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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 December 31, 1995 Commission file number 0-15414
OR
[ ] Transition report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _____ to ______
ALOETTE COSMETICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2056003
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 Wright's Lane East, West Chester, PA 19380
(Address of principal executive offices) (Zip Code)
(610) - 692-0600
(Registrant's telephone number, including area code)
NONE
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, no par value
(Securities registered pursuant to Section 12(g) of the Act)
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 periods 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 .
--- ---
Transitional Small Business Disclosure Format Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405, of Regulations S-B is not contained herein, and will not 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. [X]
Registrant's total revenues for its most recent fiscal year......$13,263,983
The aggregate market value of the 1,199,403 shares of voting stock held by
nonaffiliates of the registrant at the closing stock price of $5.00 as of March
20, 1996 was $5,997,015.
Common Stock outstanding as of March 20, 1996: 2,157,253
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Report
on Form 10-KSB:
1) Information set forth in Part III of this report is incorporated by
reference to the Registrants 1996 Proxy Statement.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Page
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<S> <C>
Item 1. Business 1
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 9
Part II
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5. Market for the Registrant's Common Equity 10
and Related Stockholder Matters
6.(i) Selected Consolidated Financial Data 11
(ii) Management's Discussion and Analysis of Results 12
of Operations and Financial Condition
7. Financial Statements and Supplementary Data 16
8. Changes in and Disagreements with Accountants on 16
Accounting and Financial Disclosure
Part III
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9. Directors and Executive Officers of the Registrant 17
10. Executive Compensation 17
11. Security Ownership of Certain Beneficial 17
Owners and Management
12. Certain Relationships and Related Transactions 17
Part IV
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13. Exhibits, Financial Statement Schedules 17
and Reports on Form 8-K
</TABLE>
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ALOETTE COSMETICS, INC.
PART I
ITEM 1. BUSINESS
Aloette Cosmetics, Inc.
Aloette Cosmetics, Inc. was incorporated in 1977 under the laws of the
Commonwealth of Pennsylvania and is primarily engaged in the distribution of
aloe vera-based skin care products, cosmetics, and other personal care products.
As used herein, "the Company" includes the operations of Aloette Cosmetics, Inc.
and its wholly-owned subsidiaries.
On June 15, 1995 the Company consummated the sale of certain assets of
its manufacturing operations in Texas for cash of approximately $2.1 million. In
connection with the sale, the Company entered into a five year supply agreement
with the buyer to purchase inventory at prices competitive in the industry. The
sale included the facility, inventory and equipment. As a result of the sale of
the manufacturing operations, the Company recorded a pre-tax charge of $3.8
million (See Item 6 and Note 18 to Consolidated Financial Statements).
Sales from the manufacturing operations were approximately $1.2 million
through the date of sale and $2.7 million for the twelve months ended December
31, 1994. The net losses from normal operations for the corresponding periods
were $478,000 and $1.1 million.
Products
The majority of the Company's revenues are derived from sales to
franchises of approximately 140 aloe vera-based skin care products, makeup,
fragrance, and cosmetic accessory products marketed exclusively under the trade
name "Aloette". A common ingredient in the Aloette skin care line is the gel
from the plant popularly known as aloe vera. The Company's Aloette skin care
items are grouped according to individual skin type and are designed to be used
in a daily regimen. Aloette's glamour products include liquid foundations,
pressed powders, powder blushes, powder eyeshadows, eye pencils, mascaras,
lipsticks, hair care items, and tanning products; among the fragrance items are
a bath set and men's and women's colognes. The Company also sells promotional
and support items to its franchises, including business supplies, product
samples, and sales and recruiting materials. For the year ended December 31,
1995, approximately 77% of the Company's total revenues were generated from
Aloette product sales.
Set forth below is certain information concerning the sales of each
product group for each of the Company's last three years.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Net Net Net
Product % of Product % of Product % of
Sales Total Sales Total Sales Total
-------- ----- ------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Skin care $ 6,634,538 59% $ 9,158,039 62% $ 8,488,342 55%
Glamour (makeup
and accessories) 2,538,164 22% 2,668,532 18% 3,469,821 22%
Fragrances 273,434 2% 1,225,632 8% 1,403,458 9%
Promotional and
support items 1,900,260 17% 1,808,343 12% 2,193,649 14%
----------- ---- ----------- ---- ----------- ----
Total $11,346,396 100% $14,860,546 100% $15,555,270 100%
=========== ==== =========== ==== =========== ====
</TABLE>
1
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Marketing
Products marketed under the Aloette name are not sold in retail stores
and are available primarily through Aloette's domestic and foreign franchises
who recruit and train Beauty Consultants to utilize sales techniques developed
by the Company. Beauty Consultants are not required to purchase, maintain
inventories of, or deliver products; instead, the Company sells products to
franchises who maintain inventories at levels sufficient to meet anticipated
orders from customers.
Beauty Consultants hold Shows where they present the Company's
products, instruct guests concerning the use of such products as part of a daily
beauty program, and obtain product orders. Franchises are responsible for
shipping the products that are ordered to hostesses, who in turn arrange for
guests to receive their orders. Beauty Consultants also obtain reorders from
customers and sell Aloette products through individual consultations. Non-show
orders are shipped by franchises directly to customers. For the years 1995, 1994
and 1993, non-show orders comprised approximately, 45%, 45% and 42%,
respectively, of retail sales.
Franchising
In North America, Australia and New Zealand, the Company presently
markets its Aloette products through a franchise system. The Aloette franchises
are granted the right to conduct business within a specified territory. Sales
generated outside the franchises' territory may be subject to certain
unrestricted fees. New franchises being granted in the United States have an
exclusive territory containing approximately one million in population. This is
a return to historical population levels that were granted prior to 1993 when
the Company developed certain Territorial Subdivision, Multi-Unit Development
and Master Franchise strategies. Under these strategies, franchises were
established with approximately 100,000 or more in population. The Company's
principal subsidiary, Aloette Cosmetics of Canada, Inc., ("Aloette Canada"), has
historically granted franchises within territories which generally contain
approximately 500,000 people.
During the development of the Company, franchises were often granted in
those territories with the most concentrated population bases. As of December
31, 1995, the Company had a total of 57 franchises operating in the United
States and 34 franchises operating in Canada. The Company continues to grant new
franchises in existing open territories and focuses on improving the
productivity of its existing franchises. The Company believes that improved
productivity from existing franchises will foster an increased demand for new
franchises in the future. The Company expects to continue to expand into
international markets primarily through the granting of international
distributorship and license agreements (see Business - International
Operations).
When a franchise relationship is established, the Company provides the
franchisee with sales and operations manuals that describe the guidelines and
specifications concerning Aloette's methods of conducting business. In addition,
the franchisee is provided two to four days of training by experienced company
personnel. The initial training program is periodically updated, the most recent
revisions occurring in 1995. Following training, the Company makes periodic site
visits to provide additional training and review certain aspects of the
franchisee's business in relation to the Company's standards. Each franchisee is
required to submit various reports to the Company including a monthly summary of
operations and annual financial statements. The Company also holds meetings of
franchisees to provide information concerning the Company and its products.
In order to become a franchisee, an applicant must enter into a
franchise agreement with the Company and pay a franchise fee. The fee is $20,000
payable upon execution, however, financing of the fee is available on approved
credit. The franchise agreement requires that a franchisee make an initial
inventory purchase of $7,500 and that the franchisee have an adequate amount of
working capital at the start of its operations.
2
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In 1995, the Company modified its franchise agreement that is effective
for all new franchisees and all franchisees renewing their agreement. Under the
agreement, the Company grants specific rights and a license to operate a
franchise in a specified territory, generally with a population of approximately
1,000,000. The right to market in a specified territory can be rescinded by
certain limited failures to achieve sales quotas at various anniversary dates of
the agreement.
The franchise agreement requires franchisees to pay the Company a
monthly royalty fee of five percent of the franchise's gross sales. For the year
ended December 31, 1995, approximately 14% of the Company's total revenues were
derived from these royalty fees.
In addition, franchisees are obligated to pay their pro rata portion of
the cost of incentive, promotional and motivational campaigns, contests, and an
annual Seminar for Beauty Consultants organized by the Company. The expenses
recorded by the Company regarding the above programs are net of any
reimbursement received from the franchisee.
The franchise agreement provides for an initial term of five years and
is renewable for additional ten-year terms upon execution of the then-current
franchise agreement. There is no fee for renewal. In order to renew, the
franchisee must be in compliance with all terms of the franchise agreement,
including being current in all financial obligations to the Company, and must
meet certain sales goals. The franchise agreement may be terminated at any time
by the franchisee upon fulfilling all of its financial obligations. The Company
may not terminate a franchise except for cause, including the franchisees
failure to comply with the franchise agreement. The Company has a right of first
refusal on the sale of any franchise and has the right to review the
qualifications of the proposed transferee. In addition, upon the transfer of a
franchise, the franchisee must pay the Company a transfer fee equal to ten
percent of the resale price not to be less than $6,500 and not to exceed
$25,000. Revenues from franchise purchase fees and transfer fees constituted
approximately 0.5% of the Company's total revenues in 1995, 1% in 1994 and 1% in
1993.
To increase market penetration in North America, in 1993 the Company
modified its franchise system to include three alternatives to the single unit
franchise: Territorial Subdivision; Multi-Unit Development; and the Master
Franchise. Effective in 1995 the Company no longer offered the Multi-Unit
Development or Master Franchise programs. As of December 31, 1994, the Company
had executed 3 Multi-Unit Developments agreements and had not consummated any
Master Franchise programs.
The Territorial Subdivision strategy will continue to be offered in
certain situations and is intended to create an incentive for existing
franchisees ("Subdividers") to transfer undeveloped markets within their current
franchise territory to third-parties with the Company's approval. The
Subdividers receive a percentage of the then current franchise fee in inventory
credits from the Company. If an existing franchisee subdivides to a third-party,
and that third-party begins its franchise with staff from the existing
franchise, the third-party is required to negotiate and pay to the existing
franchisee a "going concern value" related to the staff's previous sales levels
in order to obtain approval for the subdivision from the Company. The Company is
solely responsible for granting franchise licenses, monitoring and enforcing
compliance within the franchise system, collection of royalties and product
payables and collection and analysis of franchise data. As of December 31, 1995,
the Company has completed five (5) Territorial Subdivisions.
The Company also began providing benefits to existing franchises if
they promote Beauty Consultants to become franchisees. The Company will pay 10%
of the new franchises gross sales for one year, in the form of product credits,
to the existing franchise. In addition, the new franchise will pay to the
existing franchise, 5% of the gross sales for one year of any Beauty Consultants
who transfer their affiliation from the existing franchise to the new franchise.
3
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Set forth below is certain information concerning the number of
franchise agreements entered into and terminated in North America for each of
the Company's last three years:
1995 1994 1993
---- ---- ----
Franchises at beginning of year 88 93 90
New Franchise agreements 9 9 9
Terminated/consolidated
franchise territories (6) (14) (6)
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Franchises at end of year 91 88 93
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At December 31, 1995 the Company had a total of 57 franchises in the
United States which were located in the following geographic regions: 12 in the
Northeast; 22 in the South; 15 in the Midwest; and 8 in the West. At December
31, 1995 the Company had a total of 34 Canadian franchises which were located in
the following provinces: 20 in Ontario; 4 in Quebec; 2 in Alberta; 4 in British
Columbia and 4 in other various Canadian provinces.
International Operations
In countries other than the United States, Canada, Australia and New
Zealand, the Company grants Distributorship and License Agreements which provide
for exclusive distribution rights for Aloette products within a particular
foreign country or market, including the right to sublicense in accordance with
the Aloette franchise system. The purchase fees charged by the Company for the
Agreements are negotiated, and depend, in part, upon the size of the potential
market. The purchase fees for existing Distributorship and License Agreements
have ranged from $110,000 to $400,000. In the past, the Company had granted
franchising arrangements similar to Australia and New Zealand; however, these
arrangements have been terminated and the Company is presently distributing to
its franchises in these countries through its Australian subsidiary. At present,
the Company has no outstanding Master Franchise agreements.
Under a Distribution and License Agreement (the "Agreement"), the
distributor is required to purchase all products from the Company and is granted
the right to distribute Aloette products using any method of marketing and
distribution approved by the Company, including without limitation methods
present in the Aloette marketing system or any derivation thereof such as home
show, direct retail, duty free shops and direct response television. To reduce
risk to the Company, generally all purchases by the distributor must be
collateralized by an irrevocable letter of credit. In addition, title to the
goods passes to the distributor when product is shipped from the Company's
facilities in North America. The Company retains all rights, title and interest
in the Aloette trade name and any Aloette trademarks. The distributor is
responsible for all marketing, promotional and advertising costs and expenses
incurred in the territories governed by the agreement. All advertising is
subject to the Company's approval. The distributor is required to pay royalty
payments which generally have approximated 2.25% of all retail sales or 14% of
net product sales. In the event of an approved subdivision the distributor must
remit 10% of fees collected on the initial grant, renewal, and transfer of
rights.
The term of the Agreement generally covers an initial period ranging
from five to ten years with the eligibility of an automatic five year renewal if
certain criteria have been met. The Distributor has the right to terminate the
Agreement after the initial term; the Company may terminate the Agreement in
whole or in part at any time for non-compliance, including the failure to attain
certain sales criteria. The Distributor does not have the right to sell,
transfer, or assign rights under the agreement and is generally subject to a
five year non-compete clause upon termination.
4
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In May, 1994, the Company entered into a Distributorship and Licensing
Agreement granting the exclusive right to market and distribute Aloette products
in the Company's new packaging design introduced in 1993 in four major
metropolitan cities in the country of China. The agreement, which requires the
payment of royalty payments based on a percentage of net product sales, and a
minimum inventory purchase in the first year, is effective for an initial term
of five years and is eligible for an automatic five year renewal if the
Distributor is in compliance with the agreement including the attainment of
certain sales goals.
In March 1994, the Company entered into a Distributorship and Licensing
Agreement granting the exclusive right to market and distribute Aloette products
in the Company's former packaging design in the country of Korea. The agreement
requires a minimum inventory purchase in the first year and is effective for an
initial term of two years.
In February, 1994, the Company entered into a Distributorship and
Licensing Agreement granting the exclusive right to market and distribute
Aloette products in the Company's new packaging design in the country of Taiwan.
The agreement, which requires the payment of monthly royalty payments based on a
percentage of net product sales, and a minimum inventory purchase in the first
year, is effective for an initial term of five years and is eligible for an
automatic five year renewal if the Distributor is in compliance with the
agreement including the attainment of certain sales goals.
In February, 1992, the Company entered into a licensing agreement with
Alover Cosmetics GmbH ("Alover") granting the exclusive right to conduct Aloette
business within the following countries: Austria, Bulgaria, the Federal Republic
of Germany, Hungary, Poland and Romania. John E. Defibaugh, a director, former
officer and the husband of Patricia J. Defibaugh, the Company's Chairman and
Chief Executive Officer, owns approximately 50% of the shares in the licensee.
The original agreement required the payment of an initial licensing fee of
$110,000, and gave the licensee the right to utilize the Company's trademarks
and the exclusive right to manufacture Aloette products based on "know-how" and
expertise provided by the Company. This agreement was amended in February, 1994
to exclude the right to manufacture and to require the purchase of all products
from the Company. In addition, the required monthly royalty payments, which
under the original agreement ranged from 2% to 5% of retail sales based on
certain sales goals and were subject to a minimum annual payment provision, were
amended to be 2.25% of all retail sales. The agreement has an initial term of
five years and is renewable by the licensee for three additional five-year
option periods.
In 1991, the Company entered into a national license agreement granting
the exclusive right to distribute the Company's products in the Netherlands. The
licensee is required to pay to the Company a monthly royalty fee based on the
retail sales of Aloette products in the licensed territory. The agreement is for
an initial term of five years and is renewable by the licensee for two
successive five-year terms if the licensee is in compliance with the agreement,
including the attainment of certain sales goals. Upon termination of the
agreement, the licensee is subject to the same restrictive covenant as a
Distributor.
In 1995, net product sales generated by Aloette Canada represented 36%
of the Company's total. Net product sales to non-affiliate international
franchises and distributors for 1995, 1994 and 1993 were approximately 3%, 6%
and 3%, respectively, of the Company's total net product sales.
Aloette's international operations are subject to certain risks
inherent to conducting business outside of the United States. The Company's
Canadian operations are subject to fluctuations in currency rates while its
operations in Australia and New Zealand are also subject to risks related to
import regulations. In its recent Distribution and License Agreements, the
Company has taken measures to minimize the risks associated with doing business
outside the United States by requiring payment in United States currency and
establishing terms that are designed to minimize the Company's responsibility
with regard to exporting products for sale in foreign markets.
5
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Suppliers
Prior to June 1995 the majority of Aloette's skin care and glamour
products were being produced at the Company's manufacturing facility in Texas.
On June 15, 1995 the Company sold this facility as part of a sale of assets, for
$2.1 million. The Company entered into a five (5) year purchasing agreement with
the buyer at prices competitive in the industry. The majority of the Company's
skin care and glamour products are being manufactured under this agreement.
The Company currently purchases raw materials, consisting chiefly of
essential oils, chemicals, containers and packaging components from various
domestic and international suppliers. In addition, gel from the aloe vera plant
is an important ingredient in the Company's skin care products and is purchased
from several sources. The Company believes that it can obtain sufficient aloe
vera to manufacture and supply its products.
The Company continually engages in research and development activities
to improve its existing products and to develop new products. Such activities
did not require material expenditures in the fiscal year of 1995, and the
Company expects this trend to continue during fiscal 1996.
Distribution
The Company's products are shipped directly from the manufacturers to
Company-owned warehouse facilities. As of December 31, 1995, the Company's
warehouses were located in: West Chester, Pennsylvania and Concord, Ontario,
Canada. (See Business-Properties)
Currently the West Chester, PA warehouse generally maintains a 180 day
supply of products, promotional and support items for shipments to all domestic
franchises. The warehouse located in Canada maintains a 180 to 200 day supply of
inventory for shipments to all Canadian franchises.
Aloette products are shipped by the Company from its distribution
centers to franchises who are obligated to pay for such products within thirty
days of the invoice date. Franchises either ship products directly to the
customer or, in the case of a Show, to the hostess or host two weeks from the
date of the Show. All shipments made directly to hostesses, hosts or customers
must be paid for in full either prior to, or upon delivery.
Competition
The cosmetics industry is a highly competitive market which is
sensitive to changing consumer preferences and demands. There are many companies
which sell cosmetics by means of Shows, mail order, on a door-to-door basis and
in retail stores. All of these companies compete with the Company. Many of these
competitors are substantially larger than the Company in terms of sales and
distributors and have substantially greater financial resources and experience.
The Company's competition arises from both domestic and foreign sources
and is based on price, quality and service. The Company believes that its
continued success will depend on its ability to remain competitive in these
areas.
Two of the better known direct sales cosmetics companies which compete
with the Company's Aloette products are Mary Kay Cosmetics, Inc., which sells
cosmetics directly to its beauty consultants who, subsequently, market them to
customers and Avon Products, Inc., which historically has primarily utilized the
door-to-door selling technique. Both of these companies are substantially larger
than the Company. The market in which the Company participates is highly
competitive in price, service and quality.
In the marketing of Aloette products, price is a significant
competitive factor. Due to the Company's direct sales and franchise marketing
methods, the Company has been able to price its products at levels which are
substantially lower than those for products which the Company believes to be of
comparable quality.
6
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Regulation
The Company's advertising and sales practices are subject to regulation
by the Federal Trade Commission. In addition, the Company's operations are
subject to numerous federal, state and local laws related to the sale of
franchises and the labeling, content and packaging of its products.
Each of the other foreign jurisdictions in which the Company markets
its products imposes regulatory requirements on the manufacturing, labeling and
content of such products as well as the sale of franchises. The Company believes
that its products and its methods of distribution are in compliance with such
foreign and domestic laws and regulations.
Certain of the Company's suppliers are also subject to regulation by
the Food and Drug Administration ("FDA"). The Company has no reason to believe
that such suppliers are not in compliance with standards set by the FDA.
Environmental Matters
The Company does not believe that compliance with federal, state or
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment will have a material effect on its capital expenditures, earnings or
competitive position.
Trademarks and Patents
The Company's trademark "Aloette", issued in May, 1988, has a
twenty-year life and is subject to renewal. The Company has registered the
Aloette trademark in the United States, Canada and certain foreign countries.
The Company has also registered its logo, which is in the form of a lark, in the
United States and Canada. The trademark "lark" logo, issued in 1985, has a
twenty-year life and is also subject to renewal.
Customers
The Company extends 30-day payment terms to its franchisees for
purchases of "Aloette" products and supplies. The Company's franchises offer
customers the right to exchange certain merchandise; historically, the amounts
of such returns have been minimal. The Company does not accept product returns
from its franchises or offer warranties on its products except in the case of
manufacturing defects; historically, such amounts have not been material.
The Company sells to three franchises in Canada; Aloette of Montreal
South, Aloette of Montreal Northeast and Aloette of Quebec City, that have
common ownership. Sales to these franchises were approximately 9%, 11% and 10%
of total revenues in 1995, 1994 and 1993, respectively.
Employees
As of December 31, 1995, the Company employed 31 people who were
involved with the Company's franchise and distribution business.
The Aloette franchisees are independent business owners and not
employees of the Company. Similarly, the Beauty Consultants are independent
contractors of the franchisees and are neither employees nor involved in a
contractual relationship with the Company.
7
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None of the Company's employees are represented by a labor
organization, and the Company is not a party to any collective bargaining
agreement. The Company has never been subject to an employee strike or work
stoppage and considers its employee relations to be good.
Insurance
The Company presently maintains product liability insurance at a level
which management believes is sufficient. However, because of the risks inherent
in selling cosmetics, it is possible that the Company could be held liable in
future litigation for amounts in excess of its product liability insurance
coverage. A judgment against the Company for an amount exceeding its liability
insurance coverage could have a material adverse effect upon the Company. If a
product liability claim were asserted, and the product in question was acquired
from an independent supplier, the Company might be able to proceed against such
supplier. However, the success of any such proceeding could be affected by
product alterations by the Company, the insolvency of such supplier or other
uncertainties.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in West Chester,
Pennsylvania. The 25,000 square foot office and warehouse facility was built to
the Company's specifications at a cost of approximately $1.95 million.
Approximately 10,000 square feet is used for office space, and 15,000 square
feet is used for warehousing and shipping.
The Company also owns a 3,700 square foot office condominium located
near its headquarters. The Company is actively seeking a buyer for this
property.
The Company's Canadian headquarters is located in Concord, Ontario
where the Company owns a 17,500 square foot building.
In April, 1995, the Company sold its Georgia facility, a distribution
center used by the Company in the late 1980's, for $285,000. Prior to the sale,
this facility had been leased.
The Company sold its manufacturing facility in June, 1995. The building
contained approximately 84,400 square feet of manufacturing, distribution and
office space.
The Company believes that its current facilities are adequate to meet
its present needs.
ITEM 3. LEGAL PROCEEDINGS
On February 5, 1993, the Company obtained a default judgment against
the Defendants in the action Aloette Cosmetics, Inc. of Delaware et al. v.
Wright et al. and the Defendants' counterclaims were stricken. One defendant had
appealed this judgment and such appeal was granted. The Company negotiated a
favorable settlement agreement with the Defendants. The terms of the agreement
did not have a material effect on the consolidated financial condition or
results of operations of the Company.
On or about March 31, 1994, an action was filed against the Company in
the Eastern District of Pennsylvania under the caption Valencia et al. v.
Aloette Cosmetics, Inc. et al. alleging, among other things, breach of contract
and warranty, and fraud against the Company and an officer and seeking
compensatory and punitive damages in excess of $1,000,000 plus court costs and
attorney's fees. The Company settled this matter on August 8, 1995. The
settlement did not have a material effect on the Company's consolidated results
of operation.
On or about May 27, 1994, a similar action was filed against the
Company in the Eastern District of Pennsylvania under the caption, Slaven et al.
v. Aloette Cosmetics, Inc. et al. The Company has filed answers and
counterclaims in these actions. In March, 1995, the counts alleging breach of
covenant of good faith and fair dealing and abandonment of trademark were
8
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dismissed without prejudice based upon insufficient pleadings. The Company
believes that the plaintiffs' claims are without merit and intends to defend
these actions and to prosecute its claims vigorously.
On or about February 3, 1995, an action was filed against the Company
and certain of its present and former officers in the Superior Court of Arizona
under the caption Mattice et al. v. Aloette Cosmetics., Inc. et al. The Company
settled this matter on May 3, 1995. The settlement did not have a material
effect on the Company's consolidated results of operation.
On November 11, 1994, the Company filed an action in the High Court of
New Zealand under the caption Aloette Cosmetics, Inc. of Delaware, et al. v.
Billisa Holdings Ltd., et al. In this action the Company alleges, among other
things, that the Defendants failed to pay for product supplied and failed to pay
management fees; and the Company requested an injunction requiring Defendants to
turn over documents and inventory and to cease operating as a franchise. On
December 19, 1994, the Court granted the Company's request for an injunction.
The Defendants have filed answers and counterclaims in these actions against the
plaintiffs seeking compensatory and punitive damages in excess of approximately
$5 million plus court costs and attorneys' fees. The counterclaim alleges, among
other things, breach of express and implied terms of contract, breach of
fiduciary obligations, breach of section 9 of the Fair Trading Act of 1988, and
undue influence. Management believes that the Company's position in this matter
is meritorious, that the Defendants' counterclaims are without merit, and
intends to pursue this action vigorously.
In addition, from time to time, the Company is a defendant in
litigation arising in the normal course of business. Management and legal
counsel do not believe that any settlement resulting from any of the litigation
referred to above, individually or in the aggregate, will have a material
adverse effect on the Company's consolidated financial position; however, it
could have an impact on the annual or interim results of operations in the
period in which it is resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market
under the symbol ALET and is quoted on the NASDAQ National Market System. The
following table sets forth, for the periods indicated, the high and low market
prices and dividend information for the Company's common stock.
STOCK PRICE RANGE
<TABLE>
<CAPTION>
1995 1994
----------------------------------- ----------------------------------
Quarter Ended High Low Dividend High Low Dividend
- ------------- ---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
March 31 2 1/2 1 9/16 - 5 1/4 3 1/2 -
June 30 3 3/8 1 1/2 - 4 3/8 2 3/4 -
September 30 3 1/4 2 1/4 - 3 3/4 2 5/8 -
December 31 2 3/4 1 5/8 - 3 1/2 1 1/2 -
</TABLE>
The Company had 2,157,253 shares of no par value stock outstanding at
December 31, 1995. The approximate number of shareholders of record at March 20,
1996 was 975.
In October 1993, the Company suspended its quarterly dividend. In
addition, under the Company's new financing agreement with its lender, dated
January 4, 1996, the Company is prohibited from paying dividends.
10
<PAGE>
Item 6 (i) SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the Company's
consolidated financial statements. The information set forth below should be
read in conjunction with the Company's Consolidated Financial Statements, the
related notes and other financial information appearing elsewhere herein and
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31 1995(2) 1994 1993 1992(3) 1991(4)
- ---------------------- ------- ---- ----- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net product sales $11,346 $14,861 $15,555 $18,113 $20,795
Revenue from franchise operations 1,853 2,032 2,296 2,684 2,930
Sales of franchises 65 210 216 316 261
------- ------- ------- ------- -------
Total revenues $13,264 $17,103 $18,067 $21,113 $23,986
======= ======= ======= ======= =======
Cost of product sales $ 8,021 $10,821 $10,088 $11,835 $12,983
Selling, general and administrative $ 5,712 $ 7,975 $ 7,958 $ 7,557 $ 7,296
Loss on sale of assets of
manufacturing operations $ 3,800 - - - -
Total costs and expenses $17,596 $18,818 $18,076 $19,399 $21,031
Net income (loss) $(4,126) $(1,541) $( 180) $ 912 $ 2,019
Net income (loss) per common share $ (1.91) $( .71) $( .08) $ .42 $ .84
Cash dividends declared
per common share (1) - - $ .16 $ .32 $ .32
Weighted average shares outstanding 2,157 2,157 2,157 2,156 2,400
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ 4,488 $ 5,252 $ 9,772 $ 9,088 $ 9,891
Total assets $12,194 $24,382 $25,522 $25,542 $27,386
Long-term debt $ 1,968 $ 2,676 $ 5,478 $ 3,488 $ 3,990
Shareholders' equity $ 7,475 $11,526 $13,444 $14,769 $15,425
</TABLE>
(1) The Company suspended its quarterly dividend in the third quarter of 1993.
(2) Includes a $3.8 million pre-tax charge for the loss on the sale of assets
of manufacturing operations.
(3) Includes a charge of $290,000, or $.14 per share, as a result of a change
in accounting for income taxes resulting from the implementation of
Financial Accounting Standards Board Statement No. 109 "Accounting for
Income Taxes."
(4) Includes a $750,000 (approximately $435,000 after-tax or $.18 per share)
restructuring charge.
11
<PAGE>
Item 6 (ii) MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
1995 versus 1994
Net Sales and Earnings. The Company recorded a net loss of $4.1
million, or $1.91 per share for the fiscal year ended December 31, 1995 compared
to a net loss of $1.5 million, or $.71 per share in 1994. The decrease was
primarily attributable to the $3.8 million loss recorded as a result of the sale
of certain assets of the manufacturing operations in June, 1995 and
approximately $478,000 of losses from operations incurred by the manufacturing
operations during the first six months of 1995.
For the third and fourth quarters of 1995, the Company recorded
operating income of $83,000 and $176,000, respectively. The Company is hopeful
that this positive trend which it has experienced will continue since the
Company has returned its sole focus to enhancing its core business of cosmetics
sales through home shows and has eliminated the negative impact of the
manufacturing operations and the related overhead and low margin sales.
Total revenues for the current year declined $3.8 million, or 22%, to
$13.3 million versus $17.1 million in 1994, substantially due to a decrease in
net product sales. Net product sales for the twelve months ended December 31,
1995 were $11.3 million versus $14.9 million in 1994, a decrease of 24%, or $3.5
million. Approximately $1.5 million of the decrease in net product sales is a
direct result of the loss of private-label and contract manufacturing revenues
previously generated by the manufacturing operations. While net product sales
from the Company to domestic franchises remained relatively flat, sales to
Canadian franchises decreased $1.1 million, or 21%, and sales to the Company's
other international franchises decreased $500,000, or 69%. Sales to various
international distributors were $60,000 in 1995 compared to $150,000 in 1994. In
addition, in 1994 new product sales contributed approximately $620,000 to net
product sales. Historically, the Company has introduced several new products
every year; however, any increase in sales volume related to new products was
offset by discontinued products. In 1995, new product sales did not have a
material impact on revenues.
Sales for 1996 are expected to be lower than the sales for 1995
primarily due to the sale of the manufacturing operations and the corresponding
loss of its revenues. Revenues from the manufacturing operations generated from
sales of health and beauty aid products sold under Sue Pree and Lisa Mornay
trademarks, private label sales and contract manufacturing services were $1.2
million in 1995 through the date of sale of the manufacturing operations.
The Company implemented several strategies intended to improve the
market penetration of its Aloette business by increasing the number of
franchises in North America and international expansion in 1993. In 1995, the
Company sold nine new franchises. Although management can provide no assurances
that the trend in net product sales to its franchises will be favorably
improved, the Company continues to focus on improving the productivity of its
existing franchises combined with the sale of new franchises. "Sales Management"
is especially important for the Canadian franchises in order to reverse its
negative revenue trend. The Company has and will continue to increase franchise
operations and sales support, set clear direction on sales methods and
leadership, enhance franchise incentives focused on growth and stress continued
focus on home show sales and the importance of new recruits.
In 1995, the Company implemented a wholesale price increase on certain
of its supply and incentive items to cover corresponding increases in costs.
This increase had no material impact on revenues. The Company has no intentions
to implement an across the board price increase but plans to review prices on a
product-by-product basis in 1996.
12
<PAGE>
Revenue from franchise operations, the royalty received from Aloette
franchises based on their retail sales, decreased 9%, or $180,000, to $1.85
million for the 12 months ended December 31, 1995, from $2 million in 1994. The
decrease in revenue from franchise operations directly corresponds to the annual
decline in retail sales -- sales from franchises to their customers -- which
totaled approximately $40.3 million in 1995 compared to $44.5 million in 1994, a
decrease of $4.2 million, or 9%.
Cost of Product Sales. For the current year the cost of product sales
as a percentage of net product sales decreased 2% from 73% in 1994 to 71% in
1995, and from $10.8 million to $8 million, respectively. The decrease is
primarily due to the sale of certain assets of the manufacturing operations and
the elimination of its associated high overhead costs in the latter half of
1995. Management expects the cost of product sales as a percentage of net
product sales to continue to be favorably impacted in 1996 due to the sale of
the manufacturing operations, in addition to improved margins as a result of
negotiated discounts with certain suppliers and improved purchasing.
Selling, General and Administrative Expenses. Total selling, general,
and administrative expenses decreased $2.3 million, or 28%, to $5.7 million from
$8 million, for the fiscal years ended 1995 and 1994, respectively. The decrease
in expenses was predominantly a result of cost reduction initiatives taken in
1994 and early 1995, as well as the elimination of approximately $900,000 of
expenses from the manufacturing operations in the second half of the year and
approximately $700,000 of non-recurring charges expensed in 1994. As a result of
the positive steps taken above, expenses for 1996 are expected to be relatively
comparable with fourth quarter operating expenses of $1.1 million down from $2.8
million in 1994. Management will continue to evaluate additional areas for
expense reductions.
Loss on Sale of Assets of Manufacturing Operations. On June 15, 1995
the Company consummated the sale of certain assets of its manufacturing
operations in Texas for cash of approximately $2.1 million. In connection with
the sale, the Company entered into a five year supply agreement with the buyer
to purchase inventory at prices competitive in the industry. The sale included
the facility, inventory and equipment. As a result of the sale of these assets,
the Company recorded a pre-tax charge of $3.8 million.
Private-label sales and contract manufacturing services generated by
the manufacturing operations were approximately $1.2 million through the date of
sale and $2.7 million for the twelve months ended December 31, 1994. The loss
from operations, exclusive of the $3.8 million charge above, was $478,000 for
the first six months of 1995 and $1.1 million for 1994.
Other Income (Expense), Net. Other income for the twelve months ended
1995 versus 1994 decreased $27,000, or 10%. This was primarily the net result of
lower interest expense due to the reduction in bank debt and the loss of
interest income due to lower cash balances at a foreign subsidiary. Other income
in 1995 included a gain on the sale of the Georgia warehouse of approximately
$43,000. In 1994, other income was favorably impacted by a $171,000 gain on
exchange, resulting from cash balances maintained by the Canadian subsidiary.
Management expects no significant changes in other income in 1996.
Income Taxes. In 1995, the Company recorded a deferred tax benefit of
$500,000 compared to a deferred tax benefit of $442,000 recorded in 1994, which
primarily resulted from the net losses from its domestic subisidiaries.
1994 versus 1993
Net Sales and Earnings. The Company recorded a net loss of $1.5
million, or $.71 per share for the fiscal year 1994. The net loss for the year
ended December 31, 1993 was $180,000 or $.08 per share. Total revenues declined
$964,000 to $17.1 million in 1994 versus $18.1 in the previous year primarily
due to a decrease in net product sales of $695,000. Currency exchange rate
differences related to the Company's Canadian operation accounted for 38% of the
decline in revenues. The Company's manufacturing operations incurred $1.0
million of the $1.5 million year-to-date loss.
13
<PAGE>
In 1994, total net product sales decreased 4% to $14.9 million from
1993 levels of $15.6 million. Net product sales from the Company to domestic
franchises decreased 12% in 1994 from $6.7 million to $5.9 million while sales
to Canadian franchises decreased 16% from $6.3 million to $5.3 million.
Approximately 38% of the $1.0 million decline in Canadian net product sales was
related to currency exchange rate differences. Net product sales to the
Company's international franchises outside Canada increased 40% to $771,000
versus $549,000 in 1993 primarily as a result of increased sales to its
Australian franchises. In 1994, new products contributed approximately $620,000
to net product sales; this was comparable to the positive effect of the new
packaging launch introduced in 1993. Revenues generated from sales of health and
beauty aid products sold under Sue Pree' and Lisa Mornay trademarks, private
label sales and contract manufacturing services were $2.7 million versus $2.1
million in 1993.
Revenue from franchise operations, the royalty fee received from
Aloette franchises based on their retail sales, decreased $260,000 to $2 million
in 1994, from $2.3 million in 1993. The decline in revenue from franchise
operations directly corresponds to the year-to-date retail sales decline --
sales from franchises to their customers which totaled approximately $44.5
million in 1994 versus $49.4 million in 1993, a decrease of $4.8 million, or
10%.
Cost of Product Sales. Year-to-date cost of product sales as a
percentage of net product sales increased to 73% for 1994 versus 65% in 1993 and
from $10.1 million to $10.8 million. The current year's cost of product sales
was negatively affected by inventory reserves and increased Canadian product
costs attributable to the weakness in the Canadian dollar which totaled
$510,000. The cost of product sales was further impacted by decreased plant
utilization at its manufacturing facility
Selling, General and Administrative Expenses. Total selling, general
and administrative costs of $8.0 million in 1994 did not change from the 1993
fiscal year. These expenses as a percentage of total revenues increased to 47%
for 1994 from 44% in 1993 due to the decline in total revenues.
In 1994 the Company relocated its administrative operations in Canada
to its headquarters in the United States. However, the reduction of $1.0 million
in expenses that resulted from the consolidation and other cost reduction
initiatives implemented in 1994 were more than offset by several charges against
earnings, including bad debt expense from the termination of several franchises
in the United States, legal expenses related to the defense of lawsuits and
several fourth quarter non-recurring charges of approximately $731,000 related
to the closure of the Company's regional sales office in Mexico, expenses for
the production of the Aloette infomercial and the write-off of goodwill related
to the manufacturing subsidiary.
Other Income (Expense), Net. The decrease of approximately $150,000 in
other income is substantially due to an increase in interest expense which
totaled $730,000 in 1994 versus $579,000 in 1993. Other income in 1994 includes
a $171,000 gain on exchange, resulting from cash balances maintained by the
Canadian Subsidiary in the United States.
Income Taxes. The provision for income taxes decreased $495,000 from
the previous year primarily as a result of the Company's 1994 net loss from its
domestic subsidiaries.
ASSETS
Cash and cash equivalents decreased approximately $2.9 million.
Existing cash balances, cash proceeds from normal operations and the net
proceeds received from the sale of the manufacturing operations were used to
repay the Company's bank term loan of $2.25 million and its revolving line of
credit of $4.4 million. Accounts receivable, inventories and property, plant,
and equipment were adjusted to reflect the sale of assets of the manufacturing
operations. Inventories continue to be one of the Company's largest segment of
total assets, comprising 30%, or $3.7 million of total assets in 1995. Property
plant and equipment were $3.3 million, or 27% of total assets.
14
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
The decrease in current liabilities of $6.7 million primarily relates
to the decrease in the bank term loan and the amounts outstanding against the
revolving line of credit discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company held over $1 million in cash and cash
equivalents and had no outstanding borrowings under the line of credit. Cash and
cash equivalents decreased approximately $2.9 million. Debt decreased $7 million
as existing cash balances, cash proceeds from normal operations, and net
proceeds from the sale of the manufacturing operation were used to repay the
Company's bank term loan and its revolving line of credit. The Company also sold
its Georgia warehouse whereby the associated mortgage note payable was repaid.
On January 4, 1996, the Company entered into an agreement with a new
lender to restructure its financing arrangement. The new financing arrangement
consists of a revolving line of credit with a maximum commitment amount of $1
million, expiring at December 31, 1996. The maturity can be extended prior to
the maturity date at the option of the lender. Interest will be fully
fluctuating and calculated on a 360 day basis, based upon the Bank's prime rate
plus one percent, and payable monthly. A facility fee and all expenses incurred
by the lender are also payable by the Company. The agreement contains among
other covenants, provisions which require the Company to maintain certain
monthly and quarterly financial ratios, limit additional indebtedness, and
restricts the payment of principal and interest on any subordinated debt without
the lender's prior approval. In addition, the line of credit is collateralized
by substantially all of the Company's assets.
Working capital decreased from $5.3 million at December 31, 1994 to
$4.5 million at 1995 year end. The loss of inventories as a result of the sale
of the manufacturing operations negatively impacted working capital in 1995.
In October 1993, the Company suspended its quarterly dividend. There
were no dividends paid in 1995 or 1994, as a condition to the Company's prior
financing agreement. The new financing agreement also prohibits payments of
dividends.
In 1990, the Board of Directors authorized a stock repurchase program
to purchase up to 150,000 shares of the Company's common stock in the open
market. There is no fixed purchase period and all purchases are made at the
Board's discretion. As of December 31, 1994, the Company had repurchased 80,000
shares under this program of which 50,000 shares were for its Employee Stock
Ownership Plan. No shares were purchased during 1995.
Management believes that its working capital, continued plan to reduce
inventory levels and available line of credit will be sufficient to cover normal
and expected cash flow needs, including planned capital spending, for at least
the next twelve months.
INFLATION
The impact of inflation and changing prices on the Company's business
has been minimal. Historically, the Company has been able to increase its prices
to minimize the effect of increases in costs of materials.
FOREIGN CURRENCY TRANSLATION
Although the Company takes measures to minimize unfavorable currency
translation effects, it is subject to currency exchange fluctuations primarily
as a result of its Canadian operations.
SEASONALITY
The Company's sales and profitability are generally lower during
the first and third quarters of each year.
15
<PAGE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
AND SUPPLEMENTARY DATA
Report of Independent Accountants F-1
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the
years ended December 31, 1995, 1994 and 1993 F-3
Consolidated Statements of Shareholders'
Equity for the years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6 - F-16
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
of Aloette Cosmetics, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Aloette Cosmetics, Inc. and Subsidiaries listed in Item 13
of this Form 10-KSB. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aloette Cosmetics,
Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 20, 1996
F-1
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
Cash and cash equivalents $ 1,024,114 $ 3,962,195
Accounts receivable, less allowance
of $110,000 and $125,000, respectively 1,089,368 2,356,001
Current portion of notes receivable,
less allowance of $270,000 and 15,000,respectively 316,657 433,543
Inventories 3,672,249 6,550,357
Prepaid expenses and other current assets 588,665 888,586
Deferred income taxes 291,000 300,000
----------- -----------
Total current assets 6,982,053 14,490,682
Cost in excess of net assets acquired, net 500,398 550,438
Notes receivable, less current portion 564,836 941,608
Property, plant and equipment, net 3,261,940 7,451,779
Other assets 514,280 477,982
Deferred income taxes 370,000 470,000
----------- -----------
Total assets $12,193,507 $24,382,489
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Notes payable, banks $ - $4,385,000
Current maturities of long-term debt 902,361 2,803,398
Accounts payable 539,008 1,058,390
Accrued expenses 881,834 764,845
Accrued compensation and benefits 53,853 113,019
Current portion, deferred franchise fee revenue 116,798 114,031
----------- -----------
Total current liabilities 2,493,854 9,238,683
Deferred income taxes 189,000 882,000
Long-term debt, less current maturities 1,968,371 2,676,495
Deferred franchise fee revenue, less current portion 66,844 58,879
----------- -----------
Total liabilities 4,718,069 12,856,057
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized, 2,963,134 shares issued and
outstanding as of December 31, 1995 and 1994 25,000 25,000
Additional paid-in capital 7,489,735 7,538,995
Unearned ESOP shares (142,500) (213,750)
Cumulative currency translation adjustments (1,066,118) (1,119,249)
Retained earnings 9,930,447 14,056,562
Less: Common stock in treasury, at cost
805,881 shares (8,761,126) (8,761,126)
----------- -----------
Total shareholders' equity 7,475,438 11,526,432
----------- -----------
Total liabilities and shareholders' equity $12,193,507 $24,382,489
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Revenues:
<S> <C> <C> <C>
Net product sales $11,346,396 $14,860,546 $15,555,270
Revenue from franchise operations 1,852,892 2,032,097 2,295,546
Sales of franchises 64,695 210,588 216,065
------------ ------------- -------------
13,263,983 17,103,231 18,066,881
Costs and expenses:
Cost of product sales 8,021,329 10,821,320 10,088,530
Selling, general and administrative 5,712,170 7,975,323 7,957,798
Loss on sale of assets of
manufacturing operations 3,800,000 - -
Sales of franchise 62,059 21,699 29,620
------------ ------------- -------------
17,595,558 18,818,342 18,075,948
------------ ------------- -------------
Operating (loss) (4,331,575) (1,715,111) (9,067)
Other (expense), net (294,540) (267,533) (117,749)
------------ ------------- -------------
(Loss) before income taxes (4,626,115) (1,982,644) (126,816)
Provision (benefit) for income taxes (500,000) (442,000) 53,000
------------ ------------- -------------
Net (loss) $ (4,126,115) $ (1,540,644) $ (179,816)
============= ============= =============
Per common share data:
Net (loss) $ (1.91) $ (.71) $ (.08)
============= ============= =============
Dividends $ - $ - $ .16
============= ============= =============
Weighted average shares outstanding 2,157,253 2,157,253 2,157,253
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Common Stock Additional
Issued Paid-In
Shares Amount Capital
-------- -------- -----------
<S> <C> <C> <C>
Balance, January 1, 1993 2,963,134 $25,000 $ 7,586,695
Purchase of shares for ESOP
Allocation of ESOP shares (10,750)
Currency translation adjustment
Dividends ($.16 per share)
Net loss
--------- ------- ------------
Balance, December 31, 1993 2,963,134 25,000 7,575,945
Allocation of ESOP shares (36,950)
Currency translation adjustment
Net loss
--------- ------- ------------
Balance, December 31, 1994 2,963,134 25,000 7,538,995
Allocation of ESOP shares (49,260)
Currency translation adjustment
Net loss
--------- ------- ------------
Balance, December 31, 1995 2,963,134 $25,000 $ 7,489,735
========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Currency
Translation Retained Treasury Stock
ESOP Adjustments Earnings Shares Cost
---------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ - $ (203,888) $16,122,182 805,881 $(8,761,126)
Purchase of shares for ESOP $(356,250)
Allocation of ESOP shares 71,250
Currency translation adjustment (503,646)
Dividends ($.16 per share) (345,160)
Net loss (179,816)
--------- ----------- ----------- ------- -----------
Balance, December 31, 1993 (285,000) (707,534) 15,597,206 805,881 (8,761,126)
Allocation of ESOP shares 71,250
Currency translation adjustment (411,715)
Net loss (1,540,644)
--------- ----------- ----------- ------- -----------
Balance, December 31, 1994 (213,750) (1,119,249) 14,056,562 805,881 (8,761,126)
Allocation of ESOP shares 71,250
Currency translation adjustment 53,131
Net loss (4,126,115)
--------- ----------- ----------- ------- -----------
Balance, December 31, 1995 $(142,500) $(1,066,118) $ 9,930,447 805,881 $(8,761,126)
========= =========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $(4,126,115) $(1,540,644) $ (179,816)
Adjustments to reconcile net (loss) to cash
provided by (used in) operating activities:
Depreciation & amortization 635,852 1,052,378 873,885
ESOP expense 21,992 34,300 60,500
Provision for doubtful accounts and notes receivable 356,470 306,868 96,190
(Gain) on sale of property, plant and equipment (31,093) - -
Loss on sale of assets of manufacturing operations 3,800,000 - -
Deferred income taxes (584,000) (542,000) 4,000
Franchise fee revenue (54,471) (151,801) (135,075)
Other 4,809 2,193 (21,502)
Changes in operating assets and liabilities, net of effects
from sale of assets:
(Increase) decrease in receivables 1,000,388 (362,892) (670,778)
(Increase) decrease in inventories 667,239 1,224,671 (2,614,152)
(Increase) decrease in prepaids and other current assets 297,113 251,593 (666,848)
Increase (decrease) in accounts payable and accrued
expenses (657,104) 249,353 (411,202)
---------- ---------- -----------
Net cash provided by (used in) operating activities 1,331,080 524,019 (3,664,798)
---------- ---------- -----------
Cash flows from investing activities:
Proceeds from sale of investments - - 271,580
Proceeds of notes receivable, net 281,274 226,799 572,307
Proceeds from sale of property, plant and equipment 296,846 - -
Purchase of property, plant and equipment (26,304) (388,606) (251,119)
Proceeds for sale of the manufacturing operations 2,097,210 - -
Repurchase of franchise territories - (37,500) -
(Increase) decrease in other assets 140,995 (16,610) (392,737)
---------- ---------- -----------
Net cash provided by (used in) investing activities 2,790,021 (215,917) 200,031
---------- ---------- -----------
Cash flows from financing activities:
Dividend payments - - (517,740)
(Repayment) proceeds of notes payable, net (4,385,000) 1,895,750 (520,750)
Purchase of stock for ESOP - - (356,250)
Additional long-term debt - - 3,000,000
Payment of long-term debt (2,602,171) (1,149,849) (725,539)
---------- ---------- -----------
Net cash provided by (used in) financing activities (6,987,171) 745,901 879,721
Effect of exchange rate changes on cash (72,011) (171,161) (283,163)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (2,938,081) 882,842 (2,868,209)
Cash & cash equivalents at beginning of year 3,962,195 3,079,353 5,947,562
----------- ----------- -----------
Cash & cash equivalents at end of year $ 1,024,114 $ 3,962,195 $ 3,079,353
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Presentations:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements:
Financial statement preparation requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements and the
reported amounts of net sales and expenses during the reported period.
Differences from those estimates are recorded in the period they become known.
Fair Value of Financial Instruments:
The Company maintains financial instruments which include cash and cash
equivalents, notes receivable and long term debt. The recorded values of these
financial instruments approximate fair value.
Concentration of Risk:
Financial instruments which potentially subject the Company to
concentration of credit risk consist of cash, investments, and trade and note
receivables. The Company's investments consisted primarily of low risk
investments such as certificates of deposit, municipal bonds and government
securities, and by policy, are not heavily concentrated in any individual
security or any one financial institution. The Company's cash accounts are
primarily maintained with two financial institutions. A substantial portion of
trade and notes receivable are due from the Company's franchisees. The Company
will generally file UCC statements (in U.S.) and General Security Agreements (in
Canada) in order to obtain a priority position in the franchisees' personal
property. Certain of the notes are also collateralized by real estate and other
assets of the franchise.
Gel from the aloe vera plant is an important ingredient in the
Company's skin care products and is purchased from several sources. The Company
believes that it can obtain sufficient aloe vera to manufacture and supply its
products. In addition, the majority of the Company's skin care and glamour
products are manufactured by a single manufacturer. However, the Company
maintains all product formulas and does business with several manufacturers
capable of manufacturing these products if the present manufacturer is unable.
Hence the Company believes that there is no vulnerability of risk.
Statements of Cash Flows:
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents for purposes of the consolidated
statement of cash flows.
F-6
<PAGE>
1. Summary of Significant Accounting Policies, continued:
Inventories:
Inventories are valued at the lower of cost or market. Cost has been
determined using the first-in, first-out method.
Property, Plant and Equipment and Depreciation:
Property, plant and equipment are recorded at cost. Depreciation is
computed principally utilizing the straight-line method and the double declining
balance method over the estimated useful lives of the assets. Upon sale or
retirement, the cost and related accumulated depreciation are removed from the
accounts and resulting gains or losses are reflected in income. A summary of
estimated lives is as follows:
Buildings 20-25 years
Equipment 5-7 years
Building Improvements 15 years
Accounting for the Impairment and Sale of Long-Lived Assets:
The Company adopted SFAS Statement No. 121, accounting for the
impairment of long-lived assets and for long lived assets to be disposed of,
during 1995. The effect of this adoption was immaterial.
Cost in Excess of Net Assets Acquired:
Cost in excess of net assets acquired relates to the certain
acquisitions and franchise repurchases. Amortization of cost in excess of net
assets acquired is computed using the straight-line method over a 20-year
period. The Company's policy is to record any impairment loss against the net
unamortized cost in excess of net assets acquired in the period when it is
determined that the carrying amount of the asset may not be recoverable. An
evaluation is made at each balance sheet date and it is based on such factors as
the occurrence of a significant event, a significant change in the environment
in which the business operates or if the expected future net cash flows would
become less than the carrying amount of the asset. As of December 31, 1995 and
1994 accumulated amortization was $500,400 and $679,429, respectively.
Sales of Franchises:
The Company grants franchises in exchange for an initial franchise fee.
The fee is deferred and recognized into income over the period when all material
services, including sales and technical support, or conditions relating to the
sale of the franchise have been substantially performed. Administrative costs
associated with such sales are expensed as incurred.
Under the current franchise agreement amended in 1995, payment of the
franchise fee is normally due upon granting the franchise, however, financing
may be available with approved credit. Under a previous franchise agreement, a
portion of the franchise fee was due upon granting of the franchise, with the
balance of the original franchise fee due in installments over a two to five
year period. The franchise agreement provides that the franchisee may terminate
the agreement at any time; however, the franchise fees paid to the Company
through the date of termination are nonrefundable.
F-7
<PAGE>
1. Summary of Significant Accounting Policies, continued:
Revenue from Franchise Operations:
Revenue from franchise operations consists of monthly royalty fees
based on a percentage of franchise retail sales.
Foreign Currency Translation:
Assets and liabilities in foreign currencies are translated into U.S.
dollars at the rate of exchange prevailing at the balance sheet date. Revenues
and expenses are translated at the average rate of exchange for the period. The
cumulative translation adjustments are recorded as a separate component of
stockholders' equity. Gains and losses on foreign currency transactions are
included in the determination of net income. Such amounts were not material for
1995, 1994 and 1993.
Income Taxes:
Deferred income taxes are recognized for all temporary differences
between the tax and financial reporting bases of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income. Deferred
tax assets are reduced by a valuation allowance in the period when, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
Loss Per Common Share:
Loss per common share is based on the weighted average number of shares
outstanding during each period. The dilutive effect of common stock options and
warrants is not material.
Prospective Accounting Changes:
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Statement No. 123 requires the Company to measure all stock-based
compensation based on the estimated fair market value at the grant date and
spread the deemed cost over the vesting period. Statement No. 123 permits a
choice of whether to charge operations or disclose the calculated cost as pro
forma information. This standard requires disclosure, beginning in 1996, of the
measured cost effective with 1995 grants. The Company has not yet quantified its
cost or determined its method of adoption under Statement No. 123.
2. Inventories:
At December 31, 1995 and 1994, inventories consist of the following:
1995 1994
---- ----
Finished goods $2,114,743 $3,544,742
Work in progress 6,972 437,673
Raw materials 1,550,534 2,567,942
----------- ----------
$3,672,249 $6,550,357
========== ==========
The inventory amounts are presented net of an inventory valuation
allowance of $677,000 in 1995 and $638,000 in 1994.
F-8
<PAGE>
3. Property, Plant and Equipment:
At December 31, 1995 and 1994, property, plant and equipment consist of
the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 773,496 $1,173,650
Buildings 2,202,306 5,406,765
Equipment 1,872,917 4,162,786
Building improvements 3,122 38,898
---------- ----------
4,851,841 10,782,099
Accumulated depreciation 1,823,125 3,810,722
---------- ----------
$3,028,716 6,971,377
Property held for resale, net of
accumulated depreciation of $116,422
in 1995 and $180,757 in 1994. 233,224 480,402
---------- ----------
$3,261,940 $7,451,779
========== ==========
</TABLE>
Depreciation expense for 1995, 1994 and 1993 was $406,096, $639,179 and
$540,227, respectively. Total depreciation expense for 1995, 1994 and 1993
includes $81,082, $83,811 and $20,953, respectively, of depreciation relating to
the capital leases entered into in 1993.
Property held for resale in 1995 consists of two office condominiums
that were utilized by the Company prior to the construction of its new corporate
headquarters. In April, 1995, the Company sold the Georgia facility for
$285,000.
All real property, fixtures and improvements, owned by the Company, are
pledged as collateral under the new financing agreement dated January, 4, 1996
(Note 4).
4. Notes Payable, Banks:
The following summarizes information concerning notes payable to banks:
1995 1994
---- ----
Borrowings at December 31 $ - $4,385,000
Weighted Average Interest Rate 9.77% 5.70%
Notes payable, which totaled approximately $4.4 million at December 31,
1994, consisted of borrowings under an available line of credit. The Company had
no outstanding borrowings under a line of credit at December 31, 1995.
On January 4, 1996 the Company entered into a new financial agreement
with another lender. The new financing agreement consists of a revolving line of
credit with a maximum commitment amount of $1 million, expiring December 31,
1996. The maturity can be extended for an additional year, prior to the maturity
date, at the option of the lender. Interest will be fully fluctuating and
calculated on a 360 day basis, based upon the bank's prime rate plus one
percent, and payable monthly. A facility fee and all expenses incurred by the
lender are also payable by the Company. The agreement contains among other
covenants, provisions which require the Company to maintain certain monthly and
quarterly financial ratios, limit additional indebtedness, and restrict the
payment of principal and interest on any subordinated debt (Note 5 and 17). In
addition, the line of credit is collateralized by substantially all of the
Company's assets.
F-9
<PAGE>
5. Long-term Debt:
At December 31, 1995 and 1994, long-term debt consists of the
following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Mortgage note payable, due in monthly installments
of $2,616, including interest at 8.21%, through 2012. $ - $213,472
Subordinated note payable to a director and former officer
related to the purchase of 777,881 shares of the
Company's common stock, due in annual payments of
$393,674 through 2001, bearing interest at 9.25%
payable quarterly (Note 17). 2,755,720 2,755,720
Amounts due under capital leases payable through 1996
in monthly installments. 115,012 260,701
Bank term loan payable in 1996. - 2,250,000
---------- ----------
2,870,732 5,479,893
Less current maturities 902,361 2,803,398
---------- ----------
$1,968,371 $2,676,495
========== ==========
</TABLE>
Annual maturities of long-term debt during the next five years and
thereafter are as follows:
1996 $ 902,361
1997 393,674
1998 393,674
1999 393,674
2000 393,674
Thereafter 393,675
----------
$2,870,732
==========
The Bank Term Loan was classified as a current liability at December
31, 1994 as this loan was paid in full in January, 1995. The mortgage note
payable was paid in full in April, 1995, when its Georgia facility was sold.
6. Employee Stock Ownership Plan:
Substantially all domestic employees of Aloette Cosmetics, Inc. are
covered under the Aloette Employee Stock Ownership Plan (ESOP) and Trust. The
ESOP is non-contributory and there is no past service liability in connection
with the plan.
In 1993, the Company purchased 50,000 shares at a price of $7.125 per
share for its Employee Stock Ownership Plan and Trust. In accordance with the
plan, 10,000 shares per year were allocated to eligible employees at December
31, 1995, 1994 and 1993. The fair value of the unearned shares was $45,000 as of
December 31, 1995.
The Company's expenses for the plan were approximately $22,000,
$34,300, and $60,500 for each of the years ended December 31, 1995, 1994 and
1993. Subsequent contributions to the Plan are at the Board's discretion.
F-10
<PAGE>
7. Stock Options and Warrants:
In July, 1994, the shareholders approved an amended and restated
Incentive Stock Option Plan which permits the granting of options to purchase
900,000 shares of common stock to officers', key employees, non-employee
directors, independent contractors and consultants. Options are granted at a
purchase price equal to the fair market value of the stock at the date of grant
and become exercisable two years after they are granted. Unexercised options
expire ten years after the date of grant or termination of employment.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 517,500 62,500 53,000
Options Granted 34,000 455,000 37,500
Options Exercised -0- -0- -0-
Options Cancelled (202,500) -0- (28,000)
------- -------- --------
Outstanding at end of year 349,000 517,500 62,500
Exercisable at end of year 103,753 25,000 25,000
Option price range per share $1.75 to $3.375 $3.375 to $7.75 $6.75 to $7.75
</TABLE>
In June, 1993, the shareholders approved an amended and restated stock
warrant plan for Directors allowing an aggregate of 100,000 shares. Under this
plan, upon his/her election or appointment, each outside director is granted
1,000 warrants for each year of the term to which such Director was elected or
appointed. The warrants, which vest in increments of 1,000 on each successive
anniversary date of the grant provided the director has served through that
anniversary date, are exercisable at a price equal to the closing price of a
share of the Company's common stock as of the last business day immediately
preceding the date of such Director's election or appointment and expire six (6)
years from the date of grant, or if the Director does not fulfill his/her
appointment. Warrants granted during 1995 and 1993 were 3,000 and 30,000,
respectively. No warrants were granted in 1994. As of December 31, 1995 there
were 34,000 warrants outstanding which were granted at exercise prices ranging
from $2.25 per share to $19.75 per share.
8. Income Taxes:
Income (loss) before provision (benefit) for income taxes consists of
the following:
1995 1994 1993
---- ---- ----
Domestic $(3,966,286) $(2,077,503) $ 31,726
Foreign (659,829) 94,859 (158,542)
----------- ----------- ---------
$(4,626,115) $(1,982,644) $(126,816)
=========== =========== =========
At December 31, 1995, 1994 and 1993, the provision (benefit) for income
taxes consists of the following:
1995 1994 1993
---- ---- ----
Current
Federal $ 84,000 $ 63,000 $ (24,000)
Foreign - 37,000 73,000
----------- ----------- ---------
84,000 100,000 49,000
----------- ----------- ---------
Deferred
Federal (584,000) (622,000) (500)
Foreign - 80,000 4,500
----------- ----------- ---------
(584,000) (542,000) 4,000
----------- ----------- ---------
Total $ (500,000) $ (442,000) $ 53,000
============ =========== =========
F-11
<PAGE>
10. Income Taxes; continued:
A reconciliation of the statutory federal income tax (benefit) to the
effective tax is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory income tax (benefit) $(1,573,000) $(674,000) $ (43,000)
Utilization of foreign tax credits (1,638,000) (48,000) -
Tax effect of foreign dividend 2,394,000 50,000 -
Goodwill amortization 17,000 41,000 21,000
Foreign taxes in excess of
statutory income tax rates - 35,000 18,000
Foreign subsidiary losses not
utilized by the consolidated group 224,000 49,000 113,000
Other 76,000 105,000 (56,000)
------------ ---------- ----------
$ (500,000) $(442,000) $ 53,000
============ ========== ===========
</TABLE>
The tax effects of the primary temporary differences between values
recorded for assets and liabilities for financial reporting purposes and values
utilized for measurement in accordance with tax laws giving rise to the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
DEFERRED INCOME TAXES ASSET LIABILITY ASSET LIABILITY
- -------------------- ------- ---------- ------ ----------
<S> <C> <C> <C>
Depreciation $ - $ 27,000 $ - $ 720,000
Inventories 228,000 - 223,000 -
Net operating loss carryforward 735,000 - 744,000 -
Foreign tax credit carryforward 1,522,000 - - -
Other 63,000 162,000 77,000 162,000
----------- ---------- ----------- -----------
2,548,000 189,000 1,044,000 882,000
Valuation allowance 1,887,000 - 274,000 -
----------- ---------- ----------- -----------
$ 661,000 $ 189,000 $ 770,000 $ 882,000
========== ========= ========== ==========
</TABLE>
Applicable U.S. income and foreign withholding taxes have not been
provided on approximately $6.4 million of undistributed earnings of foreign
subsidiaries as it is the Company's intention to permanently reinvest these
earnings or to repatriate such earnings in a tax-free manner.
Certain foreign subsidiaries have available net operating loss
carryforwards of approximately $815,000 which for the most part have an
unlimited carryforward life. In addition, a domestic subsidiary has available a
net operating loss carryforward of approximately $90,000 for state tax purposes
which expires in 1997. A valuation allowance has been recorded for these net
operating loss carryforwards due to the uncertainty of their realization. During
1995, the Company generated a foreign tax credit carryforward in the U.S. of
approximately $1.522 million which expires in 2000. A full valuation allowance
has been recorded due to the uncertainity of the Company's ability to generate
sufficient foreign source income to utilize the credit.
F-12
<PAGE>
9. Employee Benefits:
Effective January 1, 1992, the Company implemented a Profit Sharing and
Section 401(k) Salary Deferral Plan and Trust covering all domestic employees of
Aloette Cosmetics, Inc. At this time, all accounts in the previous pension plan
and profit sharing plan vested and were merged into the Profit Sharing and
Section 401(k) Plan.
Aloette Canada has a defined contribution pension plan for all
employees with at least one year of service. Under the terms of the plan,
Aloette Canada contributes an amount dependent upon the employee's compensation
ranging from 2% to 10% with a maximum contribution of $3,500 per employee.
The Company has a supplemental benefits plan pursuant to which the
Company maintains non-funded accounts for designated officers and employees.
Accounts in the supplemental plan increase each year based on a growth factor.
The amounts expensed for these plans in 1995, 1994 and 1993 were
$58,554, $93,601 and $92,878, respectively.
10. Leases:
Capital Leases
In 1993, the Company entered into a lease agreement for computer and
related equipment totaling $419,000. The capital lease extends through 1996 and
is payable in quarterly installments of $33,746 including interest at 4.5%.
Future minimum lease payments under non-cancelable capital leases at
December 31, 1995 are as follows:
Total minimum lease payments all due in 1996 $118,045
Less: amount representing interest 3,033
--------
Present value of net minimum lease payments $115,012
========
Operating Leases
There were no operating lease commitments at December 31, 1995 and
1994.
Total rent expense was $16,457, $60,942 and $169,567 in 1995, 1994 and
1993, respectively.
11. Litigation:
On February 5, 1993, the Company obtained a default judgment
against the Defendants in the action Aloette Cosmetics, Inc. of Delaware et al.
v. Wright et al. and the Defendants' counterclaims were stricken. One defendant
had appealed this judgment and such appeal was granted. In August, 1995 the
Company negotiated a favorable settlement agreement with the Defendants. The
terms of the agreement did not have a material effect on the consolidated
financial condition or results of operations of the Company.
On or about March 31, 1994, an action was filed against the Company in
the Eastern District of Pennsylvania under the caption Valencia et al. v.
Aloette Cosmetics, Inc. et al. alleging, among other things, breach of contract
and warranty, and fraud against the Company and an officer and seeking
compensatory and punitive damages in excess of $1,000,000 plus court costs and
attorney's fees. The Company settled this matter on August 8, 1995. The
settlement did not have a material effect on the Company's consolidated results
of operation.
F-13
<PAGE>
11. Litigation; continued:
On or about May 27, 1994, a similar action was filed against the
Company in the Eastern District of Pennsylvania under the caption, Slaven et al.
v. Aloette Cosmetics, Inc. et al. The Company has filed answers and
counterclaims in these actions. In March, 1995, the counts alleging breach of
covenant of good faith and fair dealing and abandonment of trademark were
dismissed without prejudice based upon insufficient pleadings. The Company
believes that the plaintiffs' claims are without merit and intends to defend
these actions and to prosecute its claims vigorously.
On or about February 3, 1995, an action was filed against the Company
and certain of its present and former officers in the Superior Court of Arizona
under the caption Mattice et al. v. Aloette Cosmetics., Inc. et al. The Company
settled this matter on May 3, 1995. The settlement did not have a material
effect on the Company's consolidated results of operation.
On November 11, 1994, the Company filed an action in the High Court of
New Zealand under the caption Aloette Cosmetics, Inc. of Delaware, et al. v.
Billisa Holdings Ltd., et al. In this action the Company alleges, among other
things, that the Defendants failed to pay for product supplied and failed to pay
management fees; and the Company requested an injunction requiring Defendants to
turn over documents and inventory and to cease operating as a franchise. On
December 19, 1994, the Court granted the Company's request for an injunction.
The Defendants have filed answers and counterclaims in these actions against the
plaintiffs seeking compensatory and punitive damages in excess of approximately
$5 million plus court costs and attorneys' fees. The counterclaim alleges, among
other things, breach of express and implied terms of contract, breach of
fiduciary obligations, breach of section 9 of the Fair Trading Act of 1988, and
undue influence. Management believes that the Company's position in this matter
is meritorious, that the Defendants' counterclaims are without merit, and
intends to pursue this action vigorously.
In addition, from time to time, the Company is a defendant in
litigation arising in the normal course of business. Management and legal
counsel do not believe that any settlement resulting from any of the litigation
referred to above, individually or in the aggregate, will have a material
adverse effect on the Company's consolidated financial position; however, it
could have an impact on the annual or interim results of operations in the
period in which it is resolved.
12. Related Parties:
A former director of the Company is affiliated with a product packaging
company. Purchases from this company during 1995, 1994 and 1993 were $201,171,
$308,584 and $407,764, respectively.
In February, 1992, the Company entered into a franchise and license
agreement with a limited liability company of the Federal Republic of Germany,
Alover Cosmetics GmbH ("Alover") for exclusive right to use the tradename,
trademarks and marketing and product know-how of the Company in certain European
countries. Alover has paid $110,000 to the Company as payment for the initial
license fee. A director, shareholder and former officer of the Company and the
husband of the Chairman of the Board beneficially owns 50% of the shares of
outstanding stock of Alover. In addition, in November 1995, the Company entered
into an agreement with this director and cofounder of the Company to provide
consulting and advisory services to the Company for $50,000 annually. Amounts
paid in 1995 under this agreement were $4,166 (See Notes 5 and 17 for
description of additional related party disclosures).
From time to time, the Company enters into consulting agreements with
directors on an "as needed" basis. Total fees expended under these agreements
were $45,000 for 1995, $2,400 for 1994 and $1,800 in 1993.
F-14
<PAGE>
13. Business Segment and Export Data:
The Company's revenues are derived principally from the sale of
cosmetics and health and beauty aid products in one business segment. The
Company's financial information relating to domestic and foreign operations is
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Domestic $ 8,151,622 $ 9,937,430 $10,116,486
International(1) 5,112,361 7,165,801 7,950,395
----------- ----------- -----------
$13,263,983 $17,103,231 $18,066,881
=========== =========== ===========
Identifiable assets:
Domestic $ 7,238,708 $13,981,450 $17,012,510
International(1) 4,954,799 10,401,039 8,509,547
----------- ----------- -----------
$12,193,507 $24,382,489 $25,522,057
=========== =========== ===========
Operating income (loss):
Domestic $(3,559,126) $(1,425,275) $ 405,142
International (1) (772,449) (289,836) (414,209)
----------- ----------- -----------
$(4,331,575) $(1,715,111) $ (9,067)
============ =========== ===========
</TABLE>
(1) Aloette Canada accounts for substantially all of the international revenues
and identifiable assets.
Of the total domestic identifiable assets, receivables totaled $689,724 in
1995, $1,518,049 in 1994 and $1,704,168 in 1993.
Of the total international assets, total receivables due from Canadian
customers totaled $1,176,042 in 1995, $2,074,818 in 1994 and $1,924,252 in
1993.
Three franchises owned by one individual accounted for approximately 9%,
11% and 10% of total revenues in 1995, 1994 and 1993, respectively.
14. Supplemental Cash Flow Information:
Noncash investing and financing activities:
In the year ending December 31, 1995, the Company granted or refinanced
seven (7) franchises for notes receivable of approximately $191,000. During
1994 and 1993, the Company sold and financed resales of several franchise
territories for franchise notes receivable of $486,000 and $40,000,
respectively.
During 1995, the Company had recorded $300,000 of barter credits
generated by the sale of inventory. As of December 31, 1995, the Company had
utilized $18,000 of these credits for inventory purchases.
In 1993, the Company entered into a capital lease in the amount of
$419,000 for the purchase of equipment.
Cash paid during the year for interest and income taxes was as follows:
1995 1994 1993
---- ---- ----
Interest $260,940 $710,547 $ 620,171
Income taxes $206,456 $ 10,000 $ 801,759
F-15
<PAGE>
15. Other Income(Expense), Net:
The following table includes the components of other income (expense),
net:
1995 1994 1993
---- ---- ----
Interest income $ 109,682 $ 225,217 $ 309,200
Interest expense (487,279) (730,138) (586,462)
Other income, net 83,057 237,388 159,513
---------- --------- ----------
$(294,540) $(267,533) $ (117,749)
========== ========= ==========
16. Stock Repurchase Plan:
The Company currently has a stock repurchase program to purchase up to
150,000 shares of the Company's common stock in the open market from time to
time. As of December 31, 1995, 80,000 shares had been purchased under the plan.
Of that, 50,000 shares were for the Company's Employee Stock Ownership Plan.
17. Treasury Stock Purchase:
On April 16, 1991, the Company purchased 777,881 of its common stock
from John E. Defibaugh, Director and former President and Chief Operating
Officer, for consideration of $8.4 million or approximately $10.85 per share,
plus acquisition costs. Upon consummation, the Company paid Mr. Defibaugh $3.0
million of the original purchase price in cash financed through borrowings under
a bank line of credit, and issued a subordinated note payable for the remaining
portion. The Company made a lump-sum payment of $1.5 million in April, 1992. The
note is payable in annual installments of $393,674, commencing in 1992 through
2001 with interest at 9.25% due quarterly over a ten year period. Under the new
financing agreement with the bank the Company is restricted from making
principal and interest payments without prior approval. No interest payments
have been made since October, 1994. As of December 31, 1995 and 1994 there was
approximately $301,000 and $46,000 of interest included in accrued expenses.
Interest expense for 1995, 1994 and 1993 was $255,000, $266,000 and $303,000,
respectively.
18. Sale of Assets of the Manufacturing Operations
On June 15, 1995 the Company consummated the sale of certain assets of
its manufacturing operations in Texas for cash of approximately $2.1 million. In
connection with the sale, the Company entered into a five year supply agreement
to purchase inventory at prices competitive in the industry. The sale included
the facility, inventory and equipment. As a result of the sale of these assets,
the Company recorded a charge of $3.8 million.
Sales from the manufacturing operations were approximately $1.2 million
and $2.7 million for the twelve months ended December 31, 1995 and 1994,
respectively. The net losses from normal operations for the corresponding
periods were $478,000 and $1.1 million.
The following table presents the unaudited pro forma results of the
operations of the Company for the three and twelve months ended December 31,
1995 and 1994, as if the sale had occurred on January 1, 1994 and 1995,
respectively, giving effect to certain pro forma adjustments. The unaudited pro
forma financial information is not necessarily indicative of what the results of
operations would have been had the sale occurred on the date, nor are they
necessarily indicative of future results of the Company.
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
(Unaudited) (Unaudited)
1995 1994 1995 1994
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenue $ 3,319,686 $ 3,723,646 $12,080,360 $14,361,353
Net (loss) $ (354,423) $ (619,202) $ (726,858) $ (334,239)
(Loss) per share $ (.16) $ (.29) $ (.34) $ (.15)
</TABLE>
F-16
<PAGE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated by reference
to the Registrant's 1996 Proxy Statement.
Item 10. EXECUTION COMPENSATION
The information required under this item is incorporated by reference
to the Registrant's 1996 Proxy Statement.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference
to the Registrant's 1996 Proxy Statement.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference
to the Registrant's 1996 Proxy Statement.
PART IV
Item 13. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the Years Ended December
31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the Years Ended December
31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements
17
<PAGE>
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
All other schedules not listed above have been omitted because they are
not applicable or are not required, or because the required information is
included in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K:
None
(c) Exhibits:
3(i) Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Form 10-K dated March 28, 1988,
File No. 0-15414)
3(ii) By-laws of Registrant, as amended (incorporated by reference
to Exhibit 3.2 to Form 10-K dated March 28, 1988, File No.
0-15414)
4.1 Form of Stock Certificate for Shares of Common Stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 4
to Form S-1 Registration Statement dated June 24, 1986, File
No. 33-4918)
9. Not applicable
10.1 Incentive Stock Option Plan, as amended, of Aloette Cosmetics,
Inc. (incorporated by reference to the 1994 Proxy Statement)
10.2 Employee Stock Ownership Plan, as amended, of Aloette
Cosmetics, Inc. (incorporated by reference to Exhibit 10.2 of
Form 10-KSB dated March 30, 1994, File No. 0-15414)
10.3 Form of Franchise Agreement for the United States effective
through June, 1993, as amended (incorporated by reference to
Exhibit 10.3 to Form S-3 Registration Statement dated
September 22, 1989, File No. 33-30544)
10.4 Form of Franchise Agreement for Canada, effective through
June, 1993, as amended (incorporated by reference to Exhibit
10.30 to Form S-3 Registration Statement dated June 24, 1986,
File No. 33-4918)
10.5 Form of Distributorship and License Agreement, with attached
Exhibit A listing all such agreements (incorporated by
reference to Exhibit 10.5 of Form 10-KSB dated March 30, 1994,
File No. 0-15414)
10.6 Employment Agreement, dated March 19, 1986, by and between
Arlene Goldwaterand Aloette Cosmetics, Inc. (incorporated by
reference to Exhibit 10.15 to Amendment No. 4 to Form S-1
Registration Statement dated June 24, 1986, File No. 33-4918)
10.7 Form of Aloette Cosmetics, Inc. Consultant Agreement
(incorporated by reference to Exhibit 10.22 to Amendment No. 4
to Form S-1 Registration Statement dated June 24, 1986, File
No. 33-4918)
10.8 Form of Indemnification Agreement by and between Aloette
Cosmetics, Inc. and Officers and Directors (incorporated by
reference to Exhibit 10.30 to Form 10-K dated March 28, 1988,
File No. 0-15414)
18
<PAGE>
10.9 Deed to Secure Debt and Security Agreement with Assignment of
Revenues dated February 12, 1987, by and between Aloette
Realty, Inc. and York Federal Savings and Loan Association
(incorporated by reference to Exhibit 10.31 to Form 10-K dated
March 28, 1988, File No. 0-15414)
10.10 Consulting Agreement dated February 15, 1990 between Superior
Products Company, L.E. Mooney and Aloette Cosmetics. Inc.,
Aloette Cosmetics Inc. of Delaware (incorporated by reference
to Exhibit 10.37 to Form 10-K dated March 27, 1990, File No.
0-15414)
10.11 Director's Stock Warrant Plan (incorporated by reference to
the 1993 Proxy Statement)
10.12 Employment Agreement, dated April 1, 1993 by and between
Patricia J. Defibaugh and Aloette Cosmetics, Inc (incorporated
by reference to Exhibit 10.13 of Form 10-KSB dated March 31,
1995, File No. 0-15414)
10.13 Severance Protection Agreement, dated April 1, 1993 by and
between Patricia J. Defibaugh and Aloette Cosmetics, Inc
(incorporated by reference to Exhibit 10.14 of Form 10-KSB
dated March 31, 1995, File No. 0-15414)
10.14 Share Purchase Agreement dated April 26, 1992 between John E.
Defibaugh and Aloette Cosmetics, Inc. for the purchase of
777,881 shares of the Company's common stock (incorporated by
reference to Exhibit 10.23 to Form 10-K dated March 28, 1992,
File No. 0-15414)
10.15 Subordinated Promissory Note dated April 26, 1992 between John
E. Defibaugh and Aloette Cosmetics, Inc. (incorporated by
reference to Exhibit 10.24 to Form 10-K dated March 28, 1992,
File No. 0-15414)
10.16 Profit Sharing and Section 401(k) Salary Deferred Plan, as
amended, of Aloette Cosmetics, Inc. and Superior Products
Company dated February 5, 1992 (incorporated by reference to
Exhibit 10.17 of Form 10-KSB dated March 30, 1994, File No.
0-15414)
10.17 Capital Lease Agreement dated October 26, 1993, between
Aloette Cosmetics, Inc. and Amplicon Financial (incorporated
by reference to Exhibit 10.21 of Form 10-KSB dated March 31,
1994, File No. 0-15414)
10.18 Form of Multi-Unit Development Agreement for the United States
(incorporated by reference to Exhibit 10.22 of Form 10-KSB
dated March 30, 1994, File No. 0-15414)
10.19 Form of Multi-Unit Development Agreement for Canada, with
attached Exhibit B listing all such agreements (incorporated
by reference to Exhibit 10.23 of Form 10-KSB dated March 30,
1994, File No. 0-15414)
10.20 Form of Franchise Agreement for Canada, effective July, 1993,
as amended (incorporated by reference to Exhibit 10.25 of Form
10-KSB dated March 30, 1994, File No. 0-15414)
10.21 Asset purchase agreement by and between Aloette Cosmetics of
Canada, Inc. and Aloette Cosmetiques De Quebec, Inc
(incorporated by reference to Exhibit 10.24 of Form 10-KSB
dated March 31, 1995, File No. 0-15414)
10.22 Agreement of Sale dated March 22, 1995 to sell the Georgia
warehouse by and between Aloette Cosmetics, Inc. and Harry W.
Underwood, Jr. (incorporated by reference to Exhibit 10.24 of
Form 10-KSB dated March 31, 1995, File No. 0-15414)
19
<PAGE>
10.23 Contract of Sale of the Manufacturing Operations (incorporated
by reference to Form 8K dated June 16, 1995)
10.24 Agreement of sale of assets of manufacturing operations
(incorporated by reference to Form 8K dated June 16, 1995)
10.25 Form of Franchise Agreement effective September 1995.
10.26 Consulting Agreement dated November 14, 1995, by and between
Aloette Cosmetics, Inc. and Subsidiaries and John E.
Defibaugh.
10.27 Loan Agreement dated January 4, 1996, by and between PNC Bank,
N.A. and Aloette Cosmetics, Inc. and Subsidiaries.
10.28 Line of Credit Note dated January 4, 1996, by and between PNC
Bank, N.A. and Aloette Cosmetics, Inc. and Subsidiaries.
10.29 Security Agreement dated January 4, 1996, by and between PNC
Bank, N.A. and Aloette Cosmetics, Inc. and Subsidiaries.
10.30 Open-end Mortgage and Security Agreement dated January 4,
1996, by and between PNC Bank, N.A. and Aloette Cosmetics,
Inc.
11. Statement re: computation of per share earnings
12. Not applicable
13. Not applicable
16. Not applicable
18. Not applicable
19. Not applicable
21. Subsidiaries of the Registrant
22. Not applicable
23. Consent of Coopers & Lybrand L.L.P., independent accountants
24. Not applicable
27. Not applicable
28. Not applicable
99. None
20
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Charged to Other Change Balance at
Beginning Costs and Other Accounts Add (Deduct) End
Description of Year Expenses (Describe) (Describe) (1) of Year
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful
accounts - product:
<S> <C> <C> <C> <C> <C>
1995 $125,000 95,000 (110,000) $110,000
1994 58,000 313,000 (246,000) 125,000
1993 198,000 95,000 (235,000) 58,000
Allowance for doubtful
accounts - franchise notes
receivable:
1995 $15,000 367,000 (112,000) $270,000
1994 15,000 26,000 (26,000) 15,000
1993 51,000 34,000 (70,000) 15,000
Reserve for obsolete
inventory:
1995 $638,000 364,000 (325,000) $677,000
1994 353,000 345,000 (60,000) 638,000
1993 162,000 254,000 (63,000) 353,000
</TABLE>
(1) Uncollectible accounts or inventories written off.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALOETTE COSMETICS, INC.
/s/ Patricia J. Defibaugh /s/ Jean M. Lewis
- ---------------------------- -----------------
Patricia J. Defibaugh Jean M. Lewis
President and Chief
Operating Officer Vice President of Finance (Principal
Financial and Accounting Officer)
Date: March 26, 1996 Date: March 26, 1996
- -------------------------- -------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Patricia J. Defibaugh Chairman and Director March 26, 1996
- ----------------------------------------
Patricia J. Defibaugh
/s/ Arlene Goldwater Vice President and March 26 , 1996
- ----------------------------------------
Arlene Goldwater Director
/s/ Robert B. Throm Director March 26, 1996
- ----------------------------------------
Robert B. Throm
/s/ John E. Defibaugh Director March 26, 1996
- ----------------------------------------
John E. Defibaugh
/s/ William Albertus, Sr. Director March 26, 1996
- ----------------------------------------
William Albertus, Sr.
/s/ Mark J. DeNino Director March 26, 1996
- ----------------------------------------
Mark J. DeNino
</TABLE>
<PAGE>
EXHIBIT INDEX
PAGE NO. IN SEQUENTIAL
EXHIBIT NO. NUMBERING SYSTEM
10.25
10.26
10.27
10.28
10.29
10.30
11
21
23
<PAGE>
EXHIBIT A
---------
ALOETTE(R) COSMETICS, INC.
FRANCHISE AGREEMENT
ALOETTE OF
<PAGE>
TABLE OF CONTENTS
I. GRANT OF FRANCHISE....................................................1
A. Grant..........................................................1
B. Territorial Protection.........................................2
C. Relocation.....................................................2
D. Restrictions on Certain Activities.............................2
E. Payment of Certain Fees for Sales of Products Outside
the Designated Market......................................2
II. TERM AND RENEWAL......................................................3
A. Initial Term...................................................3
B. Renewal Term...................................................3
III. DUTIES OF FRANCHISOR..................................................4
IV. FEES ...............................................................5
A. Payments To Franchisor.........................................5
B. Payment Procedures.............................................5
C. Definition Of Gross Sales......................................6
D. Suggested Pricing Policies.....................................6
E. No Right of Set-Off; Allocation of Payments....................6
F. Default in Payment.............................................6
V. DUTIES OF FRANCHISEE..................................................6
A. Compliance With System.........................................6
B. Pre-Opening Requirements.......................................6
C. Initial Training...............................................7
D. Initial Purchase of Inventory..................................7
E. Ongoing Training...............................................7
<PAGE>
F. Operation of Franchised Business...............................7
G. Development of Market..........................................7
H. Complaince with Uniform Standards..............................7
I. Purchase and Lease of Products, Equipment and Supplies.........8
J. Inspection of Premises........................................ 8
K. Proprietary Methods............................................8
L. Nondisclosure of Names.........................................8
M. Performance Criteria.......................................... 8
N. Compliance with Beauty Consultant Policies.................... 8
O. Minimum Inventory Levels and Initial Inventory.................9
VI. PROPRIETARY MARKS.....................................................9
A. Grant Of License...............................................9
B. Conditions For Use.............................................9
VII. CONFIDENTIAL MANUALS.................................................10
A. Use...........................................................10
B. Proprietary Rights............................................10
C. Confidentiality...............................................11
VIII. CONFIDENTIAL INFORMATION.............................................11
A. Confidential Relationship.....................................11
B. Obligations Of Franchisee.....................................11
C Protection Of Information.....................................11
D. Remedies......................................................11
IX. ACCOUNTING, INSPECTIONS AND RECORDS..................................11
A. Maintenance Of Books And Records..............................12
ii
<PAGE>
B. Monthly Reports...............................................12
C. Financial and Related Reporting...............................12
D. Other Submissions.............................................12
E. Inspection....................................................12
X. ADVERTISING..........................................................12
XI. INSURANCE............................................................13
A. Procurement...................................................13
B. Certificates..................................................13
C. No Relief Of Liability To Franchisee..........................13
D. Failure to Procure............................................13
XII. TRANSFER OF INTEREST; OPERATION BY FRANCHISOR........................14
A. Transfer By Franchisor.......................................14
B. Transfer By Franchisee.......................................14
C. Additional Requirements - Corporate Franchisees..............15
D. Franchisor's Right Of First Refusal..........................16
E. Transfer Upon Death, Mental Incapacity, Disability,
Dissolution or Divorce...................................16
F. Non-Waiver Of Claims.........................................17
XIII. DEFAULT AND TERMINATION.............................................17
A. Default With No Opportunity To Cure..........................17
B. Default With Thirty (30) Day Opportunity To Cure.............18
C. Injunctive Relief............................................19
D. Default And Termination......................................19
E. No Right Or Remedy...........................................20
iii
<PAGE>
XIV. OBLIGATIONS UPON TERMINATION........................................20
A. Cessation Of Operation.......................................20
B. Cessation Of Use Of Proprietary Marks........................20
C. Cancellation Of Name.........................................20
D. Non-Usage Of Marks...........................................20
E. Prompt Payment Upon Default..................................20
F. Payment Of Costs.............................................20
G. Return Of Materials..........................................20
H. Assignment Of Telephone Listings.............................21
I. Option To Purchase...........................................21
J. Covenant Of Further Assurances...............................21
XV. RESTRICTIVE COVENANTS...............................................21
A. Term of Covenant.............................................21
B. Inapplicability of Restrictions..............................21
C. Independence Of Covenants....................................21
D. Modification Of Covenants....................................22
E. Enforcement of Covenants.....................................22
F. Written Agreements...........................................22
XVI. CHANGES AND MODIFICATIONS...........................................22
XVII. TAXES AND INDEBTEDNESS..............................................22
A. Payment......................................................22
B. Duty to Notify...............................................22
C. Compliance With Federal, State And Local Laws................22
XVIII. INDEPENDENT CONTRACTOR AND INDEMNIFICATION..........................23
A. Indeminfication..............................................23
iv
<PAGE>
B. Identification...............................................23
C. No False Representations.....................................24
XIX. APPROVALS AND WAIVERS...............................................24
A. Written Consent..............................................24
B. No Waiver....................................................24
XX. NOTICES.............................................................24
XXI. RELEASE OF PRIOR CLAIMS.............................................25
XXII. DISCLOSURE STATEMENT AND DISCLAIMER.................................25
A. Compliance With Applicable Laws..............................25
B. Receipt of Agreement.........................................25
C. Acknowledgement..............................................25
XXIII. ENTIRE AGREEMENT....................................................25
XXIV. SEVERABILITY AND CONSTRUCTION.......................................26
A. Severability.................................................26
B. Covenants....................................................26
C. Captions.....................................................26
D. References...................................................26
E. Force Majeure................................................26
XXV. APPLICABLE LAW......................................................26
A. Governing Law................................................26
B. Jurisdiction and Venue.......................................26
C. Remedy.......................................................27
D. Injunctive Relief............................................27
XXVI. ARBITRATION.........................................................27
v
<PAGE>
XXVII. ACKNOWLEDGMENTS.....................................................27
GUARANTY............................................................29
ATTACHMENT A - SITE SELECTION ADDENDUM .............................31
ATTACHMENT B - MINIMUM PERFORMANCE CRITERIA.........................33
ATTACHMENT C - TERRITORY MAP .......................................34
vi
<PAGE>
ALOETTE(R) COSMETICS, INC.
Franchise Agreement
THIS AGREEMENT is made and entered into this ___ day of _____, 19__ ,
by and between ALOETTE(R) COSMETICS, INC., a corporation organized under the
laws of the Commonwealth of Pennsylvania whose principal place of business is
1301 Wright's Lane East, West Chester, Pennsylvania 19380 (referred to as
"Franchisor") and ___________________________________________(referred to as
"Franchisee"), doing business as Aloette of _______________________________.
WITNESSETH:
WHEREAS, Franchisor, as the result of significant expenditures of time,
skill, effort and money, has developed a unique and proprietary system relating
to the establishment, development and operation of a cosmetic and beauty care
products franchise (the "Franchised Business") which specializes in the direct
sales of aloe vera based skin products, as well as makeup, fragrances and
cosmetic accessories under the trade name ALOETTE(R), and which must be operated
pursuant to its manual (as defined in this Agreement) (collectively referred to
as the "System");
WHEREAS, the distinguishing characteristics of the System include,
without limitation, unique methods, merchandising and inventory control,
technical assistance and training in the operation, management and promotion of
the Franchised Business; specialized reporting, bookkeeping and accounting
methods and documents; and advertising and promotional programs, all of which
may be changed, improved and further developed by Franchisor;
WHEREAS, Franchisor is the owner of all right, title and interst in and
to the tradename, trademarks and service marks and such other trade names,
trademarks and service marks as are now designated in this Agreement (and may
hereafter be designated by Franchisor in writing) as part of the System
(referred to as "Proprietary Marks");
WHEREAS, Franchisor continues to develop, expand, use, control and add
to the Proprietary Marks and the System for the benefit and exclusive use of
itself and its franchisees in order to identify for the public the source of the
products and services marketed under those Marks and System and to represent the
System's high standards of quality and service;
WHEREAS, Franchisee desires to operate a Franchised Business under the
System and the Proprietary Marks and pursuant to Franchisor's confidential
sales, marketing and operations manuals (collectively the "Manual") and now
wishes to obtain a license from Franchisor for that purpose, as well as to
receive the training and other assistance provided by Franchisor in connection
therewith;
WHEREAS, Franchisee understands and acknowledges the importance of
Franchisor's uniformly high standards of quality and service and the necessity
of operating the Franchised Business granted under this Agreement in strict
conformity with Franchisor's quality control standards and specifications.
NOW, THEREFORE, the parties, in consideration of the promises,
undertakings and commitments of each party to the other set forth in this
Agreement, mutually agree as follows:
I. GRANT OF FRANCHISE
A. Grant. Franchisor grants the right to Franchisee, upon the terms and
conditions contained in this Agreement, and Franchisee undertakes the
obligation, to establish and operate a Franchised Business and to use the
<PAGE>
Proprietary Marks and System in connection therewith. Franchisee shall operate
the Franchised Business only at the approved site described in Attachment A
hereto ("Approved Site"). If, at the time of execution of this Agreement,
Franchisee has not obtained a location for the Franchised Business approved by
Franchisor, Franchisee shall obtain a location within Franchisee's Designated
Market not later than thirty (30) days from the date of execution of this
Agreement.
B. Territorial Protection. Except as otherwise provided in this
Agreement, during the term of this Agreement, Franchisor will not establish and
operate, or license any other party to establish and operate, a cosmetics and
beauty care products business from a locatio noperating under the System and the
Proprietary Marks within the Designated Market, described in Attachment A hereto
without Franchisee's prior, written consent.
C. Relocation. Franchisee shall not relocate the Franchised Business
without the prior written approval of Franchisor. Franchisee is obligated to
select a relocation site within its Designated Market. Such relocation site may
not adversely impact the Approved Site of any other franchisee-operated or
company-owned ALOETTE(R) business.
D. Restrictions on Certain Activities. Franchisee may conduct training
and recruiting meetings and sales promotional or other group meetings at
locations other than its office, so long as they are held within Franchisee's
Designated Market. Franchisee acknowledges and agrees that Franchisor reserves
the right to distribute its proprietary skin care products through other
channels of distribution.
E. Payment of Certain Fees for Sales of Products Outside the Designated
Market.
1. Franchisee may recruit Beauty Consultants and may through its
Beauty Consultants conduct home shows at any location.
2. If Franchisee has had Gross Sales of Ten Thousand Dollars
($10,000) in any calendar month, Franchisee will be entitled to receive a
commission from any other Franchisee who realizes Gross Sales in excess of Five
Thousand Dollars ($5,000) during that calendar month from home shows conducted
in hostesses' homes in the Designated Market of Franchisee, said commission to
be ten percent (10%) of said sales in excess of Five Thousand Dollars ($5,000).
Franchisee is not entitled to receive the commission in any calendar month in
which its Gross Sales are less than Ten Thousand Dollars ($10,000).
3. In the event that Franchisee realizes Gross Sales in excess of
Five Thousand Dollars ($5,000.00) during any calendar month from home shows in
hostesses' homes in the designated market of another franchisee, then Franchisee
will pay to the franchisee in whose designated market the sales were made the
sum of ten (10%) percent of the amount of said sales in excess of Five Thousand
($5,000.00) Dollars if said franchisee had gross sales in that calendar month in
excess of Ten Thousand ($10,000.00) Dollars.
4. Franchisee will maintain full and complete records including
location of all show and non show sales and will file office copies of show
summaries with the order forms attached and non-show order forms for the purpose
of enabling Franchisor to audit Franchisee's books and records. Franchisor may
require, in its sole discretion, that all franchisees report to Franchisor on a
calendar monthly basis the location of home-show sales during the calendar month
and pay to Franchisor any funds due and owing to other franchisees to be
forwarded by Franchisor to the franchisees who are entitled to receive said
funds.
2
<PAGE>
5. If Franchisee believes that another franchisee of Franchisor has
failed to remit to Franchisee funds owing to Franchisee for sales conducted in
its Designated Market, Franchisee (hereinafter referred to as the "Reporting
Franchisee") may request that Franchisor audit the books and records of the
franchisee which has failed to make the required payment (hereinafter referred
to as the "Challenged Franchisee"). The results of the audit will be sent to
both the Reporting Franchisee and the Challenged Franchisee.
6. In the event that the Challenged Franchisee is found to have
kept inadequate records to determine the amount of sales within the Reporting
Franchisee's designated market, or failed to remit to the Reporting Franchisee a
sum owing to the Reporting Franchisee in excess of Five Hundred ($500.00)
Dollars within thirty (30) days of the end of the calendar month in question,
then the Challenged Franchisee will reimburse to Franchisor the costs of the
audit and will pay to the Reporting Franchisee the sum due and owing plus
interest calculated at prime plus two percent and compounded monthly from date
due until date paid. In the event that the Reporting Franchisee is not found to
be entitled to a sum in excess of Five Hundred ($500.00) Dollars per month, then
the Reporting Franchisee will reimburse to Franchisor the cost of the audit. The
Reporting Franchisee will designate the calendar months to be audited and the
cost of the audit will be imposed on the Reporting Franchisee or the Challenged
Franchisee on a calendar month-by-calendar month basis. Franchisor will require
the Reporting Franchisee to advance to Franchisor the prospective costs of the
audit.
7. The report of Franchisor's auditors will be binding and
conclusive upon all franchisees. In the event that Franchisor's auditors
conclude that the Challenged Franchisee has failed to maintain adequate records
in order to determine the amount of sales within the Reporting Franchisee's
designated market, then the auditors will base their report on such information
as is available to them and will further assume that sales which are not clearly
within the designated market of the Challenged Franchisee were realized in the
designated market of the Reporting Franchisee.
8. Franchisee may be a Reporting Franchisee or a Challenged
Franchisee and, as such, will be subject to the foregoing provision.
9. Franchisee may conduct sales in any location which is not within
the designated market of another franchisee without the payment of ten (10%)
percent of sales.
10. If Franchisee is found to be liable to make payment to another
franchisee on account of payments due to such franchisee under this Section
I.E., then if Franchisee fails to make appropriate payment of such amounts
within thirty (30) days of Franchisor's demand therefor, Franchisee shall be in
material breach of this Agreement and Franchisor shall have the right to
terminate this Agreement and the Franchised Business, but without prejudice to
any other rights and remedies it may have by reason of such breach.
II. TERM AND RENEWAL
A. Initial Term. Except as otherwise provided in this Agreement, the
term of this Agreement shall be for five (5) years commencing on the date of
execution of this Agreement.
B. Renewal Term. Franchisor may, at its option, offer to renew the
Franchise Agreement for one (1) additional five (5) year term, subject to the
following conditions which must be met three (3) months prior to renewal, except
to the extent otherwise waived by Franchisor.
3
<PAGE>
1. At least six (6) months prior to the expiration of the initial
term of this Agreement, Franchisor shall, at its option, inspect the Franchised
Business and give notice of all required modifications to the nature and quality
of the products and services offered at the Franchised Business;
2. Franchisee shall give Franchisor written notice of its desire to
renew not less than three (3) months nor more than six (6) months prior to the
end of the initial term of this Agreement;
3. Franchisee shall not be in default of the terms or any provision
of this Agreement, or any amendment or successor, or the terms of any other
agreement between Franchisee and Franchisor, or its subsidiaries, affiliates and
suppliers and shall have substantially complied with all the terms and
conditions of such agreements;
4. Franchisee shall have satisfied all monetary obligations owed by
Franchisee to Franchisor and its subsidiaries, affiliates and suppliers and
shall have timely met those obligations throughout the term of this Agreement;
5. Franchisee shall execute upon renewal Franchisor's then-current
form of Franchise Agreement, which agreement shall supersede in all respects
this Agreement, and the terms of which may differ from the terms of this
Agreement;
6. Franchisee, prior to renewal, may be requested to attend a
training session at a location designated by Franchisor and, if such training
session is not attended, Franchisor shall not be obligated to renew the
franchise;
7. Franchisee, its shareholders, directors and officers shall
execute a general release, in a form prescribed by Franchisor, of any and all
claims against Franchisor and its subsidiaries and affiliates, and their
respective officers, directors, agents and employees provided, however, that
Franchisee shall not be required to release Franchisor for violations of federal
or state franchise registration and disclosure laws; and
8. Franchisee shall have at all times been in compliance with the
minimum performance criteria as set forth in Attachment B attached hereto.
III. DUTIES OF FRANCHISOR
The duties of Franchisor are as follows:
A. Franchisor shall provide an initial training at a location to be
reasonably designated by Franchisor. Franchisee or the persons who are or will
be actively involved in the business of Franchisee must attend and successfully
complete said initial training after the execution of this Agreement. Franchisor
shall be responsible for tuition and materials only. Franchisee and its
employees shall be responsible for all meal, travel, lodging or other expenses
incurred in attending Franchisor's training. Franchisor reserves right to limit
the number of attendees at such trainings;
B. Franchisor shall provide such general advisory assistance deemed by
it to be helpful to Franchisee in the ongoing operation of the Franchised
Business;
C. Franchisor shall also provide to Franchisee a single copy of the
Manual and all updates, revisions and amendments to the Manual;
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D. Franchisor shall provide to Franchisee guidelines and specifications
for the Franchised Business (which guidelines and specifications must be adopted
by Franchisee in th Franchised Business at its location);
E. Franchisor shall continue its efforts to establish and maintain high
standards of quality, cleanliness, safety, customer satisfaction and service,
and to that end shall, (i) conduct, as it believes advisable, inspections of the
Franchised Business and its operations, evaluations of the methods and the staff
employed by Franchisee, and (ii) upon request and subject to the terms of this
Agreement, disseminate to Franchisee Franchisor's standards and specifications
for items not considered to be trade secrets;
F. Franchisor shall coordinate and conduct periodic sales and
operational training programs for its franchisees as it considers necessary;
G. Franchisor shall maintain comprehensive products liability insurance
coverage in the amount of at least One Million Dollars ($1,000,000) and shall
name each of its franchisees as additional insured parties;
H. Franchisor or its designee shall sell its proprietary lines of
cosmetic and skin care products to Franchisee, subject to the ordering and
shipping procedures set forth in the Manual, according to Franchisor's
then-current product price list and shall use its best efforts to distribute the
products within a reasonable time after receipt of order, not to exceed thirty
(30) days; and
I. Subject to the availability of its personnel, Franchisor may, but is
under no obligation to, provide management consulting services for Franchisee,
at Franchisee's request, at the rate of Two Hundred Fifty Dollars ($250) per day
plus reimbursement of all out-of-pocket travel, meal and lodging expenses.
Franchisor reserves the right from time to time to make reasonable adjustments
to such daily rate at its discretion.
All of the obligations of Franchisor in this Agreement are to
Franchisee, and no other party is entitled to rely on, enforce or obtain relief
for breach of, such obligations either directly or by subrogation.
IV. FEES
A. Payments to Franchisor. In consideration of the right and license to
operate the Franchised Business granted by this Agreement, Franchisee shall pay
to Franchisor the following fees, all in U.S. dollars:
1. Initial Franchise Fee. Franchisee shall pay an initial franchise
fee to Franchisor of . The initial franchise fee shall be payable in
full upon execution of this Agreement. The initial franchise fee shall be fully
earned by Franchisor upon payment and is nonrefundable.
2. Royalty Fees. Franchisee shall pay to Franchisor a continuing
nonrefundable monthly royalty fee equal to five percent (5%) of its Gross Sales
as defined below.
B. Payment Procedures. All monthly payments required by this Section IV
shall be postmarked by the seventh (7th) day of each month for the preceding
month and received by Franchisor not later than the tenth (10th) day of each
month throughout the term of this Agreement. In the event that any payments are
due on a national holiday, payment shall be due on the first business day
following such holiday. Any payment not actually received by Franchisor on or
before such due date shall be overdue. A late payment fee of Fifty Dollars
($50.00) shall be assessed for each week (or a portion thereof) that said
monthly royalty payment is delinquent. If any payment is overdue, Franchisee
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shall pay to Franchisor, in addition to the late payment fee and the overdue
amount, interest on such amount from the date it was due until paid at the prime
lending rate quoted in the Wall Street Journal on the date payment was due plus
2% or the maximum rate permitted by state law, whichever is less. Such interest,
which shall be calculated on a daily basis, shall be in addition to any other
remedies Franchisor may have.
C. Definition of Gross Sales. "Gross Sales", as used in this Agreement,
is defined as sales generated by all products and services sold by Franchisee,
including but not limited, to revenues received for all products and services
sold by a franchisee in conjunction with the Franchised Business, whether for
cash or credit (and regardless of whether collected or not) and income of every
kind or nature related to the Franchised Business; provided, however, that Gross
Sales shall not include any finance charges, handling charges, freight charges;
any sales tax or other taxes collected from customers by Franchisee for
transmittal to the appropriate taxing authority; or any sales of supplies,
hostess benefits, or printed matter to beauty consultants or managers ("Beauty
Consultants").
D. Suggested Pricing Policies. Franchisee shall have complete
discretion as to the prices it charges for the products and or any services
offered. Franchisee further acknowledges that the Aloette System is designed to
promote the sale of products or services at competitive prices and that
variations in pricing may affect the competitiveness and/or profitability of
Franchisee.
E. No Right of Set-Off; Allocation of Payments. The payment and
performance by Franchisee of the fees and other obligations under this Agreement
shall be absolute and unconditional, irrespective of any defense or any rights
of set-off, recoupment or counterclaim Franchisee might otherwise have against
Franchisor. Any defense or right of set-off, recoupment or counterclaim must be
brought by separate action pursuant to the provisions of Section XXVI below.
Without limiting the previous paragraph, upon receipt of any and all
payments by Franchisee, Franchisor reserves the right to allocate such payments
at its discretion, even if Franchisee has designated the payment for a
particular purpose or account.
F. Default in Payment. In the event that Franchisee fails to make
payment of any amount due under this Franchise Agreement, Franchisor may,
without prejudice to any other right or remedy available to it: (i) withhold
shipment to Franchisee of Franchisor's products until such time as Franchisee is
current in its payments; and/or (ii) refuse permission to Franchisee to
participate in Franchisor sponsored functions.
V. DUTIES OF FRANCHISEE
A. Compliance with System. Franchisee understands and acknowledges that
compliance with the System and consistency with respect to every detail of the
operation of the Franchised Business is critical to Franchisor and the System,
in order to: (1) develop and maintain high and uniform operating standards; (2)
increase the demand for the products and services provided by Franchisor; and
(3) protect the Proprietary Marks, System, trade secrets, reputation and
goodwill. Accordingly, Franchisee agrees to: (a) strictly comply with all
methods and procedures relating to the sale of Products as set forth in
Franchisor's Manuals, (b) strictly comply with all methods and procedures for
recruiting and training Beauty Consultants and promoting managers as set forth
in the Manuals, and (c) strictly comply and utilize the Beauty Consultant
commission structure prescribed by Franchisor which may be altered from time to
time at Franchisor's discretion.
B. Pre-Opening Requirements. Before commencing operation of the
Franchised Business, Franchisee, at its expense, shall comply, to Franchisor's
satisfaction, with all of the following requirements:
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1. Franchisee shall have selected a site for the operation of its
Franchised Business not later than thirty (30) days after the execution of this
Agreement.
2. Franchisee shall obtain all federal, state and local business
licenses, permits and certifications required for lawful operation of the
Franchised Business on an ongoing basis, including, without limitation, zoning,
access, variances (if required), sign, health and fire requirements and shall
certify in writing to Franchisor that all such licenses, permits and
certifications have been obtained.
C. Initial Training. As outlined under Section III, Franchisee and such
employees designated by Franchisor shall attend and successfully complete
Franchisor's initial training.
D. Initial Purchase of Inventory. Prior to opening, Franchisee shall
accept Franchisor's prescribed initial inventory to support Franchisee's sales
for the first month of franchise operation.
E. Ongoing Training. Franchisee or other individuals as designated by
Franchisor shall attend and successfully complete to Franchisor's reasonable
satisfaction, additional training programs as Franchisor may require. Franchisor
shall pay for the instruction and training materials . All other costs relative
to the training will be borne by Franchisee.
F. Operation of Franchised Business. Franchisee shall commence
operation of the Franchised Business not later than ninety (90) days after the
execution of this Agreement. Franchisee shall use the Approved Site solely for
the operation of the Franchised Business and for no other business which does
not relate directly to the operation of the Franchised Business, shall keep the
Franchised Business open and in normal operation for such minimum hours and days
as Franchisor may from time to time prescribe in the Manual or otherwise in
writing and shall refrain from using or permitting the use of the premises of
the Franchised Business for any other purpose or activity at any time without
first obtaining the written consent of Franchisor.
G. Development of Market. Franchisee shall at all times actively and
solely promote the cosmetic and beauty care products offered by the Aloette(R)
System, and shall devote its best efforts and as much time is necessary to
cultivate, develop and expand the market for these products and the management
and operation of the Franchised Business.
H. Compliance with Uniform Standards. Franchisee shall operate the
Franchised Business in conformity with such uniform methods, standards and
specifications as Franchisor may from time to time prescribe. Franchisee shall
conduct its business in a manner which reflects favorably at all times on the
System and the Proprietary Marks. Pursuant to this ongoing responsibility,
Franchisee agrees:
1. To use, at all times, only such methods, standards and
specifications contained in the Manual, or otherwise provided to Franchisee by
Franchisor and to refrain from deviating from it without Franchisor's prior
written consent.
2. to sell or offer for sale only such products and services as meet
Franchisor's uniform standards of quality and quantity outlined in the Manual,
as have been expressly approved for sale in writing by Franchisor in accordance
with Franchisor's methods and techniques; and to discontinue such products or
services as Franchisor may, in its discretion, disapprove in writing at any
time.
3. To recruit and maintain a competent, conscientious staff.
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4. To recruit and train Beauty Consultants to sell Franchisor's
products and to ensure that all Beauty Consultants execute the Beauty Consultant
Agreement in its then current form.
5. To participate in regional, national, and international
incentive, promotional and motivational campaigns, contests, programs, meetings
and seminars as may from time to time be organized by Franchisor and shall pay
its full share or proportionate part of the cost and expense of such campaigns,
contests, incentives, programs and seminars, as determined by Franchisor.
I. Purchase and Lease of Products, Equipment and Supplies. Franchisee
shall purchase all products, equipment, supplies, services, and other
copyrighted materials required for the operation of the Franchised Business from
Franchisor or a designated approved supplier who shall have proved, to the
continuing reasonable satisfaction of Franchisor, the ability to meet
Franchisor's reasonable standards and specifications for such products, services
and related items. Franchisee shall strictly comply with the procedures set
forth in the Manual to obtain the prior approval of Franchisor of a proposed
vendor, any Aloette franchisee or supplier that is not an approved supplier.
J. Inspection of Premises. Franchisee shall permit Franchisor or its
agents or representatives to enter upon the premises of the Approved Site at any
reasonable time for purposes of conducting inspections. At all times Franchisee
shall cooperate fully with Franchisor's agents or representatives in such
inspections by rendering such assistance and/or making necessary changes as they
may reasonably request.
K. Proprietary Methods. Franchisee acknowledges and agrees that
Franchisor has developed and shall continue to develop new and improve existing
methods, services, programs, operational systems, management techniques and
products and may continue to develop additional products, services, programs and
proprietary methods and techniques for use in the operation of the Franchised
Business which are all highly confidential and which are trade secrets of
Franchisor. Because of the importance of quality control and uniformity of
products and services and the significance of such proprietary methods in the
System, it is to the mutual benefit of the parties that Franchisor closely
control the dissemination of this proprietary information. Accordingly,
Franchisee agrees that, in the event such information and techniques become a
part of the System, Franchisee shall comply and strictly follow these techniques
in the operation of its business and shall purchase from Franchisor or from an
approved source designated by Franchisor any products, supplies, services or
materials necessary to protect and implement such techniques.
L. Nondisclosure of Names. Franchisee shall not disclose the names of
other franchisees to any other person(s) or directly or indirectly solicit any
other franchisee for any business or investment activity of any type or
description or for any other purpose. Franchisee will not employ or seek to
employ any person who is at that time affiliated with, or working with or for,
Franchisor or any other Franchisee or otherwise directly or indirectly induce
such person to leave such affiliation or employment.
M. Performance Criteria. Franchisee shall at all times during the term
of this Agreement be in compliance with the minimum performance criteria set
forth in Attachment B hereto; provided however, if Franchisee fails to meet the
minimum performance criteria set forth in Attachment B of this Agreement,
Franchisee shall automatically lose such territorial protection or shall be
subject to termination as outlined under Section XIII.B.7 of this Agreement.
N. Compliance With Beauty Consultant Policies. Franchisee agrees that,
should any Beauty Consultant, Manager or other independent contractor or
employee of another franchisee transfer its customers and sales to Franchisee,
Franchisee shall comply with the Beauty Consultant Transfer Policies as set
forth in the Manual.
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O. Minimum Inventory Levels and Initial Inventory. Franchisee shall
maintain the reasonable and ordinary minimum inventory as set forth in the
Manual. Franchisor shall have the right to ship to Franchisee without Franchisee
ordering same, new items in the product line, incentive items for use in
connection with promotional programs and/or supplies and other printed matter,
in reasonable initial quantities, related to Franchisee's sales history, upon
the introduction of same. No such shipment shall exceed Five Hundred ($500.00)
Dollars and Franchisee may decline in writing to receive such shipment.
VI. PROPRIETARY MARKS
A. Grant of License. Franchisee expressly understands and acknowledges
that Franchisor is the owner of all right, title and interest in and to the
Proprietary Marks and the goodwill associated with and symbolized by them.
Franchisor grants Franchisee the right and license to use the ALOETTE(R)
trademark and logo in connection with the operation of its Franchised Business
and the provision of services and products to its customers.
B. Conditions for Use. With respect to Franchisee's use of the
Proprietary Marks pursuant to the license granted under this Agreement,
Franchisee agrees that:
1. Franchisee shall use only the Proprietary Marks designated by
Franchisor and shall use them only in the manner required or authorized and
permitted by Franchisor in connection with the Franchise Business.
2. During the term of this Agreement and any renewal hereof,
Franchisee shall identify itself as a licensee and not the owner of the
Proprietary Marks and shall make any necessary filings under state or federal
law to reflect such status.
3. Franchisee shall use the Proprietary Marks to such uses as are
authorized by this Agreement or otherwise in writing by Franchisor, and shall
not use the Proprietary Marks to incur or secure any obligation or indebtedness.
Prior to using any of the Proprietary Marks, Franchisee will submit to
Franchisor, for approval, all stationery, brochures, advertising literature,
displays, labels or other materials on which Franchisee intends to use the
Proprietary Marks.
4. Subject to first obtaining the prior written consent of
Franchisor, which consent will not be unreasonably withheld, Franchisee shall
incorporate the word "Aloette" and an appropriate geographical designation in
its company or trade name. No part of the Proprietary Marks nor any similar
words shall be included in any corporate or trade name utilized by Franchisee,
without the prior written consent of Franchisor, which consent will not be
unreasonably withheld.
5. Franchisee shall comply with Franchisor's instructions in filing
and maintaining the requisite trade name or fictitious name registrations, and
shall execute any documents necessary by Franchisor or its counsel to obtain
protection for the Proprietary Marks or to maintain their continued validity and
enforceability.
6. Franchisee shall promptly notify Franchisor of any suspected
unauthorized use of the Proprietary Marks, any challenge to the validity of the
Proprietary Marks or any challenge to Franchisor's ownership of, Franchisor's
right to use and to license others to use, or Franchisee's right to use, the
Proprietary Marks. Franchisee acknowledges that Franchisor has the sole right to
direct and control any administrative proceeding or litigation involving the
Proprietary Marks, including any settlement thereof. If Franchisor, in its sole
discretion, determines that Franchisee has not used the Proprietary Marks in
accordance with this Agreement, the cost of such defense including the cost of
any judgment or settlement, shall be borne by Franchisee.
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7. Franchisee shall not directly or indirectly contest the validity
or the ownership of the Proprietary Marks.
8. Any and all goodwill arising from Franchisee's use of the
Proprietary Marks at the Franchised Business in accordance with the System shall
be solely and exclusively to Franchisor's benefit, and upon expiration or
termination of this Agreement no monetary amount shall be assigned as
attributable to any goodwill associated with Franchisee's use of the System or
the Proprietary Marks.
9. The license and rights to use the Proprietary Marks granted by
this Agreement to Franchisee are nonexclusive, and Franchisor thus may: (a)
itself use, and grant franchises and licenses to others to use, the Proprietary
Marks and the System; (b) establish, develop and franchise other
systems,different from the System licensed to Franchisee herein, without
offering or providing Franchisee any rights in, to or under such other systems;
and (c) modify or change, in whole or in part, any aspect of the Proprietary
Marks or the System.
10. Franchisor reserves the right to substitute different names and
Proprietary Marks for use in identifying the System, the Franchised Business and
other Franchised Businesses operating under the Franchise Agreement. Franchisee
acknowledges and agrees that Franchisor reserves the right to modify and update
the Proprietary Marks, including, without limitation, the color, typeface, and
other appearance of the Proprietary Marks, and all products, labels, materials,
and signage bearing the Proprietary Marks, from time to time. Franchisee shall
make all substitutions of the Proprietary Marks and all modifications to all
products, labels, materials, and signage in accordance therewith at Franchisee's
sole cost and expense.
11. Franchisor shall have no liability to Franchisee for any senior
users which may claim rights to the Proprietary Marks.
12. Franchisee shall not register or attempt to register the
Proprietary Marks in Franchisee's name or that of any other person, firm, entity
or corporation.
VII. CONFIDENTIAL MANUALS
Franchisor has prepared and will amend from time to time Franchisees's
Manual, which will be forwarded to Franchisee. Franchisee agrees to conduct its
business in strict compliance with the Manual and all additions, amendments and
revisions. One registered copy of the Manual shall be provided to Franchisee on
loan from Franchisor during the training program and Franchisee shall sign a
corresponding receipt for the term of this Agreement.
A. Use. Franchisee agrees to immediately adopt and use the programs,
services, methods, standards, materials, policies, and procedures set forth in
the Manual, as they may be modified by Franchisor from time to time. Upon
expiration or termination of this Agreement Franchisee shall return the Manual
to Franchisor.
B. Proprietary Rights. Franchisee acknowledges, knows and agrees that
designated portions of the Manual are "trade secrets" owned and treated as such
by Franchisor. Franchisee acknowledges that Franchisor is the owner of all
proprietary rights in and to the System and the Manual and any changes or
supplements thereto. Franchisee shall not make any modifications, changes or
revisions to the Manual without the prior written consent of Franchisor.
Franchisee shall strictly limit access to the Manual and shall not copy or
reproduce in any manner any part of the Manual.
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C. Confidentiality. Franchisee shall at all times treat the Manual and
the information contained in it and any other manuals/information created for or
approved for use in the operation of the Franchised Business as proprietary and
confidential, and shall use all reasonable efforts to maintain such information
as confidential.
VIII. CONFIDENTIAL INFORMATION
A. Confidential Relationship. In order to protect the value of the
confidential information supplied to Franchisee by Franchisor, the use of which
is licensed, Franchisee shall not disclose any information or knowledge
concerning the System and the products of Franchisor to any person other than
Franchisee's employees and sales personnel, and then only on a "need-to-know"
basis and in circumstances of confidence. All information remains confidential
after the term of this Agreement and such information shall only be used for the
operation of the Franchised Business. Franchisee shall take all steps necessary
at its own expense, to protect such information. Any and all information,
knowledge, know-how, systems, programs, and other methods and techniques which
Franchisor designates as confidential shall be deemed confidential information
for the purposes of this Agreement.
B. Obligations of Franchisee. Franchisee shall not copy or disclose to
any person Franchisee's Manuals, any confidential manuals, bulletins, or the
contents of any other confidential information communicated to it by Franchisor
except to the extent necessary in the operation of the Franchised Business.
1. Franchisee shall advise its employees, agents or independent
contractors of the confidential nature of such information and the requirements
of nondisclosure.
2. It is agreed that improvements to the System or techniques
prepared, compiled or developed by Franchisor whether separately or in
conjunction with Franchisee, shall be considered as part of Franchisor's
confidential information and Franchisee grants to Franchisor an irrevocable,
worldwide, exclusive, royalty-free license with the right to sub-license such
information, improvement or technique.
C. Protection of Information. Franchisee's copy of the Manual and all
other confidential manuals, training manuals, and other sales information
supplied by Franchisor shall at all times remain the sole property of Franchisor
and shall promptly be returned to it upon the termination of this Agreement.
D. Remedies. Franchisee acknowledges that, in addition to any remedies
available to Franchisor under Section XIII hereunder, Franchisee agrees to pay
all court costs and reasonable attorneys' fees incurred by Franchisor in
obtaining specific performance of, a temporary restraining order and/or an
injunction against, violation of the requirements of this Section VIII.
IX. ACCOUNTING, INSPECTIONS AND RECORDS
It is desirable and in the best interest of Franchisees and Franchisor
that Franchisee use a uniform accounting system and prepare reports in order
that Franchisor may be able to evaluate the relative operating performance of
each Franchisee, and to develop criteria that will enable Franchisor to
formulate plans and policies in the interests of Franchisee and Franchisor that
will aid Franchisee in achieving financial success. Therefore, if Franchisor so
requires, Franchisee shall use an accounting system in a form specified by
Franchisor.
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A. Maintenance of Books and Records. Franchisee shall maintain during
the term of this Agreement, and shall preserve for not less than five (5) years
from the date of preparation, full, complete and accurate books, records and
accounts in accordance with the System and in the form and manner prescribed by
Franchisor from time to time in the Manual or otherwise in writing.
B. Monthly Reports. Within ten (10) days of the close of each calendar
month, Franchisee shall send to Franchisor a complete and accurate statement of
the gross sales and any other information or data required of Franchisee for the
preceding month on Franchisor's Monthly Operational Summary form. Gross Sales
totals shall be forwarded by fax or telephone within two (2) business days from
the end of each month.
C. Financial and Related Reporting. Franchisee shall at Franchisee's
expense submit to Franchisor a monthly income statement which may be unaudited,
for the Franchised Business. Franchisee shall submit at the end of each calendar
quarter, a physical count of all inventories. Franchisee shall also submit, at
Franchisee's expense, an annual set of financial statements, which shall include
an income statement, balance sheet and statement of changes in cash flow, which
must be prepared in accordance with generally accepted accounting principles and
copies of federal and state tax returns for the Franchised Business within
ninety (90) days of the completion of the fiscal year of Franchisee. Franchisor
also reserves the right to require Franchisee to submit to Franchisor audited
financial statements for any period or periods of any fiscal year.
D. Other Submissions. Franchisee shall also submit to Franchisor, for
review and auditing, all other information and data as Franchisor may reasonably
designate. Franchisee shall also submit to Franchisor, on an annual basis, a
compliance certificate signed by the President which certifies that Franchisee
is in compliance.
E. Inspection. Franchisor or its designated agents shall have the right
at all reasonable times and without the prior notice to Franchisee to inspect
and audit or cause to be inspected and audited, the business records, shipping
records, courier records, bookkeeping and accounting records, cash register
tapes, show summaries, order forms, invoices, purchase orders, payroll records,
check stubs and bank deposit receipts of the Franchised Business, the periodic
reports, financial statements, tax returns or schedules, and other forms,
information and supporting records which Franchisee is required from time to
time to submit to Franchisor and the books and records of any corporation or
partnership which owns or operates the Franchised Business. Franchisee shall
fully co-operate with representatives of Franchisor and independent accountants
hired by Franchisor to conduct any such inspection or audit. If any such
inspection or audit shall disclose an understatement of Gross Sales for any
period or periods, then Franchisee shall pay to Franchisor within fifteen (15)
days after receipt of the inspection or audit report, the royalty and other sums
due on account of such understatement together with interest as for all overdue
accounts to Franchisor. Further, and in addition to Franchisor's right of
termination if such inspection or audit is made necessary by the failure of
Franchisee to furnish reports, financial statements, tax returns or schedules or
any other documentation required, or if an understatement of Gross Sales for any
period is determined by any such inspection or audit to be greater than two (2)
percent, Franchisee shall reimburse Franchisor for any and all costs and
expenses connected with the inspection (including without limitation, reasonable
accounting and attorneys' fees). These remedies shall be in addition to any
other remedies available to Franchisor.
X. ADVERTISING
Submission and Approval. All advertising and promotions conducted by
Franchisee in any medium shall be conducted in a dignified manner and shall
conform to such standards and requirements as Franchisor may specify from time
to time in the Manual or otherwise. Franchisee shall submit to Franchisor for
its prior approval, samples of all advertising and promotional plans, items and
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materials in whatever form that Franchisee desires to use and that have not been
previously approved within the last six (6) months by Franchisor. Franchisor
shall notify Franchisee of Franchisor's approval or disapproval within thirty
(30) days from the date of receipt by Franchisor of such materials. Franchisee
shall comply with all revisions to said advertising, plans or materials which
Franchisor may require prior to approval. Franchisee shall not use any
advertising or promotional plans or materials which have not been approved by
Franchisor, and shall cease to use any plans or materials or other items
promptly upon notice by Franchisor. Failure by Franchisee to obtain the prior
approval of Franchisor for all proposed advertising or suppliers shall be a
default of this Agreement in accordance with Section XIII. of this Agreement.
XI. INSURANCE
A. Procurement. Franchisee shall procure and maintain in full force and
effect during the term hereof, at its sole cost and expense, an insurance policy
or policies protecting Franchisee against any loss, liability or expense arising
out of or in connection with the operation of the Franchise Business for the
type of insurance and limits outlined below. Franchisor and its Officers and
Directors shall be named as an additional insured of any and all such policies.
Such policy or policies shall be underwritten by a responsible insurance company
or companies and shall include the following:
KIND OF INSURANCE MINIMUM LIMITS OF LIABILITY
----------------- ---------------------------
Workmen's Compensation Statutory
Comprehensive General Liability $250,000 per occurrence/
and Property Insurance $500,000 aggregate
Inventory equal to thirty (30) days average sales
Franchisor reserves the right to require additional forms of insurance,
additional coverage, and higher policy limits from time to time as prescribed in
the Manual.
B. Certificates. At least seven (7) days prior to the opening of the
Franchised Business, Franchisee shall furnish Franchisor certificates of
insurance, along with evidence that the premiums have been paid, and that such
insurance will not be cancelled or coverage reduced without thirty (30) days
prior notice to Franchisor.
C. No Relief of Liability to Franchisee. Franchisee's obligation to
obtain and maintain the insurance policy or polices in the amounts specified
shall not be limited in any way by reason of any insurance which may be
maintained by Franchisor, nor shall Franchisee's performance of that obligation
relieve it of liability under the indemnity provision set forth in this
Agreement.
D. Failure to Procure. Should Franchisee for any reason fail to procure
or maintain the insurance required by this Agreement, as revised from time to
time for all franchisees by the Manual or otherwise in writing, Franchisor shall
have the right and authority (without, however, any obligation to do so)
immediately to procure such insurance and to charge the same to Franchisee,
which charges, together with a reasonable fee for Franchisor's expenses in so
acting, including but not limited to attorneys' fees, shall be payable by
Franchisee immediately upon notice.
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XII. TRANSFER OF INTEREST; OPERATION BY FRANCHISOR
A. Transfer by Franchisor. Franchisor shall have the right to assign
this Agreement, and all of its rights and privileges, to any person, firm,
corporation or other entity provided that, with respect to any assignment
resulting in the subsequent performance by the assignee of the functions of
Franchisor, the assignee shall expressly assume and agree to perform such
obligation.
B. Transfer by Franchisee.
1. Franchisee understands and acknowledges that the rights and
duties set forth in this Agreement are personal to Franchisee, and that
Franchisor has entered into this Agreement and granted the license hereunder in
reliance on Franchisee's business skill and financial capacity. Accordingly,
neither Franchisee, any individual, partnership, corporation or other legal
entity which directly or indirectly controls Franchisee, if Franchisee is a
corporation or other legal entity which directly or indirectly controls
Franchisee, if Franchisee is a corporation, nor any general partner or any
limited partner (including any partnership, shall sell assign, transfer, convey,
give away, pledge, mortgage or otherwise encumber any direct or indirect
interest in Franchisee or in the Franchised Business without the prior written
consent of Franchisor; provided, however, that Franchisor's prior written
consent shall not be required for a transfer of less than a five percent (5%)
interest in a publicly-held corporation. For such purposes, and under this
Agreement in general, a publicly held corporation is a "Reporting Company" as
that term is defined by the Securities Exchange Act of 1934. Any purported
assignment or transfer, by operation of law or otherwise, not having the written
consent of Franchisor shall be null and void and shall constitute a material
breach of this Agreement, for which Franchisor may then terminate without
opportunity to cure pursuant to Section XIII of this Agreement.
2. Franchisor shall not unreasonably withhold its consent to a
transfer of any interest in Franchisee or in this Agreement; provided, however,
that if a transfer, alone or together with other previous, simultaneous or
proposed transfers, would have the effect of transferring a controlling interest
in the Franchised Business, Franchisor may, in its sole discretion, require any
or all of the following as conditions of its approval:
a. All of Franchisee's accrued monetary obligations and all other
outstanding obligations to Franchisor, its subsidiaries, affiliates and
suppliers shall be up to date, fully paid and satisfied;
b. Franchisee shall not be in default of any provision of this
Agreement, any amendment or successor, any other franchise agreement or other
agreement between Franchisee and Franchisor, or its subsidiaries, affiliates or
suppliers;
c. Franchisee and each of its shareholders, officer and directors
shall have executed a general release under seal, in a form satisfactory to
Franchisor, of any and all claims against Franchisor and its officers,
directors, shareholders and employees in their corporate and individual
capacities, however, that Franchisee shall not be required to release Franchisor
for violations of federal and state franchise registration and disclosure laws;
d. The transferee shall enter into a written assignment, under
seal and in a form satisfactory to Franchisor, assuming and agreeing to
discharge all of Franchisee's obligations under this Agreement; and, if the
obligations of Franchisee were guaranteed by the transferor, the transferee
shall guarantee the performance of all such obligations in writing in a form
satisfactory to Franchisor;
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e. The transferee shall demonstrate to Franchisor's satisfaction
that the transferee meets Franchisor's educational, managerial and business
standards; possesses a good moral character, business reputation and credit
rating; has the aptitude and ability to operate the Franchised Business; has at
least the same managerial and financial criteria required of new franchisees and
shall have sufficient equity capital to operate the Franchised Business;
f. At Franchisor's option, the transferee shall execute (and/or,
upon Franchisor's request, shall cause all interested parties to execute) for a
term ending on the expiration date of this Agreement and with such renewal term
as may be provided by this Agreement, the standard form of Franchise Agreement
then being offered to new franchisees, the terms of which may differ from the
terms of this Agreement and such other ancillary agreements as Franchisor may
require for the Franchised Business, which agreements shall supersede this
Agreement in all respects;
g. Franchisee shall remain liable for all direct and indirect
obligations to Franchisor in connection with the Franchised Business prior to
the effective date of the transfer and shall continue to remain responsible for
its obligations of nondisclosure, noncompetition and indemnification as provided
elsewhere in this Agreement and shall execute any and all instruments reasonably
requested by Franchisor to further evidence such liability;
h. Transferor shall pay to Franchisor a Transfer Fee equal to ten
percent (10%) of the total consideration received by Franchisee upon the sale or
transfer of its business, regardless of payment terms, but in no event less than
Six Thousand Five Hundred Dollars ($6,500) or more than Twenty Five Thousand
Dollars ($25,000).
3. Franchisee shall grant no security interest in the Franchised
Business or in any of its assets unless the secured party agrees that in the
event of any default by Franchisee under any documents related to the security
interest, Franchisor shall have the right and option to be substituted as
obligor to the secured party and to cure any default of Franchisee. In addition,
Franchisor shall not be construed as a guarantor or surety for Franchisee.
C. Additional Requirements - Corporate Franchisees. The following
requirements shall apply to Franchisee if Franchisee is a corporation in
addition to those set forth elsewhere in this Agreement, the Manual or
otherwise:
1. Franchisee agrees to confine its activities to operating the
Franchised Business defined in this Agreement.
2. Copies of Franchisee's Articles of Incorporation, Bylaws and
other governing documents, and any amendments of the documents, including the
resolutions of the Board of Directors authorizing entry into this Agreement,
shall be promptly furnished to Franchisor.
3. Each stock certificate of the corporation issued to shareholders
in the Franchised Business shall have conspicuously endorsed upon its face a
statement in a form satisfactory to Franchisor, such as:
"THE TRANSFER, PLEDGE OR ALIENATION OF THIS STOCK
IS SUBJECT TO THE TERMS AND RESTRICTIONS CONTAINED
WITHIN THE FRANCHISE AGREEMENT BETWEEN ALOETTE(R)
COSMETICS, INC. AND (name of Franchisee)."
4. Franchisee shall maintain a current list of all owners of record
and all beneficial owners of any class of voting stock of Franchisee and shall
furnish the list to Franchisor upon request.
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5. All shareholders of Franchisee shall jointly and severally
guarantee Franchisee's performance of the Franchise Agreement and shall bind
themselves to the terms of this Agreement; provided, however, that the
requirements of this Section XII.C.5. shall not apply to a publicly-held
corporation.
D. Franchisor's Right of First Refusal.
1. Any party who holds an interest (as reasonably determined by
Franchisor) in Franchisee or in the Franchised Business and who desires to
accept any bona fide offer from a third party to purchase his or its interest
shall notify Franchisor in writing of each such offer and, except as otherwise
provided herein, Franchisor shall have the right and option, exercisable within
thirty (30) days after receipt of such written notification, to send written
notice to the seller that Franchisor intends to purchase the seller's interest
on the same terms and conditions offered by the third party. Any material change
in the terms of any offer prior to closing shall constitute a new offer subject
to the same right of first refusal by Franchisor as in the case of an initial
offer. In the event that Franchisor elects to purchase the seller's interest,
closing on such purchase must occur within sixty (60) days from the date of
notice to the seller of the election to purchase by Franchisor. Failure of
Franchisor to exercise the option afforded by this Section XII.E. shall not
constitute a waiver of any other provision of this Agreement, including all of
the requirements of this Section XII, with respect to a proposed transfer.
2. In the event the consideration, terms and/or conditions offered
by a third party are such that Franchisor may not reasonably be required to
furnish the same consideration, terms and/or conditions, then Franchisor may
purchase the Franchised Business proposed to be sold for the reasonable
equivalent in cash. If the parties cannot agree, within a reasonable time, on
the reasonable equivalent in cash of the consideration, terms and/or conditions
offered by a third party, an independent appraiser shall be designated by
Franchisor acting reasonably and in good faith, and his determination shall be
binding.
E. Transfer Upon Death, Mental Incapacity, Disability, Dissolution or
Divorce. Within six (6) months of the death, mental incapacity or disability of
Franchisee, or a partner, or a shareholder of Franchisee, Franchisor shall
consent to the transfer of said interest in Franchisee, the Franchised Business
and this Agreement to the spouse, heirs or relative by blood or by marriage, or
said Franchisee or shareholder whether such transfer is made by will or by
operation of law, if, in Franchisor's sole discretion and judgment, such person
or persons meet Franchisor's educational, managerial and business standards;
possess a good moral character, business reputation and credit rating; have the
aptitude and ability to conduct the Franchised Business; have at least the same
managerial and financial criteria required of new franchisees and shall have
sufficient equity capital to operate the Franchised Business. If said transfer
is not approved by Franchisor, the executor, administrator or personal
representative of such person shall transfer his interest to a third party
approved by Franchisor within six (6) months after such death, mental incapacity
or disability. Such transfer shall be subject to the right of first refusal and
to the same conditions as any inter vivos transfer.
Each shareholder of a corporate Franchisee, each partner of a
Partnership Franchisee, and each co-owner of Franchisee owned by individuals,
shall be parties to an agreement, among themselves, requiring that, upon any
dissolution of the entity owning the Franchised Business, or upon any divorce
decree among the parties who own all or a part of the Franchised Business,
ownership of the interest in the Franchised Business shall be transferred, for
an agreed upon consideration, to the shareholder, partner, or individual, as the
case may be, who has primary responsibility for sales and marketing activities.
The form and content of the agreement among the parties owning the Franchised
Business must be approved by Franchisor prior to execution.
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F. Non-Waiver of Claims. Franchisor's consent to a transfer of any
interest in the Franchised Business shall not constitute a waiver of any claims
it may have against the transferring party, nor shall it be a waiver of
Franchisor's right to demand exact compliance with any of the terms of this
Agreement by the transferee.
XIII. DEFAULT AND TERMINATION
A. Default With No Opportunity To Cure. Franchisee shall be in default
and Franchisor may, at its option, terminate this Agreement and all rights
granted by this Agreement, without affording Franchisee any opportunity to cure
the default, effective immediately upon receipt of notice by Franchisee, upon
the occurrence of any of the following events:
1. If a petition in bankruptcy is filed against Franchisee and not
bona fide contested within three (3) days or if the Franchise or any shareholder
shall be adjudicated a bankrupt, becomes insolvent, makes a composition with
creditors or otherwise takes advantage of any federal or state legislation for
the relief of debtors or if a receiver (permanent or temporary) or its property
or any part or any shares of the corporate Franchisee is appointed by private
instrument or court order; if it or he makes a general assignment for the
benefit of creditors, or if a final judgment remains unsatisfied of record for
thirty (30) days or longer or if execution is levied against the franchised
Business or property or any shares of the corporate Franchisee, or suit to
foreclose any lien or mortgage against the premises upon which Franchisee
conducts its business is levied or is distress or other analogous process is
levied against the Franchised Business or the assets used in connection with the
Franchised Business;
2. If Franchisee ceases active participation in the Franchised
Business for five (5) business days without Franchisor's written approval, or if
Franchise is a corporation or partnership, the shareholders of Franchisee cease
active participation in the Franchised Business;
3. If a threat or danger to public health or safety results from the
construction, maintenance or operation of the Franchised Business;
4. If Franchisee or any of its principals is convicted of a felony
or misdemeanor or is convicted of any other crime or offense that Franchisor
reasonably believes is likely to have an adverse effect on the System, the
Proprietary Marks, the goodwill associated with the Franchise or Franchisor's
interest;
5. If a judgment or a consent decree against Franchisee, any
officer, director or shareholder is entered in any case or proceeding involving
allegations of fraud, racketeering, unfair or improper trade practices or
similar claim which is likely to have an adverse effect on the System or the
Proprietary Marks, the goodwill or interest of Franchisor;
6. If Franchisee fails to obtain the prior approval of Franchisor of
any and all advertising or promotional plans and materials in whatever form used
by Franchisee in connection with its promotion of the Franchised Business or
otherwise fails to comply with Franchisor's policies and procedures with respect
to advertising;
7. If Franchisee transfers any rights or obligations under this
Agreement to any third party without Franchisor's prior written consent,
contrary to the terms of Section XII of this Agreement;
8. If Franchisee fails to comply with any of the covenants contained
in Section XV hereof;
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9. If, contrary to Sections VII and VIII hereof, Franchisee
discloses or divulges the contents of the Manual or any other trade secrets or
Confidential Information provided to Franchisee by Franchisor;
10. If the provisions for transfer by Franchisee upon death, mental
incapacity or disability, described in Section XII.E. of this Agreement, are not
strictly followed;
11. If Franchisee knowingly maintains false books or records or
submits any false statements, applications or reports to Franchisor or any
assignee of Franchisor;
12. If Franchisee fails to find a site within thirty (30) days, or
fails to commence business within ninety (90) days, of the execution of this
Agreement;
13. If Franchisee understates by two percent (2%) or more its Gross
Sales in connection with any report required to be submitted to Franchisor;
14. If Franchisee willfully and repeatedly engages in a course of
conduct which constitutes a misrepresentation or a deceptive or unlawful act or
practice in connection with its sale of the services and products offered at the
Franchised Business;
15. If Franchisee fails to strictly comply with the product and
quality control standards and specifications or otherwise fails to strictly meet
the requirements of the vendor certification program;
16. If Franchisee fails to strictly comply with all methods and
procedures for recruiting and training Beauty Consultants and promoting such
Beauty Consultants as set forth in the Manual;
17. If Franchisee fails to attend and successfully complete any
mandatory training program unless attendance is excused or waived, in writing,
by Franchisor;
18. If any agreement issued to Franchisee, whether or not issued
pursuant to this Agreement, is in default for any reason;
19. If Franchisee willfully engages in any illegal, immoral or
unethical acts or any act in violation of the mission and values of Franchisor;
or
20. If Franchisee engages in any business or markets any service or
product under a name or mark which, in Franchisor's opinion, is confusingly
similar to the Proprietary Marks.
B. Default With Thirty (30) Day Opportunity To Cure. Except as provided
in Section XIII.A. of this Agreement, Franchisee shall have thirty (30) days
after its receipt from Franchisor of a written Notice of Termination within
which to remedy any default described in this Section XIII.B. and provide
evidence to Franchisor of the remedy. If any such default is not cured within
that time, or such longer period as applicable law may require, this Agreement,
at Franchisor's option, shall terminate without further notice to Franchisee
effective immediately upon the expiration of the thirty (30) day period or such
longer period as applicable law may require. Franchisee shall be in default of
this Agreement for any failure to comply substantially with any of the
requirements imposed by this Agreement, as it may from time to time reasonably
be supplemented by updates to the Manual, or for any failure to carry out the
terms of this Agreement in good faith. Such defaults shall include, without
limitation, the occurrence of any of the following events:
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1. If Franchisee fails, refuses or neglects to pay promptly any
monies owing to Franchisor or its subsidiaries or affiliates or suppliers when
due, or to timely submit the financial information or other reports required by
Franchisor under this Agreement;
2. If Franchisee fails to maintain any of the standards or
procedures prescribed by Franchisor in this Agreement, the Manual, any other
franchise agreement between Franchisor and Franchisee or any other agreements
between the parties, or otherwise in writing;
3. If Franchisee, by act or omission, permits a continued violation
in connection with the operation of the Franchised Business of any law,
ordinance, rule or regulation of a governmental agency, in the absence of a good
faith dispute over its application or legality and without promptly resorting to
an appropriate administrative or judicial forum for relief;
4. If Franchisee misuses or makes any unauthorized use of the
Proprietary Marks or otherwise materially impairs the goodwill associated with
the Marks or Franchisor's rights in them;
5. If Franchisee fails to comply with its duties set forth in
Section V hereof, or fails to perform any obligation owing to Franchisor or to
observe any covenant or agreement made by Franchisee, whether such obligation,
covenant or agreement is set forth in this Agreement or in any other agreement
with Franchisor or any of its affiliates including, but not limited to, any
other franchise agreement by and between Franchisor or any of its affiliates and
Franchisee;
6. If Franchisee fails to maintain and submit to Franchisor all
reports required pursuant to Section IX hereof, including but not limited to,
financial statements, weekly, monthly and other reports of Gross Sales and
copies of tax returns;
7. If Franchisee fails to meet and maintain, or within six (6)
months cure any written notice of default, relating to the minimum performance
criteria set forth in Attachment B hereto.
C. Injunctive Relief. Franchisee acknowledges that Franchisee is one of
the many franchisees using the Proprietary Marks and the System and that the
failure on the part of Franchisee to comply with any of the terms of this
Franchise Agreement could cause irreparable damage to some or all of the other
franchisees and to Franchisor.
Franchisee agrees that, upon the happening of a material and
substantial breach of this Franchise Agreement, which, in the opinion of
Franchisor, is detrimental or harmful to the good name, goodwill, or reputation
of Franchisor, Franchisor's products, or other franchisees, or is detrimental or
harmful to the interests of Franchisor, other franchisees, or the public,
Franchisor shall have the immediate right to secure an order preventing any such
default or threatened breach of this Franchise Agreement, and, if this Franchise
Agreement has been terminated, Franchisee may be prevented from any continued
operation of the franchise, the Franchised Business, or any other operation in
violation of this Franchise Agreement.
This covenant shall be independent and severable and shall be
enforceable without being prevented by any other rights or remedies that
Franchisor or Franchisee may have.
D. Default and Termination. The events of default and grounds for
termination described in this Section XIII shall be in addition to any other
grounds for termination contained elsewhere in this Agreement or otherwise.
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E. No Right or Remedy. No right or remedy in this Agreement conferred
upon or reserved to Franchisor is exclusive of any other right or remedy
provided or permitted by law or equity.
XIV. OBLIGATIONS UPON TERMINATION
Upon termination or expiration, this Agreement and all rights granted
by this Agreement to Franchisee shall terminate, and Franchisee shall observe
and perform the following provisions:
A. Cessation of Operation. Franchisee shall immediately cease to
operate the Franchised Business and shall not after the expiration or
termination, directly or indirectly, represent to the public or hold itself out
as a franchisee of Franchisor.
B. Cessation of Use of Proprietary Marks. Franchisee shall immediately
and permanently cease to use, in any manner whatsoever, any equipment, format,
confidential methods, customer data base, programs, literature, procedures and
techniques associated with the System, the name ALOETTE(R) and any Proprietary
Marks and distinctive trade dress, forms, slogans, signs, symbols or devices
associated with the System. In particular, Franchisee shall cease to use,
without limitation, all signs, fixtures, furniture, equipment, advertising
materials or promotional displays, uniforms, stationery, program material, forms
and any other articles which display the Proprietary Marks associated with the
System.
C. Cancellation of Name. Franchisee shall take such action as may be
necessary to cancel any assumed name or equivalent registration which contains
the Proprietary Marks or any other trademark, trade name or service mark
licensed by this Agreement and Franchisee shall furnish Franchisor with evidence
satisfactory to Franchisor of compliance with this obligation within thirty (30)
days after termination or expiration of this Agreement.
D. Non-Usage of Marks. Franchisee agrees, in the event it continues to
operate or subsequently begins to operate any other business, not to use any
reproduction, counterfeit, copy or colorable imitation of the Proprietary Marks,
either in connection with such other business or the promotion of any business,
which is likely to cause confusion, mistake or deception, or which is likely to
dilute Franchisor's rights in and to the Proprietary Marks, and agrees not to
utilize any designation of origin or description or representation which falsely
suggests or represents an association or connection with Franchisor or the
System so as to constitute unfair competition.
E. Prompt Payment Upon Default. Franchisee shall promptly pay all sums
owing to Franchisor and its subsidiaries, affiliates and suppliers. In the event
of termination for any default of Franchisee, such sums shall include all
damages, costs and expenses, including reasonable attorneys' fees, incurred by
Franchisor as a result of the default, which obligation shall give rise to and
remain, until paid in full, a lien in favor of Franchisor against any and all of
the personal property, fixtures, equipment and inventory owned by Franchisee and
on the premises of the Franchised Business at the time of default.
F. Payment of Costs. Franchisee shall pay to Franchisor all damages,
costs and expenses, including reasonable attorneys' fees, incurred by Franchisor
subsequent to the termination or expiration of this Agreement in obtaining
injunctive or other relief for the enforcement of any provisions of this Section
XIV or any other obligation under the terms of this Agreement.
G. Return of Materials. Franchisee shall immediately turn over to
Franchisor all copies of all materials in Franchisee's possession including the
Manual, all records, files, customer lists, beauty consultant lists,
instructions, correspondence, brochures, agreements, disclosure statements and
any and all other materials relating to the operation of the Franchised Business
in Franchisee's possession, and all copies (all of which are acknowledged
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to be Franchisor's property), and shall retain no copy or record of any of the
foregoing, excepting only Franchisee's copy of this Agreement and of any
correspondence between the parties and any other documents which Franchisee
reasonably needs for compliance with any provision of law.
H. Assignment of Telephone Listings. Franchisee shall promptly notify
the appropriate telephone company and all telephone directory listing agencies
of the termination or expiration of its right to use any telephone number and
any regular, classified or other telephone directory listings associated with
any Proprietary Marks or the System and authorize transfer of same to or at the
direction of Franchisor.
I. Option to Purchase. Franchisor shall have the right (but not the
duty) to be exercised by notice of intent to do so within thirty (30) days after
termination or expiration, to purchase any or all of the signs, advertising
materials, promotional displays, supplies, forms, inventory or other items
bearing the Proprietary Marks, at Franchisee's cost or fair market value
whichever is less. If Franchisor elects to exercise any option to purchase
provided in this Agreement it shall have the right to set off all amounts due
from Franchisee under this Agreement.
J. Covenant of Further Assurances. Franchisee shall comply with all
applicable covenants contained in Section XV of this Agreement.
XV. RESTRICTIVE COVENANTS
A. Term of Covenant. Franchisee covenants that, except as otherwise
approved in writing by Franchisor, Franchisee shall not during the term of this
Agreement and for a continuous uninterrupted period commencing upon the
expiration or termination of this Agreement, regardless of the cause for
termination, and continuing for two (2) years thereafter, either directly or
indirectly, own, maintain, engage in, be employed by, advise, assist, invest in,
franchise, make loans to, or have any interest in any business which is the same
as or substantially similar to the Franchised Business within:
1) Franchisee's Designated Market;
2) Any County Bordering on Franchisee's Designated Market;
3) Any Designated Market Bordering on Franchisee's Designated
Market;
4) Within the Designated Market of another Franchisee within the
System.
B. Inapplicability of Restrictions. This restrictive covenant shall not
apply to ownership by Franchisee of less than a five percent (5%) beneficial
interest in the outstanding equity securities of any publicly-held corporation.
C. Independence of Covenants. The parties agree that each of the
foregoing covenants shall be construed as independent of any other covenant or
provision of this Agreement. If any or all portions of the covenants in this
Section XV is held unreasonable or unenforceable by a court or agency having
valid jurisdiction in an unappealed final decision to which Franchisor is a
party, Franchisee expressly agrees to be bound by any lesser covenant included
within the terms of such covenant that imposes the maximum duty permitted by
law, as if the resulting covenant were separately stated in and made a part of
this Section XV.
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D. Modification of Covenants. Franchisee understands and acknowledges
that Franchisor shall have the right, in its sole discretion, to reduce the
scope of any covenant set forth in this Section XV or any portion, without
Franchisee's consent, effective immediately upon receipt by Franchisee of
written notice, and Franchisee agrees that it shall immediately comply with any
covenant as so modified, which shall be fully enforceable without prejudice to
the provisions of Section XXIII hereof.
E. Enforcement of Covenants. Franchisee acknowledges that violation of
the covenants not to compete contained in this Agreement would result in
immediate and irreparable injury to Franchisor for which no adequate remedy at
law will be available. Accordingly, Franchisee consents to the entry of an
injunction prohibiting any conduct by Franchisee in violation of the terms of
those covenants and expressly agrees that any violation of the terms of said
covenants not to compete was accomplished by and through Franchisee's unlawful
utilization of Franchisor's confidential information, know-how, methods and
procedures. Further, Franchisee expressly agrees that the existence of any
claims it may have against Franchisor, whether or not arising from this
Agreement, shall not constitute a defense to the enforcement by Franchisor of
the covenants not to compete set forth in this Agreement. Franchisee further
agrees to pay all costs and expenses (including reasonable attorneys' and
experts' fees) incurred by Franchisor in connection with the enforcement of
those covenants set forth in this Agreement.
F. Written Agreements. At Franchisor's request, Franchisee shall
require and obtain execution of covenants in favor of Franchisor similar to
those set forth in this Section XV (including covenants applicable upon the
termination of a person's relationship with Franchisee) from any or all of the
following persons: (1) all directors and managers and beauty consultants
affiliated with the Franchised Business and any other personnel employed by
Franchisee who have received training from Franchisor; (2) all officers,
directors and holders of a beneficial interest of five percent (5%) or more of
the securities of Franchisee and of any corporation directly or indirectly
controlling Franchisee if Franchisee is a corporation; and (3) the general
partners and any limited partners (including any corporation, and the officers,
directors and holders of a beneficial interest of five percent (5%) or more of
the securities of any corporation which controls, directly or indirectly, any
general or limited partner) if Franchisee is a partnership. All covenants
required by this Section XV. shall be in forms satisfactory to Franchisor,
including, without limitation, specific identification of Franchisor as a third
party beneficiary of such covenants with the independent right to enforce them.
Failure by Franchisee to obtain execution of a covenant required by this Section
XV shall constitute a default under Section XIII of this Agreement.
XVI. CHANGES AND MODIFICATIONS
Franchisor may modify this Agreement only upon the execution of a
written agreement by Franchisor and Franchisee. Franchisor reserves and shall
have the sole right to make changes in the Manual, the System and the
Proprietary Marks at any time and without prior notice to Franchisee. Franchisee
shall promptly alter any signs, products, business materials or related items,
at its sole cost and expense, upon written receipt of notice of such change or
modification.
Franchisee understands and agrees that due to changes in competitive
circumstances, presently unforeseen changes in the needs of customers, and/or
presently unforeseen technological innovations, Franchisor's System must not
remain static, in order that it best serve the interests of Franchisor,
franchisees and the System. Accordingly, Franchisee expressly understands and
agrees that Franchisor may from time to time change the components of the
System, including but not limited to, programs, products, services, methods,
standards, forms, policies and procedures of that System. Franchisee expressly
agrees to abide by any such modifications, changes, additions, deletions and
alterations.
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XVII. TAXES AND INDEBTEDNESS
A. Payment. Franchisee shall promptly pay, when due, all taxes levied
or assessed by any federal, state or local tax authority and any and all other
indebtedness incurred by Franchisee in the operation of the Franchised Business.
B. Duty to Notify. Franchisee shall notify Franchisor in writing within
three (3) days of the commencement of any action, suit or proceeding, and of the
issuance of any order, writ, injunction, award or decree of any court, agency or
other governmental instrumentality, which may adversely affect the operation or
financial condition of the Franchised Business. Additionally, any and all
consumer related complaints shall be answered by Franchisee within fifteen (15)
days after receipt of the complaint or such shorter period of time as may be
provided in said complaint. A copy of said answer shall be forwarded to
Franchisor within three (3) days of the date that said answer is forwarded to
the complainant.
C. Compliance with Federal, State and Local Laws. Franchisee shall
comply with all federal, state, and local laws, rules and regulations, and shall
timely obtain any and all permits, certificates, licenses and bonds necessary
for the full and proper operation and management of the Franchised Business
including, without limitation, a license to do business and provide services,
fictitious name registration and sales tax permits. Copies of all subsequent
inspection reports, warnings, certificates and ratings, issued by any
governmental entity during the term of this Agreement in connection with the
conduct of the Franchised Business which indicate Franchisee's failure to meet
or maintain the highest governmental standards or less than full compliance by
Franchisee with any applicable law, rule or regulation, shall be forwarded to
Franchisor by Franchisee within three (3) days of Franchisees receipt of such
warnings, notices, etc.
XVIII. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
A. Indemnification. Franchisee is and shall be an independent
contractor and nothing in this Agreement shall be construed so as to create an
agency or an employment relationship, a partnership or a joint venture between
the parties. Neither party shall act or have the authority to act as agent for
the other and neither Franchisee nor Franchisor shall guarantee the obligations
of the other or in any way become obligated for the debts or expenses of the
other unless agreed to in writing. Franchisee is not and shall not hold itself
out as being an agent or an employee of, or a partner or joint venturer with,
Franchisor. In all public records, and in its relationships and dealings with
all other persons, Franchisee shall indicate that it is an independent owner of
the Franchised Business licensed by this Agreement and that it is a Franchisee
of Franchisor. Franchisee shall not pledge Franchisor's credit nor bind it to
any obligation. Franchisee shall indemnify and save Franchisor and its
subsidiaries harmless from and against all claims, suits, demands, causes of
action, costs and expense, including reasonable attorney's fees and expenses
defending the same, which may arise or be asserted against Franchisor by reason
of the operation of the Franchised Business. Franchisee shall pay all costs,
expenses and reasonable attorney's fees incurred by Franchisor in connection
with said claims. Franchisee shall be responsible for and shall promptly pay
when due all expense of the Franchised Business including but not limited to,
taxes and levies of any and all kinds in connection with said business and the
income arising from the Franchised Business. Franchisor shall not be liable for
any such expenses, taxes, levies, or disbursements otherwise paid or incurred in
connection with the establishment and maintenance of the Franchise Business.
B. Identification. Franchisee shall conspicuously identify itself and
the Franchised Business and in all dealings with its clients, contractors,
suppliers, public officials and others, as an independent Franchisee of
Franchisor, and shall place such notice of independent ownership of all forms,
business cards, stationery, advertising, signs and other materials and in such
fashion as Franchisor may in its sole and exclusive discretion, specify and
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require from time to time, in its Manual (as same may be amended from time to
time) or otherwise.
C. No False Representations. Except as otherwise expressly authorized
by this Agreement, neither party hereto will make any express or implied
agreements, warranties, guarantees or representations or incur any debt in the
name of or on behalf of the other party, or represent that the relationship
between Franchisor and Franchisee is other than that of Franchisor and
Franchisee. Franchisor does not assume any liability, and will not be deemed
liable, for any agreements, representations, or warranties made by Franchisee
which are not expressly authorized under this Agreement, nor will Franchisor be
obligated for any damages to any person or property which directly or indirectly
arise from or relate to the operation of the Franchise Business franchised
hereby.
XIX. APPROVALS AND WAIVERS
A. Written Consent. Whenever this Agreement requires the prior approval
or consent of Franchisor, Franchisee shall make a timely written request to
Franchisor and such approval or consent shall be obtained in writing.
B. No Waiver. No failure of Franchisor to exercise any power reserved
to it by this Agreement or to insist upon strict compliance by Franchisee with
any obligation or condition of this Agreement, and no custom or practice of the
parties at variance with the Agreement terms, shall constitute a waiver of
Franchisor's right to demand exact compliance with any of this Agreement's
terms. Waiver by Franchisor of any particular default by Franchisee shall not
affect or impair Franchisor's rights with respect to any subsequent default.
Subsequent acceptance by Franchisor of any payments due to it by this Agreement
shall not be a waiver by Franchisor of any preceding breach by Franchisee of any
terms, covenants or conditions of this Agreement.
XX. NOTICES
Any and all notices required or permitted under this Agreement shall be
in writing and shall be personally delivered or mailed by certified mail, return
receipt requested, or dispatched by overnight delivery envelope, to the
respective parties at the following addresses unless and until a different
address has been designated by written notice to the other party:
Notices to Franchisor: Aloette(R)Cosmetics, Inc.
1301 Wright's Lane East
West Chester, Pennsylvania 19380
With a Copy (which
shall not constitute
notice) to:
Notices to Franchisee:
With a Copy (which ___________________________________
shall not constitute ___________________________________
notice) to: ___________________________________
___________________________________
Any notice sent by certified mail shall have been given at the date and
time of mailing.
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XXI. RELEASE OF PRIOR CLAIMS
By executing this Agreement, Franchisee, individually and on behalf of
Franchisee's heirs, legal representatives, successors and assigns, and each
assignee of this Agreement by accepting assignment of the same, forever releases
and discharges Franchisor and its officers, directors, employees, agents and
servants, including Franchisor's subsidiary and affiliated corporations, their
respective officers, directors, employees, agents and servants, from any and all
claims relating to or arising under any franchise agreement or any other
agreement between the parties executed prior to the date of this Agreement
including, but not limited to, any and all claims, whether presently known or
unknown, suspected or unsuspected, arising under the franchise, securities or
antitrust laws of the United States or of any state or territory of the United
States.
XXII. DISCLOSURE STATEMENT AND DISCLAIMER
A. Compliance with Applicable Laws. Franchisee acknowledges, by its
signature to this Agreement, that it received from Franchisor a Uniform
Franchise Offering Circular for the State in which the Franchised Business will
be located, or Franchisee's place of residence, as appropriate, at least ten
(10) business days prior to the execution of this Agreement or payment of any
money to Franchisor in connection herewith.
B. Receipt of Agreement. Franchisee acknowledges that it received from
Franchisor this Agreement and all attachments heretowith all blanks filled in at
least five (5) days prior to the execution of this Agreement.
C. Acknowledgement. Franchisee acknowledges and accepts the following:
THE SUCCESS OF FRANCHISEE IN OPERATING AND MANAGING A FRANCHISE IS SPECULATIVE
AND WILL DEPEND ON MANY FACTS INCLUDING, TO A LARGE EXTENT, FRANCHISEE'S
INDEPENDENT BUSINESS ABILITY. FRANCHISEE HAS NOT RELIED ON ANY WARRANTY OR
REPRESENTATION, EXPRESSED OR IMPLIED, AS TO THE POTENTIAL SUCCESS OR PROJECTED
INCOME OF THE BUSINESS VENTURE CONTEMPLATED BY THIS AGREEMENT. NO
REPRESENTATIONS OR PROMISES HAVE BEEN MADE BY FRANCHISOR TO INDUCE FRANCHISEE TO
ENTER INTO THIS AGREEMENT EXCEPT AS SPECIFICALLY INCLUDED IN THIS AGREEMENT.
FRANCHISOR HAS NOT MADE ANY REPRESENTATION, WARRANTY OR GUARANTY, EXPRESS OR
IMPLIED, AS TO THE POTENTIAL REVENUES, PROFITS OR SERVICES OF THE BUSINESS
VENTURE TO FRANCHISEE AND CANNOT, EXCEPT UNDER THE TERMS OF THIS AGREEMENT,
EXERCISE CONTROL OVER FRANCHISEE'S BUSINESS. FRANCHISEE ACKNOWLEDGES AND AGREES
THAT IT HAS NO KNOWLEDGE OF ANY REPRESENTATION MADE BY FRANCHISOR OR ITS
REPRESENTATIVES OF ANY INFORMATION THAT IS CONTRARY TO THE TERMS CONTAINED IN
THIS AGREEMENT.
XXIII. ENTIRE AGREEMENT
This Agreement, the documents referred to and the Attachments, if any,
constitute the entire, full and complete Agreement between the parties
concerning the subject matter, and supersede all prior agreements (including,
but not limited, to the Franchise Application) no other representations having
induced Franchisee to execute this Agreement. No amendment, change or variance
from this Agreement shall be binding on the parties hereto unless mutually
agreed to by the parties and executed by themselves or their authorized officers
or agents in writing.
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XXIV. SEVERABILITY AND CONSTRUCTION
A. Severability. Except as expressly provided to the contrary in this
Agreement, each section, part, term and/or provision of this Agreement shall be
considered severable, and if, for any reason, any section, part, term and/or
provision in this Agreement is determined to be invalid and contrary to, or in
conflict with, any existing or future law or regulation by a court or agency
having valid jurisdiction, such shall not impair the operation of, or have any
other effect upon, such other portions, sections, parts, terms and/or provisions
of this Agreement as may remain otherwise intelligible, and the latter shall
continue to be given full force and effect and bind the parties to the
Agreement, and said invalid sections, parts, terms and/or provisions shall not
be a part of this Agreement; provided, however, that if Franchisor determines
that such finding of invalidity or illegality adversely affects the basic
consideration of this Agreement, Franchisor, at its option, may terminate this
Agreement.
B. Covenants. Franchisee expressly agrees to be bound by any promise or
covenant imposing the maximum duty permitted by law which is subsumed within the
terms of any Agreement provision, as though it were separately articulated in
and made a part of this Agreement, that may result from striking from any of the
Agreement provisions any portion or portions which a court may hold to be
unreasonable and unenforceable in a final decision to which Franchisor is a
party, or from reducing the scope of any promise or covenant to the extent
required to comply with such a court order.
C. Captions. All captions in this Agreement are intended solely for the
convenience of the parties, and none shall affect the meaning or construction of
any provision.
D. References. All references in this Agreement to the masculine,
neuter or singular shall be construed to include the masculine, feminine, neuter
or plural, where applicable, and all acknowledgements, promises, covenants,
agreements and obligations in the Agreement made or undertaken by Franchisee
shall be deemed jointly and severally undertaken by all the parties to the
Agreement on behalf of Franchisee. This Agreement may be executed in duplicate,
and each copy so executed shall be deemed an original.
E. Force Majeure. If, as a result of hurricane, tornado, typhoon,
flooding, lightning, blizzard and other unusually severe weather, earthquake,
avalanche, volcanic eruption, fire, riot, insurrection, war, explosion,
unavoidable calamity or other act of God (a "Force Majeure"), compliance by any
party with the terms of this Agreement is rendered impossible or would otherwise
create an undue hardship upon any party, all parties shall be excused from their
respective obligations hereunder for the duration of the Force Majeure and for a
reasonable recovery period thereafter, but otherwise this Agreement shall
continue in full force and effect.
XXV. APPLICABLE LAW
A. Governing Law. This Agreement takes effect upon its acceptance and
execution by Franchisor. This Agreement shall be interpreted and construed under
the laws of the Commonwealth of Pennsylvania except to the extent governed by
the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1051 et
seq.).
B. Jurisdiction and Venue. Any action brought by franchisee against
Franchisor in any court, whether federal or state, shall be brought, in
Philadelphia, Pennsylvania . Any action brought the franchisor against the
franchisee may be brought, in Philadelphia, Pennsylvania and the parties waive
all questions of personal jurisdiction or venue for the purpose of carrying out
this provision.
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C. Remedy. No right or remedy conferred upon or reserved by Franchisor
or Franchisee by this Agreement is intended to be, nor shall it be, exclusive of
any other right or remedy contained in the Agreement or by law or equity
provided or permitted but each shall be cumulative of every other right or
remedy.
D. Injunctive Relief. Nothing contained in the Agreement shall bar
Franchisor's right to obtain injunctive relief against threatened conduct that
will cause it loss or damage under the usual equity rules, including the
applicable rules for obtaining restraining orders and preliminary injunctions.
XXVI. ARBITRATION
Except as specifically otherwise provided in this Agreement, the
parties agree that any and all disputes between them relating to this Agreement
or the offer making performance or interpretation thereof, and any claim by
either party that cannot be amicably settled shall be determined solely and
exclusively by arbitration under the then current Commercial Arbitration Rules
of the American Arbitration Association by one arbitrator appointed by such
rules. Said rules shall be modified to provide that each party shall be entitled
to conduct discovery in accordance with the Federal Rules of Civil Procedure.
The Arbitrator shall hear the dispute in West Chester, Pennsylvania or the then
current national headquarters of the Franchisor and may properly consider any
and all matters related to the Agreement that would be admissible in a non-jury
trial under applicable Federal Rules of Civil Procedure or Evidence. The
Arbitrator's award shall be announced within ten (10) days of the hearing of the
dispute and shall include all fees, costs and attorneys' fees to the prevailing
party. Judgment upon the award of the Arbitrator shall be final and binding and
shall be entered in a court of competent jurisdiction. Franchisee knows,
understands and agrees that it is the intent of the parties that any arbitration
between Franchisor and Franchisee shall be of Franchisee's individual claims and
that the claims subject to arbitration shall not be arbitrated on a classwide
basis. In many instances, arbitration may be the sole proceeding available to
the parties, who may also be required by the Arbitrator to pay a filing fee.
In no event shall Franchisee be entitled to make, nor shall Franchisee
make, any claim, and Franchisee by executing this Agreement waives any claim,
for money damages, nor shall Franchisee claim any money damages by way of
set-off, counterclaim or defense, based upon any claim or assertion by
Franchisee that Franchisor has unreasonably withheld or unreasonably delayed any
consent or approval to a proposed act by Franchisee under any of the terms of
this Franchise Agreement. Franchisee's sole remedy for any such claim shall be
an action or proceeding to enforce any such provisions, or for specific
performance, or declaratory judgment.
XXVII. ACKNOWLEDGMENTS
Franchisee acknowledges that Franchisee has conducted an independent
investigation of all aspects relating to the Franchised Business and recognizes
that the business venture contemplated by this Agreement involves business risks
and that its success will be largely dependent upon the skills and ability of
Franchisee as an independent business person. Franchisee acknowledges that it
has received, read and understands this Agreement, the attachment(s) to it and
agreements relating to it, if any, and that Franchisor has accorded Franchisee
ample time and opportunity to consult with advisors of Franchisee's own choosing
about the potential benefits and risks of entering into this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed and delivered this Agreement in duplicate on the day and year
first above written.
ATTEST: ALOETTE(R) COSMETICS, INC.
______________________ By:___________________________________
FRANCHISEE
______________________ By:___________________________________
FRANCHISEE
______________________ By:__________________________________
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<PAGE>
GUARANTY
In consideration of, and as an inducement to, the execution of that
certain Franchise Agreement (hereinafter the "Agreement") dated _______________
19__, by and between ALOETTE(R) COSMETICS, INC., a Pennsylvania corporation,
whose principal office is located at 1301 Wright's Lane East, West Chester,
Pennsylvania 19380 (hereinafter "Franchisor") and _________________________ ,
(hereinafter "Franchisee"), each of the undersigned Guarantors agree as follows:
1. The Guarantors do jointly and severally unconditionally guaranty the
full, prompt and complete performance of Franchisee and any other agreements
that Franchisee may execute relating to the operation of the Franchise under the
terms, covenants and conditions of the Agreement, including without limitation
the complete and prompt payment of all indebtedness to Franchisor under the
Agreement and any revisions, modifications and amendments to the Agreement
(hereinafter collectively referred to as the "Agreement"). The word
"indebtedness" is used in this Agreement in its most comprehensive sense and
includes without limitation any and all advances, debts, obligations, and
liabilities of Franchisee, now or hereafter incurred, either voluntarily or
involuntarily, and whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, or whether recovery thereof may be now
or hereafter barred by any statute of limitation or is otherwise unenforceable.
2. The obligations of the Guarantors are independent of the obligations
of Franchisee and a separate action or actions may be brought and prosecuted
against any or all of the Guarantors, whether or not actions are brought against
Franchisee or whether Franchisee is joined in any such action.
3. If Franchisee is a corporation or partnership, Franchisor shall not
be obligated to inquire into the power or authority of Franchisee or its
partners or the officers, directors, or agents acting or purporting to act on
Franchisee's behalf and any obligation or indebtedness made or created in
reliance upon the exercise of such power and authority shall be guaranteed under
this Guaranty. Where the Guarantors are corporations or partnerships it shall be
conclusively presumed the Guarantors and the partners, agents, officers and
directors acting on their behalf have the express authority to bind such
corporations or partnerships and that such corporations or partnerships have the
express power to act as the Guarantors pursuant to this Guaranty and that such
action directly promotes the business and is in the interest of such
corporations or partnerships.
4. Franchisor, its successors and assigns, may from time to time,
without notice to the undersigned: (a) resort to the undersigned for payment of
any of the liabilities, whether or not it or its successors have resorted to any
property securing any of the liabilities or proceeded against any other of the
undersigned or any party primarily or secondarily liable on any of the
liabilities; (b) release or compromise any liability of any of the undersigned
of the Guaranty or any liability of any party or parties primarily or
secondarily liable on any of the liabilities; and (c) extend, renew or credit
any of the liabilities for any period (whether or not longer than the original
period); alter, amend or exchange any of the liabilities; or give any other form
of indulgence, whether under the Agreement or otherwise.
5. The undersigned further waive presentment, demand, notice of
dishonor, protest, nonpayment and all other notices whatsoever, including
without limitation: notice of acceptance of the Guaranty; notice of all
contracts and commitments; notice of the existence or creation of any
liabilities under the Franchise Agreement and of the amount and terms of the
Agreement; and notice of all defaults, disputes or controversies between
29
<PAGE>
Franchisee and Franchisor resulting from such Agreement or otherwise, and the
settlement, compromise or adjustment of the Franchise Agreement.
6. This guarantee shall be interpreted and construed under the laws of
the Commonwealth of Pennsylvania. The guarantors agree that the dispute
resolution provision in the Franchise Agreement shall apply in the event of any
dispute under this guarantee. In the event any dispute between Franchisor and
Guarantors cannot be settled amicably, the parties agree that shall be
determined solely and exclusively by arbitration under the then current
Commercial Arbitration Rules of the American Arbitration Association. Said rules
shall be modified to provide that each party shall be entitled to conduct
discovery in accordance with the Federal Rules of Civil Procedure. Upon the
written demand of either party to any dispute for arbitration, each shall select
a representative to act in its behalf. The two elected representatives shall
meet within two (2) weeks of the time demand is made, unless the parties
otherwise agree in writing. The Arbitrator shall hear the dispute within two (2)
weeks of the date of the meeting of the representatives or designation by the
court, as the case may be. The Arbitrator shall hear the dispute in West
Chester, Pennsylvania or the then current headquarters of the Franchisor and may
properly consider any and all matters related to the Agreement that would be
admissible in a non-jury trial under applicable Federal Rules of Civil Procedure
or Evidence. The Arbitrator's award shall be announced within ten (10) days of
the hearing of the dispute and shall include all fees, costs and attorneys' fees
to the prevailing party. Judgment upon the award of the Arbitrator shall be
binding and shall be entered in a court of competent jurisdiction. Franchisee
knows, understands and agrees that it is the intent of the parties that any
arbitration between Franchisor and Franchisee shall be of Franchisee's
individual claims and that the claims subject to arbitration shall not be
arbitrated on a classwide basis. In many instances, arbitration may be the sole
proceeding available to the parties, who may also be required by the Arbitrator
to pay a filing fee.
7. This Guaranty shall be enforceable by and against the respective
administrators, executors, successors and assigns of the Guarantors and the
death of any Guarantor shall not terminate the liability of such Guarantor or
limit the liability of the other Guarantors.
8. If more than one person has executed this Guaranty, the term "the
undersigned," as used shall refer to each such person, and the liability of each
of the undersigned hereunder shall be joint and several and primary as sureties.
IN WITNESS WHEREOF, each of the undersigned has executed this Guaranty
under seal effective as of the ___ date of ______________ 19__.
________________________________ _______________________________________
Name Name
________________________________ _______________________________________
Address Address
________________________________ _______________________________________
Date Date
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ATTACHMENT A
------------
SITE SELECTION ADDENDUM
THIS ADDENDUM is made this ______ day of _______________, 19_____, by
and between Aloette(R) Cosmetics, Inc. ("Franchisor") and ___________________,
(the "Franchisee").
WHEREAS, Franchisor and Franchisee, are parties to a Franchise
Agreement entered into on _______________________, 19_____, by the terms of
which Franchisor has granted to Franchisee the right and license to operate an
ALOETTE(R) Franchise pursuant to Franchisor's System and Proprietary Marks:
WHEREAS, Franchisee has selected and presented a site to Franchisor
which has been approved by Franchisor;
NOW, THEREFORE, the parties, intending to be bound, agree as follows:
1. Designated Market. The Designated Market shall be as follows:
2. Approved Site. The Approved Site within the Designated Market shall
be located as follows:
3. Franchisee's Representations and Warranties. Franchisee represents
and warrants that it has executed a lease for the premises for the Franchised
Business, a copy of which has been provided to Franchisor and Franchisee
warrants and represents that the lessor has consented to Franchisee's use of
such Proprietary Marks and initial signage as Franchisor may prescribe for the
Franchised Business.
4. Miscellaneous.
a. All capitalized terms not defined in this Addendum shall have the
meaning given them in the Franchise Agreement.
b. This Site Selection Addendum constitutes an integral part of the
Franchise Agreement between the parties, and the terms of this Site Selection
Addendum shall be controlling with respect to the subject matter. Except as
modified or supplemented by this Site Selection Addendum, the terms of the
Franchise Agreement are ratified and confirmed.
IN WITNESS WHEREOF, the parties have executed, sealed and delivered
this Addendum on the day and year first above written.
FRANCHISOR:
ALOETTE(R) COSMETICS, INC.
WITNESS:
_________________________ By:______________________________________
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FRANCHISEE:
WITNESS:
_________________________ _________________________________________
_________________________ _________________________________________
Each of the undersigned owns a twenty percent (20%) or greater
beneficial interest in Franchisee; each has read this Site Selection Addendum
and each agrees to be individually bound by its terms.
WITNESS
_________________________ __________________________________________
_________________________ __________________________________________
_________________________ __________________________________________
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ATTACHMENT B
------------
ALOETTE COSMETICS, INC.
SINGLE-UNIT FRANCHISE
PERFORMANCE CRITERIA
YEAR ANNUAL GROSS SALES U.S. % vs. PRIOR YEAR
- ---- ----------------------- ----------------
Year I $200,000 ---
Year II 250,000 25%
Year III 300,000 20%
Year IV 330,000 10%
Year V 350,000 6%
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CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made as of November 14,
1995, by and between Aloette Cosmetics, Inc., a Pennsylvania corporation, with
its principal offices located at 1301 Wright's Lane East, West Chester,
Pennsylvania 19380 (the "Company") and John E. Defibaugh, whose address is 1056
Mt. Pleasant Road, Bryn Mawr, Pennsylvania 19010 (the "Consultant").
WHEREAS, the Consultant is a co-founder and past president of the
Company; and
WHEREAS, the Consultant is experienced with the philosophy and
operations of the Company; and
WHEREAS, the Consultant has a specialized knowledge in connection with
the sale of cosmetics through the Company's franchise system; and
WHEREAS, the Consultant, in the recent past, has volunteered
his services to the Company; and
WHEREAS, the Company believes the services of the Consultant to be
invaluable and desires to retain the services of the Consultant as an
independent consultant to the Company to provide his expertise to the Company,
to advise the officers of the Company; and
WHEREAS, the Consultant desires to provide his services to the Company
on the terms and subject to the conditions and limitations contained in this
Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties agree as follows:
1. Provision of Consulting Services. The Company hereby retains the
Consultant to provide consulting services as an independent contractor, and the
Consultant hereby agrees to provide consulting services as an independent
contractor to the Company on the terms and conditions set forth in this
Agreement.
2. Term. The term of this Agreement (the "Term") shall commence as of
the date hereof and, unless otherwise modified by separate agreement signed by
all parties hereto, or terminated as otherwise provided herein, shall remain in
effect until December 31, 1996. Thereafter, this Agreement shall continue from
month to month, subject to the right of either party to terminate the agreement
upon thirty (30) days written notice.
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3. Duties of the Consultant. The Consultant shall serve as a general
advisor and consultant to the management of the Company and shall perform such
duties as and when requested by the Company generally relating to finances,
sales, product and franchise development. The Consultant shall devote such time
as the Consultant deems necessary for the performance of his duties, but in no
event shall the Consultant be required to devote more than sixteen hours per
week or four, four-hour days. The Consultant shall, however, comply with all
instructions and guidelines provided by the Company from time to time with
respect to the performance of his duties hereunder.
4. Compensation. During the Term of this Agreement, the Consultant
shall be paid for the services performed under this Agreement as follows:
a. Consulting Fees. The Company shall pay the Consultant a
consultant's fee of $50,000.00 per year, payable $4,166.67 per month on the
first day of each month, commencing on the first day of the month following the
month in which this Agreement is executed, if this Agreement is executed on or
between the first and fifteenth days of the calendar year, or commencing on the
last day of the month following the month in which this Agreement is executed,
if this Agreement is executed on or between the sixteenth and last days of the
calendar month, and continuing on the respective first or last day of each month
thereafter for twelve consecutive months.
5. Relationship Between Parties. The Consultant is retained only for
the purposes and to the extent set forth in this Agreement, and his relationship
to the Company shall be that of independent contractor. The Consultant agrees
that he shall be responsible for all federal and state income, social security,
and other tax withholding and payment requirements which are or may be imposed
as a result of either the performance of his duties hereunder or the payment
therefor by the Company. Further, it is the epxress understanding of the parties
that the Consultant shall not be entitled to any employee benefits.
6. Termination of Agreement.
a. Termination Upon Death or Disability. This Agreement shall
terminate immediately upon the Consultant's death. His estate or legal heirs, as
the case may be, shall be entitled to receive the compensation as owed to the
Consultant hereunder, prorated to the date of such termination. Because the
Company desires to retain the services of the Consultant and prevent them from
being available to competing businesses, should the Consultant become disabled
or incapacitated during the Term of this Agreement, this Agreement shall not
terminate. In such event, the Consultant, or his estate, legal heirs, or legal
representative, as the case may be, shall be entitled to continue to receive the
full compensation as owed to him hereunder.
2
<PAGE>
b. Termination for Cause. At any time during the Term
hereunder, the Company may only terminate this Agreement for cause ("Termination
for Cause"). Such Termination for Cause shall be effective immediately following
the delivery by the Company to the Consultant of a written notice thereof
specifying the Cause. For purposes of this Agreement, "Cause" shall mean: (i)
fraud or embezzlement by the Consultant in the course of employment; or (ii)
wanton or willful misconduct or gross negligence in the performance of his
duties hereunder. No other standard which may be imposed by rule of law,
decisions of courts or otherwise shall be required of the Consultant hereunder,
provided that the Consultant shall nevertheless perform his duties as required
by Paragraph 3 hereof. The Company shall not be entitled to terminate this
Agreement for any reason except as expressly provided in this Paragraph 6b.
7. Expenses of Collection and Attorneys' Fees. The prevailing party in
any action to enforce rights under this agreement shall be entitled to all
reasonable costs, fees and expenses, including reasonable attorney's fees.
8. Standstill. During the term of this Agreement, or any extensions
thereof, and provided that the Company is not in breach of any of its
obligations hereunder, then Consultant agrees not to exercise any of his
existing rights or remedies relative to the subordinated debt identified in
Exhibit A attahced hereto and incorporated herein.
9. Covenant Not to Compete. During the term of this Agreement, or any
extensions thereof, and provided that the Company is not in breach of any of its
obligations hereunder, then Consultant agrees not to compete directly or
indirectly with the Company.
10. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the provision of services of the Consultant to the
Company and supersedes any prior agreements between the parties, whether oral or
written.
11. Amendments. Any amendment to this Agreement shall be made in
writing and signed by all of the parties hereto.
12. Enforceability. If any provision of this Agreement shall be found
by a court with proper jurisdiction to be invalid or unenforceable, in whole or
in part, then such provision shall be deemed to be modified, narrowed or
restricted only to the limited extent and in the manner necessary to render the
same valid and enforceable, as the case may require, and this Agreement shall be
construed and enforced to the maximum extent permitted by law, as if such
provision had been originally incorporated herein as so modified, narrowed or
restricted.
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<PAGE>
13. Successors. This Agreement shall inure to the benefit of, shall be
assignable to, and shall be binding on the successors of the business of the
Company. This Agreement is personal to the Consultant and may not be assigned by
him, provided, however, that the Consultant shall have the right to assign,
pledge, or otherwise hypothecate his right to receive payments under this
Agreement which shall be effective upon his first providing written notice of
such assignment, pledge, or hypothecation to the Company.
14. Waivers. A waiver by one party of any breach of or failure to
comply with any provision of this Agreement by the other party shall not be
construed as a waiver of any other provision, or a waiver of a breach of any
other provision, of this Agreement.
15. Notices. Any notice required or permitted by the terms hereof shall
be effectively delivered for all purposes if delivered personally, upon
delivery, or if mailed, upon deposit in the United States Mail, registered or
certified, postage prepaid, and if directed to the Company to its principal
business office, and if directed to the Consultant to his address appearing on
the records of the Company, or to such other address as he may designate in
writing to the Company.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
17. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original and all of which together shall constitute
one and the same document.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto to be effective on the date first above written.
Attest: ALOETTE COSMETICS, INC.
a Pennsylvania corporation
/S/ Jean M. Lewis /S/ John E. Defibaugh
- ------------------------------ ------------------------------
Witness: JOHN E. DEFIBAUGH
/S/ Jean M. Lewis /S/ John E. Defibaugh
- ------------------------------ ------------------------------
4
<PAGE>
Loan Agreement PNC BANK
THIS LOAN AGREEMENT (the "Agreement"), is entered into as of January
________, 1996, among ALOETTE COSMETICS, INC., a Pennsylvania corporation
("ACI"), ALOETTE COSMETICS, INC. OF PENNSYLVANIA, a Pennsylvania corporation
("APa"), ALOETTE COSMETICS, INC. OF DELAWARE, a Delaware corporation ("ADe"),
and ALOETTE REALTY, INC., a Delaware corporation ("Realty") (ACI, APa, ADe and
Realty are referred to herein collectively as "Borrowers" and individually as a
"Borrower"), and PNC BANK, NATIONAL ASSOCIATION (the "Bank").
The Borrowers and the Bank, with the intent to be legally bound, agree as
follows:
1. Loan. The following loans, lines of credit and credit facilities (if one or
more, collectively, the "Loan"), made for the purpose indicated below shall be
subject to and governed by this Agreement:
Date and Type Purpose
------------- -------
$1,000,000 Revolving Credit Facility Provide working capital and
with $200,000 sublimit for trade and trade and standby letters of credit
standby letters of credit
Expiration Date: December 31, 1996
The Loan is or will be evidenced by a promissory note or notes of the Borrowers
(if one or more, collectively, the "Note") acceptable to the Bank, which shall
set forth the interest rate, repayment and other provisions, the terms of which
are incorporated into this Agreement by reference.
2. Security. The security for repayment of the Loan shall include but not be
limited to the collateral, guaranties, mortgages and other documents heretofore,
contemporaneously or hereafter executed and delivered to the Bank (the "Security
Documents"), which shall secure repayment of the Loan, the Note and all other
loans, advances, debts, liabilities, obligations, covenants and duties owing by
the Borrowers, or any of them, to the Bank of any kind or nature, present or
future, whether or not evidenced by any note, guaranty or other instrument,
whether arising under any agreement, instrument or document, whether or not for
the payment of money, whether arising by reason of an extension of credit,
opening of a letter of credit, loan or guarantee or in any other manner, whether
arising out of overdrafts on deposit or other accounts or electronic funds
transfers (whether through automatic clearing houses or otherwise) or out of the
Bank's non-receipt of or inability to collect funds or otherwise not being made
whole in connection with depository transfer check or other similar
arrangements, whether direct or indirect (including those acquired by assignment
or participation), absolute or contingent, joint or several, due or to become
due, now existing or hereafter arising, and any amendments, extensions, renewals
or increases and all costs and expenses of the Bank incurred in the
documentation, negotiation, modification, enforcement, collection or otherwise
in connection with any of the foregoing, including but not limited to reasonable
attorneys' fees and expenses (hereinafter referred to collectively as the
"Obligations"). Unless expressly provided to the contrary in documentation for
any other loan or loans, it is the express intent of the Bank and the Borrowers
that all Obligations including those included in the Loan be
cross-collateralized and cross-defaulted, such that collateral securing any of
the Obligations shall secure repayment of all Obligations and a default under
any Obligation shall be a default under all Obligations.
This Agreement, the Note, the Mortgages and the Security Documents are
collectively referred to as the "Loan Documents".
3. Representations and Warranties. The Borrowers hereby make the following
representations and warranties, which shall be continuing in nature and remain
in full force and effect until the Obligations are paid in full, and which shall
be true and correct except as otherwise set forth on the Addendum attached
hereto and incorporated herein by reference (the "Addendum"):
<PAGE>
3.1. Existence, Power and Authority. Each Borrower is duly organized,
validly existing and in good standing under the laws of the State or province of
its incorporation or organization and has the power and authority to own and
operate its assets and to conduct its business as now or proposed to be carried
on, and is duly qualified, licensed and in good standing to do business in all
jurisdictions where its ownership of property or the nature of its business
requires such qualification or licensing. Each Borrower is duly authorized to
execute and deliver the Loan Documents, all necessary action to authorize the
execution and delivery of the Loan Documents has been properly taken, and each
Borrower is and will continue to be duly authorized to borrow under this
Agreement and to perform all of the other terms and provisions of the Loan
Documents.
3.2. Financial Statements. Borrowers have delivered or caused to be
delivered their most recent balance sheet, income statement and statement of
cash flows (the "Historical Financial Statements"). The Historical Financial
Statements are true, complete and accurate in all material respects and fairly
present the financial condition, assets and liabilities, whether accrued,
absolute, contingent or otherwise and the results of the Borrowers' operations
for the period specified therein. The Historical Financial Statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied from period to period subject in the case of interim
statements to normal year-end adjustments and to any comments and notes
acceptable to the Bank in its sole discretion.
3.3. No Material Adverse Change. Since the date of the most recent
Financial Statements, no Borrower has suffered any damage, destruction or loss,
and no event or condition has occurred or exists, which has resulted or could
result in a material adverse change in its business, assets, operations,
financial condition or results of operation.
3.4. Binding Obligations. Each Borrower has full power and authority to
enter into the transactions provided for in this Agreement and has been duly
authorized to do so by appropriate action of its Board of Directors if the
Borrower is a corporation, all its general partners if the Borrower is a
partnership or otherwise as may be required by law, charter, other
organizational documents or agreements; and the Loan Documents, when executed
and delivered by such Borrower, will constitute the legal, valid and binding
obligations of such Borrower enforceable in accordance with their terms.
3.5. No Defaults or Violations. There does not exist any Event of Default
under this Agreement or any default or violation by any Borrower of or under any
of the terms, conditions or obligations of: (i) its partnership agreement if
such Borrower is a partnership, its articles or certificate of incorporation,
regulations or bylaws if such Borrower is a corporation or its other
organizational documents as applicable; (ii) any indenture, mortgage, deed of
trust, franchise, permit, contract, agreement, or other instrument to which it
is a party or by which it is bound; or (iii) any law, regulation, ruling, order,
injunction, decree, condition or other requirement applicable to or imposed upon
it by any law, the action by any court or any governmental authority or agency;
and the consummation of this Agreement and the transactions set forth herein
will not result in any such default or violation.
<PAGE>
3.6. Title to Assets. The Borrowers and the Guarantor (as defined in the
Addendum) have good and marketable title to the assets reflected on the most
recent Financial Statements, free and clear of all liens and encumbrances,
except for (i) current taxes and assessments not yet due and payable, (ii) liens
and encumbrances, if any, reflected or noted in the Historical Financial
Statements, (iii) assets disposed of by the Borrowers or the Guarantor in the
ordinary course of business since the date of the most recent Financial
Statements, and (iv) those liens or encumbrances specified on the Addendum.
3.7. Litigation. There are no actions, suits, proceedings or governmental
investigations pending or, to the knowledge of any Borrower, threatened against
any Borrower or Guarantor, none of which could result in a material adverse
change in the business, assets, operations, financial condition or results of
operations of any Borrower or Guarantor and there is no basis known to the
Borrowers for any action, suit, proceedings or investigation which could result
in such a material adverse change. All pending or threatened litigation against
the Borrowers or Guarantor is listed on the Addendum.
3.8. Tax Returns. Each Borrower and the Guarantor has filed all returns
and reports that are required to be filed by it in connection with any federal,
state or local tax, duty or charge levied, assessed or imposed upon it or its
property or withheld by it, including unemployment, social security and similar
taxes and all of such taxes, have been either paid or adequate reserve or other
provision has been made.
3.9. Employee Benefit Plans. Each employee benefit plan as to which any
Borrower or the Guarantor may have any liability complies in all material
respects with all applicable provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"), including minimum funding requirements, and (i)
no Prohibited Transaction (as defined under ERISA) has occurred with respect to
any such plan, (ii) no Reportable Event (as defined under Section 4043 of ERISA)
has occurred with respect to any such plan which would cause the Pension Benefit
Guaranty Corporation to institute proceedings under Section 4042 of ERISA, (iii)
no Borrower or the Guarantor has withdrawn from any such plan or initiated steps
to do so, and (iv) no steps have been taken to terminate any such plan.
3.10. Environmental Matters. Each Borrower and the Guarantor is in
compliance, in all material respects, with all Environmental Laws, including,
without limitation, all Environmental Laws in jurisdictions in which such
Borrower or the Guarantor owns or operates, or has owned or operated, a facility
or site, stores Collateral, arranges or has arranged for disposal or treatment
of hazardous substances, solid waste or other waste, accepts or has accepted for
transport any hazardous substances, solid waste or other wastes or holds or has
held any interest in real property or otherwise. Except as otherwise disclosed
on the Addendum, no litigation or proceeding arising under, relating to or in
connection with any Environmental Law is pending or, to the best of any
Borrower's knowledge, threatened against any Borrower or the Guarantor, any real
property which a Borrower or the Guarantor holds or has held an interest or any
past or present operation of any Borrower or the Guarantor. No release,
threatened release or disposal of hazardous waste, solid waste or other wastes
is occurring, or to the best of any Borrower's knowledge has occurred, on, under
or to any real property in which any Borrower or the Guarantor holds any
interest or performs any of its operations, in violation of any Environmental
Law. As used in this Section, "litigation or proceeding" means any demand, claim
notice, suit, suit in equity, action, administrative action, investigation or
inquiry whether brought by a governmental authority or other person, and
"Environmental Laws" means all provisions of laws, statutes, ordinances, rules,
regulations, permits, licenses, judgments, writs, injunctions, decrees, orders,
awards and standards promulgated by any governmental authority concerning
health, safety and protection of, or regulation of the discharge of substances
into, the environment.
3.11. Intellectual Property. Each Borrower owns or is licensed to use all
patents, patent rights, trademarks, trade names, service marks, copyrights,
intellectual property, technology, know-how and processes necessary for the
conduct of its business as currently conducted that are material to the
condition (financial or otherwise), business or operations of such Borrower.
3.12. Regulatory Matters. No part of the proceeds of the Loan will be used
for "purchasing" or "carrying" any "margin stock" within the respective meanings
of each of the quoted terms under Regulation U of the Board of Governors of the
Federal Reserve System as now and from time to time in effect or for any purpose
which violates the provisions of the Regulations of such Board of Governors.
<PAGE>
3.13. Solvency. As of the date hereof and after giving effect to the
transactions contemplated by the Loan Documents, (i) the aggregate value of the
assets of each Borrower and of the Guarantor, respectively, will exceed its
liabilities (including contingent, subordinated, unmatured and unliquidated
liabilities), (ii) each Borrower and the Guarantor will have sufficient cash
flow to enable it to pay its debts as they mature, and (iii) no Borrower nor the
Guarantor will have unreasonably small capital for the business in which it is
engaged.
3.14. Disclosure. None of the Loan Documents contains or will contain any
untrue statement of material fact or omits or will omit to state a material fact
necessary in order to make the statements contained in this Agreement or the
Loan Documents not misleading. There is no fact known to any Borrower which
materially adversely affects or, so far as such Borrower can now foresee, might
materially adversely affect the business, assets, operations, financial
condition or results of operation of any Borrower or the Guarantor and which has
not otherwise been fully set forth in this Agreement or in the Loan Documents.
4. Affirmative Covenants. The Borrowers agree that from the date of execution of
this Agreement until all Obligations have been fully paid and any commitments of
the Bank to the Borrowers, or any of them, have been terminated, the Borrowers
will, and will cause the Guarantor to:
4.1. Books and Records. Maintain books and records in accordance with GAAP
and give representatives of the Bank access thereto at all reasonable times,
including permission to examine, copy and make abstracts from any of such books
and records and such other information as the Bank may from time to time
reasonably request, and the Borrowers will make available to the Bank for
examination copies of any reports, statements or returns which the Borrowers
and/or the Guarantor may make to or file with any governmental department,
bureau or agency, federal or state.
4.2. Interim Financial Statements; Certificate of No Default. Furnish
the Bank:
(i) within sixty (60) days after the end of each of the first,
second and third fiscal quarters of each year, Borrowers' 10-Q statement,
including Borrowers' Financial Statements for such period, in reasonable detail,
certified by an authorized officer of the Borrowers, in form acceptable to Bank
and prepared in accordance with GAAP applied from period to period, together
with a certificate as to compliance with the applicable financial covenants for
the period then ended and whether any Event of Default exists, and, if so, the
nature thereof and the corrective measures the Borrowers propose to take;
(ii) within thirty (30) days before the end of each fiscal year,
projections and cash flows on a month-by-month basis for the next succeeding
twelve (12) months, prepared by the chief financial officer of Borrowers.
Borrowers have furnished to Bank initial projections containing the information
required by this Section. Borrowers represent and covenant that (a) the initial
projections have been and all projections required by this Section shall be
prepared by the chief financial officer of Borrowers and represent, and in the
future shall represent, the best available good faith estimate of Borrowers
regarding the course of Borrowers' and Guarantor's business for the periods
covered thereby; (b) the assumptions set forth in the initial projections are
and the assumptions set forth in the future projections delivered hereafter
shall be reasonable and realistic based on then current economic conditions; and
(c) Borrowers know of no reason why Borrowers or the Guarantor should not be
able to achieve the performance levels set forth in the initial projections and
Borrowers have no knowledge at the time of delivery of future projections of any
reason why Borrowers or the Guarantor shall not be able to meet the performance
levels set forth therein; and
(iv) promptly following a request by Bank therefor, any and all
other reports, statements and information as Bank may reasonably require from
time to time regarding Borrowers, the Guarantor, their operations or financial
condition. For purposes of this Agreement, "Financial Statements" means the
Borrowers' and the Guarantor's consolidated and consolidating balance sheets,
income statements and statements of cash flows for the year, month or quarter
together with year-to-date figures and comparative figures for the corresponding
periods of the prior year.
4.3. Annual Financial Statements. Furnish the Borrowers' consolidated and
consolidating Financial Statements to the Bank within one hundred twenty (120)
days after the end of each fiscal year. The consolidated Financial Statements
will be prepared in accordance with GAAP by an independent certified public
accountant selected by the Borrowers and satisfactory to the Bank. The
<PAGE>
consolidating Financial Statements shall be internally prepared in accordance
with GAAP. The accountant prepared Financial Statements shall contain the
unqualified audit opinion of an independent certified public accountant and its
examination shall have been made in accordance with GAAP consistently applied
from period to period. Each annual statement delivered to Bank hereunder shall
be accompanied by a report of the independent public accountants who render an
opinion with respect to the annual financial statements referred to therein,
stating that they have reviewed the terms of this Agreement and that in making
the examinations necessary to complete their audited statements, they have
reviewed the accounts and condition of Borrowers and the Guarantor during the
accounting period covered by the statement and that such review did not disclose
the existence of any condition or event which constitutes an Event of Default or
would, upon giving notice or passage of time or both, constitute an Event of
Default (or that such conditions or events existed, describing them).
4.4. Payment of Taxes and Other Charges. Pay and discharge when due all
indebtedness and all taxes, assessments, charges, levies and other liabilities
imposed upon any Borrower or the Guarantor, its income, profits, property or
business, except those which currently are being contested in good faith by
appropriate proceedings and for which such Borrower or the Guarantor shall have
set aside adequate reserves or made other adequate provision with respect
thereto acceptable to the Bank in its reasonable discretion.
4.5. Maintenance of Existence, Operation and Assets. Do all things
necessary to maintain, renew and keep in full force and effect their respective
organizational existences and all rights, permits and franchises necessary to
enable them to continue their respective businesses; continue in operation in
substantially the same manner as at present; keep their properties in good
operating condition and repair; and make all necessary and proper repairs,
renewals, replacements, additions and improvements thereto.
4.6. Insurance. Maintain with financially sound and reputable insurers,
insurance with respect to their property and businesses against such casualties
and contingencies, of such types and in such amounts as is customary for
established companies engaged in the same or similar business and similarly
situated. In the event of a conflict between the provisions of this Section and
the terms of any Security Documents relating to insurance, the provisions in the
Security Documents will control.
4.7. Compliance with Laws. Comply with all laws applicable to any Borrower
and to the operation of its business (including any statute, rule or regulation
relating to employment practices and pension benefits or to environmental,
occupational and health standards and controls).
4.8. Bank Accounts. Establish and maintain at the Bank each
Borrower's primary depository accounts.
4.9. Financial Covenants. Comply with all of the financial and other
covenants set forth on the Addendum.
4.10. Additional Reports. Provide prompt written notice to the Bank of the
occurrence of any of the following (together with a description of the action
which any Borrower proposes to take with respect thereto): (i) any Event of
Default or potential Event of Default, (ii) any litigation filed by or against
any Borrower, (iii) any Reportable Event or Prohibited Transaction with respect
to any Employee Benefit Plan(s) (as defined in ERISA) or (iv) any event which
might result in a material adverse change in the business, assets, operations,
financial condition or results of operation of the Borrower.
5. Negative Covenants. The Borrowers covenant and agree that from the date of
execution of this Agreement until all Obligations have been fully paid and any
commitments of the Bank to any Borrower have been terminated, no Borrower will,
and Borrowers will cause Guarantor not to, except as expressly permitted on the
Addendum, without the Bank's prior written consent:
5.1. Indebtedness. Incur any indebtedness for borrowed money other than:
(i) the Loan and any subsequent indebtedness to the Bank; and (ii) existing
indebtedness disclosed on the Borrowers' Historical Financial Statements
referred to in Section 3.2; and (iii) future indebtedness for purchase money
obligations permitted under the Addendum.
5.2. Liens and Encumbrances. Except as provided in Section 3.6, create,
assume or permit to exist any mortgage, pledge, encumbrance or other security
interest or lien upon any assets now owned or hereafter acquired or enter into
any arrangement for the acquisition of property subject to any conditional sales
agreement.
<PAGE>
5.3. Guarantees. Guarantee, endorse or become contingently liable for the
obligations of any person, firm or corporation, except in connection with the
endorsement and deposit of checks in the ordinary course of business for
collection.
5.4. Loans or Advances. Purchase or hold beneficially any stock, other
securities or evidences of indebtedness, or extend any loans or advances to, or
make any investment or acquire any interest whatsoever in, any other person,
firm or corporation, including any affiliate, except investments disclosed on
the Borrowers' Historical Financial Statements or acceptable to the Bank in its
sole discretion and except as expressly permitted in the Addendum.
5.5. Merger or Transfer of Assets. Merge or consolidate with or into any
person, firm or corporation or lease, sell, transfer or otherwise dispose of
all, or substantially all, of its property, assets and business whether now
owned or hereafter acquired.
5.6. Change in Business, Management or Ownership. Make or permit any
material change in the nature of its business as carried on as of the date
hereof, in the composition of its current executive management, or in its equity
ownership.
5.7. Dividends. Declare or pay any dividends on or make any distribution
with respect to any class of its equity or ownership interest, or purchase,
redeem, retire or otherwise acquire any of its equity, except for the amount of
federal and state income tax of the principals of a Borrower attributable to the
earnings of such Borrower where such Borrower is an S corporation or a
partnership.
6. Events of Default. The occurrence of any of the following will be deemed to
be an "Event of Default":
6.1. Covenant Default. Any Borrower or the Guarantor shall default in the
performances of any of the covenants or agreements contained in this Agreement.
6.2. Breach of Warranty. Any Financial Statement, representation, warranty
or certificate made or furnished by the Borrowers to the Bank in connection with
this Agreement shall be false, incorrect or incomplete in any material respect
when made.
6.3. Other Default. The occurrence of an Event of Default as defined in
the Note or any of the Security Documents.
Upon the occurrence of an Event of Default, the Bank will have all rights and
remedies specified in the Note and the Security Documents and all rights and
remedies (which are cumulative and not exclusive) available under applicable law
or in equity.
7. Conditions. The Bank's obligation to make any advance under the Loan is
subject to the conditions that as of the date of the advance:
7.1. No Event of Default. No Event of Default or event which with the
passage of time, provision of notice or both would constitute an Event of
Default shall have occurred and be continuing.
7.2. Authorization Documents. The Bank shall have been furnished certified
copies of resolutions of the board of directors or the general partners of any
partnership or corporation that executes this Agreement, the Note or any of the
Security Documents; or other proof of authorization satisfactory to the Bank.
7.3. Receipt of Loan Documents. The Bank shall have received the Loan
Documents and such other instruments and documents which the Bank may reasonably
request in connection with the transactions provided for in this Agreement,
which may include an opinion of counsel for any party executing any of the Loan
Documents in form and substance satisfactory to the Bank.
8. Expenses. The Borrowers agree to pay the Bank, upon the closing of this
Agreement, and otherwise on demand, all costs and expenses incurred by the Bank
in connection with the (i) preparation, negotiation and delivery of this
Agreement and the other Loan Documents, and any modifications thereto, and (ii)
collecting the loan or instituting, maintaining, preserving, enforcing and
foreclosing the security interest in any of the collateral securing the Loan,
whether through judicial proceedings or otherwise, or in defending or
prosecuting any actions or proceedings arising out of or relating to this
Agreement, including reasonable fees and expenses of counsel (which may include
<PAGE>
costs of in-house counsel), expenses for auditors, appraisers and environmental
consultants, lien searches, recording and filing fees and taxes.
9. Increased Costs. On written demand, together with the written evidence of the
justification therefor, Borrowers agree to pay the Bank, all direct costs
incurred and any losses suffered or payments made by the Bank as a consequence
of making the Loan by reason of any change in law or regulation or its
interpretation imposing any reserve, deposit, allocation of capital or similar
requirement (including without limitation, Regulation D of the Board of
Governors of the Federal Reserve System) on the Bank, its holding company or any
of their respective assets.
10. Miscellaneous.
10.1. Notices. All notices, demands, requests, consents, approvals and
other communications required or permitted hereunder must be in writing and will
be effective upon receipt if delivered personally to such party, or if sent by
facsimile transmission with confirmation of delivery, or by nationally
recognized overnight courier service, to the address set forth below or to such
other address as any party may give to the other in writing for such purpose:
To the Bank:
PNC Bank, National Association
100 South Broad Street
Philadelphia, PA 19110
Attention: Kevin Wheatley, Assistant Vice President
Facsimile No: (610) 640-4914
To the Borrower:
c/o Aloette Cosmetics, Inc.
1301 Wright's Lane East
West Chester, PA 19380
Attention: Jean M. Lewis, Vice President - Finance
Facsimile No.: (610) 692-2334
10.2. Preservation of Rights. No delay or omission on the part of the Bank
to exercise any right or power arising hereunder will impair any such right or
power or be considered a waiver of any such right or power or any acquiescence
therein, nor will the action or inaction of the Bank impair any right or power
arising hereunder. The Bank's rights and remedies hereunder are cumulative and
not exclusive of any other rights or remedies which the Bank may have under
other agreements, at law or in equity.
10.3. Illegality. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
10.4. Changes in Writing. No modification, amendment or waiver of any
provision of this Agreement nor consent to any departure by any Borrower
therefrom, will in any event be effective unless the same is in writing and
signed by the Bank, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on the Borrower in any case will entitle the Borrower to any other or
further notice or demand in the same, similar or other circumstance.
10.5. Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, between
the parties with respect to the subject matter hereof.
10.6. Counterparts. This Agreement may be signed in any number of
counterpart copies and by the parties hereto on separate counterparts, but
all such copies shall constitute one and the same instrument.
10.7. Successors and Assigns. This Agreement will be binding upon and
inure to the benefit of the Borrowers and the Bank and their respective heirs,
executors, administrators, successors and assigns; provided, however, that the
Borrowers may not assign this Agreement in whole or in part without the prior
written consent of the Bank and the Bank at any time may assign this Agreement
in whole or in part.
10.8. Interpretation. In this Agreement, unless the Bank and the Borrowers
otherwise agree in writing, the singular includes the plural and the plural the
singular; words importing any gender include the other genders; references to
statutes are to be construed as including all statutory provisions
<PAGE>
consolidating, amending or replacing the statute referred to; the word "or"
shall be deemed to include "and/or", the words "including", "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to articles, sections (or subdivisions of sections) or exhibits are
to those of this Agreement unless otherwise indicated; and references to
agreements and other contractual instruments shall be deemed to include all
subsequent amendments and other modifications to such instruments, but only to
the extent such amendments and other modifications are not prohibited by the
terms of this Agreement. Section headings in this Agreement are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose. Unless otherwise specified in this Agreement, all
accounting terms shall be interpreted and all accounting determinations shall be
made in accordance with GAAP. The obligations of each Borrower hereunder will be
joint and several.
10.9. Indemnity. Borrowers agree to indemnify each of the Bank, its
directors, officers and employees and each legal entity, if any, who controls
the Bank (the "Indemnified Parties") and to hold each Indemnified Party harmless
from and against any and all claims, damages, losses, liabilities and expenses
(including, without limitation, all fees of counsel with whom any Indemnified
Party may consult and all expenses of litigation or preparation therefor) which
any Indemnified Party may incur or which may be asserted against any Indemnified
Party in connection with or arising out of the matters referred to in this
Agreement or in the other Loan Documents by any person, entity or governmental
authority (including any person or entity claiming derivatively on behalf of a
Borrower), whether (a) arising from or incurred in connection with any breach of
a representation, warranty or covenant by any Borrower, or (b) arising out of or
resulting from any suit, action, claim, proceeding or governmental
investigation, pending or threatened, whether based on statute, regulation or
order, or tort, or contract or otherwise, before any court or governmental
authority, which arises out of or relates to this Agreement, any other Loan
Document, or the use of the proceeds of the Loan; provided, however, that the
foregoing indemnity agreement shall not apply to claims, damages, losses,
liabilities and expenses solely attributable to an Indemnified Party's gross
negligence or willful misconduct. The indemnity agreement contained in this
Section shall survive the termination of this Agreement, payment of any Loan and
assignment of any rights hereunder. The Borrowers may participate at their
expense in the defense of any such action or claim.
10.10. Assignments and Participations. At any time, without any notice to
the Borrowers, the Bank may sell, assign, transfer, negotiate, grant
participations in, or otherwise dispose of all or any part of the Bank's
interest in the Loan. Each Borrower hereby authorizes the Bank to provide,
without any notice to the Borrowers, any information concerning the Borrowers,
including information pertaining to the Borrowers' financial condition, business
operations or general creditworthiness, to any person or entity which may
succeed to or participate in all or any part of the Bank's interest in the Loan.
10.11. Governing Law and Jurisdiction. This Agreement has been delivered
to and accepted by the Bank and will be deemed to be made in the State where the
Bank's office indicated above is located. THIS AGREEMENT WILL BE INTERPRETED AND
THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH
THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS LOCATED,
EXCLUDING ITS CONFLICT OF LAWS RULES. Each Borrower hereby irrevocably consents
to the exclusive jurisdiction of any state or federal court for the county or
judicial district where the Bank's office indicated above is located, and
consents that all service of process be sent by nationally recognized overnight
courier service directed to the Borrowers as provided and at the address set
forth herein and service so made will be deemed to be completed on the business
day after deposit with such courier; provided that nothing contained in this
Agreement will prevent the Bank from bringing any action, enforcing any award
or judgment or exercising any rights against any Borrower individually, against
any security or against any property of any Borrower within any other county,
state or other foreign or domestic jurisdiction. The Bank and the Borrowers
agree that the venue provided above is the most convenient forum for both the
Bank and the Borrowers. Each Borrower waives any objection to venue and any
objection based on a more convenient forum in any action instituted under this
Agreement.
10.12. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE BANK
IRREVOCABLY WAIVES ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS AGREEMENT, ANY
DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
<PAGE>
CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWERS AND THE BANK ACKNOWLEDGE
THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
Each Borrower acknowledges that it has read and understood all the provisions of
this Agreement, including the waiver of jury trial, and has been advised by
counsel as necessary or appropriate.
<PAGE>
WITNESS the due execution hereof as a document under seal, as of the date first
written above.
ALOETTE COSMETICS, INC.,
a Pennsylvania corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:____________________________________
Jean M. Lewis, Assistant Secretary
ALOETTE COSMETICS, INC. OF PENNSYLVANIA,
a Pennsylvania corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:____________________________________
Jean M. Lewis, Assistant Secretary
ALOETTE COSMETICS, INC. OF DELAWARE,
a Delaware corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:____________________________________
Jean M. Lewis, Assistant Secretary
ALOETTE REALTY, INC.,
a Delaware corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:____________________________________
Jean M. Lewis, Assistant Secretary
PNC BANK, NATIONAL ASSOCIATION
By:________________________________________
Kevin Wheatley, Assistant Vice President
<PAGE>
ADDENDUM to that certain Loan Agreement dated January ________, 1996, among
ALOETTE COSMETICS, INC., ALOETTE COSMETICS, INC. OF PENNSYLVANIA, ALOETTE
COSMETICS, INC. OF DELAWARE, and ALOETTE REALTY, INC. as the Borrowers and PNC
BANK, NATIONAL ASSOCIATION, as the Bank. Capitalized terms used in this Addendum
and not otherwise defined shall have the meanings given them in the Agreement.
Section numbers below refer to the sections of the Agreement.
3.6 Title to Assets. Borrowers' and the Guarantor's assets are and may be
subject to:
(a) the existing liens described on Exhibit "A" attached hereto and made
a part hereof; and
(b) Borrowers and/or the Guarantor may create future purchase money liens
or capitalized leases in or for equipment, provided that:
(1) the equipment subject to any of the foregoing is acquired or
leased by said Borrower or the Guarantor in the ordinary course of its business
and the lien on any such equipment is created contemporaneously with such
acquisition;
(2) the purchase money indebtedness or capitalized lease obligations
created shall not exceed one hundred percent (100%) of the lesser of cost or
fair market value as of the time of acquisition or lease of the equipment
covered thereby;
(3) the purchase money indebtedness or capitalized lease obligations
shall only be secured by the equipment so acquired or leased; and
(4) the total purchase money indebtedness or capitalized lease
obligations of Borrowers and/or the Guarantor (exclusive of the existing
capitalized lease obligation described on Exhibit "A") do not exceed Forty
Thousand Dollars ($40,000.00) in the aggregate at any time.
3.7 Litigation. Describe pending or threatened litigation, proceedings:
See Exhibit "B" attached hereto and made a part hereof.
5.4 Loans or Advances. Borrowers and the Guarantor may (a) make future loans and
advances to affiliates provided that the total amount of all such advances and
loans from all Borrowers and the Guarantor shall not exceed Two Hundred Fifty
Thousand Dollars ($250,000.00) at any time; (b) incur indebtedness secured by
purchase money liens as permitted under Section 3.6(b) above; and (c) purchase
Aloette franchises in the ordinary course of business, for full and fair
consideration, in amounts not exceeding One Hundred Fifty Thousand Dollars
($150,000.00) per franchise or Three Hundred Thousand Dollars ($300,000.00) in
the aggregate during the term of the Loan.
Financial Covenants.
1
<PAGE>
(a) Tangible Net Worth. The Borrowers will maintain a consolidated Tangible
Net Worth of not less than (i) Six Million Two Hundred Fifty thousand
Dollars ($6,250,000.00) as of the date hereof; (ii) Six Million Four
Hundred Fifty Thousand Dollars ($6,450,000.00) as of December 31, 1995;
and (iii) as of December 31, 1996, and as of each fiscal year end
thereafter, an amount equal to the sum of (x) the minimum Tangible Net
Worth required hereunder as of the end of the prior fiscal year end plus
(y) the consolidated Net Income of Borrowers (if this is a positive
number) for the fiscal year then ended. For example, as of December 31,
1996, Borrowers' consolidated Tangible Net Worth shall not be less than
Six Million Four Hundred Fifty Thousand Dollars ($6,450,000.00) plus
Borrowers consolidated Net Income (if a positive number) for the year
ended December 31, 1996.
(b) Current Ratio. The Borrowers will maintain a ratio of consolidated current
assets to consolidated current liabilities of at least (i) 2.0 to 1.0 as
of September 30, 1995; and (ii) 2.2 to 1.0 as of December 31, 1995 and as
of the end of each fiscal quarter thereafter.
(c) Leverage Ratio. The Borrowers will maintain a ratio of consolidated total
liabilities to consolidated Tangible Net Worth of less than (i) 1.20 to 1
as of September 30, 1995 and (ii) 1.1 to 1.0 as of December 31, 1995 and
as of the end of each fiscal quarter thereafter.
(d) Net Income. The Borrowers' consolidated Net Income calculated on a year to
date basis as of the end of each fiscal quarter, commencing with the
fiscal quarter ending March 31, 1996, shall be greater than $ 0.
(e) Fixed Charge Coverage Ratio. The Borrowers shall maintain a Fixed Charge
Coverage Ratio, determined on a consolidated basis, of not less than (i)
1.0 to 1.0 for the three month period ending September 30, 1995; (ii) 1.1
to 1.0 for the six (6) month period ending December 31, 1995; (iii) 1.2 to
1.0 for the nine (9) month period ending March 31, 1996; and (iv) 1.2 to
1.0 for each twelve (12) month period thereafter, tested as of the end of
each fiscal quarter for the twelve (12) months then ended.
For purposes of the foregoing:
"Tangible Net Worth" means total assets, less intangibles, less total
liabilities (including the Subordinated Debt).
"Fixed Charge Coverage Ratio" means earnings before interest, taxes,
depreciation and amortization, divided by the sum of interest expense, scheduled
current maturities of long-term debt, taxes and unfunded capital expenditures;
all calculated for the applicable test period. In calculating the foregoing, a
principal payment paid by Borrowers on the Subordinated Debt (as hereinafter
defined) shall not be included in scheduled current maturities of long term debt
as long as such payment is deposited in the Escrow Account, as hereinafter
defined.
"Net Income" means income (or loss) after income and franchise taxes and shall
have the meaning given such term by GAAP, provided that there shall be
specifically excluded therefrom (a) gains or losses from the sale of capital
assets and (b) any gains arising from extraordinary items, as defined by GAAP.
"Unfunded Capital Expenditures" means capital expenditures made from a
Borrower's funds other than borrowed funds.
2
<PAGE>
Letters of Credit. Bank, at its sole discretion, may issue for the account of
Borrowers merchandise and standby letters of credit in form and content
satisfactory to Bank, at its sole discretion, with a term not to exceed (a)
ninety (90) days for merchandise letters of credit or (b) twelve (12) months for
standby letters of credit. No letter of credit will renew automatically.
Notwithstanding the foregoing, (i) at no time shall the aggregate face amount of
all outstanding letters of credit issued under the Loan exceed the amount of Two
Hundred Thousand Dollars ($200,000.00); and (ii) at no time shall the principal
balance of the Loan, plus the aggregate face amount of all outstanding letters
of credit issued under the Loan, exceed One Million Dollars ($1,000,000.00).
Borrowers will execute a letter of credit application and letter of credit
agreement, and such other documents as may be required by Bank in connection
with the issuance of letters of credit hereunder. The outstanding face amount of
all letters of credit issued by Bank pursuant hereto will reduce Borrowers'
ability to borrow under the Loan as if such face amount were an advance under
the Loan. In the event that Bank pays any sums due pursuant to such letters of
credit for any reason, such payment shall be deemed to be an advance under the
Loan repayable by Borrowers pursuant to the terms hereof or under the applicable
letter of credit agreement.
In the event that the Loan is terminated for any reason or demand is made
thereunder, Borrowers will deposit with Bank an amount equal to the face amount
of all letters of credit then outstanding which have been issued hereunder, plus
an amount equal to the interest which would be expected to accrue on such face
amount at a per annum rate equal to the Banks Prime Rate in effect plus four
percent (4%) for the ninety (90) day period following the termination, plus all
fees related thereto or to accrue thereunder. Such funds will be held by Bank as
cash collateral to secure Borrowers' obligations hereunder.
For each issuance or renewal of a merchandise letter of credit under the Loan,
Borrowers will pay to Bank an issuance or renewal fee as determined by Bank at
the date of request therefor, which fee is payable coincident with and as a
condition of the issuance or renewal of such merchandise letter of credit. For
each issuance or renewal of a standby letter of credit under the Loan, Borrowers
will pay to Bank an issuance or renewal fee in an amount equal to two percent
(2%) per annum of the face amount of such standby letter of credit, payable
coincident with and as a condition of the issuance or renewal of such standby
letter of credit. In addition, Borrowers shall pay such other fees and charges
in connection with the negotiation or cancellation of each merchandise and
standby letter of credit as may be customarily charged by Bank. Such fees shall
be computed on the basis of a year of 360 days.
Facility Fee. So long as the Loan is outstanding and has not been terminated,
and all Obligations have not been satisfied in full, Borrowers shall
unconditionally pay to Bank a fee equal to 1/2 of 1% per annum of the maximum
amount of the Loan, which fee shall be payable quarterly in arrears.
Subordinated Debt. Borrowers and the Guarantor will cause all sums now or
hereafter owing by any of them to John Defibaugh (the "Subordinated Debt") to be
subordinate in payment and all other respects to all Obligations, and no
Borrower or the Guarantor shall make any payment of any kind thereon without
Bank's prior written consent. Bank agrees, however, that such consent shall be
deemed provided with respect to payments of regularly scheduled
(non-accelerated) principal and interest on the Subordinated Debt of Aloette
Cosmetics, Inc. in accordance with the current terms thereof as long as (i) no
Event of Default has occurred; (ii) the making of such payment will not cause,
or be reasonably expected to cause, Borrowers to be in violation of any of the
Financial Covenants contained herein; and (iii) each principal and interest
payment is deposited into an account with Bank which has been pledged and
assigned to Bank by Mr. Defibaugh as security for the Obligations (the
"Escrow Account").
3
<PAGE>
Collateral. Borrowers covenant and agree that the Obligations are and shall
be secured at all times by, inter alia:
(a) a first priority perfected security interest in all accounts, general
intangibles, instruments, documents, chattel paper, equipment, furniture,
fixtures, machinery, inventory and all other personal property of each Borrower,
and in and to all proceeds thereof;
(b) a first priority pledge and assignment by John Defibaugh of all right,
title and interest in and to the Escrow Account;
(c) a valid and enforceable first priority open-end mortgage lien against
the real property and improvements located at 1301 Wright's Lane East, Lot 9,
Goshen Park West (East Goshen Township), Chester County, Pennsylvania owned by
ACI;
(d) a valid and enforceable first priority open-end mortgage lien against
the real property and improvements located at 345 Lancaster Avenue (Unit H -
Liberty Square), East Whiteland Township, Chester County, Pennsylvania owned by
Realty; and
(e) a valid and enforceable first and prior assignment to Bank of the
Consulting Agreement between ACI and John Defibaugh, which Consulting Agreement
is in form and content acceptable to the Bank.
In addition to the foregoing, the Obligations of ACI shall be secured by the
unconditional, unlimited guaranty and suretyship agreement of Aloette Cosmetics
of Canada, Inc. ("Guarantor"), and such guaranty and suretyship agreement shall
be secured by (i) a first priority perfected security interest in all accounts,
general intangibles, instruments, documents, chattel paper, equipment,
furniture, fixtures, machinery, inventory and other personal property of
Guarantor, and in and to all proceeds thereof, and (ii) a valid and enforceable
mortgage lien against the real property and improvements located at 89 Edilcan
Drive, Concord, Ontario, Canada L4K3S6.
Initialled: _______________ _______________
BANK BORROWERS
4
<PAGE>
EXHIBIT "A"
TO
LOAN AND SECURITY AGREEMENT
Lease Obligations to Amplicon pursuant to the Leases attached hereto:
A. The Leases were sold to Tilden Financial Corporation, P. O. Box 992,
Jersey City, New Jersey 07303.
B. Payment of $33,745.89 are made quarterly, the fourth quarter of 1995 being
paid September 22, 1995, Check No. 26802.
C. As of December 31, 1995 the balance due Tilden is $115,012.31 recorded by
Aloette Cosmetics, Inc. as a currently liability.
5
<PAGE>
Committed Line of Credit Note PNC BANK
$1,000,000.00 January 4, 1996
FOR VALUE RECEIVED, ALOETTE COSMETICS, INC., ALOETTE COSMETICS, INC. OF
PENNSYLVANIA, ALOETTE COSMETICS, INC. OF DELAWARE and ALOETTE REALTY, INC.
(collectively the "Borrowers"), with an address at c/o Aloette Cosmetics, Inc.,
1301 Wright's Lane East, West Chester, PA 19380, promise to pay to the order of
PNC BANK, NATIONAL ASSOCIATION (the "Bank"), in lawful money of the United
States of America in immediately available funds at its offices located at 100
South Broad Street, Philadelphia, Pennsylvania 19110, or at such other location
as the Bank may designate from time to time, the principal sum of ONE MILLION
DOLLARS ($1,000,000.00) (the "Facility") or such lesser amount as may be
advanced to or for the benefit of the Borrowers hereunder, together with
interest accruing on the outstanding principal balance from the date hereof, as
provided below:
1. Rate of Interest. Amounts outstanding under this Note will bear interest at a
rate per annum which is at all times one percent (1%) in excess of the Prime
Rate. Interest will be calculated on the basis of a year of 360 days for the
actual number of days in each interest period. As used herein, "Prime Rate"
shall mean the rate publicly announced by the Bank from time to time as its
prime rate. The Prime Rate is not tied to any external rate or index and does
not necessarily reflect the lowest rate of interest actually charged by the Bank
to any particular class or category of customers. If and when the Prime Rate
changes, the rate of interest on this Note will change automatically without
notice to the Borrowers, effective on the date of any such change. In no event
will the rate of interest hereunder exceed the maximum rate allowed by law.
2. Advances. The Borrowers may borrow, repay and reborrow hereunder until the
Expiration Date, subject to the terms and conditions of this Note and the Loan
Documents (as defined herein). The "Expiration Date" shall mean December 31,
1996, or such later date as may be designated by the Bank by written notice from
the Bank to the Borrowers. The Borrowers acknowledge and agree that in no event
will the Bank be under any obligation to extend or renew the Facility or this
Note beyond the initial Expiration Date. In no event shall the aggregate unpaid
principal amount of advances under this Note exceed the face amount of this
Note.
3. Advance Procedures. Borrowers hereby authorize Bank to make advances on
behalf of all Borrowers upon the request of ______________________________. A
request for advance made by telephone must be promptly confirmed in writing by
such method as the Bank may require. The Borrowers authorize the Bank to accept
telephonic requests for advances, and the Bank shall be entitled to rely upon
the authority of any person providing such instructions. The Borrowers hereby
indemnify and hold the Bank harmless from and against any and all damages,
losses, liabilities, costs and expenses (including reasonable attorneys' fees
and expenses) which may arise or be created by the acceptance of such telephone
requests or making such advances. The Bank will enter on its books and records,
which entry when made will be presumed correct, the date and amount of each
advance, as well as the date and amount of each payment made by the Borrowers.
4. Payment Terms. Accrued interest will be due and payable on the first day
of each month, beginning with the payment due on February 1, 1996. The
outstanding principal balance and any accrued but unpaid interest shall be due
and payable on the Expiration Date.
If any payment under this Note shall become due on a Saturday, Sunday or public
holiday under the laws of the State where the Bank's office indicated above is
located, such payment shall be made on the next succeeding business day and such
extension of time shall be included in computing interest in connection with
such payment. Each Borrower hereby authorizes the Bank to charge such Borrower's
deposit account at the Bank for any payment when due hereunder. Payments
received will be applied to charges, fees and expenses (including attorneys'
fees), accrued interest and principal in any order the Bank may choose, in its
sole discretion.
5. Late Payments; Default Rate. If the Borrowers fail to make any payment of
principal, interest or other amount coming due pursuant to the provisions of
this Note within ten (10) calendar days of the date due and payable, the
Borrowers also shall pay to the Bank a late charge equal to the lesser of five
percent (5%) of the amount of such payment or One Hundred Dollars ($100.00).
Such ten (10) day period shall not be construed in any way to extend the due
date of any such payment. The late charge is imposed for the purpose of
defraying the Bank's expenses incident to the handling of delinquent payments
and is in addition to, and not in lieu of, the exercise by the Bank of any
rights and remedies hereunder, under the other Loan Documents or under
applicable laws, and any fees and expenses of any agents or attorneys which the
Bank may employ. Upon maturity, whether by acceleration, demand or otherwise,
and at the option of the Bank upon the occurrence of any Event of Default (as
hereinafter defined) and during the continuance thereof, this Note shall bear
interest at a rate per annum (based on a year of 360 days and actual days
elapsed) which shall be four percentage points (4%) in excess of the interest
rate in effect from time to time under this Note but not more than the maximum
rate allowed by law (the "Default Rate"). The Default Rate shall continue to
apply whether or not judgment shall be entered on this Note.
<PAGE>
6. Prepayment. The indebtedness evidenced by this Note may be prepaid in
whole or in part at any time without penalty.
7. Other Loan Documents. This Note is issued in connection with a Loan Agreement
between Borrowers and Bank of even date, the terms of which are incorporated
herein by reference (the "Loan Documents"), and is secured by the property
described in the Loan Documents and by such other collateral as previously may
have been or may in the future be granted to the Bank to secure this Note.
8. Events of Default. The occurrence of any of the following events will be
deemed to be an "Event of Default" under this Note: (i) the nonpayment of any
principal, interest or other indebtedness under this Note when due; (ii) the
occurrence of any event of default or default and the lapse of any notice or
cure period under any Loan Document or any other debt, liability or obligation
to the Bank of any Obligor; (iii) the filing by or against any Obligor of any
proceeding in bankruptcy, receivership, insolvency, reorganization, liquidation,
conservatorship or similar proceeding, or any assignment by any Obligor for the
benefit of creditors, or any levy, garnishment, attachment or similar proceeding
is instituted against any property of any Obligor held by or deposited with the
Bank; (iv) a default with respect to any other indebtedness of any Obligor for
borrowed money, if the effect of such default is to cause or permit the
acceleration of such debt; (v) the commencement of any foreclosure proceeding,
execution or attachment against any collateral securing the obligations of any
Obligor to the Bank; (vi) the entry of a final judgment against any Obligor and
the failure of such Obligor to discharge the judgment within ten days of the
entry thereof; (vii) in the event that this Note or any guarantee executed by
any Guarantor is secured, the failure of any Obligor to provide the Bank with
additional collateral if in the opinion of the Bank at any time or times, the
market value of any of the collateral securing this Note or any guarantee has
depreciated; (viii) any material adverse change in the business, assets,
operations, financial condition or results of operations of any Obligor; (ix)
the revocation or attempted revocation, in whole or in part, of any guarantee by
any Guarantor; (x) the death of any individual Obligor or, if any Obligor is a
partnership, the death of any individual general partner; (xi) any
representation or warranty made by any Obligor to the Bank in any Loan Document,
or any other documents now or in the future securing the obligations of any
Obligor to the Bank, is false, erroneous or misleading in any material respect;
or (xii) the failure of any Obligor to observe or perform any covenant or other
agreement with the Bank contained in any Loan Document which is not cured within
ten (10) calendar days of delivery to Borrowers by Bank of written notice of
such failure; provided, however, that such notice and opportunity to cure is
expressly inapplicable to (A) any failure which constitutes an Event of Default
under any other subpart of this Section 8 or under any of the other Loan
Documents; (B) any failure to comply with any of the financial covenants
contained on the Addendum to that certain Loan Agreement executed of even date
by Bank and Borrowers; or (C) any failure which is incapable of remedy or was
willfully caused or permitted by any Obligor; or (xiii) the failure of any
Obligor to observe or perform any covenant or other agreement with the Bank
contained in any other documents now or in the future evidencing or securing the
obligations or indebtedness of any Obligor to Bank which is not cured within any
grace or cure period provided therein, if any.As used herein, the term "Obligor"
means any Borrower and any Guarantor, and the term "Guarantor" means any
guarantor of the obligations of any Borrower to the Bank existing on the date of
this Note or arising in the future, including, without limitation, Aloette
Cosmetics of Canada, Inc.
Upon the occurrence of an Event of Default: (a) the Bank shall be under no
further obligation to make advances hereunder; (b) if an Event of Default
specified in clause (iii) above shall occur, the outstanding principal balance
and accrued interest hereunder together with any additional amounts payable
hereunder shall be immediately due and payable without demand or notice of any
kind; (c) if any other Event of Default shall occur, the outstanding principal
balance and accrued interest hereunder together with any additional amounts
payable hereunder, at the option of the Bank and without demand or notice of any
kind, may be accelerated and become immediately due and payable; (d) at the
option of the Bank, this Note will bear interest at the Default Rate from the
date of the occurrence of the Event of Default; and (e) the Bank may exercise
from time to time any of the rights and remedies available to the Bank under the
Loan Documents or under applicable law.
<PAGE>
9. Power to Confess Judgment. Borrowers hereby empower any attorney of any court
of record, after the occurrence of any Event of Default hereunder, to appear for
the Borrowers, or any of them, and, with or without complaint filed, confess
judgment, or a series of judgments, against the Borrowers, or any of them, in
favor of the Bank or any holder hereof for the entire principal balance of this
Note, all accrued interest and all other amounts due hereunder, together with
costs of suit and an attorney's commission of the greater of 10% of such
principal and interest or $1,000 added as a reasonable attorney's fee, and for
doing so this Note or a copy verified by affidavit shall be a sufficient
warrant. Each Borrower hereby forever waives and releases all errors in said
proceedings and all rights of appeal and all relief from any and all
appraisement, stay or exemption laws of any state now in force or hereafter
enacted. Interest on any such judgment shall accrue at the Default Rate.
No single exercise of the foregoing power to confess judgment, or a series of
judgments, shall be deemed to exhaust the power, whether or not any such
exercise shall be held by any court to be invalid, voidable, or void, but the
power shall continue undiminished and it may be exercised from time to time as
often as the Bank shall elect until such time as the Bank shall have received
payment in full of the debt, interest and costs.
10. Right of Setoff. In addition to all liens upon and rights of setoff against
the money, securities or other property of the Borrowers given to the Bank by
law, the Bank shall have, with respect to the Borrowers' obligations to the Bank
under this Note and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and each Borrower hereby
assigns, conveys, delivers, pledges and transfers to the Bank all of such
Borrower's right, title and interest in and to, all deposits, moneys, securities
and other property of such Borrower now or hereafter in the possession of or on
deposit with the Bank whether held in a general or special account or deposit,
whether held jointly with someone else, or whether held for safekeeping or
otherwise, excluding, however, all IRA, Keogh, and trust accounts. Every such
security interest and right of setoff may be exercised without demand upon or
notice to the Borrowers.
<PAGE>
11. Miscellaneous. No delay or omission of the Bank to exercise any right or
power arising hereunder shall impair any such right or power or be considered to
be a waiver of any such right or power or any acquiescence therein, nor shall
the action or inaction of the Bank impair any right or power hereunder. The
Borrowers agree to pay on demand, to the extent permitted by law, all costs and
expenses incurred by the Bank in the enforcement of its rights in this Note and
in any security therefor, including without limitation reasonable fees and
expenses of the Bank's counsel. If any provision of this Note is found to be
invalid by a court, all the other provisions of this Note will remain in full
force and effect. The Borrowers and all other makers and indorsers of this Note
hereby forever waive presentment, protest, notice of dishonor and notice of
non-payment. The Borrowers also waive all defenses based on suretyship or
impairment of collateral. The obligations of Borrowers hereunder will be joint
and several. This Note shall bind the Borrowers and their respective heirs,
executors, administrators, successors and assigns, and the benefits hereof shall
inure to the benefit of Bank and its successors and assigns.
This Note has been delivered to and accepted by the Bank and will be deemed to
be made in the State where the Bank's office indicated above is located. THIS
NOTE WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO
DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE
INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES. Each Borrower
hereby irrevocably consents to the exclusive jurisdiction of any state or
federal court for the county or judicial district where the Bank's office
indicated above is located, and consents that all service of process be sent by
nationally recognized overnight courier service directed to such Borrower at
such Borrower's address set forth herein and service so made will be deemed to
be completed on the business day after deposit with such courier; provided that
nothing contained in this Note will prevent the Bank from bringing any action,
enforcing any award or judgment or exercising any rights against any Borrower
individually, against any security or against any property of any Borrower
within any other county, state or other foreign or domestic jurisdiction. Each
Borrower acknowledges and agrees that the venue provided above is the most
convenient forum for both the Bank and the Borrowers. Each Borrower waives any
objection to venue and any objection based on a more convenient forum in any
action instituted under this Note.
12. WAIVER OF JURY TRIAL. EACH BORROWER IRREVOCABLY WAIVES ANY AND ALL RIGHTS
SUCH BORROWER MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF
ANY NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS
NOTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. EACH BORROWER
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
Each Borrower acknowledges that it has read and understood all the provisions of
this Note, including the confession of judgment and waiver of jury trial, and
has been advised by counsel as necessary or appropriate.
WITNESS the due execution hereof as a document under seal, as of the date first
written above, with the intent to be legally bound hereby.
ALOETTE COSMETICS, INC.,
a Pennsylvania corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:_____________________________________
Jean M. Lewis, Assistant Secretary
(SIGNATURES CONTINUED ON THE FOLLOWING PAGE)
<PAGE>
(SIGNATURES CONTINUED FROM THE PRECEDING PAGE)
ALOETTE COSMETICS, INC. OF PENNSYLVANIA,
a Pennsylvania corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:_____________________________________
Jean M. Lewis, Assistant Secretary
ALOETTE COSMETICS, INC. OF DELAWARE,
a Delaware corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:_____________________________________
Jean M. Lewis, Assistant Secretary
ALOETTE REALTY, INC.,
a Delaware corporation
By:________________________________________
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:_____________________________________
Jean M. Lewis, Assistant Secretary
<PAGE>
Security Agreement PNC BANK
THIS SECURITY AGREEMENT (this "Agreement") is made this ______ day of
January, 1996, by and between ALOETTE COSMETICS, INC. (the "Grantor"), with an
address at 1301 Wright's Lane East, West Chester, PA 19380, and PNC BANK,
NATIONAL ASSOCIATION (the "Bank"), with an address at 100 South Broad Street,
Philadelphia, Pennsylvania 19110.
Under the terms hereof, the Bank desires to obtain and the Grantor desires
to grant the Bank security for all of the Obligations (as hereinafter defined).
NOW, THEREFORE, the Grantor and the Bank, intending to be legally bound,
hereby agree as follows:
1. Definitions.
(a) "Collateral" shall include all personal property of the Grantor,
including without limitation the following, all whether now owned or hereafter
acquired or arising: (i) accounts, accounts receivable, contract rights, chattel
paper, notes receivable, instruments and documents (including warehouse
receipts); (ii) goods of every nature, including without limitation, inventory,
stock-in-trade, raw materials, work in process, items held for sale or lease or
furnished or to be furnished under contracts of sale or lease, goods that are
returned, reclaimed or repossessed, together with materials used or consumed in
the Grantor's business; (iii) equipment, including, without limitation,
machinery, vehicles, furniture and fixtures; (iv) general intangibles, of every
kind and description, including, but not limited, to all existing and future
customer lists, choses in action, claims (including without limitation claims
for indemnification or breach of warranty), books, records, patents and patent
applications, copyrights, trademarks, tradenames, tradestyles, trademark
applications, goodwill, blueprints, drawings, designs and plans, trade secrets,
contracts, licenses, license agreements, formulae, tax and any other types of
refunds, returned and unearned insurance premiums, rights and claims under
insurance policies, and computer information, software, source codes, object
codes, records and data; (v) all property of the Grantor now or hereafter in the
Bank's possession or in transit to or from, under the custody or control of or
on deposit with, the Bank or any affiliate thereof, including deposit and other
accounts; (vi) all cash and cash equivalents; and (vii) all cash and non-cash
proceeds (including without limitation, insurance proceeds) of all of the
foregoing property, all products thereof and all additions and accessions
thereto, substitutions therefor and replacements thereof. The Collateral shall
also include any and all other tangible or intangible property that is described
as being part of the Collateral pursuant to one or more Riders to Security
Agreement that may be attached hereto or delivered in connection herewith.
(b) "Loan Documents" means this Agreement, any and all notes evidencing
the Obligations and all related documents, instruments and agreements.
(c) "Obligations" shall include, without limitation, all loans,
advances, debts, liabilities, obligations, covenants and duties owing to the
Bank from the Grantor and/or ALOETTE COSMETICS, INC. OF
PENNSYLVANIA, ALOETTE COSMETICS, INC. OF DELAWARE or ALOETTE REALTY, INC. of any
kind or nature, present or future, whether or not evidenced by any note,
guaranty or other instrument, whether arising under any agreement, instrument or
document, whether or not for the payment of money, whether arising by reason of
an extension of credit, opening of a letter of credit, loan or guarantee or in
any other manner, whether arising out of overdrafts on deposit or other accounts
or electronic funds transfers (whether through automatic clearing houses or
otherwise) or out of the Bank's non-receipt of or inability to collect funds or
otherwise not being made whole in connection with depository transfer check or
other similar arrangements, whether direct or indirect (including those acquired
by assignment or participation), absolute or contingent, joint or several, due
or to become due, now existing or hereafter arising, and any amendments,
extensions, renewals or increases and all costs and expenses of the Bank
incurred in the documentation, negotiation, modification, enforcement,
collection or otherwise in connection with any of the foregoing, including but
not limited to reasonable attorneys' fees and expenses.
<PAGE>
2. Grant of Security Interest. To secure the Obligations, the
Grantor, as debtor, hereby assigns and grants to the Bank, as secured
party, a continuing lien on and security interest in the Collateral.
3. Change in Name or Locations. The Grantor hereby agrees that if the
location of the Collateral changes from the locations listed on Exhibit "A"
hereto and made part hereof, or if the Grantor changes its name or form of
organization, or establishes a name in which it may do business that is not
listed as a tradename on Exhibit "A" hereto, the Grantor will immediately notify
the Bank in writing of the additions or changes. The Grantor's chief executive
office is also shown on Exhibit "A" hereto.
4. Representations and Warranties. The Grantor represents, warrants and
covenants to the Bank that: (a) the Grantor has not made any prior sale, pledge,
encumbrance, assignment or other disposition of any of the Collateral and the
same are free from all encumbrances and rights of setoff of any kind; (b) except
as herein provided, the Grantor will not hereafter without the prior written
consent of the Bank sell, pledge, encumber, assign or otherwise dispose of any
of the Collateral or permit any right of setoff, lien or security interest to
exist thereon except to the Bank; (c) the Grantor will defend the Collateral
against all claims and demands of all persons at any time claiming the same or
any interest therein; (d) each account and general intangible, if included in
the definition of Collateral, is genuine and enforceable in accordance with its
terms and the Grantor will defend the same against all claims, demands, setoffs
and counterclaims at any time asserted; and (e) at the time any account or
general intangible becomes subject to this Agreement, such account or general
intangible will be a good and valid account representing a bona fide sale of
goods or services by the Grantor and such goods will have been shipped to the
respective account debtors or the services will have been performed for the
respective account debtors, and no such account or general intangible will be
subject to any claim for credit, allowance or adjustment by any account debtor
or any setoff, defense or counterclaim.
5. Grantor's Covenants. The Grantor covenants that it shall:
(a) from time to time and at all reasonable times allow the Bank, by or
through any of its officers, agents, attorneys, or accountants, to examine or
inspect the Collateral, notify account debtors of the Bank's security interest
in accounts (if included in the definition of Collateral) and obtain valuations
and audits of the Collateral, at the Grantor's expense, wherever located. The
Grantor shall do, obtain, make, execute and deliver all such additional and
further acts, things, deeds, assurances and instruments as the Bank may require
to vest in and assure to the Bank its rights hereunder and in or to the
Collateral, and the proceeds thereof, including, but not limited to, waivers
from landlords, warehousemen and mortgagees;
(b) keep the Collateral in good order and repair at all times and
immediately notify the Bank of any event causing a material loss or decline in
value of the Collateral whether or not covered by insurance and the amount of
such loss or depreciation;
(c) only use or permit the Collateral to be used in accordance with
all applicable federal, state, county and municipal laws and regulations;
and
(d) have and maintain insurance at all times with respect to all
Collateral against risks of fire (including so-called extended coverage), theft,
sprinkler leakage, and other risks (including risk of flood if any Collateral is
maintained at a location in a flood hazard zone) as the Bank may require, in
such form, in such amount, for such period and written by such companies as may
be satisfactory to the Bank in its sole discretion. The policies of all such
casualty insurance shall contain a standard Lender's Loss Payable Clauses issued
in favor of the Bank under which all losses thereunder shall be paid to the Bank
as the Bank's interest may appear. Such policies shall expressly provide that
the requisite insurance cannot be altered or canceled without at least thirty
(30) days prior written notice to the Bank and shall insure the Bank
notwithstanding the act or neglect of the Grantor. Upon demand of the Bank, the
Grantor shall furnish the Bank with duplicate original policies of insurance or
such other evidence of insurance as the Bank may require. In the event of
failure to provide insurance as herein provided, the Bank may, at its option,
obtain such insurance and the Grantor shall pay to the Bank, on demand, the cost
thereof. Proceeds of insurance may be applied by the Bank to reduce the
Obligations or to repair or replace Collateral, all in the Bank's sole
discretion.
<PAGE>
6. Negative Pledge; No Transfer. The Grantor will not sell or offer to
sell or otherwise transfer or, except as expressly permitted in that certain
Loan Agreement of even date among Grantor, Bank, ALOETTE COSMETICS, INC. OF
PENNSYLVANIA, ALOETTE COSMETICS, INC. OF DELAWARE and ALOETTE REALTY, INC. (the
"Loan Agreement") grant or suffer the imposition of a lien or security interest
upon the Collateral (except for sales of inventory and collections of accounts
in the Grantor's ordinary course of business) or use any portion thereof in any
manner inconsistent with this Agreement or with the terms and conditions of any
policy of insurance thereon.
7. Covenants for Accounts.
(a) The Grantor will, on demand of the Bank, make notations on its books
and records showing the security interest of the Bank and make available to the
Bank shipping and delivery receipts evidencing the shipment of the goods that
gave rise to an account, completion certificates or other proof of the
satisfactory performance of services that gave rise to an account, a copy of the
invoice for each account and copies of any written contract or order from which
an account arose. The Grantor shall promptly notify the Bank if an account
becomes evidenced or secured by an instrument or chattel paper and upon request
of the Bank, will promptly deliver any such instrument or chattel paper to the
Bank, including without limitation, any letter of credit delivered to the
Grantor to support a shipment of inventory by the Grantor.
(b) The Grantor will promptly advise the Bank whenever an account debtor
refuses to retain or returns any goods from the sale of which an account arose
and will comply with any instructions that the Bank may give regarding the sale
or other disposition of such returns. The Grantor will, on at least a weekly
basis, report all credits given to account debtors on all accounts.
(c) The Grantor will immediately notify the Bank if any account arises out
of contracts with the United States or any department, agency or instrumentality
thereof, and will execute any instruments and take any steps required by the
Bank so that all monies due and to become due under such contract shall be
assigned to the Bank and notice thereof given to and acknowledged by the
appropriate government agency or authority under the Federal Assignment of
Claims Act.
(d) At any time and without notice to the Grantor, the Bank may notify any
persons who are indebted to the Grantor on any Collateral consisting of accounts
or general intangibles of the assignment thereof to the Bank and may direct such
account debtors to make payment directly to the Bank of the amounts due. At the
request of the Bank, the Grantor will direct any persons who are indebted to the
Grantor on any Collateral consisting of accounts or general intangibles to make
payment directly to the Bank. The Bank is authorized to give receipts to such
account debtors for any such payments and the account debtors will be protected
in making such payments to the Bank. Upon the written request of the Bank, the
Grantor will establish with the Bank and maintain a lockbox account ("Lockbox")
with the Bank and a depository account(s) ("Cash Collateral Account") with the
Bank subject to the provisions of this subparagraph and such other agreements
related thereto as the Bank may require, whereupon all collections of accounts
shall be paid directly from account debtors into the Lockbox from which funds
shall be transferred to the Cash Collateral Account, and from which funds shall
be applied by the Bank, daily, to reduce the outstanding Obligations.
8. Further Assurances. At the request of the Bank, the Grantor will join
with the Bank in executing one or more financing, continuation or amendment
statements pursuant to the Uniform Commercial Code in form satisfactory to the
Bank and will pay the cost of preparing and filing the same in all jurisdictions
in which such filing is deemed by the Bank to be necessary or desirable. A
carbon, photographic or other copy of this Agreement or of a UCC-1 financing
statement may be filed as and in lieu of a UCC-1 financing statement.
<PAGE>
9. Events of Default. The Grantor shall, at the option of the Bank, be in
default under this Agreement upon the happening of any of the following events
or conditions (each, an "Event of Default"): (a) any Event of Default (as
defined in any of the Obligations); (b) any default under any of the Obligations
that does not have a defined set of "Events of Default" and the lapse of any
notice or cure period provided in such Obligations with respect to such default;
(c) demand by the Bank under any of the Obligations that have a demand feature;
(d) the failure by the Grantor to perform any of its obligations under this
Agreement, which is not cured within any applicable cure period permitted in the
Loan Agreement; (e) falsity, inaccuracy or material breach by the Grantor of any
written warranty, representation or statement made or furnished to the Bank by
or on behalf of the Grantor; (f) an uninsured material loss, theft, damage, or
destruction to any of the Collateral, or the entry of any judgment against the
Grantor or any lien against or the making of any levy, seizure or attachment of
or on the Collateral; (g) the failure of the Bank to have a perfected first
priority security interest in the Collateral; (h) any indication or evidence
received by the Bank that the Grantor may have directly or indirectly been
engaged in any type of activity which, in the Bank's discretion, might result in
the forfeiture of any property of the Grantor to any governmental entity,
federal, state or local; or (i) if the Bank otherwise deems itself insecure.
10. Remedies. Upon the occurrence of any such Event of Default and at any
time thereafter, the Bank may declare all Obligations secured hereby immediately
due and payable and shall have, in addition to any remedies provided herein or
by any applicable law or in equity, all the remedies of a secured party under
the Uniform Commercial Code. As permitted by such Code, the Bank may (a)
peaceably by its own means or with judicial assistance enter the Grantor's
premises and take possession of the Collateral, (b) render the Collateral
unusable, (c) dispose of the Collateral on the Grantor's premises, (d) require
the Grantor to assemble the Collateral and make it available to the Bank at a
place designated by the Bank, and (e) notify the United States Postal Service to
send the Grantor's mail to the Bank. Unless the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Bank will give the Grantor reasonable notice of the time
and place of any public sale thereof or of the time after which any private sale
or any other intended disposition thereof is to be made. The requirements of
commercially reasonable notice shall be met if such notice is sent to the
Grantor at least five (5) days before the time of the intended sale or
disposition. Expenses of retaking, holding, preparing for sale, selling or the
like shall include the Bank's reasonable attorney's fees and legal expenses,
incurred or expended by the Bank to enforce any payment due it under this
Agreement either as against the Grantor, or in the prosecution or defense of any
action, or concerning any matter growing out of or connection with the subject
matter of this Agreement and the Collateral pledged hereunder.
11. Power of Attorney. The Grantor does hereby make, constitute and
appoint any officer or agent of the Bank as the Grantor's true and lawful
attorney-in-fact, with power to endorse the name of the Grantor or any of the
Grantor's officers or agents upon any notes, checks, drafts, money orders, or
other instruments of payment or Collateral that may come into the possession of
the Bank in full or part payment of any amounts owing to the Bank; granting to
the Grantor's said attorney full power to do any and all things necessary to be
done in and about the premises as fully and effectually as the Grantor might or
could do, including the right to sign, for the Grantor, UCC-1 financing
statements and UCC-3 Statements of Change and to sue for, compromise, settle and
release all claims and disputes with respect to, the Collateral. The Grantor
hereby ratifies all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest, and is
irrevocable.
<PAGE>
12. Payment of Expenses. At its option, the Bank may discharge taxes,
liens, security interests or such other encumbrances as may attach to the
Collateral, may pay for required insurance on the Collateral and may pay for the
maintenance, appraisal or reappraisal, and preservation of the Collateral, as
determined by the Bank to be necessary. The Grantor will reimburse the Bank on
demand for any payment so made or any expense incurred by the Bank pursuant to
the foregoing authorization, and the Collateral also will secure any advances or
payments so made or expenses so incurred by the Bank.
13. Notices. All notices, demands, requests, consents, approvals and other
communications required or permitted hereunder must be in writing and will be
effective upon receipt if delivered personally to such party, or if sent by
facsimile transmission with confirmation of delivery, or by nationally
recognized overnight courier service, to the address set forth above or to such
other address as any party may give to the other in writing for such purpose.
14. Preservation of Rights. No delay or omission on the part of the Bank
to exercise any right or power arising hereunder will impair any such right or
power or be considered a waiver of any such right or power or any acquiescence
therein, nor will the action or inaction of the Bank impair any right or power
arising hereunder. The Bank's rights and remedies hereunder are cumulative and
not exclusive of any other rights or remedies which the Bank may have under
other agreements, at law or in equity.
15. Illegality. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby.
16. Changes in Writing. No modification, amendment or waiver of any
provision of this Agreement nor consent to any departure by the Grantor
therefrom, will in any event be effective unless the same is in writing and
signed by the Bank, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on the Grantor in any case will entitle the Grantor to any other or
further notice or demand in the same, similar or other circumstance.
17. Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, between
the parties with respect to the subject matter hereof.
18. Counterparts. This Agreement may be signed in any number
of counterpart copies and by the parties hereto on separate counterparts,
but all such copies shall constitute one and the same instrument.
19. Successors and Assigns. This Agreement will be binding upon and inure
to the benefit of the Grantor and the Bank and their respective heirs,
executors, administrators, successors and assigns; provided, however, that the
Grantor may not assign this Agreement in whole or in part without the prior
written consent of the Bank and the Bank at any time may assign this Agreement
in whole or in part.
20. Interpretation. In this Agreement, unless the Bank and the Grantor
otherwise agree in writing, the singular includes the plural and the plural the
singular; words importing any gender include the other genders; references to
statutes are to be construed as including all statutory provisions
consolidating, amending or replacing the statute referred to; the word "or"
shall be deemed to include "and/or", the words "including", "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to articles, sections (or subdivisions of sections) or exhibits are
to those of this Agreement unless otherwise indicated. Section headings in this
Agreement are included for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose. If this Agreement is
executed by more than one Grantor, the obligations of such persons or entities
will be joint and several.
<PAGE>
21. Indemnity. The Grantor agrees to indemnify each of the Bank, its
directors, officers and employees and each legal entity, if any, who controls
the Bank (the "Indemnified Parties") and to hold each Indemnified Party harmless
from and against any and all claims, damages, losses, liabilities and expenses
(including, without limitation, all fees of counsel with whom any Indemnified
Party may consult and all expenses of litigation or preparation therefor) which
any Indemnified Party may incur or which may be asserted against any Indemnified
Party as a result of the execution of or performance under this Agreement;
provided, however, that the foregoing indemnity agreement shall not apply to
claims, damages, losses, liabilities and expenses solely attributable to an
Indemnified Party's gross negligence or willful misconduct. The indemnity
agreement contained in this Section shall survive the termination of this
Agreement. The Grantor may participate at its expense in the defense of any such
claim.
22. Governing Law and Jurisdiction. This Agreement has been delivered to
and accepted by the Bank and will be deemed to be made in the State where the
Bank's office indicated above is located. THIS AGREEMENT WILL BE INTERPRETED AND
THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH
THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS LOCATED, EXCEPT
THAT THE LAWS OF THE STATE WHERE ANY COLLATERAL IS LOCATED (IF DIFFERENT FROM
THE STATE WHERE SUCH OFFICE OF THE BANK IS LOCATED) SHALL GOVERN THE CREATION,
PERFECTION AND FORECLOSURE OF THE LIENS CREATED HEREUNDER ON SUCH PROPERTY OR
ANY INTEREST THEREIN. The Grantor hereby irrevocably consents to the exclusive
jurisdiction of any state or federal court for the county or judicial district
where the Bank's office indicated above is located, and consents that all
service of process be sent by nationally recognized overnight courier service
directed to the Grantor at the Grantor's address set forth herein and service so
made will be deemed to be completed on the business day after deposit with such
courier; provided that nothing contained in this Agreement will prevent the Bank
from bringing any action, enforcing any award or judgment or exercising any
rights against the Grantor individually, against any security or against any
property of the Grantor within any other county, state or other foreign
or domestic jurisdiction. The Bank and the Grantor agree that the venue provided
above is the most convenient forum for both the Bank and the Grantor. The
Grantor waives any objection to venue and any objection based on a more
convenient forum in any action instituted under this Agreement.
23. SELF HELP REMEDIES. THE GRANTOR BEING FULLY AWARE OF THE RIGHT TO
NOTICE AND A HEARING ON THE QUESTION OF THE VALIDITY OF ANY CLAIMS THAT MAY BE
ASSERTED AGAINST THE GRANTOR BY THE BANK UNDER THIS AGREEMENT, AND RELATED
AGREEMENTS AND DOCUMENTS, BEFORE THE GRANTOR CAN BE DEPRIVED OF ANY PROPERTY IN
THE GRANTOR'S POSSESSION, HEREBY WAIVES THESE RIGHTS AND AGREES THAT THE BANK
MAY EMPLOY SELF-HELP OR ANY LEGAL OR EQUITABLE PROCESS PROVIDED BY LAW TO TAKE
POSSESSION OF ANY SUCH PROPERTY WITHOUT FIRST OBTAINING A FINAL JUDGMENT OR
WITHOUT FIRST GIVING THE GRANTOR NOTICE AND THE OPPORTUNITY TO BE HEARD ON THE
VALIDITY OF THE CLAIM UPON WHICH SUCH TAKING IS MADE. THE GRANTOR WAIVES ALL
RELIEF FROM ALL APPRAISEMENT OR EXEMPTION LAWS NOW IN FORCE OR HEREAFTER
ENACTED.
24. WAIVER OF JURY TRIAL. EACH OF THE GRANTOR AND THE BANK IRREVOCABLY
WAIVES ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS AGREEMENT, ANY DOCUMENTS
EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN
ANY OF SUCH DOCUMENTS. THE GRANTOR AND THE BANK ACKNOWLEDGE THAT THE FOREGOING
WAIVER IS KNOWING AND VOLUNTARY.
<PAGE>
WITNESS the due execution hereof as a document under seal, as of the date first
written above.
ALOETTE COSMETICS, INC.
By:
----------------------------------------
Patricia J. Defibaugh, President
(CORPORATE SEAL)
Attest:
------------------------------------
Jean M. Lewis, Assistant Secretary
PNC BANK, NATIONAL ASSOCIATION
By:
----------------------------------------
Kevin Wheatley, Assistant Vice President
<PAGE>
EXHIBIT "A"
TO SECURITY AGREEMENT
Address of Grantor's chief executive office, including the County:
1301 Wright's Lane East, West Chester, PA 19380
Address for books and records, if different: N/A
Addresses of other Collateral locations, including Counties and name and address
of landlord or owner if location is not owned by the Grantor:
N/A
Other names or tradenames now or formerly used by the Grantor:
See Exhibit "B" attached hereto
-----------
<PAGE>
Open-End Mortgage PNCBANK
and Security Agreement
(This Mortgage Secures Future Advances)
THIS OPEN-END MORTGAGE AND SECURITY AGREEMENT (this "Mortgage") is made
as of the _____________ day of January, 1996, by ALOETTE COSMETICS, INC. (the
"Mortgagor"), with an address at 1301 Wright's Lane East, West Chester, PA 19380
in favor of PNC BANK, NATIONAL ASSOCIATION (the "Mortgagee"), with an address at
100 South Broad Street, Philadelphia, PA 19110.
WHEREAS, the Mortgagor is the owner of a certain tract or parcel of
land described in Exhibit A attached hereto and made a part hereof, together
with the improvements now or hereafter erected thereon; and
WHEREAS, the Mortgagor has borrowed from the Mortgagee, or is providing
a guaranty of a borrowing from the Mortgagee, in a principal amount of up to One
Million Dollars ($1,000,000.00) (the "Loan"), which Loan is evidenced by one or
more promissory notes in favor of the Mortgagee (the "Note");
NOW, THEREFORE, for the purpose of securing the payment and performance
of the following obligations (collectively called the "Obligations"):
(A) the Loan, the Note and all other loans, advances, debts,
liabilities, obligations, covenants and duties owing by the Mortgagor to the
Mortgagee of any kind or nature, present or future, whether or not evidenced by
any note, guaranty or other instrument, whether arising under any agreement,
instrument or document, whether or not for the payment of money, whether arising
by reason of an extension of credit, opening of a letter of credit, loan or
guarantee or in any other manner, whether arising out of overdrafts on deposit
or other accounts or electronic funds transfers (whether through automatic
clearing houses or otherwise) or out of the Mortgagee's non-receipt of or
inability to collect funds or otherwise not being made whole in connection with
depository transfer check or other similar arrangements, whether direct or
indirect (including those acquired by assignment or participation), absolute or
contingent, joint or several, due or to become due, now existing or hereafter
arising, and any amendments, extensions, renewals or increases and all costs and
expenses of the Mortgagee incurred in the documentation, negotiation,
modification, enforcement, collection or otherwise in connection with any of the
foregoing, including but not limited to reasonable attorneys' fees and expenses.
(B) Any sums advanced by the Mortgagee or which may otherwise become
due pursuant to the provisions of the Note or this Mortgage or pursuant to any
other document or instrument at any time delivered to the Mortgagee to evidence
or secure any of the Obligations or which otherwise relate to any of the
Obligations (as the same may be amended, supplemented or replaced from time to
time, the "Loan Documents").
The Mortgagor, for good and valuable consideration, receipt of which is hereby
acknowledged, and intending to be legally bound hereby, does hereby give, grant,
bargain, sell, convey, assign, transfer, mortgage, hypothecate, pledge, set over
and confirm unto the Mortgagee and does agree that the Mortgagee shall have a
security interest in the following described property, all accessions and
additions thereto, all substitutions therefor and replacements and proceeds
thereof, and all reversions and remainders of such property now owned or held or
hereafter acquired (the "Property"), to wit:
(a) All of the Mortgagor's estate in the premises described in Exhibit
A, together with all of the easements, rights of way, privileges, liberties,
hereditaments, gores, streets, alleys, passages, ways, waters, watercourses,
rights and appurtenances thereunto belonging or appertaining, and all of the
estate, right, title, interest, claim and demand whatsoever of the Mortgagor
therein and in the public streets and ways adjacent thereto, either in law or in
equity (the "Land");
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(b) All the buildings, structures and improvements of every kind and
description now or hereafter erected or placed on the Land, and all facilities,
fixtures, machinery, apparatus, appliances, installations, machinery and
equipment, including, without limitation, electrical equipment necessary for the
operation of such buildings and heating, air conditioning and plumbing equipment
now or hereafter attached to, located in or used in connection with those
buildings, structures or other improvements (the "Improvements");
(c) All rents, issues and profits arising or issuing from the Land and
the Improvements (the "Rents") including, but not limited to, the Rents arising
or issuing from all leases and subleases now or hereafter entered into covering
all or any part of the Land and Improvements (the "Leases"), all of which Leases
and Rents are hereby assigned to the Mortgagee by the Mortgagor. The foregoing
assignment shall include without limitation, cash or securities deposited under
Leases to secure performance of lessees of their obligations thereunder, whether
such cash or securities are to be held until the expiration of the terms of such
leases or applied to one or more installments of rent coming due prior to the
expiration of such terms. The Mortgagor will execute and deliver to the
Mortgagee, on demand, such assignments and instruments as the Mortgagee may
require to implement, confirm, maintain and continue the assignment hereunder;
(d) All proceeds of the conversion, voluntary or
involuntary, of any of the foregoing into cash or liquidated claims;
(e) And without limiting any of the other provisions of this Mortgage,
the Mortgagor, as debtor, expressly grants unto the Mortgagee, as secured party,
a security interest in all those portions of the Property which may be subject
to the Uniform Commercial Code provisions applicable to secured transactions
under the laws of any state, and the Mortgagor will execute and deliver to the
Mortgagee on demand such financing statements and other instruments as the
Mortgagee may require in order to perfect and maintain such security interest
under the UCC on the aforesaid collateral.
To have and to hold the same unto the Mortgagee, its successors and
assigns, forever.
Provided, however, that if the Mortgagor shall pay to the Mortgagee the
Obligations, and if the Mortgagor shall keep and perform each of its other
covenants, conditions and agreements set forth herein and in the other Loan
Documents, then, upon the termination of all obligations, duties and commitments
of the Mortgagor under the Obligations and this Mortgage, and subject to the
provisions of Section 23 hereof, the estate hereby granted and conveyed shall
become null and void.
This Mortgage is an "Open-End Mortgage" as set forth in 42 Pa. C.S.A.
ss. 8143 and secures obligations up to a maximum principal amount of
indebtedness outstanding at any time equal to double the face amount of the
Note, plus accrued and unpaid interest, including, but not limited to, advances
for the payment of taxes and municipal assessments, maintenance charges,
insurance premiums, costs incurred for the protection of the Property or the
lien of this Mortgage, expenses incurred by the Mortgagee by reason of default
by the Mortgagor under this Mortgage and advances for construction, alteration
or renovation on the Property or for any other purpose, together with all other
sums due hereunder or secured hereby. All notices to be given to the Mortgagee
pursuant to 42 Pa. C.S.A. ss. 8143 shall be given as set forth in Section 18 of
this Mortgage.
1. Representations and Warranties. The Mortgagor represents and
warrants to the Mortgagee that the Mortgagor has good and marketable title to an
estate in fee simple absolute in the Land and Improvements and has all right,
title and interest in all other property constituting a part of the Property, in
each case free and clear of all liens and encumbrances, except as may otherwise
be approved by Mortgagee in a title insurance policy delivered to Mortgagee of
even date securing to Mortgagee the lien of this Mortgage. This Mortgage is a
valid and enforceable first lien on the Property, and the Mortgagee shall,
subject to the Mortgagor's right of possession prior to an Event of Default,
quietly enjoy and possess the Property. The Mortgagor shall preserve such title
as it warrants herein and the validity and priority of the lien hereof and shall
forever warrant and defend the same to the Mortgagee against the claims of all
persons.
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2. Affirmative Covenants. Until all of the Obligations
shall have been fully paid, satisfied and discharged the Mortgagor
shall:
(a) Payment and Performance of Obligations. Pay or
cause to be paid and perform all Obligations when due as provided
in the Loan Documents.
(b) Legal Requirements. Promptly comply with and conform to all present
and future laws, statutes, codes, ordinances, orders and regulations and all
covenants, restrictions and conditions which may be applicable to the Mortgagor
or to any of the Property (the "Legal Requirements").
(c) Impositions. Before interest or penalties are due thereon and
otherwise when due, the Mortgagor shall pay all taxes of every kind and nature,
all charges for any easement or agreement maintained for the benefit of any of
the Property, all general and special assessments (including, without
limitation, any condominium or planned unit development assessments, if any),
levies, permits, inspection and license fees, all water and sewer rents and
charges, and all other charges and liens, whether of a like or different nature,
imposed upon or assessed against the Mortgagor or any of the Property (the
"Impositions"). Within thirty (30) days after the payment of any Imposition, the
Mortgagor shall deliver to the Mortgagee evidence acceptable to the Mortgagee of
such payment. The Mortgagor's obligations to pay the Impositions shall survive
the Mortgagee's taking title to the Property through foreclosure, deed-in- lieu
or otherwise.
(d) Maintenance of Security. Use, and permit others to use, the
Property only for its present use or such other uses as permitted by applicable
Legal Requirements and approved in writing by the Mortgagee. The Mortgagor shall
keep the Property in good condition and order and in a rentable and tenantable
state of repair and will make or cause to be made, as and when necessary, all
repairs, renewals, and replacements, structural and nonstructural, exterior and
interior, foreseen and unforeseen, ordinary and extraordinary, provided,
however, that no structural repairs, renewals or replacements shall be made
without the Mortgagee's prior written consent. The Mortgagor shall not remove,
demolish or alter the Property nor commit or suffer waste with respect thereto,
nor permit the Property to become deserted or abandoned. The Mortgagor covenants
and agrees not to take or permit any action with respect to the Property which
will in any manner impair the security of this Mortgage.
3. Leases. The Mortgagor shall not (i) execute an assignment or pledge
of the Rents and/or the Leases other than in favor of the Mortgagee; (ii) accept
any prepayment of an installment of any Rents prior to the due date of such
installment; or (iii) enter into or amend any of the terms of any of the Leases
without the Mortgagee's prior written consent. Any or all leases or subleases of
all or any part of the Property shall be subject in all respects to the prior
written consent of the Mortgagee, shall be subordinated to this Mortgage and to
the rights of the Mortgagee and, together with any and all rents, issues or
profits relating thereto, shall be assigned at the time of execution to the
Mortgagee as additional collateral security for the Obligations, all in such
form, substance and detail as is satisfactory to the Mortgagee in its sole
discretion.
4. Due on Sale Clause. The Mortgagor shall not sell, convey or
otherwise transfer any interest in the Property (whether voluntarily or by
operation of law), or agree to do so, without the Mortgagee's prior written
consent, including but not limited to (i) any sale, conveyance, assignment, or
other transfer of (including installment land sale contracts), or the grant of a
security interest in, all or any part of the legal and/or equitable title to the
Property; (ii) any lease of all or any portion of the Property; or (iii) any
sale, conveyance, assignment, or other transfer of, or the grant of a security
interest in, any share of stock of the Mortgagor, except in favor of the
Mortgagee. Any default under this paragraph shall cause an immediate
acceleration of the indebtedness secured by the Note without any demand by the
Mortgagee.
<PAGE>
5. Insurance. The Mortgagor shall keep the Property continuously
insured, in an amount not less than the cost to replace the Property or an
amount not less than eighty percent (80%) of the full insurable value of the
Property, whichever is greater, against loss or damage by fire, with extended
coverage and against other hazards as the Mortgagee may from time to time
require. The Mortgagor shall also maintain comprehensive general public
liability insurance, in an amount of not less than Two Million Dollars
($2,000,000) per occurrence, property damage and workers' compensation
insurance, builder's risk insurance with respect to any construction, or
reconstruction and contractual liability insurance for obligations of the
Mortgagor under the Leases, with an insurance company or companies satisfactory
to the Mortgagee, and in such total amounts (other than the foregoing fire and
extended coverage insurance) as the Mortgagee may require from time to time.
Such insurance shall include protection for continuation of income for a period
of twelve (12) months, in the event of any damage caused by the perils referred
to above. All policies, including policies for any amounts carried in excess of
the required minimum and policies not specifically required by the Mortgagee,
shall be in form satisfactory to the Mortgagee, shall meet all coinsurance
requirements of the Mortgagee, shall be maintained in full force and effect,
shall be assigned to the Mortgagee, with premiums prepaid, as collateral
security for payment of the Obligations, shall be endorsed with a standard
mortgagee clause in favor of the Mortgagee and shall provide for at least thirty
(30) days notice of cancellation to the Mortgagee. Such insurance shall also
name the Mortgagee as an additional insured under the comprehensive general
public liability policy and the Mortgagor shall also deliver to the Mortgagee a
copy of the replacement cost coverage endorsement. If the Property is located in
an area which has been identified by any governmental agency, authority or body
as a flood hazard area or the like, then the Mortgagor shall maintain a flood
insurance policy covering the Property in an amount not less than the original
principal amount of the Loan or the maximum limit of coverage available under
the federal program, whichever amount is less.
6. Rights of Mortgagee to Insurance Proceeds. In the event of loss, the
Mortgagee shall have the exclusive right to adjust, collect and compromise all
insurance claims, and the Mortgagor shall not adjust, collect or compromise any
claims under said policies without the prior written consent of the Mortgagee.
Each insurer is hereby authorized and directed to make payment under said
policies, including return of unearned premiums, directly to the Mortgagee
instead of to the Mortgagor and the Mortgagee jointly, and the Mortgagor
appoints the Mortgagee as the Mortgagor's attorney-in-fact to endorse any draft
therefor. All insurance proceeds may, at the Mortgagee's sole option, be applied
to all or any part of the Obligations and in any order (notwithstanding that
such Obligations may not then otherwise be due and payable) or to the repair and
restoration of any of the Property under such terms and conditions as the
Mortgagee may impose.
7. Installments for Insurance, Taxes and Other Charges. The Mortgagor
shall, if requested by the Mortgagee, pay to the Mortgagee monthly, an amount
equal to one-twelfth (1/12) of the annual premiums for the insurance policies
referred to hereinabove and the annual Impositions and any other item which at
any time may be or become a lien upon the Property (the "Escrow Charges"). The
amounts so paid shall be used in payment of the Escrow Charges so long as no
Event of Default shall have occurred. No amount so paid to the Mortgagee shall
be deemed to be trust funds, nor shall any sums paid bear interest. The
Mortgagee shall have no obligation to pay any insurance premium or Imposition if
at any time the funds being held by the Mortgagee for such premium or Imposition
are insufficient to make such payments. Upon the occurrence of an Event of
Default, the Mortgagee shall have the right, at its election, to apply any
amount so held against the Obligations due and payable in such order as the
Mortgagee may deem fit, and the Mortgagor hereby grants to the Mortgagee a lien
upon and security interest in such amounts for such purpose.
<PAGE>
8. Condemnation. The Mortgagor, immediately upon obtaining knowledge of
the institution of any proceedings for the condemnation or taking by eminent
domain of any of the Property, shall notify the Mortgagee of the pendency of
such proceedings. The Mortgagee may participate in any such proceedings and the
Mortgagor shall deliver to the Mortgagee all instruments requested by it to
permit such participation. Any award or compensation for property taken or for
damage to property not taken, whether as a result of such proceedings or in lieu
thereof, is hereby assigned to and shall be received and collected directly by
the Mortgagee, and any award or compensation shall be applied, at the
Mortgagee's option, to any part of the Obligations and in any order
(notwithstanding that any of such Obligations may not then be due and payable)
or to the repair and restoration of any of the Property under such terms and
conditions as the Mortgagee may impose.
9. Environmental Matters. (a) For purposes of this Section 9, the term
"Environmental Laws" shall mean all federal, state and local laws, regulations
and orders, whether now or in the future enacted or issued, pertaining to the
protection of land, water, air, health, safety or the environment. The term
"Regulated Substances" shall mean all substances regulated by Environmental
Laws, or which are known or considered to be harmful to the health or safety of
persons, or the presence of which may require investigation, notification or
remediation under the Environmental Laws. The term "Contamination" shall mean
the discharge, release, emission, disposal or escape of any Regulated Substances
into the environment.
(b) The Mortgagor represents and warrants (i) that no Contamination is
present at, on or under the Property and that no Contamination is being or has
been emitted onto any surrounding property; (ii) all operations and activities
on the Property have been and are being conducted in accordance with all
Environmental Laws, and the Mortgagor has all permits and licenses required
under the Environmental Laws; (iii) no underground or aboveground storage tanks
are or have been located on or under the Property; and (iv) no legal or
administrative proceeding is pending or threatened relating to any environmental
condition, operation or activity on the Property, or any violation or alleged
violation of Environmental Laws. These representations and warranties shall be
true as of the date hereof, and shall be deemed to be continuing representations
and warranties which must remain true, correct and accurate during the entire
duration of the term of this Mortgage.
(c) The Mortgagor shall ensure, at its sole cost and expense, that the
Property and the conduct of all operations and activities thereon comply and
continue to comply with all Environmental Laws. The Mortgagor shall notify the
Mortgagee promptly and in reasonable detail in the event that the Mortgagor
becomes aware of any violation of any Environmental Laws, the presence or
release of any Contamination with respect to the Property, or any governmental
or third party claims relating to the environmental condition of the Property or
the conduct of operations or activities thereon. The Mortgagor also agrees not
to permit or allow the presence of Regulated Substances on any part of the
Property, except for those Regulated Substances (i) which are used in the
ordinary course of the Mortgagor's business, but only to the extent they are in
all cases used in a manner which complies with all Environmental Laws; and (ii)
those Regulated Substances which are naturally occurring on the Property. The
Mortgagor agrees not to cause, allow or permit the presence of any Contamination
on the Property.
(d) The Mortgagee shall not be liable for, and the Mortgagor shall
indemnify, defend and hold the Mortgagee and all of its officers, directors,
employees and agents, and all of their respective successors and assigns
harmless from and against all losses, costs, liabilities, damages, fines,
claims, penalties and expenses (including, without limitation, reasonable
attorneys', consultants' and contractors' fees, costs incurred in the
investigation, defense and settlement of claims, as well as costs incurred in
connection with the investigation, remediation or monitoring of any Regulated
Substances or Contamination) that the Mortgagee may suffer or incur (including,
without limitation, as holder of the Mortgage, as mortgagee in possession or as
successor in interest to the Mortgagor as owner of the Property by virtue of a
foreclosure or acceptance of a deed in lieu of foreclosure) as a result of or in
connection with (i) any Environmental Laws (including, without limitation, the
assertion that any lien existing or arising pursuant to any Environmental Laws
takes priority over the lien of the Mortgage); (ii) the breach of any
representation, warranty, covenant or undertaking by the Mortgagor in this
Section 9; (iii) the presence on or the migration of any Contamination or
Regulated Substances on, under or through the Property; or (iv) any litigation
or claim by the government or by any third party in connection with the
environmental condition of the Property or the presence or migration of any
Regulated Substances or Contamination on, under, to or from the Property.
<PAGE>
(e) Upon the request of the Mortgagee, the Mortgagor shall execute and
deliver an Environmental Indemnity Agreement satisfactory in form and substance
to the Mortgagee, to more fully reflect the representations, warranties,
covenants and indemnities of the Mortgagor with respect to the Environmental
Laws.
10. Inspection of Property. The Mortgagee shall have the right to enter
upon the Property at any reasonable hour for the purpose of inspecting the
order, condition and repair of the buildings and improvements erected thereon,
as well as the conduct of operations and activities on the Property. The
Mortgagee may enter the Property (and cause the Mortgagee's employees, agents
and consultants to enter the Property), upon prior written notice to the
Mortgagor, to conduct any and all environmental testing deemed appropriate by
the Mortgagee in its sole discretion. The environmental testing shall be
accomplished by whatever means the Mortgagee may deem appropriate, including,
but not limited to, the taking of soil samples and the installation of ground
water monitoring wells or other intrusive environmental tests. The Mortgagor
shall provide the Mortgagee (and the Mortgagee's employees, agents and
consultants) reasonable rights of access to the Property as well as such
information about the Property and the past or present conduct of operations and
activities thereon as the Mortgagee shall reasonably request.
11. Events of Default. The occurrence of any one or
more of the following events shall constitute an "Event of Default"
hereunder: (a) any Event of Default (as defined in any of the
Obligations); (b) any default under any of the Obligations that does
not have a defined set of "Events of Default" and the lapse of any
notice or cure period provided in such Obligations with respect to
such default; (c) demand by the Mortgagee under any of the
Obligations that have a demand feature; (d) the failure by the
Mortgagor to perform any of its obligations under this Mortgage or
under any Environmental Indemnity Agreement executed and
delivered pursuant to Section 9(e) hereof; (e) falsity, inaccuracy or
material breach by the Mortgagor of any written warranty,
representation or statement made or furnished to the Mortgagee by
or on behalf of the Mortgagor; (f) an uninsured material loss, theft,
damage, or destruction to any of the Property, or the entry of any
judgment against the Mortgagor or any lien against or the making of
any levy, seizure or attachment of or on the Property; (g) the failure
of the Mortgagee to have a first priority mortgage lien on the
Property; (h) any indication or evidence received by the Mortgagee
that the Mortgagor may have directly or indirectly been engaged in
any type of activity which, in the Mortgagee's discretion, might
result in the forfeiture of any property of the Mortgagor to any
governmental entity, federal, state or local; (i) foreclosure
proceedings are instituted against the Property upon any other lien or
claim, whether alleged to be superior or junior to the lien of this
Mortgage; (j) the failure by the Mortgagor to pay any Impositions as
required under Section 2(c) hereof, or to maintain in full force and
effect any insurance required under Section 5 hereof; or (k) the
Mortgagor or any other obligor or guarantor of any of the
Obligations, shall at any time deliver or cause to be delivered to the
Mortgagee a notice pursuant to 42 Pa. C.S.A. ss. 8143 electing to
limit the indebtedness secured by this Mortgage.
<PAGE>
12. Rights and Remedies of Mortgagee. If an Event of Default occurs,
the Mortgagee may, at its option and without demand, notice or delay, do one or
more of the following:
(a) The Mortgagee may declare the entire unpaid principal balance of
the Obligations, together with all interest thereon, to be due and payable
immediately.
(b) The Mortgagee may (i) institute and maintain an action of mortgage
foreclosure against the Property and the interests of the Mortgagor therein,
(ii) institute and maintain an action on any instruments evidencing the
Obligations or any portion thereof, and (iii) take such other action at law or
in equity for the enforcement of any of the Loan Documents as the law may allow,
and in each such action the Mortgagee shall be entitled to all costs of suit and
attorneys fees.
(c) The Mortgagee may, in its sole and absolute discretion: (i) collect
any or all of the Rents, including any Rents past due and unpaid, (ii) perform
any obligation or exercise any right or remedy of the Mortgagor under any Lease,
or (iii) enforce any obligation of any tenant of any of the Property. The
Mortgagee may exercise any right under this subsection (c), whether or not the
Mortgagee shall have entered into possession of any of the Property, and nothing
herein contained shall be construed as constituting the Mortgagee a "mortgagee
in possession", unless the Mortgagee shall have entered into and shall continue
to be in actual possession of the Property. The Mortgagor hereby authorizes and
directs each and every present and future tenant of any of the Property to pay
all Rents directly to the Mortgagee and to perform all other obligations of that
tenant for the direct benefit of the Mortgagee, as if the Mortgagee were the
landlord under the Lease with that tenant, immediately upon receipt of a demand
by the Mortgagee to make such payment or perform such obligations. The Mortgagor
hereby waives any right, claim or demand it may now or hereafter have against
any such tenant by reason of such payment of Rents or performance of obligations
to the Mortgagee, and any such payment or performance to the Mortgagee shall
discharge the obligations of the tenant to make such payment or performance to
the Mortgagor.
(d) The Mortgagee shall have the right, in connection with the exercise
of its remedies hereunder, to the appointment of a receiver to take possession
and control of the Property and/or to collect the Rents, without notice and
without regard to the adequacy of the Property to secure the Obligations. A
receiver while in possession of the Property shall have the right to make
repairs and to make improvements necessary or advisable in its or his opinion to
preserve the Property, or to make and keep them rentable to the best advantage,
and the Mortgagee may advance moneys to a receiver for such purposes. Any moneys
so expended or advanced by the Mortgagee or by a receiver shall be added to and
become a part of the Obligations secured by this Mortgage.
13. Application of Proceeds. The Mortgagee shall apply the proceeds of
any foreclosure sale of, or other disposition or realization upon, or Rents or
profits from, the Property to satisfy the Obligations in such order of
application as the Mortgagee shall determine in its exclusive discretion.
14. Confession of Judgment in Ejectment. At any time after the
occurrence of an Event of Default, without further notice, regardless of whether
the Mortgagee has asserted any other right or exercised any other remedy under
this Mortgage or any of the other Loan Documents, it shall be lawful for any
attorney licensed in the Commonwealth of Pennsylvania as attorney for the
Mortgagor to confess judgment in ejectment against the Mortgagor and all persons
claiming under the Mortgagor for the recovery by the Mortgagee of possession of
all or any part of the Property, for which this Mortgage shall be sufficient
warrant. If for any reason after such action shall have commenced the same shall
be discontinued and the possession of the Property shall remain in or be
restored to the Mortgagor, the Mortgagee shall have the right upon any
subsequent default or defaults to bring one or more amicable action or actions
as hereinbefore set forth to recover possession of all or any part of the
Property.
<PAGE>
15. Mortgagee's Right to Protect Security. The Mortgagee is hereby
authorized to do any one or more of the following, irrespective of whether an
Event of Default has occurred: (a) appear in and defend any action or proceeding
purporting to affect the security hereof or the rights or powers of the
Mortgagee hereunder; (b) purchase such insurance policies covering the Property
as it may elect if the Mortgagor fails to maintain the insurance coverage
required hereunder; and (c) take such action as the Mortgagee may determine to
pay, perform or comply with any Impositions or Legal Requirements, to cure any
Events of Default and to protect its security in the Property.
16. Appointment of Mortgagee as Attorney-in-Fact. The Mortgagee, or any
officer of the Mortgagee, is hereby irrevocably appointed attorney-in-fact for
the Mortgagor (without requiring any of them to act as such), such appointment
being coupled with an interest, to do any or all of the following: (a) collect
the Rents after the occurrence of an Event of Default; (b) settle for, collect
and receive any awards payable under Section 8 hereof from the authorities
making the same; and (c) execute, deliver and file such financing statements and
other instruments as the Mortgagee may require in order to perfect and maintain
its security interest under the Uniform Commercial Code on any portion of the
Property.
17. Certain Waivers. The Mortgagor hereby waives and releases all
benefit that might accrue to the Mortgagor by virtue of any present or future
law exempting the Property, or any part of the proceeds arising from any sale
thereof, from attachment, levy or sale on execution, or providing for any stay
of execution, exemption from civil process or extension of time for payment,
and, unless specifically required herein, all notices of the Mortgagor's default
or of the Mortgagee's election to exercise, or the Mortgagee's actual exercise
of any option under this Mortgage or any other Loan Document.
18. Notices. All notices, demands, requests, consents, approvals and
other communications required or permitted hereunder must be in writing and will
be effective upon receipt if delivered personally to the Mortgagor or the
Mortgagee, or if sent by facsimile transmission with confirmation of delivery,
or by nationally recognized overnight courier service, to the address set forth
above or to such other address as the Mortgagor or the Mortgagee may give to the
other in writing for such purpose.
19. Preservation of Rights. No delay or omission on the part of the
Mortgagee to exercise any right or power arising hereunder will impair any such
right or power or be considered a waiver of any such right or power or any
acquiescence therein, nor will the action or inaction of the Mortgagee impair
any right or power arising hereunder. The Mortgagee's rights and remedies
hereunder are cumulative and not exclusive of any other rights or remedies which
the Mortgagee may have under other agreements, at law or in equity. The
Mortgagee may exercise any one or more of its rights and remedies without regard
to the adequacy of its security.
20. Illegality. In case any one or more of the provisions contained
in this Mortgage should be invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
<PAGE>
21. Changes in Writing. No modification, amendment or waiver of any
provision of this Mortgage nor consent to any departure by the Mortgagor
therefrom, will in any event be effective unless the same is in writing and
signed by the Mortgagee, and then such waiver or consent shall be effective only
in the specific instance and for the purpose for which given. No notice to or
demand on the Mortgagor in any case will entitle the Mortgagor to any other or
further notice or demand in the same, similar or other circumstance.
22. Entire Agreement. This Mortgage (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, between
the Mortgagor and the Mortgagee with respect to the subject matter hereof.
23. Survival; Successors and Assigns. This Mortgage will be binding
upon and inure to the benefit of the Mortgagor and the Mortgagee and their
respective heirs, executors, administrators, successors and assigns; provided,
however, that the Mortgagor may not assign this Mortgage in whole or in part
without the prior written consent of the Mortgagee and the Mortgagee at any time
may assign this Mortgage in whole or in part; and provided, further, that the
rights and benefits under Sections 9, 10 and 25 hereof shall also inure to the
benefit of any persons or entities who acquire title or ownership of the
Property from or through the Mortgagee or through action of the Mortgagee
(including but not limited to a foreclosure, sheriff's or judicial sale). The
provisions of Sections 9, 10 and 25 hereof shall survive the termination,
satisfaction or release of this Mortgage, the foreclosure of this Mortgage or
the delivery of a deed in lieu of foreclosure.
24. Interpretation. In this Mortgage, the singular includes the plural
and the plural the singular; words importing any gender include the other
genders; references to statutes are to be construed as including all statutory
provisions consolidating, amending or replacing the statute referred to; the
word "or" shall be deemed to include "and/or", the words "including", "includes"
and "include" shall be deemed to be followed by the words "without limitation".
Section headings in this Mortgage are included for convenience of reference only
and shall not constitute a part of this Mortgage for any other purpose. If this
Mortgage is executed by more than one party as Mortgagor, the obligations of
such persons or entities will be joint and several.
25. Indemnity. The Mortgagor agrees to indemnify each of the Mortgagee,
its directors, officers and employees and each legal entity, if any, who
controls the Mortgagee (the "Indemnified Parties") and to hold each Indemnified
Party harmless from and against any and all claims, damages, losses, liabilities
and expenses (including, without limitation, all fees of counsel with whom any
Indemnified Party may consult and all expenses of litigation or preparation
therefor) which any Indemnified Party may incur or which may be asserted against
any Indemnified Party in connection with or arising out of the matters referred
to in this Mortgage or in the other Loan Documents by any person, entity or
governmental authority (including any person or entity claiming derivatively on
behalf of the Mortgagor), whether (a) arising from or incurred in connection
with any breach of a representation, warranty or covenant by the Mortgagor, or
(b) arising out of or resulting from any suit, action, claim, proceeding or
governmental investigation, pending or threatened, whether based on statute,
regulation or order, or tort, or contract or otherwise, before any court or
governmental authority, which arises out of or relates to this Mortgage, any
other Loan Document, or the use of the proceeds of the Loan; provided, however,
that the foregoing indemnity agreement shall not apply to claims, damages,
losses, liabilities and expenses solely attributable to an Indemnified Party's
gross negligence or willful misconduct. The indemnity agreement contained in
this Section shall survive the termination of this Mortgage, payment of any Loan
and assignment of any rights hereunder. The Mortgagor may participate at its
expense in the defense of any such action or claim.
<PAGE>
26. Governing Law and Jurisdiction. This Mortgage has been delivered to
and accepted by the Mortgagee and will be deemed to be made in the State where
the Mortgagee's office indicated above is located. THIS MORTGAGE WILL BE
INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE MORTGAGOR AND THE MORTGAGEE
DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE MORTGAGEE'S OFFICE
INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES. The Mortgagor
hereby irrevocably consents to the exclusive jurisdiction of any state or
federal court for the county or judicial district where the Mortgagee's office
indicated above is located, and consents that all service of process be sent by
nationally recognized overnight courier service directed to the Mortgagor at the
Mortgagor's address set forth herein and service so made will be deemed to be
completed on the business day after deposit with such courier; provided that
nothing contained in this Mortgage will prevent the Mortgagee from bringing any
action, enforcing any award or judgment or exercising any rights against the
Mortgagor individually, against any security or against any property of the
Mortgagor within any other county, state or other foreign or domestic
jurisdiction. The Mortgagor acknowledges and agrees that the venue provided
above is the most convenient forum for both the Mortgagee and the Mortgagor. The
Mortgagor waives any objection to venue and any objection based on a more
convenient forum in any action instituted under this Mortgage.
27. WAIVER OF JURY TRIAL. THE MORTGAGOR IRREVOCABLY WAIVES ANY AND ALL
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY
NATURE RELATING TO THIS MORTGAGE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS
MORTGAGE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE MORTGAGOR
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
The Mortgagor acknowledges that it has read and understood all the provisions of
this Mortgage, including the waiver of jury trial, and has been advised by
counsel as necessary or appropriate.
<PAGE>
WITNESS the due execution hereof as a document under seal, as of the date first
written above.
ALOETTE COSMETICS, INC.
By:
------------------------------------------
Patricia J. Defibaugh, President
(CORPORATE SEAL) Attest:
--------------------------------------
Jean M. Lewis, Assistant Secretary
The address of the within named Mortgagee is:
PNC Bank, National Association
100 South Broad Street
Philadelphia, PA 19110
By:
-------------------------------------------
Kevin Wheatley, Assistant Vice President
<PAGE>
COMMONWEALTH OF PENNSYLVANIA )
) ss:
COUNTY OF MONTGOMERY )
On this, the ______ day of January, 1996, before me, a Notary Public,
the undersigned officer, personally appeared Patricia J. Defibaugh, who
acknowledged herself to be the President of Aloette Cosmetics, Inc., a
Pennsylvania corporation, and that she, in such capacity, being authorized to do
so, executed the foregoing instrument for the purposes therein contained by
signing on behalf of said corporation.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
- --------------------------------------
Notary Public
My commission expires:
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
<PAGE>
OPEN-END MORTGAGE AND SECURITY AGREEMENT
------------------------------------------------
ALOETTE COSMETICS, INC.,
Mortgagor
AND
PNC BANK, NATIONAL ASSOCIATION,
Mortgagee
------------------------------------------------
Return to:
PNC Bank, National Association
100 South Broad Street
Philadelphia, PA 19110
Attention: Kevin Wheatley, Assistant Vice President
<PAGE>
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
for the years ending December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net (loss) $(4,126,115) $(1,540,644) $ (179,816)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253
Net (loss) per common share $ (1.91) $ (.71) $ (.08)
PRIMARY (1)
Net (loss) $(4,126,115) $(1,540,644) $ (179,816)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253
Net (loss) per common share $ (1.91) $ (.71) $ (.08)
FULLY DILUTED (1)
Net (loss) $(4,126,115) $(1,540,644) $ (179,816)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253
Net (loss) per common share $ (1.91) $ (.71) $ (.08)
</TABLE>
(1) This calculation is submitted in accordance with the regulations of the
Securities and Exchange although not required by APB Opinion No. 15 because
it results in dilution of less than 3%.
<PAGE>
ALOETTE COSMETICS, INC.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OR JURISDICTION OF
NAME INCORPORATION
ALOETTE COSMETICS, INC.
OF DELAWARE Delaware
ALOETTE INTERNATIONAL, INC. Delaware
ALOETTE REALTY, INC. Delaware
ALOETTE COSMETICS, INC.
OF PENNSYLVANIA Pennsylvania
D.D. COSMETIC SALES COMPANY Texas
ALOETTE COSMETICS OF CANADA, INC. Canada
ALOETTE COSMETICS (UK) LTD. United Kingdom
ALOETTE COSMETICS (AUSTRALASIA) LTD. Australia
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Aloette Cosmetics, Inc. and Subsidiaries on Form S-8 (File No.
33-4918) of our report dated February 20, 1996, on our audits of the
consolidated financial statements and financial statement schedule of Aloette
Cosmetics, Inc. and Subsidiaries as of December 31, 1995 and 1994 and for the
years ended December 31, 1995, 1994 and 1993, which report is included in this
Form 10-KSB.
Coopers & Lybrand L.L. P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000792160
<NAME> ALOETTE COSMETICS, INC.
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,024,114
<SECURITIES> 0
<RECEIVABLES> 1,199,368
<ALLOWANCES> (110,000)
<INVENTORY> 3,672,249
<CURRENT-ASSETS> 6,982,053
<PP&E> 5,318,289
<DEPRECIATION> (2,056,349)
<TOTAL-ASSETS> 12,193,507
<CURRENT-LIABILITIES> 2,493,854
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 7,450,438
<TOTAL-LIABILITY-AND-EQUITY> 12,193,507
<SALES> 11,346,396
<TOTAL-REVENUES> 13,263,983
<CGS> 8,021,329
<TOTAL-COSTS> 17,595,558
<OTHER-EXPENSES> 294,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,626,115)
<INCOME-TAX> (500,000)
<INCOME-CONTINUING> (4,126,115)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,126,115)
<EPS-PRIMARY> (1.91)
<EPS-DILUTED> (1.91)
</TABLE>
