option or other award and/or the shares of Stock relating
thereto, based in each case on such factors as the Committee shall determine, in
its sole discretion);
(e) to determine whether and under what
circumstances a Stock Option may be settled in cash, Restricted Stock and/or
Deferred Stock under Section 5(k) or (1), as applicable, instead of Stock;
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<PAGE> 6
(f) to determine whether, to what extent and
under what circumstances grants and/or other awards under the Plan and/or other
cash awards made by the Company are to be made, and operate, on a tandem basis
vis-a-vis other awards under the Plan and/or cash awards made outside of the
Plan, or on an additive basis;
(g) to determine whether, to what extent and
under what circumstances Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or at the election
of the participant (including providing for and determining the amount (if any)
of any deemed earnings on any deferred amount during any deferral period);
(h) to determine the terms and restrictions
applicable to Stock Purchase Rights and the Stock purchased by
exercising such Rights; and
(i) to grant with the consent of the optionee, in
substitution for outstanding Stock Options, replacement Stock Options, which may
be at a lower exercise price, provided that, in the case of Incentive Stock
Options, such replacement stock options are not at an exercise price less than
the Fair Market Value of the Stock at the time of replacement.
The Committee shall have the authority to adopt, alter and
repeal such rules, guidelines and practices governing the Plan as it shall, from
time to time, deem advisable; to interpret the terms and provisions of the Plan
and any award issued under
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<PAGE> 7
the Plan (and any agreements relating thereto); and to otherwise supervise the
administration of the Plan.
All decisions made by the Committee pursuant to the provisions
of the Plan shall be made in the Committee's sole discretion and shall be final
and binding on all persons, including the Company and Plan participants.
SECTION 3. Stock Subject to Plan
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 4,000,000 shares. Such shares may consist,
in whole or in part, of authorized and unissued shares or treasury shares.
Subject to Section 6(b)(iv) below, if any shares of Stock that
have been optioned cease to be subject to a Stock Option, or if any such shares
of Stock that are subject to any Restricted Stock or Deferred Stock award, Stock
Purchase Right or Other Stock-Based Award granted hereunder are forfeited or any
such award otherwise terminates, without a payment being made to the participant
in the form of Stock, such shares shall again be available for distribution in
connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split spin-offs, spin-outs or other
change in corporate structure affecting the Stock, such substitution or
adjustment shall be made in the aggregate number of shares reserved for issuance
-7-
<PAGE> 8
under the Plan, in the number and option price of shares subject to outstanding
Options granted under the Plan, in the number and purchase price of shares
subject to outstanding Stock Purchase Rights under the Plan, and in the number
of shares subject to other outstanding awards granted under the Plan as may be
determined to be appropriate by the Committee, in its sole discretion, provided
that the number of shares subject to any award shall always be a whole number.
Such adjusted option price shall also be used to determine the amount payable by
the Company upon the exercise of any Stock Appreciation Right associated with
any Stock Option.
SECTION 4. Eligibility
Officers, directors and key employees of the Company and its
Subsidiaries and Affiliates and any other individual as determined by the
Committee who are responsible for or contribute to the management, growth and/or
profitability of the business of the Company and/or its Subsidiaries and
Affiliates are eligible to be granted awards under the Plan.
SECTION 5. Stock Options
Stock Options may be granted alone, in addition to or in
tandem with other awards granted under the Plan and/or cash awards made outside
of the Plan. Any Stock Option granted under the Plan shall be in such form as
the Committee may from time to time approve.
-8-
<PAGE> 9
Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.
The Committee shall have the authority to grant to any
optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of
Stock Options (in each case with or without Stock Appreciation Rights).
Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee shall
deem desirable:
(a) Option Price. The option price per share of
Stock purchasable under an Incentive Stock Option shall be determined by the
Committee at the time of grant but shall be not less than 100% of the Fair
Market Value of the Stock at the time of grant. Non-Qualified Stock Options may,
in the discretion of the Committee, may be granted at a price per share less
than the Fair Market Value of the Stock at the time of grant.
(b) Option Term. The term of each Stock Option
shall be fixed by the Committee, but no Incentive Stock Option shall be
exercisable more than ten years after the date the Option is granted.
(c) Exercisability. Stock Options shall be
exercisable at such time or times and subject to such terms and conditions as
shall be determined by the Committee at or after grant. If the Committee
provides, in its sole discretion, that
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<PAGE> 10
any Stock Option is exercisable only in installments, the Committee may waive
such installment exercise provisions at any time at or after grant in whole or
in part, based on such factors as the Committee shall determine, in its sole
discretion.
(d) Method of Exercise. Subject to whatever
installment exercise provisions apply under Section 5(c), Stock Options may be
exercised in whole or in part at any time during the option period by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by check, note or such other instrument as the Committee may
accept. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of Stock or, in
the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or
Deferred Stock subject to an award hereunder (based, in each case, on the Fair
Market Value of the Stock on the date the option is exercised, as determined by
the Committee).
No shares of Stock shall be issued until full payment therefor
has been made. An optionee shall generally have the rights to dividends or other
rights of a shareholder with respect to shares subject to the Option when the
optionee has given written notice of exercise, has paid in full for such shares,
and if requested, has given the representation described in Section 14(a).
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<PAGE> 11
(e) Non-Transferability of Options. No Stock
Option shall be transferable by the optionee otherwise than by will or by the
laws of descent and distribution, and all Stock Options shall be exercisable,
during the optionee's lifetime, only by the optionee.
(f) Termination by Death. Subject to Section
5(j), if an optionee's employment by the Company or any Subsidiary or Affiliate
terminates by reason of death, any Stock Option held by such optionee may
thereafter be exercised, to the extent such option was exercisable at the time
of death or on such accelerated basis as the Committee may determine at or after
grant (or as may be determined in accordance with procedures established by the
Committee), by the legal representative of the estate or by the legatee of the
optionee under the will of the optionee, for a period of one year (or such other
period as the Committee may specify at grant) from the date of such death or
until the expiration of the stated term of such Stock Option, whichever period
is the shorter.
(g) Termination by Reason of Disability. Subject
to Section 5(j), if an optionee's employment by the Company and any Subsidiary
or Affiliate terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in accordance
with procedures established by the
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<PAGE> 12
Committee), for a period of one year (or such other period as the Committee may
specify at grant) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter, provided, however, that, if the optionee dies within such one-year
period (or such other period as the Committee shall specify at grant), any
unexercised Stock Option held by such optionee shall thereafter be exercisable
to the extent to which it was exercisable at the time of death for a period of
one year from the date of such death or until the expiration of the stated term
of such Stock Option, whichever period is the shorter. In the event of
termination of employment by reason of Disability, if an Incentive Stock Option
is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Non-Qualified Stock Option.
(h) Other Termination. Unless otherwise
determined by the Committee (or pursuant to procedures established by the
Committee) at or after grant, if an optionee's employment by the Company or any
Subsidiary or Affiliate terminates for any reason other than death or
Disability, the Stock Option shall thereupon terminate, except that such Stock
Option may be exercised, to the extent otherwise then exercisable, for the
lesser of three months or the balance of such Stock Option's term if the
optionee is involuntarily terminated by the Company or any Subsidiary or
Affiliate without
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<PAGE> 13
Cause. For purposes of this Plan, "Cause" means a felony conviction of an
optionee or the failure of an optionee to contest prosecution for a felony, or
an optionee's willful misconduct or dishonesty, any of which is directly and
materially harmful to the business or reputation of the Company or any
Subsidiary or Affiliate.
(i) Incentive Stock Options. Anything in the
Plan to the contrary notwithstanding, no term of this Plan relating to Incentive
Stock Options shall be interpreted, amended or altered, nor shall any discretion
or authority granted under the Plan be so exercised, so as to disqualify the
Plan under Section 422 of the Code, or, without the consent of the optionee(s)
affected, to disqualify any Incentive Stock Option under such Section 422.
To the extent required for "incentive stock option" status
under Section 422(d) of the Code (taking into account applicable Internal
Revenue Service regulations and pronouncements), the Plan shall be deemed to
provide that the aggregate Fair Market Value (determined as of the time of
grant) of the Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the optionee during any calendar year under
the Plan and/or any other stock option plan of the Company or any Subsidiary or
parent corporation (within the meaning of Section 425 of the Code) shall not
exceed $100,000. If Section 422 is hereafter amended to delete the requirement
now in Section 422(d) that the plan text expressly
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<PAGE> 14
provide for the $100,000 limitation set forth in Section 422(d), then this first
paragraph of Section 5(i) shall no longer be operative.
(j) Buyout Provisions. The Committee may at any
time offer to buy for a payment in cash, Stock, Deferred Stock or Restricted
Stock an option previously granted, based on such terms and conditions as the
Committee shall establish and communicate to the optionee at the time that such
offer is made.
(k) Settlement Provisions. If the option
agreement so provides at grant or is amended after grant and prior to exercise
to so provide (with the optionee's consent), the Committee may require that all
or part of the shares to be issued with respect to the spread value of an
exercised Option take the form of Deferred or Restricted Stock, which shall be
valued on the date of exercise on the basis of the Fair Market Value (as
determined by the Committee) of such Deferred or Restricted Stock determined
without regard to the deferral limitations and/or forfeiture restrictions
involved.
SECTION 6. Stock Appreciation Rights
(a) Grant and Exercise. Stock Appreciation
Rights may be granted in conjunction with all or part of any Stock Option
granted under the Plan. In the case of a Non-Qualified Stock Option, such rights
may be granted either at or after the time of the grant of such Stock Option. In
the case of
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<PAGE> 15
an Incentive Stock Option, such rights may be granted only at the time of the
grant of such Stock Option.
A Stock Appreciation Right or applicable portion thereof
granted with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option,
subject to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full number of
shares covered by a related Stock Option.
A Stock Appreciation Right may be exercised by an optionee,
subject to Section 6(b), in accordance with the procedures established by the
Committee for such purpose. Upon such exercise, the optionee shall be entitled
to receive an amount determined in the manner prescribed in Section 6(b). Stock
Options relating to exercised Stock Appreciation Rights shall no longer be
exercisable to the extent that the related Stock Appreciation Rights have been
exercised.
(b) Terms and Conditions. Stock Appreciation
Rights shall be subject to such terms and conditions, not inconsistent with the
provisions of the Plan, as shall be determined from time to time by the
Committee, including the following:
(i) Stock Appreciation Rights shall be
exercisable only at such time or times and to the extent that the Stock Options
to which they relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of
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<PAGE> 16
the Plan. The exercise of Stock Appreciation Rights held by optionees who are
subject to Section 16(b) of the Exchange Act shall comply with Rule 16b-3
thereunder, to the extent applicable.
(ii) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive an amount in cash and/or shares of Stock
equal in value to the excess of the Fair Market Value of one share of Stock over
the option price per share specified in the related Stock Option multiplied by
the number of shares in respect of which the Stock Appreciation Right shall have
been exercised, with the Committee having the right to determine the form of
payment. When payment is to be made in shares, the number of shares to be paid
shall be calculated on the basis of the Fair Market Value of the shares on the
date of exercise.
(iii) Stock Appreciation Rights shall be transferable only
when and to the extent that the underlying Stock Option would be transferable
under Section 5(e).
(iv) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is related
shall be deemed to have been exercised for the purpose of the limitation set
forth in Section 3 on the number of shares of Stock to be issued under the Plan,
but only to the extent of the number of shares issued under the Stock
Appreciation Right at the time of exercise based on the value of the Stock
Appreciation Right at such time.
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<PAGE> 17
(v) In its sole discretion, the Committee may grant "Limited"
Stock Appreciation Rights under this Section 6, i.e., Stock Appreciation Rights
that become exercisable only in the event of a Change in Control, subject to
such terms and conditions as the Committee may specify at grant. Such Limited
Stock Appreciation Rights shall be settled solely in cash.
(vi) The Committee, in its sole discretion, may also provide
that, in the event of a Change in Control, the amount to be paid upon the
exercise of a Stock Appreciation Right or Limited Stock Appreciation Right shall
be based on the Change of Control Price, subject to such terms and conditions on
the Committee may specify at grant.
SECTION 7. Restricted Stock
(a) Administration. Shares of Restricted Stock
may be issued either alone, in addition to or in tandem with other awards
granted under the Plan and/or cash awards made outside the Plan. The Committee
shall determine the eligible persons to whom, and the time or times at which,
grants of Restricted Stock will be made, the number of shares to be awarded, the
price (if any) to be paid by the recipient of Restricted Stock (subject to
Section 7(b)), the time or times within which such awards may be subject to
forfeiture, and all other terms and conditions of the awards.
The Committee may condition the grant of Restricted Stock upon
the attainment of specified performance goals or such
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<PAGE> 18
other factors as the Committee may determine, in its sole discretion.
The provisions of Restricted Stock awards need not be the same
with respect to each recipient.
(b) Awards and Certificates. The prospective
recipient of a Restricted Stock award shall not have any rights with respect to
such award, unless and until such recipient has executed an agreement evidencing
the award and has delivered a fully executed copy thereof to the Company, and
has otherwise complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of
Restricted Stock may be equal to or less than their par value and may be zero.
(ii) Awards of Restricted Stock must be
accepted within a period of 60 days (or such shorter period as the committee may
specify at grant) after the award date, by executing a Restricted Stock Award
Agreement and paying whatever price (if any) is required under Section 7(b)(i).
(iii) Each participant receiving a
Restricted Stock award shall be issued a stock certificate in respect of such
shares of Restricted Stock. Such certificate shall be registered in the name of
such participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award.
(iv) The Committee shall require that the
stock certificates evidencing such shares be held in custody by
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<PAGE> 19
the Company until the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock award, the participant shall have delivered a
stock power, endorsed in blank, relating to the Stock covered by such award.
(c) Restrictions and Conditions. The shares of
Restricted Stock awarded pursuant to this Section 7 shall be subject to the
following restrictions and conditions:
(i) Subject to the provisions of this Plan
and the award agreement, during a period set by the Committee commencing with
the date of such award (the "Restricted Period"), the participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded
under the Plan. Within these limits, the Committee, in its sole discretion, may
provide for the lapse of such restrictions in installments and may accelerate or
waive such restriction in whole or in part, based on service, performance and/or
such other factors or criteria as the Committee may determine, in its sole
discretion.
(ii) Except as provided in this paragraph
(ii) and Section 7(c)(i), the participant shall have, with respect to the shares
of Restricted Stock, all of the rights of a stockholder of the Company,
including the right to vote the shares and the right to receive any cash
dividends. The Committee, in its sole discretion, as determined at the time of
award, may permit or require the payment of cash dividends to be deferred and,
if the Committee so determines, reinvested, subject to Section 14(e), in
additional Restricted Stock, to the extent
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<PAGE> 20
shares are available under Section 3, or otherwise reinvested. Pursuant to
Section 3 above, Stock dividends issued with respect to Restricted Stock shall
be treated as additional shares of Restricted Stock that are subject to the same
restrictions and other terms and conditions that apply to the shares with
respect to which such dividends are issued.
(iii) Subject to the applicable provisions
of the award agreement and this Section 7, upon termination of a participant's
employment with the Company or any Subsidiary or Affiliate for any reason during
the Restricted Period, all shares still subject to restriction will vest or be
forfeited, in accordance with the terms and conditions established by the
Committee at or after grant.
(iv) If and when the Restricted Period
expires without a prior forfeiture of the Restricted Stock subject to such
Restricted Periods, certificates for an appropriate number of unrestricted
shares shall be delivered to the participant promptly.
(d) Minimum Value Provisions. In order to better
ensure that award payments actually reflect the performance of the Company and
service of the participant, the Committee may provide, in its sole discretion,
for a tandem performance-based or other award designed to guarantee a minimum
value, payable in cash or Stock to the recipient of a Restricted Stock award,
subject to such performance, future service deferral and other terms and
conditions as may be specified by the Committee.
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<PAGE> 21
SECTION 8. Deferred Stock
(a) Administration. Deferred Stock may be
awarded either alone, in addition to or in tandem with other awards granted
under the Plan and/or cash awards made outside of the Plan. The Committee shall
determine the eligible persons to whom and the time or times at which Deferred
Stock shall be awarded, the number of shares of Deferred Stock to be awarded to
any person, the duration of period (the "Deferral Period") during which, and the
conditions under which, receipt of the Stock will be deferred, and the other
terms and conditions of the award in addition to those set forth in Section
8(b).
The Committee may condition the grant of Deferred Stock upon
the attainment of specified performance goals or such other factors or criteria
as the Committee shall determine, in its sole discretion.
The provisions of Deferred Stock awards need not be the same
with respect to each recipient.
(b) Terms and Conditions. The shares of Deferred
Stock awarded pursuant to this Section 8 shall be subject to the following terms
and conditions:
(i) Subject to the provisions of this Plan
and the award agreement referred to in Section 8(b)(vi) below, Deferred Stock
awards may not be sold, assigned, transferred, pledged or otherwise encumbered
during the Deferral Period. At the expiration of the Deferral Period (or the
Elective Deferral Period referred to in Section 8(b)(v), where applicable),
share
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<PAGE> 22
certificates shall be delivered to the participant, or his legal representative,
in a number equal to the shares covered by the Deferred Stock award.
(ii) Unless otherwise determined by the
Committee at grant, amounts equal to any dividends declared during the Deferral
Period with respect to the number of shares covered by a Deferred Stock award
shall be paid to the participant currently, or deferred and deemed to be
reinvested in additional Deferred Stock, or otherwise reinvested, all as
determined at or after the time of the award by the Committee, in its sole
discretion.
(iii) Subject to the provision of the award
agreement and this Section 8, upon termination of a participant's employment
with the Company or Subsidiary or Affiliate for any reason during the Deferral
Period for a given award, the Deferred Stock in question will vest or be
forfeited, in accordance with the terms and conditions established by the
Committee at or after grant.
(iv) Based on service, performance and/or
such other factors or criteria as the Committee may determine, the Committee
may, at or after grant, accelerate the vesting of all or any part of any
Deferred Stock award and/or waive the deferral limitations for all or any part
of such award.
(v) A participant may elect to further
defer receipt of an award (or an installment of an award) for a specified period
or until a specified event (the "Elective
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<PAGE> 23
Deferral Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee, all in its sole discretion. Subject to
any exceptions adopted by the Committee, such election must generally be made at
least one year prior to completion of the Deferral Period for such Deferred
Stock award (or such installment).
(vi) Each award shall be confirmed by,
and subject to the terms of, a Deferred Stock agreement executed by the Company
and the participant.
(c) Minimum Value Provisions. In order to better
ensure that award payments actually reflect the performance of the Company and
service of the participant, the Committee may provide, in its sole discretion,
for a tandem performance-based or other award designed to guarantee a minimum
value, payable in cash or Stock to the recipient of a deferred stock award,
subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
SECTION 9. Stock Purchase Rights
(a) Awards and Administration. Subject to Section 3
above, the Committee may grant eligible participants Stock Purchase Rights which
shall enable such participants to purchase Stock (including Deferred Stock and
Restricted Stock):
(i) at its Fair Market Value on the date of
grant;
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<PAGE> 24
(ii) at 50% of such Fair Market Value on
such date;
(iii) at an amount equal to Book Value on
such date; or
(iv) at an amount equal to the par value of
such Stock on such date.
The Committee shall also impose such deferral, forfeiture
and/or other terms and conditions as it shall determine, in its sole discretion,
on such Stock Purchase Rights or the exercise thereof.
The terms of Stock Purchase Rights awards need not be the same
with respect to each participant.
Each Stock Purchase Right award shall be confirmed by, and be
subject to the terms of, a Stock Purchase Rights Agreement.
(b) Exercisability. Stock Purchase Rights shall
generally be exercisable for such period after grant as is determined by the
Committee not to exceed 30 days. However, the Committee may provide, in its sole
discretion, that the Stock Purchase Rights of persons potentially subject to
Section 16(b) of the Exchange Act shall not become exercisable until six months
and one day after the grant date, and shall then be exercisable for ten trading
days at the purchase price specified by the Committee in accordance with Section
9(a).
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<PAGE> 25
SECTION 10. Other Stock-Based Awards
(a) Administration. Other awards of Stock
and other awards that are valued in whole or in part by reference to, or are
otherwise based on, Stock ("Other Stock-Based Awards"), including, without
limitation, performance shares, convertible preferred stock, convertible
debentures, exchangeable securities and Stock awards or options valued by
reference to Book Value or subsidiary performance, may be granted either alone
or in addition to or in tandem with Stock Options, Stock Appreciation Rights,
Restricted Stock, Deferred Stock or Stock Purchase Rights granted under the Plan
and/or cash awards made outside of the Plan.
Subject to the provision of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
awards shall be made, the number of shares of Stock to be awarded pursuant to
such awards, and all other conditions of the awards. The Committee may also
provide for the grant of Stock upon the completion of a specified performance
period.
The provisions of Other Stock-Based Awards need not be the
same with respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards
made pursuant to this Section 10 shall be subject to the following terms and
conditions:
(i) Subject to the provision of the Plan and
the award agreement referred to in Section 10(b)(v) below, shares
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<PAGE> 26
subject to awards made under this Section 10 may not be sold, assigned,
transferred, pledged or otherwise encumbered prior to the date on which the
shares are issued, or, if later, the date on which any applicable restriction,
performance or deferral period lapses.
(ii) Subject to the provisions of the Plan
and the award agreement and unless otherwise determined by the Committee at
grant, the recipient of an award under this Section 10 shall be entitled to
receive, currently or on a deferred basis, interest or dividends or interest or
dividend equivalents with respect to the number of shares covered by the award,
as determined at the time of the award by the Committee, in its sole discretion,
and the Committee may provide that such amounts (if any) shall be deemed to have
been reinvested in additional Stock or otherwise reinvested.
(iii) Any award under this Section 10 and
any Stock covered by any such award shall vest or be forfeited to the extent so
provided in the award agreement, as determined by the Committee, in its sole
discretion.
(iv) In the event of the participant's
retirement, Disability or death, or in cases of special circumstances, the
Committee may, in its sole discretion, waive in whole or in part any or all of
the remaining limitations imposed hereunder (if any) with respect to any or all
of an award under this Section 10.
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<PAGE> 27
(v) Each award under this Section 10 shall
be confirmed by, and subject to the terms of, an agreement or other instrument
by the Company and by the participant.
(vi) Stock (including securities convertible
into Stock) issued on a bonus basis under this Section 10 may be issued for no
cash consideration. Stock (including securities convertible into Stock)
purchased pursuant to a purchase right awarded under this Section 10 shall be
priced at least 50% of the Fair Market Value of the Stock on the date of grant.
SECTION 11. Change in Control Provisions
(a) Impact of Event. In the event of a "Change in
Control" as defined in Section 11(b), unless otherwise decided by the Committee,
the following acceleration and valuation provisions shall apply:
(i) Any Stock Appreciation Rights
(including, without limitation, any Limited Appreciation Rights) outstanding for
at least six months and any Stock Options awarded under the Plan not previously
exercisable and vested shall become fully exercisable and vested.
(ii) The restrictions and deferral
limitations applicable to any Restricted Stock, Deferred Stock, Stock Purchase
Rights and Other Stock-Based Awards, in each case to the extent not already
vested under the Plan, shall lapse and such shares and awards shall be deemed
fully vested.
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<PAGE> 28
(iii) The value of all outstanding Stock
Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock
Purchase Rights and Other Stock-Based Awards, in each case to the extent vested,
shall, unless otherwise determined by the Committee in its sole discretion at or
after grant but prior to any Change in Control, be cashed out on the basis of
the "Change in Control Price" as defined in Section 11(c) as of the date such
Change in Control is determined to have occurred or such other date as the
Committee may determine prior to the Change in Control.
(b) Definition of "Change in Control". For purposes
of Section 11(a), a "Change in Control" means the happening of any of the
following:
(i) When any "person" as defined in Section
3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act but
excluding the Company and any Subsidiary and any employee benefit plan sponsored
or maintained by the Company or any Subsidiary (including any trustee of such
plan acting as trustee), directly or indirectly, becomes the "beneficial owner"
(as defined in Rule 13(d)-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing 20 percent or more of the
combined voting power of the Company's then outstanding securities;
(ii) When, during any period of 24
consecutive months during the existence of the Plan, the
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<PAGE> 29
individuals who, at the beginning of such period, constitute the Board (the
"Incumbent Directors") cease for any reason other than death to constitute at
least a majority thereof, provided, however, that a director who was not a
director at the beginning of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning of such 24-month
period) or by prior operation of this Section 11(b)(ii); or
(iii) The occurrence of a transaction
requiring stockholder approval for the acquisition of the Company by an entity
other than the Company or a Subsidiary through purchase of assets, or by merger,
or otherwise.
(c) Change in Control Price. For purposes of this
Section 11, "Change Control Price" means the highest price per share bid in any
transaction reported on the NASDAQ Stock Market Inc., or paid or offered in any
bona fide transaction related to a Change in Control of the Company at any time
during the 60 day period immediately preceding the occurrence of the Change in
Control, in each case as determined by the Committee except that, in the case of
Incentive Stock Options and Stock Appreciation Rights relating to Incentive
Stock Options, such price shall be based only on transactions reported for the
date on which the optionee exercises such Stock Appreciation Rights
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<PAGE> 30
(or Limited Stock Appreciation Rights) or, where applicable, the date on which a
cashout occurs under Section 11(a)(ii).
SECTION 12. Amendment and Termination
The Board may amend, alter, or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made which would impair the
rights of an optionee or participant under a Stock Option, Stock Appreciation
Right (or Limited Stock Appreciation Right), Restricted or Deferred Stock award,
Stock Purchase Right or Other Stock-Based Award theretofore granted, without the
optionee's or participant's consent, or which, without the approval of the
Company's stockholders, would cause the Plan to no longer comply with Rule 16b-3
under the Exchange Act or any successor rule or other regulatory requirements.
The Committee may amend the terms of any Stock Option or other
award theretofore granted, prospectively or retroactively, but, subject to
Section 3 above, no such amendment shall impair the rights of any holder without
the holder's consent.
Subject to the above provisions, the Board shall have broad
authority to amend the Plan to take into account changes in applicable
securities and tax laws and accounting rules.
SECTION 13. Unfunded Status of Plan
The Plan is intended to constitute an "unfunded" plan
for incentive and deferred compensation. With respect to any
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<PAGE> 31
payments not yet made to a participant or optionee by the Company, nothing
contained herein shall give any such participant or optionee any rights that are
greater than those of a general creditor of the Company. In its sole discretion,
the Committee may authorize the creation of trusts or other arrangements to meet
the obligations created under the Plan to deliver Stock or payments in lieu of
or with respect to awards hereunder, provided, however, that, unless the
Committee otherwise determines with the consent of the affected participant, the
existence of such trusts or other arrangements is consistent with the "unfunded"
status of the Plan.
SECTION 14. General Provisions
(a) The Committee may require each person purchasing
shares pursuant to a Stock Option or other award under the Plan to represent and
to agree with the Company in writing that the optionee or participant is
acquiring the shares without a view to distribution thereof. The certificates
for such shares may include any legend which the Committee deems appropriate to
reflect any restrictions on transfer.
All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Securities and Exchange Commission
any stock exchange upon which the Stock is then listed, and any applicable
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<PAGE> 32
Federal or state securities law, and the Committee may cause a legend or legends
to be put on any such certificates to make appropriate reference to such
restrictions.
(b) Nothing contained in the Plan shall prevent the
Board from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required, and such arrangements may be
either generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon
any employee of the Company or any Subsidiary or Affiliate any right to
continued employment with the Company or a Subsidiary or Affiliate, as the case
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary or Affiliate to terminate the employment of any of its employees at
any time.
(d) No later than the date of which an amount first
becomes included in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations may be settled with Stock, including Stock
that is part of the award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditional on such
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<PAGE> 33
payment or arrangements and the Company and its Subsidiaries or Affiliates
shall, to the extent permitted by law, have the rights to deduct any such taxes
from any payment of any kind otherwise due to the participant.
(e) The actual or deemed reinvestment or dividends or
dividend equivalents in additional Restricted Stock for in Deferred Stock or
other types of Plan awards at the time of any dividend payment shall only be
permissible if sufficient shares of Stock are available under Section 3 for such
reinvestment taking into account then outstanding Stock Options, Stock Purchase
Rights and other Plan awards.
(f) The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Delaware.
SECTION 15. Effective Date of Plan
The Plan shall be effective as of March 23, 1997, subject to
the approval of the Plan by a majority of the votes cast by the holders of the
Company's Common Stock at the next annual shareholders' meeting in 1997. Any
grants made under the Plan prior to such approval shall be effective when made
(unless otherwise specified by the Committee at the time of grant), but shall be
conditioned on, and subject to, such approval of the Plan by such shareholders.
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<PAGE> 1
Exhibit 10.12
================================================================================
$7,000,000
LOAN AGREEMENT
between
Clearwater Fund IV, LLC, as Lender
and
MEHL/Biophile International Corporation, as Borrower
Dated as of August 5, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. Definitions.................................................... 1
SECTION 2. Amount and Terms............................................... 7
2.1 Tranches....................................................... 7
2.2 Cancellation of Demand Note.................................... 7
2.3 Borrowing Notice; Borrowings................................... 8
2.4 Interest....................................................... 8
2.5 Repayment and Prepayment of Loans.............................. 8
2.6 Warrants....................................................... 10
SECTION 3. Conditions Precedent........................................... 10
3.1 Representations and Warranties................................. 10
3.2 Performance; No Default........................................ 10
3.3 Officer's Certificate.......................................... 10
3.4 Borrowing Notice............................................... 11
3.5 Note........................................................... 11
3.6 Security Documents............................................. 11
3.7 Consents, etc.................................................. 11
3.8 Legal Matters.................................................. 11
3.9 Corporate Proceedings and Documents............................ 11
3.10 Opinion of Counsel............................................. 11
3.11 Other Items.................................................... 11
SECTION 4. Representations and Warranties................................. 11
4.1 Organizational Status.......................................... 12
4.2 Organizational Power and Authority, Capital, etc............... 12
4.3 No Violation................................................... 12
4.4 Litigation..................................................... 12
4.5 Use of Proceeds................................................ 12
4.6 Governmental Approvals, etc.................................... 12
4.7 Investment Company Act......................................... 13
4.8 Financial Condition; Financial Statements; Projections......... 13
4.9 Security Interests............................................. 13
4.10 Tax Returns and Payments....................................... 13
4.11 ERISA.......................................................... 13
4.12 Subsidiaries................................................... 14
4.13 Patents, Copyrights, Trademarks, etc........................... 14
4.14 Compliance With Laws, etc...................................... 14
4.15 Properties..................................................... 14
4.16 Collective Bargaining Agreements............................... 14
4.17 Indebtedness Outstanding....................................... 14
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
4.18 Liens.......................................................... 14
4.19 Agreements..................................................... 14
4.20 Bank Accounts.................................................. 15
4.21 Full Disclosure................................................ 15
4.22 SEC Filings.................................................... 15
SECTION 5. Affirmative Covenants.......................................... 15
5.1 Information Covenants.......................................... 15
5.2 Books, Records and Inspections................................. 16
5.3 Maintenance of Property; Licenses; Insurance................... 17
5.4 Payment of Taxes............................................... 17
5.5 Maintain Existence............................................. 18
5.6 Compliance With Statutes, etc.................................. 18
5.7 Performance of Obligations..................................... 18
5.8 Notice of Litigation........................................... 18
5.9 Bank Statements................................................ 18
SECTION 6. Negative Covenants............................................. 18
6.1 Changes in Business............................................ 18
6.2 Liens.......................................................... 18
6.3 Indebtedness................................................... 19
6.4 Advances, Investments and Notes................................ 19
6.5 Modification of Organizational Documents....................... 19
6.6 Dividends, etc................................................. 19
6.7 Disbursements.................................................. 19
6.8 Subsidiaries................................................... 19
6.9 Disposition of Assets.......................................... 19
6.10 ERISA.......................................................... 20
6.11 Mergers and Acquisitions....................................... 20
6.12 Limitations on Issuances of Common Stock....................... 20
SECTION 7. Events of Default.............................................. 20
7.1 Payments....................................................... 20
7.2 Representations, etc........................................... 20
7.3 Covenants...................................................... 20
7.4 Default Under Other Agreements................................. 20
7.5 Bankruptcy, etc. ............................................. 21
7.6 Security Documents............................................. 21
7.7 Judgments...................................................... 21
SECTION 8. Miscellaneous.................................................. 22
8.1 Payment of Expenses, etc....................................... 22
8.2 Right of Set-off............................................... 22
8.3 Notices........................................................ 22
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
8.4 Benefit of Agreement........................................... 23
8.5 No Waiver; Remedies Cumulative................................. 23
8.6 Governing Law; Submission to Jurisdiction; Venue............... 23
8.7 Counterparts................................................... 24
8.8 Headings Descriptive........................................... 24
8.9 Amendment or Waiver............................................ 24
8.10 WAIVER OF JURY TRIAL........................................... 24
8.11 Independence of Covenants...................................... 24
8.12 Entire Agreement............................................... 24
8.13 Execution by Facsimile Transmission............................ 24
</TABLE>
EXHIBITS
Exhibit A - Demand Note
Exhibit B - Form of Cash Collateral Agreement
Exhibit C - Form of Guaranty
Exhibit D - Form of Pledge Agreement
Exhibit E - Form of Security Agreement
Exhibit F - Form of Note
Exhibit G - Form of Warrant
Exhibit H - Form of Warrant
Exhibit I - Form of Warrant
Exhibit J - Form of Warrant
SCHEDULES
Schedule 4.8 - Changes in Financial Position or Operations
Schedule 4.12 - Subsidiaries
Schedule 4.13 - Intellectual Property
Schedule 4.17 - Indebtedness
Schedule 4.20 - Bank Accounts
Schedule 6.2 - Permitted Liens
iii
<PAGE> 5
LOAN AGREEMENT, dated as of August 5, 1997, between
MEHL/Biophile International Corporation, a Delaware corporation (the
"Borrower"), and Clearwater Fund IV, LLC, a Delaware limited liability company
(the "Lender").
WITNESSETH:
WHEREAS, Borrower desires to borrow up to $7,000,000 from
Lender to be used by Borrower in connection with the manufacture and delivery of
laser hair removal systems and for general working capital purposes;
WHEREAS, Borrower has previously borrowed from Lender the
principal amount of One Million Four Hundred Thirty-One Thousand Nine Hundred
Thirty-One and 51/100 Dollars ($1,431,931.51), pursuant to that certain 10%
Demand Promissory Note and Security Agreement, dated July 7, 1997, by and
between Borrower and Lender (the "Demand Note"), a copy of which is attached
hereto as Exhibit A, and the parties now desire to cancel the Demand Note and
have the principal amount thereof as of the date of cancellation together with
all accrued and unpaid interest thereon (the "Demand Note Obligations") be
governed by the terms of this Agreement; and
WHEREAS, Lender is prepared to loan up to $7,000,000
(including an amount equal to the Demand Note Obligations) to Borrower upon the
terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms
shall have the meanings herein specified unless the context otherwise requires.
Defined terms in this Agreement shall include in the singular, the plural, and
in the plural, the singular:
"Affiliate" means, with respect to any Person, any other
Person which, directly or indirectly, controls, or is under common control with,
or is controlled by, such Person. As used in this definition, "control" shall
mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other interests, by contract or otherwise).
"Agreement" means this Loan Agreement, as the same may after
its execution be amended, supplemented or otherwise modified from time to time
in accordance with the terms hereof.
"Bank Accounts" has the meaning provided in Section 4.20.
"Bankruptcy Code" means Chapter 11 U.S.C. Section 101 et seq.
(as now or hereinafter in effect or any successor thereto).
"Borrower" has the meaning ascribed to such term in the
preamble.
<PAGE> 6
"Borrowing Date" means the Business Day specified in each
Borrowing Notice as the date on which Borrower requests Lender to make funds
available under each Loan.
"Borrowing Rate" has the meaning provided in Section 2.4.
"Business Day" means any day excluding Saturday, Sunday and
any day which shall be in the City of New York a legal holiday or a day on which
banking institutions are authorized by law or other governmental actions to
close.
"Capital Lease" of any Person means any lease of or other
agreement conveying the right to use any property (whether real, personal or
mixed) by that Person as lessee or other like user which, in conformity with
GAAP, is, or is required to be, accounted for as a capital lease on the balance
sheet of that Person, together with any renewals of such leases (or entry into
new leases) on substantially similar terms.
"Capitalized Lease Obligations" of any Person means all
obligations under Capital Leases of such Person, in each case taken at the
amount thereof accounted for as liabilities in accordance with GAAP.
"Cash" means money, currency or a credit balance in a deposit
account.
"Cash Collateral Agreement" means the Cash Collateral
Agreement to be executed by Smith Barney Inc., Borrower and Lender substantially
in the form of Exhibit B, as the same may be amended from time to time.
"Cash Equivalents" means (i) securities issued, or directly
and fully guaranteed, or insured by the United States of America or any agency
or instrumentality thereof (provided that the full faith and credit of the
United States of America is pledged in support thereof) having maturities of not
more than three years from the date of acquisition, (ii) marketable direct
obligations issued by any State of the United States of America, or any local
government, or other political subdivision thereof rated (at the time of
acquisition of such security) at least AA by Standard & Poor's Corporation
("S&P") or the equivalent thereof by Moody's Investors Service, Inc.
("Moody's"), having maturities of not more than one year from the date of
acquisition, (iii) U.S. dollar denominated time deposits, certificates of
deposit and bankers' acceptances of any domestic commercial bank of recognized
standing having capital and surplus in excess of $250,000,000 or any bank whose
short-term commercial paper rating (at the time of acquisition of such security)
by S&P is at least A-1 or the equivalent thereof or by Moody's is at least P-1
or the equivalent thereof (any such bank, an "Approved Bank"), in each case with
maturities of not more than six months from the date of acquisition, (iv)
commercial paper and variable or fixed rate notes issued by any Approved Bank or
by the parent company of any Approved Bank and (v) commercial paper and variable
rate notes issued by, or guaranteed by, any industrial or financial company with
a short-term commercial paper rating (at the time of acquisition of such
security) of at least A-1 or the equivalent thereof by S&P or at least P-1 or
the equivalent thereof by Moody's, or guaranteed by any industrial company with
a long-term
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<PAGE> 7
unsecured debt rating (at the time of acquisition of such security) of at least
AA or the equivalent thereof by S&P or at least the equivalent thereof by
Moody's, and in each case maturing within one year after the date of
acquisition.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and the regulations promulgated thereunder.
"Collateral" means all of the Collateral as defined in the
Security Documents.
"Contingent Obligations" means, as to any Person, without
duplication, any obligation of such Person guaranteeing or intended to guarantee
any Indebtedness, leases, dividends or other obligations ("primary obligations")
of any other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
whether or not contingent, (a) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (b) to 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 of the primary obligor, (c) to
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) otherwise to assure or hold
harmless the owner of such primary obligation against loss in respect thereof;
provided, however, that the term Contingent Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the maximum amount that such Person may be obligated to expend
pursuant to the terms of such Contingent Obligation or, if such Contingent
Obligation is not so limited, the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof (assuming such Person is required to perform thereunder) as determined
by such Person in good faith.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Demand Note" has the meaning ascribed to such term in the
recitals hereof.
"Dollar(s)" means lawful money of the United States of
America.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated thereunder.
Section references to ERISA are to ERISA, as in effect at the date of this
Agreement, and any subsequent provisions of ERISA, amendatory thereof,
supplemental thereto or substituted therefor.
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<PAGE> 8
"ERISA Affiliate" means any entity, whether or not
incorporated, which is under common control or would be considered a single
employer with Borrower within the meaning of Section 414(b), (c), (m), (n) or
(o) of the Code and regulations promulgated under those sections or within the
meaning of section 4001(b) of ERISA and regulations promulgated under that
section.
"Event of Default" has the meaning ascribed to such term in
Section 7.
"Financial Statements" has the meaning ascribe to such term in
Section 4.8.
"GAAP" means generally accepted accounting principles in the
United States of America, as in effect from time to time.
"Governmental Authority" means any federal, state, local or
other governmental or administrative body, instrumentality, department or agency
or any court, tribunal, administrative hearing body, arbitration panel,
commission, or other similar dispute-resolving panel or body or any subdivision
thereof.
"Guaranties" means the personal guaranties of the Obligations
issued by Thomas Mehl, Sr. and Martin Kass in favor of Lender, in the form of
Exhibit C, as each may be amended, supplemented or otherwise modified from time
to time.
"Indebtedness" of any Person means, without duplication, (i)
all indebtedness of such Person for borrowed money, (ii) the deferred purchase
price of assets or services which in accordance with GAAP would be shown on the
liability side of the balance sheet of such Person, (iii) the face amount of all
letters of credit issued for the account of such Person and, without
duplication, all drafts drawn thereunder, (iv) all indebtedness of a second
Person secured by any Lien on any property owned by such first Person, whether
or not such indebtedness has been assumed by such first Person, (v) all
Capitalized Lease Obligations of such Person, (vi) all obligations of such
Person to pay a specified purchase price for goods or services whether or not
delivered or accepted, i.e., take-or-pay and similar obligations, and (viii) all
Contingent Obligations of such Person; provided that Indebtedness shall not
include trade payables, accrued expenses, deferred taxes and accrued income
taxes, in each case arising in the ordinary course of business.
"Intellectual Property" has the meaning ascribed to such term
in Section 4.13.
"Inventory" means Borrower's presently owned and hereafter
acquired goods which are held for sale or lease.
"Knowledge" means with respect to Borrower, what the executive
officers of Borrower actually know or should have known given diligent inquiry.
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<PAGE> 9
"Laser Devices" shall mean the CHROMOS 694 lasers currently
marketed by the Company or its Affiliates.
"Lender" has the meaning ascribed to such term in the
preamble.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien, claim, hypothecation, assignment for security or charge of
any kind (including any agreement to give any of the foregoing, any conditional
sale or other title retention agreement or any lease in the nature thereof).
"Loan Documents" means this Agreement, the Security Documents
and the Note.
"Loan" and "Loans" has the meaning ascribed to such term in
Section 2.1.
"Material Adverse Effect" means, (i) any material adverse
effect with respect to the operations, business, properties, assets, nature of
assets, liabilities (contingent or otherwise), financial condition of Borrower,
or (ii) any fact or circumstance as to which, singly or in the aggregate, there
is a reasonable likelihood of (x) a material adverse change described in clause
(i) with respect to Borrower, or (y) the inability of Borrower to perform in any
material respect its Obligations hereunder or under any of the other Loan
Documents or the inability of Lender to enforce in any material respect their
rights purported to be granted hereunder or under any of the other Loan
Documents or the Obligations (including realizing on the Collateral).
"Material Agreement" has the meaning ascribed to such term in
Section 4.18 hereof.
"Maturity Date" has the meaning ascribed to such term in
Section 2.5 hereof.
"Multiemployer Plan" means a "multiemployer plan" as defined
in Section 4001(a)(3) of ERISA with respect to which Borrower or any of its
ERISA Affiliates is or has been required to contribute.
"Note" has the meaning ascribed to such term in Section 2.1.
"Obligations" means all amounts, direct or indirect,
contingent or absolute, of every type or description, and at any time existing,
owing to Lender pursuant to the terms of this Agreement or any other Loan
Document.
"Pension Plan" means any employee benefit pension plan as
defined in Section 3(2) of ERISA (other than a Multiemployer Plan) that is
subject to Title IV of ERISA and that is or has been maintained by or to which
contributions are or have been made by Borrower or any of its ERISA Affiliates.
5
<PAGE> 10
"Permanent Financing" means debt financing obtained by the
Company in an amount sufficient to enable Borrower to repay the Obligations in
full.
"Permitted Liens" has the meaning provided in Section 6.2.
"Person" means any individual, partnership, joint venture,
firm, corporation, limited liability company, association, trust or other
enterprise or any governmental or political subdivision or any agency,
department or instrumentality thereof.
"Placed in Service" means Laser Devices which, since July 15,
1997, have been delivered to, are operational at, and are the subject of an
effective license agreement with, a third party physician, clinic or hospital.
"Pledge Agreements" means the Pledge Agreements to be executed
Thomas Mehl, Sr. and Martin Kass in favor of Lender in the form of Exhibit D, as
the same may be amended from time to time.
"Public Filings" has the meaning ascribe to such term in
Section 4.8.
"Required Documentation" means copies, certified as true and
complete by an executive officer of Borrower, of the license agreement and
delivery receipt relating to each Laser Device Placed in Service, in each case
signed by the recipient of such Laser Devise.
"Security Agreement" means the Security Agreement to be
executed by Borrower in favor of Lender substantially in the form of Exhibit E,
as the same may be amended, supplemented or otherwise modified from time to
time.
"Security Documents" means the Security Agreement, the Pledge
Agreements, the Cash Collateral Agreement and the Guaranties, and any other
agreements or instruments utilized to pledge as Collateral for the Obligations
any property or assets of whatever kind or nature.
"Subsidiary" of any Person means and includes (i) any
corporation more than 50% of whose stock of any class or classes having by the
terms thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any 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 owned by such Person, directly
or indirectly through Subsidiaries, and (ii) any partnership, association, joint
venture or other entity in which such Person, directly or indirectly through
Subsidiaries, has more than a 50% equity interest at the time.
"Taxes" has the meaning ascribed to such term in Section 2.11.
"Tranche 1 Loan" shall have the meaning ascribed to such term
in Section 2.1(a).
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<PAGE> 11
"Tranche 2 Loan" shall have the meaning ascribed to such term
in Section 2.1(b).
"UCC" means the Uniform Commercial Code as in effect in any
applicable jurisdiction.
SECTION 2. Amount and Terms.
2.1 Tranches. Subject to and upon the terms and conditions set
forth herein, Lender agrees to lend to Borrower the following amounts at the
following times:
(a) an amount equal to the sum of (x) four million Dollars
($4,000,000) minus (y) the amount of the Demand Note Obligations,
immediately upon execution of the Loan Documents (the "Tranche 1
Loan"); and
(b) three million ($3,000,000) Dollars, upon request of
Borrower made in accordance with Section 2.3, at any time before the
Maturity Date after fifty (50) Laser Devices have been Placed in
Service (the "Tranche 2 Loan").
The Tranche 1 Loan and Tranche 2 Loan are each referred to herein
individually as a "Loan" and collectively as the "Loans." Borrower shall use the
proceeds of the Loans to pay for expenses incurred in connection with Placing in
Service Laser Devices and such other expenses of Borrower and its Affiliates as
shall have been approved in advance by Lender. The aggregate principal balance
of the Loans shall be evidenced by a single promissory note (the "Note") made by
Borrower and payable to Lender in the form of Exhibit F hereto. Lender shall
endorse on the schedule attached to the Note (or any continuation thereof) the
date and amount of each Loan and the date and amount of all payments on account
of each Loan. All entries shall be presumed correct, absent manifest error.
Notwithstanding the foregoing, the failure by Lender to make such entries shall
not affect the rights of Lender or the obligations of Borrower hereunder or
thereunder.
2.2 Cancellation of Demand Note. Concurrently with execution
and delivery of the Note and other Loan Documents, Lender shall cancel the
Demand Note and return same to Borrower and the Demand Note shall thereupon be
of no further force and effect. An amount equal to the Demand Note Obligations
shall, upon cancellation of the Demand Note, continue to be outstanding under
the Tranche 1 Loan and be deemed to constitute part thereof, subject to all of
the terms and conditions of this Agreement.
2.3 Borrowing Notice; Borrowings. (a) To request the Tranche 2
Loan, Borrower shall deliver to Lender written notice of such request, which
notice shall be irrevocable and shall be effective only if received by Lender
not later than 1:00 P.M. Eastern Standard time one Business Day prior to the
requested Borrowing Date. Such notice of borrowing shall state the principal
amount to be borrowed and the date Borrower requests that such Loan be made, and
shall be accompanied by Required Documentation evidencing that the requisite
number of Laser Devices have been Placed in Service.
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<PAGE> 12
(b) Lender shall, on the date hereof, deposit the amount of
the Tranche 1 Loan, and following receipt of an acceptable notice of borrowing,
on the applicable Borrowing Date, deposit the amount of the Tranche 2 Loan, by
wire transfer of immediately available funds, to Borrower's account with [Cash
Collateral Account to be identified] or to such other account or Person for the
account of Borrower, as Borrower shall request and Lender shall approve in its
sole and absolute discretion.
2.4 Interest. (a) Borrower shall pay interest on the
outstanding principal amount of each Loan at the rate of fifteen (15%) percent
per annum (the "Borrowing Rate"), in arrears on the first Business Day of each
month commencing with September 1, 1997. Notwithstanding the foregoing, Borrower
shall, on demand, pay interest on each Loan and any portion thereof, and on any
other amount payable by Borrower hereunder (to the extent permitted by law),
which shall not be paid in full when due (whether at stated maturity, by
acceleration or otherwise) for the period commencing on the due date thereof
until the same are paid in full at a rate equal to the Borrowing Rate plus two
(2%) percent per annum. Interest payable pursuant to this Agreement shall be
calculated on the basis of actual days elapsed over a 365 day year.
(b) Anything in this Agreement or the Note to the contrary
notwithstanding, the obligation of Borrower to make payments of interest shall
be subject to the limitation that payments of interest shall not be required to
be made to Lender to the extent that Lender's receipt thereof would not be
permissible under the law or laws applicable to Lender limiting rates of
interest which may be charged or collected by Lender. Any such payments of
interest which are not made by Borrower as a result of the limitation referred
to in the preceding sentence shall be made by Borrower to Lender on the earliest
interest payment date or dates on which the receipt thereof would be permissible
under the laws applicable to Lender limiting rates of interest which may be
charged or collected by Lender. Such deferred interest shall not bear interest.
2.5 Repayment and Prepayment of Loans. (a) Subject to
mandatory prepayment of the Loans as provided herein, the outstanding principal
amount of each Loan shall be repaid in full, together with all accrued and
unpaid interest thereon, on January 15, 1998 (the "Maturity Date"). Borrower
shall, at any time, and from time to time, be entitled to prepay any portion of
the principal amount of the Loans, without premium or penalty, provided, that
(i) all such prepayments shall be made together with accrued interest through
the date of prepayment on the principal amount being prepaid and (ii) the Lender
shall have received at least one Business Days' prior written notice of such
prepayment which notice states the proposed date of prepayment and the amount of
principal and interest being prepaid. All principal and interest payable by
Borrower pursuant to this Agreement shall be paid in Dollars to an account
specified in writing by Lender from time to time no later than 1:00 p.m. on the
date specified for payment.
(b) Borrower shall prepay (without premium or penalty), and
there shall immediately become due and payable, the outstanding principal amount
of each Loan and all accrued and unpaid interest thereon (and any fees, costs
and expenses payable pursuant to any
8
<PAGE> 13
of the Loan Documents) concurrently with the receipt of the proceeds of a
Permanent Financing. Borrower shall deliver written notice of any Permanent
Financing to Lender at least one Business Day prior to the closing thereof.
(c) All payments received by Lender from Borrower shall be
applied first, to pay all fees, costs and expenses of Lender then due and
payable under the Loan Documents, second, to pay accrued and unpaid interest on
each Loan and third, to repay the outstanding principal balance of the Loans.
(d) All payments by Borrower under this Agreement or under any
other Loan Document shall be made without set-off or counterclaim and in such
amounts as may be necessary in order that all such payments (after deduction or
withholding for or on account of any present or future taxes, levies, imposts,
duties or other charges of whatsoever nature imposed by any government or any
political subdivision or taxing authority thereof, other than any tax on or
measured by the income of Lender pursuant to the income tax laws of the United
States or of any other jurisdiction (collectively, "Taxes")) shall not be less
than the amounts otherwise specified to be paid under this Agreement and/or any
other Loan Document. A certificate as to the calculation of any additional
amounts payable to Lender under this Section 2.5(d) submitted to Borrower by
Lender shall, absent manifest error, be final, conclusive and binding for all
purposes upon all parties hereto. With respect to each deduction or withholding
for or on account of any Taxes, Borrower shall promptly furnish to Lender such
certificates, receipts and other documents as may be required (in the reasonable
judgment of Lender) to establish any tax credit to which Lender may be entitled.
(e) Without prejudice to the provisions of paragraph (d) of
this Section 2.5, if Borrower is required by law to make any payment on account
of Taxes on or in relation to any sum received or receivable under this
Agreement and/or the other Loan Documents by Lender or any liability for Taxes
in respect of any such payment is imposed, levied or assessed against Lender,
Borrower will promptly indemnify Lender against such Tax payment or liability,
together with any interest, penalties and reasonable expenses (including counsel
fees and expenses) payable or incurred in connection therewith, including any
tax arising by virtue of payments under this Section 2.5(e), computed in a
manner consistent with paragraph (d) of this Section 2.5. A certificate by
Lender as to the calculation and amount of such payments shall, absent manifest
error, be final, conclusive and binding upon all parties hereto for all
purposes.
2.6 Warrants. As additional consideration hereunder, Borrower
shall issue each of the following common stock purchase warrants to Lender at
the following times:
(a) concurrently with execution hereof, a common stock
purchase warrant in the form attached hereto as Exhibit G;
(b) on the Borrowing Date of the Tranche 2 Loan, a common
stock purchase warrant in the form attached hereto as Exhibit H;
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<PAGE> 14
(c) on October 2, 1997, a common stock purchase warrant in the
form attached hereto as Exhibit I, unless the Obligations shall have
been paid in full on or prior to the close of business on October 1,
1997; and
(d) on December 2, 1997, a common stock purchase warrant in
the form attached hereto as Exhibit J, unless the Obligations shall
have been paid in full on or prior to the close of business on December
1, 1997.
SECTION 3. Conditions Precedent. The obligation of Lender to
make each Loan (unless otherwise specified) is subject to the satisfaction of
each of the following conditions precedent:
3.1 Representations and Warranties. The representations and
warranties of Borrower made in this Agreement and the other Loan Documents, and
each of the representations and warranties of Borrower or any officer of
Borrower contained in any certificate, document or financial or other statement
furnished at any time under or in connection with this Agreement, shall be true
and correct when made and on the Borrowing Date of each Loan (unless such
representations and warranties expressly relate to an earlier date).
3.2 Performance; No Default. Borrower shall have performed and
complied with all agreements and conditions contained in the Loan Documents
required to be performed or complied with by it and after giving effect to each
Loan (and the application of the proceeds thereof as contemplated by this
Agreement) no Default or Event of Default shall have occurred and be continuing.
3.3 Officer's Certificate. Lender shall have received
certificates executed by the Chief Executive Officer of Borrower stating that
the conditions set forth in Sections 3.1 and 3.2 have been satisfied.
3.4 Borrowing Notice. Lender shall have received a notice of
borrowing relating to such Loan in accordance with Section 2.3(a).
3.5 Note. As of the Borrowing Date of the Tranche 2 Loan, the
Note shall be in full force and effect and no challenge to the validity or
enforceability thereof shall have been threatened or initiated.
3.6 Security Documents. Each of the Security Documents shall
be in full force and effect and grant, create or perfect the Liens, rights,
powers, priorities, remedies and benefits contemplated therein, no default shall
exist thereunder and no challenge to the validity or enforceability thereof
shall have been threatened or initiated.
3.7 Consents, etc. All material Governmental Authority and
third party approvals and consents, if any, in connection with the transactions
contemplated by the Loan Documents shall have been obtained and remain in
effect, and all applicable waiting periods shall
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<PAGE> 15
have expired without any action being taken by any competent authority, and
evidence thereof shall be delivered to Lender. There shall not exist any
judgment, order, injunction or other restraint issued or filed with respect to
the making of each Loan.
3.8 Legal Matters. All legal matters incident to the making of
each Loan shall be satisfactory to counsel to Lender.
3.9 Corporate Proceedings and Documents. With respect to the
Tranche 1 Loan, Lender shall have received a certificate executed by the
Secretary of Borrower, certifying as to evidence of all corporate action taken
by Borrower to authorize the borrowing of each Loan and the execution, delivery
and performance of each of the Loan Documents.
3.10 Opinion of Counsel. Counsel to Borrower shall have
delivered its legal opinion, in form and substance satisfactory to Lender's
counsel, on such matters as shall be requested by Lenders counsel.
3.11 Other Items. Borrower shall provide such other
certificates, approvals, documents, opinions and agreements as Lender shall
reasonably request.
All of the certificates and documents referred to in this Section 3 shall be
satisfactory in form and substance to Lender.
SECTION 4. Representations and Warranties. In order to induce
Lender to enter into this Agreement and make each Loan provided for herein,
Borrower makes the following representations and warranties to Lender, all of
which shall survive the execution and delivery of this Agreement and the making
of each Loan.
4.1 Organizational Status. Borrower (i) is a duly organized
and validly existing corporation under the laws of the State of Delaware and has
the power and authority to own its property and assets and to transact the
business in which it is engaged and presently proposes to engage and (ii) is in
good standing in its jurisdiction of organization and is duly qualified or
authorized to do business and is in good standing in all jurisdictions where it
is required to be so qualified or authorized except where the failure to be so
qualified or authorized would not have a Material Adverse Effect.
4.2 Organizational Power and Authority, Capital, etc. Borrower
has the requisite power and authority to execute, deliver and carry out the
terms and provisions of the Loan Documents and has taken all necessary action to
authorize the execution, delivery and performance of the Loan Documents. This
Agreement constitutes, and each other Loan Document (when executed and delivered
by Borrower) will constitute, the legal, valid and binding obligation of
Borrower enforceable against Borrower in accordance with its terms.
4.3 No Violation. Neither the execution, delivery and
performance by Borrower of any of the Loan Documents, nor compliance with the
terms and provisions thereof, nor the
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<PAGE> 16
consummation of the transactions contemplated herein or therein (i) will
contravene any applicable provision of any law, statute, rule, regulation,
order, writ, injunction or decree of any court or Governmental Authority, (ii)
will conflict or be inconsistent with or result in any breach of any of the
terms, covenants, conditions or provisions of, or constitute a default under, or
result in the creation or imposition of (or the obligation to create or impose)
any Lien upon any of the property or assets of Borrower (or the Liens created by
the Security Documents) pursuant to the terms of any indenture, mortgage, deed
of trust, agreement or other instrument to which Borrower is a party or by which
the property or assets are bound or to which they may be subject, or (iii) will
violate any provision of the bylaws or the certificate of incorporation of
Borrower.
4.4 Litigation. Other than as set forth in the Public Filings
(as defined below), there are no actions, judgments, suits or proceedings
pending or, to Borrower's Knowledge, threatened as to which there is a
reasonable possibility of a Material Adverse Effect.
4.5 Use of Proceeds. The use of the proceeds of each Loan will
not violate or be inconsistent with the provisions of Regulation G, T, U or X of
the Board of Governors of the Federal Reserve System.
4.6 Governmental Approvals, etc. No order, consent, approval,
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, any third party or any Governmental Authority (other than
those orders, consents, approvals, licenses, authorizations or validations which
have previously been obtained and except for filings to perfect security
interests granted pursuant to the Security Documents), is required to authorize
or is required in connection with (i) the execution, delivery and performance of
any Loan Document or the transactions contemplated therein or (ii) the legality,
validity, binding effect or enforceability of any Loan Document.
4.7 Investment Company Act. Borrower is not, and after giving
effect to the transactions contemplated hereby will not be, an "investment
company" or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
4.8 Financial Condition; Financial Statements; Projections.
The financial statements (the "Financial Statements") included in Borrower's
Annual Report on Form 10-KSB for the fiscal year ended May 31, 1996 and
Borrower's Quarterly Report on Form 10-QSB for the nine months ended February
28, 1997 (the "Public Filings") have been prepared in accordance with GAAP,
applied on a consistent basis, during the respective periods, except as therein
noted. The Financial Statements present fairly the financial position of
Borrower as of such dates and the results of operations and changes in cash
flows and shareholders' equity for such periods. Borrower does not have any
material obligation or liability, individually or in the aggregate, of the
nature required to be disclosed in financial statements prepared in accordance
with GAAP that is not disclosed in the Financial Statements. Other than as set
forth on Schedule
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<PAGE> 17
4.8, subsequent to February 28, 1997, there has been no change in the financial
position or operations of Borrower which could reasonably be expected to have a
Material Adverse Effect.
4.9 Security Interests. The Security Documents will create, in
favor of Lender, as security for the Obligations purported to be secured
thereby, a valid and enforceable first priority Lien upon all of the Collateral,
superior to and prior to the rights of all third persons and subject to no other
Liens except as provided in Section 6.2. No filings or recordings are required
in order to perfect the security interests created under any Security Document
except for filings or recordings required provided for in each such Security
Document.
4.10 Tax Returns and Payments. Borrower has filed all tax
returns required to be filed by it. Borrower has paid all federal, state, local
and foreign income taxes (including, without limitation, franchise taxes based
upon income) which have become due. Borrower knows of no proposed tax assessment
against it that could reasonably be expected to have a Material Adverse Effect.
4.11 ERISA. (a) Borrower and each of its ERISA Affiliates, if
any, are in compliance in all material respects with all applicable provisions
of ERISA and the regulations and published interpretations thereunder with
respect to all employee benefit plans. Neither Borrower nor any of its ERISA
Affiliates, if any, maintains, contributes to or is obligated to contribute to,
or during the last five years has maintained, contributed to or was obligated to
contribute to, any Pension Plan or Multiemployer Plan.
(b) The execution, performance and delivery of the Loan
Documents by any party thereto will not involve any prohibited transaction
within the meaning of Section 406 of ERISA or Section 4975 of the Code for which
an exemption therefrom is not available.
4.12 Subsidiaries. Other than as set forth on Schedule 4.12,
Borrower has no Subsidiaries and is not a partner in any partnership.
4.13 Patents, Copyrights, Trademarks, etc. Schedule 4.13 sets
forth all patents, copyrights, trademarks and service marks owned, possessed or
licensed by Borrower. Borrower owns or possesses adequate licenses or other
rights to use all patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, copyrights,
trade secrets and know-how (collectively, the "Intellectual Property"), that are
necessary for the operation of its business. No claim is pending, or to
Borrower's Knowledge threatened, to the effect that Borrower infringes upon or
conflicts with the asserted rights of any other person under any Intellectual
Property, which, if adversely determined, would have a Material Adverse Effect.
Except as disclosed in the Public Filings, no claim is pending, or to Borrower's
Knowledge threatened, to the effect that any such Intellectual Property owned or
licensed by Borrower or which Borrower otherwise has the right to use is invalid
or unenforceable by Borrower, which, if adversely determined, would have a
Material Adverse Effect.
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4.14 Compliance With Laws, etc. Borrower is in compliance with
all material laws and regulations of all Governmental Authorities, the violation
of which would have a Material Adverse Effect.
4.15 Properties. Borrower does not own any Real Property.
Borrower owns or has valid leasehold interests in all of its properties and
assets, free and clear of all Liens except for Permitted Liens. Borrower holds
all material licenses, permits, leases, certificates of occupancy or operation
and similar certificates and clearances of municipal and other authorities
necessary to own and operate its properties.
4.16 Collective Bargaining Agreements. There are not currently
any collective bargaining or similar agreements applicable to Borrower.
4.17 Indebtedness Outstanding. Schedule 4.17 sets forth all
Indebtedness of Borrower for borrowed money as of the date hereof.
4.18 Liens. There are no Liens affecting any of Borrower's
assets or properties, including the Collateral, other than Permitted Liens.
4.19 Agreements. Borrower has performed all obligations
required to be performed by it under each material agreement to which it is a
party or by which it or its assets or properties may be bound (the "Material
Agreements") and no event of default has occurred thereunder which would entitle
the other party thereto to terminate such Material Agreement or accelerate
Borrower's obligations thereunder, and no event has occurred which, with the
lapse of time or the giving of notice or both, would constitute an event of
default by Borrower thereunder, or to the Knowledge of Borrower, by any other
party to any Material Agreement.
4.20 Bank Accounts. Schedule 4.20 attached hereto lists each
bank account maintained by Borrower and its Subsidiaries (the "Bank Accounts").
4.21 Full Disclosure. No representation or warranty contained
herein or any exhibit hereto nor any other certificate, statement or opinion,
made or furnished in writing to Lender by or on behalf of Borrower in connection
with this Agreement or the transactions contemplated herein, contains (in each
case, as of its date) any untrue statement of a material fact, or omits to state
a material fact necessary in order to make the statements contained therein or
herein not misleading.
4.22 SEC Filings. Borrower's Public Filings do not contain any
untrue statement of a material fact, or omit to state a material fact necessary
in order to make the statements contained therein or herein not misleading.
SECTION 5. Affirmative Covenants. Borrower covenants and
agrees that until payment in full of the Obligations:
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5.1 Information Covenants. Borrower will furnish or cause to
be furnished to Lender:
(a) As soon as available after the close of each monthly
accounting period, the balance sheet of Borrower as at the end of such
monthly period and the related statements of operations, of
shareholders' equity and of cash flows for such monthly period and for
the elapsed portion of the fiscal year ended with the last day of such
monthly period, each such statement to be certified by an appropriate
officer of Borrower, which certificate shall state that such statements
present fairly the balance sheet and related income, equity interests
and cash flows of Borrower as of the dates and for the periods
indicated, in conformity with GAAP applied on a basis consistent with
prior years (except for such changes with which the independent
certified accountants concur) and in each case setting forth
comparative figures for the fiscal year budget, subject to normal
year-end audit adjustments.
(b) As soon as available, a budget of Borrower in reasonable
detail for each month of its fiscal year, as customarily prepared by
management for its internal use, setting forth, with appropriate
discussion, the principal assumptions upon which such budgets are
based. Together with each delivery of financial statements pursuant to
Section 5.1(a), a comparison of the current year to date financial
results against the budgets required to be submitted pursuant to this
Section 5.1(b) shall be presented.
(c) At the time of the delivery of the financial statements
provided for in Section 5.1(a), a certificate of an appropriate officer
of each of Borrower to the effect that no Default or Event of Default
exists, or, if any Default or Event of Default does exist, specifying
the nature and extent thereof;
(d) Promptly upon receipt thereof, a copy of each "management
letter" submitted to Borrower by its independent accountants in
connection with any compilation, review or audit made by them of the
books of Borrower.
(e) Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent or
made available generally by Borrower to its securityholders of all
regular and periodic reports and all registration statements and
prospectuses, if any, filed by Borrower with any securities exchange or
with the United States Securities and Exchange Commission and of all
press releases and other statements made available generally by
Borrower to the public.
(f) Prompt written notice (x) of any condition or event which
constitutes a Default or Event of Default, (y) that any holder of any
note or other evidence of Indebtedness of Borrower has given any notice
to Borrower or taken any other action with respect to a claimed default
or event or condition of the type referred to in Section 7.4, or (z) of
any event which could reasonably be expected to have a Material Adverse
Effect.
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(g) Prompt written notice of the institution of, or written
threat of, any action, suit, proceeding, governmental investigation or
arbitration against or affecting Borrower or any property of any of
Borrower not previously disclosed to Lender, which action, suit,
proceeding, governmental investigation or arbitration which seeks (or
in the case of multiple actions, suits, proceedings, governmental
investigations or arbitrations arising out of the same general
allegations or circumstances which seek) recovery from Borrower
aggregating $100,000 or more. In addition to the requirements set forth
in the previous sentence, Borrower upon request shall promptly give
notice of the status of any action, suit, proceeding, governmental
investigation or arbitration covered by a report delivered to Lender
pursuant to this Section 5.1(g) and provide such other information as
may be reasonably available to it (exclusive of privileged documents)
to enable Lender and its counsel to evaluate such matters.
(h) On demand, such other information that Lender shall
reasonably request.
5.2 Books, Records and Inspections. Borrower will keep true
books of records and accounts in which full and correct entries will be made of
all of its business transactions and will reflect in its financial statements
adequate accruals and appropriations to reserves, all in accordance with GAAP.
Borrower will permit officers and designated representatives of Lender to visit
and inspect any of the properties or assets of Borrower in whomsoever
possession, and to examine the books of account of Borrower (and to make copies
thereof at Borrower's expense) and discuss the affairs, finances and accounts of
Borrower with, and be advised as to the same by, appropriate officers of
Borrower, all at such reasonable times and intervals and to such reasonable
extent as Lender may reasonably request.
5.3 Maintenance of Property; Licenses; Insurance.
(a) Borrower will exercise commercially reasonable efforts to
maintain or cause to be maintained in good repair, working order and condition
(subject to normal wear and tear) all properties used in its businesses and from
time to time will make or cause to be made all appropriate repairs, renewals and
replacements thereof.
(b) Borrower will maintain in full force and effect all of its
rights, franchises, licenses and permits and other rights in or to use any
licenses, patents, processes, trademarks, trade names or copyrights owned or
possessed by it, except where such failure to keep in full force and effect such
rights, franchises, licenses or permits could not reasonably be expected to have
a Material Adverse Effect.
(c) Borrower will maintain or cause to be maintained, with
financially sound and reputable insurers, insurance with respect to their
properties and business against loss or damage of the kinds customarily insured
against by Persons of established reputation engaged in the same or similar
businesses and similarly situated, of such types and in such amounts as are
customarily carried under similar circumstances by such other Persons to the
extent that such types and such amounts of insurance are available at
commercially reasonable rates. Borrower
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will furnish to Lender, upon reasonable request, information as to the insurance
carried, and will not cancel, without replacement, any such insurance without
the consent of Lender, which consent shall not be unreasonably withheld.
5.4 Payment of Taxes. Borrower will pay and discharge all
taxes, assessments and governmental charges or levies imposed upon it or upon
their income or profits, or upon any properties belonging to it, prior to the
date on which material penalties attach thereto, and Borrower will promptly pay
and discharge all other taxes, assessments and governmental charges or levies
imposed upon each of them or upon their income or profits, or upon any
properties belonging to it, and all lawful claims which, if unpaid, might become
a Lien or charge upon any properties of Borrower or cause a failure or
forfeiture of title thereto, prior to the date on which material penalties
attach thereto; provided that Borrower shall not be required to pay any such
tax, assessment, charge, levy or claim that is being contested in good faith and
by proper proceedings promptly instituted and diligently conducted, which
proceedings have the effect of preventing the forfeiture or sale of the property
or asset that may become subject to such Lien, if it has maintained adequate
reserves with respect thereto in accordance with and to the extent required
under GAAP.
5.5 Maintain Existence. Borrower will do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence rights and authority.
5.6 Compliance With Statutes, etc. Borrower will comply with
all applicable statutes, regulations and orders of, and all applicable
restrictions imposed by, all Governmental Authorities, the non compliance of
which would have a Material Adverse Effect.
5.7 Performance of Obligations. Borrower will perform in all
material respects all of their obligations under the terms of each Material
Agreement, except where such nonperformance would not reasonably be expected to
have a Material Adverse Effect.
5.8 Notice of Litigation. Borrower will promptly notify Lender
if it receives: (i) any notice of any violation or administrative or judicial
complaint or order having been filed or about to be filed against it, including
without limitation, all complaints or orders alleging violations of any law
material to its business, (ii) any notice from any Governmental Authority or any
other Person alleging that it is or may be subject to any liability under any
law material to its business; and promptly upon receipt thereof, provide Lender
with a copy of such notice together with a statement of the action it has or
intends to take with respect thereto.
5.9 Bank Statements. Borrower shall cause to be delivered to
Lender copies of all statements and reports relating to each Bank Account, at
such time as such statements and reports become available to Borrower.
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SECTION 6. Negative Covenants. Borrower covenants and agrees
that while each Loan is outstanding, until each Note is paid in full, and until
full and complete performance of the Obligations:
6.1 Changes in Business. Borrower will not engage in any
business other than business of Borrower currently conducted.
6.2 Liens. Borrower will not directly or indirectly create,
incur, assume or permit or suffer to exist any Lien upon or with respect to any
item constituting Collateral, whether now owned or hereafter acquired, or sell
any such Collateral subject to an understanding or agreement, contingent or
otherwise, to repurchase such Collateral or assign any right to receive income,
or file or permit the filing of any financing statement under the UCC or any
other similar notice of Lien under any similar recording or notice statute,
except for (i) Liens in favor of Lender, (ii) Liens expressly permitted by any
Security Document, and (iii) Liens set forth on Schedule 6.2 to this Agreement,
which are herein collectively referred to as "Permitted Liens."
6.3 Indebtedness. Borrower will not contract, create, incur,
assume or suffer to exist any Indebtedness, except the Indebtedness incurred or
otherwise contemplated by this Agreement.
6.4 Advances, Investments and Notes. Borrower will not lend
money or credit or make advances to any Person, or purchase or acquire any
stock, obligations or securities of, or any other interest in, or make any
capital contribution to any Person, except:
(a) investments in Cash and Cash Equivalents;
(b) receivables owing to Borrower and advances to customers
and suppliers, in each case if created, acquired or made in the ordinary course
of business and payable or dischargeable in accordance with customary trade
terms; and
(c) investments (including debt obligations) received in
connection with the bankruptcy or reorganization of suppliers and customers and
in settlement of delinquent obligations of, and other disputes with, customers
and suppliers arising in the ordinary course of business.
6.5 Modification of Organizational Documents. Borrower will
not amend, modify or change any of its organizational documents including,
without limitation, its certificate of incorporation, or any agreement entered
into by Borrower with respect to its capital stock or enter into any new
agreement with respect to its capital stock, the result of which is reasonably
likely to be adverse to the interests of Lender.
6.6 Dividends, etc. Borrower will not declare or pay or
authorize any dividend, distribution, payment or delivery of property or cash to
its stockholders as such, or redeem,
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retire, purchase or otherwise acquire, directly or indirectly, for any
consideration, any of the capital stock or other equity interests of Borrower
now or hereafter outstanding (or any warrants or options in respect of such
equity interests), or set aside any funds for any of the foregoing purposes.
6.7 Disbursements. Borrower shall not cause any funds in any
Bank Account to be disbursed without the prior written consent of Lender.
6.8 Subsidiaries. Borrower shall not form, acquire or permit
any Person to become its Subsidiary.
6.9 Disposition of Assets. Borrower will not engage in any
sale, transfer, assignment, lease or other disposition of any of its assets to
any Person, except that Borrower may sell, assign, transfer, convey, or
otherwise dispose of or lease all or any part of its Inventory, acquired and
disposed of in the ordinary course of business.
6.10 ERISA. Borrower will not adopt, or become obligated to
contribute to, or allow any of its ERISA Affiliates to adopt, maintain, or
contribute to, a Pension Plan, and Borrower will not become obligated to
contribute to, or allow any of its ERISA affiliates to become obligated to
contribute to, any Multiemployer Plan.
6.11 Mergers and Acquisitions. Borrower will not acquire any
Person (including through the purchase of all of the capital stock or other
ownership interests of such Person or through merger or consolidation or
acquisition of all or substantially all of the assets of such Person) or merge
with any other Person.
6.12 Limitations on Issuances of Common Stock. Borrower will
not, nor permit any Subsidiary to, issue, sell or otherwise dispose of any
shares of any of its capital stock, any option rights thereto or any securities
convertible into capital stock of Borrower or any Subsidiary to any vendor or
other third party provider of goods or services to the Company or any
Subsidiary.
SECTION 7. Events of Default. Each of the following upon its
occurrence and during its continuance shall constitute an event of default
("Event of Default"):
7.1 Payments. Borrower shall fail to pay when due any
principal of, or interest on, the Loans or any fee payable under this Agreement
or any of the other Loan Documents and such failure shall continue unremedied
for five or more Business Days.
7.2 Representations, etc. Any representation, warranty or
statement made or deemed made by Borrower herein, or in any other Loan Document,
or in any statement or certificate delivered or required to be delivered
pursuant hereto or thereto shall prove to be untrue in any material respect on
the date as of which made or deemed made.
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7.3 Covenants. Borrower shall (a) default in the due
performance or observance by it of any term, covenant or agreement contained in
Section 6, or (b) default in the due performance or observance by it of any
other term, covenant or agreement contained in this Agreement or any Loan
Document and such default shall continue unremedied for a period of at least
fifteen days after the date of such default.
7.4 Default Under Other Agreements. (a) Borrower shall (i)
default in any payment with respect to any Indebtedness (other than the
Obligations) in excess of $50,000 beyond the period of grace, if any, provided
in the instrument or agreement under which such Indebtedness was created or (ii)
default in the observance or performance of any agreement or condition relating
to any such Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause, or to
permit the holder or holders of such Indebtedness (or a trustee or agent on
behalf of such holder or holders) to cause, any such Indebtedness to become due
prior to its stated maturity, or (b) any such Indebtedness of Borrower shall be
declared to be due and payable, or required to be prepaid other than by a
regularly scheduled required prepayment, prior to the stated maturity thereof.
7.5 Bankruptcy, etc. Borrower shall commence a voluntary case
concerning itself under the Bankruptcy Code; or an involuntary case is commenced
against Borrower and the petition is not controverted within ten days, or is not
dismissed or stayed within sixty days, after commencement of the case; or a
custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge
of, all or substantially all of the property of Borrower; or Borrower commences
any other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to Borrower; or there
is commenced against Borrower any such proceeding which remains undismissed and
unstayed for a period of sixty days; or Borrower is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or Borrower suffers any appointment of any custodian or
the like for it or any substantial part of its property to continue undischarged
or unstayed for a period of sixty days; or Borrower makes a general assignment
for the benefit of creditors; or any corporate action is authorized by Borrower
for the purpose of effecting any of the foregoing.
7.6 Security Documents. Any Security Document shall cease to
be in full force and effect, or shall cease to give Lender the Liens, rights,
powers and privileges purported to be created thereby, in favor of Lender,
superior to and prior to the rights of all third Persons and subject to no Liens
other than Liens expressly permitted by this Agreement and the applicable
Security Document.
7.7 Judgments. One or more judgments or decrees shall be
entered against Borrower involving a liability of $100,000 or more in the case
of any one such judgment or decree and $100,000 or more in the aggregate for all
such judgments and decrees (in either case in excess of the amount covered by
insurance as to which the insurance company has acknowledged coverage) and (i)
any such judgments or decrees shall not have been vacated,
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<PAGE> 25
discharged, bonded or enforcement thereof stayed pending appeal within sixty
days from the entry thereof or (ii) any enforcement proceeding therefor shall
have been commenced.
Then, and in any such event, and at any time thereafter, if
any Event of Default shall then be continuing, Lender shall, by written notice
to Borrower, take any or all of the following actions, without prejudice to the
rights of Lender, to enforce its claims against Borrower; provided, however,
that, if an Event of Default specified in Section 7.5 shall occur, the result
which would occur upon the giving of written notice by Lender as specified in
clauses (i) and (ii) below shall occur automatically without the giving of any
such notice): (i) terminate the availability of any Loan not theretofore made to
Borrower and/or accelerate the maturity date of each Loan outstanding and
declare the principal of and accrued interest in respect of each such Loan, and
all other Obligations owing hereunder and under any Loan Document, to be
immediately due and payable, whereupon the same shall become, forthwith due and
payable without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by Borrower, and/or (ii) enforce any or all of the
remedies created pursuant to the Security Documents.
SECTION 8. Miscellaneous.
8.1 Payment of Expenses, etc. Borrower agrees to: (i) pay all
reasonable out-of-pocket costs and expenses of Lender (including, without
limitation, the reasonable attorneys' fees and disbursements in connection with
the enforcement of, or the preservation of rights under, this Agreement and any
of the other Loan Documents (including, without limitation, in any bankruptcy,
insolvency, reorganization or similar proceedings); (ii) pay and hold Lender
harmless from and against any and all present and future stamp and other similar
taxes with respect to this Agreement and the other Loan Documents and save
Lender harmless from and against any and all liabilities with respect to or
resulting from any delay or omission (other than to the extent attributable to
Lender) to pay such taxes; (iii) pay all filing and recording fees relating to,
and taxes and other charges incurred in connection with, perfecting, maintaining
and protecting the Liens created or contemplated to be created pursuant to the
Security Documents; and (iv) indemnify Lender, its officers, directors,
employees, representatives and agents from and hold each of them harmless
against any and all losses, liabilities, claims, damages, costs or expenses
incurred by any of them (except to the extent resulting from their gross
negligence or willful misconduct) as a result of, or arising out of, or in any
way related to, or by reason of, any investigation, litigation or other
proceeding (whether or not Lender is a party thereto) related to the entering
into and/or performance of any Loan Document or the use of the proceeds of each
Loan hereunder or the consummation of any other transactions contemplated in any
Loan Document, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding.
8.2 Right of Set-off. In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance of
an Event of Default, Lender is hereby authorized at any time or from time to
time thereafter, without presentment, demand, protest or other notice
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of any kind to Borrower or to any other Person, any such notice being hereby
expressly waived, to set off and to appropriate and apply any and all deposits
(general or special) and any other Indebtedness at any time held or owing by
Lender to or for the credit or the account of Borrower against and on account of
the Obligations of Borrower to Lender under this Agreement or under any of the
other Loan Documents, and all other claims of any nature or description arising
out of or connected with this Agreement or any other Loan Document, irrespective
of whether or not Lender shall have made any demand hereunder and although said
Obligations, liabilities or claims, or any of them, shall be contingent or
unmatured.
8.3 Notices. Except as otherwise expressly provided herein,
all notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered, if to Borrower to:
MEHL/Biophile International Corp., 4127 NW 27th Lane, Suite A, Gainesville, FL
32606, Attention: Thomas L. Mehl, Sr. with a copy to: Marks & Murase LLP, 399
Park Avenue, New York, NY 10022, Attention: Alan Bernstein; if to Lender, at
Clearwater Fund IV, LLC, 611 Druid Road East #200, Clearwater, Florida 34616,
with a copy to: Rosenman & Colin LLP, 575 Madison Avenue, New York, New York
10022, Attention: Todd J. Emmerman; or, at such other address as shall be
designated by any party in a written notice to the other parties hereto. All
such notices and communications shall, when mailed, be effective upon receipt,
or when telegraphed, telexed, telecopied, or cabled or sent by overnight
courier, be effective when delivered to the telegraph company, cable company or
overnight courier, as the case may be, or when sent by telex or telecopier.
8.4 Benefit of Agreement. (a) This Agreement shall be binding
upon and inure to the benefit of and be enforceable by the parties hereto, all
future holders of each Note, and their respective successors and assigns.
Borrower may not assign or delegate any of its rights and obligations hereunder
without the prior written consent of Lender.
(b) Lender shall have the right to transfer or assign all or
any part of each Note. Lender may furnish any information concerning Borrower in
the possession of Lender from time to time to assignees (including prospective
assignees).
8.5 No Waiver; Remedies Cumulative. No failure or delay on the
part of Lender in exercising any right, power or privilege under this Agreement
or under any other Loan Document and no course of dealing between Borrower and
Lender shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power, or privilege hereunder or under any other Loan
Document preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder or thereunder. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which Lender would otherwise have. No notice to or demand on Borrower
in any case shall entitle Borrower to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of Lender to
any other or further action in any circumstances without notice or demand.
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8.6 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK
OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, BORROWER AND LENDER HEREBY IRREVOCABLY ACCEPT
FOR THEMSELVES AND IN RESPECT OF THEIR PROPERTY, GENERALLY AND UNCONDITIONALLY,
THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS.
(b) BORROWER AND LENDER HEREBY IRREVOCABLY WAIVE ANY OBJECTION
WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE
AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE
(a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM
IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT
HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
8.7 Counterparts. This Agreement may be executed in any number
of counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. A set of
counterparts executed by all the parties hereto shall be lodged with Borrower
and Lender.
8.8 Headings Descriptive. The headings of the several sections
and subsections of this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement.
8.9 Amendment or Waiver. Neither this Agreement nor any other
Loan Document nor any terms hereof or thereof may be changed, waived, discharged
or terminated unless such change, waiver, discharge or termination is in writing
signed by the parties hereto.
8.10 WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS
AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE
LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
8.11 Independence of Covenants. All covenants hereunder shall
be given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitation of, another covenant shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.
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8.12 Entire Agreement. This Agreement together with the other
Loan Documents embodies the entire agreement and understanding among the parties
hereto and supersedes all prior agreements and understandings relating to the
subject matter hereof.
8.13 Execution by Facsimile Transmission. This Agreement may
be validly executed and delivered by exchange of executed signature pages by
facsimile transmission, provided that original executed signature pages are
promptly delivered to each party thereafter by overnight courier.
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<PAGE> 29
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Agreement to be duly executed and delivered as of the date
first above written.
CLEARWATER FUND IV, LLC
By: ____________________________________
Name:
Title:
MEHL/BIOPHILE INTERNATIONAL CORPORATION
By: ____________________________________
Name: Thomas L. Mehl, Sr.
Title: Chairman & CEO
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Exhibit 10.13
SELVAC ACQUISITION CORP.
LICENSING AGREEMENT
This LICENSING AGREEMENT effective as of the 13th day of
March, 1997 between SELVAC ACQUISITION CORP., a Delaware corporation and
successor by way of merger with Classy Lady by Mehl of Puerto Rico, Inc.
("Sublicensor") and MEHL GROUP MARKETING, INC. a Puerto Rico corporation
("Sublicensee").
WHEREAS, on October 22, 1991, inventor Nardo Zaias ("Zaias")
was issued United States Patent No. 5,509,192 (the "Zaias Patent");
WHEREAS, Zaias granted to Sublicensor by that certain Amended
Exclusive License Agreement for Patented Laser Hair Removal Invention dated as
of the 5th day of December, 1995 (the "Patent Licensing Agreement"), certain
rights with respect to the Zaias Patent;
WHEREAS, Sublicensor and Sublicensee desire to enter into a
sublicense of certain intellectual property rights as set forth more fully
herein;
NOW, THEREFORE, in consideration of the mutual premises and
promises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. DEFINITIONS.
a. The term "Know-how" shall be used herein to mean those
trade secrets, inventions, designs, data, drawings, operating techniques,
models, manufacturing, engineering and other drawings, technical information,
research records and other information owned by Sublicensor in the field of
laser hair removal.
b. The term "Patent" shall be used herein to mean the Zaias
Patent and patent applications pertaining to the Zaias Patent, together with all
reissues, reexaminations, renewals, divisions, continuations and
continuations-in-part thereof, any patents which may be granted based upon any
of the foregoing, and any foreign counterpart patents and patent applications to
any of the foregoing.
c. The term "Improvement Patents" shall be used herein to mean
those patents and patent applications, together with all reissues,
re-examinations, renewals, divisions, continuations and continuations-in-part
thereof and any patents which may be granted based upon any of the foregoing,
and any foreign counterpart patents and patent applications to any of the
foregoing, relating to inventions conceived by Zaias in the field of laser hair
removal subsequent to the effective date of Patent Licensing Agreement and
exclusively licensed to Sublicensor.
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d. The term "Territories" shall mean the United States of
America, or with respect to the Improvement Patents, the territories in which
patents have been granted or applications are pending therefor.
2. GRANT OF SUBLICENSE.
a. Know-how. Sublicensor hereby grants to Sublicense a
non-transferable sublicense to use the Know-how which is necessary for the
research and development, manufacturing, marketing and sale of laser hair
removal products and services in the Territories.
b. Patent. Sublicensor hereby grants to Sublicensee a
non-transferable sublicense to engage in research and development, manufacture,
market and sell in the Territories products and services covered by the Patent.
c. Improvement Patents. Sublicensor also agrees to grant to
Sublicensee a sublicense to any Improvement Patents and any associated Know-how
relating thereto, subject to terms that are generally comparable to, and are no
less favorable than, the terms and conditions of this Agreement.
d. Additional Sublicense. Sublicensor has entered into a
Licensing Agreement dated as of December 19, 1995 with Sharplan 2000, Inc.
("Sharplan") pertaining to the sublicense of the Know-how, Zaias Patent and
Improvement Patents to Sharplan (the "Additional Sublicense"). Except as set
forth in this Agreement and in the Additional Sublicense, Sublicensor agrees
that it will not sublicense any rights to, in or under the Know-how, Zaias
Patent or Improvement Patents in the Territories to any other party; provided,
however, that if the Additional Sublicense is terminated, the foregoing
restriction shall, upon such termination, be null and void and of no further
force and effect.
e. Cross License. Sublicensee agrees that if any technology is
developed as a result of this Licensing Agreement, including any patents
(collectively "Developments"), Sublicensee shall assign to Sublicensor all of
its right, title and interest in and to the Developments and Sublicensor shall
grant to Sublicensee a non-exclusive, non-transferable license to use the
Developments for the manufacturing, marketing and sale of laser hair removal
products and services on the same royalty terms set forth in this Agreement.
f. Extension. Sublicensee shall have the right to extend this
sublicense to any contractor for purposes of research and development. Any such
extension shall be in writing, and the party to whom the sublicense is extended
shall be bound by all liabilities and obligations to which the Sublicensee is
bound under this Agreement.
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g. Territories. The sublicense granted herein pertains to the
market of the Territories only and specifically excludes any right to distribute
or sell products in any other country.
3. ROYALTY.
Sublicensor and Sublicensee will use their good faith efforts
to negotiate a mutually agreeable royalty for the rights granted by Sublicensor
in Section 2 hereof. In the event that Sublicensor and Sublicensee are unable to
agree upon such rate on or before December 31, 1997, Sublicensee shall pay to
Sublicensor a quarterly royalty payment equal to [1%] of the gross revenues
received by Licensee attributable to the sale or distribution of goods, products
and services covered by the rights licensed hereunder.
4. TERMINATION OF SUBLICENSE.
a. Term. The sublicense granted by section 2 hereof shall
extend for the period during which the Patent or Improvement Patents are in
force. The expiration of the term shall not limit or otherwise affect the
Sublicensee's right to continue to use Know-how made available hereunder.
5. CONFIDENTIALITY.
a. In the course of the performance of this Agreement, the
parties each hereby recognize that each may obtain access to confidential
technical, business, and operational information owned by and/or controlled by
the other parties (the "Confidential Information"), and that such Confidential
Information has been acquired and maintained at great effort and expense and is
not generally known, and that each party considers its own Confidential
Information to constitute valuable assets thereof.
b. Subject to section 5(c), all information transmitted
pursuant to this Agreement shall be considered as being designated as
Confidential Information.
c. Confidential Information will not include information
which: (i) is at the time of disclosure or later becomes generally available to
the public through no fault of the receiving or disclosing party or any
employee, independent contractor, consultant or agent thereof, and under
circumstances involving no breach of any agreement between Sublicensor and
Sublicensee; (ii) was already known both to Sublicensor and Sublicensee; or
(iii) is lawfully and in good faith made available or known to the receiving
party by a third party, not connected with the disclosing party and without an
obligation of confidence to the disclosing party, directly or indirectly.
d. Each party hereby agrees that it will maintain the
confidential nature of the disclosed or received Confidential Information. In
furtherance of such
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obligation, each party hereby agrees to instruct its employees, independent
contractors, consultants and agents receiving or holding any Confidential
Information regarding these confidentiality obligations, and ensure that the
foregoing adhere to the same.
e. Each party hereby covenants that it shall not disclose any
Confidential Information to any third party; provided, however, that disclosure
may be made to a third party pursuant to a non-disclosure agreement with such
third party adequate to protect the confidential nature of such Confidential
Information in a manner at least consistent with the provisions of this section
5, but only if such disclosure to said third party is necessary for the parties
to conduct their respective businesses.
6. TITLE, FEES AND INFRINGEMENT.
a. Title. Sublicensor represents and warrants that Sublicensor
is the sole owner of the exclusive rights in the Patent and the Know-how, and
that Sublicensor has the rights and authority to enter into this Agreement and
grant licenses of the scope set forth herein.
b. Noninfringement. Sublicensor represents and warrants that
to the best of its knowledge, the use of the rights licensed herein does not
interfere with, infringe or otherwise come into conflict with any other patent
or patent application.
c. Fees. Sublicensor shall be solely responsible for applying
all patent renewal fees and related expenses for securing continued protection
under the Patent in the United States.
d. Infringement Actions. If Sublicensee learns that a third
party is infringing the Patent, Sublicensee shall give prompt written notice to
Sublicensor of the infringement. Sublicensor shall use its best efforts to
protect the Patent from infringements in the United States including by taking
legal action. The foregoing notwithstanding, if Sublicense so elects, then
Sublicensee shall have the right at its own expense to undertake such legal or
other action or settlement negotiations, provided that Sublicensee should be
reimbursed for its legal expenses if its election to pursue legal or other
action was a result of Sublicensor's failure to commence or use its best efforts
to advance the success of such legal or other action against the infringer. If
Sublicensee undertakes any such action, then Sublicensor agrees to provide all
reasonably necessary cooperation, including appearing as a party at its own
expense. Sublicensee shall be entitled to all amounts received, including
without limitation reasonable attorney's fees, which relate to damages suffered
by Sublicensee or other amounts related thereto.
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7. INDEMNIFICATION.
Sublicensor agrees to indemnify and hold harmless Sublicensee
from and against any liability, cost or expenses (including without limitation
reasonable attorney's fees) arising out of a breach of Sublicensor's
representations and warranties under sections 6(a) or 6(b) hereof.
8. NO ASSIGNMENTS OR SUBLICENSE.
The rights and obligations of any party under this Agreement
may not be assigned or sublicensed, except as provided herein, without the prior
written consent of the other party hereto.
9. MISCELLANEOUS.
a. Entire Agreement. This Agreement embodies the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, with
respect to the transactions contemplated herein. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by all
parties hereto.
b. Binding Agreement. This Agreement and all covenants,
promises and agreements herein shall be binding upon all parties hereto upon the
effective date hereof, and shall be binding upon and inure to the benefit of
each party and its respective permitted successors and assigns.
c. Further Assurances. During the effectiveness of this
Agreement, each of the parties agrees that, upon the reasonable request of any
other party hereto, it will take such actions and execute and deliver such
additional documents and instruments as may be necessary or appropriate to carry
out the intent of this Agreement and to more fully vest in each party the rights
granted herein.
d. Counterparts. This Agreement may be executed in
counterparts, each of which will constitute an original and both of which
together will constitute one and the same Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their respective duly authorized representatives as of the date and
year set forth above.
SELVAC ACQUISITION CORP.
By: _________________________________
Name: Thomas L. Mehl, Sr.
Title: President
MEHL GROUP MARKETING, INC.
By: __________________________________
Name: Todd Waters
Title: Vice President
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Exhibit 10.14
DATED: ______________________, 1997 LASER SERVICES AGREEMENT
BETWEEN: Mehl Group Marketing, Inc.
270 Munoz Rivera Avenue, 6th Floor
Hato Rey, Puerto Rico 00918 ("MEHL GROUP")
-And-
_________________________
_________________________
_________________________ ("CUSTOMER")
RECITALS:
Whereas, MEHL GROUP is a wholly owned subsidiary of MEHL/BIOPHILE
INTERNATIONAL CORPORATION, a Delaware corporation;
Whereas, MEHL GROUP is the sub-licensee and provider of services in the
areas of training, marketing, maintenance and operation of the laser depilation
system known as the Chromos 694 Ruby Long Pulse Laser ("Chromos 694");
Whereas, CUSTOMER intends to accept delivery of the laser depilation
system from MEHL/BIOPHILE INTERNATIONAL CORPORATION;
Whereas, CUSTOMER is interested in obtaining on-going services
generally from MEHL GROUP for the training, marketing, maintenance and operation
of the laser depilation system; and
Now Therefore, with respect to the foregoing and for the mutual
promises hereinafter set forth, the parties to this Agreement acknowledge that
they have entered into a binding and valid contract for which their mutual
promises provide full and adequate consideration, wherein they agree as follows.
I. DEFINITIONS:
1. CHROMOS 694: The depilation laser, known as the Chromos 694, which MEHL GROUP
believes will provide for a substantially better method for the professional
removal of unwanted hair, and for use of which patent protection has been filed
under patents and patents pending.
2. BUSINESS PREMISES: The term "Business Premises" shall mean the premises
wherein the Chromos 694(s) is (are) located. See attached Schedule A for
location and serial number.
3. GROSS REVENUE: "Gross Revenue" shall mean all receipts of the CUSTOMER
associated with the Chromos 694, including CONSULTATION AND TREATMENT, before
deductions for any purpose, except any sales, use, consumption or related taxes
collected by the CUSTOMER on behalf of the taxing authority in the jurisdiction.
II. TERM
The term of this Agreement is effective from the execution date for a
period of THREE (3) YEARS after CUSTOMER'S acceptance of the Chromos 694.
CUSTOMER is granted an option to renew upon timely written notice to and
approval by MEHL GROUP for two further terms of three (3) years on the same
conditions as specified herein. MEHL GROUP'S approval of renewal terms shall not
be unreasonably withheld.
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III. LICENSES
1. MEHL GROUP grants CUSTOMER a license for the use of the Chromos 694 at the
Business Premises to the extent such rights are created in any patents in the
field of laser depilation issued and assigned to MEHL GROUP. MEHL GROUP retains
all rights in any patents except said use granted to CUSTOMER. Such license
shall be only for the Term of this Agreement and shall terminate without notice
at the time of expiration or termination of this Agreement.
2. CUSTOMER agrees to keep confidential any and all patented products,
processes, any trade secrets or other proprietary information applicable to
laser depilation made available to CUSTOMER as a part of the services rendered
by MEHL GROUP and to retain the confidential nature by taking reasonable steps
to safeguard information and material including but not limited to instructing
personnel regarding confidential nature of information and taking reasonable
precautions to safeguard against unauthorized release.
3. CUSTOMER agrees to disclose and license to MEHL GROUP on reasonable terms all
ideas, inventions and other developments or improvements conceived by CUSTOMER,
alone or with others, during the Term of this Agreement that are related in any
manner to the Chromos 694 and its use in laser depilation. CUSTOMER further
agrees to assist MEHL GROUP, at MEHL GROUP'S expense, to obtain patents on
patentable ideas, inventions and other developments, and agrees to execute all
documents necessary to obtain such patents in the name of MEHL GROUP.
4. CUSTOMER agrees not to operate a competing laser depilation system for the
Term of this Agreement.
IV. TERMS AND CONDITIONS OF DELIVERY
1. Title to the Chromos 694 shall remain in MEHL/BIOPHILE INTERNATIONAL
CORPORATION. CUSTOMER shall have only the right to use it subject to the terms
and provisions of this Agreement.
2. MEHL GROUP will give CUSTOMER 120 days notice of the date of delivery and
installation of the Chromos 694.
3. MEHL GROUP will be responsible for paying freight and insurance, customs
clearance, duty/taxes, storage, delivery and any other charges for
transportation of the Chromos 694 from the manufacturer to the Business
Premises.
4. CUSTOMER shall provide the necessary electrical, other utilities and general
preparedness for the safe and suitable installation of the Chromos 694. MEHL
GROUP will be responsible for the complete installation of the Chromos 694 at
the Business Premises.
V. TRAINING AND OPERATION
1. MEHL GROUP will provide at no cost to the CUSTOMER the required training
course in the operation of the Chromos 694 for up to three staff members.
Additional training shall be five hundred dollars ($500.00) per staff member.
Expenses related to travel and accommodation for any training will be the
responsibility of the CUSTOMER.
2. Trainees must meet manufacturer's standard of operation and obtain a
certificate of successful completion.
3. CUSTOMER agrees to ensure that none other than certified persons operate the
Chromos 694.
4. CUSTOMER agrees to attend for a reasonable fee on-going training for
up-grades or changes to the Chromos 694.
5. MEHL GROUP shall provide the CUSTOMER with advice and consulting services
relating to the operation of the Chromos 694 and to the suitability or
applicability of the treatment as may be reasonably requested by CUSTOMER.
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6. CUSTOMER agrees to operate the Chromos 694 at all times in accordance with
the operations manual supplied by the manufacturer and supply MEHL GROUP with
proof of all required authorizations for the operation of the Chromos 694 from
the governing agency of the state wherein the Business Premises is located, and
shall only make those representations concerning the Chromos 694 set forth by
the Food and Drug Administration.
VI. PROMOTION AND ADVERTISING
1. MEHL GROUP, in its sole discretion and at its cost, shall provide the
CUSTOMER with initial literature including brochures, reports, clinical data and
consultation questionnaires for CUSTOMER'S marketing and use of the Chromos 694.
CUSTOMER may purchase from MEHL GROUP additional marketing materials.
2. CUSTOMER shall use only advertising and promotional materials for the Chromos
694 approved by MEHL GROUP in writing before use and participate in any
promotional programs for the Chromos 694 sponsored or adopted by MEHL GROUP.
MEHL GROUP may refuse to approve advertisements on reasonable grounds, in which
case, CUSTOMER agrees to immediately remove or cease using the affected
material.
3. CUSTOMER agrees to pay for any local advertising CUSTOMER chooses to
undertake. MEHL GROUP will pay for any national advertising that MEHL GROUP
chooses to undertake.
4. CUSTOMER agrees not to engage in any conduct which may prejudicially affect
the goodwill of the Chromos 694 or of MEHL GROUP, ensuring that its servants,
employees, agents or representatives will only make those representations and
warranties in respect to the treatment that are included in literature provided
by MEHL GROUP.
VII. MAINTENANCE AND UPGRADES
1. MEHL GROUP will keep the Chromos 694 in satisfactory working order and
repair, except that, if replacements or service charges are necessitated by
CUSTOMER'S improper use of the Chromos 694 or negligence in its use, CUSTOMER
will bear the expense of such replacements or repairs. CUSTOMER shall not permit
any party other than MEHL GROUP or it authorized sub-contractor to provide the
maintenance, repair or replacement parts for the Chromos 694.
2. CUSTOMER will allow MEHL GROUP sufficient time to perform maintenance and
repair. MEHL GROUP will not be responsible for any losses, including any loss of
income or consequential damage, attributable in any way to the time during which
the maintenance/repair is being performed. MEHL GROUP shall perform repairs to
the Chromos 694 within a reasonable time.
3. MEHL GROUP agrees that should any upgrades or changes to hardware or software
of the Chromos 694 be developed, these changes shall be made at NO CHARGE to the
CUSTOMER. CUSTOMER agrees to take delivery of and properly use after sufficient
training any and all upgrades or changes.
VIII. ACCOUNTS, RECORDS AND ACCESS
1. CUSTOMER shall maintain books and records for the Business Premises in
accordance with generally accepted accounting practices (GAAP). CUSTOMER shall
provide MEHL GROUP with patient statistical and financial records for the
Chromos 694. Customer may mask patient names or take other precautions necessary
to protect the confidentiality of its patients, provided such measures do not
prevent MEHL GROUP from obtaining the information to which it is entitled.
2. CUSTOMER agrees to permit MEHL GROUP or its authorized representatives upon
five (5) days notice to enter the Business Premises during business hours in
order to ensure CUSTOMER has complied with the obligations imposed on CUSTOMER
under this Agreement.
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IX. CUSTOMER'S PAYMENT OF FEES FOR SERVICES
1. CUSTOMER shall pay to MEHL GROUP a monthly fee for services equal to FIFTY
PERCENT (50%) of the monthly gross revenue generated by each Chromos 694. The
monthly fee for services shall be payable on or before the 15TH day of the month
for the preceding month's gross revenue.
2. MINIMUM MONTHLY GUIDELINES: CUSTOMER shall use its best efforts to market and
use the Chromos 694. In the event that CUSTOMER shall fail to attain a minimum
monthly fee for services in the amount of Ten Thousand Dollars ($10,000.00) per
month for each Chromos 694 after CUSTOMER has used the laser for a period of six
(6) months, MEHL GROUP, upon thirty (30) days written notice, shall have the
right to terminate this Agreement and to reclaim the Chromos 694 and any
ancillary products connected with it. MEHL GROUP shall not seek compensatory
damages in the form of lost profits upon the failure of CUSTOMER to attain the
minimum monthly fee for services.
3. MEHL GROUP shall provide CUSTOMER with the "Smart Card" as demand requires.
MEHL GROUP shall have the right to withhold issuance of the "Smart Card" in the
event that CUSTOMER is delinquent in its payment of the monthly fee for
services.
X. INSURANCE AND INDEMNITY
1. MEHL GROUP shall take out valid and enforceable product liability insurance
in the amount of One Million Dollars ($1,000,000.00) and provide CUSTOMER with
proof of insurance by certificate. CUSTOMER shall take out valid and enforceable
professional liability insurance in the amount of One Million Dollars
($1,000,000.00). CUSTOMER shall take out a valid and enforceable all risk
equipment floater policy including theft in the amount of One Hundred Thousand
Dollars ($100,000.00) per Chromos 694 and shall name MEHL GROUP as an additional
insured. CUSTOMER shall provide MEHL GROUP with proof of insurance by
certificate.
2. CUSTOMER agrees to indemnify MEHL GROUP against all expenses, losses,
damages, costs, claims, demands and liabilities that MEHL GROUP may sustain or
incur as a result, whether directly or indirectly, of any: (a) breach of this
Agreement by CUSTOMER including but not limited to a breach in respect of which
MEHL GROUP exercises an express right to terminate this Agreement; (b) claim by
a third party arising out of CUSTOMER'S negligent operation of the Chromos 694;
or (c) loss or damage to any property or injury to or death of any person caused
by any act or omission of CUSTOMER, its officers or staff, in relation to any
breach of CUSTOMER'S obligations under this Agreement.
XI. REPRESENTATIONS, COVENANTS AND WARRANTIES
1. MEHL GROUP AND CUSTOMER each represent, warrant and covenant to one another
that:
(a) It is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it conducts business and
has the power to own its assets and properties and to carry on its business as
now being and heretofore conducted;
(b) The execution, delivery and performance of this Agreement have been
duly authorized, do not violate its certificate of incorporation, bylaws or
similar governing instruments or applicable law; and
(c) All claims and representations made by MEHL GROUP and CUSTOMER to
one another about its ability to perform its obligations under this Agreement
are true and correct. MEHL GROUP and CUSTOMER covenant that such claims and
representations, and any additional information provided to one another in the
marketing and use of the Chromos 694 shall be and remain true and correct and in
compliance with all rules and regulations of any applicable local, state, and
federal authority.
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XII. TERMINATION
1. MEHL GROUP may terminate this Agreement in the event CUSTOMER:
(a) is in breach of this Agreement, and if the breach is capable of
being rectified, fails to rectify such breach within fourteen (14) days of
written notice being given by MEHL GROUP requiring rectification;
(b) commits any act of bankruptcy or has assets assigned to the benefit
of creditors;
(c) fails to give MEHL GROUP notice of relocation of the Business
Premises; or
(d) defaults in payment of the fee for services due to MEHL GROUP on
the date appointed for payment thereof and fails to cure such default within
three (3) days of written notice, MEHL GROUP may immediately terminate this
Agreement.
2. CUSTOMER may terminate this Agreement where MEHL GROUP:
(a) is in breach of this Agreement, and if the breach is capable of
being rectified, fails to rectify such breach within fourteen (14) days of
written notice being given by CUSTOMER requiring rectification; or
(b) goes into liquidation.
3. Upon termination of this Agreement CUSTOMER must:
(a) pay all amounts of the fee for service due but unpaid to MEHL GROUP
under this Agreement;
(b) cease using the Chromos 694;
(c) keep confidential all information for a period of three (3) years
from the date of termination; and
(d) allow MEHL GROUP access to the Business Premises to recover
possession of the Chromos 694 and any ancillary products and surrender the same
in the original repair, condition and working order as at the commencement of
the term except for reasonable wear and tear resulting from permitted use.
The termination of this Agreement for any reason whatsoever shall not
affect any obligation of CUSTOMER under this Agreement which expressly or by
implication continues thereafter, including but not limited to maintaining
confidentiality, nor shall it affect any accrued rights or remedies which either
party may have.
XIII. GENERAL PROVISIONS
1. This Agreement shall be governed by, construed under and enforced in
accordance with the substantive laws of the Commonwealth of Puerto Rico without
regard to principles of conflict of law.
2. The parties hereto agree to submit all disputes arising out of, or relating
to this Agreement which cannot be resolved amicably, to arbitration. Such
arbitration will be held in San Juan, Puerto Rico, before a panel of three (3)
arbitrators, under and pursuant to the rules of the American Arbitration
Association, with any decision thereunder to be final and non-appealable. One
arbitrator will be chosen by MEHL GROUP, a second arbitrator will be chosen by
CUSTOMER, and the third arbitrator will be chosen by the two arbitrators.
Notwithstanding the above arbitration provisions, both parties shall be entitled
to seek both legal and equitable relief for breach of confidentiality, breach of
non-competition, challenges to or infringements of MEHL GROUP'S intellectual
property and the obligation to pay money.
3. The prevailing party in any arbitration or litigation arising with respect to
interpretation, performance, or enforcement of this Agreement, shall recover all
court costs and reasonable attorney's fees, including attorney's fees for
services rendered on appeal.
4. CUSTOMER shall not assign, transfer, sell, sub-license, mortgage or encumber
or otherwise dispose of the right conferred on CUSTOMER by this Agreement
without the prior written consent of MEHL GROUP. Any approval which may be given
by MEHL GROUP under this article shall be subject to the following conditions:
(a) that CUSTOMER is not in breach of this Agreement; and
(b) that CUSTOMER ensures that the transferee assumes all of the
obligations of CUSTOMER under this Agreement;
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5. MEHL GROUP shall have the right to cause the services required or provided
for in this Agreement to be provided through third parties, whether related to
or associated with MEHL GROUP, and the provision of such services, maintenance
and training by such third parties will be conclusively deemed to fulfil MEHL
GROUP'S obligation under this Agreement.
6. All notices, requests, demands or other communications to or from the
respective parties required or permitted to be given hereunder shall be in
writing and shall be deemed to have been received when delivered in person or
sent by facsimile, seven (7) days if by first class, or upon receipt of
registered or certified mail, or by a reliable overnight delivery service
providing a receipt evidencing such delivery, to the recipient at its address
given above or at such other address as hereafter shall be furnished by a notice
sent in like manner by such addressee to the other.
7. Every provision of this Agreement is intended to be severable, and, if any
term or provision hereof is determined to be illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the legality or
validity of the remainder of this Agreement.
8. No modification, limitation, waiver, termination, rescission, discharge or
cancellation of this Agreement or any provision thereof shall be binding on the
party unless in writing and signed by all parties.
9. Force Majeure:
(a) The parties to this Agreement shall not be considered to be in
default of any obligation hereunder, other than the obligation of a party to
make payment of amounts due to the other party, if the failure of performance
shall be due to a Force Majeure, including but not limited to drought, flood,
earthquake, storm, fire, lightning, epidemic, war, riot, civil disturbance,
sabotage, strike or labor difficulty, casualty to equipment or other
unavailability of equipment or replacement equipment, inability to obtain and
maintain right-of-way permits, licenses, and other required authorizations from
any local, state or federal agency or person for any of the facilities or
equipment necessary to provide or receive service hereunder, and restraint by
court or public authority.
(b) If any party is affected by a Force Majeure event, such party shall
give fourteen (14) days notice to the other party stating the nature of the
event, its anticipated duration and any action being taken to avoid or minimize
its effect. The suspension of performance shall be of no greater scope and no
longer duration than is required and the nonperforming party shall use its best
efforts to remedy its inability to perform. The obligation to pay money in a
timely manner is absolute and shall not be subject to the Force Majeure
provisions, except to the extent prohibited by governmental rule or regulation.
10. This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements and understandings, oral and written, of the parties
concerning the subject matter hereof.
11. MEHL GROUP and CUSTOMER are independent contractors with respect to one
another and nothing herein shall create any relationship of employer and
employee, principal and agent, association, partnership, joint venture, agency
or fiduciary relationship between them except as provided for in this Agreement.
12. The Agreement may be executed in any number of counterparts and by
facsimile, each of which when so executed shall be deemed to be the original,
but all such counterparts shall constitute one and the same instrument.
EXECUTED as an Agreement, the parties hereto have hereunto set their
hands:
_________________________________ Signature: ___________________________
TODD D. WATERS,
Vice-President of Marketing Print name: __________________________
MEHL GROUP MARKETING, INC.
(MEHL GROUP) Title: _______________________________
Company Name: ________________________
(CUSTOMER)
6
<PAGE> 7
SCHEDULE A
BUSINESS PREMISES
THE BUSINESS PREMISES AS SPECIFIED IN THIS AGREEMENT SHALL MEAN AS FOLLOWS:
NOTE: EACH LOCATION OF THE BUSINESS PREMISES SHALL BE PROVIDED TO MEHL GROUP BY
CUSTOMER.
1.
<PAGE> 1
Exhibit 10.15
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 18th day of March, 1997, by and between
MEHL/Biophile International Corporation, a Delaware corporation (the "Company"),
and Robert J. Figliozzi ( the "Executive" ).
W I T N E S S E T H :
WHEREAS, the Company and the Executive desire to establish an
employment relationship on the terms set forth herein;
NOW,THEREFORE, in consideration of the mutual covenants and conditions
set forth herein and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the Company and the Executive
hereby agree as follows:
1. Offer and Acceptance of Employment. Subject to the terms and
provisions of the Agreement, the Company agrees to and hereby does, employ the
Executive as its Executive Vice President ("EVP"), commencing,at the discretion
of the Executive, on or before May 30, 1997 (the "Effective Date"). The
Executive hereby accepts such employment in such capacity and agrees to
discharge faithfully, diligently, and to the best of his ability the
responsibilities of such position commencing on the Effective Date for an
initial period of three years (the "Employment Term") and continuing thereafter
from year to year (a "Renewal Term"); provided that, subject to Section 6(c)
hereof, either the Company or Executive may terminate such employment at anytime
during the Employment Term or any Renewal Term by giving the other not less than
one month's prior written notice of such termination.
2. Duties and Responsibilities.
(a) During the Employment Term, the Executive (i) shall be in
charge of the Company's investor relations program and, report to the Company's
Chairman, and (ii) assist in the strategic planning of the Company, and in the
overall execution of the Company's business plan, as
<PAGE> 2
directed by the Chairman,and (iii) shall assume and perform such further
reasonable responsibilities and duties as may be requested of him by the
Chairman or the Board of Directors.
If elected or appointed, the Executive shall serve as a
director of the Company without additional compensation.
(B) Excluding periods of vacation and sick leave to which the
Executive will be entitled, the Executive agrees to devote the whole of his
intention, working time and energy to the business and affairs of the Company,
and to use his best efforts to perform the responsibilities assigned to him
hereunder faithfully and efficiently. However, the Executive hereby states and
the Company hereby acknowledges that the Executive is a registered person with
the New York Stock Exchange firm of Stuart, Coleman and Company ("Stuart") as a
supervisory analyst. The Executive hereby states that such registration is
solely to keep active the Executive's registration, and that the affiliation of
the Executive with Stuart don't not entail or require any of the Executive's
time, nor does such affiliation conflict in any way with the required functions
and/or responsibilities of the Executive with the Company. The Company hereby
consents to the Executive's continuance as a registered person with Stuart but
reserves the right, during the Employment Term, to request that the Executive
terminate such affiliation.
3. Compensation. The following provisions apply during such time as the
Executive is employed by the Company, subject to annual review and adjustment
by the Board of Directors;
(a) Signing Bonus. The Company shall pay the Executive a
signing bonus ("Signing Bonus") equal to the sum of (I) $182,000 payable as
follows: $91,000 on the Effective Date, and $45,500 on the ninetieth day after
the Effective Date and $45,500 on the one hundredth and eightieth day after the
Effective Date.
(b) Base Salary. During the Employment Term, the Executive
shall receive a base salary of not less than One Hundred Eighty Five Thousand
($185,000) as increased hereunder from time to time (the
2
<PAGE> 3
"Base Salary") payable in accordance with the Company's normal payroll practices
for salaried employees from time to time adopted by the Company. The Base Salary
shall be reviewed annually and may be increased (but not decreased) in the
course of each such review. Under no circumstances shall any increase in the
Base Salary (i) limit or reduce any other obligation to the Executive under this
Agreement, or (ii) once effective, be later reduced or eliminated.
(C) Annual Bonus. In addition to the Base Salary, the
Executive shall be eligible, for each year of the Employment Term and Renewal
Term, for an annual bonus ("Annual Bonus") to be approved in good faith by the
Compensation Committee, which Annual Bonus shall be consistent with the amount
of the bonuses awarded to top executives of companies engaged in the Business
(as herein defined), and shall take into account such factors as approved by the
Compensation Committee.
Each Annual Bonus calculated in accordance with the foregoing
shall be earned ratably throughout the year and shall be payable within three
months after the end of the fiscal year for which the Annual Bonus is awarded,
unless the Executive shall otherwise timely elect to defer the receipt of such
Annual Bonus under any deferred compensation plan of the Company then in effect.
(D) Stock Option Agreement
(i) Prior to or contemporaneously with the signing of
this Agreement, the Company and the Executive shall enter into a stock option
agreement ("Stock Option Agreement") dated as of the date hereof pursuant to
which the Executive shall be entitled to acquire up to 500,000 shares ("Option
Shares") of the Company's $.01 par value common stock at an exercise price of
$2.875. The Stock Option Agreement shall be in customary form substantially as
set forth on Exhibit A attached hereto. The Option Shares shall vest in
accordance with the following schedule: June 4th, 1997- 200,000 shares ; June
4th, 1998- 150,000 shares ; June 4th, 1999- 150,000 shares.
(ii) The Option Shares granted hereunder shall retain
the same equity position as a percent of the outstanding Common Stock of the
3
<PAGE> 4
Company as of the date of this Agreement, and shall not be diluted in any manner
due to any circumstance. The Stock Option Agreement shall include provisions
that in the event the outstanding Common Stock is changed into or exchanged for
a different number or kind of shares or other securities of the Company or of
another corporation by reason of merger, consolidation, other reorganization,
recapitalization, reclassification, combination of shares,stock split, stock
dividend or another event which increases or decreases the outstanding common
stock, (a) the aggregate number and kind of Common Stock subject to the option
granted hereunder and pursuant to the Stock Option Agreement shall be adjusted
appropriately, and (b) the rights to purchase Option Shares granted hereunder
and pursuant to the Stock Option Agreement, both as to number of Option Shares
and the option price shall be adjusted appropriately.
(e) On or before August 1, 1997, the Company shall either implement a
stock option plan in which the Executive is a participant or enter into an
additional stock option agreement with the Executive, on mutually acceptable
terms, pursuant to which the Executive shall have the right to acquire
additional shares of Common Stock on terms no less favorable than those enjoyed
by the other executive officers of the Company.
(f) Employee Benefit Plans. During the Employment Term and any Renewal
Term, the Executive and/or the Executive's dependents, as the case may be, shall
be eligible to participate in and shall receive all benefits under each employee
benefit plan of the Company, including, without limitation, all savings and
retirement plans, medical, dental,disability, group life, accidental death and
travel accident insurance plans and programs of the Company.
The Company and the Executive shall, within ninety days hereof,
establish a life insurance plan which shall provide, at the Company's expense,
minimum coverage of $500,000 to the Executive.
The Company shall reimburse the Executive (within ten days of
submission of an invoice therefor) for any COBRA payments which Executive makes
as a result of leaving his previous employer to accept employment hereunder.
4
<PAGE> 5
(g) Expenses. During the Employment Term and any Renewal Term,
the Executive shall be entitled, upon submission of proper substantiation, to
receive reimbursement for all reasonable business-related expenses actually and
necessarily paid or incurred by the Executive in connection with the discharge
of his duties hereunder and in promotion of the business of the Company.
(h) Fringe Benefits. During the Employment Term and any
Renewal Term, the Executive shall be entitled to fringe benefits in accordance
with the policies of the Company. Such benefits shall include, but shall not be
limited to, the following:
(i) The Executive shall be entitled to a car allowance
equal to $800 per month, plus documented operating and maintenance expenses, for
use in carrying out his duties as Executive Vice-President.
(ii) The Executive shall be provided appropriate office
space, equipment and personnel in, or in the general area of Teaneck, New
Jersey, in order to adequately perform his duties hereunder.
(i) Vacation. During the Employment Term and any Renewal Term,
the Executive shall be entitled to paid vacation in accordance with the policies
of the Company with respect to other key executives of the Company in comparable
positions.
4. Termination. The following provisions relate solely to termination
of the Executive's employment during the Employment Term or any Renewal Term:
(a) Termination Upon Death. In the event the Executive dies
during the term of this Agreement, this Agreement shall terminate except to the
extent described in Section 6(a).
(b) Termination Upon Disability. For purposes of this
Agreement, "Disability" for the specific position of Executive Vice-President
means that: (i) the Executive is declared legally incompetent under the laws of
the State of New Jersey; or (ii) the Executive's physical or mental condition
meets the definition of "permanent disability" as defined under standard
disability
5
<PAGE> 6
insurance policies intended for use within the State of New Jersey for a period
of six consecutive months.
In the event the Executive becomes incapable of performing
substantially all of the normal duties required by this Agreement and performed
by him before such Disability, the Executive shall receive his full Base Salary
during the first six (6) months of such Disability and no salary thereafter and
Executive's employment hereunder may, at the option of the Company, be
terminated at any time thereafter; provided, however, in no event shall any such
termination cause the termination of the Executive's disability and medical
insurance coverage.
(c) The Executive's right to terminate his employment
hereunder shall not be affected by his incapacity due to Disability or other
physical or mental illness.
(d) The date on which Executive's employment hereunder
terminates for any reason shall be referred to as the "Termination Date".
5. Notice of Termination. Any termination of Executive's employment by
the Company or the Executive shall be communicated in writing to the other party
in accordance with Section 12(b) of this Agreement. If the Termination Date is
other than the date of receipt, the notice shall specify the Termination Date.
6. Obligations of the Company Upon Termination. The following
provisions apply if the Executive is terminated during the Employment Term or
any Renewal Term:
(a) Termination Upon Death. If the Executive's employment is
terminated by reason of the Executive's death, this Agreement shall terminate
without further obligation to the Executive's legal representatives under this
Agreement other than those payment amounts accrued and payable hereunder,
including all amounts earned or accrued pursuant to Section 3 hereof, at the
date of the Executives death.
Upon Executive's death, all Option Shares become vested and
become immediately exerciseable by Executive's legal representative as
6
<PAGE> 7
provided in the Stock Option Agreement.
Anything in this Agreement to the contrary notwithstanding,
the Executive's family shall be entitled to receive additional benefits at least
equal to those provided by the Company to surviving families of executives of
the Company in comparable positions under such plans, programs and policies
relating to family death benefits, if any.
(b) Termination Upon Disability. If the Executive's employment
is terminated by reason of the Executive's Disability, the Executive shall be
entitled to receive additional disability and other benefits at least equal to
those provided by the Company to disabled employees and/or their families in
accordance with such plans, programs and policies relating to disability, if
any. In the event of the Executive's disability, the Executive will no longer be
required to perform his duties hereunder and will relinquish such duties to a
successor selected by the Board of Directors.
(c) Termination Other than by Death or Disability. If the
Executive's employment with the Company terminates for any reason other than as
a result of the Executive's resignation, or as a result of termination by the
Company upon Executive's conviction of a felony, the following shall become
effective on the Termination Date:
(i) the Company shall pay to the Executive an amount
equal to two years of his Base Salary on the Termination Date plus any unpaid
Signing Bonus; less usual payroll taxes and other deductions, such amounts being
payable in a lump sum within ten days following the Termination Date.
(ii) the Company shall promptly (within ten days of
submission of an invoice therefor) reimburse Executive for COBRA payments made
by Executive after the Termination Date;
(iii) the Option Shares shall immediately vest and
Executive shall be entitled to purchase one hundred percent (100%) of the Option
Shares at any time as provided in the Stock Option Agreement.
7. Non-Competition. The term "Executive Capacity" means the Executive
serving, directly or indirectly, as a key executive with substantially
7
<PAGE> 8
the same duties as described herein to any company involved in hair removal
products, services or systems. (the "Competitors").
At all times during the Executive's employment with the Company and for
the period of two years after the Executive's employment is terminated with the
Company, the Executive shall not serve in an Executive Capacity to any
Competitor.
The Company and the Executive agree that none of the forgoing shall be
deemed to prohibit the Executive from acquiring, solely as an investment and
through open market purchases, securities of a Competitor that are registered
under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended,
and that are listed or admitted for trading on any United States national
securities exchange or that are quoted on the National Association of Securities
Dealers Automated Quotations System or any similar system of automated
dissemination of quotations of securities prices in common use, so long as the
Executive is not a member of any "control group" (within the meaning of the
rules and regulations of the Securities and Exchange Commission) of any such
Competitor.
8. Non-Solicitation of Executives and Customers. The Executive shall
not at any time during his employment hereunder and for the applicable period
following termination of employment set forth in Section 7, directly or
indirectly, for himself or for any other person, firm, corporation, partnership,
association or other entity, recruit, solicit or induce, or attempt to recruit,
solicit or induce any employee or former employee of the Company, its
affiliates, or predecessors-in-interest to become employed by a Competitor,
unless such employee or former employee has not been employed by the Company,
its affiliates, or predecessors-in-interest for a period of not less that six
months.
9. Non-Disclosure. Except as expressly permitted by the Company, or in
connection with the performance of his duties hereunder, the Executive shall not
at any time during his employment by the Company or for two years after the
termination of such employment for any reason,disclose,directly or indirectly,
to any person, firm, corporation, partnership, association or other entity any
Confidential Information.
8
<PAGE> 9
"Confidential Information" means all information of a proprietary
nature relating to (i) the Company's Business, and (ii) the business of the
clients of the Company ("Company Clients") known or made available to the
Company and such of its authorized agents, employees, and other contacts as may
be necessary for the same to be utilized, including, but not by way of
limitation: names, addresses, telephone numbers, contact persons and other
identifying information relating to Company Clients and the customers of Company
Clients; compilations and lists of Company Clients and the customers of Company
Clients; information with respect to the needs and requirements of various
Company Clients and the customers of Company Clients including the dates on
which any contracts between such parties will terminate and be subject to
renewal or on which renewal orders will be placed; rate and price information on
products and services provided by the Company or by Company Clients;
compilations and lists of suppliers, contractors or vendors of the Company or of
Company Clients; information with respect to the Company's relationship with its
suppliers, contracts or vendors, including the dates on which and contracts held
by the Company with its suppliers will terminate or be subject to renewal; all
business records and personal data relating to the employees of the Company or
of the Company's Clients, including compensation arrangements of such employees;
information contained in any confidential documents prepared by or for the
Company and its employees or agents at the Company's expense, on Company time or
otherwise in furtherance of the Company's Business, including but not limited to
any such documents prepared for or on behalf of Company Clients; financial
information with respect to the Company Business or the business of the Company
Clients; any trade secrets, know-how or confidential information used or
obtained by the Executive in the course of his employment hereunder from any
officer, employee, agent or representative of the Company or of the Company
Clients, including, without limitation, technical information,data or know-how
respecting the design, cost, manufacture, processing, marketing or sale of
products; and information with respect to any business system, program or report
(whether or not computerized) used or developed by the Company or Company
Clients.
Such information and compilations of information shall be contractually
subject to protection under this Agreement whether or not such information
constitutes a trade secret and is separately protectable at law or in equity as
9
<PAGE> 10
a trade secret; provided, however, that "Confidential Information" does not
include: (i) any information that is, nor shall become generally known to the
industry or the public through no fault of the Executive,(ii) any information
received in good faith from any other person who has the right to disclose such
information,(iii) any information that the Executive can demonstrate was within
his legitimate possession prior to the time if his employment by the Company, or
(iv) any confidential information which does not constitute a trade secret after
two (2) years from termination or expiration of the Executive's employment with
the Company.
The Executive acknowledges and agrees that the Confidential Information
is a valuable, special and unique asset of the Company's business.
10. Books and Records. All books, records and accounts relating in any
manner to the Company's customers or suppliers, whether prepared by the
Executive or otherwise coming into the Executive's possession, and all copies
thereof in the Executive's possession, shall be the exclusive property of the
Company and shall be returned immediately to the Company upon termination of the
Executive's employment hereunder or upon the Company's request at any time.
11. Successors.
(a) This Agreement is personal to the Executive and, without
the prior written consent of the Company, the benefits accrued and payable
hereunder shall not be assignable by the Executive otherwise than by will or the
laws of descent and distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors.
(c) In the event that another corporation or unincorporated
entity becomes a Successor (as such term is defined below) of the Company, then
the Successor shall, by an agreement in form and substance reasonably
satisfactory to the Executive, expressly assume and agree to perform this
Agreement in the same manner and to the same extent as the
10
<PAGE> 11
Company be required to perform if there had been no Successor. As used herein,
the term "Successor" means another corporation or unincorporated entity or group
of corporations or unincorporated entities which (i) acquires all or
substantially all of the assets of the Company, or (ii) is the surviving entity
as a result of the merger of the Company into such entity.
12. Miscellaneous.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to
principles of conflict of laws.
The captions of these Agreement are not part of the provisions
hereof and shall have no force or effect.
This Agreement may not be amended or modified otherwise than
by a written agreement executed by the parties hereto or their respective
successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Robert J. Figliozzi
324 Franklin Avenue
Ridgewood, New Jersey 07450
If to the Company:
MEHL/Biophile International Corporation
4127 NW 27th Lane, Suite A
Gainesville, Florida 32606
ATTN: Thomas L. Mehl, Sr.
or to such other address as either party shall have furnished to the other in
11
<PAGE> 12
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) If any term or provision of the Agreement or the
application hereof any person or circumstances shall, to any extent, be invalid
or unenforceable, the remainder of this Agreement, or the application of such
term or provision to persons or circumstances other than those to which it is
held invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law. Moreover, if a court or competent jurisdiction deems any
provision hereof to be too broad in time, scope or area, it is expressly agreed
that such provision shall be enforced to a less degree which the court or
competent jurisdiction would find enforceable.
(d) The Company may withhold from any amounts payable under
this Agreement such federal, state and local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) This Agreement contains the entire understanding of the
Company and the Executive with respect to the subject matter hereof.
(f) Any waiver of any breach of this Agreement shall not be
construed to be a continuing waiver of consent to any subsequent breach by
either party hereto.
(g) In the event that either party hereto brings suit for the
collection of any damages resulting from, or the injunction of any action
constituting, a breach of any of the terms or provisions of this Agreement, then
the party found to be at fault shall pay all reasonable court costs and
attorney's fees of the other.
(h) The Executive shall not delegate the employment
obligations pursuant to this Agreement to any other person.
{The rest of this page intentionally left blank}
12
<PAGE> 13
IN WITNESS WHEREOF, the Executive has hereunto set his hand, and the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first written above.
COMPANY:
MEHL/Biophile International Corporation
By:_____________________________________
Name: Thomas L. Mehl,Sr
Title: CEO and Chairman of the Board
EXECUTIVE:
______________________________________
Robert J. Figliozzi
13
<PAGE> 1
Exhibit 21
Subsidiaries
Name Jurisdiction of Incorporation
- ---- -----------------------------
MEHL Technologies, Inc. Delaware
Mehl Group Marketing, Inc. Puerto Rico
SLS (Biophile) Limited Wales
Integrated Technologies Research Limited Wales
Video Knights, Inc. New Jersey
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-3 and related Prospectus filed with the Securities and Exchange
Commission on July 1, 1996 in Registration No. 333-7367 of our report, dated
July 10, 1997, except for note 18, as to which the date is August 5, 1997, with
respect to the consolidated financial statements of Mehl/Biophile International
Corporation and subsidiaries included in its Annual Report on Form 10-K for the
year ended May 31, 1997, filed with the Securities and Exchange Commission.
JOSEPH DECOSIMO AND COMPANY
A TENNESSEE REGISTERED LIMITED LIABILITY PARTNERSHIP
Chattanooga, Tennessee
September 10, 1997
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the
Registration Statements on Form S-3 (No. 333-24231 and No. 333-07367)
of our report dated July 11, 1996, with respect to the consolidated balance
sheet, statements of operations, stockholders' equity and cash flows of
Mehl/Biophile International Corporation included in its Form 10-KSB for the
year ended May 31, 1996, filed with the Securities and Exchange Commission.
/s/ Bond, Andiola & Co.
BOND, ANDIOLA & CO.
Raritan, New Jersey
September 5, 1997
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