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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to 240.14a-11(c) or 240.14a-12
COSMETIC GROUP U.S.A., INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] No fee required.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
Based on aggregate Purchase Price of $7,600,000 for sale of certain
assets of the Registrant.
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(4) Proposed maximum aggregate value of transaction:
$7,600,000
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(5) Total fee paid:
$1,520
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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COSMETIC GROUP U.S.A., INC.
11312 PENROSE STREET
SUN VALLEY, CALIFORNIA 91352
August 20, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Cosmetic Group U.S.A., Inc. (the "Company"), to be held
on Monday, September 22, 1997 at 10:00 a.m., Pacific time, at the
Burbank Airport Hilton, located at 2500 Hollywood Way, Burbank, California
91505.
At the Special Meeting, you will be asked to consider and vote upon certain
proposals (the "Proposals") to sell substantially all of the assets of the
Company relating to its contract packaging business (the "Sale") and to rename
the Company "Zegarelli Group International, Inc."
THE COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED EACH OF THE PROPOSALS
AND UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE PROPOSALS.
In the materials accompanying this letter, you will find a Notice of Special
Meeting of Shareholders and a Proxy Statement relating to the actions to be
taken by the Company's shareholders at the Special Meeting. The Proxy
Statement more fully describes the Sale and includes important information
concerning the Company. A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1996 AND QUARTERLY REPORT ON FORM 10-QSB FOR
THE QUARTER ENDED JUNE 30, 1997 ALSO ACCOMPANY THIS LETTER.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the
accompanying Proxy Statement at any time before it has been voted at the
Special Meeting. If you attend the Special Meeting, you may vote in person
even if you have previously returned your proxy card. Your prompt cooperation
will be greatly appreciated.
Sincerely,
Alfred E. Booth, Jr.
Chairman of the Board and
Chief Executive Officer
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COSMETIC GROUP U.S.A., INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 22, 1997
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Cosmetic Group U.S.A., Inc., a California corporation (the
"Company"), will be held at the Burbank Airport Hilton, 2500 Hollywood Way,
Burbank, California 91505, on Monday, September 22, 1997 at 10:00 a.m., Pacific
Time, for the following purposes:
1. To approve the sale to CGUSA LLC, a privately-held New Jersey
limited liability company, of substantially all of the assets of
the Company relating to its contract packaging business (the
"Sale") on the terms contained in the Asset Purchase Agreement
described in the accompanying Proxy Statement.
2. To amend the Company's Articles of Incorporation, conditioned on
the closing of the Sale, to rename the Company
"Zegarelli Group International, Inc." (the "Amendment").
3. To act upon such other matters as may properly come before the
Special Meeting or any postponements or adjournments thereof.
Each of the above proposals is more fully described in the accompanying Proxy
Statement.
Approval of each of the Sale and the Amendment will require the affirmative
vote by holders of a majority of the outstanding shares of common stock, no par
value, of the Company entitled to vote at the Special Meeting.
Only shareholders of record at the close of business on August 18, 1997 shall
be entitled to notice of and to vote at the Special Meeting or any postponement
or adjournments thereof. All shareholders are cordially invited to attend the
Special Meeting in person.
Sincerely,
Alfred E. Booth, Jr.
Chairman of the Board and
Chief Executive Officer
August 20, 1997
Sun Valley, California
IF YOU DO NOT EXPECT TO BE PRESENT AT THE SPECIAL MEETING AND WISH YOUR SHARES
OF COMMON STOCK TO BE VOTED, YOU ARE REQUESTED TO SIGN AND MAIL PROMPTLY THE
ENCLOSED PROXY CARD WHICH IS BEING SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS. A RETURN ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES IS ENCLOSED FOR THAT PURPOSE.
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---------------
PROXY STATEMENT
---------------
SPECIAL MEETING OF SHAREHOLDERS
SEPTEMBER 22, 1997
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Cosmetic Group U.S.A., Inc., a California
corporation (the "Company"), for use at the Special Meeting of Shareholders
(the "Special Meeting") to be held on Monday, September 22, 1997, at
10:00 a.m., Pacific Time, at the Burbank Airport Hilton, 2500 Hollywood Way,
Burbank, California 91505, and at any postponements or adjournments thereof.
The Company intends to mail this Proxy Statement, Notice of Special Meeting of
Shareholders and the accompanying proxy card to shareholders entitled to vote
at the Special Meeting on or about August 20, 1997. A copy of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996 and Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997 also is being sent to
such shareholders, together with the Proxy Statement.
At the Special Meeting, holders of common stock, no par value (the "Common
Stock"), of the Company will be asked to consider and vote upon the following
matters (the "Proposals"): (1) to approve the sale (the "Sale") of the
Company's contract packaging business and substantially all of the assets used
in the operation thereof (the "Contract Packaging Business") to CGUSA LLC, a
privately-held New Jersey limited liability company, substantially on the terms
contained in the Asset Purchase Agreement (defined herein) and (2) to amend the
Company's Articles of Incorporation, conditioned on the closing of the Sale, to
rename the Company "Zegarelli Group International, Inc." (the "Amendment").
RECORD DATE; VOTING
The Board of Directors of the Company (the "Board") has fixed the close of
business on August 18, 1997 as the record date (the "Record Date") for the
determination of holders of Common Stock entitled to notice of and to vote at
the Special Meeting or any and all postponements or adjournments thereof. As
of the Record Date, there were 5,830,438 shares of Common Stock issued and
outstanding.
Each share of Common Stock is entitled to one vote on each of the Proposals.
The presence, whether in person or by proxy, of a majority of the outstanding
shares of Common Stock is necessary to constitute a quorum at the Special
Meeting. The affirmative vote by holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Special Meeting is required to
approve each of the Proposals. Abstentions from voting and broker non-votes
(which occur if a broker or other nominee does not have discretionary authority
and has not received voting instructions from the beneficial owner with respect
to a Proposal) on a particular Proposal will be counted for purposes of
determining the presence of a quorum but will not be counted as an affirmative
or negative vote on the Proposal. Accordingly, abstentions and broker
non-votes will have the same legal effect as a vote against the Proposals.
As of the Record Date, the directors and executive officers of the Company,
together with their respective affiliates, held 1,972,531 shares of Common
Stock, representing 34 percent of the votes to be cast at the Special Meeting.
Alfred E. Booth, Jr. and Judith Zegarelli, directors and officers of the
Company, have informed
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the Company that they intend to vote their shares of Common Stock FOR each of
the Proposals. As of the Record Date, Mr. Booth and Ms. Zegarelli held,
respectively, 870,000 and 382,441 shares of Common Stock or 15 percent and 7
percent of all outstanding shares of Common Stock, for a combined total of
1,252,441 or 22 percent.
NO DISSENTERS' RIGHTS
Under the California General Corporation Law, shareholders of the Company are
not entitled to dissenter's rights in connection with the Sale or the
Amendment.
REVOCABILITY OF PROXIES
If a person who has executed and returned a proxy is present at the meeting and
wishes to vote in person, such person may elect to do so and thereby revoke the
power of the proxy holders to vote such proxy. A proxy also may be revoked
before it is exercised by filing with the secretary of the Company a duly
signed revocation or a proxy bearing a later date.
SOLICITATION
The Company will bear the entire cost of the solicitation of proxies from its
shareholders, including preparation, assembly, printing and mailing of this
Proxy Statement, the proxy card and any additional information furnished to
shareholders. Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
Common Stock beneficially owned by others to forward to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by telephone,
facsimile, telegram or personal solicitation by directors, officers, regular
employees and other representatives of the Company. No additional compensation
will be paid to such persons for such services.
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, the Company's independent auditors, are
expected to attend the Special Meeting and to be available to answer
appropriate questions. Such representatives will have the opportunity to make
a statement to the shareholders if they desire to do so.
THE COMPANY
Since 1995, the Company has operated in two segments: (i) the Contract Packaging
Business, which involves the custom development, formulation and manufacture of
a wide range of color cosmetics and other personal care products for customers
that market products for sale under their own brand names and (ii) the marketing
and distribution of professional hair care products under the name "Zegarelli"
(the "Zegarelli Business"). The Contract Packaging Business and the Zegarelli
Business accounted for, respectively, approximately 73% and 27% of the Company's
sales in 1996, and 79% and 21% of sales for the first half of 1997.
Since the introduction of the Zegarelli product line in 1995, the Company has
expended a significant effort in developing the marketing and distribution of
Zegarelli products. The Company has determined to focus its efforts exclusively
on the marketing and distribution of Zegarelli products and similar hair care
products and is proposing to sell the Contract Packaging Business. See "Sale of
the Contract Packaging Business -- Reasons for the Sale." The Contract
Packaging Business is conducted primarily in two adjacent buildings located in
Sun Valley, California (the "Sun Valley Facilities"). The sales and warehousing
operations of the Zegarelli Business are located primarily in the Company's
facilities in Pacoima, California (the "Pacoima Facilities). Immediately
following the sale of the Contract Packaging Business, the Company will conduct
substantially all of its operations at the Pacoima Facilities. See "Description
of the Company Following the Sale -- Facilities." The net proceeds from the
Sale would be used to continue the expansion of the
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Zegarelli Business, retire the Company's current secured borrowing facilities
and reduce its accounts payable. Uses of the remaining proceeds may include
repurchases of Common Stock from the shareholders. See "Description of the
Company Following the Sale -- Use of Proceeds."
Reference is made to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996, and its Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997, each of which accompanies this Proxy Statement and
is incorporated herein by reference, for additional information regarding the
Company and its business.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement, as it may be amended or supplemented, and certain
documents incorporated by reference herein contain or may contain both
statements of historical fact and "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
There are certain important factors that could cause future results to differ
materially from those anticipated by management in the forward-looking
statements included herein. Among these important factors are (a) the
Company's dependence on a small number of customers, (b) recent operating
losses and cash flow deficiencies, (c) risks associated with the introduction
of the Company's Zegarelli product line, including the need to increase sales
levels and expand the Company's distribution network, (d) the Company's
dependence on key executives, (e) the variability of quarterly results, (f) the
competitive environment in the Company's markets, (g) the Company's reliance on
a single manufacturing facility, (h) product liability risks, (i) government
regulation, (j) control by management and (k) volatility in the price of the
Common Stock, including the possible effect on the market price of the
availability for sale and actual sales of currently outstanding shares of
Common Stock and shares of Common Stock issuable upon the exercise of
outstanding options and warrants.
PROPOSAL 1
SALE OF THE CONTRACT PACKAGING BUSINESS
Pursuant to an Asset Purchase Agreement, dated July 24, 1997 (the "Asset
Purchase Agreement"), a copy of which is attached to this Proxy Statement as
Annex A, the Company proposes to sell (the "Sale") the assets and business of
the Contract Packaging Business to CGUSA LLC, a newly-formed privately-held New
Jersey limited liability company ("CGUSA"). The purchase price, subject to
adjustment as discussed below, is $7,600,000, consisting of $4,100,000 in cash
and $3,500,000 in the form of an eight-year 10% subordinated promissory note
(the "CGUSA Note"), a copy of which is attached as Annex B to this Proxy
Statement. In addition, CGUSA will assume certain operating liabilities
related to the acquired business. The sale is subject, among other things, to
approval by the Company's shareholders. Immediately following the sale of the
Contract Packaging Business, the Company's only remaining operations will be
those related to the marketing and distribution of the Zegarelli product line.
See "-- Terms of the Sale."
NEGOTIATIONS RELATING TO THE SALE
During 1996 the Company received several unsolicited offers to acquire the
Contract Packaging Business. The offers were reviewed by management and the
Board of Directors and rejected as being insufficient to warrant further
action. The offerees were so notified. In May of 1997, the owners of CGUSA
(the "CGUSA Principals") approached the Company to inquire if there was an
interest in discussing a possible transaction involving the sale of the
Contract Packaging Business. Prior to this time, the Company and its
affiliates did not have a pre-existing personal or business relationship or
prior interaction with the CGUSA Principals. The Company permitted the CGUSA
Principals to conduct a preliminary due diligence analysis of the Company which
led to a proposal from the CGUSA Principals for the purchase of the Contract
Packaging Business. Discussions ensued between the CGUSA Principals and
management of the Company and the Company engaged L.H. Friend, Weinress,
Frankson & Presson, Inc. ("L.H. Friend"), an investment banking and advisory
firm, to advise the Company as to the fairness of the proposal submitted by the
CGUSA Principals.
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By late May of 1997, the CGUSA Principals' proposal was reviewed by the
Company's management and members of the Board and with L.H. Friend and the
Company's counsel. The Company's management pursued further discussions and
negotiations with the CGUSA Principals and entered into an agreement in
principle, dated May 30, 1997 (the "Agreement in Principle"), with respect to
the acquisition by CGUSA, a newly-formed company owned by the CGUSA Principals.
See "-- Information Regarding CGUSA."
The Agreement in Principle contemplated the purchase by CGUSA of the assets and
business of the Contract Packaging Business and up to the lesser of 500,000
shares of Common Stock or shares of Common Stock worth $750,000 based on the
market price at consummation of the sale. The aggregate purchase price was
$9,250,000, consisting of a cash payment of $5,750,000 at closing, an
eight-year subordinated promissory note bearing interest at 10% per annum in
the principal amount of $3,500,000, and the assumption of certain operating
liabilities. The Agreement in Principle also contemplated that the Company
would enter into a supply contract to purchase all of the Company's
requirements for products manufactured by CGUSA based on comparable industry
pricing terms. Conditions to the sale included CGUSA's satisfactory completion
of due diligence, negotiation of definitive documentation, receipt of a
fairness opinion from L.H. Friend, shareholder approval and CGUSA's receipt of
a consulting and noncompetition agreement from each of Alfred E. Booth and
Judith Zegarelli, each of whom serves as an officer of the Company, which would
have provided for payments aggregating $500,000 to Mr. Booth and $250,000 to
Ms. Zegarelli over a three-year period. The parties also agreed the Company
would pay CGUSA a break-up fee equal to the lesser of $2,000,000 or the highest
legally permissible fee in the event the Company wished to terminate the
Agreement in Principle and accept any other proposal that may thereafter be
received to acquire the Contract Packaging Business.
In the course of CGUSA's due diligence review and the negotiating of definitive
documentation, the Company estimated a significant decrease in its sales from
the Contract Packaging Business for the first six months of 1997 to $7,600,000
on an annualized basis in comparison to the sales from that business segment
for 1996 of $13,172,000. In addition, the Board and management of the Company
grew concerned that certain of the ancillary agreements, including provisions
for the sale of Common Stock, the supply contract and the consulting and
noncompete agreements with officers of the Company, were delaying the
negotiating process and possibly suppressing the price that the Company could
obtain from a sale. CGUSA proposed that the cash portion of the purchase price
be reduced in proportion to the estimated decrease in annualized revenue for
1997. Discussions took place during late June and early July of 1997 during
which period the parties determined to (i) reduce the cash component of the
purchase price to $4,100,000, (ii) delete the provisions for the sale of Common
Stock, the supply contract and the consulting and noncompetition agreements
with Mr. Booth and Ms. Zegarelli and (iii) include a non-compete provision
preventing the Company from directly or indirectly, through its present or
future affiliates, employees or consultants, operating a business in
competition with the business being sold to CGUSA.
By July 15, 1997, management of the Company and CGUSA grew increasingly
concerned with the Company's ability to fund the costs of completing the Sale
and service accounts payable during the period between signing of definitive
documents and the shareholder vote on approving the Sale, particularly given
the estimated results of operations for the Contract Packaging Business in the
first half of 1997. In addition, throughout the negotiating process the
Company insisted that a definitive acquisition agreement include a financial
undertaking by an entity other than CGUSA in support of CGUSA's agreements with
the Company. In this context, CGUSA agreed to extend a $700,000 bridge loan
(the "Bridge Loan") to the Company for the period between signing of definitive
documents and consummation of the sale or, failing such consummation, December
31, 1997 and the Company agreed to drop the financial undertaking requirement.
CGUSA agreed to the Bridge Loan on the conditions that (i) CGUSA's payment of a
portion of the cash purchase price be offset at closing against the Company's
repayment of the Bridge Loan, (ii) the Company grant CGUSA a subordinated lien
on substantially all of the Company's assets and (iii) the Company restrict its
borrowings, use of the proceeds from the Bridge Loan and use of Contract
Packaging Business cash flow for the operations of the Contract Packaging
Business. The revised terms of the Sale were reviewed by the Company's Board
of Directors and with L.H. Friend and the Company's counsel. Based on those
revised terms, the Board unanimously approved the Sale on July 24, 1997 and the
parties executed the Asset Purchase Agreement and documents evidencing the
Bridge Loan and underlying security interest on July 24, 1997.
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REASONS FOR THE SALE
The Board believes that the Sale of the Contract Packaging Business is in the
best interest of the Company and its shareholders and unanimously recommends
that the shareholders of the Company vote FOR approval of the Sale.
As described above in "Negotiations Relating to the Sale," the decision of the
Board to approve the Sale on July 24, 1997 followed intensive negotiations
between the Company and CGUSA over the terms of the Sale and the Bridge Loan.
Prior to reaching its conclusions, the Board received presentations from, and
reviewed the transactions contemplated by the Asset Purchase Agreement and
Bridge Loan with, the Company's management and its financial and legal
advisors. The following are material factors, among others, considered by the
Board in reaching its conclusions:
(i) The Company's ability to operate in both the Contract
Packaging Business and the hair care products business has been
adversely affected by the substantial continuing expenditures required
for the development and marketing of the Zegarelli line of
professional hair care products and the significant cyclicality of and
variations in revenues from the Contract Packaging Business. During
periods of slowdown in the Contract Packaging Business, the Company
found it necessary over the last several years to increase borrowings
and sell Common Stock to provide additional funds for working capital.
The cost and timely availability of additional funds imposed
limitations on the ability to finance the growth of the hair care
products line of the Zegarelli Business. In the first half of 1997
there was a slowdown in revenues for the Contract Packaging Business,
which again decreased the availability of working capital.
(ii) There has been an increased acceptance of the product line of
the Zegarelli Business in markets where it has been introduced. With
sufficient capital, management believes that this product line will
experience more rapid sales and earnings growth, and that it could
become more valuable to the Company and its shareholders, than
continuing operations in both the Contract Packaging Business and the
Zegarelli Business.
(iii) The price offered by CGUSA, considered in light of the
historical and projected earnings of the Contract Packaging Business
and the estimated fair market value of the assets of that business,
the growth potential of contract packaging considering the financial
condition of the Company and its ability to meet the needs of
potential customers.
(iv) The purchase price to be paid by CGUSA consists of $4,100,000
in cash, payable at closing, and the CGUSA Note in the original
principal amount of $3,500,000. The purchase price is subject to
adjustment up or down if the net tangible assets delivered at closing
are more or less than $4,400,000. The Company's right to receive
payment on the CGUSA Note will be subject to CGUSA's existing and
future obligations to its senior secured lender (which CGUSA has
informed the Company is initially expected to aggregate up to
$3,850,000) and to most other creditors of CGUSA. See "Terms of the
Sale -- CGUSA Note." Although the Company expects that the CGUSA Note
will be fully paid when due, the Board recognized that there is risk
that the CGUSA Note will not be paid. The Board also recognized,
however, that the terms of the Asset Purchase Agreement limit CGUSA's
right in respect of most indemnification claims against the Company to
offset such claims solely against payments of the CGUSA Note.
(v) The oral opinion of L.H. Friend provided to the Board on June
20, 1997 that the compensation to be received pursuant to the
Agreement in Principle was fair to the Company and its shareholders
from a financial point of view. The additional oral opinion of L.H.
Friend provided to the Company on July 23, 1997, that the compensation
to be received by the Company upon the consummation of the Sale
pursuant to the terms of the Asset Purchase Agreement was fair to the
Company and its shareholders from a financial point of view. L.H.
Friend's July 23 oral opinion was subsequently confirmed in a written
opinion dated as of July 24, 1997, a full text which sets forth
assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex C to this Proxy Statement and is
incorporated herein by
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reference. The Board was aware that L.H. Friend had received fees in
connection with rendering its opinion and that an officer of L.H.
Friend held a small amount of the Company's equity securities. See
"-- Opinion of the Company's Financial Advisor."
(vi) The Board recognized that CGUSA had required as a condition to
its participation in the discussions and negotiations with the Company
that led to the Asset Purchase Agreement that the Company and its
representatives not solicit from third parties indications of interest
in an acquisition of the Contract Packaging Business and that no such
solicitation had been undertaken since those discussions and
negotiations had commenced in late May of 1997 through the time at
which the Asset Purchase Agreement was approved by the Board on July
24, 1997. In determining that this was the appropriate course, the
Board considered (a) the lack of interest in an acquisition of the
Contract Packaging Business by any of the potential qualified
acquirors that previously had made offers to the Company in 1996, (b)
the likelihood that the Company would need to obtain working capital
financing to support the balance of its 1997 operations, and (c) the
fact that CGUSA had indicated that it would withdraw as a potential
acquiror of the Contract Packaging Business if the Company continued
to solicit other potential bids while discussions were underway
between CGUSA and the Company. The Board also took into account the
view of its management and L.H. Friend that, based on, among other
things, the Company's disappointing operating results and the lack of
interest expressed by other qualified potential acquirors in a
possible acquisition of the Contract Packaging Business, it was
unlikely that a third party would be prepared to pay a higher price
than the consideration offered.
(vii) While the Company did not advertise for potential buyers, the
Board believed that the Company had received inquiries from a
significant number of the most likely potential buyers known to the
Company and all offers in connection with such inquiries were
substantially below CGUSA's proposal. Moreover, the Company received
no inquiries from other parties interested in acquiring the Contract
Packaging Business or the Company as a whole since the public
announcement on June 2, 1997 of CGUSA's proposed acquisition of the
Contract Packaging Business.
(viii) The willingness of CGUSA to extend the Bridge Loan to the
Company on a subordinated secured basis without payment obligations
until consummation or termination of the Sale or failing such events
December 31, 1997. In light of limitations on the Company's working
capital financing and the general weakness in its estimated first half
1997 operating results, significant vendors and professionals might
refuse to do, or limit, their business with the Company. In approving
the Bridge Loan, the Board recognized that significant restrictions
were being placed on the Company's borrowing capacity, use of proceeds
and use of cash from the Contract Packaging Business up to the time of
the closing of the Sale.
(ix) The representation and warranty by CGUSA in the Asset Purchase
Agreement that it has the financial resources to finance the Sale and
consummate the transactions contemplated by the Asset Purchase
Agreement.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Sale, the Board did not find it practical to, and
did not, quantify or otherwise attempt to assign relative weights to specific
factors considered in reaching its determinations.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
The Company engaged L.H. Friend on June 6, 1997, to render an opinion with
respect to the Sale of the Contract Packaging Business. L.H. Friend was not
retained to provide any investment banking services other than its fairness
opinion, and did not participate with the Company in any search for other
potential acquirors for the Contract Packaging Business. L.H. Friend provided
to the Board of Directors its oral opinion on June 20, 1997 that the
compensation to be received pursuant to the Agreement in Principle was fair to
the Company and its shareholders from a financial point of view. On July 23,
1997, L.H. Friend provided the Board with its additional oral opinion
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that the compensation to be received upon the consummation of the Sale pursuant
to the Asset Purchase Agreement, $4,100,000 in cash and a $3,500,000 eight year
interest bearing subordinated note (the "Consideration"), was fair to the
Company and its shareholders from a financial point of view. L.H. Friend's
July 23 oral opinion was subsequently confirmed in a written opinion dated as
of July 24, 1997. L.H. Friend also noted that CGUSA extended a $700,000 Bridge
Loan to the Company for the period between signing of the definitive documents
and the consummation or termination of the Sale or failing such events December
31, 1997. The full text of the opinion of L.H. Friend, which sets forth
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex C to this Proxy Statement and is incorporated herein by
reference. Shareholders are urged to read the opinion carefully and in its
entirety. The summary of the opinion of L.H. Friend set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of the
opinion.
The terms of the Sale of the Contract Packaging Business were determined
through arms-length negotiations between the Company and CGUSA. L.H. Friend
did not materially participate in the negotiations and was not requested to and
did not make any recommendation to the Board regarding the terms of the Sale.
In addition, L.H. Friend's opinion is directed only to the fairness of the Sale
from a financial point of view to the Company and its shareholders and does not
constitute a recommendation to any shareholder of the Company as to how to vote
at the Special Meeting.
In connection with its opinion, among other things, L.H. Friend: (i) reviewed
the Asset Purchase Agreement dated July 24, 1997; (ii) discussed the Sale and
related matters with the Company's management; (iii) reviewed the Annual
Reports on the Form 10-KSB filed by the Company with the Securities and
Exchange Commission for the fiscal years ended December 31, 1993, 1994, 1995
and 1996, the Company's Quarterly Report an Form 10-QSB for the period ended
March 31, 1997 and the Company's Proxy Statement dated May 16, 1997; (iv)
reviewed certain other financial information for periods subsequent to March
31, 1997; (v) reviewed unaudited internal financial statements for the Contract
Packaging Business for the periods ending December 31, 1995 and 1996; (vi)
reviewed pro forma financial data of the Company and the Contract Packaging
Business; (vii) reviewed certain financial projections of the Company and the
Contract Packaging Business prepared by management of the Company and examined
certain other operating and financial information concerning the businesses of
the Company and the Contract Packaging Business; (viii) analyzed certain
publicly available financial and market data of certain other similar companies
having publicly traded securities and compared it to financial data regarding
the Company; and (ix) performed such other studies, analyses, inquiries and
investigations as it deemed appropriate. L.H. Friend's opinion is limited to
the fairness, from a financial point of view, of the Consideration and does not
address the Company's underlying business decision to effect the Sale.
In rendering its opinion, L.H. Friend relied upon the accuracy and completeness
of all financial and other information that was supplied to L.H. Friend and
assumed that there has been no material change in the assets, financial
condition and business prospects of the Company and the Contract Packaging
Business since the date of the most recent financial statements and projections
made available to L.H. Friend. With respect to financial projections for the
Company and the Contract Packaging Business, L.H. Friend assumed that such
projections were reasonably prepared and reflect the best currently available
estimates of the future financial results and conditions of the Company and the
Contract Packaging Business.
The following is a brief summary of the various financial information analyzed
or otherwise considered by L.H. Friend in connection with rendering its
opinion:
Comparison with Selected Companies. L.H. Friend reviewed and compared
selected historical stock market and financial statistics for the Contract
Packaging Business to the corresponding data and statistics of five
publicly traded companies in the contract manufacturing and packaging
industries: Elamex S.A. de C.V., Guest Supply, Inc., IEC Electronics
Corporation, Sigmatron International, Inc., and Smartflex Systems, Inc. (the
"Comparable Group"). L.H. Friend examined certain publicly available financial
data and statistics of the Comparable Group and the Company, including revenue,
earnings before interest and taxes ("EBIT"), EBIT plus depreciation and
amortization
7
<PAGE> 11
("EBITDA"), book value, gross profit margins, EBIT margins, EBITDA margins,
pretax margins, net income margins and the multiple of Total Enterprise Value
(defined as the market value of the common equity, plus total debt, less cash
and equivalents) to revenue, gross profit, EBIT and EBITDA. In addition, L.H.
Friend examined the multiples of total market value of common equity to book
value and the stock price per share divided by earnings per share (the "P/E
ratio"). With the exception of the P/E ratio, all of the multiple comparisons
were done for the latest 12 months of reported results. P/E ratios were for
publicly available brokerage analysts' estimates of earnings per share for each
company's next fiscal year and the following fiscal year.
The indicated mean and median Total Enterprise Value multiple ranges for the
Comparable Group were 0.5 times and 0.5 times revenue, 7.6 times and 6.5 times
EBITDA, and 9.4 and 8.6 times EBIT. The multiple range average was 1.7 times
and 1.6 times for book value. L.H. Friend then applied these multiples to the
Contract Packaging Business' average operating results for the last four fiscal
years ending December 31, 1996 which resulted in implied values of the Contract
Packaging Business ranging from $5.1 million to $7.5 million. In addition,
L.H. Friend applied the same multiples to the Contract Packaging Business'
projected financial results for the fiscal year ending December 31, 1997 which
resulted in implied values of the contract manufacturing business ranging from
$4.1 million to $7.3 million. The indicated mean and median P/E ratios ranges
were 16.0 times and 16.4 times earnings for the next fiscal, and was 9.7 times
and 9.0 times for the following fiscal year. L.H. Friend then applied these
multiples to Contract Packaging Business projected earnings for the next fiscal
year and the following fiscal year which resulted in implied values of the
Contract Packaging business ranging from $3.2 million to $4.9 million.
None of the Comparable Group companies is substantially similar to the
Company. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in historical financial and operating characteristics of
the companies, the projected financial results of the companies, and other
factors that could affect the public trading value of the companies. These
factors make it difficult to derive meaningful information from the above
analysis.
Selected Mergers and Acquisitions Transactions -- Multiples Analysis. L.H.
Friend also reviewed the consideration paid in selected acquisition
transactions of companies in the contract manufacturing and packaging
industries. Specifically, L.H. Friend reviewed the following transactions:
the acquisition of Carriage Industries, Inc. by Dixie Yarns, Inc., the
acquisition of the contract manufacturing business of Aloette Cosmetics, Inc.
by Naterra International, Inc., the acquisition of Quality Care Pharmaceuticals
by Golden Pharmaceuticals, the reverse merger acquisition of the manufacturing
operations of Suave Shoe by French Fragrances, Inc., the acquisition of
Marietta Corporation by an Investor Group and the acquisition of EMD
Technologies by Benchmark Electronics, Inc. L.H. Friend calculated Transaction
Value to sales, EBITDA, EBIT, net income and book value multiples. The
indicated mean and median Transaction Value multiples were 0.5 times and 0.5
times for sales, 5.8 times and 4.1 times for EBITDA, 8.8 times and 8.9 times
for EBIT and 1.3 times and 1.4 times for book value, respectively. L.H.
Friend then applied these multiples to the Contract Packaging Business' average
operating results for the last four fiscal years ending December 31, 1996 which
resulted in implied values of the contract manufacturing business ranging from
$4.1 million to $6.0 million. In addition, L.H. Friend applied these multiples
to the Contract Packaging Business' projected financial results for the
projected fiscal year ending December 31, 1997 which resulted in an implied
value of the contract manufacturing business of between $3.7 million and $6.0
million. L.H. Friend also noted that although six transactions were selected
for the above analysis, only the acquisition of Aloette's contract
manufacturing by Naterra International was comparable to the Sale. However,
Aloette's contract manufacturing business was not profitable so deriving
meaningful information from the transaction is difficult.
Only one company or transaction used in the above analysis is substantially
comparable to the Company as noted above. Accordingly, the comparable
acquisition analysis of the remaining transaction values involves complex
considerations and judgments concerning differences in historical financial and
operating characteristics of the companies, the projected financial results of
the companies, and other factors in relation to the acquisition value of the
comparable acquisitions. These factors make it difficult to derive meaningful
information from those transactions.
8
<PAGE> 12
Discounted Cash Flow Analysis. L.H. Friend performed a discounted cash flow
analysis of the contract manufacturing business using projections provided to
it by the Company. L.H. Friend calculated the present values of the estimated
free cash flows of the Contract Packaging Business through December 31, 1999
and the estimated terminal value of the contract manufacturing business at the
end of such date. In calculating the estimated terminal value, L.H. Friend
utilized the mean EBITDA multiple of the Comparable Group. The mean multiple
was 7.6 times and L.H. Friend's calculations utilized multiples of 6.1 times,
7.6 times and 9.1 times. In calculating the present values of estimated free
cash flows and estimated terminal value, L.H. Friend used implied discount
rates of 14.9%, 19.9% and 24.9% respectively. These discount rates were chosen
based on a weighted average cost of capital analysis of the Contract Packaging
Business. These calculations implied a present value of the Company of between
$2.5 million and $5.6 million.
L.H. Friend also conducted a discounted cash flow analysis of the CGUSA Note
to be received by the Company in this transaction to estimate its present
value. In calculating the present value of the CGUSA Note, L.H. Friend used
implied discount rates of 14.9%, 19.9% and 24.9%, respectively. These discount
rates were chosen based on a weighted average cost of capital analysis of the
Contract Packaging Business. These calculations implied a present value of the
CGUSA Note between $2.1 million and $2.9 million, and an estimated total
present value of the Consideration of between $6.2 million and $7.0 million.
Liquidation Value Analysis. L.H. Friend also evaluated the liquidation value
of the Contract Packaging Business assets and liabilities. L.H. Friend
calculated the Contract Packaging Business' liquidation value to be $1.4
million. L.H. Friend deemed this approach highly subjective and, accordingly,
decreased its relative reliance on this approach.
L.H. Friend was selected by the Company's Board of Directors based on L.H.
Friend's qualifications, experience, expertise, and reputation. As part of its
investment banking business, L.H. Friend is regularly engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other transactions.
Pursuant to a letter agreement dated as of June 6, 1997, the Company has
agreed to pay L.H. Friend a fee of $75,000 for its services referred to above,
$50,000 of which has been paid to date, and has agreed to reimburse L.H. Friend
for its reasonable expenses incurred in connection with its engagement by the
Company. The Company has also agreed to indemnify L.H. Friend and its
directors, officers, agents, employees, affiliates, and controlling persons
against any loses, claims, or liabilities to which L.H. Friend becomes subject
to in connection with its rendering of services, except those that arise from
L.H. Friend's gross negligence or willful misconduct.
TERMS OF THE SALE
The following is a summary of the material provisions of the Asset Purchase
Agreement and the terms of the CGUSA Note and the $700,000 Bridge Loan. This
Summary and all other discussions of the terms and conditions of the Sale, the
Asset Purchase Agreement, the CGUSA Note and the Bridge Loan included elsewhere
in this Proxy Statement are qualified in their entirety by reference to the
Asset Purchase Agreement and the CGUSA Note, copies of which are attached as
Appendix A and Appendix B hereto and incorporated by reference herein.
The Sale. On the terms and subject to the conditions of the Asset Purchase
Agreement, on the closing date, the Company will sell and assign to CGUSA all
of the Company's assets and business relating to the Contract Packaging
Business, excluding cash and accounts receivable that are not collected by
CGUSA in the ordinary course within 60 days of the closing date.
9
<PAGE> 13
Purchase Price. At closing, CGUSA will pay $4,100,000 in cash (subject to
any purchase price adjustment described below) and deliver the CGUSA Note in
the principal amount of $3,500,000. The sum of $3,600,000 of the cash will be
paid directly to the Company. CGUSA will deliver the remaining $500,000 of
cash (the "Escrow Fund") to an escrow agent to hold in escrow pending
conclusion of the purchase price adjustment described below. In addition, the
terms of the Bridge Loan provide that amounts due on the Bridge Loan will be
offset against a portion of CGUSA's obligation to pay the cash portion of the
purchase price. Thus, cash actually received by the Company at the closing
will be reduced by principal and accrued interest due on the Bridge Loan at
closing. CGUSA has informed the Company that CGUSA's payment of the cash
purchase price is expected to be funded primarily by an advance from CGUSA's
senior secured lender.
Purchase Price Adjustment. The Company and CGUSA have agreed to adjust the
purchase price up or down in the event that as of the closing, the net assets
acquired by CGUSA (i.e., the total book value of the assets acquired less
assumed liabilities, intangible assets and goodwill, inventory that is
unsuitable due to its age, quality, type, category or quantity, and applicable
reserves and items properly deductible) is more or less than $4,400,000. The
Company will inform CGUSA of its calculation of the purchase price adjustment
at or prior to the closing date and any such adjustment will increase or
decrease, as the case may be, the aggregate cash consideration to be paid by
CGUSA to the Company at closing. CGUSA will inform the Company of its
calculation of the purchase price adjustment between 60 and 75 days after the
closing date, subject to the Company's right to dispute any such adjustment
based on procedures set forth in the Asset Purchase Agreement. Any decrease in
the purchase price due to CGUSA's purchase price adjustment will be paid to
CGUSA first in cash from the Escrow Fund and then, if necessary, through a
decrease in the aggregate principal amount of the CGUSA Note. Any increase
from CGUSA's purchase price adjustment will result in an increase of the
principal amount of the CGUSA Note for the benefit of the Company. Following
the settlement of the foregoing purchase price adjustments, all funds remaining
in the Escrow Fund, if any, will be released to the Company.
CGUSA Note. Under the terms of the CGUSA Note, $500,000 is payable to the
Company on each anniversary of the closing date commencing on the second
anniversary of the closing date. Interest accrues on the unpaid principal
amount of the CGUSA Note at the rate of 10% per annum and is payable quarterly.
The principal amount of the CGUSA Note is subject to adjustment in the event of
a reduction in the purchase price based on a purchase price adjustment
described above that exceeds the amount in the Escrow Fund. Interest and
principal payable on the CGUSA Note is also subject to an offset against
liabilities owing to CGUSA by the Company in the event CGUSA is entitled to be
indemnified by the Company under the Asset Purchase Agreement. For the
Company's financial reporting purposes, the Company plans to discount the
carrying amount of the CGUSA Note to $2,426,000, which is expected to provide
an effective yield of 20% a year to the Company. Adjustments in the CGUSA Note
resulting from adjustments in the purchase price or offsets against liabilities
for indemnification, payments made on the CGUSA Note and CGUSA's future ability
to pay the CGUSA Note as a result of the subordination provisions thereof or
otherwise, will affect the future carrying value of the CGUSA Note and may
adversely affect the actual percentage yield.
The Company's right to receive payment on the CGUSA Note is subordinate to
any existing or future obligations of CGUSA to (i) CGUSA's senior secured
lender, which CGUSA has informed the Company is initially expected to be
$3,850,000 as of the closing plus an additional working capital line of credit,
(ii) borrowings from any other bank or financial institution and (iii) any
other indebtedness for borrowed money, except obligations owed to a seller
entered into in connection with CGUSA's acquisition of a business from such
seller and indebtedness incurred in the ordinary course of business to trade
creditors or others furnishing services to CGUSA. There can be no assurances
that CGUSA will not default on its obligations under the CGUSA Note. Under the
terms of the Asset Purchase Agreement, CGUSA is required to deliver a pro forma
balance sheet dated as of the closing date showing that CGUSA's net worth is at
least $1,000,000. The Company realizes that the CGUSA Note will be a
substantial liability for CGUSA and that CGUSA will rely on future earnings and
cash flow from its business to be able to repay the installments on the CGUSA
Note. In addition, obligations on the CGUSA Note are not secured by the assets
of CGUSA and the Company's right to repayment will be limited to that of a
general unsecured creditor in the event
10
<PAGE> 14
of any insolvency proceedings involving CGUSA. The Board in evaluating the
advisability of the Sale recognized that there is risk that the CGUSA Note will
not be paid. See "-- Reasons for the Sale."
Limited Assumption of Liabilities. CGUSA will not assume any liabilities of
the Company which exist on the closing date, except those arising from existing
contracts and leases of the Contract Packaging Business, accounts payable
related to the Contract Packaging Business, certain customer deposits, and
certain accrued expenses relating to the Contract Packaging Business. The
existing leases which will be assumed by CGUSA include the real property leases
for the Company's Sun Valley Facilities. The Company will retain the real
property lease of the Pacoima Facilities. Each party has agreed to bear
one-half of any sales or transfer taxes that result from the Sale.
Each party has agreed to pay its own transaction expenses. The Company
estimates its transaction expenses for the Sale will aggregate $250,000, which
includes financial advisor, consulting, legal and accounting fees, and fees of
preparing proxy solicitation materials.
Bridge Loan. Concurrently with the signing of the Asset Purchase Agreement,
CGUSA loaned the Company $700,000 under the Bridge Loan, which accrues interest
at a rate of 10% per annum. Obligations under the Bridge Loan are secured by a
lien on substantially all of the Company's assets, which lien is subordinate to
the liens of the Company's existing secured creditors. All interest and
principal owing on the Bridge Loan is due and payable upon the earlier of (i)
the closing date, (ii) termination of the Asset Purchase Agreement and (iii)
December 31, 1997 (unless extended by CGUSA in its sole discretion). The terms
of the Bridge Loan provide that amounts due on the Bridge Loan will be offset
against an equal amount of CGUSA's payment to the Company of the cash portion
of the purchase price at the closing. Obligations under the Bridge Loan may be
accelerated by CGUSA upon the occurrence of an event of default under the
Bridge Loan, which includes the Company's material breach of the Asset Purchase
Agreement, the occurrence of a material adverse change in the financial
condition, operations or business of the Company, a default under the terms of
the Company's secured lending facilities (whether or not declared by the
secured lender thereunder) and certain other material adverse events involving
the Company.
Proceeds from the Bridge Loan may only be used by the Company to fund the
Contract Packaging Business. In addition, until the closing date, cash flow
from the Contract Packaging Business may only be only be used to fund the
operations and obligations of the Contract Packaging Business, except for
certain limited amounts to fund the Zegarelli employee payroll and up to
$60,000 for purchases of raw materials for Zegarelli products. Until the
closing date, the Company cannot incur additional indebtedness or grant
additional liens on its assets, other than incurring up to approximately $1.7
million of aggregate debt under the Company's secured credit facilities, debt
and liens in the ordinary course of business and up to $600,000 of unsecured
indebtedness to fund the Zegarelli Business ("Zegarelli Debt") provided that
until closing the new Zegarelli Debt does not mature prior to the closing and
the Company must retain the right to convert all new Zegarelli Debt into Common
Stock at any time prior to the closing.
Agreements Prior to Closing. The Company has agreed to continue to operate
the Contract Packaging Business in the ordinary course of business consistent
with past practices prior to the closing with a view to the maintenance and
preservation of the assets and business thereof.
Conditions to Closing; Termination. Closing is scheduled to occur upon
approval of the Sale by shareholders of the Company and satisfaction or waiver
of each party's respective closing conditions, which include the absence of a
material breach of the Asset Purchase Agreement by the other party and the
absence of any pending or threatened litigation existing at the time of the
closing that seeks to enjoin or prevent the Sale. The transaction does not
require any regulatory approvals which have not yet been obtained.
The parties may terminate the Asset Purchase Agreement prior to closing by
mutual consent or if the transaction has not closed by December 31, 1997.
Either party may terminate the Asset Purchase Agreement if the party's
conditions to closing are not satisfied, other then as a result of such
terminating party's breach of the Asset Purchase
11
<PAGE> 15
Agreement. In addition, the Company may terminate the Asset Purchase Agreement
at any time upon payment of a $2,000,000 cash fee to CGUSA.
Post-Closing Agreements. The Asset Purchase Agreement includes a non-compete
provision pursuant to which the Company agrees for three years following the
closing, whether directly or indirectly through its present or future
affiliates, employees or consultants, not to operate a business in competition
with the business sold to CGUSA under the Asset Purchase Agreement. The
Company has also agreed to provide "tail coverage" for the benefit of CGUSA on
its products liability insurance for a two-year period after the closing.
CGUSA has agreed to add the Company as an additional insured on its products
liability insurance policies for the same time period. It is anticipated that
the Company will use CGUSA to manufacture Zegarelli products, although there is
no agreement that binds either party in that respect.
Employee Matters. CGUSA has agreed that effective on the closing date, it
will make "at will" offers of employment to substantially all of the employees
of the Contract Packaging Business on substantially similar terms as provided
by the Company to such employees (other than equity-based compensation). In
addition, the Company has agreed to continue to employ Howard Simon, the
Company's vice president, until the closing date and direct him to devote his
time exclusively to the Contract Packaging Business except for limited
appearances for the Zegarelli Business.
Representations and Warranties. The Company has made standard
representations and warranties concerning its due organization and corporate
power, its authorization to enter into the transaction, the absence of adverse
changes and undisclosed liabilities, title to and condition of its assets,
certain tax matters, litigation, environmental, regulatory and ERISA matters,
outstanding contracts and insurance coverage and intellectual property matters.
The representations and warranties of the Company generally terminate thirty
months after the closing date.
CGUSA's remedies for the Company's breach of its representations, warranties
and other agreements under the terms of the Asset Purchase Agreement are
generally limited to offsetting the Company's indemnification obligations
against amounts otherwise due to the Company under the CGUSA Note. In
addition, such breaches prior to the closing may cause an event of default
under the Bridge Loan as described above.
CGUSA has made standard representations and warranties concerning its due
organization and organizational power and its authorization to enter into the
transaction. In addition, CGUSA has represented that it has the financial
resources to enable it to consummate the Sale.
INTEREST OF MANAGEMENT IN THE SALE
Howard Simon, the Company's vice president, was Secretary of the Company
through June 20, 1997. CGUSA has informed the Company that it intends to enter
into an employment agreement with Mr. Simon to serve as President of CGUSA.
Mr. Simon participated in negotiations and discussions with the Company and
CGUSA regarding the Sale, but had no vote in approving the Sale. Except for
the arrangements with Mr. Simon, there is no affiliation between the Company
and its officers and directors, on the one hand, and the CGUSA Principals and
CGUSA and its managers, members and affiliates, on the other.
FEDERAL INCOME TAX CONSEQUENCES
Gain on the Sale generally will be taxable to the Company under the Internal
Revenue Code at capital gains rates. The Company had available at December 31,
1996 (latest fiscal year end) net loss operating loss carryforwards of
approximately $2,500,000 which may be used to offset the gain from the Sale.
Further, a portion of the gain, represented by the CGUSA Note issued by CGUSA,
may be deferred for income tax purposes.
Consummation of the Sale will not be a taxable event for income tax purposes
for the Company's shareholders.
12
<PAGE> 16
INFORMATION REGARDING CGUSA
CGUSA LLC is a privately-held New Jersey limited liability company that was
formed solely to effectuate the acquisition of the Contract Packaging Business.
In addition to the financing provided by the CGUSA Note to be issued to the
Company in connection with the Sale, it is anticipated that CGUSA will obtain
additional financing through debt provided by its senior secured lender and the
CGUSA Principals. Under the terms of the Asset Purchase Agreement, CGUSA has
the right to assign the Asset Purchase Agreement to a wholly-owned subsidiary
provided the subsidiary agrees to be bound by the same terms as CGUSA. The
CGUSA Principals and CGUSA and its managers, members and affiliates are not
associated or affiliated with the Company, its officers and directors or any of
their respective affiliates. The information in this section was provided to
the Company by CGUSA.
PROPOSAL 2
CHANGE OF NAME
Under the terms of the Asset Purchase Agreement, from and after the closing of
the Sale, the Company is required to discontinue the use of the name Cosmetic
Group U.S.A., Inc. and any variations thereof. Outstanding stock certificates
will keep the Company's present name until events other than the Sale permit new
certificates to be issued. The Board has unanimously approved the Amendment to
the Company's Articles of Incorporation, conditioned on the closing of the Sale,
to rename the Company "Zegarelli Group International, Inc." Attached hereto as
Annex D is the form of Amendment to Articles of Incorporation, which is
incorporated herein by reference.
The Board unanimously recommends that the shareholders of the Company vote FOR
approval of the Amendment of Articles of Incorporation to rename the Company
"Zegarelli Group International, Inc.," conditioned on the closing of the Sale.
13
<PAGE> 17
PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1996 and for the six months ended
June 30, 1997, have been prepared to reflect the proposed Sale of the
Contract Packaging Business of the Company and assuming that such sale took
place on January 1, 1996. The statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the period ending December 31, 1996
(the "1996 Annual Report") and the condensed consolidated financial statements
for the six months ended June 30, 1997 and 1996 in the Company's Quarterly
Report on Form 10-QSB for the quarter ending June 30, 1997, (the "June 1997
Quarterly Report"), which reports are incorporated herein by reference. The
pro forma condensed consolidated statements of operations are not necessarily
indicative of the results of operations of the Company as they may be in the
future or as they might have been had the Sale been effective January 1, 1996.
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------
Contract Pro
Actual Packaging Other Forma
-------- -------- -------- --------
(a) (b)(c)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 15,180 $(11,146) -- $ 4,034
Interest income $ 485 485
Cost of sales 8,739 (6,713) -- 2,026
Selling, general and administrative 5,470 (1,428) -- 4,042
Interest expense 346 (154) (173) 19
Settlement of litigation 240 (240) -- --
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes 385 (2,611) 658 (1,568)
Income tax credit 20 (20) -- --
-------- -------- -------- --------
Income (loss) from continuing operations $ 405 $ (2,631) $ 658 ($ 1,568)
======== ======== ======== ========
Net income (loss) per share $ .08 -- -- $ (.31)
Weighted average shares 5,085 -- -- 5,085
</TABLE>
14
<PAGE> 18
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------
Contract Pro
Actual Packaging Other Forma
------- ------- ------- -------
(a) (b)(c)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 4,810 $(3,807) -- $ 1,003
Interest income -- -- $ 242 242
Cost of sales 2,952 (2,460) -- 492
Selling, general and administrative 2,732 (693) -- 2,039
Interest expense 135 (41) (60) 34
------- ------- ------- -------
Income (loss) from continuing operations before
income taxes (1,009) (613) 302 (1,320)
Income taxes -- -- -- --
------- ------- ------- -------
Income (loss) from continuing operations $(1,009) $ (613) $ 302 $(1,320)
======= ======= ======= =======
Net income (loss) per share $ .19 -- -- $ (.25)
Weighted average shares 5,266 -- -- 5,266
</TABLE>
_____________________________
(a) To eliminate the operations of the Contract Packaging Business.
(b) To accrue interest income on portion of proceeds from Sale represented
by the CGUSA Note (assuming the CGUSA Note has a face amount of
$3,500,000).
(c) To eliminate interest expense incurred with respect to the Company's
debt on its accounts receivable financing and equipment financing
which will be paid at closing with proceeds from the Sale or assumed
by the Buyer in the Sale.
15
<PAGE> 19
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet at June
30, 1997, has been prepared to reflect the proposed Sale of the Company's
Contract Packaging Business based on the assumption that the Sale was
consummated at that date. The pro forma condensed consolidated balance sheet
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in the Company's 1996 Annual Report and
the condensed consolidated financial statements of the Company for the six
months ended June 30, 1997 and 1996 included in the Company's June 1997
Quarterly Report, which reports are incorporated herein by reference.
<TABLE>
<CAPTION>
Pro Forma Adjustment
--------------------
Sale of Contract
Actual Packaging (1) Pro Forma
------ ------------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Cash $ 8 $ 4,100 $ 4,108
Accounts receivable 1,273 (964) 309
Inventory 3,590 (3,090) 500
Other current assets 736 (125) 611
------- ------- -------
5,607 (79) 5,528
Property, plant and equipment 2,093 (2,010) 83
Note receivable from Sale, less
allowance -- 2,426 2,426
Other assets 306 (87) 219
------- ------- -------
Total assets $ 8,006 $ 250 $ 8,256
======= ======= =======
Current liabilities $ 3,153 $(1,240) $ 1,913
Long-term debt 604 (304) 300
Shareholders' equity 4,249 1,794 6,043
------- ------- -------
Total liabilities and
shareholders' equity $ 8,006 $ 250 $ 8,256
======= ======= =======
Book value per common share
outstanding $ .74 -- $ 1.05
======= ======= =======
</TABLE>
_____________________________
(1) To eliminate the assets and liabilities of the Contract Packaging
Business to be sold to buyer and to give effect to the proposed Sale
as of June 30, 1997. The pro forma gain applicable to the above
proposed Sale is as follows:
<TABLE>
<S> <C>
Proceeds from Sale $ 7,600,000
Allowance provided on CGUSA Note (1,074,000)
Net assets sold (4,400,000)
Sales tax payable by Company ( 82,000)
Estimated expenses related to the Sale ( 250,000)
-----------
Pro forma gain $ 1,794,000
===========
</TABLE>
16
<PAGE> 20
CAPITALIZATION
The following table sets forth (1) the outstanding capitalization of the
Company at June 30, 1997, and (2) the capitalization as adjusted to reflect
the proposed Sale by the Company of the Contract Packaging Business for
$7,600,000 assuming no adjustments thereto.
<TABLE>
<CAPTION>
June 30, 1997
-------------------------
Actual As adjusted
------ -----------
(In thousands)
<S> <C> <C>
Short-term debt:
Due under finance agreement $ 574 --
Note payable 100 $ 100
Current portion of long-term debt 323 --
------- -------
Total short-term debt $ 997 $ 100
======= =======
Long-term debt:
Long-term notes, less current portion $ 304 --
10% Subordinated convertible notes 300 $ 300
------- -------
Total long-term debt 604 300
======= =======
Shareholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000
shares, none issued
Common stock, no par value, authorized 25,000,000
shares, issued and outstanding 5,755,438 shares $ 7,228 $ 7,228
Retained Earnings (Deficit) (2,979) (1,185)
------- -------
Total shareholders' equity $ 4,249 $ 6,043
======= =======
</TABLE>
17
<PAGE> 21
DESCRIPTION OF THE COMPANY FOLLOWING THE SALE
If the Sale is consummated, the Company's only remaining operations will be
those related to the marketing and distribution of the product line of the
Zegarelli Business. For information concerning the Zegarelli Business segment
of the Company and its management, employees and facilities, see the Company's
1996 Annual Report, which is incorporated herein by reference. For certain pro
forma financial information concerning the Company upon consummation of the
Sale, see "Pro Forma Financial Information" above.
USE OF PROCEEDS
Management currently plans to focus on the expansion of the Zegarelli Business
by seeking additional distributors throughout the United States and in foreign
countries and thereby increasing market penetration of the Company's hair care
products. Management also plans to add additional beauty and hair care
products that compliment the current product line of the Zegarelli Business as
opportunities arise.
The Company intends to use a portion of the cash proceeds from the Sale to
retire indebtedness under its secured lending facilities at closing and to
reduce accounts payable. The Company plans to use the balance of net proceeds
from the Sale, including amounts received from payments on the CGUSA Note, for
working capital to finance operations of the Zegarelli Business and for general
corporate purposes. The Company will also consider using a portion of the
proceeds from the Sale to repurchase its shares in the open market under Rule
10b-18 of the Securities Exchange Act of 1934, as amended. The amount to be
utilized for repurchases of shares will be dependent upon the Company's
business opportunities existing at the time a repurchase decision is made, as
well as the prevailing market price of the Common Stock at such time and other
factors. Pending use of the proceeds for the purposes described above, the
Company plans to invest such proceeds in short-term, interest bearing
obligations.
MANAGEMENT AND EMPLOYEES
Under the Asset Purchase Agreement, CGUSA has agreed to make "at will" offers
of employment to the Company's employees who are involved in the Contract
Packaging Business at the closing of the Sale. The Company's remaining
employees will remain with the Company on generally the same terms and
conditions as exist at the closing of the Sale. The number of employees
remaining will be approximately 25.
Management will remain unchanged following the Sale, except that Howard Simon
is expected to become the President of CGUSA and leave the Company effective as
of the closing of the Sale.
FACILITIES
The Company will continue to use the Pacoima Facilities for the Zegarelli
Business following the closing of the Sale. The Sun Valley Facilities will be
transferred to CGUSA as part of the Sale. The consolidation of the Company's
retained operations into one facility is not expected to have a material
adverse affect on the Company's Zegarelli operations.
18
<PAGE> 22
PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning ownership of the
Company's Common Stock as of the Record Date by: (a) each director and executive
officer of the Company; (b) each person known to the Company to be the
beneficial owner of more than five percent of its Common Stock; and (c) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Shares Beneficially Owned (1) Percent of Class
------------------------------------ ----------------------------- ----------------
<S> <C> <C>
Alfred E. Booth, Jr. (2)(3) 933,227 15.8%
Judith E. Zegarelli (2)(4) 439,502 7.5%
Frank X. McGarvey (5) 178,237 3.0%
Howard L. Simon (2)(6) 35,001 *
William B. Barnett (7) 37,100 *
Jack Brehm (8) 44,090 *
Eric Nickerson (9) 743,817 12.4%
Jennifer J. Eggers (2)(10) 5,000 *
All executive officers and directors
as a group (8 in number)(11) 2,415,974 41.0%
</TABLE>
___________________________________
* Less than 1%
(1) Except as indicated in other footnotes, no effect has been given to
the possible issuance of up to 34,000 shares issuable upon the
exercise of outstanding options.
(2) The address of each of these persons is 11312 Penrose Street, Sun
Valley, California 91352.
(3) Includes 63,227 shares subject to stock options which may be acquired
within sixty days of the Record Date.
(4) Includes 57,601 shares subject to stock options which may be acquired
within sixty days of the Record Date.
(5) Mr. McGarvey's address is 3150 Soft Breezes, Suite 216, Las Vegas,
Nevada 89128. Includes 68,237 shares subject to stock options which
may be acquired within sixty days of the Record Date.
(6) Includes 12,001 shares subject to stock options which may be acquired
within sixty days of the Record Date.
(7) Mr. Barnett's address is 15233 Ventura Boulevard, Suite 1110, Sherman
Oaks, California 91403. Includes 37,100 shares subject to stock
options which may be acquired within sixty days of the Record Date.
(8) Mr. Brehm's address is 19501 Greenbriar Drive, Tarzana, California
91356. Includes 40,000 shares subject to stock options which may be
acquired within sixty days of the Record Date.
(9) Mr. Nickerson's address is 1711 Chateau Court, Fallston, Maryland
21047. Mr. Nickerson is the managing partner of two mutual funds that
own 618,000 shares and 44,000 shares, respectively. The amount of
shares reflected in the table also include 150,000 shares issuable upon
conversion of a promissory note in favor of one of the mutual funds,
which note is convertible within 60 days of the Record Date, and 11,817
shares subject to warrants exercisable within 60 days of the Record
Date.
(10) Includes 4,000 shares subject to stock options which may be acquired
within sixty days of the Record Date.
(11) Includes 260,692 shares subject to stock options which may be acquired
within sixty days of the Record Date.
19
<PAGE> 23
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended, (File No. 0-19227), are hereby incorporated in this Proxy Statement by
reference: (a) the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, (b) the Company's Quarterly Report on Form 10-QSB for the
quarter ending June 30, 1997 and (c) all other reports filed by the Company
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, since December 31, 1996.
By order of the Board of Directors
Alfred E. Booth, Jr.
Chairman of the Board and
Chief Executive Officer
20
<PAGE> 24
ANNEX A
ASSET PURCHASE AGREEMENT
dated as of July 24, 1997
by and between
CGUSA LLC
and
COSMETIC GROUP U.S.A., INC.
<PAGE> 25
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which
it is attached but is inserted for convenience only.
<TABLE>
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ARTICLE I
SALE OF ASSETS; LOAN AND CLOSING
1.01 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.03 Purchaser Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.04 Purchase Price; Allocation; Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.05 Closing; Escrow; Application of Seller's Obligations Under Purchaser Note . . . . . . . . . . . . . . . . 10
1.06 Prorations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.07 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.08 Third-Party Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
2.01 Organization of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.02 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.03 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.04 Governmental Approvals and Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.05 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.06 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.07 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.08 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.09 [RESERVED] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.10 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.11 Compliance With Laws and Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.12 Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.13 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.14 Tangible Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.15 Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.16 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.17 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.19 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.20 Employees; Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.21 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.22 Substantial Customers and Suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.23 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
A-i
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2.24 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.25 Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.26 No Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.27 Entire Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.28 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.29 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.30 Representations and Warranties Concerning the Loan . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.01 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.02 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.03 No Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.04 Governmental Approvals and Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.05 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.06 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.07 Availability of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE IV
COVENANTS OF SELLER
4.01 Regulatory and Other Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.02 Investigation by Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.03 No Solicitations or Business Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.04 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.05 Financial Statements and Reports; Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.06 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.07 Certain Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.08 Security Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.09 Delivery of Books and Records, etc.; Removal of Property; Discontinuance of Use of Name . . . . . . . . . 38
4.10 Noncompetition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.11 Preparation of Proxy Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.12 Approval of Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.13 Notice and Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.14 Fulfillment of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.15 Howard Simon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.16 Use of Loan Proceeds and Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.17 Incurrence of Indebtedness; Granting of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
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ARTICLE V
COVENANTS OF PURCHASER
5.01 Regulatory and Other Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.02 Notice and Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.03 Fulfillment of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.04 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.05 Non-Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.06 Products Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PURCHASER
6.01 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.02 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.03 Officers' Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.04 Orders and Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.05 Regulatory Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.06 Third Party Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.07 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.08 Real Property Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.09 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.10 Due Diligence; Environmental Survey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.11 Deliveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.12 [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.13 Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLER
7.01 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.02 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.03 Officers' Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.04 Orders and Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.05 Regulatory Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.06 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.07 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.08 Deliveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.09 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.10 Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
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ARTICLE VIII
TAX MATTERS AND POST-CLOSING TAXES
8.01 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
8.02 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.03 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.04 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE IX
EMPLOYEE MATTERS
9.01 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
9.02 Termination of Benefits by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
9.03 Benefits to Continuing Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
9.04 Obligations under Purchaser's Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
9.05 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE X
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
10.01 Survival of Representations, Warranties, Covenants and Agreements . . . . . . . . . . . . . . . . . . . . 52
ARTICLE XI
INDEMNIFICATION
11.01 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
11.02 Method of Asserting Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
11.03 Liability is Net of Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
11.04 Offset Against Seller Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE XII
TERMINATION
12.01 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
12.02 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
</TABLE>
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ARTICLE XIII
DEFINITIONS
13.01 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ARTICLE XIV
MISCELLANEOUS
14.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
14.02 Bulk Sales Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
14.03 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
14.04 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
14.05 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
14.06 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
14.07 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
14.08 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
14.09 No Third Party Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
14.10 No Assignment; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
14.11 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
14.12 Consent to Jurisdiction and Service of Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
14.13 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
14.14 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
14.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
</TABLE>
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EXHIBITS
<TABLE>
<S> <C>
Exhibit A Seller Note
Exhibit B Escrow Agreement
Exhibit C General Assignment and Bill of Sale
Exhibit D Assumption Agreement
Exhibit E Officers' Certificate of Seller
Exhibit F Secretary's Certificate of Seller
Exhibit G Opinion of Counsel to Seller
Exhibit H Officer's Certificate of Purchaser
Exhibit I Secretary's Certificate of Purchaser
Exhibit J Opinion of Counsel to Purchaser
</TABLE>
SCHEDULES
<TABLE>
<S> <C> <C> <C>
SECTION 1.01(a)(i) Real Property Leases
SECTION 1.01(a)(iv) Tangible Personal Property
SECTION 1.01(a)(v) Personal Property Leases
SECTION 1.01(a)(viii) Intangible Personal Property
SECTION 1.01(a)(ix) Business Licenses
SECTION 1.01(a)(x) Vehicles
SECTION 1.01(b)(v) Retained Real and Personal Property
SECTION 1.02(a)(ii) Accounts Payable
SECTION 1.02(a)(v) Accrued Expenses
SECTION 1.03 Wire Transfer Instructions for Loan
SECTION 2.03 No Conflicts
SECTION 2.04 Governmental Approvals and Filings
SECTION 2.05 Books and Records
SECTION 2.06 Financial Statements
SECTION 2.07 Absence of Changes
SECTION 2.08 No Undisclosed Liabilities
SECTION 2.10 Legal Proceedings
SECTION 2.11 Compliance With Laws and Orders
SECTION 2.12(a) Benefit Plans; ERISA
SECTION 2.12(c) Benefit Plans; ERISA
SECTION 2.13 Real Property
SECTION 2.14 Tangible Personal Property
SECTION 2.16(a) Contracts
SECTION 2.18 Insurance
SECTION 2.19(a) Affiliate Transactions
SECTION 2.20 Employees; Labor Relations
SECTION 2.21 Environmental Matters.
SECTION 2.22 Substantial Customers and Suppliers
SECTION 2.23 Accounts Receivable
SECTION 2.26 Guarantees
SECTION 2.27 Entire Business
SECTION 2.30 Consents of Existing Secured Lenders
SECTION 4.17 Existing Senior Indebtedness
SECTION 6.06 Third Party Consents
</TABLE>
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<PAGE> 31
This ASSET PURCHASE AGREEMENT dated as of July 24, 1997 is
made and entered into by and between CGUSA LLC, a New Jersey limited liability
company ("Purchaser"), and Cosmetic Group U.S.A., Inc., a California
corporation ("Seller"). Capitalized terms not otherwise defined herein have
the meanings set forth in Section 13.01.
WHEREAS, Seller is engaged in the contract manufacturing
business at its facilities in Sun Valley, California, whereby it custom
develops, formulates and manufactures color cosmetics, fragrances, creams,
lotions and other personal care products for customers that market products for
sale under their own brand names (the "Business"). The Seller also sells and
distributes professional hair care products under the name "Zegarelli" (the
"Zegarelli Business"), which (except for the manufacturing segment thereof) is
not part of the "Business" for purposes of this Agreement;
WHEREAS, Seller desires to sell, transfer and assign to
Purchaser, and Purchaser desires to purchase and acquire from Seller, certain
of the assets of Seller relating to the operation of the Business, and in
connection therewith, Purchaser has agreed to assume certain of the liabilities
of Seller relating to the Business, all on the terms set forth herein; and
WHEREAS, Purchaser desires, concurrently with the execution of
this Agreement, to lend Seller $700,000, secured by a lien on substantially all
of Seller's assets and properties.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
SALE OF ASSETS; LOAN AND CLOSING
1.01 Assets. (a) Assets Transferred. On the terms and
subject to the conditions set forth in this Agreement, Seller will sell,
transfer, convey, assign and deliver to Purchaser, and Purchaser will purchase
and pay for, at the Closing, all of Seller's right, title and interest in, to
and under the following Assets and Properties of Seller used or held for use in
connection with the Business, except as otherwise provided in Section 1.01(b),
as the same shall exist on the Closing Date (collectively, the "Assets"):
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(i) Real Property Leases. Subject to Section 1.08, the
leases and subleases of real property described in Section 1.01(a)(i)
of the Disclosure Schedule as to which Seller is the lessee or
sublessee, together with any options to purchase the underlying
property and leasehold improvements thereon, and in each case all
other rights, subleases, licenses, permits, deposits and profits
appurtenant to or related to such leases and subleases, the "Real
Property Leases");
(ii) Inventory. All inventories of raw materials,
work-in-process, finished goods, products under research and
development, demonstration equipment, office and other supplies,
parts, packaging materials and other accessories related thereto which
are held at, or are in transit from or to, the locations at which the
Business is conducted, or located at customers' premises on
consignment, in each case, which are used or held for use by Seller in
the conduct of the Business, including any of the foregoing purchased
subject to any conditional sales or title retention agreement in favor
of any other Person, together with all rights of Seller against
suppliers of such inventories (the "Inventory"), but excluding from
and after the Closing Date any Retained Inventory;
(iii) Accounts Receivable. All trade accounts receivable and all
notes, bonds and other evidences of Indebtedness of and rights to
receive payments arising out of sales occurring in the conduct of the
Business and the Security Documents related thereto, if any, including
any rights of Seller with respect to any third party collection
procedures or any other Actions or Proceedings which have been
commenced in connection therewith (the "Accounts Receivable"), but
excluding from and after the Closing Date any Retained Accounts
Receivable;
(iv) Tangible Personal Property. All furniture, fixtures,
equipment, machinery and other tangible personal property (other than
Inventory and Vehicles) used or held for use in the conduct of the
Business at the locations at which the Business is conducted or at
customers' premises on consignment, or otherwise used or held for use
by Seller in the conduct of the Business (including but not limited to
the items listed in Section 1.01(a)(iv) of the Disclosure Schedule),
including any of the foregoing purchased subject to any conditional
sales or title retention agreement in favor of any other Person (the
"Tangible Personal Property");
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(v) Personal Property Leases. Subject to Section 1.08, the
leases of Tangible Personal Property described in Section 1.01(a)(v)
of the Disclosure Schedule as to which Seller is the lessee or
sublessee, together with any options to purchase the underlying
property (the "Personal Property Leases");
(vi) Business Contracts. Subject to Section 1.08, all Contracts
(other than the Real Property Leases, the Personal Property Leases and
the Accounts Receivable) to which Seller is a party and which are
utilized in the conduct of the Business, including without limitation
Contracts relating to suppliers, sales representatives, distributors,
purchase orders, marketing arrangements and manufacturing arrangements
(the "Business Contracts");
(vii) Prepaid Expenses. All prepaid expenses relating to the
Business to the extent listed on the Closing Adjustment Worksheet
delivered by Seller pursuant to Section 1.04(b) (the "Prepaid
Expenses"), but excluding from and after the Closing Date any Retained
Prepaid Expenses;
(viii) Intangible Personal Property. All Intellectual Property
used or held for use in the conduct of the Business (including
Seller's goodwill therein) and all rights, privileges, claims, causes
of action and options relating or pertaining to the Business or the
Assets, including but not limited to all Intellectual Property
associated with the name "Cosmetic Group USA" and any variations
thereof and the items listed in Section 1.01(a)(viii) of the
Disclosure Schedule (the "Intangible Personal Property");
(ix) Licenses. To the extent their transfer is permitted under
applicable Laws, and subject to Section 1.07, all Licenses (including
applications therefor) utilized in the conduct of the Business,
including but not limited to the Licenses listed in Section
1.01(a)(ix) of the Disclosure Schedule (the "Business Licenses");
(x) Vehicles. All motor vehicles owned or leased by Seller
and used or held for use in the conduct of the Business, including but
not limited to the vehicles listed in Section 1.01(a)(x) of the
Disclosure Schedule (the "Vehicles");
(xi) Security Deposits. All security deposits deposited by or on
behalf of Seller as lessee or sublessee under the Real Property Leases
(the "Tenant Security Deposits");
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(xii) Books and Records. All Books and Records used or held for
use in the conduct of the Business or otherwise relating to the
Assets, other than the Excluded Books and Records (the "Business Books
and Records"); and
(xiii) Other Assets and Properties. All other Assets and
Properties of Seller used or held for use in connection with the
Business except as otherwise provided in Section 1.01(b) (the "Other
Assets").
To the extent any of the Business Books and Records are items
susceptible to duplication and are either (x) used in connection with Seller's
Zegarelli Business or (y) are required by Law to be retained by Seller, Seller
may deliver photostatic copies or other reproductions from which, in the case
of Business Books and Records referred to in clause (x), information solely
concerning Seller's Zegarelli Business other than the Business has been
deleted. In the event that any of the Other Assets are used in the Business
and in any of Seller's other businesses, such Assets shall be allocated between
the Business and such other businesses in a fair and equitable manner that is
reasonably satisfactory to the parties.
(b) Excluded Assets. Notwithstanding anything in this
Agreement to the contrary, the following Assets and Properties of Seller (the
"Excluded Assets") shall be excluded from and shall not constitute Assets:
(i) Cash. Cash (including checks received prior to the
close of business on the Closing Date, whether or not deposited or
cleared prior to the close of business on the Closing Date),
commercial paper, certificates of deposit and other bank deposits,
treasury bills and other cash equivalents;
(ii) Insurance. Life insurance policies of officers and other
employees of Seller and all other insurance policies relating to the
operation of the Business;
(iii) Employee Benefit Plans. All assets owned or held by any
Benefit Plans;
(iv) Tax Refunds. All refunds or credits, if any, of
Taxes due to or from Seller which cannot be assigned by Law;
(v) Real and Personal Property. The real or personal
property described in Section 1.01(b)(v) of the Disclosure Schedule;
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(vi) Excluded Books and Records. The minute books,
stock transfer books and corporate seal of Seller and any other Books
and Records relating solely to the Excluded Assets, the Retained
Liabilities or the Zegarelli Business (the "Excluded Books and
Records");
(vii) Litigation Claims. Any rights (including
indemnification) and claims and recoveries under litigation of Seller
against third parties arising out of or relating to events prior to
the Closing Date;
(viii) Excluded Obligations. The rights of Seller in, to and
under all Contracts of any nature, the obligations of Seller under
which expressly are not assumed by Purchaser pursuant to Section
1.02(b);
(ix) Tradename. All of Seller's right, title and interest
in, to and under the name "Zegarelli";
(x) Retained Accounts Receivable. Seller's right, title
and interest in any accounts that are classified as "Accounts
Receivable" as of the Closing Date on the Closing Adjustment Worksheet
to the extent such accounts are not (A) collected by Purchaser in the
ordinary course within 60 days after the Closing Date and (B) are
listed as uncollected accounts receivable by Purchaser on the
Post-Closing Adjustment Worksheet delivered by Purchaser pursuant to
Section 1.04(b) ("Retained Accounts Receivable").
(xi) Retained Inventory. Seller's right, title and
interest in any Retained Inventory as of the Closing Date;
(xii) Retained Prepaid Expenses. Seller's right, title and
interest in any prepaid expense of Seller that is not listed on the
Closing Adjustment Worksheet ("Retained Prepaid Expenses"); and
(xiii) Seller's rights under this Agreement and the
Operative Agreements.
1.02 Liabilities. (a) Assumed Liabilities. In connection
with the sale, transfer, conveyance, assignment and delivery of the Assets
pursuant to this Agreement, on the terms and subject to the conditions set
forth in this Agreement, at the Closing, Purchaser will assume and agree to
pay, perform and discharge when due the following obligations of Seller arising
in connection with the operation of the Business, as the same shall exist on
the Closing Date (the "Assumed Liabilities"), and no others:
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(i) Real Property Lease Obligations. All obligations of
Seller under the Real Property Leases arising and to be performed on
or after the Closing Date, and excluding (A) any such obligations
arising or to be performed prior to the Closing Date and (B) any
obligations in connection with obtaining a consent to the assignment
of such leases to Purchaser;
(ii) Accounts Payable. All obligations of Seller with respect to
accounts payable related to the Business reflected or reserved against
in the balance sheet included in the Quarterly Financial Statements or
those arising in the ordinary course of business since the Quarterly
Financial Statement Date, including but not limited to the items
listed in Section 1.02(a)(ii) of the Disclosure Schedule (the
"Accounts Payable");
(iii) Personal Property Lease Obligations. All obligations of
Seller under the Personal Property Leases arising and to be performed
on or after the Closing Date, and excluding (A) any such obligations
arising or to be performed prior to the Closing Date and (B) any
obligations in connection with obtaining a consent to the assignment
of such leases to Purchaser;
(iv) Obligations under Contracts and Licenses. All
obligations of Seller under the Business Contracts and Business
Licenses arising and to be performed on or after the Closing Date, and
excluding (A) any such obligations arising or to be performed prior to
the Closing Date and (B) any obligations in connection with obtaining
a consent to the assignment of such contracts to Purchaser; and
(v) Accrued Expenses. All obligations of Seller with
respect to accrued expenses relating to the Business reflected or
reserved against in the balance sheet included in the Quarterly
Financial Statements or those incurred in the ordinary course of
business since the Quarterly Financial Statement Date, including
without limitation the items listed in Section 1.02(a)(v) of the
Disclosure Schedule (the "Accrued Expenses"), but excluding
obligations with respect to general corporate expenses of Seller and
fees and expenses of professionals and other general corporate
consultants of Seller.
(b) Retained Liabilities. Except for the Assumed
Liabilities, Purchaser shall not assume by virtue of this Agreement or the
transactions contemplated hereby, and shall have no liability for, any
Liabilities of Seller (including, without limitation, those related to the
Business, products liability
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<PAGE> 37
claims for products manufactured or sold prior to the Closing Date whether the
occurrence giving rise to such claim arises before or after the Closing Date,
all of Seller's legal fees and all of Seller's expenses incurred in connection
with this transaction) of any kind, character or description whatsoever (the
"Retained Liabilities"). Seller shall discharge in a timely manner or shall
make adequate provision for all of the Retained Liabilities that are related to
the Business, provided that Seller shall have the ability to contest, in good
faith, any such claim of liability asserted in respect thereof by any Person
other than Purchaser and its Affiliates; provided, further, that Seller shall
have the right to defend the legal proceedings set forth on Section 2.10 of the
Disclosure Schedule.
1.03 Purchaser Loan. Concurrently with the execution of this
Agreement, and in reliance upon the representations, warranties and covenants
of Seller set forth in this Agreement, Purchaser is lending $700,000 to Seller
in the manner provided on Section 1.03 of the Disclosure Schedule (the "Loan"),
Seller is executing and delivering a Secured Promissory Note, dated as of even
date herewith, to evidence the Loan (the "Purchaser Note") and each of Seller
and Purchaser is executing a Security Agreement, dated as of even date herewith
(the "Security Agreement"), whereby Seller is granting to Purchaser a security
interest in the Collateral (as defined in the Security Agreement) to secure
Seller's obligations to Purchaser.
1.04 Purchase Price; Allocation; Adjustment.
(a) Purchase Price. The aggregate purchase price for the
Assets and the covenant of Seller contained in Section 4.10 is $7,600,000,
subject to adjustment as provided in paragraph (b) below (the "Purchase
Price"), consisting of (x) $4,100,000 (the "Cash Consideration") payable in
part in immediately available United States funds and in part by offset against
Seller's obligations on the Purchaser Note at the Closing as provided in
Section 1.05 and (y) a promissory note of Purchaser in the principal amount of
$3,500,000 in the form of Exhibit A hereto (the "Seller Note"). The parties
hereby agree that for all purposes, including Taxes, the Purchase Price, as
adjusted in accordance with paragraph (b) below, shall be allocated as set
forth on an allocation schedule to be prepared by Purchaser in its sole
discretion and delivered to Seller along with, and in the same manner as, the
Post-Closing Adjustment Worksheet.
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(b) Adjustment of Purchase Price.
(i) As soon as practicable prior to Closing (and no more than
five (5) days prior to the Closing), Seller shall prepare and deliver
to Purchaser a Closing Adjustment Worksheet (the "Closing Adjustment
Worksheet"), which shall set forth the TNA (as defined below) based on
Seller's calculation of the Assets and Assumed Liabilities as of the
Closing Date using the same accounting procedures and policies used by
Seller in preparing Seller's audited balance sheet included in its
financial statements at and for the year ended December 31, 1996
(included in Seller's Annual Report on Form 10-KSB for the year ended
December 31, 1996). If the Closing Adjustment Worksheet indicates
that the TNA is higher or lower than $4,400,000, then the Purchase
Price shall be adjusted upward or downward, respectively, on a
dollar-for-dollar basis. Any such adjustment shall be satisfied by
increasing or decreasing, as the case may be, the Cash Consideration
immediately prior to Purchaser's payment thereof. One day prior to
the Closing, Seller and Purchaser shall conduct a physical count of
the Inventory.
(ii) Between 60 and 75 days following the Closing Date, Purchaser
shall prepare and deliver to Seller a Post- Closing Adjustment
Worksheet (the "Post-Closing Adjustment Worksheet"), which shall set
forth the TNA based on the results of Purchaser's calculation of the
Assets and Assumed Liabilities as of the Closing Date (except that the
amount of Tangible Personal Property used by Purchaser in such
calculation shall be equal to the amount of Tangible Personal Property
used by Seller in calculating the amounts on the Closing Adjustment
Worksheet). If the Post-Closing Adjustment Worksheet indicates that
the TNA (as defined below) is higher or lower than $4,400,000, then
the Purchase Price, as adjusted pursuant to Section 1.04(b)(i), shall
be further adjusted upward or downward, respectively, on a
dollar-for-dollar basis. Any adjustment upward shall be satisfied
upon delivery of the Post-Closing Adjustment Worksheet to Seller by an
immediate increase in the principal amount of the Seller Note in an
amount equal to the difference between the amount of TNA set forth on
the Post-Closing Adjustment Worksheet and $4,400,000, with such
increase applied evenly to each annual principal repayment amount set
forth in the Seller Note. Any adjustment downward shall be equal to
the difference between $4,400,000 and the amount of TNA set forth on
the Post-Closing Adjustment Worksheet and such adjustment shall be
satisfied upon delivery of the Post-Closing Adjustment Worksheet to
Seller (x) first, by the prompt release and payment from the
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Escrow Fund to the Purchaser of all adjustment amounts up to, but not
exceeding the total amount in, the Escrow Fund and (y) second, all
adjustment amounts in excess of the amount in the Escrow Fund shall be
immediately deducted from the principal amount of the Seller Note,
with such reduction applied evenly to each annual principal repayment
amount set forth in the Seller Note.
(iii) For the purpose of this Agreement, "TNA" shall mean the
total book value of the Assets less, without duplication, (x) all
Assumed Liabilities, (x) applicable reserves and items properly
deductible, each in accordance with GAAP and (z) all goodwill and
Intangible Personal Property, provided that Purchaser shall also
subtract from the book value of the Assets on the Post-Closing
Adjustment Worksheet, without duplication, all items that constitute
Retained Accounts Receivable or Retained Inventory to the extent the
same was included as Accounts Receivable or Inventory, respectively,
on Seller's Closing Adjustment Worksheet.
(iv) For purposes of this Agreement, "Retained Inventory" shall
mean the following: All items that were classified as "Inventory" as
of the Closing Date on the Closing Adjustment Worksheet to the extent
Purchaser determines that such items are unsuitable for purposes of
the Business acquired by Purchaser due to age, quality, type, category
or quantity, as such determination is reflected on the Post-Closing
Adjustment Worksheet.
(v) If (x) Seller reasonably disagrees with Purchaser's
determinations as stated on the Post-Closing Adjustment Worksheet and
delivers a written notice to Purchaser to such effect within five (5)
days of receipt of the Post-Closing Adjustment Worksheet, and (y)
Seller and Purchaser cannot resolve any dispute in regard to
Purchaser's determination of Retained Inventory within five (5) days
of the receipt of Seller's notice in (x), then the final determination
of the contents of the Post-Adjustment Worksheet (and no other issues)
shall be submitted to a "Big Six" accounting firm other than Coopers &
Lybrand and Ernst & Young that is mutually acceptable to the parties
(the "Big Six Firm"). Purchaser and Seller hereby agree that the Big
Six Firm's determination shall be the binding resolution of the matter
to the same extent as if rendered by a Board of Arbitration pursuant
to Section 11.02(c) hereof. The Big Six Firm shall be guided in its
decision by the procedures for arbitration set forth in Section
11.02(c) and shall award costs (including counsel fees) as provided in
and based on the procedures set forth in that Section;
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(vi) Notwithstanding any adjustment to the Purchase Price
pursuant to this Section 1.04(b), each party will remain liable to the
other for any breach of this Agreement.
1.05 Closing; Escrow; Application of Seller's Obligations
Under Purchaser Note. The Closing will take place at the offices of Milbank,
Tweed, Hadley & McCloy, 601 South Figueroa Street, 30th Floor, Los Angeles,
California 90017, or at such other place as Purchaser and Seller mutually
agree, at 10:00 A.M. local time, on the Closing Date. At the Closing,
Purchaser will deliver the Purchase Price by (x) paying the Cash Consideration
by wire transfer of immediately available funds to such account as Seller may
reasonably direct by written notice delivered to Purchaser by Seller at least
five (5) Business Days before the Closing Date, provided that $500,000 of the
Cash Consideration shall be delivered by Purchaser by wire transfer of
immediately available funds to an escrow agent that is mutually acceptable to
the parties (the "Escrow Agent"), under an escrow agreement to be entered into
on the Closing Date by Seller, Purchaser and the Escrow Agent, substantially in
the form of Exhibit B hereto (with such changes therein as may be reasonably
requested by the Escrow Agent to protect its interests) (the "Escrow
Agreement"), provided, further, that the parties agree that all amounts owing
by Seller to Purchaser under the Purchaser Note may be applied by Purchaser to
offset Purchaser's payment of the Cash Consideration at the Closing and (y)
delivering the Seller Note to Seller, duly executed by Purchaser.
Simultaneously, (a) Seller will assign and transfer to Purchaser all of its
right, title and interest in and to the Assets (free and clear of all Liens,
other than Permitted Liens) by delivery of (i) a General Assignment and Bill of
Sale substantially in the form of Exhibit C hereto (the "General Assignment"),
duly executed by Seller, (ii) an assignment of the Intellectual Property in
form and substance reasonably satisfactory to Purchaser, and (iii) such other
good and sufficient instruments of conveyance, assignment and transfer, in form
and substance reasonably acceptable to Purchaser's counsel, as shall be
effective to vest in Purchaser good title to the Assets (the General Assignment
and the other instruments referred to in clauses (ii) and (iii) being
collectively referred to herein as the "Assignment Instruments"), and (b)
Purchaser will assume from Seller the due payment, performance and discharge of
the Assumed Liabilities by delivery of (i) an Assumption Agreement
substantially in the form of Exhibit D hereto (the "Assumption Agreement"),
duly executed by Purchaser, and (ii) such other good and sufficient instruments
of assumption, in form and substance reasonably acceptable to Seller's counsel,
as shall be effective to cause Purchaser to assume the Assumed Liabilities as
and to the extent provided in Section 1.02(a) (the Assumption Agreement and
such other instruments referred to in clause (ii) being
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<PAGE> 41
collectively referred to herein as the "Assumption Instruments"). At the
Closing, there shall also be delivered to Seller and Purchaser the opinions,
certificates and other contracts, documents and instruments required to be
delivered under Articles VI and VII and such other documentation to evidence
(i) the application of Seller's obligations under the Purchaser Note to offset
Purchaser's payment of the Cash Consideration and (ii) the satisfaction of
Seller's obligations under the Purchaser Note and Security Agreement with
respect to such offset.
1.06 Prorations. The following prorations relating to the
Assets and the ownership and operation of the Business will be made as of the
Closing Date, with Seller liable to the extent such items relate to any time
period prior to the Closing Date and Purchaser liable to the extent such items
relate to periods beginning with and subsequent to the Closing Date:
(a) Rents, additional rents, taxes, charges for sewer, water,
telephone, electricity and other utilities and other items payable by
Seller under the Real Property Leases.
(b) All other items (excluding franchise and income taxes)
normally adjusted in connection with similar transactions.
Except as otherwise agreed by the parties, the net amount of all such
prorations will be settled and paid on the Closing Date.
1.07 Further Assurances; Post-Closing Cooperation. (a) At
any time or from time to time after the Closing, at Purchaser's request and
without further consideration, Seller shall execute and deliver to Purchaser
such other instruments of sale, transfer, conveyance, assignment and
confirmation, provide such materials and information and take such other
actions as Purchaser may reasonably deem necessary or desirable in order more
effectively to transfer, convey and assign to Purchaser, and to confirm
Purchaser's title to, all of the Assets, and, to the full extent permitted by
Law, to put Purchaser in actual possession and operating control of the
Business and the Assets and to assist Purchaser in exercising all rights with
respect thereto, and otherwise to cause Seller to fulfill its obligations under
this Agreement and the Operative Agreements.
(b) Effective on the Closing Date, Seller hereby
constitutes and appoints Purchaser the true and lawful attorney of Seller, with
full power of substitution, in the name of Seller or Purchaser, but on behalf
of and for the benefit of Purchaser: (i) to demand and receive from time to
time any and all the Assets and to make endorsements and give receipts and
releases for and in respect of the same and any part thereof; (ii) to
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institute, prosecute, compromise and settle any and all Actions or Proceedings
that Purchaser may deem proper in order to collect, assert or enforce any
claim, right or title of any kind in or to the Assets; (iii) to defend or
compromise any or all Actions or Proceedings in respect of any of the Assets;
and (iv) to do all such acts and things in relation to the matters set forth in
the preceding clauses (i) through (iii) as Purchaser shall deem desirable.
Seller hereby acknowledges that the appointment hereby made and the powers
hereby granted are coupled with an interest and are not and shall not be
revocable by it in any manner or for any reason. Seller shall deliver to
Purchaser at Closing an acknowledged power of attorney to the foregoing effect
executed by Seller. Purchaser shall indemnify and hold harmless Seller from
any and all Losses caused by or arising out of any breach of Law by Purchaser
in its exercise of such power of attorney.
(c) Following the Closing, each party will afford the
other party, its counsel and its accountants, during normal business hours,
reasonable access to the books, records and other data relating to the Business
in its possession with respect to periods prior to the Closing and the right to
make copies and extracts therefrom, to the extent that such access may be
reasonably required by the requesting party in connection with (i) the
preparation of Tax Returns, (ii) the determination or enforcement of rights and
obligations under this Agreement, (iii) compliance with the requirements of any
Governmental or Regulatory Authority, (iv) the determination or enforcement of
the rights and obligations of any party to this Agreement or any of the
Operative Agreements or (v) in connection with any actual or threatened Action
or Proceeding. Further each party agrees for a period extending six (6) years
after the Closing Date not to destroy or otherwise dispose of any such books,
records and other data unless such party shall first offer in writing to
surrender such books, records and other data to the other party and such other
party shall not agree in writing to take possession thereof during the ten (10)
day period after such offer is made.
(d) If, in order properly to prepare its Tax Returns,
other documents or reports required to be filed with Governmental or Regulatory
Authorities or its financial statements or to fulfill its obligations
hereunder, it is necessary that a party be furnished with additional
information, documents or records relating to the Business not referred to in
paragraph (c) above, and such information, documents or records are in the
possession or control of the other party, such other party shall use its best
efforts to furnish or make available such information, documents or records (or
copies thereof) at the recipient's request, cost and expense. Any information
obtained by Seller in
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accordance with this paragraph or paragraph (c) of this Section shall be held
confidential by Seller in accordance with Section 14.06.
(e) Notwithstanding anything to the contrary contained in
this Section, if the parties are in an adversarial relationship in litigation
or arbitration, the furnishing of information, documents or records in
accordance paragraphs (c) or (d) of this Section shall be subject to applicable
rules relating to discovery.
1.08 Third-Party Consents. To the extent that any Real
Property Lease, Personal Property Lease, Business Contract or Business License
is not assignable without the consent of another party, this Agreement shall
not constitute an assignment or an attempted assignment thereof if such
assignment or attempted assignment would constitute a breach thereof or a
default thereunder. Seller shall use its best efforts to obtain the consent of
such other party to the assignment of any such Real Property Lease, Personal
Property Lease, Business Contract or Business License to Purchaser in all cases
in which such consent is or may be required for such assignment. If any such
consent shall not be obtained, Seller shall cooperate with Purchaser in any
reasonable arrangement designed to provide for Purchaser the benefits intended
to be assigned to Purchaser under the relevant Real Property Lease, Personal
Property Lease, Business Contract or Business License, including enforcement of
any and all rights of Seller against the other party thereto arising out of the
breach or cancellation thereof by such other party or otherwise. If and to the
extent that such arrangement cannot be made, Purchaser shall have no obligation
pursuant to Section 1.02 or otherwise with respect to any such Real Property
Lease, Personal Property Lease, Business Contract or Business License. The
provisions of this Section 1.08 shall not affect the right of Purchaser not to
consummate the transactions contemplated by this Agreement if the condition to
its obligations hereunder contained in Section 6.06 has not been fulfilled.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser as follows:
2.01 Organization of Seller. Seller is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
California, and has full corporate power and
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authority to conduct the Business as and to the extent now conducted and to
own, use and lease the Assets.
2.02 Authority. Seller has full corporate power and
authority to execute and deliver this Agreement, the Purchaser Note, the
Security Agreement and the Operative Agreements to which it is a party and,
subject to obtaining Seller Shareholders' Approval pursuant to Section 4.12, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby, including without limitation to
sell and transfer (pursuant to this Agreement) the Assets and satisfy its
obligations under the Purchaser Note and Security Agreement. The execution and
delivery by Seller of this Agreement, the Purchaser Note, Security Agreement
and the Operative Agreements to which it is a party, and the performance by
Seller of its obligations hereunder and thereunder, have been duly and validly
authorized by the Board of Directors of Seller, the Board of Directors of
Seller has recommended adoption of this Agreement by the stockholders of the
Company and directed that this Agreement be submitted to the stockholders of
the Company for their consideration, no other corporate action on the part of
Seller being necessary, other than obtaining Seller Shareholders' Approval.
This Agreement, the Purchaser Note and the Security Agreement have been duly
and validly executed and delivered by Seller and constitute, and upon the
execution and delivery by Seller of the Operative Agreements to which it is a
party, such Operative Agreements will constitute, legal, valid and binding
obligations of Seller enforceable against Seller in accordance with their
terms.
2.03 No Conflicts. The execution and delivery by Seller of
this Agreement, the Purchaser Note and the Security Agreement do not, and the
execution and delivery by Seller of the Operative Agreements to which it is a
party, the performance by Seller of its obligations under this Agreement, the
Purchaser Note, the Security Agreement and such Operative Agreements and the
consummation of the transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of
any of the terms, conditions or provisions of the articles of incorporation or
by-laws (or other comparable corporate charter documents) of Seller;
(b) subject to obtaining the consents, approvals and actions,
making the filings and giving the notices disclosed in Section 2.04 of the
Disclosure Schedule, conflict with or result in a violation or breach of any
term or provision of any Law or Order applicable to Seller or any of its Assets
and Properties; or
(c) except as disclosed in Section 2.03 of the Disclosure
Schedule, (i) conflict with or result in a violation
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or breach of, (ii) constitute (with or without notice or lapse of time or both)
a default under, (iii) require Seller to obtain any consent, approval or action
of, make any filing with or give any notice to any Person as a result or under
the terms of, or (iv) result in the creation or imposition of any Lien upon
Seller or any of its Assets and Properties under, any Contract or License to
which Seller is a party or by which any of its Assets and Properties is bound.
2.04 Governmental Approvals and Filings. Except as disclosed
in Section 2.04 of the Disclosure Schedule, no consent, approval or action of,
filing with or notice to any Governmental or Regulatory Authority on the part
of Seller is required in connection with the execution, delivery and
performance of this Agreement, the Purchaser Note, the Security Agreement or
any of the Operative Agreements to which it is a party or the consummation of
the transactions contemplated hereby or thereby.
2.05 Books and Records. Except as set forth in Section 2.05
of the Disclosure Schedule, none of the Business Books and Records is recorded,
stored, maintained, operated or otherwise wholly or partly dependent upon or
held by any means (including any electronic, mechanical or photographic
process, whether computerized or not) which (including all means of access
thereto and therefrom) are not under the exclusive ownership and direct control
of one or more Employees.
2.06 Financial Statements. Prior to the execution of this
Agreement, Seller has delivered to Purchaser true and complete copies of the
following financial statements:
(a) the unaudited balance sheets of each of the Business, the
Zegarelli Business and Seller, as of March 31, 1997 and 1996 and the related
unaudited statement of operations for each of the fiscal quarters then ended;
and
(b) the, unaudited balance sheet of each of the Business, the
Zegarelli Business and Seller as of December 31, 1996 and the related unaudited
statement of operations for the fiscal year then ended.
(c) the audited balance sheets of Seller as of December 31,
1996, 1995 and 1994, and the related audited statement of operations for each
fiscal year then ended, together with a true and correct copy of the report on
such audited information by Ernst & Young LLP, and all letters from such
accountants with respect to the results of such audits.
Except as set forth in the notes thereto and as disclosed in Section 2.06 of
the Disclosure Schedule, all such financial statements (i) were prepared on a
consistent basis and in accordance with GAAP, (ii) fairly present the financial
condition and results of operations of the Business and Seller, as
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applicable, as of the respective dates thereof and for the respective periods
covered thereby, and (iii) were compiled from Business Books and Records
regularly maintained by management and used to prepare the financial statements
of Seller in accordance with the principles stated therein. Seller has
maintained the Business Books and Records in a manner sufficient to permit the
preparation of financial statements in accordance with GAAP.
2.07 Absence of Changes. Except for the execution and
delivery of this Agreement, the Purchaser Note, the Security Agreement and the
transactions to take place pursuant hereto on or prior to the Closing Date and
except as disclosed in Section 2.07 of the Disclosure Schedule, since the
Quarterly Financial Statement Date there has not been any material adverse
change, or any event or development which, individually or together with other
such events, could reasonably be expected to result in a material adverse
change, in the Condition of the Business. Without limiting the foregoing,
except for the Loan and the application of the proceeds thereof in accordance
with this Agreement or as disclosed in Section 2.07 of the Disclosure Schedule,
there has not occurred, between the Quarterly Financial Statement Date and the
date hereof, any of the following:
(i) (x) any increase in the salary, wages or other compensation of
any Employee whose annual salary is, or after giving effect to such
change would be, $50,000 or more; (y) any establishment or
modification of (A) targets, goals, pools or similar provisions in
respect of any fiscal year under any Benefit Plan or any
employment-related Contract or other compensation arrangement with or
for Employees or (B) salary ranges, increase guidelines or similar
provisions in respect of any Benefit Plan or any employment-related
Contract or other compensation arrangement with or for Employees; or
(z) any adoption, entering into or becoming bound by any Benefit Plan,
employment-related Contract or collective bargaining agreement, or
amendment, modification or termination (partial or complete) of any
Benefit Plan, employment-related Contract or collective bargaining
agreement, except to the extent required by applicable Law and, in the
event compliance with legal requirements presented options, only to
the extent the option which Seller reasonably believed to be the least
costly was chosen;
(ii) (A) incurrences by Seller of Indebtedness with respect to
the conduct of the Business in an aggregate principal amount exceeding
$200,000 (net of any amounts discharged during such period), or (B)
any voluntary purchase, cancellation, prepayment or complete or
partial discharge in advance of a scheduled payment date with
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respect to, or waiver of any right of Seller under, any Indebtedness
of or owing to Seller with respect to the conduct of the Business;
(iii) any physical damage, destruction or other casualty loss
(whether or not covered by insurance) affecting any of the plant, real
or personal property or equipment of Seller used or held for use in
the conduct of the Business in an aggregate amount exceeding $20,000;
(iv) any material change in (A) any pricing, investment,
accounting, financial reporting, inventory, credit, allowance or Tax
practice or policy of the Business or (B) any method of calculating
any bad debt, contingency or other reserve of the Business for
accounting, financial reporting or Tax purposes;
(v) (A) any acquisition or disposition of any Assets and
Properties used or held for use in the conduct of the Business, other
than Inventory in the ordinary course of business consistent with past
practice and other acquisitions or dispositions not exceeding in
either case $50,000 in the aggregate; or (B) any creation or
incurrence of a Lien, other than a Permitted Lien, on any Assets and
Properties used or held in the conduct of the Business;
(vi) any entering into, amendment, modification,
termination (partial or complete) or granting of a waiver under or
giving any consent with respect to (A) any Contract which is required
(or had it been in effect on the date hereof would have been required)
to be disclosed in the Disclosure Schedule pursuant to Section 2.16(a)
or (B) any License disclosed in Section 1.01(a)(ix) of the Disclosure
Schedule;
(vii) capital expenditures or commitments for additions to
property, plant or equipment used or held for use in the conduct of
the Business constituting capital assets in an aggregate amount
exceeding $10,000;
(viii) any transaction involving the Business with any
officer, director or Affiliate of Seller (A) outside the ordinary
course of business consistent with past practice or (B) other than on
an arm's-length basis;
(ix) any entering into of a Contract to do or engage in
any of the foregoing after the date hereof; or
(x) any other transactions in the aggregate amount of
more than $10,000 directly involving, or directly affecting,
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the Business or the Assets outside the ordinary course of business
consistent with past practice.
2.08 No Undisclosed Liabilities. Except as reflected or
reserved against in the balance sheet included in the Quarterly Financial
Statements or in the notes thereto or as disclosed in Section 2.08 of the
Disclosure Schedule or any other Section of the Disclosure Schedule, there are
no Liabilities against, relating to or affecting the Business or any of the
Assets, other than Liabilities (i) incurred in the ordinary course of business
consistent with past practice or (ii) which, individually or in the aggregate,
are not material to the Condition of the Business.
2.09 [RESERVED].
2.10 Legal Proceedings. Except as disclosed in Section 2.10
of the Disclosure Schedule (with paragraph references corresponding to those
set forth below):
(a) there are no Actions or Proceedings pending or, to the
Knowledge of Seller, threatened against, relating to or affecting Seller with
respect to the Business or any of its Assets and Properties which (i) could
reasonably be expected to result in the issuance of an Order restraining,
enjoining or otherwise prohibiting or making illegal the consummation of any of
the transactions contemplated by this Agreement, the Purchaser Note, the
Security Agreement or any of the Operative Agreements or otherwise result in a
material diminution of the benefits contemplated by this Agreement, the
Purchaser Note, Security Agreement or any of the Operative Agreements to
Purchaser, or (ii) if determined adversely to Seller, could reasonably be
expected to result in (x) any injunction or other equitable relief that would
interfere in any material respect with the Business or (y) Losses by Seller,
individually or in the aggregate with Losses in respect of other such Actions
or Proceedings, exceeding $25,000;
(b) there are no facts or circumstances Known to Seller
that could reasonably be expected to give rise to any Action or Proceeding that
would be required to be disclosed pursuant to clause (a) above; and
(c) there are no Orders outstanding against Seller with
respect to the Business.
Prior to the execution of this Agreement, Seller has delivered to Purchaser all
responses of counsel to auditors' requests for information delivered in
connection with Seller's most recently prepared audited financial statements
(together with any updates
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provided by such counsel) regarding Actions or Proceedings pending or
threatened against, relating to or affecting the Business.
2.11 Compliance With Laws and Orders. Except as disclosed in
Section 2.11 of the Disclosure Schedule, Seller is not, nor has it at any time
within the last five (5) years been, nor has it received any notice that it is
or has at any time within the last five (5) years been, in violation of or in
default under, in any material respect, any Law or Order applicable to the
Business or the Assets.
2.12 Benefit Plans; ERISA.
(a) Section 2.12(a) of the Disclosure Schedule (i)
contains a true and complete list and description of each of the Benefit Plans,
(ii) identifies each of the Benefit Plans that is a Qualified Plan, (iii)
identifies each Benefit Plan which at any time during the five-year period
preceding the date of this Agreement was a Defined Benefit Plan and (iv) lists,
describes and identifies each other Plan maintained, established, sponsored or
contributed to by an ERISA Affiliate, or any predecessor thereof, which, during
the five-year period preceding the date of this Agreement, was at any time a
Defined Benefit Plan. Seller has not scheduled or agreed upon future increases
of benefit levels (or creations of new benefits) with respect to any Benefit
Plan, and no such increases or creation of benefits have been proposed, made
the subject of representations to Employees or requested or demanded by
Employees under circumstances which make it reasonable to expect that such
increases will be granted. Except as disclosed in Section 2.12(a) of the
Disclosure Schedule, no loan is outstanding between Seller and any Employee.
(b) Seller does not maintain nor is it obligated to
provide benefits under any life, medical or health plan (other than as an
incidental benefit under a Qualified Plan) which provides benefits to retired
or other terminated Employees other than benefit continuation rights under the
Consolidated Omnibus Budget Reconciliation of 1985, as amended.
(c) Except as set forth in Section 2.12(c) of the
Disclosure Schedule, each Benefit Plan covers only Employees (or former
Employees or beneficiaries with respect to service with Seller in connection
with the Business), so that the transactions contemplated by this Agreement
will require no spin-off of assets and liabilities or other division or
transfer of rights with respect to any such plan.
(d) Neither Seller, any ERISA Affiliate nor any other
corporation or organization controlled by or under common control
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with any of the foregoing within the meaning of Section 4001 of ERISA has at
any time contributed to, on behalf of any Employee, any "multiemployer plan",
as that term is defined in Section 4001 of ERISA.
(e) Each of the Benefit Plans is, and its administration
is and has been since inception, in all material respects in compliance with,
and Seller has not received any claim or notice that any such Benefit Plan is
not in compliance with, all applicable Laws and Orders and prohibited
transactions exemptions, including the requirements of ERISA, the Code, the Age
Discrimination in Employment Act, the Equal Pay Act and Title VII of the Civil
Rights Act of 1964. Each Qualified Plan is qualified under Section 401(a) of
the Code, and, if applicable, complies with the requirements of Section 401(k)
of the Code. Each Benefit Plan which is intended to provide for the deferral
of income, the reduction of salary or other compensation or to afford other Tax
benefits complies with the requirements of the applicable provisions of the
Code or other Laws required in order to provide such Tax benefits.
(f) Seller is not in default in performing any of its
contractual obligations under any of the Benefit Plans or any related trust
agreement or insurance contract. All contributions and other payments required
to be made by Seller to any Benefit Plan with respect to any period ending
before or at or including the Closing Date have been made or reserves adequate
for such contributions or other payments have been or will be set aside
therefor and have been or will be reflected in the Financial Statements in
accordance with GAAP. There are no material outstanding liabilities of any
Benefit Plan other than liabilities for benefits to be paid to participants in
such Benefit Plan and their beneficiaries in accordance with the terms of such
Benefit Plan.
(g) No event has occurred, and there exists no condition
or set of circumstances in connection with any Benefit Plan, under which
Seller, directly or indirectly (through any indemnification agreement or
otherwise), could reasonably be expected to be subject to any risk of material
liability under Section 409 of ERISA, Section 502(i) of ERISA, Title IV of
ERISA or Section 4975 of the Code.
(h) No transaction contemplated by this Agreement will
result in liability to the PBGC under Section 302(c)(ii), 4062, 4063, 4064 or
4069 of ERISA, or otherwise, with respect to the Purchaser or any corporation
or organization controlled by or under common control with Purchaser within the
meaning of Section 4001 of ERISA, and no event or condition exists or has
existed which could reasonably be expected to result in any such
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liability with respect to Purchaser or any such corporation or organization.
No "reportable event" within the meaning of Section 4043 of ERISA has occurred
with respect to any Defined Benefit Plans. No termination re-establishment or
spin-off re-establishment transaction has occurred with respect to any Subject
Defined Benefit Plan. No Subject Defined Benefit Plan has incurred any
accumulated funding deficiency whether or not waived. No filing has been made
and no proceeding has been commenced for the complete or partial termination
of, or withdrawal from, any Benefit Plan which is a Pension Benefit Plan.
(i) No benefit under any Benefit Plan, including, without
limitation, any severance or parachute payment plan or agreement, will be
established or become accelerated, vested, funded or payable by reason of any
transaction contemplated under this Agreement.
(j) To the Knowledge of Seller, there are no pending or
threatened claims by or on behalf of any Benefit Plan, by any Person covered
thereby, or otherwise, which allege violations of Law which could reasonably be
expected to result in liability on the part of Purchaser or any fiduciary of
any such Benefit Plan, nor is there any basis for such a claim.
(k) No employer securities, employer real property or
other employer property is included in the assets of any Benefit Plan.
(l) The fair market value of the assets of each Subject
Defined Benefit Plan, as determined as of the last day of the plan year of such
plan which coincides with or first precedes the date of this Agreement, was not
less than the present value of the projected benefit obligations under such
plan at such date as established on the basis of the actuarial assumptions
applicable under such Subject Defined Benefit Plan at said date and, to the
Knowledge of Seller, there have been no material changes in such values since
said date.
(m) Complete and correct copies of the following
documents have been furnished to Purchaser prior to the execution of this
Agreement:
(i) the Benefit Plans and any predecessor plans referred
to therein, any related trust agreements, and service provider
agreements, insurance contracts or agreements with investment
managers, including without limitation, all amendments thereto;
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(ii) current summary Plan descriptions of each Benefit
Plan subject to ERISA, and any similar descriptions of all other
Benefit Plans;
(iii) the most recent Form 5500 and Schedules thereto for
each Benefit Plan subject to ERISA reporting requirements;
(iv) the most recent determination of the IRS with respect
to the qualified status of each Qualified Plan;
(v) the most recent accountings with respect to any
Benefit Plan funded through a trust;
(vi) the most recent actuarial report of the qualified
actuary of any Subject Defined Benefit Plan or any other Benefit Plan
with respect to which actuarial valuations are conducted; and
(vii) all qualified domestic relations orders or other
orders governing payments from any Benefit Plan.
2.13 Real Property. Section 1.01(a)(i) of the Disclosure
Schedule contains a true and correct list of each parcel of real property
leased by Seller and used or held for use in connection with the Business.
Seller has a valid and subsisting leasehold estate in and the right to quiet
enjoyment of the real properties subject to the Real Property Leases described
in Section 1.01(a)(i) of the Disclosure Schedule for the full term thereof.
Each Real Property Lease is a legal, valid and binding agreement, enforceable
in accordance with its terms, of Seller and of each other Person that is a
party thereto, and except as set forth in Section 2.13 of the Disclosure
Schedule, there is no, nor has Seller received any notice of any, default (or
any condition or event which, after notice or lapse of time or both, would
constitute a default) thereunder. Seller does not owe any brokerage
commissions with respect to any such leased space. Seller has delivered to
Purchaser prior to the execution of this Agreement true and complete copies of
all Real Property Leases (including any amendments and renewal letters).
Seller does not own (or lease or sublease as a landlord) any real property.
2.14 Tangible Personal Property. Seller is in possession of
and has good title to, or has valid leasehold interests in or valid rights
under Contract to use, all the Tangible Personal Property, which includes all
tangible personal property reflected on the balance sheet included in the
Quarterly Financial Statements and tangible personal property acquired since
the Quarterly Financial Statement Date other than tangible
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personal property disposed of since such date in the ordinary course of
business consistent with past practice. All the Tangible Personal Property is
free and clear of all Liens, other than Permitted Liens and Liens disclosed in
Section 2.14 of the Disclosure Schedule, and is in good working order and
condition, ordinary wear and tear excepted, and its use complies in all
material respects with all applicable Laws.
2.15 Intellectual Property Rights. Seller has interests in
or uses only the Intellectual Property disclosed in Section 1.01(a)(viii) of
the Disclosure Schedule in connection with the conduct of the Business, each of
which Seller either has all right, title and interest in or a valid and binding
rights under Contract to use. No other Intellectual Property is used or
necessary in the conduct of the Business. Except as disclosed in Section 2.15
of the Disclosure Schedule, (i) Seller has the exclusive right to use the
Intellectual Property disclosed in Section 1.01(a)(viii) of the Disclosure
Schedule, (ii) all registrations with and applications to Governmental or
Regulatory Authorities in respect of such Intellectual Property are valid and
in full force and effect and are not subject to the payment of any Taxes or
maintenance fees or the taking of any other actions by Seller to maintain their
validity or effectiveness, (iii) there are no restrictions on the direct or
indirect transfer of any Contract, or any interest therein, held by Seller in
respect of such Intellectual Property, (iv) Seller has delivered to Purchaser
prior to the execution of this Agreement documentation with respect to any
invention, process, design, computer program or other know-how or trade secret
included in such Intellectual Property, which documentation is accurate in all
material respects and reasonably sufficient in detail and content to identify
and explain such invention, process, design, computer program or other know-how
or trade secret and to facilitate its full and proper use without reliance on
the special knowledge or memory of any Person, (v) Seller has taken reasonable
security measures to protect the secrecy, confidentiality and value of its
trade secrets in respect of the Business, (vi) Seller is not, nor has it
received any notice that it is, in default (or with the giving of notice or
lapse of time or both, would be in default) under any Contract to use such
Intellectual Property and (vii) to the Knowledge of Seller, no such
Intellectual Property is being infringed by any other Person. Seller has not
received notice that Seller is infringing any Intellectual Property of any
other Person in connection with the conduct of the Business, no claim is
pending or, to the Knowledge of Seller, has been made to such effect that has
not been resolved and, to the Knowledge of Seller, Seller is not infringing any
Intellectual Property of any other Person in connection with the conduct of the
Business.
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2.16 Contracts. (a) Section 2.16(a) of the Disclosure
Schedule (with paragraph references corresponding to those set forth below)
contains a true and complete list of each of the following Contracts or other
arrangements (true and complete copies or, if none, reasonably complete and
accurate written descriptions of which, together with all amendments and
supplements thereto and all waivers of any terms thereof, have been delivered
to Purchaser prior to the execution of this Agreement) to which Seller is a
party or by which any of the Assets is bound:
(i) (A) all Contracts (excluding Benefit Plans) providing for
a commitment of employment or consultation services for a specified or
unspecified term to, or otherwise relating to employment or the
termination of employment of, any Employee, the name, position and
rate of compensation of each Employee party to such a Contract and the
expiration date of each such Contract; and (B) any written or
unwritten representations, commitments, promises, communications or
courses of conduct (excluding Benefit Plans and any such Contracts
referred to in clause (A)) involving an obligation of Seller to make
payments in any year, other than with respect to salary or incentive
compensation payments in the ordinary course of business, to any
Employee or any group of Employees;
(ii) all Contracts with any Person containing any provision or
covenant prohibiting or limiting the ability of Seller to engage in
any business activity or compete with any Person in connection with
the Business or, except as provided in Section 4.10, prohibiting or
limiting the ability of any Person to compete with Seller in
connection with the Business;
(iii) all partnership, joint venture, shareholders' or other
similar Contracts with any Person in connection with the Business;
(iv) all Contracts with distributors, dealers,
manufacturer's representatives, sales agencies or franchises with whom
Seller deals in connection with the Business;
(v) all Contracts relating to the future disposition or
acquisition of any Assets, other than dispositions or acquisitions of
Inventory in the ordinary course of business consistent with past
practice;
(vi) all collective bargaining or similar labor Contracts
covering any Employee; and
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(vii) all other Contracts (other than Benefit Plans, the Real
Property Leases and insurance policies listed in Section 2.18 of the
Disclosure Schedule) with respect to the Business that (A) involve the
payment or potential payment, pursuant to the terms of any such
Contract, by or to Seller of more than $5,000 annually and (B) cannot
be terminated within sixty (60) days after giving notice of
termination without resulting in any material cost or penalty to
Seller.
(b) Each Contract required to be disclosed in Section
2.16(a) of the Disclosure Schedule is in full force and effect and constitutes
a legal, valid and binding agreement, enforceable in accordance with its terms,
of each party thereto; and except as disclosed in Section 2.16(b) of the
Disclosure Schedule neither Seller nor, to the Knowledge of Seller, any other
party to such Contract is, or has received notice that it is, in violation or
breach of or default under any such Contract (or with notice or lapse of time
or both, would be in violation or breach of or default under any such Contract)
in any material respect.
(c) Except as disclosed in Section 2.16(c) of the
Disclosure Schedule, the execution, delivery and performance by Seller of this
Agreement, the Purchaser Note, the Security Agreement and the Operative
Agreements to which it is a party, and the consummation of the transactions
contemplated hereby and thereby, will not (A) result in or give to any Person
any right of termination, cancellation, acceleration or modification in or with
respect to, (B) result in or give to any Person any additional rights or
entitlement to increased, additional, accelerated or guaranteed payments under,
or (C) result in the creation or imposition of any Lien, other than Permitted
Liens, upon Seller or any of its Assets and Properties under, any Business
Contract.
2.17 Licenses. Section 1.01(a)(ix) of the Disclosure
Schedule contains a true and complete list of all material Licenses used or
held for use in the Business (and all pending applications for any such
Licenses), setting forth the grantor, the grantee, the function and the
expiration and renewal date of each. Prior to the execution of this Agreement,
Seller has delivered to Purchaser true and complete copies of all such
Licenses. Except as disclosed in Section 2.17 of the Disclosure Schedule:
(i) Seller owns or validly holds all Licenses that are
material, individually or in the aggregate, to the Business;
(ii) each Business License is valid, binding and in full force
and effect;
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(iii) Seller is not, nor has it received any notice that it is, in
default (or with the giving of notice or lapse of time or both, would
be in default) under any Business License; and
(iv) the execution, delivery and performance by Seller of
this Agreement, the Purchaser Note, the Security Agreement and the
Operative Agreements to which it is a party, and the consummation of
the transactions contemplated hereby and thereby, will not (A) result
in or give to any Person any right of termination, cancellation,
acceleration or modification in or with respect to, (B) result in or
give to any Person any additional rights or entitlement to increased,
additional, accelerated or guaranteed payments under, or (C) result in
the creation or imposition of any Lien, other than Permitted Liens,
upon Seller or any of its Assets and Properties under, any Business
License.
2.18 Insurance. Section 2.18 of the Disclosure Schedule
contains a true and complete list (including the names and addresses of the
insurers, the names of the Persons to whom such Policies have been issued, the
expiration dates thereof, the annual premiums and payment terms thereof,
whether it is a "claims made" or an "occurrence" policy and a brief description
of the interests insured thereby) of all liability, property, workers'
compensation and other insurance policies currently in effect that insure the
Business, the Employees or the Assets. Each such insurance policy is valid
and binding and in full force and effect, no premiums due thereunder have not
been paid and Seller has not received any notice of cancellation or termination
in respect of any such policy or is in default thereunder. Such insurance
policies are placed with financially sound and reputable insurers and, in light
of the nature of the Business and the Assets, are in amounts and have coverages
that are reasonable and customary for Persons engaged in such business and
having such Assets and Properties. Neither the Seller nor the Person to whom
such policy has been issued has received notice that any insurer under any
policy referred to in this Section is denying liability with respect to a claim
thereunder or defending under a reservation of rights clause.
2.19 Affiliate Transactions. Except as disclosed in Section
2.19(a) of the Disclosure Schedule, (i) no officer, director or Affiliate of
Seller provides or causes to be provided any assets, services or facilities
used or held for use in connection with the Business, and (ii) the Business
does not provide or cause to be provided any assets, services or facilities to
any such officer, director or Affiliate. Except as disclosed in Section
2.19(b) of the Disclosure Schedule, each of
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the transactions listed in Section 2.19(a) of the Disclosure Schedule is
engaged in on an arm's-length basis.
2.20 Employees; Labor Relations. (a) Section 2.20 of the
Disclosure Schedule contains a list of the name of each Employee at the date
hereof, together with such Employee's position or function, annual base salary
or wages and any incentive or bonus arrangement with respect to such Employee
in effect on such date. Seller has not received any information that would
lead it to believe that a material number of Employees will or may cease to be
Employees, or will refuse offers of employment from Purchaser, because of the
consummation of the transactions contemplated by this Agreement.
(b) Except as disclosed in Section 2.20 of the Disclosure
Schedule, (i) no Employee is presently a member of a collective bargaining unit
and, to the Knowledge of Seller, there are no threatened or contemplated
attempts to organize for collective bargaining purposes any of the Employees,
and (ii) no unfair labor practice complaint or sex, age, race or other
discrimination claim has been brought during the last five (5) years against
Seller with respect to the conduct of the Business before the National Labor
Relations Board, the Equal Employment Opportunity Commission or any other
Governmental or Regulatory Authority. Since January 1, 1993 there has been no
work stoppage, strike or other concerted action by employees of Seller engaged
in the Business. During that period, Seller has complied in all material
respects with all applicable Laws relating to the employment of labor,
including, without limitation those relating to wages, hours and collective
bargaining.
2.21 Environmental Matters. Seller has obtained all Licenses
which are required under applicable Environmental Laws in connection with the
conduct of the Business or the Assets. Each of such Licenses is in full force
and effect. Seller has conducted the Business in compliance in all material
respects with the terms and conditions of all such Licenses and with any
applicable Environmental Law. In addition, except as set forth in Section 2.21
of the Disclosure Schedule (with paragraph references corresponding to those
set forth below):
(a) No Order has been issued, no Environmental Claim has
been filed, no penalty has been assessed and no investigation or review is
pending or, to the Knowledge of Seller, threatened by any Governmental or
Regulatory Authority with respect to any alleged failure by Seller to have any
License required under applicable Environmental Laws in connection with the
conduct of the Business or with respect to any generation, treatment, storage,
recycling, transportation, discharge, disposal or Release of any Hazardous
Material in connection with the
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Business, and to the Knowledge of Seller there are no facts or circumstances in
existence which could reasonably be expected to form the basis for any such
Order, Environmental Claim, penalty or investigation.
(b) Seller does not own, operate or lease a treatment,
storage or disposal facility requiring a permit under the Resource Conservation
and Recovery Act, as amended, or under any other comparable state or local Law;
and, without limiting the foregoing, (i) no polychlorinated biphenyl is or has
been present, (ii) no asbestos or asbestos-containing material is or has been
present, (iii) there are no underground storage tanks or surface impoundments
for Hazardous Materials, active or abandoned, and (iv) no Hazardous Material
has been Released in a quantity reportable under, or in violation of, any
Environmental Law or otherwise Released, in the cases of clauses (i) through
(iv), at, on or under any such site or facility during any period that Seller
owned, operated or leased such property.
(c) Seller has not transported or arranged for the
transportation of any Hazardous Material in connection with the operation of
the Business to any location that is (i) listed on the NPL under CERCLA, (ii)
listed for possible inclusion on the NPL by the Environmental Protection Agency
in CERCLIS or on any similar state or local list or (iii) the subject of
enforcement actions by federal, state or local Governmental or Regulatory
Authorities that may lead to Environmental Claims against Seller or the
Business.
(d) No Hazardous Material generated in connection with
the operation of the Business has been recycled, treated, stored, disposed of
or Released by Seller at any location.
(e) No oral or written notification of a Release of a
Hazardous Material in connection with the operation of the Business has been
filed by or on behalf of Seller, and no site or facility now or previously
owned, operated or leased by Seller is listed or proposed for listing on the
NPL, CERCLIS or any similar state or local list of sites requiring
investigation or clean-up.
(f) No Liens have arisen under or pursuant to any
Environmental Law on any site or facility owned, operated or leased by Seller,
and no federal, state or local Governmental or Regulatory Authority action has
been taken or, to the Knowledge of Seller, is in process that could subject any
such site or facility to such Liens.
(g) There have been no environmental investigations,
studies, audits, tests, reviews or other analyses conducted by, or that are in
the possession of, Seller in relation to any site
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or facility now or previously owned, operated or leased by Seller which have
not been delivered to Purchaser prior to the execution of this Agreement.
2.22 Substantial Customers and Suppliers. Section 2.22(a) of
the Disclosure Schedule lists all material customers of the Business, on the
basis of revenues for goods sold or services provided for the most
recently-completed fiscal year. Section 2.22(b) of the Disclosure Schedule
lists the ten (10) largest suppliers of the Business, on the basis of cost of
goods or services purchased for the most recently-completed fiscal year.
Except as disclosed in Section 2.22(c) of the Disclosure Schedule, no such
customer or supplier has ceased or materially reduced its purchases from, use
of the services of, or sales or provision of services to the Business since the
Annual Financial Statement Date, or to the Knowledge of Seller, has threatened
to cease or materially reduce such purchases, use, sales or provision of
services after the date hereof. Except as disclosed in Section 2.22(d) of the
Disclosure Schedule, to the Knowledge of Seller, no such customer or supplier
is threatened with bankruptcy or insolvency.
2.23 Accounts Receivable. Except as set forth in Section
2.23 of the Disclosure Schedule, the Accounts Receivable (i) arose from bona
fide sales transactions in the ordinary course of business and are payable on
ordinary trade terms, (ii) are legal, valid and binding obligations of the
respective debtors enforceable in accordance with their terms, (iii) are not
subject to any valid set-off or counterclaim, (iv) do not represent obligations
for goods sold on consignment, on approval or on a sale-or-return basis or
subject to any other repurchase or return arrangement, (v) are collectible in
the ordinary course of business consistent with past practice in the aggregate
recorded amounts thereof, net of any applicable reserve reflected in the
balance sheet included in the Quarterly Financial Statements, and (vi) are not
the subject of any Actions or Proceedings brought by or on behalf of Seller.
Section 2.23 of the Disclosure Schedule sets forth a description of any
security arrangements and collateral securing the repayment or other
satisfaction of the Accounts Receivable (the "Security Documents"). All steps
necessary to render all such security arrangements legal, valid, binding and
enforceable, and to give and maintain for Seller a perfected security interest
in the related collateral, have been taken.
2.24 Inventory. All the Inventory consists of a quality and
quantity usable and salable in the ordinary course of business consistent with
past practice, subject to normal and customary allowances in the industry for
spoilage, damage and outdated items. All items included in the Inventory are
the
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property of Seller, free and clear of any Lien other than Permitted Liens, have
not been pledged as collateral, are not held by Seller on consignment from
others and conform in all material respects to all standards applicable to such
inventory or its use or sale imposed by Governmental or Regulatory Authorities.
2.25 Vehicles. Section 1.01(a)(x) of the Disclosure Schedule
contains a true and complete list of all motor vehicles owned or leased by
Seller and used or held for use in the conduct of the Business. Except as
disclosed in Section 2.25 of the Disclosure Schedule, Seller has good and valid
title to, or has valid leasehold interests in or valid rights under Contract to
use, each Vehicle, free and clear of all Liens other than Permitted Liens.
2.26 No Guarantees. Except as set forth on Section 2.26 of
the Disclosure Schedule, none of the Liabilities of the Business or of Seller
incurred in connection with the conduct of the Business is guaranteed by or
subject to a similar contingent obligation of any other Person, nor has Seller
guaranteed or become subject to a similar contingent obligation in respect of
the Liabilities of any customer, supplier or other Person to whom Seller sells
goods or provides services in the conduct of the Business or with whom Seller
otherwise has significant business relationships in the conduct of the
Business.
2.27 Entire Business. The sale of the Assets by Seller to
Purchaser pursuant to this Agreement will effectively convey to Purchaser the
entire Business and all of the tangible and intangible property used by Seller
(whether owned, leased or held under license by Seller, by any of Seller's
Affiliates or by others) in connection with the conduct of the Business as
heretofore conducted by Seller (except for the Excluded Assets and subject to
Section 1.08) including, without limitation, all tangible Assets and Properties
of Seller reflected in the balance sheet included in the Quarterly Financial
Statements and Assets and Properties acquired since the Quarterly Financial
Statement Date in the conduct of the Business, other than the Excluded Assets
and Assets and Properties disposed of since such date, consistent with Section
2.07(v). Except as disclosed in Section 2.27 of the Disclosure Schedule, there
are no shared facilities or services which are used in connection with any
business or other operations of Seller or any of Seller's Affiliates other than
the Business.
2.28 Brokers. All negotiations relative to this Agreement
and the transactions contemplated hereby have been carried out by Seller
directly with Purchaser without the intervention of any Person on behalf of
Seller in such manner as
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to give rise to any valid claim by any Person against Purchaser for a finder's
fee, brokerage commission or similar payment.
2.29 Disclosure. All material facts relating to the
Condition of the Business have been disclosed to Purchaser in or in connection
with this Agreement. No representation or warranty contained in this
Agreement, and no statement contained in the Disclosure Schedule or in any
certificate, list or other writing furnished to Purchaser pursuant to any
provision of this Agreement (including without limitation the Financial
Statements), contains any untrue statement of a material fact or omits to state
a material fact necessary in order to make the statements herein or therein, in
the light of the circumstances under which they were made, not misleading.
2.30 Representations and Warranties Concerning the Loan.
(a) Disclosure. All material facts relating to the
business, condition (financial or otherwise), results of operations, Assets and
Properties and prospects of Seller have been disclosed to Purchaser in or in
connection with this Agreement. Seller has provided Purchaser with true and
complete copies of Seller's latest proxy statement and report on Form 10-KSB
and any Form 10-QSBs filed since the date of such Form 10-KSB and no such
statement or report contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading.
(b) No Conflicts. Attached to Section 2.30 of the
Disclosure Schedule are complete copies of all necessary consents and approvals
from Seller's lenders to permit the Loan and Seller's execution and delivery of
and performance under the Purchaser Note and Security Agreement and the filing
of any financing statement in connection with perfecting the security interest
granted under the Security Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
3.01 Organization. Purchaser is a limited liability company
duly organized, validly existing and in good standing under the Laws of the
State of New Jersey. Purchaser has full organizational power and authority to
enter into this Agreement,
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the Security Agreement and the Operative Agreements to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby and to make the Loan.
3.02 Authority. The execution and delivery by Purchaser of
this Agreement, the Security Agreement and the Operative Agreements to which it
is a party, and the performance by Purchaser of its obligations hereunder and
thereunder, have been duly and validly authorized by the Managers of Purchaser,
no other organizational action on the part of Purchaser or its members being
necessary. This Agreement and the Security Agreement have been duly and
validly executed and delivered by Purchaser and constitute, and upon the
execution and delivery by Purchaser of the Operative Agreements to which it is
a party, such Operative Agreements will constitute, legal, valid and binding
obligations of Purchaser enforceable against Purchaser in accordance with their
terms.
3.03 No Conflicts. The execution and delivery by Purchaser
of this Agreement and the Security Agreement do not, and the execution and
delivery by Purchaser of the Operative Agreements to which it is a party, the
performance by Purchaser of its obligations under this Agreement, the Security
Agreement and such Operative Agreements and the consummation of the
transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of
any of the terms, conditions or provisions of the articles of organization or
operating agreement (or other comparable corporate charter document) of
Purchaser;
(b) conflict with or result in a violation or breach of any
term or provision of any Law or Order applicable to Purchaser or any of its
Assets and Properties; or
(c) (i) conflict with or result in a violation or breach of,
(ii) constitute (with or without notice or lapse of time or both) a default
under, (iii) require Purchaser to obtain any consent, approval or action of,
make any filing with or give any notice to any Person as a result or under the
terms of, or (iv) result in the creation or imposition of any Lien upon
Purchaser or any of its Assets or Properties under, any Contract or License to
which Purchaser is a party or by which any of its Assets and Properties is
bound.
3.04 Governmental Approvals and Filings. No consent,
approval or action of, filing with or notice to any Governmental or Regulatory
Authority on the part of Purchaser is required in connection with the
execution, delivery and performance of this
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Agreement, the Security Agreement or the Operative Agreements to which it is a
party or the consummation of the transactions contemplated hereby or thereby.
3.05 Legal Proceedings. There are no Actions or Proceedings
pending or, to the knowledge of Purchaser, threatened against, relating to or
affecting Purchaser or any of its Assets and Properties which could reasonably
be expected to result in the issuance of an Order restraining, enjoining or
otherwise prohibiting or making illegal the consummation of any of the
transactions contemplated by this Agreement, the Security Agreement or any of
the Operative Agreements.
3.06 Brokers. All negotiations relative to this Agreement
and the transactions contemplated hereby have been carried out by Purchaser
directly with Seller without the intervention of any Person on behalf of
Purchaser in such manner as to give rise to any valid claim by any Person
against Seller for a finder's fee, brokerage commission or similar payment.
3.07 Availability of Financing. Purchaser has, and as of the
Closing will have, the financing and the financial resources to enable
Purchaser to consummate the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS OF SELLER
Seller covenants and agrees with Purchaser that, at all times
from and after the date hereof until the Closing and, with respect to any
covenant or agreement by its terms to be performed in whole or in part after
the Closing, for the period specified therein or, if no period is specified
therein, indefinitely, Seller will comply with all covenants and provisions of
this Article IV, except to the extent Purchaser may otherwise consent in
writing.
4.01 Regulatory and Other Approvals. Seller will, as
promptly as practicable, (a) take all commercially reasonable steps necessary
or desirable to obtain all consents, approvals or actions of, make all filings
with and give all notices to Governmental or Regulatory Authorities or any
other Person required of Seller to consummate the transactions contemplated
hereby and by the Security Agreement and the Operative Agreements, including
without limitation those described in Sections 2.03 and 2.04 of the Disclosure
Schedule, (b) provide such other information and communications to such
Governmental or Regulatory Authorities or other Persons as Purchaser or such
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Governmental or Regulatory Authorities or other Persons may reasonably request
in connection therewith and (c) cooperate with Purchaser in connection with the
performance of its obligations under Section 5.01. Seller will provide prompt
notification to Purchaser when any such consent, approval, action, filing or
notice referred to in clause (a) above is obtained, taken, made or given, as
applicable, and will advise Purchaser of any communications (and, unless
precluded by Law, provide copies of any such communications that are in
writing) with any Governmental or Regulatory Authority or other Person
regarding any of the transactions contemplated by this Agreement, the Purchaser
Note, the Security Agreement or any of the Operative Agreements.
4.02 Investigation by Purchaser. Seller will (a) provide
Purchaser and any Person who is considering providing financing to Purchaser to
finance all or any portion of the Purchase Price and their respective officers,
directors, employees, agents, counsel, accountants, financial advisors,
consultants and other representatives (collectively, "Representatives") with
full access, upon reasonable prior notice and during normal business hours, to
the Employees and such other officers, employees and agents of Seller who have
any responsibility for the conduct of the Business, to Seller's accountants and
to the Assets, and (b) furnish Purchaser and such other Persons with all such
information and data (including without limitation copies of Business
Contracts, Business Licenses, Benefit Plans and other Business Books and
Records) concerning the Business, the Assets and the Assumed Liabilities as
Purchaser or any of such other Persons reasonably may request in connection
with such investigation.
4.03 No Solicitations or Business Dispositions. Seller will
not take, nor will it permit any Affiliate of Seller (or authorize or permit
any investment banker, financial advisor, attorney, accountant or other Person
retained by or acting for or on behalf of Seller or any such Affiliate) to
take, directly or indirectly, any action to solicit, encourage, receive,
negotiate, assist or otherwise facilitate (including by furnishing confidential
information with respect to the Business or permitting access to the Assets and
Properties and Books and Records of Seller) any offer or inquiry from any
Person, other than Purchaser or Affiliates of Purchaser, (i) to engage in any
sale or other disposition of all or any substantial part of the Business (a
"Business Disposition"), (ii) to reach any agreement or understanding (whether
or not such agreement or understanding is absolute, revocable, contingent or
conditional) for, or otherwise attempt to consummate, any Business Disposition
or (iii) to furnish or cause to be furnished any information with respect to
Seller or any of its subsidiaries to any Person who
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Seller or any such Affiliate Knows or has reason to believe is in the process
of considering any transaction that would result in a Business Disposition;
provided, however, that Seller, its subsidiaries, and their directors, officers
and Affiliates will remain free to participate in any discussions or
negotiations regarding furnishing any information with respect to, assist or
participate in, or facilitate in any other manner any offer or attempt by any
Person to do or seek a Business Disposition to the extent their fiduciary
duties may require, and that if any of them exercises such fiduciary duty,
Seller shall immediately pay to Purchaser the lesser of $2,000,000 and the
maximum amount permitted under applicable law. If Seller or any such Affiliate
(or any such Person acting for or on their behalf) receives from any Person any
offer, inquiry or informational request referred to above, Seller will promptly
advise such Person, by written notice, of the terms of this Section 4.03 and
will promptly, orally and in writing, advise Purchaser of such offer, inquiry
or request and deliver a copy of such notice to Purchaser.
4.04 Conduct of Business. Seller will operate the Business
only in the ordinary course consistent with past practice. Without limiting
the generality of the foregoing, Seller will:
(a) use commercially reasonable efforts to (i) preserve
intact the present business organization and reputation of the Business, (ii)
keep available (subject to dismissals and retirements in the ordinary course of
business consistent with past practice) the services of the Employees, (iii)
maintain the Assets in good working order and condition, ordinary wear and tear
excepted, (iv) maintain the good will of customers, suppliers, lenders and
other Persons to whom Seller sells goods or provides services or with whom
Seller otherwise has significant business relationships in connection with the
Business and (v) continue all current sales, marketing and promotional
activities relating to the Business;
(b) except to the extent required by applicable Law, (i)
cause the Business Books and Records to be maintained in the usual, regular and
ordinary manner, and (ii) not permit any material change in any pricing,
investment, accounting, financial reporting, inventory, credit, allowance or
Tax practice or policy of Seller that would adversely affect the Business, the
Assets or the Assumed Liabilities;
(c) (i) use commercially reasonable efforts to maintain in
full force and effect until the Closing substantially the same levels of
coverage as the insurance afforded under the Contracts listed in Section 2.18
of the Disclosure Schedule, (ii) use all commercially reasonable efforts to
cause such insurance
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coverage to continue to be provided at the expense of Seller for at least two
(2) years after the Closing Date with respect to products liability claims for
products manufactured or sold prior to the Closing Date and at least 10 days
after the Closing Date for all other insurance, in all cases on substantially
the same terms and conditions as provided on the date of this Agreement except
that Purchaser shall be named as an additional insured, and (iii) cause any and
all benefits under such Contracts paid or payable with respect to the Assets or
the Business to be paid to Seller; and
(d) comply, in all material respects, with all Laws and
Orders applicable to the Business and promptly following receipt thereof to
give Purchaser copies of any notice received from any Governmental or
Regulatory Authority or other Person alleging any violation of any such Law or
Order.
4.05 Financial Statements and Reports; Filings.
(a) As promptly as practicable and in any event no later than
45 days (or 50 days in the event Seller timely files with the SEC a
notification under SEC Rule 12(b)-25) after the end of each fiscal quarter
ending after the date hereof and before the Closing Date, Seller will deliver
to Purchaser true and complete copies of the unaudited balance sheet, and the
related unaudited statement of operations, of each of the Business, Zegarelli
Business and Seller, as of and for the fiscal quarter and the portion of the
fiscal year then ended, which financial statements shall be prepared on a basis
consistent with the Quarterly Financial Statements.
(b) As promptly as practicable, Seller will deliver
copies of all License applications and other filings made by Seller in
connection with the operation of the Business after the date hereof and before
the Closing Date with any Governmental or Regulatory Authority (other than
routine, recurring filings made in the ordinary course of business consistent
with past practice), including without limitation all statements and reports
filed by Seller with the SEC.
4.06 Employee Matters. Except as may be required by Law or
except as is approved by Howard Simon or set forth on Schedule 2.07 (i)(x) of
the Disclosure Schedule, Seller will refrain from directly or indirectly:
(a) making any representation or promise, oral or written, to
any Employee concerning any Benefit Plan, except for statements as to the
rights or accrued benefits of any Employee under the terms of any Benefit Plan;
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(b) making any increase in the salary, wages or other
compensation of any Employee;
(c) adopting, entering into or becoming bound by any Benefit
Plan, employment-related Contract or collective bargaining agreement with
respect to the Business or any of the Employees, or amending, modifying or
terminating (partially or completely) any such Benefit Plan, employment-related
Contract or collective bargaining agreement, except to the extent required by
applicable Law and, in the event compliance with legal requirements presents
options, only to the extent that the option which Seller reasonably believes to
be the least costly is chosen; or
(d) establishing or modifying any (i) targets, goals,
pools or similar provisions in respect of any fiscal year under any Benefit
Plan or any employment-related Contract or other compensation arrangement with
or for Employees or (ii) salary ranges, increase guidelines or similar
provisions in respect of any Benefit Plan or any employment-related Contract or
other compensation arrangement with or for Employees.
Seller will administer each Benefit Plan, or cause the same to
be so administered, in all material respects in accordance with the applicable
provisions of the Code, ERISA and all other applicable Laws. Seller will
promptly notify Purchaser in writing of each receipt by Seller (and furnish
Purchaser with copies) of any notice of investigation or administrative
proceeding by the IRS, Department of Labor, PBGC or other Person involving any
Benefit Plan.
4.07 Certain Restrictions. Seller will refrain from:
(a) acquiring or disposing of any Assets and Properties
used or held for use in the conduct of the Business, other than Inventory in
the ordinary course of business consistent with past practice and other
acquisitions or dispositions not exceeding in either case $25,000 in the
aggregate, or creating or incurring any Lien, other than a Permitted Lien, on
any Assets and Properties used or held for use in the conduct of the Business;
(b) entering into, amending, modifying, terminating
(partially or completely), granting any waiver under or giving any consent with
respect to any Business Contract or any material Business License;
(c) violating, breaching or defaulting under in any
material respect, or taking or failing to take any action that (with or without
notice or lapse of time or both) would
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constitute a material violation or breach of, or default under, any term or
provision of any Business Contract or any Business License;
(d) incurring, purchasing, canceling, prepaying or
otherwise providing for a complete or partial discharge in advance of a
scheduled payment date with respect to, or waiving any right of Seller under,
any Liability of or owing to Seller in connection with the Business, other than
in the ordinary course of business consistent with past practice;
(e) engaging in any transaction with respect to the
Business with any officer, director or Affiliate of Seller, either outside the
ordinary course of business consistent with past practice or other than on an
arm's-length basis; or
(f) making capital expenditures or commitments for
additions to property, plant or equipment constituting capital assets on behalf
of the Business in an aggregate amount exceeding $10,000.
4.08 Security Deposits. Seller will take all actions
necessary to transfer to Purchaser on the Closing Date all of Seller's right,
title and interest in and to the Tenant Security Deposits.
4.09 Delivery of Books and Records, etc.; Removal of
Property; Discontinuance of Use of Name. (a) On the Closing Date, Seller will
deliver or make available to Purchaser at the locations at which the Business
is conducted all of the Business Books and Records and such other Assets as are
in Seller's possession at other locations, and if at any time after the Closing
Seller discovers in its possession or under its control any other Business
Books and Records or other Assets, it will forthwith deliver such Business
Books and Records or other Assets to Purchaser.
(b) On the Closing Date, Seller will cause to be filed
with all appropriate Governmental and Regulatory Authorities, the appropriate
documents to change its name to a name which is not the same as, or similar to,
Cosmetic Group U.S.A., Inc. or any variation thereof. From and after the
Closing Date, Seller will cease using the name "Cosmetic Group USA" and any
variations thereof, including any Intellectual Property associated therewith,
in any way, shape or form; provided that Seller will not be required to replace
outstanding stock certificates solely to change the name printed thereon.
4.10 Noncompetition. (a) Seller will, for a period of three
(3) years from the Closing Date, refrain from, either
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alone or in conjunction with any other Person, or directly or indirectly
through its present or future Affiliates, employees or consultants:
(i) employing, engaging or seeking to employ or engage any
Person who within the prior six (6) months had been an employee of
Purchaser or any of its Affiliates engaged in the Business, unless
such employee (A) resigns voluntarily (without any solicitation from
Seller or any of its Affiliates) or (B) is terminated by Purchaser or
any of its Affiliates after the Closing Date;
(ii) causing or attempting to cause (A) any client, customer or
supplier of the Business to terminate or materially reduce its
business with Purchaser or any of its Affiliates or (B) any officer,
employee or consultant of Purchaser or any of its Affiliates engaged
in the Business to resign or sever a relationship with Purchaser or
any of its Affiliates;
(iii) disclosing (unless compelled by judicial or
administrative process) or using any confidential or secret
information relating to the Business or any client, customer or
supplier of the Business; or
(iv) participating or engaging in (other than through the
ownership of 5% or less of any class of securities registered under
the Securities Exchange Act of 1934, as amended), or otherwise lending
assistance (financial or otherwise) to any Person participating or
engaged in, any of the lines of business which comprised the Business
on the Closing Date in any jurisdiction in the United States in which
Seller has done business within one year prior to the Closing Date.
(b) The parties hereto recognize that the Laws and public
policies of the various states of the United States may differ as to the
validity and enforceability of covenants similar to those set forth in this
Section. It is the intention of the parties that the provisions of this
Section be enforced to the fullest extent permissible under the Laws and
policies of each jurisdiction in which enforcement may be sought, and that the
unenforceability (or the modification to conform to such Laws or policies) of
any provisions of this Section shall not render unenforceable, or impair, the
remainder of the provisions of this Section. Accordingly, if any provision of
this Section shall be determined to be invalid or unenforceable, such
invalidity or unenforceability shall be deemed to apply only with respect to
the operation of such provision in the particular jurisdiction in
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which such determination is made and not with respect to any other provision or
jurisdiction.
(c) The parties hereto acknowledge and agree that any
remedy at Law for any breach of the provisions of this Section would be
inadequate, and Seller hereby consents to the granting by any court of an
injunction or other equitable relief, without the necessity of actual monetary
loss being proved, in order that the breach or threatened breach of such
provisions may be effectively restrained.
4.11 Preparation of Proxy Statement. Seller shall prepare
and file with the SEC a proxy statement or information statement relating to
the Seller Shareholders' Meeting (the "Proxy Statement") as soon as reasonably
practicable after the date hereof, and shall use its best efforts to have the
Proxy Statement cleared by the SEC. If at any time prior to the Closing Date
any event shall occur that should be set forth in an amendment of or a
supplement to the Proxy Statement, Seller shall prepare and file with the SEC
such amendment or supplement as soon thereafter as is reasonably practicable.
Seller shall notify Purchaser of the receipt of any comments of the SEC with
respect to the Proxy Statement and of any requests by the SEC for any amendment
or supplement thereto or for additional information, and shall provide to
Purchaser promptly copies of all correspondence between Seller or any
representative of Seller and the SEC with respect to the Proxy Statement.
Seller shall give Purchaser and its counsel the opportunity to review the Proxy
Statement and all responses to requests for additional information by and
replies to comments of the SEC before their being filed with, or sent to, the
SEC. Seller agrees to use its best efforts, after consultation with the other
parties hereto, to respond promptly to all such comments of and requests by the
SEC and to cause the Proxy Statement to be mailed to the stockholders entitled
to vote at Seller Shareholders' Meeting at the earliest practicable time.
4.12 Approval of Shareholders. Seller shall, through its
Board of Directors, duly call, give notice of, convene and hold a meeting of
its stockholders (the "Seller Shareholders' Meeting") for the purpose of voting
on the adoption of this Agreement and, if necessary, the receipt of the Loan
and the granting of the security interest pursuant to the Security Agreement
(the "Seller Shareholders' Approval") as soon as reasonably practicable after
the date hereof. Subject to the exercise of fiduciary obligations under
applicable law as advised in writing by outside counsel (a copy of which will
be provided promptly to Purchaser) and compliance with Section 4.03, Seller
shall, through its Board of Directors, include in the Proxy Statement the
recommendation of the Board of Directors of Seller
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that the stockholders of Seller adopt this Agreement and if necessary, ratify
the receipt of the Loan and the granting of the security interest pursuant to
the Security Agreement, and shall use its best efforts to obtain such adoption.
4.13 Notice and Cure. Seller will notify Purchaser in
writing (where appropriate, through updates to the Disclosure Schedule) of, and
contemporaneously will provide Purchaser with true and complete copies of any
and all information or documents relating to, and will use all commercially
reasonable efforts to cure before the Closing, any event, transaction or
circumstance, as soon as practicable after it becomes Known to Seller,
occurring after the date of this Agreement that causes or will cause any
covenant or agreement of Seller under this Agreement to be breached or that
renders or will render untrue any representation or warranty of Seller
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. No notice given pursuant to this
Section shall have any effect on the representations, warranties, covenants or
agreements contained in this Agreement for purposes of determining satisfaction
of any condition contained herein or shall in any way limit Purchaser's right
to seek indemnity under Article XI.
4.14 Fulfillment of Conditions. Seller will execute and
deliver at the Closing each Operative Agreement that Seller is required hereby
to execute and deliver as a condition to the Closing, will take all
commercially reasonable steps necessary or desirable and proceed diligently and
in good faith to satisfy each other condition to the obligations of Purchaser
contained in this Agreement and will not take or fail to take any action that
could reasonably be expected to result in the nonfulfillment of any such
condition.
4.15 Howard Simon. Seller shall continue to employ Howard
Simon up to the Closing Date under the terms of his employment arrangement as
of the date hereof and direct him to devote all of his business time
exclusively to matters concerning the Business (except for weekend launches of
Zegarelli products) at all times from and after the date hereof to and
including the Closing Date.
4.16 Use of Loan Proceeds and Operating Income.
(a) Seller shall use proceeds from the Loan solely to pay
accounts payable relating to the Business. None of such proceeds may be used
to pay general corporate obligations of Seller or obligations related to the
Zegarelli Business.
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(b) Seller shall use all cash flow from operations of the
Business from the date hereof to the Closing Date solely to fund the operations
and obligations related to the Business; provided that Seller may (i) use a
portion of such cash flow to pay the employee payroll of the Zegarelli Business
and (ii) purchase up to an aggregate of $60,000 of raw materials for the
Zegarelli Business, each of clauses (i) and (ii) in the ordinary course of
business. Seller represents that the payroll of the Zegarelli Business is
approximately $106,000 per week as of the date hereof when aggregated with the
employee payroll of the Business.
4.17 Incurrence of Indebtedness; Granting of Liens. From
date hereof to the Closing Date, without the prior written consent of
Purchaser, Seller shall not (A) incur any Indebtedness, whether secured or
unsecured, that will enable the holder thereof to have recourse against the
Assets to be acquired by Purchaser hereunder or the cash flow from operations
of the Business or (B) create any Liens on any of the Assets to be acquired by
Purchaser hereunder or the cash flow from operations of the Business (other
than Liens existing on the date hereof and Permitted Liens). Notwithstanding
clause (A), Seller may incur (i) up to the maximum amount available under the
existing senior Indebtedness as of the date hereof, (ii) obligations to trade
creditors, service providers, professionals and consultants in the ordinary
course of business or in connection with this transactions contemplated by this
Agreement or (iii) up to $600,000 in Indebtedness to fund the operation of the
Zegarelli Business, provided such Indebtedness does not mature prior to the
Closing Date and is convertible in whole into capital stock of Seller at the
option of Seller at all times prior to the Closing Date regardless of whether
Seller is in default under the terms of such Indebtedness. Seller represents
to Purchaser that the aggregate outstanding amount of existing senior
Indebtedness as of the date hereof is equal to the outstanding amount set forth
on Section 4.17 of the Disclosure Schedule and the maximum amount available
under the existing senior Indebtedness as of the date hereof, under the terms
of such senior Indebtedness, is equal to the maximum amount set forth on
Section 4.17 of the Disclosure Schedule.
ARTICLE V
COVENANTS OF PURCHASER
Purchaser covenants and agrees with Seller that, at all times
from and after the date hereof until the Closing, Purchaser will comply with
all covenants and provisions of this Article V, except to the extent Seller may
otherwise consent in writing.
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5.01 Regulatory and Other Approvals. Purchaser will, as
promptly as practicable, (a) take all commercially reasonable steps necessary
or desirable to obtain all consents, approvals or actions of, make all filings
with and give all notices to Governmental or Regulatory Authorities or any
other Person required of Purchaser to consummate the transactions contemplated
hereby and by the Operative Agreements, (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other Persons
as Seller or such Governmental or Regulatory Authorities or other Persons may
reasonably request in connection therewith and (c) cooperate with Seller in
connection with the performance of its obligations under Section 4.01.
Purchaser will provide prompt notification to Seller when any such consent,
approval, action, filing or notice referred to in clause (a) above is obtained,
taken, made or given, as applicable, and will advise Seller of any
communications (and, unless precluded by Law, provide copies of any such
communications that are in writing) with any Governmental or Regulatory
Authority or other Person regarding any of the transactions contemplated by
this Agreement or any of the Operative Agreements.
5.02 Notice and Cure. Purchaser will notify Seller in
writing of, and contemporaneously will provide Seller with true and complete
copies of any and all information or documents relating to, and will use all
commercially reasonable efforts to cure before the Closing, any event,
transaction or circumstance, as soon as practicable after it becomes known to
Purchaser, occurring after the date of this Agreement that causes or will cause
any covenant or agreement of Purchaser under this Agreement to be breached or
that renders or will render untrue any representation or warranty of Purchaser
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. No notice given pursuant to this
Section shall have any effect on the representations, warranties, covenants or
agreements contained in this Agreement for purposes of determining satisfaction
of any condition contained herein or shall in any way limit Seller's right to
seek indemnity under Article XI.
5.03 Fulfillment of Conditions. Purchaser will execute and
deliver at the Closing each Operative Agreement that Purchaser is hereby
required to execute and deliver as a condition to the Closing, will take all
commercially reasonable steps necessary or desirable and proceed diligently and
in good faith to satisfy each other condition to the obligations of Seller
contained in this Agreement and will not take or fail to take any action that
could reasonably be expected to result in the nonfulfillment of any such
condition.
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5.04 Financial Statements. Purchaser will deliver to Seller
when delivered to Purchaser's senior lender during the term of the Seller Note,
a balance sheet of Purchaser as of the end of each fiscal quarter and fiscal
year and a related statement of operations for the fiscal period then ended.
At the Closing, Purchaser shall deliver a pro forma balance sheet of Purchaser
as of the Closing Date which gives effect to all transactions contemplated
hereby, including without limitation any financing for the funding of the Cash
Consideration and Purchaser's obligations under the Operative Agreements. Such
pro forma balance sheet shall reflect a fair and accurate representation of
Purchaser's financial condition at the Closing Date and shall show a net worth
of Purchaser of at least $1,000,000.
5.05 Non-Solicitation. (a) Purchaser will, for a period of
three (3) years from the Closing Date, refrain from, either alone or in
conjunction with any other Person, or directly or indirectly through its
present or future Affiliates: Employing, engaging or seeking to employ or
engage any Person who within the prior six (6) months had been an employee of
Seller or any of its Affiliates engaged in the Zegarelli Business, unless such
employee (A) is an Employee as defined herein, (B) resigns voluntarily (without
any solicitation from Purchaser or any of its Affiliates) or (C) is terminated
by Seller or any of its Affiliates after the Closing Date;
(b) The parties hereto recognize that the Laws and public
policies of the various states of the United States may differ as to the
validity and enforceability of covenants similar to those set forth in this
Section. It is the intention of the parties that the provisions of this
Section be enforced to the fullest extent permissible under the Laws and
policies of each jurisdiction in which enforcement may be sought, and that the
unenforceability (or the modification to conform to such Laws or policies) of
any provisions of this Section shall not render unenforceable, or impair, the
remainder of the provisions of this Section. Accordingly, if any provision of
this Section shall be determined to be invalid or unenforceable, such
invalidity or unenforceability shall be deemed to apply only with respect to
the operation of such provision in the particular jurisdiction in which such
determination is made and not with respect to any other provision or
jurisdiction.
(c) The parties hereto acknowledge and agree that any
remedy at Law for any breach of the provisions of this Section would be
inadequate, and Purchaser hereby consents to the granting by any court of an
injunction or other equitable relief, without the necessity of actual monetary
loss being proved, in
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order that the breach or threatened breach of such provisions may be
effectively restrained.
5.06 Products Liability Insurance. For a period of two (2)
years after the Closing Date, Purchaser will, at its expense, use all
commercially reasonable efforts to name Seller as an additional insured with
respect to products liability claims for products manufactured or sold by
Purchaser after to the Closing Date on substantially the same terms and
conditions as provided to Purchaser.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser hereunder to purchase the Assets
and to assume and to pay, perform and discharge the Assumed Liabilities are
subject to the fulfillment, at or before the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by Purchaser
in its sole discretion):
6.01 Representations and Warranties. Each of the
representations and warranties made by Seller in this Agreement (other than
those made as of a specified date earlier than the Closing Date) shall be true
and correct in all material respects on and as of the Closing Date as though
such representation or warranty was made on and as of the Closing Date, and any
representation or warranty made as of a specified date earlier than the Closing
Date shall have been true and correct in all material respects on and as of
such earlier date.
6.02 Performance. Seller shall have performed and complied
with, in all material respects, each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by Seller at or
before the Closing.
6.03 Officers' Certificates. Seller shall have delivered to
Purchaser a certificate, dated the Closing Date and executed in the name and on
behalf of Seller by the Chairman of the Board, the President or any Executive
or Senior Vice President of Seller, substantially in the form and to the effect
of Exhibit E hereto, and a certificate, dated the Closing Date and executed by
the Secretary or any Assistant Secretary of Seller, substantially in the form
and to the effect of Exhibit F hereto.
6.04 Orders and Laws. There shall not be in effect on the
Closing Date any Order or Law restraining, enjoining or
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otherwise prohibiting or making illegal the consummation of any of the
transactions contemplated by this Agreement or any of the Operative Agreements
or which could reasonably be expected to otherwise result in a material
diminution of the benefits of the transactions contemplated by this Agreement
or any of the Operative Agreements to Purchaser, and there shall not be pending
or threatened on the Closing Date any Action or Proceeding in, before or by any
Governmental or Regulatory Authority which could reasonably be expected to
result in the issuance of any such Order or the enactment, promulgation or
deemed applicability to Purchaser or the transactions contemplated by this
Agreement or any of the Operative Agreements of any such Law.
6.05 Regulatory Consents and Approvals. All consents,
approvals and actions of, filings with and notices to any Governmental or
Regulatory Authority necessary to permit Purchaser and Seller to perform their
obligations under this Agreement and the Operative Agreements and to consummate
the transactions contemplated hereby and thereby (a) shall have been duly
obtained, made or given, (b) shall be in form and substance reasonably
satisfactory to Purchaser, (c) shall not be subject to the satisfaction of any
condition that has not been satisfied or waived and (d) shall be in full force
and effect, and all terminations or expirations of waiting periods imposed by
any Governmental or Regulatory Authority necessary for the consummation of the
transactions contemplated by this Agreement and the Operative Agreements shall
have occurred.
6.06 Third Party Consents. The consents (or in lieu thereof
waivers) (i) listed in Section 6.06 of the Disclosure Schedule and (ii) all
other consents (or in lieu thereof waivers) to the performance by Purchaser and
Seller of their obligations under this Agreement and the Operative Agreements
or to the consummation of the transactions contemplated hereby and thereby as
are required under any Contract to which Purchaser or Seller is a party or by
which any of their respective Assets and Properties are bound (a) shall have
been obtained, (b) shall be in form and substance reasonably satisfactory to
Purchaser, (c) shall not be subject to the satisfaction of any condition that
has not been satisfied or waived and (d) shall be in full force and effect,
except (in the case of clause (ii) above) where the failure to obtain any such
consent (or in lieu thereof waiver) could not reasonably be expected,
individually or in the aggregate with other such failures, to materially
adversely affect Purchaser, the Assets, the Assumed Liabilities or the Business
or otherwise result in a material diminution of the benefits of the
transactions contemplated by this Agreement and the Operative Agreements to
Purchaser.
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6.07 Opinion of Counsel. Purchaser shall have received the
opinion of Freshman, Marantz, Orlanski, Cooper & Klein and William B. Barnett,
Esq., counsel to Seller, dated the Closing Date, to the effect as substantially
set forth on Exhibit G hereto, and to such further effect as Purchaser may
reasonably request.
6.08 Real Property Leases. For each of the Real Property
Leases described in Section 1.01(a)(i) of the Disclosure Schedule, Seller shall
have delivered to Purchaser an estoppel certificate and consent to assignment
from the lessor thereunder in form and substance reasonably satisfactory to
Purchaser.
6.09 Escrow Agreement. Seller and the Escrow Agent shall
have entered into the Escrow Agreement.
6.10 Due Diligence; Environmental Survey. Purchaser shall
have completed a due diligence review of Seller and the Business and be
satisfied in all respects with the results obtained. In addition, Purchaser
shall have received an environmental survey and assessment in form and
substance reasonably satisfactory to Purchaser prepared by a firm of licensed
engineers (familiar with the identification of Hazardous Materials) reasonably
satisfactory to Purchaser, such environmental survey and assessment to be based
upon physical on-site inspections by such firm of each of the existing sites
and facilities owned, operated and leased by Seller used in connection with the
Business, as well as a historical review of the uses of such sites and
facilities and of the Business (including any former subsidiaries or divisions
of Seller which have been disposed of prior to the date of such survey and
assessment and with respect to which Seller may have retained liability for
environmental matters).
6.11 Deliveries. Seller shall have duly executed and
delivered to Purchaser (i) the General Assignment and the other Assignment
Instruments and (ii) an amendment to Seller's articles of incorporation
indicating a change of name consistent with the terms of this Agreement.
6.12 [Reserved].
6.13 Proceedings. All proceedings to be taken on the part of
Seller in connection with the transactions contemplated by this Agreement and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Purchaser, and Purchaser shall have received copies of all such
documents and other evidences as Purchaser may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
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ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller hereunder to sell the Assets are
subject to the fulfillment, at or before the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by Seller in
its sole discretion):
7.01 Representations and Warranties. Each of the
representations and warranties made by Purchaser in this Agreement shall be
true and correct in all material respects on and as of the Closing Date as
though such representation or warranty was made on and as of the Closing Date.
7.02 Performance. Purchaser shall have performed and
complied with, in all material respects, each agreement, covenant and
obligation required by this Agreement to be so performed or complied with by
Purchaser at or before the Closing.
7.03 Officers' Certificates. Purchaser shall have delivered
to Seller a certificate, dated the Closing Date and executed in the name and on
behalf of Purchaser by the Chairman of the Board, the President or any
Executive or Senior Vice President of Purchaser, substantially in the form and
to the effect of Exhibit H hereto, and a certificate, dated the Closing Date
and executed by the Secretary or any Assistant Secretary of Purchaser,
substantially in the form and to the effect of Exhibit I hereto.
7.04 Orders and Laws. There shall not be in effect on the
Closing Date any Order or Law restraining, enjoining or otherwise prohibiting
or making illegal the consummation of any of the transactions contemplated by
this Agreement or any of the Operative Agreements or which could reasonably be
expected to otherwise result in a material diminution of the benefits of the
transactions contemplated by this Agreement or any of the Operative Agreements
to Seller, and there shall not be pending or threatened on the Closing Date any
Action or Proceeding in, before or by any Governmental or Regulatory Authority
which could reasonably be expected to result in the issuance of any such Order
or the enactment, promulgation or deemed applicability to Seller or the
transactions contemplated by this Agreement or any of the Operative Agreements
of any such Law.
7.05 Regulatory Consents and Approvals. All consents,
approvals and actions of, filings with and notices to any Governmental or
Regulatory Authority necessary to permit Seller and Purchaser to perform their
obligations under this Agreement
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and the Operative Agreements and to consummate the transactions contemplated
hereby and thereby (a) shall have been duly obtained, made or given, (b) shall
not be subject to the satisfaction of any condition that has not been satisfied
or waived and (c) shall be in full force and effect, and all terminations or
expirations of waiting periods imposed by any Governmental or Regulatory
Authority necessary for the consummation of the transactions contemplated by
this Agreement and the Operative Agreements shall have occurred.
7.06 Shareholder Approval. Seller shall have obtained the
Seller Shareholders' Approval.
7.07 Fairness Opinion. Seller shall have obtained the
written opinion of L.H. Friend, Weinress, Frankson & Presson, Inc. that the
terms of sale of the Business are fair to Seller and its shareholders from a
financial point of view.
7.08 Deliveries. Purchaser shall have duly executed and
delivered to Seller (i) the Seller Note, (ii) the Assumption Agreement and the
other Assumption Instruments and (iii) the Escrow Agreement.
7.09 Opinion of Counsel. Seller shall have received the
opinion of counsel to Seller, dated the Closing Date, substantially in the form
and to the effect of Exhibit J hereto.
7.10 Proceedings. All proceedings to be taken on the part of
Purchaser in connection with the transactions contemplated by this Agreement
and all documents incident thereto shall be reasonably satisfactory in form and
substance to Seller, and Seller shall have received copies of all such
documents and other evidences as Seller may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
ARTICLE VIII
TAX MATTERS AND POST-CLOSING TAXES
8.01 Transfer Taxes. Purchaser and Seller shall share
equally all sales, use, transfer, real property transfer, recording, gains,
stock transfer and other similar taxes and fees or liability for such taxes or
fees ("Transfer Taxes") arising out of or in connection with the transactions
effected pursuant to this Agreement or the Loan. Each party shall promptly
provide to the other copies of all Tax Returns and other documents required to
be filed with respect to the Transfer Taxes.
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8.02 Cooperation. Seller, on the one hand and Purchaser, on
the other hand, shall provide the other party hereto with such assistance as
may reasonably be requested by such party, at such party's cost and expense, in
connection with the preparation and filing of any financial statement, Tax
Return, audit or other examination by any taxing authority, and any judicial or
administrative proceedings relating to liability for Taxes attributable to the
Assets or the operation of the Business.
8.03 Tax Matters. Seller represents and warrants that the
Assets when transferred to Purchaser will be free and clear of any and all
Liens of any nature for Taxes, except Liens for Taxes not yet due and Transfer
Taxes, and Seller shall indemnify Purchaser against any such Liens for Taxes in
accordance with the provisions of Article XI.
8.04 Payments. All indemnity payments due under this
Agreement shall be made without offset or withholding of any nature for Taxes.
ARTICLE IX
EMPLOYEE MATTERS
9.01 Employees. Effective as of the Closing Date, Purchaser
shall offer employment on an "at will" basis to substantially all Employees of
the Business who are actively employed on the Closing Date and those Employees
who are on a short-term disability leave and who are expected to return to
active employment within 120 days of the Closing Date. Seller shall use its
best efforts to encourage Employees to continue their employment until the
Closing Date, subject to the provisions of Section 4.06. All Employees who
accept offers of employment with Purchaser effective as of the Closing Date
shall be referred to herein as the "Continuing Employees". Purchaser's offer
of employment shall be on pay levels and other terms and conditions (including
health and welfare benefits, but not including participation in any
equity-based employee benefits), substantially comparable to the terms and
conditions of Seller's employment of the Employees immediately prior to the
Closing Date. The parties hereto expressly acknowledge that Purchaser shall
not be liable for any claims asserted by or in respect of any employee of the
Business who is not a Continuing Employee.
9.02 Termination of Benefits by Seller. As of 11:59 p.m.
immediately prior to the Closing Date, Seller shall cease all benefit accruals
in the Seller's Plans attributed to Employees of the Business (to take effect
thereafter after the earliest practicable date in accordance with the
provisions of
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the respective Seller's Plans) and shall fully vest and fully fund to the
Closing Date the accrued benefits of Employees of the Business under the
Seller's 401(k) Plan, including but not limited to employer matching
contributions and account balances under Seller's 401(k) Plan. The parties
hereto expressly acknowledge that Purchaser shall not be liable for any claims
arising out of or accruing under the Seller's Plans.
9.03 Benefits to Continuing Employees. As soon as practicable
after the Closing Date, Purchaser shall offer to Continuing Employees
participation in a 401(k) or pension plan(s) that are comparable or superior to
Seller's 401(k) plan for Employees and will use commercially reasonable efforts
to provide a mechanism to allow Continuing Employees to transfer or "roll-over"
their account balances (including employer matching contributions accrued to
the Closing Date as described in Section 9.02) under Seller's 401(k) Plan into
Purchaser's 401(k) Plan or pension plan(s). To the extent applicable, evidence
of insurability shall be waived for all Continuing Employees (and their
eligible dependents) and Continuing Employees (and their eligible dependents)
shall be given credit under employee benefit plans, programs, policies and
arrangements, including vacation pay plans, that are established or maintained
by Purchaser for the benefit of the Continuing Employees (the "Purchaser's
Plans") for their service with Seller (i) for purposes of eligibility to
participate and vesting to the extent such service was taken into account under
a corresponding Seller's Plan and (ii) for purposes of satisfying any waiting
periods or the application of any pre-existing condition limitations under
Purchaser's Plans and shall be given credit for amounts paid under a
corresponding Seller's Plan during the same period for purposes of applying
deductibles, co-payments and out-of-pocket maximums as though such amounts had
been paid in accordance with the terms and conditions of the plans, programs,
policies and arrangements maintained by Purchaser.
9.04 Obligations under Purchaser's Plans. The parties hereto
expressly acknowledge that Seller shall not be liable for any claims arising
out of or accruing under the Purchaser's Plans or otherwise to or in respect of
any Continuing Employee terminated by Purchaser for any reason on or after the
Closing Date, including without limitation, any severance benefits payable in
accordance with any Purchaser Plan and any liability triggered under any
unemployment compensation or other government-mandated benefits relating to the
termination of any Continuing Employee on or after the Closing Date, including,
without limitation, liability for WARN.
9.05 No Third Party Beneficiaries. All provisions contained
in this Article IX are included for the sole benefit of
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the respective parties hereto and do not and shall not create any right in any
other person, including, but not limited to, any Employee, Continuing Employee,
any participant in any benefit or compensation plan or any beneficiary thereof.
ARTICLE X
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
10.01 Survival of Representations, Warranties, Covenants and
Agreements. Notwithstanding any right of Purchaser (whether or not exercised)
to investigate the Business or any right of any party (whether or not
exercised) to investigate the accuracy of the representations and warranties of
the other party contained in this Agreement, Seller and Purchaser have the
right to rely fully upon the representations, warranties, covenants and
agreements of the other contained in this Agreement. The representations,
warranties, covenants and agreements of Seller and Purchaser contained in this
Agreement will survive the Closing (a) coterminous with applicable statutes of
limitations (or if none for as long as a party may be liable under applicable
Law) with respect to (i) the representations and warranties contained in
Sections 1.02, 2.02, and 3.02, and (ii) the covenants and agreements contained
in Sections 1.01, 1.02, 1.03, 1.07 and 14.06, (b) until sixty (60) days after
the expiration of all applicable statutes of limitation (including all periods
of extension, whether automatic or permissive) with respect to matters covered
by Article VIII and (insofar as they relate to ERISA or the Code) Section 2.12
and Article IX, (c) until thirty (30) months in the case of all other
representations and warranties and any covenant or agreement to be performed in
whole or in part on or prior to the Closing or (d) with respect to each other
covenant or agreement contained in this Agreement, until sixty (60) days
following the last date on which such covenant or agreement is to be performed
or, if no such date is specified, coterminous with applicable statutes of
limitations (or if none for as long as a party may be liable under applicable
Law); provided that any representation, warranty, covenant or agreement that
would otherwise terminate in accordance with clause (b), (c) or (d) above will
continue to survive if a Claim Notice or Indemnity Notice (as applicable) shall
have been timely given under Article XI on or prior to such termination date,
until the related claim for indemnification has been satisfied or otherwise
resolved as provided in Article XI.
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ARTICLE XI
INDEMNIFICATION
11.01 Indemnification.
(a) Subject to paragraph (c) of this Section and the other
Sections of this Article XI, Seller shall indemnify the Purchaser Indemnified
Parties in respect of, and hold each of them harmless from and against, any and
all Losses suffered, incurred or sustained by any of them or to which any of
them becomes subject, resulting from, arising out of or relating to (i) any
breach of representation or warranty or nonfulfillment of or failure to perform
any covenant or agreement on the part of Seller contained in this Agreement or
(ii) a Retained Liability or (iii) liabilities (other than Assumed Liabilities)
created or incurred by Seller from and after the Closing Date.
(b) Subject to the other Sections of this Article XI,
Purchaser shall indemnify the Seller Indemnified Parties in respect of, and
hold each of them harmless from and against, any and all Losses suffered,
incurred or sustained by any of them or to which any of them becomes subject,
resulting from, arising out of or relating to (i) any breach of representation
or warranty or nonfulfillment of or failure to perform any covenant or
agreement on the part of Purchaser contained in this Agreement or (ii) an
Assumed Liability or (iii) liabilities (other than Retained Liabilities)
created or incurred by Purchaser from and after the Closing Date.
(c) No amounts of indemnity shall be payable in the case of a
claim by a Purchaser Indemnified Party under Section 11.01(a)(i) (A) unless and
until the Purchaser Indemnified Parties have suffered, incurred, sustained or
become subject to Losses referred to in such Section in excess of $100,000 in
the aggregate, in which event the Purchaser Indemnified Parties shall be
entitled to claim indemnity for the full amount of such Losses and (B) unless
upon payment thereof Purchaser Indemnified Parties have received payments from
Seller in respect of claims made under such Section of $3,500,000 or less in
the aggregate; provided that this paragraph (c) shall not apply to a breach of
a representation or warranty contained in Section 2.02, 2.04, or 8.03 or to the
breach of a covenant contained in Section 4.10, 14.04, 14.06 or Article VIII.
11.02 Method of Asserting Claims. All claims for
indemnification by any Indemnified Party under Section 11.01 will be asserted
and resolved as follows:
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(a) In the event any claim or demand in respect of which an
Indemnified Party might seek indemnity under Section 11.01 is asserted against
or sought to be collected from such Indemnified Party by a Person other than
Seller or any Affiliate of Seller or of Purchaser (a "Third Party Claim"), the
Indemnified Party shall deliver a Claim Notice with reasonable promptness to
the Indemnifying Party. If the Indemnified Party fails to provide the Claim
Notice with reasonable promptness after the Indemnified Party receives notice
of such Third Party Claim, the Indemnifying Party will not be obligated to
indemnify the Indemnified Party with respect to such Third Party Claim to the
extent that the Indemnifying Party's ability to defend has been irreparably
prejudiced by such failure of the Indemnified Party. The Indemnifying Party
will notify the Indemnified Party as soon as practicable within the Dispute
Period whether the Indemnifying Party disputes its liability to the Indemnified
Party under Section 11.01 and whether the Indemnifying Party desires, at its
sole cost and expense, to defend the Indemnified Party against such Third Party
Claim.
(i) If the Indemnifying Party notifies the Indemnified Party
within the Dispute Period that the Indemnifying Party desires to
defend the Indemnified Party with respect to the Third Party Claim
pursuant to this Section 11.02(a), then the Indemnifying Party will
have the right to defend, with counsel reasonably satisfactory to the
Indemnified Party, at the sole cost and expense of the Indemnifying
Party, such Third Party Claim by all appropriate proceedings, which
proceedings will be vigorously and diligently prosecuted by the
Indemnifying Party to a final conclusion or will be settled at the
discretion of the Indemnifying Party (but only with the consent of the
Indemnified Party, which consent will not be unreasonably withheld, in
the case of any settlement that provides for any relief other than the
payment of monetary damages as to which the Indemnified Party will be
indemnified in full). The Indemnifying Party will be deemed to have
waived its right to dispute its liability to the Indemnified Party
under Section 11.01 with respect to any Third Party Claim as to which
it elects to control the defense. The Indemnifying Party will have
full control of such defense and proceedings, including any compromise
or settlement thereof; provided, however, that the Indemnified Party
may, at the sole cost and expense of the Indemnified Party, at any
time prior to the Indemnifying Party's delivery of the notice referred
to in the first sentence of this Section 11.02(a)(i), file any motion,
answer or other pleadings or take any other action that the
Indemnified Party reasonably believes to be necessary or appropriate
to protect its interests; and provided further, that if requested by
the Indemnifying Party, the Indemnified
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Party will provide reasonable cooperation to the Indemnifying Party in
contesting any Third Party Claim that the Indemnifying Party elects to
contest. The Indemnified Party may retain separate counsel to
represent it in, but not control, any defense or settlement of any
Third Party Claim controlled by the Indemnifying Party pursuant to
this Section 11.02(a)(i), and the Indemnified Party will bear its own
costs and expenses with respect to such separate counsel except as
provided in the preceding sentence. Notwithstanding the foregoing,
the Indemnified Party may retain or take over the control of the
defense or settlement of any Third Party Claim the defense of which
the Indemnifying Party has elected to control if the Indemnified Party
irrevocably waives its right to indemnity under Section 11.01 with
respect to such Third Party Claim.
(ii) If the Indemnifying Party fails to notify the Indemnified
Party within the Dispute Period that the Indemnifying Party desires to
defend the Third Party Claim pursuant to Section 11.02(a), or if the
Indemnifying Party gives such notice but fails to prosecute vigorously
and diligently or settle the Third Party Claim, or if the Third Party
Claim seeks an order, injunction or other equitable relief against the
Indemnified Party which could materially interfere with the business,
operations, assets, condition or prospects of the Indemnified Party,
then the Indemnified Party will have the right to defend, at the sole
cost and expense of the Indemnifying Party, the Third Party Claim by
all appropriate proceedings, which proceedings will be prosecuted by
the Indemnified Party in good faith or will be settled at the
discretion of the Indemnified Party (with the consent of the
Indemnifying Party, which consent will not be unreasonably withheld).
The Indemnified Party will have full control of such defense and
proceedings, including any compromise or settlement thereof; provided,
however, that if requested by the Indemnified Party, the Indemnifying
Party will provide reasonable cooperation to the Indemnified Party and
its counsel in contesting any Third Party Claim which the Indemnified
Party is contesting. Notwithstanding the foregoing provisions of this
Section 11.02(a)(ii), if the Indemnifying Party has notified the
Indemnified Party within the Dispute Period that the Indemnifying
Party disputes its liability hereunder to the Indemnified Party with
respect to such Third Party Claim and if such dispute is resolved in
favor of the Indemnifying Party in the manner provided in clause (iii)
below, the Indemnifying Party will not be required to bear the costs
and expenses of the Indemnified Party's defense pursuant to this
Section 11.02(a)(ii) and the Indemnified Party will reimburse the
Indemnifying Party in full for all reasonable costs and expenses
incurred by
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the Indemnifying Party in connection with such litigation. The
Indemnifying Party may participate in, but not control, any defense or
settlement controlled by the Indemnified Party pursuant to this
Section 11.02(a)(ii), and the Indemnifying Party will bear its own
costs and expenses with respect to such participation.
(iii) If the Indemnifying Party notifies the Indemnified
Party that it does not dispute its liability to the Indemnified Party
with respect to the Third Party Claim under Section 11.01 or fails to
notify the Indemnified Party within the Dispute Period whether the
Indemnifying Party disputes its liability to the Indemnified Party
with respect to such Third Party Claim, the Loss arising from such
Third Party Claim will be conclusively deemed a liability of the
Indemnifying Party under Section 11.01 and the Indemnifying Party
shall pay the amount of such Loss to the Indemnified Party on demand
following the final determination thereof. If the Indemnifying Party
has timely disputed its liability with respect to such claim, the
Indemnifying Party and the Indemnified Party will proceed in good
faith to negotiate a resolution of such dispute, and if not resolved
through negotiations within the Resolution Period, such dispute shall
be resolved by arbitration in accordance with Section 11.02(c).
(b) In the event any Indemnified Party should have a claim
under Section 11.01 against any Indemnifying Party that does not involve a
Third Party Claim, the Indemnified Party shall deliver an Indemnity Notice with
reasonable promptness to the Indemnifying Party. The failure by any
Indemnified Party to give the Indemnity Notice shall not impair such party's
rights hereunder except to the extent that an Indemnifying Party demonstrates
that it has been irreparably prejudiced thereby. If the Indemnifying Party
notifies the Indemnified Party that it does not dispute the claim described in
such Indemnity Notice or fails to notify the Indemnified Party within the
Dispute Period whether the Indemnifying Party disputes the claim described in
such Indemnity Notice, the Loss arising from the claim specified in such
Indemnity Notice will be conclusively deemed a liability of the Indemnifying
Party under Section 11.01 and the Indemnifying Party shall pay the amount of
such Loss to the Indemnified Party on demand following the final determination
thereof. If the Indemnifying Party has timely disputed its liability with
respect to such claim, the Indemnifying Party and the Indemnified Party will
proceed in good faith to negotiate a resolution of such dispute, and if not
resolved through negotiations within the Resolution Period, such dispute shall
be resolved by arbitration in accordance with Section 11.02(c).
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(c) Any dispute submitted to arbitration pursuant to this
Section 11.02 shall be finally and conclusively determined by the decision of a
board of arbitration consisting of three (3) members (hereinafter sometimes
called the "Board of Arbitration") selected as hereinafter provided. Each of
the Indemnified Party and the Indemnifying Party shall select one (1) member
and the third member shall be selected by mutual agreement of the other
members, or if the other members fail to reach agreement on a third member
within twenty (20) days after their selection, such third member shall
thereafter be selected by the American Arbitration Association upon application
made to it for a third member possessing expertise or experience appropriate to
the dispute jointly by the Indemnified Party and the Indemnifying Party. The
Board of Arbitration shall meet in Los Angeles, California or such other place
as a majority of the members of the Board of Arbitration determines more
appropriate, and shall reach and render a decision in writing (concurred in by
a majority of the members of the Board of Arbitration) with respect to the
amount, if any, which the Indemnifying Party is required to pay to the
Indemnified Party in respect of a claim filed by the Indemnified Party. In
connection with rendering its decisions, the Board of Arbitration shall adopt
and follow such rules and procedures as a majority of the members of the Board
of Arbitration deems necessary or appropriate. To the extent practical,
decisions of the Board of Arbitration shall be rendered no more than thirty
(30) days following commencement of proceedings with respect thereto. The
Board of Arbitration shall cause its written decision to be delivered to the
Indemnified Party and the Indemnifying Party. Any decision made by the Board
of Arbitration (either prior to or after the expiration of such thirty (30) day
period) shall be final, binding and conclusive on the Indemnified Party and the
Indemnifying Party and entitled to be enforced to the fullest extent permitted
by law and entered in any court of competent jurisdiction. Each party to any
arbitration shall bear its own expense in relation thereto, including but not
limited to such party's attorneys' fees, if any, and the expenses and fees of
the Board of Arbitration shall be divided between the Indemnifying Party and
the Indemnified Party in the same proportion as the portion of the related
claim determined by the Board of Arbitration to be payable to the Indemnified
Party bears to the portion of such claim determined not to be so payable.
11.03 Liability is Net of Insurance Proceeds.
Notwithstanding any provision herein to the contrary, the liability of either
party computed otherwise in accordance with this Article XI shall be net of any
insurance proceeds recovered or recoverable by the indemnified party.
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11.04 Offset Against Seller Note. In the event and to the
extent that Purchaser is entitled to indemnification from Seller pursuant to
this Article XI, satisfaction thereof shall come solely from Purchaser's offset
of said indemnification obligations against the payments of interest and
principal payable under the Seller Note (the "Note Payments") on and subject to
the following terms and conditions: (i) any amounts offset shall be credited
to Purchaser to discharge the indemnification obligation in respect of which
the offset is made; (ii) any offset shall be taken against the Note Payments
equally, by subtracting the total amount to be offset from the interest and
principal amount then due on the Seller Note and dividing the remainder by the
number of remaining principal Note Payments equally, and the quotient shall
thereupon become the amount of each of the principal Note Payments to be made
thereafter; (iii) any such offset shall occur only upon satisfaction of the
procedures under Sections 11.01, 11.02 and 11.03 for establishing Purchaser's
right to indemnification, and if a Note Payment is due during the pendency of
such procedures, Purchaser shall remit the amount of such Note Payment proposed
to be offset to the Escrow Agent (or a substitute escrow agent reasonably
agreeable to the parties) who shall hold such amount in an interest bearing
account and release the same only in accordance with the mutual written
instructions of the parties hereto or of the Board of Arbitration. All fees of
the Escrow Agent (or its substitute) in connection with such escrow shall be
paid one-half by each party hereto; provided that Purchaser may reasonably
estimate the fees to be owed by Purchaser and Seller to the Escrow Agent, pay
the same to the Escrow Agent, deem one-half of such fee payment to be an
indemnification obligation of Seller and immediately offset such one-half of
fee payment against the Note Payments and deem the remaining one-half to be for
Purchaser's own account.
ARTICLE XII
TERMINATION
12.01 Termination. This Agreement may be terminated, and the
transactions contemplated hereby may be abandoned:
(a) at any time before the Closing, by mutual written
agreement of Seller and Purchaser;
(b) at any time before the Closing, by Seller or Purchaser,
in the event (i) of a material breach hereof by the non-terminating party if
such non-terminating party fails to cure such breach within five (5) Business
Days following notification thereof by the terminating party or (ii) upon
notification of the
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non-terminating party by the terminating party that the satisfaction of any
condition to the terminating party's obligations under this Agreement becomes
impossible or impracticable with the use of commercially reasonable efforts if
the failure of such condition to be satisfied is not caused by a breach hereof
by the terminating party; or
(c) at any time after December 31, 1997 by Seller or
Purchaser upon notification of the non-terminating party by the terminating
party if the Closing shall not have occurred on or before such date and such
failure to consummate is not caused by a breach of this Agreement by the
terminating party.
(d) at any time before the Closing, by Seller upon
payment of the lesser of $2,000,000 and the maximum amount provided under
applicable law pursuant to Section 4.03 by wire transfer in immediately
available funds to an account designated by Purchaser and delivery of a written
release and waiver, in form reasonably satisfactory to Purchaser, of all
liability of Purchaser to Seller or any Affiliate of Seller arising out of or
in connection with this Agreement or the transactions contemplated hereby.
12.02 Effect of Termination. If this Agreement is validly
terminated pursuant to Section 12.01, this Agreement will forthwith become null
and void, and there will be no liability or obligation on the part of Seller or
Purchaser (or any of their respective officers, directors, employees, agents or
other representatives or Affiliates), except as provided in the next succeeding
sentence and except that the provisions with respect to expenses in Section
14.04 and confidentiality in Section 14.06 will continue to apply following any
such termination. Notwithstanding any other provision in this Agreement to the
contrary, upon termination of this Agreement pursuant to Section 12.01(b), (c)
or (d), Seller will remain liable to Purchaser for any breach of this Agreement
by Seller existing at the time of such termination, and upon termination of
this Agreement pursuant to Section 12.01(b) or (c), Purchaser will remain
liable to Seller for any breach of this Agreement by Purchaser existing at the
time of such termination, and Seller or Purchaser may seek such remedies,
including damages and fees of attorneys, against the other with respect to any
such breach as are provided in this Agreement or as are otherwise available at
Law or in equity. No termination of this Agreement shall act as a discharge of
Seller's obligations under the Purchaser Note or the Security Agreement, unless
Purchaser specifically agrees to such treatment in writing in connection with
such termination.
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ARTICLE XIII
DEFINITIONS
13.01 Definitions. (a) Defined Terms. As used in this
Agreement, the following defined terms have the meanings indicated below:
"Accounts Payable" has the meaning ascribed to it in Section
1.02(a)(ii).
"Accounts Receivable" has the meaning ascribed to it in
Section 1.01(a)(iii).
"Accrued Expenses" has the meaning ascribed to it in Section
1.01(b)(v).
"Actions or Proceedings" means any action, suit, proceeding,
arbitration or Governmental or Regulatory Authority investigation or audit.
"Adjustment Worksheet" has the meaning ascribed to it in
Section 1.04(b).
"Affiliate" means any Person that directly, or indirectly
through one of more intermediaries, controls or is controlled by or is under
common control with the Person specified. For purposes of this definition,
control of a Person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such Person whether by Contract or
otherwise and, in any event and without limitation of the previous sentence,
any Person owning ten percent (10%) or more of the voting securities of another
Person shall be deemed to control that Person.
"Agreement" means this Asset Purchase Agreement and the
Exhibits and the Disclosure Schedule hereto and the certificates delivered in
accordance with Sections 6.03 and 7.03, as the same shall be amended from time
to time.
"Annual Financial Statement Date" means the last day of the
most recent fiscal year of the Business for which Financial Statements are
delivered to Purchaser pursuant to Section 2.06.
"Annual Financial Statements" means the Financial Statements
for the most recent fiscal year of the Business delivered to Purchaser pursuant
to Section 2.06.
"Assets" has the meaning ascribed to it in Section 1.01(a).
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"Assets and Properties" of any Person means all assets and
properties of every kind, nature, character and description (whether real,
personal or mixed, whether tangible or intangible, whether absolute, accrued,
contingent, fixed or otherwise and wherever situated), including the goodwill
related thereto, operated, owned or leased by such Person, including without
limitation cash, cash equivalents, Investment Assets, accounts and notes
receivable, chattel paper, documents, instruments, general intangibles, real
estate, equipment, inventory, goods and Intellectual Property.
"Assignment Instruments" has the meaning ascribed to it in
Section 1.05.
"Assumed Liabilities" has the meaning ascribed to it in
Section 1.02(a).
"Assumption Agreement" has the meaning ascribed to it in
Section 1.05.
"Assumption Instruments" has the meaning ascribed to it in
Section 1.05.
"Benefit Plan" means any Plan established by Seller, or any
predecessor or Affiliate of Seller, existing at the Closing Date or prior
thereto, to which Seller contributes or has contributed on behalf of any
Employee, former Employee or director, or under which any Employee, former
Employee or director of Seller or any beneficiary thereof is covered, is
eligible for coverage or has benefit rights.
"Big Six Firm" has the meaning ascribed to it in Section
1.04(b).
"Board of Arbitration" has the meaning ascribed to it in
Section 11.02(c).
"Books and Records" of any Person means all files, documents,
instruments, papers, books and records relating to the business, operations,
condition of (financial or other), results of operations and Assets and
Properties of such Person, including without limitation financial statements,
Tax Returns and related work papers and letters from accountants, budgets,
pricing guidelines, ledgers, journals, deeds, title policies, minute books,
stock certificates and books, stock transfer ledgers, Contracts, Licenses,
customer lists, computer files and programs, retrieval programs, operating data
and plans and environmental studies and plans.
"Business" has the meaning ascribed to it in the forepart of
this Agreement.
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"Business Books and Records" has the meaning ascribed to it in
Section 1.01(a)(xii).
"Business Contracts" has the meaning ascribed to it in Section
1.01(a)(vi).
"Business Day" means a day other than Saturday, Sunday or any
day on which banks located in the States of California or New Jersey are
authorized or obligated to close.
"Business Disposition" has the meaning ascribed to it in
Section 4.03.
"Business Licenses" has the meaning ascribed to it in Section
1.01(a)(ix).
"Cash Consideration" has the meaning ascribed to it in Section
1.04(a).
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and the rules and
regulations promulgated thereunder.
"CERCLIS" means the Comprehensive Environmental Response and
Liability Information System, as provided for by 40 C.F.R. Section 300.5.
"Claim Notice" means written notification pursuant to Section
11.02(a) of a Third Party Claim as to which indemnity under Section 11.01 is
sought by an Indemnified Party, enclosing a copy of all papers served, if any,
and specifying the nature of and basis for such Third Party Claim and for the
Indemnified Party's claim against the Indemnifying Party under Section 11.01,
together with the amount or, if not then reasonably determinable, the estimated
amount, determined in good faith, of the Loss arising from such Third Party
Claim.
"Closing" means the closing of the transactions contemplated
by Section 1.05.
"Closing Adjustment Worksheet" has the meaning ascribed to it
in Section 1.04(b).
"Closing Date" means the date of the obtaining of the Seller
Shareholders' Approval, or such other date as Purchaser and Seller mutually
agree upon in writing.
"Code" means the Internal Revenue Code of 1986, as amended,
and the rules and regulations promulgated thereunder.
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"Condition of the Business" means the business, condition
(financial or otherwise), results of operations, Assets and Properties and
prospects of the Business.
"Contract" means any agreement, lease, license, evidence of
Indebtedness, mortgage, indenture, security agreement or other contract
(whether written or oral).
"Continuing Employees" has the meaning ascribed to it in
Section 9.01.
"Defined Benefit Plan" means each Benefit Plan which is
subject to Part 3 of Title I of ERISA, Section 412 of the Code or Title IV of
ERISA.
"Disclosure Schedule" means the record delivered to Purchaser
by Seller herewith and dated as of the date hereof, containing all lists,
descriptions, exceptions and other information and materials as are required to
be included therein by Seller pursuant to this Agreement.
"Dispute Period" means the period ending thirty (30) days
following receipt by an Indemnifying Party of either a Claim Notice or an
Indemnity Notice.
"Employee" means each employee, officer or consultant of
Seller engaged exclusively in the conduct of the Business.
"Environmental Claim" means, with respect to any Person, any
written or oral notice, claim, demand or other communication (collectively, a
"claim") by any other Person alleging or asserting such Person's liability for
investigatory costs, cleanup costs, Governmental or Regulatory Authority
response costs, damages to natural resources or other property, personal
injuries, fines or penalties arising out of, based on or resulting from (a) the
presence, or Release into the environment, of any Hazardous Material at any
location, whether or not owned by such Person, or (b) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law. The
term "Environmental Claim" shall include, without limitation, any claim by any
Governmental or Regulatory Authority for enforcement, cleanup, removal,
response, remedial or other actions or damages pursuant to any applicable
Environmental Law, and any claim by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive relief
resulting from the presence of Hazardous Materials or arising from alleged
injury or threat of injury to health, safety or the environment.
"Environmental Law" means any Law or Order relating to the
regulation or protection of human health, safety or the
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environment or to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or wastes into the environment (including, without limitation,
ambient air, soil, surface water, ground water, wetlands, land or subsurface
strata), or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means any Person who is in the same
controlled group of corporations or who is under common control with Seller
(within the meaning of Section 414 of the Code).
"Escrow Agent" and "Escrow Agreement" have the respective
meanings ascribed to them in Section 1.05.
"Estoppel Certificate" means the written certification, issued
not more than thirty (30) days prior to the Closing Date by a lessor, sublessor
or other party to a lease or occupancy agreement, stating (a) that such lease
or occupancy agreement is (i) in full force and effect and (ii) has not been
modified or amended except as described therein, (b) the date to which rental
has been paid, (c) that no default or event of default exists thereunder and
(d) that to the best of the knowledge of the issuer thereof, no event has
occurred which, with the giving of notice or lapse of time or both, would be a
default or event of default thereunder.
"Excluded Assets" has the meaning ascribed to it in Section
1.01(b).
"Excluded Books and Records" has the meaning ascribed to it in
Section 1.01(b)(vi).
"Financial Statements" means the financial statements
delivered to Purchaser pursuant to Section 2.06 or 4.05.
"GAAP" means generally accepted accounting principles,
consistently applied throughout the specified period and in the immediately
prior comparable period.
"General Assignment" has the meaning ascribed to it in Section
1.05.
"Governmental or Regulatory Authority" means any court,
tribunal, arbitrator, authority, agency, commission, official or
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other instrumentality of the United States, any foreign country or any domestic
or foreign state, county, city or other political subdivision.
"Hazardous Material" means (A) any petroleum or petroleum
products, flammable explosives, radioactive materials, asbestos in any form
that is or could become friable, urea formaldehyde foam insulation and
transformers or other equipment that contain dielectric fluid containing levels
of polychlorinated biphenyls (PCBs); (B) any chemicals or other materials or
substances which are now or hereafter become defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants" or words of similar import under any
Environmental Law; and (C) any other chemical or other material or substance,
exposure to which is now or hereafter prohibited, limited or regulated by any
Governmental or Regulatory Authority under any Environmental Law.
"Indebtedness" of any Person means all obligations of such
Person (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or
similar instruments, (iii) for the deferred purchase price of goods or services
(other than trade payables or accruals incurred in the ordinary course of
business), (iv) under capital leases and (v) in the nature of guarantees of the
obligations described in clauses (i) through (iv) above of any other Person.
"Indemnified Party" means any Person claiming indemnification
under any provision of Article XI.
"Indemnifying Party" means any Person against whom a claim for
indemnification is being asserted under any provision of Article XI.
"Indemnity Notice" means written notification pursuant to
Section 11.02(b) of a claim for indemnity under Article XI by an Indemnified
Party, specifying the nature of and basis for such claim, together with the
amount or, if not then reasonably determinable, the estimated amount,
determined in good faith, of the Loss arising from such claim.
"Intangible Personal Property" has the meaning ascribed to it
in Section 1.01(a)(viii).
"Intellectual Property" means all patents and patent rights,
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, processes, formulae, copyrights and copyright rights, trade
dress, business
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and product names, logos, slogans, trade secrets, industrial models, processes,
designs, methodologies, computer programs (including all source codes) and
related documentation, technical information, manufacturing, engineering and
technical drawings, know-how and all pending applications for and registrations
of patents, trademarks, service marks and copyrights.
"Inventory" has the meaning ascribed to it in Section
1.01(a)(ii).
"Investment Assets" means all debentures, notes and other
evidences of Indebtedness, stocks, securities (including rights to purchase and
securities convertible into or exchangeable for other securities), interests in
joint ventures and general and limited partnerships, mortgage loans and other
investment or portfolio assets owned of record or beneficially by Seller (other
than trade receivables generated in the ordinary course of business of the
Seller).
"IRS" means the United States Internal Revenue Service.
"Knowledge" of a Person or "Known" to a Person means the
knowledge of any officer, director or employee of such Person.
"Laws" means all laws, statutes, rules, regulations,
ordinances and other pronouncements having the effect of law of the United
States, any foreign country or any domestic or foreign state, county, city or
other political subdivision or of any Governmental or Regulatory Authority.
"Liabilities" means all Indebtedness, obligations and other
liabilities of a Person (whether absolute, accrued, contingent, fixed or
otherwise, or whether due or to become due).
"Licenses" means all licenses, permits, certificates of
authority, authorizations, approvals, registrations, franchises and similar
consents granted or issued by any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security
interest, lease, lien, adverse claim, levy, charge or other encumbrance of any
kind, or any conditional sale Contract, title retention Contract or other
Contract to give any of the foregoing.
"Loan" has the meaning ascribed to it in Section 1.03.
"Loss" means any and all damages, fines, fees, penalties,
deficiencies, Taxes, losses expenses (including without limitation interest,
court costs, fees of attorneys,
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accountants and other experts or other expenses of litigation or other
proceedings or of any claim, default or assessment).
"TNA" has the meaning ascribed to it in Section 1.04(b).
"NPL" means the National Priorities List under CERCLA.
"Operative Agreements" means, collectively, the General
Assignment and the other Assignment Instruments, the Assumption Agreement and
the other Assumption Instruments, Escrow Agreement, Supply Agreement and
Registration Rights Agreement.
"Order" means any writ, judgment, decree, injunction or
similar order of any Governmental or Regulatory Authority (in each such case
whether preliminary or final).
"Other Assets" has the meaning ascribed to it in Section
1.01(a)(xiii).
"PBGC" means the Pension Benefit Guaranty Corporation
established under ERISA.
"Pension Benefit Plan" means each Benefit Plan which is a
pension benefit plan within the meaning of Section 3(2) of ERISA.
"Permitted Lien" means (i) any Lien for Taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for
which adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of Law
with respect to a Liability that is not yet due or delinquent, (iii) any minor
imperfection of title or similar Lien which individually or in the aggregate
with other such Liens does not materially impair the value of the property
subject to such Lien or the use of such property in the conduct of the Business
and (iv) any Lien securing an obligation of Seller to Purchaser.
"Person" means any natural person, corporation, limited
liability company, general partnership, limited partnership, proprietorship,
other business organization, trust, union, association or Governmental or
Regulatory Authority.
"Personal Property Leases" has the meaning ascribed to it in
Section 1.01(a)(v).
"Plan" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock
option, stock ownership, stock appreciation rights, phantom stock, leave of
absence, layoff, vacation, day or
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dependent care, legal services, cafeteria, life, health, accident, disability,
workmen's compensation or other insurance, severance, separation or other
employee benefit plan, practice, policy or arrangement of any kind, whether
written or oral, including, but not limited to, any "employee benefit plan"
within the meaning of Section 3(3) of ERISA.
"Prepaid Expenses" has the meaning ascribed to it in Section
1.01(a)(vii).
"Proxy Statement" has the meaning ascribed to it in Section
4.11.
"Purchase Price" has the meaning ascribed to it in Section
1.04(a).
"Purchaser" has the meaning ascribed to it in the forepart of
this Agreement.
"Purchaser Indemnified Parties" means Purchaser and its
officers, directors, employees, agents and Affiliates.
"Purchaser Note" has the meaning ascribed to it in Section
1.03.
"Purchaser's Plans" has the meaning ascribed to it in Section
9.03.
"Qualified Plan" means each Benefit Plan which is intended to
qualify under Section 401 of the Code.
"Quarterly Financial Statement Date" means the last day of the
most recent fiscal quarter of the Business for which Financial Statements are
delivered to Purchaser pursuant to Section 2.06.
"Quarterly Financial Statements" means the Financial
Statements for the most recent fiscal quarter of the Business delivered to
Purchaser pursuant to Section 2.06.
"Real Property Leases" has the meaning ascribed to it in
Section 1.01(a)(i).
"Release" means any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environment, including, without
limitation, the movement of Hazardous Materials through ambient air, soil,
surface water, ground water, wetlands, land or subsurface strata.
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"Representatives" has the meaning ascribed to it in Section
4.02.
"Resolution Period" means the period ending thirty (30) days
following receipt by an Indemnified Party of a written notice from an
Indemnifying Party stating that it disputes all or any portion of a claim set
forth in a Claim Notice or an Indemnity Notice.
"Retained Accounts Receivable" has the meaning ascribed to it
in Section 1.02(b).
"Retained Inventory" has the meaning ascribed to it in Section
1.04(b).
"Retained Liabilities" has the meaning ascribed to it in
Section 1.02(b).
"Retained Prepaid Expenses" has the meaning ascribed to it in
Section 1.02(b).
"SEC" means the United States Securities and Exchange
Commission.
"Security Agreement" has the meaning ascribed to it in Section
1.03.
"Security Documents" has the meaning ascribed to it in Section
2.23.
"Seller" has the meaning ascribed to it in the forepart of
this Agreement.
"Seller Indemnified Parties" means Seller and its officers,
directors, employees, agents and Affiliates.
"Seller Note" has the meaning ascribed to it in Section
1.04(a).
"Seller Shareholders' Approval" has the meaning ascribed to it
in Section 4.12.
"Seller Shareholders' Meeting" has the meaning ascribed to it
in Section 4.12.
"Subject Defined Benefit Plan" means each Defined Benefit Plan
listed and described in Section 2.12(a) of the Disclosure Schedule.
"Tangible Personal Property" has the meaning ascribed to it in
Section 1.01(a)(iv).
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"Tax Return" means a report, return or other information
(including any amendments) required to be supplied to a governmental entity by
Seller with respect to Taxes including, where permitted or required, combined
or consolidated returns for any group of entities that includes Seller.
"Taxes" means all taxes, charges, fees, levies or other
assessments, including but not limited to all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, payroll,
employment, social security, unemployment, excise, license, production,
estimated, occupation, property, capital gain, registration, governmental
pension or insurance, withholding, royalty, severance, stamp or documentary,
value added, or other tax, charge, assessment, duty, levy, compulsory loan, or
other direct or indirect impost of any nature whatsoever (including any
interest, additions to tax, or civil or criminal penalties thereon) of the
United States or any jurisdiction therein, or any domestic state, county, city
or other political subdivision or any jurisdiction therein.
"Tenant Security Deposits" has the meaning ascribed to it in
Section 1.01(a)(xi).
"Third Party Claim" has the meaning ascribed to it in Section
11.02(a).
"Transfer Taxes" has the meaning ascribed to it in Section
8.01.
"Vehicles" has the meaning ascribed to it in Section
1.01(a)(x).
"WARN" means the Workers Adjustment and Retraining
Notification Act.
"Zegarelli Business" has the meaning ascribed to it in the
forepart of this Agreement.
(b) Construction of Certain Terms and Phrases. Unless
the context of this Agreement otherwise requires, (i) words of any gender
include each other gender; (ii) words using the singular or plural number also
include the plural or singular number, respectively; (iii) the terms "hereof,"
"herein," "hereby" and derivative or similar words refer to this entire
Agreement; (iv) the terms "Article" or "Section" refer to the specified Article
or Section of this Agreement; and (v) the phrases "ordinary course of business"
and "ordinary course of business consistent with past practice" refer to the
business and practice of Seller in connection with the Business. Whenever this
Agreement refers to a number of days, such number shall refer to calendar days
unless Business Days are specified. All
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accounting terms used herein and not expressly defined herein shall have the
meanings given to them under GAAP.
ARTICLE XIV
MISCELLANEOUS
14.01 Notices. All notices, requests and other
communications hereunder must be in writing and will be deemed to have been
duly given only if delivered personally or by facsimile transmission or mailed
(first class postage prepaid or by a national overnight delivery service) to
the parties at the following addresses or facsimile numbers:
If to Purchaser, to:
before the Closing Date to:
CGUSA LLC
c/o Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street
Thirtieth Floor
Los Angeles, California 90017
Facsimile No.: (213) 629-5063
Attn: Kenneth J. Baronsky, Esq.
on and after the Closing Date, to:
CGUSA LLC
11312 Penrose Street
Sun Valley, California 91352
Facsimile No.: (818) 767-3556
Attn: President
with a copy to:
Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street
Thirtieth Floor
Los Angeles, California 90017
Facsimile No.: (213) 629-5063
Attn: Kenneth J. Baronsky, Esq.
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If to Seller:
before the Closing Date to:
Cosmetic Group U.S.A., Inc.
11312 Penrose Street
Sun Valley, California 91352
Facsimile No.: (818) 767-3556
Attn: Alfred E. Booth, Jr.
on and after the Closing Date, to:
Zegarelli Products
10318 Norris Street
Pacoima, California 91331
Facsimile No.: (818) 897-9487
Attn: Alfred E. Booth, Jr.
with a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard
Beverly Hills, California 90212-3480
Facsimile No.: (310) 274-8293
Attn: Mark A. Klein, Esq.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number
as provided in this Section, be deemed given upon receipt, and (iii) if
delivered by mail or by overnight delivery in the manner described above to the
address as provided in this Section, be deemed given upon receipt (in each case
regardless of whether such notice, request or other communication is received
by any other Person to whom a copy of such notice, request or other
communication is to be delivered pursuant to this Section). Any party from
time to time may change its address, facsimile number or other information for
the purpose of notices to that party by giving notice specifying such change to
the other party hereto.
14.02 Bulk Sales Act. The parties hereby waive compliance
with the bulk sales act or comparable statutory provisions of each applicable
jurisdiction.
14.03 Entire Agreement. This Agreement, the Purchaser Note,
the Security Agreement and the Operative Agreements supersede all prior
discussions and agreements between the parties with respect to the subject
matter hereof and thereof, including without limitation that certain letter of
intent between the parties dated May 30, 1997, and contain the sole and
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entire agreement between the parties hereto with respect to the subject matter
hereof and thereof.
14.04 Expenses. Except as otherwise expressly provided in
this Agreement, the Purchaser Note or the Security Agreement (including without
limitation as provided in Section 12.02), whether or not the transactions
contemplated hereby are consummated, each party will pay its own costs and
expenses incurred in connection with the negotiation, execution and closing of
this Agreement, the Purchaser Note, the Security Agreement and the Operative
Agreements and the transactions contemplated hereby and thereby.
14.05 Public Announcements. At all times at or before the
Closing, Seller and Purchaser will not issue or make any reports, statements or
releases to the public with respect to this Agreement or the transactions
contemplated hereby without the consent of the other, which consent shall not
be unreasonably withheld. If either party is unable to obtain the approval of
its public report, statement or release from the other party and such report,
statement or release is, in the opinion of legal counsel to such party,
required by Law in order to discharge such party's disclosure obligations, then
such party may make or issue the legally required report, statement or release
and promptly furnish the other party with a copy thereof. Seller and Purchaser
will also obtain the other party's prior approval of any press release to be
issued immediately following the Closing announcing the consummation of the
transactions contemplated by this Agreement.
14.06 Confidentiality. Each party hereto will hold, and will
use its best efforts to cause its Affiliates, and in the case of Purchaser, any
Person who has provided, or who is considering providing, financing to
Purchaser to finance all or any portion of the Purchase Price, and their
respective Representatives to hold, in strict confidence from any Person (other
than any such Affiliate, Person who has provided, or who is considering
providing, financing or Representative), unless (i) compelled to disclose by
judicial or administrative process (including without limitation in connection
with obtaining the necessary approvals of this Agreement and the transactions
contemplated hereby of Governmental or Regulatory Authorities) or by other
requirements of Law or (ii) disclosed in an Action or Proceeding brought by a
party hereto in pursuit of its rights or in the exercise of its remedies
hereunder, all documents and information concerning the other party or any of
its Affiliates furnished to it by the other party or such other party's
Representatives in connection with this Agreement or the transactions
contemplated hereby, except to the extent that such documents or information
can be shown to have been (a) previously known by the party
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receiving such documents or information, (b) in the public domain (either prior
to or after the furnishing of such documents or information hereunder) through
no fault of such receiving party or (c) later acquired by the receiving party
from another source if the receiving party is not aware that such source is
under an obligation to another party hereto to keep such documents and
information confidential; provided that following the Closing the foregoing
restrictions will not apply to Purchaser's use of documents and information
concerning the Business, the Assets or the Assumed Liabilities furnished by
Seller hereunder. In the event the transactions contemplated hereby are not
consummated, upon the request of the other party, each party hereto will, and
will cause its Affiliates, any Person who has provided, or who is considering
providing, financing to such party and their respective Representatives to,
promptly redeliver or destroy all copies of documents and information furnished
by the other party in connection with this Agreement or the transactions
contemplated hereby and certify to the other party as to such destruction.
14.07 Waiver. Any term or condition of this Agreement may be
waived at any time by the party that is entitled to the benefit thereof, but no
such waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No
waiver by any party of any term or condition of this Agreement, in any one or
more instances, shall be deemed to be or construed as a waiver of the same or
any other term or condition of this Agreement on any future occasion. All
remedies, either under this Agreement or by Law or otherwise afforded, will be
cumulative and not alternative.
14.08 Amendment. This Agreement may be amended, supplemented
or modified only by a written instrument duly executed by or on behalf of each
party hereto.
14.09 No Third Party Beneficiary. The terms and provisions
of this Agreement are intended solely for the benefit of each party hereto and
their respective successors or permitted assigns, and it is not the intention
of the parties to confer third-party beneficiary rights upon any other Person
other than any Person entitled to indemnity under Article XI.
14.10 No Assignment; Binding Effect. Neither this Agreement
nor any right, interest or obligation hereunder may be assigned by any party
hereto without the prior written consent of the other party hereto and any
attempt to do so will be void, except (a) for assignments and transfers by
operation of Law and (b) that Purchaser may assign any or all of its rights,
interests and obligations hereunder (including without limitation its rights
under Article XI) to (i) a wholly-owned subsidiary,
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provided that any such subsidiary agrees in writing to be bound by all of the
terms, conditions and provisions contained herein, (ii) any post-Closing
purchaser of the Business or a substantial part of the Assets or (iii) any
financial institution providing purchase money or other financing to Purchaser
from time to time as collateral security for such financing, but no such
assignment referred to in clause (i) or (ii) shall relieve Purchaser of its
obligations hereunder. Subject to the preceding sentence, this Agreement is
binding upon, inures to the benefit of and is enforceable by the parties hereto
and their respective successors and assigns.
14.11 Headings. The headings used in this Agreement have
been inserted for convenience of reference only and do not define or limit the
provisions hereof.
14.12 Consent to Jurisdiction and Service of Process. Each
party hereby irrevocably submits to the non- exclusive jurisdiction of the
United States District Court for the Central District of California or any
court of the State of California located in the City of Los Angeles in any
action, suit or proceeding arising out of or relating to this Agreement or any
of the Operative Agreements or any of the transactions contemplated hereby or
thereby, and agrees that any such action, suit or proceeding shall be brought
only in such court, provided, however, that such consent to jurisdiction is
solely for the purpose referred to in this Section and shall not be deemed to
be a general submission to the jurisdiction of said courts or in the State of
California other than for such purpose. Each party hereby irrevocably waives,
to the fullest extent permitted by Law, any objection that it may now or
hereafter have to the laying of the venue of any such action, suit or
proceeding brought in such a court and any claim that any such action, suit or
proceeding brought in such a court has been brought in an inconvenient forum.
Nothing herein shall affect the right of any party to serve process in any
other manner permitted by Law or to commence legal proceedings or otherwise
proceed against the other in any other jurisdiction.
14.13 Invalid Provisions. If any provision of this Agreement
is held to be illegal, invalid or unenforceable under any present or future
Law, and if the rights or obligations of any party hereto under this Agreement
will not be materially and adversely affected thereby, (a) such provision will
be fully severable, (b) this Agreement will be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
hereof and (c) the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom.
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14.14 Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of California applicable to
a contract executed and performed in such State, without giving effect to the
conflicts of laws principles thereof.
14.15 Counterparts. This Agreement may be executed in any
number of counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
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<PAGE> 107
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer of each party as of the date first
above written.
COSMETIC GROUP U.S.A., INC.
By: /s/ Alfred E. Booth, Jr.
--------------------------------
Name: Alfred E. Booth, Jr.
Title: Chief Executive Officer
CGUSA LLC
By: /s/ Clifford M. Sobel
--------------------------------
Name: Clifford M. Sobel
Title: Operating Manager
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ANNEX B
FORM OF CGUSA NOTE
THE INDEBTEDNESS HEREUNDER IS SUBORDINATE TO CERTAIN OTHER INDEBTEDNESS OF
OBLIGOR PURSUANT TO THE PROVISIONS
OF THIS NOTE
NON-NEGOTIABLE SUBORDINATED NOTE
Original Principal Amount: $3,500,000 As of _________, 1997
FOR VALUE RECEIVED, the undersigned, CGUSA LLC, a New Jersey
limited liability company with a principal place of business at
__________________________________________________ ("Obligor"), hereby promises
to pay to ___________________ (fka: Cosmetic Group U.S.A., Inc.), a California
corporation, or its assigns (the "Holder"), at
__________________________________________________ (or at such other place as
the Holder may designate by written notice to Obligor from time to time), the
principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000),
with interest on the principal amount hereof from time to time outstanding at
the rate of ten percent (10%) per annum, payable (subject to the terms and
conditions hereof) as follows:
(a) interest shall be payable quarterly in arrears on each
December 31, March 31, June 30 and September 30 during the term of this Note,
commencing with December 31, 1997;
(b) principal shall be payable commencing on September 30, 1999
and on each September 30 thereafter in the amounts set forth in the following
table:
<TABLE>
<CAPTION>
Principal Payment
-----------------
<S> <C>
September 30, 1999 $500,000
September 30, 2000 $500,000
September 30, 2001 $500,000
September 30, 2002 $500,000
September 30, 2003 $500,000
</TABLE>
<PAGE> 109
<TABLE>
<CAPTION>
Principal Payment
-----------------
<S> <C>
September 30, 2004 $500,000
September 30, 2005 $500,000
</TABLE>
(c) on September 30, 2005, the entire amount of outstanding
principal and accrued but unpaid interest as of such time shall be due and
payable in full.
This Note is the Seller Note referred to in the Asset Purchase
Agreement dated July 24, 1997 among the Obligor and the Holder (the "Purchase
Agreement"). Unless otherwise defined herein, terms defined in the Purchase
Agreement and used herein shall have the meanings given to them in the Purchase
Agreement. Payment of this Note is subordinated pursuant to the provisions set
forth in Section 5 hereof.
1. Allocation of Payments; Prepayments. All payments made in
respect of this Note shall first be allocated to accrued but unpaid interest
and then to unpaid principal. Payments of principal and interest due under
this Note shall be made in lawful money of the United States of America and in
immediately available funds. The principal of this Note may be prepaid,
without premium, penalty or discount, in whole or in part, at any time and from
time to time. Any and all prepayments shall be allocated to the last
installments due hereunder in order of time.
2. Acceleration Upon Default. The Holder may declare the entire
unpaid principal amount of this Note, together with all accrued and unpaid
interest, to be immediately due and payable upon written demand, at the
Holder's election, if the Obligor fails to make a payment of principal or
interest when due and such failure continues without cure for a period of 30
days following receipt of a written notice from the Holder of the Obligor's
failure to pay (a "Default").
3. Rights and Remedies. The Holder shall have all rights and
remedies provided for by applicable law (including all forms of legal and
equitable relief) with respect to the acceleration hereof or a Default
hereunder and the Holder shall in addition have the other rights and remedies
provided for in this Note. All rights and remedies contemplated in the
preceding sentence shall be independent and cumulative, and may, to the extent
permitted by law, be exercised concurrently or separately, and the exercise of
any one right or remedy shall not be deemed to be an election of such right or
remedy or to preclude or waive the exercise of any other right or remedy.
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<PAGE> 110
4. Off-Set; Escrow Account; Purchase Price Adjustment; Escrow
Agreement.
4.1 Indemnity Obligation. Obligations under this Note
may be offset against obligations of the Holder to indemnify the Obligor to the
extent set forth in Section 11.04 of the Purchase Agreement.
4.2 Purchase Price Adjustment. The terms of this Note
are subject to adjustment to the extent set forth in Section 1.04(b) of the
Purchase Agreement.
4.3 Escrow Account. In the event that at any time or
from time to time, the Obligor determines, in its reasonable judgment, that the
Holder is obligated to indemnify the Obligor with respect to any matter
pursuant to Section 11.01 of the Purchase Agreement, the Obligor may withhold
from payments of principal (but not interest) under this Note the amount of all
Losses (as defined in the Purchase Agreement) with respect to such matter for
which Obligor reasonably determines it is entitled to be indemnified pursuant
to Article XI of the Purchase Agreement. All amounts so withheld shall be
deposited into an escrow account to be established pursuant to an escrow
agreement in form and substance reasonably satisfactory to the Obligor and the
Holder to be executed by the Obligor, the Holder and the Escrow Agent as soon
as practicable following the first time (if any) that the Obligor determines to
withhold, pursuant to Article XI of the Purchase Agreement and this subsection
4.3, any principal payment due under this Note. Any amount so deposited shall
be governed by the provisions of such escrow agreement. For all purposes of
this Note, amounts so deposited shall be treated as having been paid to the
Holder.
5. Subordination. This Note is subordinate in right of payment
of interest and principal to the Senior Debt Holders (as hereinafter defined)
on the terms and subject to the conditions hereof.
5.1 Definitions.
As used in this Note, the following terms shall have the
meanings set forth below:
"Bankruptcy Code" shall mean the Bankruptcy Code, 11 U.S.C.
101 et seq., as amended, and any similar or successor federal statute,
and the rules and regulations thereunder, all as the same shall be in
effect from time to time.
"Indebtedness" shall mean (without duplication) (i) all
indebtedness for borrowed money or as evidenced by notes,
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bonds, debentures or similar evidences of indebtedness, all
obligations for the deferred and unpaid purchase price of any
property, service or business (other than trade accounts payable and
accrued liabilities incurred in the ordinary course of business and
constituting current liabilities in accordance with generally accepted
accounting principles), and all obligations under capitalized leases,
(ii) letters of credit and all reimbursement obligations related
thereto, (iii) the aggregate net liability in respect of interest rate
swap agreements, currency swap agreements and other similar agreements
designed to hedge against fluctuations in interest rates or foreign
exchange rates, (iv) any liability secured by any lien in respect of
any obligation of the type described in clauses (i) through (iii) on
property owned or acquired, whether or not such liability shall have
been assumed, and (v) all guarantees or other credit support in
respect of any obligation of the type described in clauses (i) through
(iii).
"Senior Debt Holders" shall mean, at any time, the holders of
Senior Indebtedness at such time.
"Senior Indebtedness" shall mean (i) the loan agreement
between the Obligor and Fleet National Bank ("Fleet"), (ii) any
borrowing arrangement between the Obligor and a bank, institutional
investor or similar financial lender or (iii) any other Indebtedness
for borrowed money (other than, with respect to clause (iii), (A)
obligations under or pursuant to agreements or instruments relating to
Indebtedness owed to a seller entered into in connection with any
future acquisitions of a business by the Obligor, whether by means of
the purchase of assets or stock, by merger or otherwise, to pay all or
part of the purchase paid to such seller subsequent to the closing of
the purchase of such business, (B) Indebtedness incurred by the
Obligor in the ordinary course to trade creditors or others furnishing
services to the Obligor and (C) obligations under the Note), and any
related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, in the case of each of
clauses (i) through (iii), as amended, modified, renewed, refunded,
replaced or refinanced from time to time, in whole or in part and any
loan agreements, notes, guarantees, collateral documents, instruments
and agreements executed in connection with any such amendment,
modification, renewal, refunding, replacement or refinancing (and
whether incurred before, on or after the date hereof), and all
obligations of any other person or entity as endorser, guarantor or
surety of or for any of such Indebtedness or obligation owed by the
Obligor, including, without limitation, all principal, interest
(including all
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interest accruing after the commencement of any case, proceeding or
other action relating to the bankruptcy, insolvency or reorganization
of the Obligor) accruing thereon, charges, expenses, fees and other
sums chargeable to the Obligor by the holder of any such Indebtedness
or obligation, and reimbursement, indemnity or other obligations due
and payable to any holder of such Indebtedness or obligation, in each
case in such holder's capacity as a Senior Debt Holder.
5.2 Subordination of Note to Senior Indebtedness. The
Obligor and the Holder agree that, to the extent and in the manner hereinafter
set forth, the indebtedness incurred in connection with this Note and
represented by this Note and the payment of the principal and interest
(including, without limitation, any interest accruing subsequent to the
commencement of any proceeding against or with respect to the Obligor under the
Bankruptcy Code or any other proceedings in insolvency, bankruptcy,
receivership, reorganization, dissolution, assignment for the benefit of
creditors or other similar case or proceeding) on this Note and all other
indebtedness, obligations and liabilities, now existing or hereafter created,
arising under or in connection with this Note, including without limitation,
all expenses, fees, indemnities, interest and other amounts payable hereunder
(all of the foregoing, the "Subordinated Obligations") are hereby expressly
made subordinated, junior and subject in right of payment to the prior payment
in full of all Senior Indebtedness.
The expression "payment in full" or any similar term(s) or
phrase(s) when used in this Section 5 with respect to Senior Indebtedness shall
mean the indefeasible satisfaction and final payment in full of all such Senior
Indebtedness in cash, or, in the case of Senior Indebtedness consisting of
contingent obligations including, without limitation, contingent obligations in
respect of letters of credit or other reimbursement guarantees, the setting
apart of cash sufficient to discharge such portion of Senior Indebtedness in an
account for the exclusive benefit of the holder thereof, in which account such
holders shall be granted by the Obligor a first priority perfected security
interest in a manner acceptable to such holders, which payment or perfected
security interest shall have been retained by the holders of Senior
Indebtedness, in each case, for a period of time in excess of all applicable
preference or other similar periods under applicable bankruptcy, insolvency or
creditors rights laws.
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5.3 Subordination Upon Bankruptcy or Insolvency. In the
event of (a) any insolvency or bankruptcy case or proceeding under the
Bankruptcy Code or any other similar federal or state law, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection
therewith, against or with respect to the Obligor as debtor, (b) any
involuntary liquidation, dissolution or other winding-up of the Obligor,
whether or not involving insolvency or bankruptcy, or (c) any assignment for
the benefit of creditors or any other marshalling of assets and liabilities of
the Obligor, then and in any such event:
(a) the Holder irrevocably authorizes and empowers the
Senior Debt Holders to receive payment in full of all amounts due or to become
due on or in respect of all Senior Indebtedness, before the Holder receives any
payment on account of the Subordinated Obligations;
(b) the Holder irrevocably authorizes and empowers the
Senior Debt Holders to receive any payment or distribution of any kind or
character, whether in cash, property or securities, by set-off or otherwise, to
which the Holder would be entitled but for the provisions of this Section 5,
including any such payment or distribution which may be payable or deliverable
by reason of the payment of any other Indebtedness of the Obligor being
subordinated to the payment of this Note, which shall be paid by the
liquidating trustee or agent or other person making such payment or
distribution, whether a trustee in bankruptcy, a receiver or liquidating
trustee or otherwise, directly to the Senior Debt Holders or any agent thereof,
to the extent necessary to make Payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any current payment or distribution to
the Senior Debt Holders; and
(c) in the event that, notwithstanding the foregoing
provisions of this subsection 5.3 or otherwise contrary to any provisions
hereof, the Holder of this Note shall have received such payment or
distribution of any kind or character, whether in cash, property or securities,
before all Senior Indebtedness is paid in full, then and in such event such
payment or distribution shall be deemed to be the property of, segregated,
received and held in trust for the benefit of, and shall be immediately paid
over or delivered forthwith to the agent of, the Senior Debt Holders for
application to the payment of all Senior Indebtedness remaining unpaid until
all such Senior Indebtedness shall have been paid in full, after giving effect
to any concurrent payment or distribution to the Senior Debt Holders.
The Holder agrees that while it shall retain the right to vote
its claims and otherwise act in any such reorganization
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proceeding relative to the Obligor (including, without limitation, the right to
vote to accept or reject any plan of partial or complete liquidation,
reorganization, arrangement, composition, or extension), the Holder shall not
take any action or vote in any way so as to contest (i) the validity or
enforceability of the subordination provisions of this Note or any agreement or
instrument to the extent evidencing or relating to the Senior Indebtedness or
(ii) without prejudicing the rights of the Holder to seek the same, any motion
by the Senior Debt Holders for post-petition interest in any proceeding
referred to in this subsection 5.3, it being understood that the above
restrictions shall not prevent or restrict any action or vote in favor of any
such plan, provided that the Holder complies with the provisions of the
penultimate paragraph of subsection 5.4 hereof.
5.4 Subordination Upon Default of Senior Indebtedness or
of Subordinated Obligations.
(a) If any Senior Debt Holder notifies the Holder in
writing that an event of default has occurred under any document governing
Senior Indebtedness and has not been cured to the satisfaction of, or waived in
writing by, such Senior Debt Holder (a "Suspension Notice"), no payment shall
be made by the Obligor and no payment shall be received by the Holder on
account of the Subordinated Obligations, and the Holder shall not assert,
participate in or bring any sort of action, suit or proceeding (including,
without limitation, bankruptcy or insolvency proceedings) either at law or in
equity for the enforcement, collection or realization of all or any part of the
Subordinated Obligations, from the date the Holder shall receive a Suspension
Notice until the date, if any, on which such event of default is waived in
writing by, or cured to the satisfaction of, such Senior Debt Holder, or until
such payment or such action, suit or proceeding is permitted pursuant to
subsection 5.4(b) hereof.
In the event such Senior Debt Holder waives the event of
default or determines that the event of default has been cured to its
satisfaction, such Senior Debt Holder shall so notify the Holder and the
Obligor in writing and the suspended payments may resume. Such resumed
payments shall be subject to all of the terms and subordination provisions of
this Note.
Any Suspension Notice shall specify in reasonable detail the
event of default which is continuing and the basis upon which such notice is
being given and shall state that no amounts shall be payable by the Obligor in
respect of the Subordinated Obligations in accordance with this subsection 5.4.
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(b) In the event that an event of default occurs under
any document governing the Subordinated Obligations, the restrictions set forth
in subsection 5.4(a) above shall apply as if Obligor had received a Suspension
Notice on the date of such default (whether or not a Suspension Notice was
previously received by the Obligor), but in the case of a payment default under
this Note such restrictions shall cease upon the occurrence of the following
events: (i) the Holder shall have given the Obligor and each of the Senior Debt
Holders at least ninety (90) days prior written notice of such default; (ii)
the Obligor shall not have cured or caused to be cured such default; and (iii)
none of the Senior Debt Holders shall have commenced action (which action need
not include litigation) to enforce the Senior Indebtedness or to realize upon
such Senior Debt Holder's security interests, mortgages and/or other liens in
the collateral security for such Senior Indebtedness. The cessation of the
restrictions set forth in subsection 5.4(a) shall not impair the senior
priority of payment of the Senior Indebtedness or the senior priority of all
security interests securing the Senior Indebtedness, and the Senior Debt
Holders shall remain entitled to receive payment in full of all amounts due or
to become due on or in respect of all Senior Indebtedness before the Holder
receives any payment on account of the Subordinated Obligations. Upon the
request of any of the Senior Debt Holders, the Holder shall immediately cease
any action, suit or proceeding for the enforcement, collection or realization
of all or any part of the Subordinated Obligations then being pursued by the
Holder if such Senior Debt Holder at any time elects, in its sole discretion,
to demand payment of its Senior Indebtedness and commences action (which action
need not include litigation) to enforce the Senior Indebtedness or to realize
upon such Senior Debt Holder's security interests, mortgages and/or other liens
in the collateral security for such Senior Indebtedness under the agreements
and instruments relating to such Senior Debt Holder's Senior Indebtedness or as
otherwise authorized by applicable law.
(c) In the event that, notwithstanding the foregoing
provisions of this subsection 5.4, the Holder shall have received any payment
or distribution of any kind or character, whether in cash, property or
securities, that it is prohibited from receiving pursuant to this subsection
5.4, before all Senior Indebtedness is paid in full, then and in such event
such payment or distribution shall be deemed to be the property of, segregated,
received and held in trust for the benefit of, and shall be immediately paid
over or delivered forthwith to, the Senior Debt Holders for application to the
payment of all Senior Indebtedness remaining unpaid until all such Senior
Indebtedness shall have been paid in full, after giving effect to any
concurrent payment or distribution to the Senior Debt Holders.
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(d) The provisions of this subsection 5.4 shall not apply
to any payment with respect to which subsection 5.3 would be applicable.
5.5 Holder's Rights and Remedies. If the Holder in
violation of this Section 5 shall assert or bring any action, suit or
proceeding against the Obligor, the Obligor may interpose as a defense or
dilatory plea the making of this Note. If the Holder shall attempt to enforce,
collect or realize upon this Note in violation of this Section 5, the Obligor
may restrain any such enforcement, collection or realization.
With respect to the holders of the Senior Indebtedness, the
Holder agrees that there are no implied covenants or obligations of such
holders of the Senior Indebtedness with respect to the delivery of notices to
the Holder other than to deliver a Suspension Notice to cause the Holder to be
subject to the restrictions contained in subsection 5.4.
Subject to the payment in full of all Senior Indebtedness, the
Holder of this Note shall be subrogated, to the extent permitted by applicable
law, to the rights of the Senior Debt Holders to receive payments and
distributions of cash, property and securities applicable to the Senior
Indebtedness until the principal of and interest on this Note and any fees or
other amounts payable by the Obligor under this Note shall be paid in full.
Notwithstanding the foregoing, the Senior Debt Holders make no representations
or warranties whatsoever as to the validity or enforceability of the Senior
Indebtedness or any collateral thereunder. For purposes of such subrogation,
no payments or distributions to the Senior Debt Holders of any cash, property
or securities to which the holder of this Note would be entitled except for the
provisions of this Section 5, and no payments over pursuant to the provisions
of this Section 5 to the Senior Debt Holders by the holder of this Note, shall,
among the Obligor, its creditors, other than the Senior Debt Holders, and the
Holder of this Note, be deemed to be a payment or distribution by the Obligor
to or on account of the Senior Indebtedness. The provisions of this subsection
5.5 shall survive the termination of this Note.
5.6 No Waiver of Subordination Provisions. No right of
any present or future Senior Debt Holder to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Obligor, or by any non-compliance by the
Obligor with the terms, provisions and covenants of this Note, regardless of
any knowledge thereof any such Senior Debt Holder may have or be otherwise
charged with.
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Without in any way limiting the generality of the foregoing
paragraph, the Senior Debt Holders may, at any time and from time to time,
without the consent of or notice to the Holder, without incurring
responsibility to the Holder and without impairing or releasing the
subordination provided in this Note or the obligations hereunder of the Holder
to the Senior Debt Holders, do any one or more of the following: (a) change the
manner, place or terms of payment or extend the time of payment of, or renew,
amend, modify or alter, any Senior Indebtedness or any instrument evidencing
the same or any agreement evidencing, governing, creating, guaranteeing or
securing any Senior Indebtedness; (b) sell, exchange, release or otherwise deal
with any guarantees, property pledged, mortgaged or otherwise securing Senior
Indebtedness and make any settlements and compromises thereof; (c) release any
person liable in any manner for the collection of Senior Indebtedness; and (d)
exercise or refrain from exercising any rights against the Obligor, Guarantor
and any other person.
No knowledge of any breach or other non-observance by the
Holder of the terms and provisions of this Note shall constitute a waiver
hereof, nor a waiver of any obligations to be performed by the Holder
hereunder.
5.7 Reliance on Judicial Order or Certificate of
Liquidating Agent. Upon any payment or distribution of assets of the Obligor
referred to in this Section 5, the Holder shall be entitled to rely upon any
order or decree by any court of competent jurisdiction in which such
insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution,
winding-up or similar case or proceeding is pending, or a certificate of the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for
the benefit of creditors, agent or other person making such payment or
distribution, delivered to the Holder, for the purpose of ascertaining the
persons entitled to participate in such payment or distribution, the holders of
Senior Indebtedness of the Obligor and other indebtedness of the Obligor, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Section 5.
5.8 Holder Entitled to Assume Payments Not Prohibited in
Absence of Notice. The Holder shall not at any time be charged with knowledge
of the existence of any facts which would prohibit the making of any payment to
the Holder pursuant to subsection 5.4(a), unless and until the Holder shall
have received a Suspension Notice thereof at its principal place of business
set forth above (or such other address which shall have been given in writing
to all Senior Debt Holders and the Obligor) from the Obligor or from one or
more Senior Debt Holders or from
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any representative or representatives thereof; and prior to the receipt of any
such Suspension Notice the Holder shall be entitled to assume conclusively that
no such facts exist.
The Holder shall be entitled to rely on the delivery to him of
a Suspension Notice by a person representing himself to be a Senior Debt Holder
to establish that such notice has been given by a Senior Debt Holder. In the
event that the Holder determines in good faith that further evidence is
required with respect to the right of any person as a Senior Debt Holder to
participate in any payment or distribution pursuant to this Section 5, the
Holder may request such person to furnish evidence to the reasonable
satisfaction of the Holder as to the amount of Senior Indebtedness held by such
person, the extent to which such person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such
person under this Section 5 and, if such evidence is not furnished, the Holder
may defer any payment to such person pending judicial determination as to the
right of such person to receive such payment.
5.9 Reliance. The Holder acknowledges and agrees that
the provisions of this Section 5 are, and are intended to be, an inducement and
a consideration to each Senior Debt Holder, whether the Senior Indebtedness was
created or acquired before or after the issuance of this Note, to acquire
and/or continue to hold such Senior Indebtedness and each Senior Debt Holder
shall be deemed conclusively to have relied on the provisions of this Section 5
in acquiring and/or continuing to hold such Senior Indebtedness. In
furtherance of the foregoing, the Holder represents and warrants to the holders
of the Senior Indebtedness: the Obligor owes to the Holder, as of the date
hereof, the aggregate principal amount of this Note; there are, and will be, no
guarantees for this Note; and this Note is not as of the date hereof, and will
not be, subject to any lien, security interest, guarantees, subordination or
collateral assignment, except (a) the subordination in favor of holders of
Senior Indebtedness pursuant hereto and contemplated by subsection 5.10 hereof
and (b) as permitted by subsection 5.11.
5.10 Further Assurances. The Holder agrees to cooperate
with the Obligor in connection with implementing the subordination of this Note
to such Senior Indebtedness as may be incurred by the Obligor after the date
hereof and encumbrances granted to secure such Senior Indebtedness, including
without limitation by executing such agreements of subordination as may be
reasonably required by the Senior Debt Holders of such Senior Indebtedness.
5.11 Assignment. The Holder shall not, directly or
indirectly, sell, assign or otherwise transfer, in whole or in
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part, this Note or any other Subordinated Obligation, any interest therein or
any collateral security or guaranty therefor to any person or entity without
the prior written consent of the Obligor; provided, however, that the Obligor
shall not unreasonably withhold its consent to a proposed transfer or
assignment of this Note or any other Subordinated Obligation or any interest
therein or collateral security or guaranty therefor, and the Obligor's consent
to a proposed pledge of this Note or any other Subordinated Obligations to an
institutional lender shall not be required, provided that the assignee,
transferee or pledgee shall agree in writing in form and substance reasonably
satisfactory to the Obligor to be bound by the obligations of the Holder under
this Note.
6. Miscellaneous.
(a) Severability. If any provision of this Note or the
application thereof to any person(s) or circumstances shall be invalid or
unenforceable to any extent, (i) the remainder of this Note and the application
of such provision to other persons or circumstances) shall not be affected
thereby and (ii) each such provision shall, as to such person or circumstances
as to which it is not enforceable in full, be enforced to the greatest extent
permitted by law.
(b) Amendments; No Waiver; Successors and Assigns. No
amendment, modification, rescission, waiver, forbearance or release of any
provision of this Note shall be valid or binding unless made in writing and
executed by a duly authorized representative of Obligor and the Holder. No
consent or waiver, express or implied, by the Holder to or of the breach by
Obligor in the performance by it of any of its obligations hereunder shall be
deemed or construed to be a consent to or waiver of the breach in the
performance of the same or any other obligation of Obligor hereunder. Failure
on the part of the Holder to complain of the act or failure to act by Obligor
or to declare Obligor in breach irrespective of how long such failure
continues, shall not constitute a waiver by the Holder of any of its rights
hereunder. All consents and waivers shall be in writing. All of the terms,
covenants and conditions contained in this Note shall be binding upon and inure
to the benefit of the parties hereto and their respective legal
representatives, personal representatives, estates, successors and permitted
assigns.
(c) Governing Law. This Note, and the rights and
obligations hereunder, including the performance and enforceability hereof,
shall be governed and enforced by and construed in accordance with the laws of
the State of California, without regard to the principles of conflicts of law.
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(d) Waiver of Notice. The Obligor hereby waives demand,
presentment, protest, notice of protest, notice of dishonor or nonpayment, and
any other condition precedent to action against the Obligor for the payment
hereof.
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IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed and delivered by its duly authorized representative as of the date
first set forth above.
CGUSA LLC
By:
----------------------------
Name:
Title:
Acknowledged and agreed with
respect to the obligations of
the Holder hereunder:
- ----------------------------------
(fka: COSMETIC GROUP U.S.A., INC.)
By:
-------------------------------
Name:
Title:
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ANNEX C
[FAIRNESS OPINION]
July 24, 1997
Board of Directors
Cosmetic Group U.S.A., Inc
11312 Penrose Street
Sun Valley, CA 91352
Gentlemen:
You have asked L.H. Friend, Weinress, Frankson & Presson, Inc. ("L.H. Friend")
for our opinion as investment bankers as to the fairness, from a financial point
of view, to Cosmetic Group U.S.A., Inc., a California corporation (the
"Company"), and to the Company's shareholders of the consideration to be
received by the Company pursuant to the Asset Purchase Agreement dated July 24,
1997 (the "Agreement") whereby the Company is selling substantially all of the
net assets used or held for use in the Company's contract packaging business
to CGUSA LLC, a New Jersey limited liability company, for cash and a note (the
"Transaction").
The Agreement provides to the Company, upon consummation of the Transaction,
$4,100,000 in cash and $3,500,000 in an eight-year 10% subordinated promissory
note (the "Consideration") as consideration for the sale of substantially all of
the net assets used or held for use in the Company's contract packaging
business. In addition, CGUSA LLC extended a $700,000 bridge loan to the Company
for the period between signing of the definitive documents and consummation or
termination of the transaction or, failing such events, December 31, 1997.
As part of its investment banking business, L.H. Friend is continually engaged
in the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes. We have been engaged to act as financial advisors to the
Company's Board of Directors in connection with the Transaction and to advise
the Board of Directors as to the fairness of the Consideration, but we have not
materially participated in the negotiations leading to the Agreement.
You have requested our opinion as to whether the proposed Consideration is fair
to the Company and its shareholders from a financial point of view.
In connection with formulating our opinion, we have, among other things:
(a) reviewed the Asset Purchase Agreement dated July 24, 1997;
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(b) discussed the Transaction and related matters with the Company's
management;
(c) reviewed the Annual Reports on Form 10KSB filed by the Company with the
Securities and Exchange Commission for the fiscal years ended December 31,
1993, 1994, 1995 and 1996, the Company's Quarterly Report on Form 10-QSB
for the period ended March 31, 1997; and the Company's Proxy Statement
dated May 16, 1997;
(d) reviewed certain other financial information for periods subsequent to
March 31, 1997;
(e) reviewed unaudited internal financial statements for the contract
packaging business for the periods ending December 31, 1995 and
December 31, 1996;
(f) reviewed pro forma financial data of the Company and the contract
packaging business;
(g) reviewed certain financial projections of the Company and the contract
packaging business prepared by management of the Company and examined
certain other operating and financial information concerning the
businesses of the Company and the contract packaging business;
(h) analyzed certain publicly available financial and market data of certain
other similar companies having publicly traded securities and compared it
to financial data regarding the Company; and
(i) performed such other studies, analyses, inquiries and investigations as we
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition and business prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us and do not assume any responsibility with respect to
it. We have not made any physical inspection or independent appraisal of any of
the properties or assets of the Company, or conducted any independent inquiry or
investigation with respect to the Company or the Transaction. This opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
This opinion is furnished solely for the benefit of the Company, its Board of
Directors, and its shareholders in connection with the Transaction, and may not
be relied upon by any
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other person or for any other purpose without our express, prior, written
consent. This opinion is delivered to each recipient subject to the conditions,
scope of engagement, limitations and understandings set forth in this opinion
and our engagement letter dated June 6, 1997, and subject to the understanding
that the obligations of Friend in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Friend shall be subjected to any personal liability
whatsoever to any person, nor will any such claim be asserted by or on behalf of
any recipient of this opinion. The Company has also agreed to indemnify Friend
for certain liabilities that may arise out of rendering this opinion.
Our opinion is limited to the fairness, from a financial point of view, of the
Consideration and does not address the Company's underlying business decision to
effect the Transaction.
As of the date hereof, based upon and subject to the foregoing, and based upon
such other matters as we deemed relevant, it is our opinion that the
Consideration is fair to the Company and its shareholders from a financial point
of view.
Very truly yours,
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
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ANNEX D
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
ALFRED E. BOOTH, JR. and JUDITH E. ZEGARELLI certify that:
1. They are the president and the secretary of Cosmetic Group U.S.A., Inc.,
a California corporation.
2. Article I of the Articles of Incorporation of this corporation is
amended to read as follows:
The name of this corporation is "Zegarelli Group International, Inc."
3. The foregoing amendment of articles of incorporation has been duly
approved by the board of directors.
4. The foregoing amendments of articles of incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902 of
the Corporations Code. The total number of outstanding shares of the
corporation is ______________. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote required
was more than 50%.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Date: September __, 1997
_________________________________
ALFRED E. BOOTH, JR., Chief
Executive Officer
_________________________________
JUDITH E. ZEGARELLI, Secretary
<PAGE> 126
PROXY COSMETIC GROUP U.S.A., INC. PROXY
The undersigned hereby appoints Alfred E. Booth, Jr. and Judith E.
Zegarelli, or either of them, with power of substitution, as proxies, to appear
and vote, as designated below, all the shares of Common Stock of Cosmetic Group
U.S.A., Inc. (the "Company"), held of record by the undersigned on August 18,
1997 at the Special Meeting of Shareholders to be held on September 22, 1997 and
any adjournments or postponements thereof.
1. To approve the sale to CGUSA LLC of substantially all of the assets of the
Company relating to its contract packaging business on the terms contained
in an Asset Purchase Agreement dated July 24, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To approve an amendment to the Company's Articles of Incorporation,
conditioned on the closing of the sale noted in proposal number 1, to rename
the Company "Zegarelli Group International, Inc."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment or
adjournments thereof:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS INDICATED, THE PROXY WILL BE VOTED "FOR" EACH OF THE ABOVE
PROPOSALS.
