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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 20, 1996
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COSMETIC GROUP U.S.A., INC.
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(Exact name of registrant as specified in its charter)
California 0-19227 95-4040591
- ---------------------------- ------------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
11312 Penrose Street
Sun Valley, California 91352
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 767-2889
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ITEM 5. OTHER INFORMATION
Settlement of Watkins Litigation.
As previously reported in the Company's Current Report on Form 8-K
dated March 26, 1996, the Company is a defendant in a lawsuit filed on
March 22, 1996 in the United States District Court for the District of
Minnesota by Watkins Incorporated, a Minnesota corporation ("Watkins").
The complaint alleged that a portion of a product delivered by the Company to
Watkins was defective and sought incidental and consequential damages in an
unspecified amount and reimbursement of certain fees and expenses. On
October 7, 1996, the Company and Watkins agreed to settle the litigation in
consideration of the payment by the Company to Watkins of the sum of $100,000,
payable in installments on or before December 1, 1996, and the issuance by the
Company to Watkins of 100,000 shares of the Company's Common Stock, in exchange
for which Watkins agreed to dismiss the litigation with prejudice. The Company
will record an expense of approximately $250,000 in the third quarter of 1996,
representing the full amount of the consideration payable by the Company to
Watkins pursuant to the settlement agreement and certain fees and expenses
incurred in connection with the settlement of the litigation.
Private Placement of Convertible Notes.
In September 1996, the Company commenced a private placement of
$500,000 principal amount of its 10% Subordinated Convertible Notes (the
"Convertible Notes"). The Convertible Notes bear interest at the rate of 10%
per annum, payable semi-annually, and the principal amount of the Convertible
Notes is due and payable in September 1999. The indebtedness evidenced by the
Convertible Notes will be subordinated in right of payment to all indebtedness
of the Company unless such indebtedness expressly provides that it is not
senior to the Convertible Notes or is subordinated to all indebtedness of the
Company. The Convertible Notes are convertible into shares of Common Stock at
the rate of $2.00 per share of Common Stock. The conversion rate is subject to
adjustment in the event of any stock dividends, stock splits, recapitalizations
or similar transactions, upon the issuance of shares of Common Stock, or
certain rights or warrants to acquire shares of Common Stock, at a price which
is less than $2.00 per share and upon the distribution by the Company to all
holders of its Common Stock of evidences of its indebtedness or assets
(excluding dividends paid in cash out of legally available funds).
On September 20, 1996, the Company sold $300,000 principal amount of
Convertible Notes to Third Century II. Eric Nickerson, a director of the
Company, is the general partner of Third Century II and has discretionary
authority with respect to the voting and disposition of the securities owned by
such entity. The Company has retained Schneider Securities, Inc. to serve as
the placement agent for the sale of the remaining $200,000 principal amount of
Convertible Notes. No assurances can be given that the placement of the
remaining Convertible Notes will be successfully completed. The net proceeds
from the placement will be used to fund the cash portion of the settlement
payable in the Watkins litigation and for working capital and other general
corporate purposes.
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ITEM 7. EXHIBITS.
99.1 Form of 10% Subordinated Convertible Note.
99.2 Form of Promissory Note Purchase Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 7, 1996 COSMETIC GROUP U.S.A., INC.
By: /s/ ALFRED E. BOOTH, JR.
---------------------------------
Alfred E. Booth, Jr.,
Chairman of the Board, President
and Chief Executive Officer
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EXHIBIT 99.1
COSMETIC GROUP U.S.A., INC.
(A California Corporation)
_________________________________
10% SUBORDINATED CONVERTIBLE NOTE
$____________________ PRINCIPAL AMOUNT
DUE SEPTEMBER 20, 1999
_________________________________
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF AS
PROVIDED HEREIN HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER THE LAWS OF ANY STATE OR OTHER JURISDICTION. TRANSFER OF
THIS NOTE AND SUCH SECURITIES IS RESTRICTED PURSUANT TO SUCH LAWS.
Los Angeles, California
$____________________________ ___________________, 1996
1. Note.
1.1 Cosmetic Group U.S.A., Inc., a California corporation (the
"Company" or the "Borrower"), hereby promises to pay to the order of Third
Century II (the "Holder") the amount of $____________ by September 20, 1999
("Due Date") and to pay interest at ten percent (10%) per annum on the
outstanding principal. Payments shall be made to the Holder in lawful money of
the United States at ____________________________________________, or at such
other place as the Holder may specify in writing.
1.2 This Note is one of a duly authorized issue of Notes of the
Company designated as its 10% Subordinated Convertible Notes due September 20,
1999, limited to the aggregate principal amount of $500,000.00 issued or to be
issued under and pursuant to a Promissory Note Purchase Agreement duly executed
between the Company and the Holder. Interest shall be paid semi-annually on
the first day of April and October of each year commencing April 1, 1997, until
payments of the principal sum has been made.
1.3 In the event the Company does not make, when due, any payment
of principal or interest required to be made hereunder, the Company will pay,
on demand, interest on the amount of any overdue payment of principal or
interest for the period following the Due Date of such payment, at a rate of
eleven percent (11%) per annum.
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2. Default.
In the event of an occurrence of any event of default specified below,
the principal and all accrued interest on the Note shall become immediately due
and payable without notice, except as specified below. The occurrence of any
of the following events shall constitute an event of default under this Note:
2.1 The Company fails to make any payment hereunder when
due, which failure has not been cured within fifteen (15) days following such
failure.
2.2 If the Company shall default in the observance or
performance of any covenant contained in or provision of the Promissory Note
Purchase Agreement herewith between the Company and the Holder and which has
not been cured within ten (10) days of the receipt by the Company of written
notice thereof from or on behalf of the Holder.
2.3 If the Borrower shall file a petition to take
advantage of any insolvency act; make an assignment for the benefit of its
creditors; commence a proceeding for the appointment of a receiver, trustee,
liquidator or conservator of itself of a whole or any substantial part of its
property; file a petition or answer seeking reorganization or arrangement or
similar relief under the federal bankruptcy laws or any other applicable law or
statute of the United States of America or any state; or
2.4 If a court of competent jurisdiction shall enter an
order, judgment or decree appointing a custodian, receiver, trustee, liquidator
or conservator of the Borrower or of the whole or any substantial part of its
properties, or approve a petition filed against the Borrower seeking
reorganization or arrangement or similar relief under the federal bankruptcy
laws or any other applicable law or statute of the United States of America or
any state; or if, under the provisions of any other law for the relief or aid
of debtors, a court of competent jurisdiction shall assume custody or control
of the Borrower or of the whole or any substantial part of its properties; or
if there is commenced against the Borrower any proceeding for any of the
foregoing relief and such proceeding or petition remains undismissed for a
period of 30 days; or if the Borrower by any act indicates its consent to or
approval of any such proceeding or petition; or
2.5 If (i) any judgment, remaining unpaid, unstayed or
undismissed for a period of 60 days is rendered against the Borrower which by
itself or together with all other such judgments rendered against the Borrower
remaining unpaid, unstayed or undismissed for a period of 60 days, is in excess
of $200,000, or (ii) there is any attachment or execution against the
Borrower's properties remaining unstayed or undismissed for a period of 60
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days which by itself or together with all other attachments and executions
against the Borrower's properties remaining unstayed or undismissed for a
period of 60 days is for an amount in excess of $200,000.
3. Conversion.
3.1 Conversion Rights. The Holder will have the right,
at its option, to convert the Note into Shares of Common Stock of the Company
(the "Shares") at any time before the close of business on September 20, 1999
at the conversion rate then in effect.
The initial conversion rate is 500 Shares of Common
Stock per $1,000 principal amount at maturity of the Note, or a total of
_________________ Shares, subject to adjustments in certain events. No
fractional Share or scrip representing a fractional Share will be issued upon
conversion of the Notes. Cash will be paid in lieu of any fractional Shares
equal to the then current market value of such fractional Share. A Holder may
convert a portion of the Notes provided that the portion is $1,000 principal
amount at maturity or an integral multiple thereof.
The conversion rate will be appropriately adjusted if
the Company (a) pays a dividend or makes a distribution on its Shares of Common
Stock which is paid or made in Shares of Common Stock, (b) subdivides or
reclassifies its outstanding Shares of Common Stock, (c) combines its
outstanding Shares of Common Stock into a smaller number of Shares of Common
Stock, (d) issues Shares of Common Stock, or issues rights or warrants to all
Holders of its Common Stock entitling them to subscribe for or purchase Shares
of Common Stock (or securities convertible into Common Stock), at a price per
Share less than $2.00 per Share, or (e) distributes to all Holders of its
Common Stock evidences of its indebtedness or assets (excluding any dividend
paid in cash out of legally available funds) subject to the limitation that
adjustments by reason of any of the foregoing need not be made until they
result in a cumulative change in the conversion rate of at least five percent
(5%). The conversion rate will not be adjusted upon the conversion of
presently outstanding stock options or warrants.
In case of any consolidation or merger to which the
Company is a party other than a merger or consolidation in which the Company is
the surviving corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as
an entirety, or in case of any statutory exchange of securities with another
corporation, there will be no adjustment of the conversion price, but each
Holder of the Notes then outstanding will have the right thereafter to convert
such Notes into the kind and amount of securities, cash or other property which
he would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale or conveyance had such Notes
been converted
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immediately prior to the effective date of such consolidation, merger,
statutory exchange, sale or conveyance. In the case of a cash merger of the
Company into another corporation or any other cash transaction of the type
mentioned above, the effect of these provisions would be that the conversion
features of the Notes would thereafter be limited to converting the Notes at
the conversion price in effect at such time into the same amount of cash per
Share that such Holder would have received had such Holder converted the Notes
into Common Stock immediately prior to the effective date of such cash merger
or transaction.
3.2 Mechanics of Conversion
The Notes may be converted upon surrender of the
Notes at any time prior to the close of business on September 20, 1999 at the
offices of the Company, 11312 Penrose Street, Sun Valley, California, with the
form of "Notice of Conversion" duly completed and executed as indicated.
Shares of Common Stock issued upon conversion will be fully paid and
non-assessable.
4. Prepayment. Borrower may prepay any or all amounts due under
this Note at any time without penalty; provided, however, that Borrower, as a
condition to prepayment of some or all of the balance hereof, shall deliver
written notice of its intention to prepay at least 14 calendar days prior to
the date of such prepayment ("Prepayment Date") and cooperate with Holder in
Holder's exercise of Holder's convertibility rights, as set forth in Paragraph
3, above, if Holder elects to exercise such rights prior to prepayment.
5. Subordination. The indebtedness evidenced by this Note shall
be subordinated in right of payment to the prior payment in full of all
existing and future Senior Indebtedness of the Company. Senior Indebtedness is
defined in the Promissory Note Purchase Agreement between the Company and the
Holder.
6. Securities Law Compliance. The Holder understands that the
right of conversion of this Note is subject to full compliance with the
provisions of all applicable securities laws and the availability thereunder
upon any conversion of any exemption from registration thereunder for such
conversion, and that the certificate or certificates evidencing such Note and
Shares will bear a legend to the following effect:
"THE SECURITIES EVIDENCED HEREBY MAY NOT BE TRANSFERRED
WITHOUT (i) THE OPINION OF COUNSEL SATISFACTORY TO THIS
CORPORATION THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT
REGISTRATION UNDER THE FEDERAL SECURITIES ACT OF 1933, AS
AMENDED, OR (ii) SUCH REGISTRATION."
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7. "Piggyback" Registration. If the Company, at any time after
the date of this Note and before two years thereafter, files a registration
statement under the Securities Act of 1933, as amended (the "Act"), relating to
any shares of Cosmetic Group U.S.A., Inc. Common Stock to be offered and sold
by the Company pursuant to an underwriting (except with respect to registration
statements filed on Forms S-8 or S-14, or any other inappropriate form), the
Company shall give written notice to the the Holder of this Note (the "Holder")
as promptly as possible for the proposed filing of such registration statement
and will use all reasonable efforts to cause such number of shares of Common
Stock issuable upon conversion of this Note as the Holder shall request in
writing, within fifteen days after the giving of such notice, to be included in
such registration statement for offering and sale upon the same terms and in
the same manner as the Company proposes to offer and to sell such shares of its
Common Stock pursuant thereto; provided, that (a) the Company shall not be
required to include any Common Stock in any such registration statement if the
Company is advised by its investment banking firm that the inclusion of such
shares may, in such firm's opinion, interfere with the orderly sale and
distribution of the shares of Cosmetic Group U.S.A., Inc. Common Stock to be
offered and sold by the Company; and (b) the Company, at its sole discretion,
and without the consent of the Holder, may decide not to file or to withdraw
such registration statement and may abandon the proposed offering at any time.
In connection with any registration statement in which Common Stock is
included, the Company will pay all Commission and "blue sky" registration and
other necessary filing fees, printing expenses, fees and disbursements of legal
counsel for the Company and "blue sky" counsel, transfer agents' and
registrars' fees, fees and disbursements of experts used by the Company in
connection with such registration and expenses incidental to any post-effective
amendment to such registration statement. The Holder/Seller shall pay all
other expenses attributable to inclusion in the offering of Common Stock,
including, without limitation, Commission and "blue sky" registration and other
necessary filing fees and underwriting discounts, commissions and expenses
attributable thereto and fees and disbursements of the Holder/Seller's counsel,
accountants and experts, if any.
The Common Stock issued upon conversion of the Note, which bear
restrictive legends as a result of the manner in which they were issued by the
Company, generally may be sold in the public market (in the absence of
registration) only if the sale is made in compliance with Rule 144 under the
Act. In general, under Rule 144, a person (or persons whose shares are
aggregated with those of others) who has beneficially owned "restricted" shares
for at least two years, and a person who is deemed to be an "affiliate" of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of Common
Stock or the average weekly trading volume in the over-the-counter market
during the four calendar weeks preceding such sale. Non-affiliates who have
held their
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shares for at least three years are entitled to sell their shares under Rule
144 without regard to volume limitations. The Common Stock bearing restrictive
legends should satisfy the two-year holding period required by Rule 144, from
time to time, commencing two years from the date of this Note.
8. Notices. Any notice herein required or permitted to be given
shall be in writing and may be personally served, sent by United States Mail,
certified, or by overnight delivery service. For the purposes hereof, the
address of the Holder and the address of the Company shall be as reflected in
the Promissory Note Purchase Agreement between the Purchaser and the Company of
even date herewith. Both the Holder and the Company may change the address for
service by written notice to the other as herein provided.
9. No Waiver: Rights and Remedies Cumulative. No failure on the
part of the Holder to exercise, and no delay in exercising any right hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise by
the Holder of any right hereunder preclude any other or further exercise
thereof or the exercise of any other right. The rights and remedies herein
provided are cumulative and not exclusive of any remedies or rights provided by
law or by any other agreement between the Borrower and the Holder.
10. Costs and Expenses. The Borrower shall reimburse the
Purchaser for all costs and expenses incurred by the Purchaser in connection
with the preparation, execution and closing of this Note and shall pay the
reasonable fees and disbursements of counsel to the Purchaser in connection
with the enforcement of the Purchaser's rights hereunder.
11. Amendments. No amendment, modification or waiver of any
provision of this Note nor consent to any departure by the Holder therefrom
shall be effective unless the same shall be in writing and signed by the Holder
and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
12. Successors and Assigns. This Note shall be binding upon the
Borrower and its successors and assigns and the terms hereof shall inure to the
benefit of the Holder and its successors and assigns, including subsequent
holders hereof.
13. Severability. The provisions of this Note are severable, and
if any provision shall be held invalid or unenforceable in whole or in part in
any jurisdiction, then such invalidity or unenforceability shall not in any
manner affect such provision in any other jurisdiction or any other provision
of this Note in any jurisdiction.
14. Waiver of Notice. The Borrower hereby waives presentment,
demand for payment, notice of protest and all other
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demands in connection with the delivery, acceptance, performance, default or
enforcement of this Note.
15. Governing Law. this Note has been executed in and shall be
governed by the laws of the State of California.
16. Note Holder is Not a Shareholder. No Holder of this Note,
solely by virtue of the ownership of this Note, shall be considered a
shareholder of the Company for any purpose, nor shall anything in this Note be
construed to confer on any Holder of this Note any rights of a shareholder of
the Company including, without limitation, any right to vote, give or withhold
consent to any corporate action, receive notice of meetings of shareholders or
receive dividends.
17. Exchange and Replacement of Note. Upon surrender of this Note
to the Borrower, the Borrower shall execute and deliver, at its expense, one or
more new Notes of such denominations and in such names, as requested by the
holder of the surrendered Note. Upon receipt of evidence satisfactory to the
Company of the loss, theft, mutilation, or destruction of any Note, the
Borrower will make and deliver a new Note, of like tenor, at the request of the
holder of such Note.
IN WITNESS WHEREOF, the Company has caused this Note to be
signed by its authorized officers as of the _______ day of ________________,
1996.
ATTEST: COSMETIC GROUP U.S.A., INC.
By: By:
------------------------ -----------------------
JENNIFER J. EGGERS ALFRED E. BOOTH, JR.
Assistant Secretary Chairman and CEO
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EXHIBIT 99.2
COSMETIC GROUP, U.S.A., INC.
PROMISSORY NOTE PURCHASE AGREEMENT
September 20, 1996
To Each of the Purchasers
Named in Exhibit A to this
Agreement (the "Purchasers")
Ladies and Gentlemen:
Cosmetic Group U.S.A., Inc., a California corporation (the "Company"),
is offering for sale, in a limited offering under Regulation D under the
Securities Act of 1933, as amended (the "Securities Act"), to a limited number
of Accredited Investors (as defined in Rule 501 of Regulation D), up to an
aggregate of $500,000 of 10% Subordinated Convertible Promissory Notes of the
Company (the "Notes") on the terms and conditions hereinafter set forth in this
Promissory Note Purchase Agreement (the "Agreement"). In connection with the
limited offering of the Notes (the "Offering"), the Company has furnished to
each of the Purchasers (as hereinafter defined) the Company's Form 10-KSB for
the year ended December 31, 1995, its Form 10-QSB for the six months ended June
30, 1996, and its Form 8-Ks filed with the Securities and Exchange Commission
through the date hereof. In consideration of the agreement by each person
named in Exhibit A hereto (individually, a "Purchaser") to purchase, severally,
the amount of Notes set forth opposite such Purchaser's name in Exhibit A
hereto, the Company hereby agrees with each Purchaser as follows:
1. Sale and Purchase of Notes. Subject to the terms and
conditions hereof and in reliance upon the representations and warranties of
the Company contained herein, the Company hereby agrees to sell to each
Purchaser and each Purchaser agrees, severally and not jointly, to purchase
from the Company the amount of Notes of the Company set forth opposite such
Purchaser's name in Exhibit A attached hereto.
2. Closing. The closing of the sale and purchase of the Notes
(the "Closing") shall take place at the offices of the Company, 11312 Penrose
Street, Sun Valley, California from time to
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time until all of the Notes have been sold, or October 31, 1996, whichever
occurs first (the "Closing Dates"). At the Closing, the Company will execute
and deliver to each Purchaser, or to such Purchaser's representative, a
Promissory Note or Promissory Notes dated as of the Closing Date, registered in
such Purchaser's name as stated in Exhibit A or the names of such Purchaser's
respective nominees, representing the amount of Notes being purchased by such
Purchaser, against delivery to the Company of a bank cashier's check or
confirmation of wire transfer of funds in the amount set forth after such
Purchaser's name in Exhibit A in payment of the total purchase price of the
Notes being purchased by each such Purchaser.
3. Representations and Warranties by the Company. Except as
otherwise disclosed, the Company represents and warrants to each of the
Purchasers (who shall sometimes also be referred to herein as "you") that as of
the date hereof and again as of the Closing Date as if made again as of such
Date:
3.1 Organization, Good Standing, etc.
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
California, and has all requisite corporate power and authority to own
its property and to carry on its business as now being conducted.
(b) The Company does not own or control, directly
or indirectly, any other corporation, association or business
organization, other than Cosmetic Group, Inc., a California
corporation, Arnold Zegarelli Products, Inc., a California
corporation, and Cosmetic Group Asia, Ltd., a Hong Kong corporation
(collectively called the "Subsidiary"). The Subsidiary is a
corporation duly organized, validly existing and in good standing
under the laws of California, and has all requisite corporate power
and authority to own its property and to carry on its business as now
being conducted.
(c) Each of the Company, and Subsidiary is duly
qualified, licensed or domesticated as a foreign corporation in good
standing in each jurisdiction in which the nature of the business
conducted by it or the properties owned, leased or operated by it make
such qualification, licensing or domestication necessary and failure
to be qualified, licensed or domesticated would have a material
adverse effect upon the Company or the Subsidiary.
3.2 Capital Stock. As of the date hereof, the authorized
capital stock of the Company consists of (i) 25,000,000 shares of Common Stock,
no par value, of which on the date hereof there are 5,063,756 shares issued and
outstanding; and (ii) 1,000,000 shares of Preferred Stock, par value $0.01 per
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share, of which none are outstanding. All issued and outstanding shares of
Common Stock of the Company are duly authorized, validly issued, fully paid and
non-assessable. Except as set forth in the financial statements, there are no
outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, conversion rights or other agreements or arrangements of any
character or nature under which the Company is or may be obligated to issue
shares of its Common Stock or Preferred Stock, and the Company has no
obligation for the repurchase of any of its outstanding shares of Common Stock
or Warrants. No holder of any security of the Company is entitled to any
preemptive or similar rights (contractual 10 or other) to purchase any
securities of the Company.
3.3 Authority Relative to this Agreement. The execution,
delivery and performance of, and compliance with, this Agreement and the sale
and issuance of the Notes have been duly authorized by all necessary corporate
action on the part of the Company, and this Agreement is a valid and binding
agreement of the Company enforceable in accordance with its terms, except as
such enforcement is subject to any applicable bankruptcy, insolvency,
reorganization or other law relating to or affecting creditors' rights
generally and general principles of equity. No consent, license, approval or
authority of, or registration or declaration with, any governmental authority,
bureau or agency is required in connection with the execution, delivery and
performance of this Agreement by the Company or the issuance of the Notes
hereunder, except under Regulation D under the Act and applicable state
securities laws. Neither the execution nor the delivery of this Agreement nor
the consummation of the transactions contemplated hereby will conflict with,
or, with or without the giving of notice or passage of time, result in a
material breach of the terms, conditions or provisions of, or constitute a
default under, or result in the imposition of any lien or encumbrance upon any
asset or property of the Company or any of the Subsidiary pursuant to, any
applicable law, administrative regulation or judgment, order or decree of any
court or governmental body, any contract or agreement to which the Company or
any of the Subsidiaries is a party of by which it or any of its properties,
assets or rights is bound or affected, or the Articles of Incorporation or
Bylaws of the Company or the Certificate or Articles of Incorporation or Bylaws
of any of the Subsidiary. The Promissory Notes to be delivered by the Company
hereunder will be genuine, and the Company has no knowledge of any fact which
would impair the validity thereof.
3.4 Financial Statements. The Company has furnished you
with its combined balance sheets for the period ended December 31, 1995,
together with the related combined statements of operations, stockholders'
equity and changes in financial position for the years then ended, together
with the reports thereon of Ernst & Young, independent certified public
accountants. The Company has also furnished you with its unaudited combined
balance sheet (the
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"Balance Sheet") as at June 30, 1996 (the "Balance Sheet Date"), together with
unaudited combined statements of operations and changes in financial position
covering the six months then ended.
The Balance Sheet and such unaudited statements of operations and
changes in financial position covering the additional period ended on the
Balance Sheet Date accurately represent the financial position of the Company
at the Balance Sheet Date and the results of operations for the period then
ended. Except as otherwise specified therein, all the foregoing financial
statements have been prepared in accordance with generally accepted accounting
principles (as they apply thereto) applied on a basis consistently maintained
throughout the period involved, and there has been no material adverse change
in the business or assets of the Company or in the financial condition thereof
since the Balance Sheet Date. Specifically, but not by way of limitation, the
Balance Sheet, including by reference therein the footnotes to the Balance
Sheet, discloses all of the debts, liabilities and obligations of any nature
(whether absolute, accrued or contingent and whether due or to become due) of
the Company and the Subsidiary at the Balance Sheet Date which in accordance
with generally accepted accounting principles would be required to be disclosed
in the Balance Sheet as a liability, and includes appropriate reserves, if any,
for all taxes and other liabilities accrued or due at the Balance Sheet Date
but not yet payable.
3.5 Business. The Company and each of the Subsidiary are
duly authorized, qualified and licensed under all laws, regulations,
authorizations or orders of public authorities to the extent known to be
necessary for the ownership of their respective properties and the carrying on
of their respective businesses as presently conducted and as planned to be
conducted.
3.6 Tax Returns and Audits. All required federal, state
and local tax returns of the Company and the Subsidiary have been filed, and
all federal, state and local taxes required to be paid with respect to such
returns have been paid or due provision for the payment thereof has been made
and neither the Company nor the Subsidiary is delinquent in the payment of any
such tax or in the payment of any assessment or governmental charge. Neither
the Company nor the Subsidiary has any tax deficiency proposed or assessed
against it and has not executed any waiver of any statute of limitations on the
assessment or collection of any tax.
3.7 Litigation. There are no legal actions, suits,
arbitrations, investigations or any other legal, administrative or governmental
proceedings pending or, to the knowledge of the Company, threatened against the
Company or the Subsidiary, their respective properties, assets or businesses,
which, if decided adversely, would have a material adverse effect upon the
business or financial condition of the Company and its Subsidiary, taken as a
whole, and neither the Company nor any of its officers is aware
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of any facts which might result in or form the basis for any such action, suit
or other proceeding. Neither the Company nor any Subsidiary is in default with
respect to any judgment, order or decree of any court or any governmental
agency or instrumentality.
3.8 Title to Properties and Encumbrances. The Company
and the Subsidiary have good and marketable title to all their respectively
owned material properties and assets, including, without limitation, the
properties and assets reflected in the Balance Sheet, except for property
disposed of in the ordinary course of business since the Balance Sheet Date,
subject to no mortgage, pledge, lien, charge, security interest, encumbrance or
restriction, except (a) those which are shown and described in the Balance
Sheet or the notes thereto and (b) those which do not materially affect the
value of or interfere with the uses made of such properties and assets. The
leased premises and equipment of the Company and each of the Subsidiary are
subject to valid and subsisting leases, none of which is in default in any
material respect, and have been kept in good condition and repair in the
ordinary course of business. Neither the Company nor the Subsidiary has been
threatened with any action or proceeding under any building or zoning
ordinance, law or regulation.
3.9 Assets and Contracts. Except as enumerated in the
Balance Sheet or notes relating thereto, neither the Company nor any of the
Subsidiary is a party to or otherwise bound by any written or oral (a) Material
Contract, (b) employment agreement, bonus, pension, profit sharing, retirement,
share purchase, hospitalization, group insurance or stock option plan or
similar plan providing employee benefits, (c) Material Personal Property Lease
or real property lease, or (d) deed of trust, mortgage, conditional sales
contract, security agreement, pledge agreement, trust receipt or any other
agreement or arrangement, whereby any of the assets or properties of the
Company or any of the Subsidiary are subject to any lien, encumbrance or
charge. The Company and the Subsidiary have in all material respects
substantially performed all obligations required to be performed by them to
date and are not in default in any material respect under any of the contracts,
agreements, leases, documents, commitments or other arrangements to which they
are a party or by which they are otherwise bound.
3.10 Intangible Property Rights. The Company and the
Subsidiary possess in their respective names adequate patents, patent rights,
trademarks, trademark rights, copyrights and trade names necessary to carry on
their respective businesses as presently conducted and as proposed to be
conducted. No person has any lien, encumbrance, claim or royalty whatsoever,
direct or indirect, in respect of any invention, discovery, improvement,
process, formula, proprietary right or data, trade secret, shop right, idea or
know-how, whether patentable or not, owned by, used by or useful to the Company
or the Subsidiary in respect of which
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or by reason of which the Company or the Subsidiary is, or may become, indebted
in any respect whatsoever to such person, his heirs or assigns. Neither the
Company nor the Subsidiary has received any notice of infringement of or
conflict with asserted rights or others with respect to any patent, patent
rights, trademarks, trademark rights, inventions, trade secrets or other
confidential matters and to the knowledge, information and belief of the
Company, no claim of infringement or conflict has been threatened with respect
thereto.
3.11 Absence of Certain Changes or Events. Since the
Balance Sheet Date, neither the Company nor the Subsidiary has: incurred any
debts, obligations or liabilities, absolute, accrued or contingent and whether
due or to become due, except current liabilities incurred in the ordinary course
of business, none of which (individually or in the aggregate) materially and
adversely affects the business, properties or prospects of the Company or of the
Subsidiary; paid any obligation or liability other than, or discharged or
satisfied any liens or encumbrances other than those securing, current
liabilities, in each case in the usual and ordinary course of business; declared
or made any payment to or distribution to its stockholders as such, or purchased
or redeemed any of its shares of capital stock, or obligated itself to do so;
mortgaged, pledged or subjected to any lien, charge, security interest or other
encumbrance any of its material assets, tangible or intangible; sold,
transferred or leased any of its assets except in the usual and ordinary course
of business; suffered any physical damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the properties,
business or prospects of the Company or the Subsidiary; encountered any labor
difficulties or labor union organizing activities; nor has the Company or the
Subsidiary agreed to do any of the foregoing. There has been no material
adverse change in the financial condition, operations, results of operations or
business of the Company or the Subsidiary since the Balance Sheet Date.
3.12 Securities Laws. Based in part upon the
representations and warranties contained in Section 4 of this Agreement, no
consent, authorization, approval, permit or order of or filing with any
governmental or regulatory authority is required under current laws and
regulations in connection with the execution and delivery of this Agreement or
the offer, issuance, sale or delivery of the Notes other than the filing of a
Notice on Form D under the Securities Act and the qualification thereof, if
required, under applicable state securities laws, which qualification has been
or will be effected as a condition of these sales.
3.13 Brokers or Finders Fees. No person, firm or
corporation has or will have, as a result of any act or omission of the Company,
any right, interest or valid claim against or upon you for any commission, fee
or other compensation as a finder or
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broker, or in any similar capacity, in connection with the transactions
contemplated by this Agreement, and the Company will pay and save you harmless
against any and all liability with respect to any such commission, fee or other
compensation (including, without limitation, the fees hereinafter referred to)
which may be payable or determined to be payable in connection with the
transactions contemplated by this Agreement. Certain broker/dealers who are
members of the National Association of Securities Dealers may receive certain
fees up to 7.5 percent of the aggregate price of the Notes sold by them payable
by the Company after the Notes have been purchased and paid for by you.
3.14 Compliance With Other Instruments. To the best of the
Company's knowledge and belief, the business and operations of the Company and
Subsidiary have been and are being conducted in accordance with all applicable
laws, rules and regulations of all authorities. Neither the Company nor its
Subsidiary is in violation of its Certificate or Articles, as the case may be,
of Incorporation or its Bylaws nor in violation of, or in default under, any
material lien, indenture, mortgage, lease, agreement, instrument, commitment or
arrangement, or subject to any restriction which would prohibit the Company
from entering into or performing its obligations under this Agreement.
3.15 Outstanding Debt. Neither the Company nor its
Subsidiary has any Indebtedness for Borrowed Money, except as otherwise set
forth in the Balance Sheet or the notes thereto. Neither the Company nor its
Subsidiary is in default in the payment of the principal of or interest or
premium on any such Indebtedness for Borrowed Money, and no event has occurred
or is continuing under the provisions of any instrument, document or agreement
evidencing or relating to any such Indebtedness for Borrowed Money which with
the lapse of time or the giving of notice, or both, would constitute an event
of default thereunder. For purposes of this Agreement, "Indebtedness for
Borrowed Money" shall include indebtedness of the Company and its Subsidiary
incurred as the result of a direct borrowing of money and indebtedness incurred
with respect to trade accounts in an aggregate amount in excess of $25,000.
3.16 Insurance Coverage. There are in full force policies
of insurance issued by insurers of recognized responsibility insuring the
Company and its Subsidiary, their respective properties and businesses against
such losses and risks, and in such amounts, as in the Company's reasonable
opinion are acceptable for the nature and extent of the business of the Company
and its Subsidiary and their respective resources.
3.17 Conflicts of Interest. No officer or director of the
Company (regardless of the number of shares of Company stock owned by such
officer or director), and no stockholder of the Company owning beneficially 5%
or more of the Company's voting
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stock, or any affiliate (as such term is defined in Rule 405 under the
Securities Act) of any such persons has (a) a material interest in any
corporation, partnership, proprietorship, association or other person or entity
which furnishes or sells material services or products which are furnished to
or sold by the Company or any of the Subsidiaries, or (b) an interest in any
material contract (excluding any existing employment agreement) to which the
Company or the Subsidiary is a party or by which the Company or the Subsidiary
may be bound.
3.18 Disclosure. No representation or warranty in this
Agreement or in any writing furnished or to be furnished pursuant hereto or in
connection herewith, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact required to be
stated therein or herein or necessary to make the statements therein or herein
not misleading as of the date of this Agreement.
4. Representations and Warranties of the Purchasers. Each
Purchaser severally represents and warrants that:
4.1 Investment Intent. The Notes being acquired by such
Purchaser hereunder are being acquired for his/her/its own account and not with
the view to, or for resale in connection with, any distribution or public
offering thereof within the meaning of the Securities Act. Such Purchaser
understands that the Notes have not been registered under the Securities Act by
reason of its issuance in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to Sections
3(b) or 4(2) thereof, that such Notes must be held indefinitely unless such
Notes are registered under the Securities Act or are exempt from registration
and that the reliance of the Company and others upon this exemption is
predicated in part upon this representation and warranty by you. You
understand that, unless registered, a Purchaser may not sell the securities
pursuant to Rule 144, promulgated under the Securities Act by the Securities
and Exchange Commission (the "Commission"), prior to the expiration of a
two-year period after you have acquired the securities, and that any sales
pursuant to Rule 144 are limited in amount and can only be made in full
compliance with the provisions of Rule 144, which include specific requirements
that the Company is then providing certain information to the public with
respect to its business and financial affairs.
4.2 Residence and Qualification as an Accredited
Investor. The state or jurisdiction in which your principal office is located
is the state or jurisdiction set forth in your address in Exhibit A. You are
an Accredited Investor within the meaning of Rule 501 under the Securities Act
and have such knowledge and experience in financial and business matters that
you are capable of evaluating the merits and risks of the investment to be made
hereunder by you. You have and have had access to all of the
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Company's material books and records and access to the Company's officers has
been provided to you or to your qualified agents.
4.3 Acts and Proceedings. This Agreement has been duly
authorized by all necessary action on your part and has been duly executed and
delivered by you, and is a valid and binding agreement upon your part
enforceable in accordance with its terms.
5. Conditions of Purchasers' Obligation. Each Purchaser's
obligation to purchase and pay for the Notes which it has agreed to purchase on
the Closing Date is subject to the fulfillment, prior to such Closing Date, of
the following conditions, any of which may be waived in whole or in part by a
Purchaser:
5.1 Representations and Warranties. The representations
and warranties of the Company under this Agreement shall be true in all
material respects as of the Closing Date with the same effect as though made on
and as of such Closing Date and no event shall have occurred which has caused,
or may cause, a material adverse change in the Company, its business, assets,
financial conditions or prospects.
5.2 Compliance with Agreement. The Company shall have
performed and complied with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by it prior to or as of the
Closing Date.
5.3 Qualification Under State Securities Laws. All
registrations, qualifications, permits and approvals required under applicable
state securities laws for the lawful execution and delivery of this Agreement
and the offer, sale, issuance and delivery of the Stock shall have been
obtained.
5.4 Proceedings. All corporate and other proceedings to
be taken in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in substance and form to you
and your special counsel, and you and your special counsel shall have received
all such counterpart originals or certified or other copies of such documents
as you or they may reasonably request.
6. Covenants of the Company. The Company covenants and agrees
that:
6.1 Replacement of Promissory Notes. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Promissory Note, and, in the case of any such loss, theft
or destruction, upon delivery of a bond of indemnity satisfactory to the
Company, or, in the case of any such mutilation, upon surrender and
cancellation of the Promissory Note,
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the Company will issue new Promissory Notes of like tenor, in lieu of such
lost, stolen, destroyed or mutilated Promissory Notes.
6.2 Use of Proceeds. The Company agrees to use the net
proceeds of the Offering for working capital purposes.
6.3 Reservation of Underlying Common Stock The Company
shall at all times reserve and keep available for issuance upon conversion such
number of its authorized but unissued shares of Common Stock as will be
sufficient to permit the conversion in full of the Notes (and all other
securities which are convertible into Common Stock).
7. Description of Notes.
7.1 General. The Notes will be unsecured obligations of
the Company limited to $500,000.00 aggregate principal amount at maturity and
will mature on September 20, 1999. The principal amount at maturity of each
Note will be equal to the face amount thereof and will be payable at the office
of the Company.
7.2 Subordination. Indebtedness evidenced by the Notes
will be subordinated in right of payment to the prior payment in full of all
existing and future Senior Indebtedness of the Company. Senior Indebtedness is
defined as the principal of (and premium, if any) and unpaid interest
(including post-petition interest) or accrued original issue discount on and
other amounts due on or in connection with any Debt (as defined below)
incurred, assumed or guaranteed by the Company, whether outstanding on the date
of the issuance of the Notes or thereafter incurred, assumed or guaranteed, and
all renewals, extensions and refundings of any such Debt; provided, however,
that the following will not constitute Senior Indebtedness: (i) any Debt as
to which, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is expressly provided that such Debt is
subordinate in right of payment to all other debt of the Company not expressly
subordinated to such Debt; (ii) any Debt which by its terms refers explicitly
to the Notes and states that such Debt shall not be senior in right of payment
thereto; (iii) any Debt of the Company in respect of the Notes; (iv) any
Debt of the Company to any Subsidiary of the Company; and (v) any Debt of the
Company to any joint venture or partnership, which joint venture or partnership
is required, under generally accepted accounting principles, to be consolidated
in the Company's consolidated financial statements. Debt is defined to mean,
with respect to any person at any date, without duplication, (A) all
obligations of such person for borrowed money, (B) all obligations of such
person evidenced by bonds, debentures, notes or other similar instruments, (C)
all Debt of others secured by a lien on any asset of such person, whether or
not such Debt is assumed by such person, (D) all Debt of others for the payment
of which such person is responsible or liable as obligor or guarantor, (E) all
obligations of such
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person in respect of letters of credit or other similar instruments (or
reimbursement obligations with respect thereto), (F) all obligations of such
person to pay the deferred purchase price of property or services, except Trade
Payables, (G) all obligations of such person as lessee under Capital Leases,
and (H) all reimbursement, reserve funding and other obligations of such person
in respect of surety bonds executed by such person or at the request of and for
the benefit of such person.
By reason of such subordination, in the event of dissolution,
insolvency, bankruptcy or other similar proceedings, upon any distribution of
assets, (i) holders of Senior Indebtedness will be entitled to be paid in full
before payments may be made on the Notes, and the Holders of the Notes will be
required to pay over their share of such distribution to the holders of Senior
Indebtedness until such Senior Indebtedness is paid in full and (ii) creditors
of the Company who are neither Holders of Notes nor holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the Holders of the Notes.
In the event the Notes are declared or become due and payable
prior to their Stated Maturity by reason of the occurrence of an Event of
Default, then the Company is obligated to promptly notify holders of Senior
Indebtedness of such acceleration. The Company may not pay the Notes until 120
days have passed after such acceleration occurs and may thereafter pay the
Notes.
7.3 Conversion Rights. Each Purchaser will have the
right, at his, her or its option, to convert the Note into shares of Common
Stock at any time before the close of business on September 20, 1999 at the
conversion rate then in effect.
The initial conversion rate is 500 shares of Common Stock per
$1,000 principal amount at maturity of the Note, subject to adjustments in
certain events. No fractional share or scrip representing a fractional share
will be issued upon conversion of the Notes. Cash will be paid in lieu of any
fractional shares equal to the then current market value of such fractional
share. A Purchaser may convert a portion of the Notes provided that the
portion is $1,000 principal amount at maturity or an integral multiple thereof.
The conversion rate will be appropriately adjusted if the
Company (a) pays a dividend or makes a distribution on its shares of Common
Stock which is paid or made in shares of Common Stock, (b) subdivides or
reclassifies its outstanding shares of Common Stock, (c) combines its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, (d) issues shares of Common Stock, or issues rights or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock (or securities convertible into Common Stock), at a
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price per share less than $2.00 per share, or (e) distributes to all holders of
its Common Stock evidences of its indebtedness or assets (excluding any
dividend paid in cash out of legally available funds) subject to the limitation
that adjustments by reason of any of the foregoing need not be made until they
result in a cumulative change in the conversion rate of at least five percent
(5%). The conversion rate will not be adjusted upon the conversion of
presently outstanding stock options or warrants.
In case of any consolidation or merger to which the Company is
a party other than a merger or consolidation in which the Company is the
surviving corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as
an entirety, or in case of any statutory exchange of securities with another
corporation, there will be no adjustment of the conversion price, but each
holder of the Notes then outstanding will have the right thereafter to convert
such Notes into the kind and amount of securities, cash or other property which
he would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale or conveyance had such Notes
been converted immediately prior to the effective date of such consolidation,
merger, statutory exchange, sale or conveyance. In the case of a cash merger
of the Company into another corporation or any other cash transaction of the
type mentioned above, the effect of these provisions would be that the
conversion features of the Notes would thereafter be limited to converting the
Notes at the conversion price in effect at such time into the same amount of
cash per share that such holder would have received had such holder converted
the Notes into Common Stock immediately prior to the effective date of such
cash merger or transaction.
The Notes may be converted upon surrender of the Notes at any
time prior to the close of business on September 20, 1999 at the offices of the
Company, 11312 Penrose Street, Sun Valley, California, with the form of "Notice
of Conversion" duly completed and executed as indicated. Shares of Common
Stock issued upon conversion will be fully paid and non-assessable.
7.4 Interest Payments. Interest shall be paid on the
Notes from the date of issue at the rate of 10% per annum, semi-annually, in
like coin or currency, on the first day of April and October of each year,
commencing April 1, 1997, until payments of the principal sum has been made.
7.5 Defaults and Certain Rights on Default. Upon the
occurrences of any of the following events of default:
(a) Failure to pay any installment of principal
of or any interest on the Notes after the same becomes due which
failure has not been cured within fifteen (15) days following such
failure; or
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(b) If the Company shall default in the
observance or performance of any covenant contained in or provision of the
Promissory Note Purchase Agreement herewith between the Company and the Holder
and which has not been cured within ten (10) days of the receipt by the Company
of written notice thereof from or on behalf of the Holder.
(c) If the Borrower shall file a petition to take
advantage of any insolvency act; make an assignment for the benefit of its
creditors; commence a proceeding for the appointment of a receiver, trustee,
liquidator or conservator of itself of a whole or any substantial part of its
property; file a petition or answer seeking reorganization or arrangement or
similar relief under the federal bankruptcy laws or any other applicable law or
statute of the United States of America or any state; or
(d) If a court of competent jurisdiction shall
enter an order, judgment or decree appointing a custodian, receiver, trustee,
liquidator or conservator of the Borrower or of the whole or any substantial
part of its properties, or approve a petition filed against the Borrower
seeking reorganization or arrangement or similar relief under the federal
bankruptcy laws or any other applicable law or statute of the United States of
America or any state; or if, under the provisions of any other law for the
relief or aid of debtors, a court of competent jurisdiction shall assume
custody or control of the Borrower or of the whole or any substantial part of
its properties; or if there is commenced against the Borrower any proceeding
for any of the foregoing relief and such proceeding or petition remains
undismissed for a period of 30 days; or if the Borrower by any act indicates
its consent to or approval of any such proceeding or petition; or
(e) If (i) any judgment, remaining unpaid,
unstayed or undismissed for a period of 60 days is rendered against the
Borrower which by itself or together with all other such judgments rendered
against the Borrower remaining unpaid, unstayed or undismissed for a period of
60 days, is in excess of $200,000, or (ii) there is any attachment or execution
against the Borrower's properties remaining unstayed or undismissed for a
period of 60 days which by itself or together with all other attachments and
executions against the Borrower's properties remaining unstayed or undismissed
for a period of 60 days is for an amount in excess of $200,000;
then, and in any such event, the principal amount of the Notes outstanding and
all accrued interest on the Notes shall become immediately due and payable
without presentment, demand, protest, or other notice of any kind, except as
specified above.
8. Prepayment. Borrower may prepay any or all amounts due under
this Note at any time without penalty; provided, however, that Borrower, as a
condition to prepayment of some or all of the
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balance hereof, shall deliver written notice of its intention to prepay at
least 14 calendar days prior to the date of such prepayment ("Prepayment Date")
and cooperate with Holder in Holder's exercise of Holder's convertibility
rights, as set forth in Paragraph 3, above, if Holder elects to exercise such
rights prior to prepayment.
9. Registration of Common Stock.
9.1 "Piggyback" Registration. Each time, during a period
of two (2) years from the date hereof, that the Company shall determine to
proceed with the actual preparation and filing with the Securities and Exchange
Commission (the "Commission") of a registration statement under the Securities
Act in connection with the proposed offer and sale for cash of any of its
Common Stock by it or any of its security holders (hereinafter in this Section
9.1 called "Selling Security Holders"), other than a registration statement on
a form that does not permit the inclusion of shares by its security holders,
the Company shall give written notice of such determination to all record
holders of the Notes (including any assignee of a Purchaser, but not anyone who
acquired his or her shares of the Common Stock in a public sale). Upon the
written request of a majority of the record holders of any such Notes given
within fifteen (15) days after receipt of any such notice from the Company, the
Company will, except as otherwise hereinafter provided, cause all such shares
of the Common Stock into which the Notes are convertible, the record holders of
which have so requested registration thereof pursuant to this Section 9.1, to
be included in such registration statement, all to the extent requisite to
permit the sale or other disposition by such prospective seller or sellers of
such Common Stock to be so registered; provided, however, that nothing herein
shall prevent the Company from, at any time, abandoning or delaying any
registration. If in the good faith judgment of the managing underwriter of
such public offering (as evidenced by a letter in writing from such managing
underwriter to the record holders of the Notes who have elected to sell the
Common Stock pursuant hereto) the inclusion of all or any portion of the Notes
(as converted into Common Stock of the Company) would reduce the number of
shares that can be sold by the Company in such underwritten offering, the
number of shares held by Selling Security Holders and the number of shares of
such Common Stock otherwise to be included in the underwritten public offering
will be either eliminated from such offering or reduced pro rata among the
holders thereof.
9.2 Potential Additional Trading Restrictions. While the
Company intends to register the underlying Common Stock component of the Notes
if the Company effects a registration statement within the next two years, it
is customary for a prospective underwriter of a public stock offering to
require that the existing stockholders of a company enter into a "lock-up
agreement" which limits the ability of such stockholders to re-sell
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their stock into the public market for a specified period of time. While the
Company will use its best efforts to obtain an exception from any lock-up
requirement for the purchasers of the Notes, the prospective underwriter may,
nonetheless, require such agreements as a condition precedent to the proposed
public offering. Accordingly, each purchaser of the Notes offered hereby
agrees to comply with any reasonable "lock-up agreement" that may subsequently
be negotiated between the Company and a prospective underwriter of a public
offering; provided, however, that the maximum term of such a lock-up agreement
shall not exceed six months.
9.3 Registration Procedures. Whenever the Company is
required by the provisions of Section 9.1 to effect a registration of the
underlying Common Stock ("Convertible Shares") of the Notes under the
Securities Act, the Company will:
(a) Furnish to the security holders participating
in such registration, to brokers or dealers effecting transactions in
the Convertible Shares on behalf of such holders and to the
underwriters of the securities being registered such reasonable number
of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such holders, brokers or
dealers and underwriters may reasonably request in order to facilitate
the public offering of such securities;
(b) Use its reasonable best efforts to register
or qualify the securities covered by such registration statement under
such state securities or blue sky laws of such jurisdictions as such
participating holders may reasonably request, except that the Company
shall not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(c) Promptly notify the security holders
participating in such registration of the time when such registration
statement has become effective or when a supplement to any prospectus
included in such registration statement has been filed;
(d) Notify such holders promptly of any request
by the Commission for the amending or supplementing of such
registration statement or prospectus or for additional information;
(e) Promptly advise such holders of the issuance
of any "stop order" by the Commission suspending the effectiveness of
such registration statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts to
prevent the issuance of any "stop
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order" or to obtain its withdrawal if such "stop order" should be
issued;
(f) At the request of any such holder, furnish
(i) at the closing provided for in the underwriting agreement, an
opinion, dated such date, of the counsel representing the Company for
the purposes of such registration, addressed to the underwriters and
to the holder or holders making such request, covering such matters
relating to the Company or its securities as such underwriters and
holder or holders may reasonably request, and (ii) on the effective
date of the registration statement and at the closing provided for in
the underwriting agreement, a letter dated each such date, from the
independent certified public accountants of the Company, addressed to
the underwriters and to the holder or holders making such request,
covering such matters as such underwriters and holder or holders may
reasonably request, in which letter such accountants shall state
(without limiting the generality of the foregoing) that they are
independent certified public accountants within the meaning of the
Securities Act and that in the opinion of such accountants the
financial statements and other financial data of the Company included
in the registration statement or any amendment or supplement thereto
comply in all material respects with the applicable accounting
requirements of the Securities Act.
9.4 Expenses.
(a) With respect to each inclusion of Convertible
Shares in a registration statement pursuant to this Section 9, any and
all fees, costs and expenses of or incidental to, or incurred in
connection with such registration, inclusion and public offering (as
specified in paragraph (b) below) shall be borne by the Company;
provided, however, that any security holders participating in such
registration shall bear their pro rata share of any underwriting
discounts and commissions and transfer taxes.
(b) The fees, costs and expenses of or incidental
to each such registration to be borne by the Company as provided in
paragraph (a) above shall include, without limitation, all
registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such
securities (if the Company and/or selling security holders are
required to bear such fees and disbursements), all legal fees and
disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the securities to be
offered are to be registered or qualified, and the premiums and other
costs of policies of insurance against liability arising out of such
public offering; fees and disbursements of one counsel
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for all of the Purchasers or their assignees who are selling security
holders and any other expenses reasonably incurred by them not
expressly included above. All such fees, costs and expenses shall be
paid, or reimbursed by the Company to the Purchasers (or their
assignees) whose shares of Convertible Shares into which such
Purchaser's Stock has been converted are included in any registration
under this Section 9, as and when such fees, costs and expenses are
incurred, against documentation evidencing the incurrence thereof.
(c) Nothing in this Agreement shall obligate the
Company to undergo an audit other than as required under rules and
regulations of the Securities and Exchange Commission applicable to
the Company.
9.5 Indemnification.
(a) The Company shall indemnify, hold harmless
and defend each Purchaser of the Notes convertible into Convertible
Shares which are included in a registration statement pursuant to the
provisions of this Section 9 and any underwriter (as defined in the
Securities Act) for such Purchaser and each person, if any, who
controls such Purchaser or such underwriter within the meaning of the
Securities Act, from and against, and will reimburse such Purchaser
and each such underwriter and controlling person with respect to, any
and all loss, damage, liability, cost and expense (as and when
incurred), including without limitation, the costs of investigation
and defense of any legal action, proceeding or investigation, to which
such Purchaser or any such underwriter or controlling person may
become subject under the Securities Act, the Securities Exchange Act
of 1934, as amended, or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by or arise out of any
untrue statement or alleged untrue statement of any material fact
contained in such registration statement, any prospectus contained
therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were
made, not misleading; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, damage,
liability, cost or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission
so made in conformity with information furnished by such Purchaser,
such underwriter or such controlling person in writing specifically
for use in the preparation thereof.
(b) Each Purchaser of the Notes convertible into
the Convertible Shares to be included in a registration pursuant to
the provisions of this Section 9 will indemnify
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and hold harmless the Company, any controlling person and any
underwriter from and against, and will reimburse the Company, any
controlling person and any underwriter with respect to, any and all
loss, damage, liability, cost or expense to which the Company or any
controlling person and/or any underwriter may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended, or
otherwise, insofar as such losses, damages, liabilities, costs or
expenses are caused by any untrue or alleged untrue statement of any
material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out
of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which
they were made, not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was so made in reliance upon and in
strict conformity with written information furnished by such Purchaser
specifically for use in the preparation thereof, provided that, with
respect to each inclusion of the Convertible Shares in a registration
pursuant to the provisions of this Section 9, the total liability
hereunder of any Purchaser of the Notes to the Company and any
controlling persons shall in no event exceed the net proceeds to such
Purchaser from his, her or its sale of his, her or its Convertible
Shares pursuant to such registration.
(c) Promptly after receipt by an indemnified
party pursuant to the provisions of paragraph (a) or (b) of this
Section 9.5 of notice of the commencement of any action involving the
subject matter of the foregoing indemnity provisions such indemnified
party will, if a claim thereof is to be made against the indemnifying
party pursuant to the provisions of said paragraph (a) or (b),
promptly notify the indemnifying party of the commencement thereof;
but the omission to so notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party
otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, if the defendants in any action include both
the indemnifying party and the indemnifying party and if there is a
conflict of interest which would prevent counsel for the indemnified
party from also representing the indemnified party, or any of the
indemnified parties have available to them defenses or counterclaims
not available to the indemnifying party even
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though this does not result in a conflict of interest, the indemnified
party or parties shall have the right to select one separate counsel
to participate in the defense of such action on behalf of all such
indemnified party or parties at the expense of the Company. After
notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party pursuant to the provisions of
said paragraph (a) or (b) for any legal or other expense subsequently
incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the
indemnified party shall have employed counsel in accordance with the
proviso of the preceding sentence, (ii) the indemnifying party shall
not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time
after the notice of the commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
9.6 Transfer of Registration Rights. The rights granted
by this Section 9 may be transferred to and are exercisable by any assignee of
any Purchaser of the Notes.
10. Restriction on Transfer of the Stock.
10.1 Legend. Each Promissory Note and the Common Stock
received upon conversion shall be endorsed with the following legend:
"The securities evidenced hereby may not be transferred without
(i) the opinion of counsel satisfactory to this corporation that
such transfer may lawfully be made without registration under
the Federal Securities Act of 1933, as amended, or (ii) such
registration."
In addition, the Company may place "stop transfer" instructions
with its transfer agent with respect to the Notes and such Common Stock pending
compliance with the conditions of such legend.
10.2 Removal of Legend. Any legend endorsed on a Promissory
Note or Common Stock evidencing a security pursuant to Section 10.1 hereof
shall be removed, and the Company shall issue or cause to be issued a
Promissory Note or Common Stock without such legend to the holder of such
security, if such security is being disposed of pursuant to a registration
under the Securities Act and any applicable state acts or if such security is
being disposed of pursuant to an exemption therefrom and such holder provides
the Company with an opinion of counsel satisfactory to the Company to the
effect that the proposed transfer of such security
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may be made without registration. Notwithstanding the foregoing, no opinion
shall be required to be delivered to obtain a removal of such legend on or
after the third anniversary of the date of the purchase of any Notes of the
Stock by a Purchaser, if the Purchaser (or his assignee) delivers to the
Company a written certification that (i) he, she or it had owned the Notes
continuously for three (3) years (inclusive of any periods which, under Rule
144, may be "tacked" to his holding period) following the payment in full for
the Notes by the Purchaser; (ii) he, she or it is not and has not been for at
least three (3) months an affiliate (as defined under the Securities Act) of
the Company; and (iii) in seeking removal of the legend he is not acting in
concert with any other Purchasers.
10.3 Register of Stock. The Company or its duly appointed
agent shall maintain a register for the Notes in which it shall register the
issuance and transfer of the Notes. The Company shall be entitled to regard
the registered holders of such securities as the actual owner of the securities
so registered until the Company or its agent is required to record a transfer
of such securities on its register. The Company or its agent shall be required
to record any such transfer when it receives (a) the Promissory Note evidencing
the security to be transferred duly and properly endorsed by the registered
holder thereof or by its attorney duly authorized in writing, and (b) the
opinion of counsel or certificate referred to in Sections 10.1 and 10.2 hereof
or evidence of compliance with the registration provisions referred to in those
Sections.
11. Waivers and Amendments. The obligations of the Company under
this Agreement may be waived in writing (either generally or in a particular
instance and either retroactively or prospectively) by each Purchaser, with
respect to his, her or its individual rights hereunder, and by the record
holders of at least two-thirds of the Notes, with respect to the rights of all
holders of the Notes hereunder, and with the written consent of the record
holders of at least two-thirds of the Notes, the Company may enter into a
supplementary agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement; provided,
however, that no such waiver or supplemental agreement shall reduce the
aforesaid percentage of the Notes, the holders of which are required to consent
to any waiver or supplemental agreement.
12. Understanding Among the Purchasers. The determination by each
of the Purchasers to purchase securities pursuant to this Agreement has been
made by each such Purchaser independent of the other Purchasers, and
independent of any statements or opinions as to the advisability of such
purchase or as to the properties, business, prospects or condition (financial
or otherwise) of the Company which may have been made or given by the other
Purchasers or by any agents or employees of the other Purchasers. In addition,
it is acknowledged by each of the Purchasers that the
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other Purchasers have not acted as such Purchaser's agent in connection with
making such Purchaser's investment hereunder and that the other Purchasers will
not be acting as such Purchaser's agent in connection with monitoring such
Purchaser's investment hereunder.
13. Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
delivered, or mailed first-class, postage prepaid, registered or certified mail
within the United States and by first-class air mail to or from a country
outside of the United States;
(a) If to any Purchaser of any Notes, addressed to
such Purchaser at its address as shown on the books of the Company, or
at such other address as such Purchaser may specify by written notice to
the Company; or
(b) If to the Company, at 11312 Penrose Street, Sun
Valley, California 91352, Attention: Frank McGarvey, Secretary;
and such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by mail, at the close of business on the fourth (4th)
day after mailing.
14. Survival of Representations and Warranties, Etc. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement, any investigation at any time made by you or on
your behalf, and the sale and purchase of the Notes and payment therefor. All
statements contained in any instrument or other writing delivered by or on
behalf of the Company pursuant hereto or in connection with or in contemplated
of the transactions herein contemplated shall constitute representations and
warranties by the Company hereunder.
15. Parties in Interest. Except as otherwise expressly provided
herein, all the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto, whether so expressed or not, and, in particular,
shall inure to the benefit of and be enforceable by the holder or holders at
the time of any of the Notes.
16. Headings. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
17. Choice of Law. It is the intention of the parties that the laws
of California shall govern the validity of this Agreement,
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the construction of its terms and the interpretation of the rights and duties
of the parties.
18. Counterparts. This Agreement may be executed concurrently in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
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If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this Agreement and return the same to
the undersigned, whereupon this Agreement shall become a binding contract
between you and the undersigned.
Very truly yours,
COSMETIC GROUP U.S.A., INC.
By:
------------------------------
Alfred E. Booth, Jr.
Chairman and CEO
The foregoing Agreement is
hereby accepted as of the
date first written above:
- ---------------------------------
By:
------------------------------
Its:
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