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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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
MENLEY & JAMES, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
N/A
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2) Aggregate number of securities to which transaction applies:
N/A
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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):
N/A
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4) Proposed maximum aggregate value of transaction:
N/A
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5) Total fee paid:
N/A
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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:
___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
___________________________________________________________________________
3) Filing Party:
___________________________________________________________________________
4) Date Filed:
___________________________________________________________________________
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MENLEY & JAMES, INC.
100 Tournament Drive
Horsham, Pennsylvania 19044
October 23, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Meeting") which will be held at the Hotel Inter-Continental New York, 111 East
48th Street, New York, New York, on Monday, November 23, 1998, at 10:00 a.m.
The purpose of the Meeting is to approve and adopt an Asset Purchase
Agreement dated August 21, 1998, and as amended by Amendment No. 1 dated as of
October 13, 1998 (as amended, the "Sale Agreement"), by and among Menley &
James, Inc. (the "Company"), Menley & James Laboratories, Inc. (the
"Subsidiary"), and Numark Laboratories, Inc. (the "Purchaser"), concerning the
proposed sale of substantially all of the assets, and the assignment of
substantially all of the liabilities, of the Subsidiary, for a purchase price
of $12,930,000, subject to an increase or decrease of up to $500,000 (the
"Sale"). Approval and adoption of the Sale Agreement requires the affirmative
vote of holders of a majority of the outstanding Common Shares. Concurrently
with the execution of the Sale Agreement, stockholders who beneficially own, in
the aggregate, approximately 53.5% of the outstanding shares of the Company's
common stock, par value $0.01 per share (the "Common Shares"), agreed to vote
their Common Shares in favor of approval and adoption of the Sale Agreement.
Accordingly, no action on the part of any other stockholder will be required to
approve and adopt the Sale Agreement.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY HAS APPROVED AND ADOPTED
THE SALE AGREEMENT, HAS DETERMINED THAT THE SALE IS IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND IS RECOMMENDING THAT HOLDERS OF COMMON
SHARES VOTE FOR APPROVAL AND ADOPTION OF THE SALE AGREEMENT. In reaching its
determination regarding the Sale Agreement, the Board of Directors considered,
among other things, the opinion of Howard, Lawson & Co. that the Sale is fair
to the Company and its stockholders from a financial point of view. The opinion
of Howard, Lawson & Co. is included as Appendix B to the attached Proxy
Statement
The Notice and Proxy Statement on the following pages contain important
details concerning the Sale. Please complete, sign and return your proxy card
in the enclosed envelope to ensure that your Common Shares will be represented
and voted at the Meeting even if you cannot attend. You are urged to complete,
sign and return the enclosed proxy card even if you plan to attend the meeting.
I look forward to personally meeting all stockholders who are able to
attend.
Sincerely,
Lawrence D. White
President and Chief Executive Officer
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MENLEY & JAMES, INC.
100 Tournament Drive
Horsham, Pennsylvania 19044
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held November 23, 1998
-------------------------
To the Stockholders of Menley & James, Inc.:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Stockholders (the
"Meeting") of Menley & James, Inc., a Delaware corporation (the "Company"),
will be held at the Hotel Inter-Continental New York, 111 East 48th Street, New
York, New York, on Monday, November 23, 1998, at 10:00 a.m. (local time) to
consider and act on the following matters:
1. To approve and adopt the Asset Purchase Agreement dated as of August
21, 1998, and as amended by Amendment No. 1 dated as of October 13, 1998
(as amended, the "Sale Agreement"), by and among the Company, its
wholly-owned subsidiary, Menley & James Laboratories, Inc., a Delaware
corporation (the "Subsidiary"), and Numark Laboratories, a Delaware
corporation ("Numark" or the "Purchaser"), involving the proposed sale of
substantially all of the assets, and the assignment of substantially all of
the liabilities, of the Subsidiary to the Purchaser, a copy of which
agreement is attached to the accompanying Proxy Statement as Appendix A;
and
2. To transact such other business as may properly come before the
Meeting, in connection with the foregoing or otherwise, or any adjournment
or postponements of the Meeting.
The Board of Directors has fixed the close of business on October 7, 1998
as the record date for the purpose of determining stockholders entitled to
notice of and to vote at the Meeting or any postponement or adjournment
thereof. A list of such stockholders will be open to the examination of any
stockholder during regular business hours for a period of 10 days prior to the
Meeting at the offices of Menley & James, Inc. at 100 Tournament Drive,
Horsham, Pennsylvania.
By Order of the Board of Directors,
Greg L. Kearl
Secretary
Horsham, Pennsylvania
October 23, 1998
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WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENVELOPE PROVIDED. YOU MAY
REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE BY SENDING WRITTEN
NOTICE OF REVOCATION TO THE SECRETARY OF THE COMPANY PRIOR TO THE MEETING OR
BY ATTENDING THE MEETING AND VOTING YOUR SHARES IN PERSON.
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TABLE OF CONTENTS
Page
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QUESTIONS AND ANSWERS ABOUT THE SALE .................................... 1
SUMMARY ................................................................. 4
THE MEETING ............................................................. 8
THE SALE ................................................................ 9
Background of the Sale ............................................... 9
Reasons for the Sale; Recommendation of the Board of Directors ....... 12
Opinion of Financial Advisor ......................................... 14
Use of Proceeds ...................................................... 16
No Payment, Dividend or Distribution to Holders of Common Shares ..... 17
Absence of Dissenters' Rights of Appraisal ........................... 17
Terms of the Sale Agreement and the Stockholder Agreement ............ 17
Accounting Treatment of the Sale ..................................... 21
Certain Federal Income Tax Consequences .............................. 22
Interests of Certain Persons in the Sale ............................. 22
Certain Information Concerning the Purchaser ......................... 23
BUSINESS OF THE COMPANY FOLLOWING THE SALE .............................. 24
Business Plan ........................................................ 24
Unaudited Pro Forma Financial Information ............................ 26
Risk Factors ......................................................... 27
PRINCIPAL STOCKHOLDERS .................................................. 32
MARKET FOR COMMON SHARES ................................................ 33
INDEPENDENT AUDITORS .................................................... 33
WHERE YOU CAN FIND ADDITIONAL INFORMATION ............................... 33
OTHER BUSINESS .......................................................... 34
Appendix A -- Composite Asset Purchase Agreement (as amended)
Appendix B -- Opinion of Howard, Lawson & Co.
Appendix C -- Annual Report on Form 10-K for the Year Ended December 31, 1997
<PAGE>
MENLEY & JAMES, INC.
100 Tournament Drive
Horsham, Pennsylvania 19044
PROXY STATEMENT
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SPECIAL MEETING OF STOCKHOLDERS
November 23, 1998
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QUESTIONS AND ANSWERS ABOUT THE SALE
Q: When and where is the Meeting?
A: The Meeting will take place on November 23, 1998 at 10:00 a.m. (local time)
at the Hotel Inter-Continental New York, 111 East 48th Street (between
Park Ave. and Lexington Ave.) in New York, New York.
Q: What proposal will I be voting on at the Meeting?
A: You will be asked to consider a resolution in favor of the sale of
substantially all of the assets and assignment of substantially all of the
liabilities of Menley & James, Inc.'s wholly-owned subsidiary, Menley &
James Laboratories, Inc., to Numark Laboratories, Inc. for an aggregate
cash consideration of $12,930,000, subject to an adjustment, up or down,
of up to $500,000. Specifically, you will be asked to approve and adopt
the Sale Agreement, a copy of which is attached to the accompanying Proxy
Statement as Appendix A.
Q: What will happen to Menley & James after the Sale?
A: Substantially all of the assets of the Company are owned by the operating
subsidiary, Menley & James Laboratories, Inc. As a result of the Sale,
substantially all of our assets will be sold, and substantially all of our
liabilities will be assigned to Numark. The Company will be transformed
into an acquisition company with cash and net loss carryforwards, which
may be used to offset against future income, if any. Our objective will
then be to serve as a vehicle to effect acquisitions, whether by merger,
exchange of capital stock, acquisition of assets or other similar business
combination, with, or by making a strategic investment by acquiring a
minority interest in, a company that the management and the Board of
Directors believes has potential to increase stockholder value.
Q: Will I be able to vote separately on the change in nature of the Company's
business?
A: You will not have an opportunity to vote separately on the sale of assets
and the change in the nature of the business of the Company. Consequently,
a vote in favor of the approval and adoption of the Sale Agreement will
constitute a vote in favor of changing the nature of the business of the
Company.
Q: Why is your Board of Directors recommending the Sale?
A: Your Board of Directors has determined that the terms of the Sale are in
the best interests of the stockholders of the Company. In reaching this
conclusion, they considered a number of factors, including:
o the cash purchase price of $12,930,000, subject to an adjustment, up
or down, of up to $500,000; o the risks associated with the
over-the-counter drug and toiletry product business;
o the opinion of Howard, Lawson & Co. that the Sale is fair to the
Company and its stockholders from a financial point of view;
o the financial results of the Company since 1993 and the unlikelihood
that the Company would be able to achieve sales growth if it stayed in
its current business;
o the Company's proposed business plan and opportunities going forward;
o the current and historical trading prices of the Common Shares; and
o the absence of any better offer.
To review the background and reasons for the Sale in greater detail, see
page 9. A copy of the opinion of Howard, Lawson & Co. is included as
Appendix B to the attached Proxy Statement.
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Q: How will the Company pay for the costs and expenses associated with the
Sale?
A: Excluded from the assets to be sold will be up to $2,000,000 in cash (the
"Retained Cash") from which the Company will pay all of the costs and
expenses associated with the Sale, and certain other liabilities,
including employee severance obligations.
Q: Will I receive any payment as a result of the Sale?
A: No, you will not receive any payments as a result of the Sale. The Company
will retain the net proceeds from the Sale (including the Retained Cash)
and use them for general corporate purposes, including for potential
acquisitions of other businesses and payment of retained liabilities.
Q: Can I still sell my Common Shares?
A: Neither the Sale nor the Sale Agreement will affect your right to sell or
otherwise transfer your Common Shares.
Q: What is the required vote to approve and adopt the Sale Agreement?
A: The affirmative vote of the holders of a majority of the outstanding Common
Shares is required to approve and adopt the Sale Agreement. So long as the
Sale Agreement has not been terminated, Warburg, Pincus Investors, L.P., a
significant stockholder of the Company ("Warburg, Pincus"), and Lawrence
D. White, the President and Chief Executive Officer of the Company, have
each agreed to vote their respective Common Shares in favor of the Sale.
Warburg, Pincus and Mr. White together own or control approximately 53.5%
of the outstanding Common Shares. Accordingly, the affirmative vote of
Warburg, Pincus and Mr. White will be sufficient to approve and adopt the
Sale Agreement.
Q: If I sign and return the proxy without completing it, will that be
considered a "yes" or "no" vote?
A: If a proxy is executed and returned without instructions as to how it is to
be voted, such proxy will be voted against the approval and adoption of
the Sale Agreement.
Q: What if I want to change my vote?
A: To change your vote, just send in a later-dated, completed and signed proxy
card before the Meeting or attend the Meeting in person and vote.
Q: If my Common Shares are held in "street name" by my broker, will my broker
vote my Common Shares for me?
A: Your broker will vote your Common Shares ONLY if you instruct your broker
how to vote. Your broker should mail information to you that will explain
how to give instructions to your broker.
Q: Will I owe any federal income tax as a result of the Sale?
A: No, you will not owe any federal income tax as a result of the Sale.
However, if you decide to sell your Common Shares at any time you may owe
certain taxes at that time. Please contact your own tax advisor.
Q: When do you expect the Sale to be completed?
A: The Company and Numark are working toward completing the Sale as quickly as
possible, with the goal of completing the Sale on the same date that the
Meeting is held, or as shortly as possible thereafter.
Q: Will I have appraisal rights?
A: Under the Delaware General Corporation Law, you do not have appraisal
rights in connection with the Sale.
Q: What do I need to do now?
A: Please complete and mail your signed proxy card in the enclosed return
envelope as soon as possible, so that your Common Shares may be
represented at the Meeting. In addition, you may attend and vote at the
Meeting in person, whether or not you have completed, signed and mailed
your proxy card.
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Q: Whom should I call with questions?
A. If you have any questions about the Sale, please call William W. Yeager,
the Company's Chief Financial Officer, at (215) 441-6500.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE UPON REQUEST FROM MENLEY & JAMES, INC., 100 TOURNAMENT DRIVE, HORSHAM,
PENNSYLVANIA, 19044, ATTENTION OF WILLIAM W. YEAGER, CHIEF FINANCIAL OFFICER,
TELEPHONE NUMBER (215) 441-6500. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH
DOCUMENTS, ANY REQUEST SHOULD BE DELIVERED TO MR. YEAGER BY NO LATER THAN
NOVEMBER 16, 1998.
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SUMMARY
This summary highlights selected information from this document. Because
Menley & James, Inc. operates through its wholly-owned subsidiary, Menley &
James Laboratories, Inc., references to the "Company" or "Menley & James" in
this Proxy Statement include Menley & James, Inc. and Menley & James
Laboratories, Inc., except where the context requires otherwise.
This summary may not contain all of the information that is important to
you. To understand the Sale fully and for a more complete description of the
legal terms of the Sale, you should read carefully this entire document and the
other documents to which we have referred you. See "Where You Can Find
Additional Information" at page 33 of this Proxy Statement. The actual terms of
the Sale are contained in the Sale Agreement. The Sale Agreement is included in
this Proxy Statement as Appendix A.
The Meeting
Time, Place, and Purpose
The special meeting of the stockholders of Menley & James, Inc. (the
"Company") will be held on November 23, 1998, at 10:00 a.m. (local time) at the
Hotel Inter-Continental New York, 111 East 48th Street, New York, New York, or
any adjournment or postponement thereof (the "Meeting"), to vote upon the
approval and adoption of the Sale Agreement and to transact such other business
as may properly come before the Meeting or any adjournment thereof. Copies of
this Proxy Statement, the attached Notice of Special Meeting of Stockholders
and the enclosed form of proxy were first mailed to the Company's stockholders
on or about October 23, 1998.
Proposal
At the Meeting, the Company's stockholders will consider and vote upon a
proposed resolution in favor of the approval and adoption of the Asset Purchase
Agreement dated as of August 21, 1998, as amended by Amendment No. 1 dated as
of October 13, 1998 (as amended, the "Sale Agreement"), by and among the
Company, the Company's wholly-owned subsidiary, Menley & James Laboratories,
Inc., a Delaware corporation (the "Subsidiary"), and Numark Laboratories, Inc.,
a Delaware corporation ("Numark" or the "Purchaser"). A vote in favor of the
approval and adoption of the Sale Agreement will be considered a vote in favor
the sale (the "Sale") of substantially all of the assets of the Subsidiary (the
"Purchased Assets") for an aggregate cash consideration of $12.93 million,
subject to an adjustment, up or down, of up to $500,000 (the "Purchase Price"),
plus the assignment to and the assumption by the Purchaser of substantially all
of the liabilities of the Subsidiary, all as more fully described herein.
Excluded from Purchased Assets will be up to $2.0 million in cash (the
"Retained Cash") from which the Company will pay all of its costs and expenses
associated with the Sale, and certain other liabilities, including employee
severance obligations. A copy of the Sale Agreement is attached to this Proxy
Statement as Appendix A and incorporated herein by reference. The stockholders
of the Company will not have an opportunity to vote separately on the change in
the nature of the business of the Company. Consequently, a vote in favor of the
approval and adoption of the Sale Agreement will also constitute a vote in
favor of changing the nature of the business of the Company. See "Business of
the Company Following the Sale."
Voting of Proxies
The Company's common stock, par value $0.01 per share (the "Common
Shares"), represented by the enclosed proxy, when properly completed, executed
and received by the Secretary of the Company prior to the Meeting, and not
revoked, will be voted in accordance with the directions thereon, or if no
directions are indicated, the proxy will be voted against the approval and
adoption of the Sale Agreement. If any other matter should be presented at the
Meeting upon which a vote may properly be taken, the Common Shares represented
by the proxy will be voted with respect thereto at the discretion of the person
or persons holding such proxy. The Board of Directors currently knows of no
other business that will be presented for consideration at the Meeting. Proxies
may be revoked by stockholders at any time prior to the voting of the proxy by
written notice to the Company, by submitting a new proxy or by personal ballot
at the Meeting. Presence at the Meeting does not itself revoke the proxy.
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Solicitation of Proxies
Proxies are being solicited by and on behalf of the Company. Officers and
employees of the Company may solicit proxies by personal interview, mail,
telegraph or telephone. Such officers and employees of the Company will not be
additionally compensated, but will be reimbursed for out-of-pocket expenses in
connection with such solicitation. Arrangements will also be made with brokers
and dealers, custodians, nominees and fiduciaries to assist the Company in the
solicitation of proxies, including for forwarding of proxy materials to
beneficial owners of Common Shares held of record by such persons, and the
Company will reimburse such brokers, dealers, custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith but will
not otherwise compensate such persons. The cost of preparing this Proxy
Statement and all other costs in connection with solicitation of proxies for
the Meeting are being borne by the Company.
Shares Entitled to Vote
As of the close of business on October 7, 1998, the record date for
determining stockholders entitled to vote at the Meeting (the "Record Date"),
the Company had 6,163,520 Common Shares issued and outstanding. Each Common
Share entitles the holder to one vote on each matter presented for
consideration at the Meeting. A majority of the Common Shares issued,
outstanding and entitled to vote at the Meeting, present in person or
represented by proxy, shall constitute a quorum. Abstentions and broker
non-votes will be counted as present in determining whether the quorum
requirement is satisfied. A broker non-vote occurs when a broker or other
nominee holding shares for a beneficial owner does not vote on a proposal
because the broker or nominee does not have discretionary voting power and the
beneficial owner has not checked one of the boxes on the proxy card. See "The
Meeting--Quorum; Shares Entitled to Vote."
Vote Required
Approval of a majority of the 6,163,520 Common Shares outstanding on the
Record Date has been established as a requirement for the approval and adoption
of the Sale Agreement in order to comply with the provisions of the Sale
Agreement and applicable law. Abstentions and broker non-votes will be counted
as votes against the approval and adoption of the Sale Agreement. See "The
Meeting--Vote Required."
Shares Committed
So long as the Sale Agreement has not been terminated, Warburg, Pincus
Investors, L.P. ("Warburg, Pincus"), a significant stockholder of the Company,
and Lawrence D. White, the President and Chief Executive Officer of the
Company, have agreed to vote their respective Common Shares in favor of the
approval and adoption of the Sale Agreement. Warburg, Pincus and Mr. White
beneficially own in the aggregate approximately 53.5% of the issued and
outstanding Common Shares. Accordingly, the affirmative vote of Warburg, Pincus
and Mr. White will be sufficient to approve and adopt the Sale Agreement. No
action on the part of any other stockholder will be required to approve and
adopt the Sale Agreement. See "The Meeting--Shares Committed" and "The
Sale--Terms of the Sale Agreement and Stockholder Agreement."
No Appraisal Rights
Under the Delaware General Corporation Law (the "DGCL"), stockholders of
the Company do not have appraisal rights in connection with the Sale.
The Sale
Terms of the Sale
Pursuant to the terms of the Sale Agreement, the Purchaser has agreed to
pay $12.93 million in cash, subject to an adjustment, up or down, of up to
$500,000, and to assume substantially all of the liabilities of the Company.
Excluded from Purchased Assets will be the Retained Cash (consisting of up to
$2.0 million in cash) from which the Company will pay all of its costs and
expenses associated with the Sale and
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certain other liabilities, including employee severance obligations. For a more
detailed description of the Sale Agreement and the assets and liabilities to be
transferred to, and assumed by, the Purchaser, and the assets and liabilities
to be retained by the Company, see "The Sale--Terms of the Sale Agreement and
Stockholder Agreement--Sale Agreement."
Consummation of the Sale is subject to the satisfaction of a number of
conditions, including obtaining the approval of the stockholders of the
Company. See "The Sale--Terms of the Sale Agreement and Stockholder
Agreement--Sale Agreement--Conditions to the Sale."
Reasons for the Sale; Recommendation of the Board of Directors
The Board of Directors has determined that the terms of the Sale are fair
to, and in the best interests of, the stockholders of the Company, and has
unanimously approved the Sale Agreement. Accordingly, the Board of Directors
unanimously recommends that the stockholders vote to approve and adopt the Sale
Agreement. In reaching its conclusion, the Board of Directors considered a
number of factors, including: (i) the amount and nature of the consideration to
be received by the Company; (ii) the opinion of Howard, Lawson & Co. ("HL&Co.")
to the effect that the Sale is fair to the Company and its stockholders from a
financial point of view; (iii) the proposed business plan and opportunities for
the Company after the Sale; (iv) the financial results of the Company since
1993 and the prospects for the Company's historical business; (v) the current
and historical stock prices of the Common Shares; (vi) the absence of any
better offer; and (vii) the risks associated with the over-the-counter ("OTC")
drug and toiletry product markets generally. The Board also placed value on the
possibility that the Company may be able to generate returns for its
stockholders in the future through the implementation of a post-Sale
acquisition strategy. Upon completion of the Sale, the Company will be a public
company with approximately $13.0 million in cash and cash equivalents, no
material liabilities, and, assuming an estimated taxable loss for the year
ended December 31, 1998 of $1.6 million, a net operating loss carryforward for
federal income tax purposes of approximately $7.3 million and an estimated
capital loss carryforward of approximately $24.5 million. Mr. White, at the
direction of the Board of Directors and with the assistance of Warburg, Pincus,
will have the primary responsibility of seeking potential business combinations
outside of the OTC drug and toiletry business. See "The Sale--Background of the
Sale," "--Reasons for the Sale; Recommendation of the Board of Directors" and
"--Opinion of Financial Advisor."
Opinion of Financial Advisor
The Company retained HL&Co. to render its opinion as to the fairness, from
a financial point of view, of the Sale. HL&Co. provided the Board of Directors
with an oral opinion on August 21, 1998, confirmed by a written opinion on the
same date, the date of the Board of Directors meeting at which the execution of
the Sale Agreement by the Company was authorized and approved. Such opinion
states that the Sale is fair, from a financial point of view, to the Company
and its stockholders. HL&Co. has advised the Company that the opinion remains
in full force and effect as of the date of this Proxy Statement. The full text
of the HL&Co. opinion, which sets forth certain assumptions made, matters
considered and limitations on the review performed, is attached as Appendix B.
See "The Sale--Opinion of Financial Advisor."
Conduct of Business After the Sale; Use of Proceeds
As a result of the Sale, substantially all of the Company's assets will be
sold to, and substantially all of its liabilities will be assigned to and
assumed by, the Purchaser, and the Company will retain cash, net loss
carryforwards (which may be used to offset future income, if any) and certain
liabilities. The Company will be transformed to serve as a vehicle to effect a
business combination, whether by merger, exchange of capital stock, acquisition
of assets, strategic investment of a minority interest, or other similar
business combination (a "Business Combination"), involving an operating
business (a "New Operating Business"). The business objective of the
transformed Company (hereinafter, "Post-Sale M&J") will be to effect a Business
Combination with a New Operating Business which Post-Sale M&J believes has
potential to increase stockholder value. Any such Business Combination would
depend on the availability of attractive candidates and the Company's ability
to finance any such Business Combination. Post-Sale M&J
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intends to utilize its remaining cash, together with additional equity or debt,
or a combination thereof, in effecting a Business Combination. The Company has
not identified any acquisition candidates or the availability of financing
arrangements and there can be no assurance that any Business Combination will
be accomplished or, if accomplished, it will result in increased stockholder
value. See "Business of the Company Following the Sale."
The Company plans to use the cash proceeds from the Sale (including the
Retained Cash) to pay certain retained liabilities and fund transaction
expenses related to the Sale. The Company estimates that the retained
liabilities, which include employee severance obligations, obligations under
certain office and equipment leases, and the costs and expenses incurred by the
Company in connection with the Sale (including accounting, legal, printing and
investment banking fees), will aggregate approximately $2.0 million. The
Company will use the remainder of the net proceeds for general corporate
purposes, including to pay ongoing general and administrative costs, and to
seek candidates to effect a Business Combination. Pending use of the remaining
net proceeds, the Company may invest such funds in investment securities, as
defined in the Investment Company Act of 1940 (the "1940 Act"), and become
subject to further regulation by the SEC under the 1940 Act. If Post-Sale M&J
is deemed to be an investment company under the 1940 Act because of its
investment securities holdings, Post-Sale M&J must register as an investment
company under the 1940 Act. The Company does not intend to become an investment
company and intends to rely on the transient investment company exemption under
Rule 3a-2 of the 1940 Act. See "Business of the Company Following the
Sale--Risk Factors--Regulation."
No Payments to Holders of Common Shares
The stockholders will not receive any payments as a result of the Sale.
Accounting Treatment of the Sale
For accounting purposes, the Sale will be presented as a sale of assets
transaction that is expected to result in a loss to the Company of
approximately $8.2 million, based on the Company's interim financial statements
for the six months ended June 30, 1998, as reported on the Company's Quarterly
Report on Form 10-Q, after consideration of the expected proceeds from the Sale
less the estimated transaction costs. The estimated loss will be recorded in
the Company's financial statements for the quarter ended September 30, 1998.
The Company will operate its business consistent with its past practices
through the closing date of the Sale and the resulting income or loss will be
recorded in operations. The estimated loss on the Sale will be adjusted
subsequently if the actual proceeds or transaction costs differ from the
estimated amounts.
Certain Federal Income Tax Consequences
The Company will recognize a gain or loss on the sale of the Purchased
Assets, generally on an asset-by-asset basis. The Company expects that gain, if
any, recognized with respect to any Purchased Asset will be fully absorbed by
losses recognized on the sale of other assets and by net operating loss
carryforwards ("NOL carryforwards") available to the Company. Accordingly, no
current tax is expected to be due as a result of the Sale. The Company further
expects that NOL carryforwards will remain available for use by the Company
following the Sale. In addition, the Company expects that substantial capital
loss carryforwards ("CL carryforwards") will result from the sale of certain
assets. In general, these NOL carryforwards and CL carryforwards will be
available to offset future taxable income of the corporation, absent a change
in control of the Company. To finance a Business Combination, the Company may
have to raise equity from persons or entities not presently stockholders of the
Company, which could result in a change in control. Thus, there is no assurance
that the Company (or any Company successor) will receive future tax benefits
from such utilization.
The Sale will not be taxable to stockholders of the Company. STOCKHOLDERS
ARE ADVISED TO CONSULT WITH THEIR TAX ADVISORS FOR A MORE DETAILED ANALYSIS OF
ANY FEDERAL, STATE OR LOCAL TAX CONSEQUENCES. See "The Sale--Certain Federal
Income Tax Consequences."
7
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THE MEETING
Quorum; Shares Entitled to Vote. As of the Record Date, 6,163,520 Common
Shares were issued and outstanding and entitled to vote at the Meeting. The
holders of a majority of such Common Shares, present in person or represented
by proxy, shall constitute a quorum at the Meeting. Abstentions and broker
non-votes will be counted as present in determining whether the quorum
requirement is satisfied. A broker non-vote occurs when a broker or other
nominee holding shares for a beneficial owner does not vote on a proposal
because the broker or nominee does not have discretionary voting power and the
beneficial owner has not checked one of the boxes on the proxy card.
Vote Required. Approval of a majority of the 6,163,520 Common Shares
outstanding on the Record Date has been established as a requirement for the
approval and adoption of the Sale Agreement in order to comply with the
provisions of the Sale Agreement and applicable law. Abstentions and broker
non-votes will be counted as votes against the approval and adoption of the
Sale Agreement.
Shares Committed. So long as the Sale Agreement has not been terminated,
Warburg, Pincus, a significant stockholder of the Company, and Lawrence D.
White, the President and Chief Executive Officer of the Company, have agreed to
vote their respective Common Shares in favor of the approval and adoption of
the Sale Agreement. Warburg, Pincus and Mr. White beneficially own in the
aggregate approximately 53.5% of the issued and outstanding Common Shares.
Accordingly, the affirmative vote of Warburg, Pincus and Mr. White will be
sufficient to approve and adopt the Sale Agreement. No action on the part of
any other stockholder will be required to approve and adopt the Sale Agreement.
Voting of Proxies. Proxies in the accompanying form, which are properly
completed, executed and duly returned to the Secretary of the Company and not
revoked prior to exercise, will be voted in accordance with the instructions
contained therein. If a proxy is executed and returned without instructions as
to how it is to be voted, such proxy will be voted against the approval and
adoption of the Sale Agreement. Each proxy granted pursuant to this
solicitation is revocable and may be revoked at any time prior to its exercise,
provided written notice of revocation is received by the Secretary of the
Company prior to the Meeting. A stockholder who attends the Meeting in person
may, if he or she wishes, vote by ballot at the Meeting, thereby canceling any
proxy previously given by such stockholder.
Solicitation of Proxies. Officers and employees of the Company may
solicit proxies by personal interview, mail, telegraph or telephone. Brokers,
bankers and other nominees will be reimbursed for out-of-pocket and other
reasonable clerical expenses incurred in obtaining instructions from beneficial
owners of the Common Shares. The cost of preparing this Proxy Statement and all
other costs in connection with solicitation of proxies for the Meeting are
being borne by the Company.
STOCKHOLDERS WHO DO NOT EXPECT TO ATTEND IN PERSON ARE URGED TO COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. IN ORDER TO
AVOID UNNECESSARY EXPENSE, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY
PROMPTLY, NO MATTER HOW LARGE OR HOW SMALL YOUR HOLDINGS MAY BE.
8
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THE SALE
Background of the Sale
General
Since the founding of the Company in 1990, the OTC drug industry has
experienced a series of significant changes, including:
o the acceleration of a strategy of introducing numerous, non-innovative,
low-cost line extensions by major brand-name product companies;
o the continuation of the switch of numerous products from prescription to
non-prescription status, such as the H2 Antagonists (e.g., Pepcid,
Tagamet, Zantac);
o the proliferation of private-label store brand products into virtually
every category in the major drug chains and drug wholesalers; and
o the rapid consolidation of drug store chains driven primarily by the
profit pressures of managed care and the desire to build market share.
Management and the Board of Directors believe that changes in the OTC drug and
toiletry market will continue to favor large consumer package goods brands to
the detriment of smaller, lesser known products. As a consequence of the
changes in this market, the shelf space devoted to small brand name, non-unique
products, including those marketed by the Company, has been reduced. Since
large drug store chains ordinarily employ one plan for shelf space allocation
of the items being stocked throughout their entire chain ("Shelf Allocation
Plan") and large consumer package goods brands are distributed nationwide,
while the smaller brands tend to be distributed regionally, consolidation among
drug store chains has generally resulted in the large consumer package goods
brands being included in the Shelf Allocation Plan for the combined company to
the detriment of the small regional brands, such as those marketed by the
Company. Further, when a product is switched from prescription to
nonprescription status, the large consumer package goods companies have
sufficient resources to switch their products' status while the small companies
usually do not, resulting again in a decrease in shelf space and, accordingly,
sales.
To address the changing industry, the Company revised its strategy in an
attempt to remain competitive. The elements of this strategy included:
enhancing the Company's balance sheet position by focusing on debt repayment,
resulting in approximately $10.5 million of debt being repaid since 1993;
implementing strategic ventures with three pharmaceutical companies to obtain
new products that would not require acquisition funds; maintaining a solid
infrastructure capable of achieving new product retail distribution;
identifying a limited number of brands that would receive primary marketing
support and could serve as the lead growth products of the Company; and
focusing on the nutraceutical industry for potential acquisitions.
Since 1995, the Company contacted over 100 companies in an effort to
expand its business through acquisitions and strategic ventures. To insure that
this process received the fullest management focus, the Board of Directors
instructed Mr. White to devote the majority of his time and efforts to this
endeavor. As a result of these efforts, the Company developed three new brands
(Derifil, Humibid and Capsaicin) through strategic ventures. Sales of these
three brands represented over 11% of the Company's total sales in 1997. During
1997, the Company focused its development and marketing efforts on Benzedrex,
Derifil and Humibid Guaifenesin Plus. This systematic approach of developing
and executing targeted programs for specific brands was designed to identify a
product that would provide sufficient sales response to become the lead product
for the Company. To date, this has not been achieved, and the Company does not
believe it can be achieved in the future with its current line-up of products.
In 1998 the Company continued to spend marketing funds in an attempt to develop
Albolene, Benzedrex, Derifil and Humibid into significant brands. Albolene,
Benzedrex and Humibid received over $600,000 in advertising support from the
Company, and Derifil was promoted to nursing homes via an internal
telemarketing operation. As part of its efforts to expand its business, the
Company contacted four nutraceutical companies during the first six months of
1998 to discuss possible acquisitions. Additionally, the Company completed an
extensive evaluation of the nutraceutical direct-to-consumer, multilevel
marketing industry to determine if
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<PAGE>
there was an opportunity for the Company to initiate this type of
direct-to-consumer business. In addition, while the Company has devoted
significant time and resources in pursuing acquisitions to help expand the
business, this effort during the past three years has been largely
unsuccessful.
As a result, the Company's sales have remained constant for the third
consecutive year. The Company had sales of approximately $14.4 million in 1997,
of which $1.7 million were from the new products marketed through its three
joint ventures with pharmaceutical companies. For the first six months of 1998,
the Company's sales were virtually unchanged as compared to the same period in
1997 and, as of June 30, 1998, the Company had a working capital position of
$8.6 million. Additionally, at December 31, 1997, the Company had NOL
carryforwards for federal tax purposes of approximately $5.7 million.
It was the assessment of management and the Board of Directors of the
Company that the continued focus on the retail OTC drug and toiletry
marketplace would not be the best way to increase stockholder value. Management
and the Board of Directors believe that the conditions that currently exist for
the OTC drug and toiletry marketplace and the future direction of this market
will continue to favor larger consumer package goods brands to the detriment of
smaller, lesser known products. Though the Company has maintained a flat sales
level and significantly improved the balance sheet, management and the Board of
Directors do not believe that the Company's current lineup of products or
potential for acquisitions in the retail OTC drug and toiletry industry will
provide significant revenue growth in the future.
Chronology of Events
On May 11, 1998, Mr. White was informed by James E. Thomas, a Director of
the Company and a managing director of E.M. Warburg, Pincus & Co., LLC, an
affiliate of Warburg, Pincus, that the Purchaser has expressed a serious
interest in acquiring the Company at a price per share significantly above the
recent trading price. Numark had no previous relationship with Warburg, Pincus
or any of its affiliates. Mr. White spoke with Patrick M. Lonergan, President
of Numark, to confirm the interest and the Company and Purchaser entered into a
confidentiality agreement on May 12, 1998. In advance of their meeting, the
Company provided the Purchaser with certain historical, financial and other
information. On June 5, 1998, Mr. White met with Mr. Lonergan and Benjamin M.
Deavenport, another principal of Numark, to discuss the Purchaser's interest
and to review the previously supplied information. Mr. White provided Messrs.
Lonergan and Deavenport with more detailed financial information concerning the
Company at that time.
On June 26, 1998, at the direction of the Company's Board of Directors,
Mr. White sent a letter to four prospective purchasers soliciting their
interest in acquiring the Company and indicating how they could proceed to make
an offer to purchase the business of the Company. Each of these prospective
purchasers was selected by the Company because it had previously expressed an
interest to directors or officers of the Company in acquiring the business of
the Company. In response to requests for additional information from three of
the prospective purchasers, the Company delivered to each of them certain
financial and other information concerning the Company. William Everett, a Vice
President of the Purchaser, and O. David Fischer, a principal of the
Purchaser's independent accounting firm, met with Mr. White on July 13 at the
Company's offices to discuss certain financial information and to conduct due
diligence. During that meeting, Messrs. Everett and Fischer requested and
received additional product, financial, and other due diligence information.
Mr. White was furnished with a draft letter of intent by Numark, at which time
he informed Mr. Lonergan that the Board would discuss the Purchaser's interest
at its July 16 meeting.
By the July 15 deadline imposed by the Company, three indications of
interest had been received ranging in price from $2.00 to $2.05 per Common
Share, each of which was subject to the completion of due diligence. The first
bid was a $2.00 per share cash tender offer for 100% of the Company's
outstanding Common Shares (representing an aggregate purchase price of
approximately $12.3 million) and was subject to a financing contingency. A
second bid was a $2.05 per share offer for 100% of the Company's outstanding
Common Shares (representing an aggregate purchase price of approximately $12.6
million) and was supported by a term sheet for collateralized bank financing
with personal guarantees. The second bid was also subject to obtaining
financing and completion of an independent audit of the Company's interim
financial statements by an accounting firm selected by the second bidder (the
"Other Bidder"). A third bid (the Purchaser's) was a $2.00 per share offer for
100% of the Company's outstanding Common Shares (representing an aggregate
purchase price of approximately $12.3 million) with bank financing
collateralized by both the Company's and the Purchaser's assets as
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<PAGE>
well as personal guarantees of the Purchaser's principals. After considering
the relative strength of the bids (including the price and contingencies) and
the ability to complete the transaction in a timely manner, a decision was made
by the Board of Directors to pursue offers proposed by the Purchaser and the
Other Bidder.
At the same time the preferred bidders were being selected, and after
considering the advice of its counsel and certain directors, the Company
decided to pursue a transaction involving a sale and assignment of
substantially all of the Company's assets and liabilities, rather than a tender
offer or merger. The Company determined that an asset sale transaction would
enable the Company to obtain fair value for the business of the Company while,
at the same time, potentially obtaining future additional value from its NOL
carryforwards and CL carryforwards for the benefit of the Company's
stockholders. Since neither the Purchaser nor Applied had expressed an interest
in maintaining the public corporate entity or utilizing the NOL carryforwards
and CL carryforwards, the Company had flexibility in determining the structure
of the sale of the business without impacting the price that either party would
pay. The Board determined that a public company with approximately $13.0
million of cash and cash equivalents, and substantial NOL carryforwards (which
may possess positive value even in the event of a charge in control) could be
valuable in the marketplace. Further, by positioning the Company to seek
potential Business Combinations after the Sale in an effort to capture this
potential value, the Company could realize a potential benefit for the
stockholders over and above the Purchase Price.
As a result, Mr. White sent to each of the Purchaser and the Other Bidder
a letter requesting a final and binding offer from each of them and stating
that the preferred form of transaction would be a sale and assignment of
substantially all of the Company's assets and liabilities. Mr. White's letter
also stated that the Company would retain $2.0 million in cash in order to
satisfy certain retained liabilities, including the office lease, transaction
costs and obligations to and in respect of the employees. On July 28, Mr.
Lonergan telephoned Mr. White and stated that the Purchasers would be willing
to pay $12.3 million for the acquisition of the Company's assets and assumption
of the Company's liabilities. Mr. White and Mr. Thomas discussed the offer and
decided to ask the Purchaser to increase the purchase price and agree to
complete due diligence promptly. Mr. Lonergan telephoned Mr. White on July 29
and offered approximately $12.9 million for the Company's assets and
liabilities (subject to reduction if the net tangible assets at closing were
less than they were at May 31, 1998) and requested that the Company negotiate
exclusively with the Purchaser pending a final agreement.
At a telephonic Board meeting on July 30, noting that Numark was further
along than the Other Bidder in completing its due diligence and securing its
financing, that the Other Bidder's offer contained significant conditions that
were not part of Numark's offer (including obtaining financing and satisfactory
completion of an interim audit of financial statements), and that Numark was
unlikely to proceed without an exclusivity period, the Board decided to pursue
a transaction with Numark. In that regard, the Board authorized Mr. White to
negotiate a letter of intent (with a limited exclusivity period) concerning the
sale of the Subsidiary's assets and liabilities to the Purchaser. The Board
instructed Mr. White to set August 12 as the date for completion of Numark's
due diligence and August 18 as the date for execution of the definitive
agreement. In addition, the Board approved the exclusive negotiation with the
Purchaser on the further condition that the Purchaser secure its financing by
August 12. The Board further authorized Mr. White to engage Howard, Lawson &
Co. ("HL&Co.") to serve as financial advisor to the Company.
During the first few days of August, counsel for the Purchaser and the
Company exchanged drafts of a letter of intent. On August 3, 1998, the Company
and the Purchaser executed a letter of intent (the "Letter of Intent") setting
forth the terms of the proposed transaction which included a transfer of
substantially all of the assets and liabilities of the Company, a $12.93
million purchase price, subject to an adjustment, up or down, of up to $500,000
based upon the level of the net tangible assets at the closing, and the
retention by the Company of the Retained Cash to pay transaction costs and
certain retained liabilities. The Letter provided, among other things, that (a)
the Purchaser would complete its due diligence and secure its financing by
August 12, (b) the parties would enter into a final agreement by August 18, and
(c) provided that the condition set forth in (a) was satisfied or waived, the
Company would not negotiate a sale of the Company with any entity other than
the Purchaser until August 18.
On August 5, 1998, counsel for the Company delivered a draft asset
purchase agreement to counsel for the Purchaser. On August 6, 1998, the Company
received a letter from the Other Bidder increasing its bid to $2.21 per Common
Share (representing an aggregate purchase price of $13.6 million). This letter
indicated that the bid
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<PAGE>
remained subject to the same conditions, including obtaining financing and
completing the audit of interim financial statements. In light of the Company's
contractual exclusivity arrangement with Numark, the Company responded to the
Other Bidder that it was not in a position to proceed with them at that time
but would contact them if that were to change. The Company and Purchaser
engaged in various due diligence meetings between August 3 and August 12. On
August 10, counsel for the Purchaser delivered written comments to the draft
asset purchase agreement. During this period, counsel for the two parties also
exchanged drafts of and comments on a proposed stockholders' agreement which
would obligate Warburg, Pincus and Mr. White to vote in favor of approval and
adoption of the definitive agreement. On August 12, Mr. White and Mr.
Deavenport met to conduct a final due diligence meeting. At the conclusion of
the meeting, Mr. Deavenport informed Mr. White that the Purchaser had concluded
its due diligence, but had not yet received its financing commitment. Later
that evening, Mr. White received a telephone message from Mr. Deavenport
indicating that the Purchaser had received an oral financing commitment pending
the execution of certain documents by representatives of the Purchaser. Mr.
White telephoned Mr. Deavenport on the morning of August 13 and informed him
that the Company would extend the deadline set forth in the Letter for
obtaining the firm financing commitment until the close of business on August
14. On August 14, Mr. Deavenport provided Mr. White with a letter confirming
that the Purchaser had received a commitment letter for the necessary financing
from a commercial bank (the "Commitment Letter").
At a telephonic meeting of the Board of Directors on August 18, 1998,
HL&Co. made a presentation that included a discussion of its valuation
methodologies and analyses used in analyzing the Sale. At that meeting, HL&Co.
advised the Company's Board of Directors that, absent any material changes, it
was prepared to render its opinion that the Sale was fair to the Company and
its stockholders from a financial point of view. The Company's Board of
Directors questioned HL&Co. as to the various valuation methodologies employed
by it in rendering its conclusion. At the same meeting, counsel to the Company
advised the members of the Board of Directors as to their obligations under
Delaware law and answered questions regarding the proposed terms and conditions
of the Sale. At this meeting, Mr. White was instructed to complete the
negotiation of the Sale Agreement and the collateral documents and report back
to the Board of Directors at a meeting on the morning of August 21. After the
meeting, the Company, through its counsel, informed Numark that the Company
would extend the exclusivity period and the deadline set forth in the Letter
for signing a definitive agreement until the close of business on August 21.
Between August 18 and August 21, management of the Company and the
Purchaser continued to negotiate the terms of the Sale and the Sale Agreement.
The Company also requested that the Commitment Letter be modified to extend the
outside closing date of the transaction from October 15 to November 30, 1998.
Thereafter, on August 21, the Company's Board of Directors, having received a
copy of the most recent draft of the Sale Agreement, met by telephone with
counsel and HL&Co. to consider and vote on the Sale and the Sale Agreement. At
that meeting, HL&Co. delivered to the Board of Directors its oral opinion,
which opinion was subsequently confirmed in a written opinion dated as of such
date, to the effect that, based upon the assumptions made, matters considered
and the limitations on the review undertaken in connection therewith, the Sale
was fair to the Company and its stockholders from a financial point of view.
After discussion and with the recommendation of the Company's senior
management, the Board of Directors determined that the Sale was fair to and in
the best interests of the stockholders, approved the Sale and authorized the
execution of the Sale Agreement, as conclusively negotiated by management.
On the afternoon of August 21, 1998, the Company and the Purchaser reached
agreement on all outstanding issues and entered into the Sale Agreement.
Concurrently therewith, the Purchaser delivered to the Company a copy of the
signed Commitment Letter, modified as requested, and entered into the
Stockholders' Agreement with Warburg, Pincus and Mr. White. Immediately
thereafter, the Company issued a press release announcing the execution of the
Sale Agreement. Warburg, Pincus will not receive any compensation in connection
with the Sale.
Reasons for the Sale; Recommendation of the Board of Directors
The Board of Directors has determined that the terms of the Sale are fair
to, and in the best interests of, the stockholders of the Company, and has
unanimously approved the Sale Agreement. Accordingly, the Board of
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<PAGE>
Directors unanimously recommends that the stockholders vote to approve and
adopt the Sale Agreement. In reaching its conclusion, the Board of Directors
considered a number of factors, including: (i) the amount and nature of the
consideration to be received by the Company; (ii) the opinion of HL&Co. to the
effect that the Sale is fair to the Company and its stockholders from a
financial point of view; (iii) the proposed business plan and opportunities for
the Company after the Sale; (iv) the financial results of the Company since
1993 and the prospects for the Company's historical business; (v) the current
and historical stock prices of the Common Shares; (vi) the absence of any
better offer; and (vii) the risks associated with the OTC drug and toiletry
product markets generally.
Among the specific factors considered in evaluating the Purchaser's offer,
the Board of Directors of the Company noted:
o The Company's sales have remained flat for the last three years and are
just 51% of the sales level achieved in 1992. The Board of Directors
determined that the Company should seek an opportunity to conduct future
operations, in a related or new industry, so as to provide the potential
for a greater return for stockholders.
o The Purchaser will pay cash for the assets, so there is no risk involved
to the Company or the stockholders with the form of consideration.
o Management's and the Board of Director's belief that the present value of
the assets of the Company is currently higher than it will be in the
future due to the following factors: (a) indications of interest from the
Purchaser and other companies interested in acquiring the assets of the
Company; (b) the Company's inability to effectively compete with major
brand-name product companies; (c) increased destocking pressure from major
customers; (d) difficulty in identifying and supporting future
acquisitions of companies in the OTC drug and toiletry product market at a
reasonable economic cost; and (e) difficulty in maintaining the current
revenue and income levels.
o The Board of Directors, based on the Company's efforts in seeking
potential acquirors and its knowledge of the marketplace, determined that
a sale could not be structured with another purchaser that would offer
greater value to the stockholders.
o The Board of Directors determined that the terms and conditions of the
Sale Agreement, including the right of the Board of Directors to terminate
the Sale Agreement under certain circumstances in the exercise of its
fiduciary duties, were favorable to the Company and its stockholders. This
determination was supported by the opinion of HL&Co. to the effect that
the Sale is fair to the Company and its stockholders from a financial
point of view.
The Board also placed value on the possibility that the Company may be
able to generate returns for its stockholders in the future through the
implementation of a post-Sale acquisition strategy. Upon completion of the
Sale, the Company will be a public company with approximately $13.0 million in
cash and cash equivalents, no material liabilities, and, assuming an estimated
taxable loss for the year ended December 31, 1998 of $1.6 million, a NOL
carryforward for federal income tax purposes of approximately $7.3 million and
an estimated CL carryforward of approximately $24.5 million, the ability to use
equity issuances to finance potential acquisitions, a knowledgeable and
supportive Board of Directors, and a significant stockholder (Warburg, Pincus)
experienced in making venture capital and related investments, engaged in
seeking Business Combination transactions for the Company. Mr. White has over
25 years of business management experience and, over the last eight years, has
been instrumental in the negotiation and completion of the Company's
significant acquisitions, financings and ventures, including the purchase of
the Company's business from SmithKline Beecham Corporation. Mr. White, at the
direction of the Board of Directors and with the assistance of Warburg, Pincus,
will have the primary responsibility of seeking potential Business Combinations
outside of the OTC and toiletry business. The business objective of Post-Sale
M&J will be to effect a Business Combination with a New Operating Business
which Post-Sale M&J believes has potential to increase stockholder value. In
seeking candidates for a potential Business Combination, the Company will
target successful companies with (a) a strong management team, (b) a
demonstrated track record of sales and profit growth, (c) the potential for
continued strong growth, and (d) a business plan designed to achieve a position
of significance in its market. Any such Business Combination would depend on
the availability of attractive candidates and the Company's ability to finance
any
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such Business Combination. Post-Sale M&J intends to utilize its remaining cash,
together with additional equity or debt, or a combination thereof, in effecting
a Business Combination. The Company has not identified any acquisition
candidates or the availability of financing arrangements and there can be no
assurance that any Business Combination will be accomplished or, if
accomplished, it will result in increased stockholder value. See "--Interests
of Certain Persons in the Sale" and "Business of the Company Following the
Sale."
The foregoing discussion of the factors considered by Board of Directors
is not intended to be complete, though it does include all material factors
considered by the Board of Directors. In view of the variety of factors
considered in connection with its evaluation of the Sale, the Board of
Directors did not find it practicable to and did not attempt to rank or assign
relative weights to the foregoing factors. In addition, individual members of
the Company's Board of Directors may have given different weights to different
factors.
The Board of Directors recommends that the stockholders vote FOR adoption
of the Sale Agreement.
Opinion of Financial Advisor
The Company retained Howard, Lawson & Co. to render its opinion as to the
fairness, from a financial point of view, of the Sale. HL&Co. provided the
Board of Directors with an oral opinion on August 21, 1998, confirmed by a
written opinion on the same date, the date of the Board of Directors meeting at
which the execution of the Sale Agreement by the Company was authorized and
approved. Such opinion states that the Sale is fair, from a financial point of
view, to the Company and its stockholders. HL&Co. has advised the Company that
the opinion remains in full force and effect as of the date of this Proxy
Statement. The full text of the HL&Co. opinion, which sets forth certain
assumptions made, matters considered and limitations on the review performed,
is attached as Appendix B.
In rendering its opinion, HL&Co. reviewed the following materials: (i) a
draft of this proxy statement dated August 21, 1998; (ii) the Sale Agreement;
(iii) the Company's Annual Reports on Form 10-K for the years ended December
31, 1992 through December 31, 1997; (iv) the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998; (v) certain
operating and financial information provided by the Company related to the
business and prospects of the Company, including forecasted operating results
for the year ending December 31, 1998; (vi) collateral documents relating to
the Sale; (vii) information on the historical trading prices and volume of the
Common Shares; (viii) publicly available financial and market information
regarding certain public companies which HL&Co. believes share valuation
characteristics with the Company; and (ix) the financial terms, to the extent
publicly available, of certain acquisitions deemed comparable and relevant.
HL&Co. held discussions with the management of the Company concerning the Sale,
the events leading to the Sale, the business and operations of the Company, and
the historical and projected financial statements of the Company. HL&Co. also
performed such other studies, analysis, inquiries and investigations as it
deemed relevant for the purposes of its opinion. Specifically, HL&Co.
considered and analyzed the financial data of the Company and performed a
variety of financial and comparative analyses, as described below.
HL&Co. is an investment banking firm with substantial experience in
valuing operating businesses and corporate securities. HL&Co. was selected by
the Company because of its experience in transactions similar to the Sale and
because it is familiar with the Company, its business and its industry. HL&Co.
has had no prior business relationship with the Company. As part of its
investment banking business, HL&Co. is continually engaged in the valuation of
operating businesses and corporate securities in connection with mergers and
acquisitions, competitive biddings, private placements and valuations for
corporate and other purposes. Pursuant to the terms of the engagement of HL&Co.
for its opinion with respect to the fairness of the transaction, the Company
agreed to pay HL&Co. an aggregate fee of $75,000 plus certain out-of-pocket
expenses in cash.
Analysis of the Sale Price
The Company has agreed to sell substantially all of its assets for $12.93
million in cash (excluding $2.0 million in cash and certain other assets) and
assign substantially all of its liabilities to the Purchaser. The purchase
price will be subject to an adjustment, up or down, of up to $500,000 based on
the net tangible assets of the Company as of the date on which the Sale is
consummated (the "Closing Date") as compared to May 31, 1998. Excluded from the
liabilities that the Purchaser will assume are all of its costs and expenses
associated with the Sale, and certain other liabilities, including employee
severance obligations.
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HL&Co. calculated a total expected price of $13.43 million (the "Sale
Price") on the assumption that the purchase price adjustment will increase the
price by the maximum of $500,000. HL&Co. also considered the Retained Cash, for
a calculated transaction value of $15.43 million (the "Transaction Value"), and
the implied value of the non-cash assets which the Purchaser will purchase. The
Company will use the Retained Cash to pay all of its costs and expenses
associated with the Sale and certain other liabilities, including employee
severance obligations. Based on the June, 30, 1998 balance sheet of the
Company, the Purchaser will be acquiring approximately $1.6 million in cash in
the Sale. The Sale Price, net of this cash, is approximately $11.8 million (the
"Enterprise Value of the Sale").
Historical Trading Analysis
HL&Co. reviewed the recent stock market performance of the Common Shares
as quoted on the NASDAQ National Market System. The trading price for the
Common Shares has ranged from $0.625 per share to $2.25 per share in the past
three years, with trading primarily between $1.00 and $1.75. HL&Co. calculated
the Market Capitalization (the market value of the equity) of the Common Shares
for this period, which ranged from $3.8 million to $13.9 million, and observed
that the Market Capitalization was consistently below the Transaction Value of
$15.43 million. HL&Co. also calculated the ratio of the Transaction Value to
the Market Capitalization on various dates in 1998 and observed that on these
dates the ratio ranged from 1.25 to 1.82. On August 14, 1998, the last trading
day considered by HL&Co., the ratio was 1.43.
HL&Co. also calculated the Total Capitalization (the market capitalization
plus debt, net of cash) of the Common Shares for this period, which ranged from
$4.7 million to $11.3 million, and observed that the Total Capitalization was
consistently below the Enterprise Value of the Sale of $11.8 million. HL&Co.
also calculated the ratio of the Enterprise Value of the Sale to the Total
Capitalization on various dates in 1998 and observed that on these dates that
the ratio ranged from 1.35 to 2.10. On August 14, 1998, the last trading day
considered by HL&Co., the ratio was 1.64.
HL&Co. also prepared an analysis of the market for the Common Shares
specifically as it relates to its efficiency. A number of factors considered,
including the trading volume of the Common Shares, the responsiveness of the
trading price to relevant public announcements, and analyst reporting indicate
an inefficient market for the Common Shares.
Review of Historical and Forecasted Financial Performance
HL&Co. also reviewed the Company's financial performance from 1993 through
the six months ended June 30, 1998 and the forecasted performance for 1998.
HL&Co. observed that after declining 37% from 1993 to 1995, sales have remained
flat in the range of $14.3 to $14.5 million for the past three fiscal years and
that earnings (as measured by EBITDA, earnings before interest, taxes,
depreciation and amortization) have declined 38% from $2.4 million in 1995 to
$1.5 million in 1997. It reviewed the factors underlying the Company's
financial performance. HL&Co. also calculated the financial results for the
trailing 12 months ("TTM") ended June 30, 1998 of sales of $14.5 million and
EBITDA of $0.9 million. For 1998, management has forecasted a decline in sales
to $14.0 million and EBITDA of $1.5 million, comparable to 1997. HL&Co. also
observed that the Sale Price represented 0.93 and 0.96 times TTM and forecasted
1998 sales, respectively, and 14.7 and 9.0 times TTM and forecasted 1998
EBITDA. It also observed that the Enterprise Value of the Sale represented 0.81
and 0.84 times TTM and forecasted 1998 sales, and 13.0 and 7.9 times TTM and
forecasted 1998 EBITDA.
Comparable Public Companies Analysis
Using publicly available information, HL&Co. analyzed valuation multiples
for certain public companies in the consumer health care industry: Chattem,
Inc., Compare Generiks, Inc., Futurebiotics, Inc., HealthRite, Inc., Naturade,
Inc., PDK Labs, Inc., and The Quigley Corporation. Given the recent net losses
of the Company, HL&Co. focused on the multiples of total capitalization (market
value of equity plus total debt, net of cash) to revenues and EBITDA. For the
comparable public companies, the multiple of total capitalization to TTM
revenues ranged from 0.3x to 3.2x (1.6x excluding Chattem), with a median of
0.9x. While the Sale Price multiple (0.93x) exceeds the median of the group,
the Enterprise Value multiple (0.81x) is less than the median of the group.
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For the comparable public companies that had positive TTM EBITDA, the
multiple of total capitalization to EBITDA ranged from 3.5x to 10.8x (8.2x
excluding Chattem), with a median of 6.0x. The Sale Price and Enterprise Value
of the Sale represent multiples of 14.7x and 13.0x, respectively, both of which
are well above the median multiples of the comparable public companies.
Comparable Acquisitions Analysis
Using publicly available information, HL&Co. analyzed the purchase prices
and implied transaction multiples of 31 acquisitions of comparable businesses
since 1992 and chose six for further analysis based on their comparability and
the availability of information to make useful comparisons. These transactions
were: the acquisition of Cumberland-Swan Inc. by Perrigo Co., the acquisition
of Neutrogena Corp. by Johnson & Johnson Inc.; the acquisition of St. Ives
Laboratories by Alberto-Culver Co.; the acquisition of Sunsource International
by Chattem, Inc.; the acquisition of the Ban Deodorant brand by Chattem, Inc.;
and the acquisition of Aloette Cosmetics, Inc. by ACI Acquisition Partners. The
multiples of transaction value to sales of the acquired company ranged from
0.3x to 3.3x, with a median of 1.1x. The Sale Price multiple (0.93x) and the
Enterprise Value multiple (0.81x) are less than the median. Data on multiples
of transaction value to EBITDA of the acquired company were available for four
transactions and the multiples ranged from 5.2x. to 19.6x, with a median of
14.1x. While the Sale Price multiple (14.7x) exceeds the median of the group,
the Enterprise Value multiple is less (13.0x). HL&Co. noted that several of the
acquisitions, in particular those at the upper end of the valuation multiple
ranges, represented leading brands with a strong market presence.
Cash Flow Analysis
HL&Co. performed an analysis of the historical and projected cash flows of
the Company. Management of the Company has prepared a forecast of the financial
statements for 1998. It does not, however, in the normal course of business
prepare longer range projections and has not done so in connection with the
Sale. Nonetheless, management discussed with HL&Co. its expectations for the
longer run performance of the business. Management advised HL&Co. that it
believes that the outlook for the next three to five years includes stable or
declining revenues with flat or declining profit margins.
HL&Co. prepared an analysis of the projected cash flows of the Company
under the scenario of flat operating performance. Under such an analysis,
normalized cash flows of $1.5 million could be expected from its operations.
Using a range of rates of returns, HL&Co. capitalized the normalized cash flows
to arrive at a range of indicated value. Such indicated values represent the
present value of a future constant stream of annual cash flows. Using rates of
return of 14% to 18%, the implied value ranges from $8.1 million to $10.4
million. This compares to the Enterprise Value of the Sale of $11.8 million.
In rendering its opinion, HL&Co. relied on the completeness and accuracy
of the information provided to it by the management of the Company including
the information listed earlier. HL&Co. did not independently verify the
financial, legal, tax, operating and other information provided to it by the
Company or publicly available and relied on the completeness and accuracy of
such information in all respects. HL&Co. did not make independent appraisals or
evaluations of the assets of the Company, and relied upon the representations
of management of the Company concerning information with respect to the Company
and its financial statements. HL&Co. assumed that the information relating to
the prospects of the Company furnished by management reflects the best then
currently available estimates and judgments of the management of the Company.
HL&Co. relied on the Company to advise it promptly if any information
previously provided became inaccurate or was required to be updated. HL&Co. did
not contact any prospective purchaser of the Company or any of its assets.
HL&Co.'s analysis is necessarily based upon economic, market and other
conditions and the information made available to it as of the date of its
opinion. HL&Co.'s analysis does not incorporate or provide an opinion on the
effects of future transactions.
Use of Proceeds
The Company plans to use the cash proceeds from the Sale (including the
Retained Cash) to pay certain retained liabilities and fund transaction
expenses related to the Sale. The Company will use the remainder of the net
proceeds for general corporate purposes, including to pay ongoing general and
administrative costs, and to seek candidates to effect a Business Combination.
Pending use of the remaining net proceeds, the Company may
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invest such funds in investment securities, as defined in the 1940 Act, and
become subject to further regulation by the SEC under the 1940 Act. If
Post-Sale M&J is deemed to be an investment company under the 1940 Act because
of its investment securities holdings, Post-Sale M&J must register as an
investment company under the 1940 Act. The Company does not intend to become an
investment company and intends to rely on the transient investment company
exemption under Rule 3a-2 of the 1940 Act. See "Business of the Company
Following the Sale--Risk Factors--Regulation."
No Payment, Dividend or Distribution to Holders of Common Shares
The stockholders will not receive any payments, whether as a dividend or
distribution in liquidation, as a result of the Sale. Any determination to pay
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, capital requirements, contractual restrictions and other
factors deemed relevant by the Board of Directors. The Board of Directors does
not intend to declare dividends in the foreseeable future, but instead intends
to retain earnings, if any, for use in the Company's business operations.
Absence of Dissenters' Rights of Appraisal
The Delaware General Corporation Law governs stockholders' rights in
connection with the Sale. Under the applicable provisions of Delaware law, the
Company's stockholders will have no right in connection with the Sale to
dissent and seek appraisal of their Common Shares.
Terms of the Sale Agreement and the Stockholder Agreement
The following is a summary, is not complete and is qualified in its
entirety by reference to the copy of the Sale Agreement included as Appendix A
to this Proxy Statement, and the Stockholders' Agreement filed as an exhibit to
the Schedule 14A of which this Proxy Statement forms a part. Capitalized terms
used but not defined herein shall have the meaning set forth in the Sale
Agreement.
Sale Agreement
Pursuant to the terms of the Sale Agreement, in consideration of the
transfer to the Purchaser of substantially all of the assets of the Subsidiary,
the Purchaser has agreed to pay to the Company $12.93 million in cash, subject
to an increase or decrease of up to $500,000 depending on the level of net
tangible assets as of the Closing Date as compared to such level at May 31,
1998 (the "Purchase Price Adjustment"), and to assume substantially all of the
liabilities of the Company.
Purchase Price. The Purchase Price is payable in the following manner: (i)
$500,000 in cash deposited in an escrow account, to be reserved for any
Purchase Price Adjustment; and (ii) $12.43 million by wire transfer of
immediately available funds. Following the Closing Date (but not later than
sixty (60) days after the Closing Date), the Company will deliver to the
Purchaser an unaudited balance sheet of the Subsidiary as of the Closing Date
(the "Closing Date Balance Sheet"). In the event that the Closing Date Net
Assets are less than $8.846 million, the Purchase Price will be reduced, on a
dollar for dollar basis, for the amount of such difference. In the event that
the Closing Date Net Assets are more than $8.846 million, the Purchase Price
will be increased, on a dollar for dollar basis, for the amount of such excess.
In no event, however, shall any reduction or increase in the Purchase Price
exceed $500,000. Any downward Purchase Price Adjustment will be satisfied with
funds from the escrow account. In the event there is an upward Purchase Price
Adjustment, the escrow account will be released to the Subsidiary, and the
Purchaser must pay the Purchase Price Adjustment to the Subsidiary within three
business days following the delivery of the Closing Date Balance Sheet or, in
the event that the Purchaser delivers a notice of disagreement, within three
business days following the resolution of the disagreement.
Assets and Liabilities to be Transferred. The Purchased Assets to be
transferred to the Purchaser include all properties, assets, contracts, and
rights of the Subsidiary, both tangible and intangible, including intellectual
property, accounts receivables, deposits and prepaid expenses, vendor lists,
customer lists, customer files, customer records, licenses and permits
susceptible of transfer under regulatory agency rules, insurance policies and
contract rights relating to the marketing and distribution of its OTC and
toiletries products, other than certain excluded assets (the "Excluded
Assets").
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The liabilities to be assigned to, and assumed by, the Purchaser (the
"Assumed Liabilities") include all liabilities and obligations of the
Subsidiary set forth on or reserved against the June 30, 1998 balance sheet of
the Subsidiary, all liabilities incurred since June 30, 1998 and until and
including the Closing Date, and all other liabilities, including those that
arise out of contract (including any agreement, license, permit or commitment),
litigation (whether pending or threatened), tortious claims (including product
liability, breach of warranty, negligence or misrepresentation), governmental
authorizations and taxes, other than the Excluded Liabilities.
Excluded Assets and Excluded Liabilities. The Excluded Assets include,
among other assets, cash or cash equivalents on hand at the closing in the
amount of $2.0 million (less amounts actually paid before the Closing Date in
respect of certain of the Excluded Liabilities referred to below), the
Company's office lease, the officers and directors liability insurance
policies, the product liability insurance policies, automobile and certain
office equipment leases, and all rights to the corporate names "Menley & James,
Inc." and "Menley & James Laboratories, Inc."
The Excluded Liabilities include: all severance and termination amounts
payable to the Company's officers, directors and employees that become payable
as a result of the Sale or a change of control of the Subsidiary (including
amounts payable as a result of accrued vacation and certain other employee
benefits); liabilities relating to the office, automobile and equipment leases;
costs and expenses incurred by the Company or the Subsidiary in connection with
the Sale (including accounting, legal, printing and investment banking fees);
costs associated with the cancellation of any options, warrants, or convertible
or exchangeable securities issued by the Company; liabilities to the
stockholders of the Company in connection with the costs of investigating,
defending against and settling claims and suits brought by its stockholders;
and liabilities under any Pennsylvania bulk sales statutes.
Limited Indemnification. From and after the Closing Date, the Purchaser on
the one hand, and the Company and the Subsidiary (jointly and severally) on the
other hand, agree to indemnify, defend and hold harmless each other and their
respective stockholders, directors, officers and affiliates, from and against
any and all claims, suits, investigations, proceedings, judgments, losses,
damages (whether direct, consequential or special), diminution in value, costs
and expenses which either party, respectively, may sustain, suffer or incur,
resulting from, related to, or arising out of the failure of the Subsidiary or
the Purchaser, as the case may be, to perform their obligations under terms of
the Sale Agreement with respect to the Excluded Liabilities and Assumed
Liabilities, respectively.
Representations and Warranties. The Sale Agreement contains various
representations and warranties of the Company and the Subsidiary on the one
hand, and the Purchaser on the other hand. The respective representations and
warranties of the parties will not survive beyond the Closing Date.
The representations of the Company and the Subsidiary relate generally to:
corporate organization, qualification and corporate power; authorization,
performance, enforceability and related matters; conflict and requisite
consents; the accuracy and adequacy of forms and reports filed with the U.S.
Securities and Exchange Commission (the "SEC"); financial statements and other
financial information provided to the Purchaser; the absence of certain changes
in the Company's business since January 1, 1998; ownership, condition and title
to assets and properties; intellectual property; litigation; labor matters;
taxes; contracts; inventories; warranties and guarantees; personnel; employee
benefit plans; conduct of business; compliance with applicable laws and
environmental matters; licenses and permits; insurance; bulk sales; the absence
of brokers; employee and labor relations; major customers and suppliers;
accounts payable and receivable; and promotional programs.
The representations of the Purchaser relate generally to: corporate
organization, qualification and corporate power; authorization, performance,
enforceability and related matters; conflict and requisite consents; the
absence of brokers; and the accuracy and adequacy of information supplied to
the Company for this Proxy Statement. In addition, the Purchaser makes
representations and warranties that it has received and entered into the
Commitment Letter and that it will have, on the Closing Date, the funds
available to it sufficient to pay the Purchase Price (including any increases
thereto).
Additional Agreements. The Sale Agreement provides that the Company comply
with certain covenants during the period between execution of the Sale
Agreement on August 21, 1998 and the Closing Date (the "Pre-Closing Period")
and following the closing. Among such covenants, during the Pre-Closing Period
(and, in the
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case of the covenant in clause (vi) below, after the closing), the Company
must: (i) generally cause the business of the Company to be conducted in the
ordinary course consistent with past practice; (ii) afford the Purchaser access
to its books and records; (iii) as promptly as practicable, prepare and file
with the SEC the Proxy Statement and use all reasonable efforts to have the
Proxy Statement cleared by the SEC and promptly mailed to stockholders; (iv)
promptly take all action necessary in accordance with the DGCL and the
Company's Certificate of Incorporation and By-Laws to convene the Meeting; and
(v) consult with the Purchaser before issuing any press release or otherwise
making any public statements with respect to the Sale. The Sale Agreement also
requires the Company not to solicit or encourage proposals from third parties
to purchase the Company or engage in negotiations with third parties concerning
the sale of all or a material portion of the Company, except to the extent
required by fiduciary duties applicable to the Board.
Pursuant to the Sale Agreement, the Purchaser has agreed to maintain all
books and records and regulatory filings forming a part of the purchased assets
for a period of at least six years from the Closing Date (including to cause
any subsequent transferee of any of the purchased assets to be bound by such
terms and provisions) and, during such time, to provide the Company and the
Subsidiary with full and complete access to all such information for any lawful
purpose, including to defend or prosecute any legal actions or government
proceedings (including tax audits) brought by or against the Company or any
Subsidiary.
Conditions to the Sale. The respective obligations of the Company, the
Subsidiary, and the Purchaser to effect the Sale will be subject to the
satisfaction or waiver of the following conditions: (i) the approval of the
Sale Agreement; (ii) no provision of any applicable law or regulation and no
judgment, injunction or order will prohibit the consummation of the Sale or
have a material adverse effect on the Company, the Subsidiary or the Purchaser;
and (iii) the parties will have obtained all of the consents and approvals to
the transfer of the certain contracts.
The obligation of the Company and the Subsidiary to effect the Sale is
also subject to the satisfaction or the waiver by the Company and the
Subsidiary of the following additional conditions on the Closing Date: (i) the
representations and warranties of the Purchaser set forth in the Sale Agreement
and the Collateral Documents will be true and correct, except for such
misstatements or omissions that, individually or in the aggregate, would not
have a material adverse effect on the Purchaser; (ii) the Purchaser will have
performed or complied in all material respects with all agreements, conditions
and covenants required by the Sale Agreement to be performed or complied with
by it on or before the closing; (iii) the Purchaser will have delivered to the
Company and the Subsidiary a certificate signed on behalf of the Purchaser by
its Chairman or President, attesting to the Purchaser's performance and
compliance with the foregoing; (iv) the Purchaser's counsel will have delivered
its opinion in form and substance reasonably satisfactory to the Company and
the Subsidiary as to certain specified matters; and (v) the Company and the
Subsidiary have received all documents, agreements and instruments required to
be delivered by the Purchaser pursuant to the Sale Agreement and pursuant to
each of the Collateral Documents, including, but not limited to, a bill of sale
for the tangible portion of the Purchased Assets, an assignment and assumption
agreement, an omnibus intellectual property assignment, a patent assignment and
the Escrow Agreement.
The obligation of the Purchaser to effect the Sale is also subject to the
satisfaction or the waiver by the Purchaser of the following additional
conditions on the Closing Date: (i) the representations and warranties of the
Company and Subsidiary set forth in the Sale Agreement and the Collateral
Documents will be true and correct, except for such misstatements or omissions
that, individually or in the aggregate, would not have a material adverse
effect on the Subsidiary; (ii) the Company and Subsidiary will have performed
or complied in all material respects with all agreements, conditions and
covenants required by the Sale Agreement to be performed or complied with by it
on or before the closing; (iii) the Company and Subsidiary will have delivered
to the Purchaser a certificate signed on behalf of the Company and the
Subsidiary by their respective Chairman or President, attesting to the
Company's and the Subsidiary's performance and compliance with the foregoing;
(iv) the Company's counsel will have delivered its opinion in form and
substance reasonably satisfactory to the Purchaser as to certain specified
matters; (v) the Purchaser will have been provided with the originally-executed
documents, agreements and instruments required to be delivered by the Company
and the Subsidiary pursuant to the Sale Agreement and pursuant to each of the
Collateral Documents, including, but not limited to, a bill of sale for the
tangible portion of the Purchased Assets, an assignment and assumption
agreement, an omnibus
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intellectual property assignment, a patent assignment, the Escrow Agreement and
an affidavit of the Subsidiary stating that the Subsidiary is not a foreign
person; and (vi) the Purchaser will have received a wire transfer of the cash
and cash equivalents of the Subsidiary on hand as of the Closing Date, less the
Excluded Cash.
Employee Matters. The Purchaser is under no obligation to offer employment
to any employee of the Company. The Company will remain responsible for any
employer or employment related obligations including, without limitation,
accrued vacation time, sick pay, employee perquisites and any obligations
pursuant to the Company's employee benefit plans or government-mandated
employee or employment-related payments, if any. Due to the discontinuation of
the Company's operations in connection with the Sale, employee terminations
will be necessary.
Termination. The Sale Agreement may be terminated (i) by mutual written
consent of the Company and the Purchaser, (ii) by either party if the Sale is
not consummated by December 31, 1998, (iii) by either party if there exists any
law or regulation that makes consummation of the Sale illegal or otherwise
prohibited or if consummation of the Sale would violate any nonappealable final
order, decree or judgment of any court or governmental authority; (iv) by the
Purchaser if the Board of Directors withdraws, modifies or changes its
recommendation to its stockholders of the approval and adoption of the Sale
Agreement, recommends to the stockholders any other proposal with respect to a
merger, consolidation, share exchange or similar transaction, (v) by the
Company if prior to the closing of the Sale, the Company shall have received an
offer that the Board of Directors determines, upon the advice of counsel, that
it is necessary for it to accept such offer in the exercise of its fiduciary
duties because it is more favorable to the stockholders than the Sale, (vi) by
either party if the other party has breached its representations or warranties
contained in the Sale Agreement, or has failed to perform any of its covenants
and agreements contained in the Sale Agreement, in each case, in any material
respect, and such breach or failure continues for a period of 10 days after the
receipt of notice of the breach from the non-breaching party, or (vii) by the
Company if the closing shall not have occurred by November 30, 1998 and, prior
to such date, either (a) the Financing Commitment shall not have been extended
to December 31, 1998, or (b) a substitute financing commitment satisfactory to
the Company shall not have been obtained by the Purchaser.
Expenses. The Sale Agreement provides that each party will pay all of the
fees and expenses incurred by it in connection with the Sale, whether or not
the closing occurs. Notwithstanding the foregoing, in the event the Sale
Agreement is terminated (i) by the Purchaser because the Company's Board of
Directors has withdrawn, modified or changed its recommendation to its
stockholders of the approval and adoption of the Sale Agreement or recommends
to the stockholders any other proposal with respect to a merger, consolidation,
share exchange or similar transaction, or (ii) by the Company because the
Company shall have received an offer that the Board of Directors determines,
upon the advice of counsel, that it is necessary for it to accept such offer in
the exercise of its fiduciary duties because it is more favorable to the
stockholders than the Sale, then the Company is obligated to pay the Purchaser
$150,000 plus reasonable out-of-pocket expenses incurred in connection with the
Sale.
Stockholders' Agreement
As a condition to the Sale, Warburg, Pincus and Mr. White (each a
"Stockholder" and collectively the "Stockholders") entered into a stockholders'
agreement on August 21, 1998 with the Purchaser (the "Stockholders' Agreement")
concerning the 3,020,478 Common Shares beneficially owned by Warburg, Pincus
and 295,121 Common Shares beneficially owned by Mr. White.
Agreement to Vote. The Stockholders' Agreement provides that each
Stockholder will vote his or its Common Shares in favor of the approval and
adoption of the Sale Agreement. Specifically, the Stockholders have agreed that
at any meeting of the Stockholders of the Company, however called, and in any
action by consent of the stockholders of the Company, each Stockholder will:
(i) vote his or its Common Shares in favor of the approval and adoption of the
Sale Agreement; (ii) vote his or its Common Shares against any action or
agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Company under the Sale
Agreement; (iii) vote his or its Common Shares against any proposal relating
to, (a) any extraordinary corporate transaction (other than the Sale), such as
a merger, business combination, recapitalization, reorganization or liquidation
involving the Company or the Subsidiary, (b) a sale or transfer of a material
amount of assets of the Company or the Subsidiary, (c) any change in the
management or board of directors of the Company, except as otherwise agreed to
in writing by the Purchaser.
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Representations and Warranties. The Stockholders each represented and
warranted, severally and not jointly, that: the Common Shares specified in the
Stockholders' Agreement are all of the Common Shares beneficially owned by him
or it, and that the Common Shares specified will be all the Common Shares
beneficially owned by the Stockholders on the Meeting Date; the Stockholder
currently had and will have as of the Meeting Date, good, valid and marketable
title, free and clear of all liens, encumbrances, stockholders agreements,
stockholders trusts or proxies, and claims of every kind in regards to the
Common Shares; the Stockholder had full legal right, power and authority to
enter into and perform all of the obligations under the Stockholders'
Agreement; the Stockholders' Agreement were duly executed and delivered and
constituted legal, valid and binding agreements of the Stockholder; that the
Stockholders' Agreement did not (a) require any consent or approval of or
filing with any governmental or other regulatory body (other than filings
required under the federal securities laws), or (b) constitute a violation of,
conflict with or constitute a default under, any contract, commitment,
agreement, understanding, arrangement or other restriction of any kind to which
the Stockholder was a party; and no one was entitled to any commission or
finder's fee from the Stockholders' Agreements.
The Purchaser represented and warranted to the respective Stockholders
that: it had full legal right, power and authority to enter into and perform
all of the obligations under the Stockholders' Agreement; the Stockholders'
Agreement was duly executed and delivered, and constituted a legal, valid and
binding agreement of the Purchaser; that the Stockholders' Agreement did not
(a) require any consent or approval of or filing with any governmental or other
regulatory body, or (b) constitute a violation of, conflict with or constitute
a default under, any contract, commitment, agreement, understanding,
arrangement or other restriction of any kind to which the Purchaser was a
party; and that no one was entitled to any commission or finder's fee from the
Stockholders' Agreement.
All representations, warranties, covenants and agreements made by the
Stockholders or the Purchaser in the Stockholders' Agreement survive regardless
of any investigation at any time made by or on behalf of any party.
Termination. The Stockholders' Agreement will terminate on the earlier of
(i) the Closing Date, and (ii) the termination of the Sale Agreement.
Expenses. Each party will pay all of its expenses in connection with the
transactions contemplated therein, including, without limitation, the fees and
expenses of counsel and other advisers.
Certain Covenants of the Stockholders. Each of the Stockholders agrees
that, prior to the termination of the Stockholders' Agreement, he or it will
not: (i) directly or indirectly, sell, transfer, pledge, encumber, assign or
otherwise dispose of, or enter into any contract, option or other arrangement
or understanding with respect to the sale, transfer, pledge, encumbrance,
assignment or other disposition of, any of his or its Common Shares; (ii) grant
any proxies, deposit any Common Shares into a stockholders trust or enter into
a stockholders agreement with respect to any Common Shares; (iii) take any
action to encourage, initiate or solicit any inquiries or the making of any
proposal or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to
any any other proposal with respect to a merger, consolidation, share exchange
or similar transaction or otherwise assist or facilitate any effort or attempt
by any person or entity (other than the Purchaser, or its officers, directors,
representatives, agents, affiliates or associates) to make or implement an
proposal; or (iv) enter into any agreement which would interfere with its
obligations under the Stockholders' Agreement or the Sale. Each of the
Stockholders further agrees to notify the Purchaser promptly of the number of
any Common Shares acquired by the Stockholder after the date of the
Stockholders' Agreement.
Accounting Treatment of the Sale
For accounting purposes, the Sale will be presented as a sale of assets
transaction that is expected to result in a loss to the Company of
approximately $8.2 million, based on the Company's interim financial statements
for the six months ended June 30, 1998, as reported on the Company's Quarterly
Report on Form 10-Q, after consideration of the expected proceeds from the Sale
less the estimated transaction costs. The estimated loss will be recorded in
the Company's financial statements for the quarter ended September 30, 1998.
The Company will operate its business consistent with its past practices
through the Closing Date and the resulting income or loss will be recorded in
operations. The estimated loss on the Sale will be adjusted subsequently if the
actual proceeds or transaction costs differ from the estimated amounts.
21
<PAGE>
Certain Federal Income Tax Consequences
THE FOLLOWING IS A GENERAL SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX
CONSEQUENCES OF THE TRANSACTION. IT DOES NOT ADDRESS ANY STATE OR LOCAL TAX
CONSEQUENCES. STOCKHOLDERS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISORS FOR A
MORE DETAILED ANALYSIS OF ANY FEDERAL, STATE OR LOCAL TAX CONSEQUENCES.
The Company will recognize gain or loss on the sale of the Purchased
Assets, generally on an asset-by-asset basis. The Company expects that gain, if
any, recognized with respect to any Purchased Asset will be fully absorbed by
losses recognized on the sale of other Assets and by NOL carryforwards
available to the Company. Accordingly, no current tax is expected to be due as
a result of the Sale.
The Company further expects that NOL carryforwards will remain available
for use by the Company following the Sale. In addition, the Company expects
that substantial CL carryforwards will result from the sale of certain assets.
In general, these NOL carryforwards and CL carryforwards will be available to
offset future taxable income of the corporation. However, CL carryforwards can
be used to offset only future capital gains. In addition, there are a number of
potential restrictions under various provisions of the Internal Revenue Code of
1986, as amended, including the time periods during which NOL carryforwards and
CL carryforwards may be used, that may apply to limit the Company's (or any
Company successor's) future utilization of the NOL carryforwards and CL
carryforwards, absent a change in control of the Company. To finance a Business
Combination, the Company may have to raise equity from persons or entities not
presently stockholders of the Company, which could result in a change in
control. There is no assurance that the Company (or any Company successor) will
receive future tax benefits from such utilization.
The Sale will not be taxable to stockholders of the Company.
THE COMPANY WILL NOT SEEK AN OPINION OF COUNSEL WITH RESPECT TO THE
ANTICIPATED TAX TREATMENT. THE FOREGOING SUMMARY OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS INCLUDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE
LEGAL ADVICE TO ANY STOCKHOLDER.
Interests of Certain Persons in the Sale
All of the Company's officers and members of the Board of Directors own
Common Shares and/or options to purchase Common Shares and, to that extent,
their interest in the Sale is the same as the Stockholders. However, in
considering the Sale, stockholders should be aware that certain directors and
officers the Company have interests in the Sale as described below.
Severance and Employment Arrangements. Effective upon completion of the
Sale, the terms of the Company's severence agreement with Greg L. Kearl, the
Company's Executive Vice President and Chief Operating Officer, has been
amended such that he will receive a termination payment of $276,000 within five
business days after the Closing Date. Mr. Kearl has made arrangements to serve
as a consultant for the Purchaser after the Sale and will be paid $10,000 per
month for three months. Thereafter, Mr. Kearl will be compensated at a rate of
$1,000 per day for services provided to the Purchaser.
Following the sale, the Company will retain the services of William W.
Yeager, the Company's Chief Financial Officer, pursuant to the terms of a
consulting agreement. Under that agreement, Mr. Yeager will provide to the
Company services substantially similar to his current role. The consulting
agreement will have an initial term of five months, renewable thereafter on a
month-to-month basis, and will provide for compensation to Mr. Yeager at a rate
of $8,000 per month.
Mr. White is also a party to a severance agreement with the Company, with
terms similar to those of Mr. Kearl's agreement. However, Mr. White's
employment with the Company will not be terminated in connection with the Sale
and he will not, therefore, receive any payments under his severance agreement
at this time. Following the Sale, Mr. White will continue to serve as the
Company's President and Chief Executive Officer in accordance with the terms of
his existing employment arrangement with the Company.
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<PAGE>
The Company maintains a severance plan for its employees providing for a
termination payment based on a formula of the number of years of service.
Certain of the Company's employees have received additional severance benefits
pursuant to agreements with the Company. Mr. Yeager and Dennis Kinsey, Director
of Manufacturing and Distribution, will each receive an aggregate of 6 months
salary upon the closing of the Sale. Other officers and employees of the
Company may be entitled to severance payments based on existing agreements,
severance plans and policies of the Company upon completion of the Sale or in
the event such individuals should be terminated after the Sale.
Options. Pursuant to the Company's Amended and Restated 1991 Stock Option
Plan, options to purchase Common Shares, held by employees terminated by the
Company in connection with the Sale, will remain exercisable for a period of
one year to the extent they were exercisable at the time of the closing of the
Sale. In addition, options to purchase 7,500 Common Shares held by each of
James T. McMillan and Bruce W. Simpson, directors of the Company, will vest
immediately upon the closing of the Sale. The Sale will have no other effect on
the outstanding options to purchase Common Shares held by the directors or
employees of the Company. As a result, options to purchase an aggregate of
307,360 Common Shares will be outstanding immediately following the Sale, all
of which options will be immediately exercisable.
Other Interests
Neither Warburg, Pincus nor any of its affiliates has or will receive any
compensation in connection with the Sale. However, Warburg, Pincus may assist
the Company in identifying possible Business Combination transactions after the
Sale. Because a Business Combination transaction may include a transaction with
a Warburg, Pincus affiliate, Warburg, Pincus may realize a benefit from a
Business Combination not shared by all of the stockholders by virtue of its
relationship with, or ownership interest in, such entity. In the event that a
Business Combination transaction with an affiliate of Warburg, Pincus is
proposed, the Board of Directors will take necessary measures to ensure that
such transaction is considered first by an independent committee of the
Company's Board of Directors which will make a recommendation to the full Board
of Directors, or that representatives or affiliates of Warburg, Pincus who
serves as members of the Company's Board of Directors will not participate in
the consideration of any such proposed transaction. Further, Warburg, Pincus
and its affiliates will not be compensated for their efforts and assistance in
identifying possible Business Combination transactions. See "Business of the
Company Following the Sale--Business Plan" and "--Risk Factors."
Certain Information Concerning the Purchaser
Numark was formed in 1987 to pursue a strategy of acquiring and marketing
healthcare products to food, drug and mass merchandiser customers. Its strategy
has been to acquire established, but under-selling, brands and revitalizing
sales by product improvement, repackaging, advertising and increased
distribution. Many of Numark's brands focus on specific market segments and are
categorized as niche products. Numark's current product line consists of 17 OTC
products and four prescription products. The principal executive offices of
Numark are located at 75 Mayfield Avenue, Edison, New Jersey 08818, and its
telephone number is (800) 338-8079.
All information contained in this Proxy Statement relating to the
Purchaser has been supplied by it to the Company.
23
<PAGE>
BUSINESS OF THE COMPANY FOLLOWING THE SALE
As a result of the Sale, substantially all of the Company's assets will be
sold, and substantially all of its liabilities will be assigned to and assumed
by the Purchaser, and the Company will retain cash, net loss carryforwards
(which may be used to offset future income, if any) and certain liabilities.
Set forth below is a description of the Company's business as proposed to be
operated following consummation of the Sale. The stockholders of the Company
will not have an opportunity to vote separately on the sale of assets and the
change in the nature of the Company's business. A vote for the approval and
adoption of the Sale Agreement is also a vote for a change in the nature of the
Company's business. See "--Risk Factors."
Business Plan
The business objective of the transformed Company (hereinafter, "Post-Sale
M&J") will be to effect a Business Combination with a New Operating Business
which Post-Sale M&J believes has potential to increase stockholder value. Any
such Business Combination would depend on the availability of attractive
candidates and the Company's ability to finance any such Business Combination.
Post-Sale M&J intends to utilize its remaining cash, together with additional
equity or debt, or a combination thereof, in effecting a Business Combination.
The Company has not identified any acquisition candidates or the availability
of financing arrangements and there can be no assurance that any Business
Combination will be accomplished or, if accomplished, it will result in
increased stockholder value. The Company has not chosen (nor will it choose
prior to the completion of the Sale) any particular area of business in which
it may propose to engage (except Post-Sale M&J does not expect to explore any
Business Combination transaction with a New Operating Business primarily
engaged in the OTC drug and toiletry business) and has not conducted any market
studies with respect to any business, property or industry. Nothing contained
herein is, nor shall it be deemed to be, a representation regarding the
viability of Post-Sale M&J or of the availability, viability or success of any
subsequent Business Combinations or the results of operations of Post-Sale M&J
in connection with such subsequent Business Combinations or business venture.
While Post-Sale M&J expects to explore possible Business Combinations with more
than one prospective New Operating Business, there can be no assurance that any
Business Combination transaction will be effected. See "Risk Factors" below for
important factors that should be considered in connection with the realization
of Post-Sale M&J's business objective.
This newly reconfigured Company will endeavor to effect a Business
Combination transaction that will add to stockholder value. Mr. White, at the
direction of the Board of Directors and with the assistance of Warburg, Pincus,
will have the primary responsibility of seeking potential Business Combinations
outside of the OTC drug and toiletry business. A Business Combination could
include a transaction with an entity affiliated with Warburg, Pincus. The
ability to acquire and to successfully and profitably operate a New Operating
Business, if any, will be subject to substantial business risks. See "--Risk
Factors."
Transition Activities and Operations
As a result of the Sale, substantially all of the Company's assets will be
sold, and substantially all of its liabilities will be assigned to and assumed
by the Purchaser, and the Company will retain cash, NOL carryforwards and CL
carryforwards (which may be used to offset future income, if any). The
management of Post-Sale M&J will consist solely of Mr. White who will
implementing Post-Sale M&J's strategy of pursuing Business Combinations with
New Operating Businesses at the direction of the Board of Directors and with
the assistance of Warburg, Pincus. At the present time, it is the intention of
management and the Board of Directors to meet or be in telephone contact
periodically to review business opportunities and evaluate potential Business
Combinations. Prior to any such Business Combination, Mr. White will administer
the affairs of Post-Sale M&J (including financial reporting matters, general
administrative concerns and the payment of retained liabilities) with the
assistance of consultants hired on an as needed basis. The need for employees
or consultants and their availability will be addressed in connection with the
decision of whether or not to acquire a New Operating Business or otherwise
participate in a specific Business Combination. The Company is unable to make
any estimate as to the future number of employees which may be necessary, if
any, to work for Post-Sale M&J. If New Operating Business is acquired, it is
possible that the existing staff of that New Operating Business would be hired
by Post-Sale M&J.
24
<PAGE>
Form, Structure and Financing of Business Combinations
No agreements, commitments or understandings have been made with any New
Operating Business candidates. No assurances can be made that future
discussions will result in definitive agreements, although it is the Company's
intention to proceed diligently with the implementation of Post-Sale M&J's
business plan.
Of the various methods and forms by which Post-Sale M&J may structure a
Business Combination, Post-Sale M&J may use, without limitation, one of the
following forms: (i) a merger or consolidation of the New Operating Business
into or with Post-Sale M&J; (ii) a merger or consolidation of the New Operating
Business into or with a subsidiary of Post-Sale M&J, or a merger or
consolidation of a subsidiary into or with the New Operating Business; (iii) an
acquisition of all, a controlling amount or a minority interest in the equity
of a New Operating Business; (iv) an acquisition of the assets of a New
Operating Business by Post-Sale M&J or a subsidiary; (v) a merger or
consolidation of Post-Sale M&J with or into the New Operating Business or
subsidiary thereof; (vi) a leveraged buyout transaction in which most of the
purchase price is provided by borrowings; or (vii) a combination of any of the
foregoing. The actual form and structure of a Business Combination may be also
dependent upon numerous other factors pertaining to the New Operating Business
and its stockholders as well as potential tax and accounting treatments
afforded the Business Combination.
It is anticipated that Post-Sale M&J would use cash, equity, debt or a
combination of these to achieve a Business Combination. Post-Sale M&J may
borrow funds to increase the amount of capital available for a Business
Combination or otherwise finance the operation of the New Operating Business.
The amount and nature of any borrowings by Post-Sale M&J will depend on
numerous considerations including its capital requirements, its perceived
ability to service such debt and prevailing conditions in the financial markets
and the general economy. Although Post-Sale M&J has no commitments to issue any
Common Share, Post-Sale M&J may issue a substantial number of additional shares
in connection with a Business Combination. To the extent that such additional
shares are issued, dilution to the interest of Post-Sale M&J's stockholders may
occur and the value of the Common Shares may be adversely affected. See "--Risk
Factors."
25
<PAGE>
Unaudited Pro Forma Financial Information
The following unaudited pro forma condensed consolidated balance sheet
reflects the proposed sale of substantially all of the assets and the
assignment of substantially all of the liabilities of the Company in exchange
for $12,930,000 of cash as if the transaction had been consummated on June 30,
1998. This pro forma balance sheet does not purport to be indicative of the
Company's financial position in future periods. A pro forma income statement
for the six month period ended June 30, 1998 or year ended December 31, 1997
would reflect no income from operations as all of the Company's operations will
be sold in the proposed transaction.
Menley & James, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro forma
Historical Adjustments Pro forma
------------ ----------------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 3,625 $ 9,305 (1) $12,930
Accounts receivable, net ........................... 2,217 (2,217)(1) 0
Inventory .......................................... 3,170 (3,170)(1) 0
Other current assets ............................... 1,277 (1,277)(1) 0
Total current assets ............................... 10,289 2,641 12,930
Other long-term assets .............................. 1,417 (1,417)(1) 0
Product lines, trade names and packaging designs,
net ................................................ 10,601 (10,601)(1) 0
Long-term deferred tax asset ........................ 503 (503)(1) 0
------- --------- -------
Total assets ....................................... $22,810 ($ 9,880) $12,930
======= ========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 1,039 ($ 1,039)(1) $ 0
Accrued expenses and other ......................... 659 (659)(1) 0
------- --------- -------
Total current liabilities .......................... 1,698 (1,698) 0
Stockholders' equity ................................ 21,112 (8,182)(1) 12,930
------- --------- -------
Total liabilities and stockholders' equity ......... $22,610 ($ 9,880) $12,930
======= ========= =======
</TABLE>
- ------------
(1) Adjusted to record the sale of substantially all of the assets and
assignment of substantially all of the liabilities of the Company in
exchange for $12.93 million. These adjustments assume that the
transaction-related liabilities of approximately $2.0 million will be paid
from the $2.0 million of cash retained by the Company.
26
<PAGE>
Risk Factors
If the Sale is consummated, Post-Sale M&J will serve as a vehicle to
effect Business Combinations. The stockholders of the Company will not get to
vote separately on whether to change the nature of Post-Sale M&J's business to
an acquisition company. Consequently, the following risk factors should be
taken into consideration by each stockholder in determining whether to vote to
approve and adopt the Sale Agreement.
No Operating History. The Company will change the nature of its business
if the Sale Agreement is approved and the Sale is consummated. Post-Sale M&J
will have had no operating history in its new line of businesses, which is yet
to be determined. Accordingly, there can be no assurance that Post-Sale M&J's
future operations will generate operating or net income, and Post-Sale M&J's
prospects must therefore be considered in light of the risks, expenses,
problems and delays inherent in establishing a new business. As of the date of
this Proxy Statement, the Company has not entered into any arrangement to
participate in any business ventures or purchase any products.
Acquisition Risks. Post-Sale M&J's strategy is to pursue Business
Combinations with New Operating Businesses. The success of Post-Sale M&J will
depend to a great extent on the operations, financial condition and management
of the companies with which Post-Sale M&J may merge or which it may acquire.
Further, these acquisitions involve certain financial and operational risks.
Financial risks include the possible incurrence of indebtedness by Post-Sale
M&J in order to effect the acquisition and the consequent need to service that
indebtedness. Operational risks include the possibility that an acquisition
does not ultimately provide the benefits originally anticipated by management
to result from the Business Combination while Post-Sale M&J continues to incur
operating expenses to provide the services formerly provided by the acquired
company. In addition, if Post-Sale M&J makes a strategic investment by
acquiring a minority interest in a company, Post-Sale M&J would lack control
over the operations and strategy of the business in which Post-Sale M&J
invested. There can be no assurance that Post-Sale M&J will be successful in
identifying New Operating Businesses, completing and financing Business
Combination transactions on favorable terms, or operating the New Operating
Business profitably. In implementing its strategy, Post-Sale M&J attempts to
minimize the risk of unexpected liabilities and contingencies associated with
the New Operating Businesses through planning, investigation and negotiation,
but such unexpected liabilities may nevertheless accompany such Business
Combination transactions.
Unspecified Business Risks. The Company has not identified the business
opportunities in which it will attempt to obtain an interest. The Company
therefore cannot describe the specific risks presented by such business. To the
extent that Post-Sale M&J effects a Business Combination with a financially
unstable company or an entity in its early stage of development or growth
(including entities without established records of revenues or income),
Post-Sale M&J will become subject to numerous risks inherent in the business
and operations of financially unstable and early stage or potential emerging
growth companies. In addition, to the extent that Post-Sale M&J effects a
Business Combination with an entity in an industry characterized by a high
level of risk, Post-Sale M&J will become subject to the currently
unascertainable risks of that industry. An extremely high level of risk
frequently characterizes certain industries which experience rapid growth.
Although management will endeavor to evaluate the risks inherent in a
particular New Operating Business or industry, there can be no assurance that
it will properly ascertain or assess all such risks. Such New Operating
Business may involve an unproven product, technology or marketing strategy, the
ultimate success of which cannot be assured. The New Operating Business may be
in competition with larger, more established firms over which it will have no
competitive advantage. Post-Sale M&J's investment in a business opportunity may
be highly illiquid and could result in a total loss to Post-Sale M&J if the
opportunity is unsuccessful.
Need For Additional Financing. Immediately prior to the closing of the
Sale, the Company will terminate its existing working capital facility, under
which there are currently no amounts outstanding. It is anticipated that
Post-Sale M&J will be required to raise cash in excess of its existing cash and
cash equivalents to consummate a Business Combination or to provide funds for
an additional infusion of capital into a New Operating Business. There
currently are no limitations on Post-Sale M&J's authority to borrow or
otherwise raise funds to increase the amount of capital available to effect a
Business Combination. However, Post-Sale M&J's limited resources and lack of
operating history may make it difficult to borrow funds. The amount and nature
of any borrowings by Post-Sale M&J will depend on numerous considerations,
including Post-Sale M&J's capital requirements, Post-Sale M&J's perceived
ability to meet debt service on any such borrowings and the then prevailing
conditions in the financial markets, as well as general economic conditions.
There can be no assurance that debt
27
<PAGE>
financing, if required or sought, would be available on terms deemed to be
commercially acceptable by and in the best interests of Post-Sale M&J. If
Post-Sale M&J is able to raise additional funds through the incurrence of debt,
and it does so, it would likely become subject to restrictive financial
covenants. Additionally, to the extent that debt financing ultimately proves to
be available, any borrowings may subject Post-Sale M&J to various risks and
restrictions traditionally associated with indebtedness, including the risks of
interest rate fluctuations and insufficiency of cash flow to pay principal and
interest. If additional funds are raised through the issuance of equity
securities, the percentage ownership of Post-Sale M&J's then current
stockholders, including the ownership interests represented by Common Shares,
would be reduced and, if such equity securities take the form of preferred
stock, the holders of such preferred stock may have rights, preferences or
privileges senior to those of holders of Common Shares. Post-Sale M&J is not
currently in discussions, nor has it had any discussions in regard to obtaining
any debt or equity financing. There can be no assurance that Post-Sale M&J will
be able to raise equity capital, obtain capital lease or bank financing or
incur other borrowings on commercially reasonable terms, if at all, to fund any
Business Combination or the working capital and other capital requirements of a
New Operating Business.
Regulation. Post-Sale M&J will continue to be subject to regulation under
the Securities Act of 1933 and the Securities Exchange Act of 1934. In
addition, as a result of the investment of net proceeds of the sale in
investment securities, Post-Sale M&J will be subject to regulation under the
Investment Company Act of 1940 (the "1940 Act"). If Post-Sale M&J is deemed to
be an investment company under the 1940 Act because of its investment
securities holdings, Post-Sale M&J must register as an investment company under
the 1940 Act. As a registered investment company, Post-Sale M&J would be
subject to the further regulatory oversight of the Division of Investment
Management of the SEC, and its activities would be subject to substantial
regulation under the 1940 Act. In addition, no more than 60% of Post-Sale M&J
Board of Directors could be "interested persons" of the Company, within the
meaning under the 1940 Act. Post-Sale M&J would seek to hire an investment
adviser registered under the Investment Advisers Act of 1940 to manage its
assets, and such investment adviser would be entitled to management fees.
Post-Sale M&J would also require the services of a custodian to maintain its
securities, which custodian would be entitled to custodial fees. In addition to
registering with the SEC, Post-Sale M&J would need to file annual and
semi-annual reports with the SEC, and to distribute these reports to its
stockholders.
The Company does not intend to become an investment company and intends to
rely on the transient investment company exemption under Rule 3a-2 of the 1940
Act. The Company will be required to register as an investment company at the
end of the one-year period following the closing, unless it then engaged in
non-investment company business, changes the composition of its assets such
that less than 40% of its assets are investment securities, or is granted an
exemption by the SEC (of which there can be no assurance). Though the Company
intends to acquire a New Operating Business, and therefore be engaged in
non-investment company business, before the expiration of the one-year period,
there can be no assurance that its acquisition efforts will be successful or
that it will not be required to register as an investment company under the
1940 Act.
Limited Management Resources and Experience. The management of Post-Sale
M&J will consist solely of Mr. White who will implement Post-Sale M&J's
strategy at the direction of the Board of Directors and with the assistance of
Warburg, Pincus. Prior to any such Business Combination, Mr. White will
administer the affairs of Post-Sale M&J (including financial reporting matters,
general administrative concerns and the payment of retained liabilities) with
the assistance of consultants hired on an as needed basis. The success of
Post-Sale M&J will be dependent largely upon the active participation of its
management and directors who may lack experience or background in the business
in which Post-Sale M&J proposes to engage. In order to supplement the business
experience of management and the directors, Post-Sale M&J may employ
accountants, technical experts, appraisers, attorneys or other consultants or
advisors. The selection of any such advisors will be made by post-Sale
management and directors. Additionally, it is anticipated that such persons may
be engaged by Post-Sale M&J on an independent basis without a continuing
fiduciary or other obligation to Post-Sale M&J.
Ability to Attract and Retain Key Personnel. Post-Sale M&J's future
success will depend on its ability to attract and retain key management and
other personnel with expertise required in connection with the growth and
development of a New Operating Business. Competition for qualified employees
and personnel may be intense and, from time to time, there may be a limited
number of persons with knowledge of and experience in
28
<PAGE>
a particular industry. There can be no assurance that Post-Sale M&J will be
successful in attracting and retaining such executives and personnel. The loss
of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on Post-Sale M&J's
results of operations, development efforts and ability to expand.
Conflicts of Interest. Certain of the directors and officers of Post-Sale
M&J will be associated with other firms or occupations involving other business
activities. Because of the affiliations, there are potential inherent conflicts
of interest in their acting as directors and officers of Post-Sale M&J and of
other entities. All of the Company's post-Sale directors and officers may be
directors or controlling stockholders of other entities engaged in a variety of
businesses which may in the future have various transactions with Post-Sale
M&J. A Business Combination could include a transaction with an entity
affiliated with Warburg, Pincus. Additional conflicts of interest and non-arm's
length transactions may also arise in the future in the event the officers or
directors of Post-Sale M&J are involved in the management of any firms with
which Post-Sale M&J transacts business. Post-Sale M&J may pay finder's fees or
other fees to its post-Sale officers, directors or affiliates in connection
with any potential business combination involving Post-Sale M&J.
Scarcity of and Competition for Business Combinations. Post-Sale M&J will
be an insignificant participant in the business of seeking mergers with and
acquisitions of small private entities. Post-Sale M&J expects to encounter
intense competition from other entities having business objectives similar to
those of Post-Sale M&J. Many of these entities, including venture capital
partnerships and corporations, blind pool and blank check companies, large
industrial and financial institutions, small business investment companies and
wealthy individuals, are well-established and have extensive experience in
identifying and effecting Business Combinations directly or through affiliates.
Many of these competitors possess greater financial, technical, human and other
resources than Post-Sale M&J and there can be no assurance that Post-Sale M&J
will have the ability to compete successfully. Post-Sale M&J's financial
resources will be limited in comparison to those of many of its competitors.
This inherent competitive limitation may compel Post-Sale M&J to select certain
less attractive Business Combination prospects. There can be no assurance that
Post-Sale M&J will be able to achieve its stated business objectives.
No Agreement for Business Combination or Other Transaction. The Company
has no current arrangement, agreement or understanding with respect to a
Business Combination transaction with any entity, private or public. There can
be no assurance Post-Sale M&J will be successful in identifying and evaluating
suitable New Operating Businesses and in concluding a Business Combination
transaction on terms favorable to Post-Sale M&J; or, if concluded, whether any
such Business Combination transaction will result in a financial return to its
stockholders.
Possible Lack of Diversification. Post-Sale M&J may be unable to diversify
its business activities and, as a consequence, may suffer a total loss to
Post-Sale M&J and the stockholders should a Business Combination by Post-Sale
M&J prove to be unprofitable. Post-Sale M&J's failure or inability to diversify
its activities into a number of areas may subject Post-Sale M&J to economic
fluctuations within a particular business or industry and, therefore, increase
the risks associated with Post-Sale M&J's operations.
Tax Considerations. The Company expects that NOL carryforwards will remain
available for use by the Company following the Sale. In addition, the Company
expects that substantial CL carryforwards will result from the sale of certain
assets. However, there are a number of potential restrictions under various
provisions of the Internal Revenue Code of 1986, as amended, including the time
periods during which NOL carryforwards and CL carryforwards may be used, that
may apply to limit Post-Sale M&J's (or any successor's) future utilization of
the NOL carryforwards and CL carryforwards, absent a change in control of
Post-Sale M&J. To finance a Business Combination, Post-Sale M&J may have to
raise equity from persons or entities not presently stockholders of the
Company, which could result in a change in control. There is no assurance that
Post-Sale M&J (or any Company successor) will receive future tax benefits from
such utilization.
As a general rule, federal and state tax laws and regulations have a
significant impact upon the structuring of business combinations. Post-Sale M&J
will evaluate the possible tax consequences of any prospective Business
Combination and will endeavor to structure the Business Combination so as to
achieve the most favorable tax treatment to Post-Sale M&J, the Acquired
Business and their respective stockholders. There can be no assurance, however,
that the Internal Revenue Service (the "IRS") or appropriate state tax
authorities will ultimately
29
<PAGE>
assent to Post-Sale M&J's tax treatment of a consummated Business Combination.
To the extent the IRS or state tax authorities ultimately prevail in
recharacterizing the tax treatment of a Business Combination, there may be
adverse tax consequences to Post-Sale M&J, the New Operating Business and their
respective stockholders.
Limited Public Market for Common Shares. There can be no assurance that an
active trading market for the Common Shares will be developed or maintained.
Historically, the market prices for securities of non-operating companies in
the business of seeking mergers with and acquisitions have been highly
volatile. The market price of the Common Share could be subject to significant
fluctuations in response to various factors and events, including the liquidity
of the market for the Common Shares, announcements of potential Business
Combinations, and changes in general market conditions.
Issuance of Additional Shares. Approximately 8,836,000 Common Shares, or
59% of the total authorized Common Shares, less the number of Common Shares
underlying outstanding options and warrants, have not yet been issued and are
available for sale. The Board of Directors generally has the power to issue
such shares without stockholder approval. Post-Sale M&J may issue Common Shares
to raise additional capital or to effect a merger or acquisition with a target
corporation. In addition, Post-Sale M&J's Certificate of Incorporation
authorizes the Board of Directors to issue 5,000,000 shares of preferred stock,
in one or more series, without stockholder approval. The Board of Directors has
the power to determine the rights and preferences of any such series, and the
price under which any such preferred stock may be issued. In order to effect a
Business Combination, Post-Sale M&J may issue securities to the stockholders of
a New Operating Business. Any additional issuance by Post-Sale M&J from its
authorized but unissued shares would have the effect of further reducing the
percentage ownership of Post-Sale M&J's stockholders and could result in
stockholders of a target company obtaining a controlling interest in Post-Sale
M&J.
Certain Anti-takeover Provisions. Post-Sale M&J's charter and bylaws
include certain provisions which may have the effect of delaying, deterring or
preventing a future takeover or change in control of Post-Sale M&J unless such
takeover or change in control is approved by Post-Sale M&J's Board of
Directors. In addition, Post-Sale M&J's Board of Directors has the authority to
issue up to 5,000,000 additional shares of preferred stock and to determine the
price, rights, preferences and privileges of those shares without any further
vote or actions by the stockholders. The rights of the holders of Common Shares
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of such
shares of preferred stock, while potentially providing desirable flexibility in
connection with possible Business Combinations and serving other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire, or may discourage a third party from attempting to acquire, a
majority of the outstanding Common Shares. Post-Sale M&J has no present
intention to issue such additional shares of preferred stock. In addition,
Post-Sale M&J is subject to the anti-takeover provisions of Section 203 of the
DGCL, which will prohibit it from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change in
control of Post-Sale M&J.
No Dividends Anticipated. The Company has not paid any cash dividends. Any
determination to pay dividends in the future will be at the discretion of the
Board of Directors and will be dependent upon the Company's results of
operations, financial condition, capital requirements, contractual restrictions
and other factors deemed relevant by the Board of Directors. The Board of
Directors does not intend to declare dividends in the foreseeable future, but
instead intends to retain earnings, if any, for use in the Company's business
operations.
Year 2000. Many currently installed computer systems and software products
use only two digits to identify a year in the date field with the assumption
that the first two digits of the year are always "19." Consequently, on January
1, 2000, computers that are not Year 2000 compliant may read the year as 1900.
Systems that calculate, compare or sort using the incorrect date may
malfunction. As a result, computer systems and software products used by many
companies may need to be upgraded before the end of 1999 to comply with such
"Year 2000" requirements. Specifically, these systems and programs must be
modified to accept four digit entries in the date field to distinguish
21st-century dates from 20th-century dates. Significant uncertainty exists
concerning the potential effects associated with such compliance.
30
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The Company has completed an assessment of its computer programs and is in
the process of modifying its software so that its computer system will comply
with the "Year 2000" requirements. This project is 90% complete, and the
Company does not believe that the costs associated with this project will be
material.
Post-Sale M&J will not immediately be engaged in any substantial business
operations, and management, therefore, does not believe that computer problems
associated with the change of year to the year 2000 will have any material
effect on its operations. However, the possibility exists that Post-Sale M&J
may merge with or acquire a business that will be negatively affected by the
"year 2000" problem. The effect of such problem on Post-Sale M&J in the future
can not be predicted with any accuracy until such time as Post-Sale M&J
identifies a merger or acquisition target.
Forward Looking Statements
This Proxy Statement contain forward-looking statements. Actual results
could differ materially from those projected herein. Such difference could
occur because of the application of factors referred to above, of competitive
or general business conditions or of some other and unforeseen factor.
31
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the Record Date, the beneficial
ownership of Common Shares by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Shares, (ii) each
director of the Company, and (iii) all directors and officers of the Company as
a group. As of such date, there were 6,163,520 Common Shares outstanding.
Except as otherwise noted, the named beneficial owner has sole voting and
investment power with respect to the Common Shares.
<TABLE>
<CAPTION>
Amount and Nature Percent
Name and Address of Beneficial Ownership of Class
- ---------------- ----------------------- --------
<S> <C> <C>
Warburg, Pincus Investors, L.P. (1) ..................................... 3,020,478 49.0%
466 Lexington Avenue
New York, New York 10017
OTC Group L.P. (2) ...................................................... 93,100 1.5%
89 Highland Avenue
Montclair, New Jersey 07042
James E. Thomas (1) ..................................................... 3,020,478 49.0%
466 Lexington Avenue
New York, New York 10017
Peter J. Carr (2) ....................................................... 169,357 2.7%
89 Highland Avenue
Montclair, New Jersey 07042
James T. McMillan, II (3) ............................................... 130,000 2.1%
780 West Eight Mile Road
Ferndale, Michigan 48220
Bruce W. Simpson (4) .................................................... 45,000 0.7%
755 Jefferson Road
Rochester, New York 14623
Lawrence D. White (5) ................................................... 295,121 4.8%
Greg L. Kearl (5) ....................................................... 290,121 4.7%
All executive officers and directors as a group (7 persons) (6) ......... 3,965,277 62.5%
</TABLE>
- ------------
(1) Warburg, Pincus Investors, L.P. ("Warburg, Pincus") is a Delaware limited
partnership engaged in making venture capital and related investments. The
sole general partner of Warburg, Pincus is Warburg, Pincus & Co., a New
York general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC ("EMW
LLC") manages Warburg, Pincus. The members of EMW LLC are substantially
the same as the partners of WP. Lionel I. Pincus is the managing partner
of WP and the managing member of EMW LLC and may be deemed to control both
WP and EMW LLC. WP, as the sole general partner of Warburg, Pincus, has a
20% interest in the profits of Warburg, Pincus. Mr. Thomas, a director of
the Company, is a Managing Director and member of EMW LLC and a general
partner of WP. As such, Mr. Thomas may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934 (the "Exchange Act")) in an indeterminate portion of
the Common Shares beneficially owned by Warburg, Pincus and WP. All of the
Common Shares indicated as owned by Mr. Thomas are owned directly by
Warburg, Pincus and are included because of Mr. Thomas' affiliation with
Warburg, Pincus. Mr. Thomas disclaims "beneficial ownership" of these
Common Shares within the meaning of Rule 13d-3 under the Exchange Act,
except to the extent of his indirect pecuniary interest.
(2) Peter J. Carr is currently the general partner of OTC Group L.P. Mr. Carr
is deemed to have beneficial ownership of the Common Shares that are owned
by OTC Group L.P.
(3) Includes (i) 85,000 Common Shares held by the James T. McMillan, II Trust,
(ii) 37,500 Common Shares issuable upon exercise of options which are
currently exercisable, and (iii) 7,500 Common Shares issuable upon exercise
of options which will become exercisable upon the closing of the Sale.
(4) Represents (i) 37,500 Common Shares issuable upon exercise of options which
are currently exercisable and, (ii) 7,500 Common Shares issuable upon
exercise of options which will become exercisable upon the closing of the
Sale.
(5) Includes 38,000 Common Shares issuable upon exercise of options which are
currently exercisable.
(6) Includes (i) 166,200 Common Shares issuable upon exercise of options which
are currently exercisable and (ii) 15,000 Common Shares issuable upon
exercise of options which will become exercisable upon the closing of the
Sale.
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<PAGE>
MARKET FOR COMMON SHARES
The Common Shares are listed for quotation on the Nasdaq SmallCap Market
under the symbol "MENJ." On August 20, 1998, the last trading day preceding the
public announcement of the Sale Agreement, the last sales price for the Common
Shares as reported in The Wall Street Journal was $1.563.
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, the Company's independent auditors,
are expected to be present at the Meeting, where they will be available to
respond to appropriate questions and have the opportunity to make a statement
if they so desire.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by law, the Company files reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
contain additional information about the Company. You can inspect and copy
these materials at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
at the following Regional Offices of the SEC: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. For further information concerning the SEC's public reference
rooms, you may call the SEC at 1-800-SEC-0330. Some of this information may
also be accessed on the World Wide Web through the SEC's Internet address at
http://www.sec.gov.
The SEC allows the Company to "incorporate by reference" information into
this Proxy Statement, which means that the Company can disclose important
information by referring you to another document filed separately with the SEC.
Information incorporated by reference is considered part of this Proxy
Statement, except to the extent that the information is superseded by
information in this Proxy Statement. This Proxy Statement incorporates by
reference the information contained in the following documents previously filed
by the Company with the SEC (SEC file number 0-19788):
(a) the Company's Annual Report on Form 10-K for the year ended December
31, 1997 (a copy of which is attached hereto as Appendix C);
(b) the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998;
(c) the Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1998; and
(d) the Company's Current Report on Form 8-K dated August 21, 1998 and
filed with the SEC on August 31, 1998, and as amended on September 8,
1998.
The Company also incorporates by reference the information contained in
all other documents the Company files with the SEC after the date of this Proxy
Statement and before the Meeting. The information contained in any such
document will be considered part of this Proxy Statement from the date the
document is filed.
If you are a stockholder of the Company and would like to receive a copy
of any document incorporated by reference into this Proxy Statement (which will
not include any of the exhibits to the document other than those exhibits that
are themselves specifically incorporated by reference into this Proxy
Statement), you should call or write to William W. Yeager, Chief Financial
Officer, Menley & James, Inc., 100 Tournament Drive, Horsham, Pennsylvania,
19044, telephone no. (215) 441-6500. In order to ensure timely delivery of the
documents you request, you should make your request by November 16, 1998.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN (OR INCORPORATED BY
REFERENCE INTO) THIS PROXY STATEMENT. THE COMPANY HAS NOT AUTHORIZED ANYONE TO
GIVE ANY INFORMATION DIFFERENT FROM THE INFORMATION CONTAINED IN (OR
INCORPORATED BY REFERENCE INTO) THIS PROXY STATEMENT. THIS PROXY STATEMENT IS
DATED OCTOBER 23, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS
PROXY STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE
CONTRARY.
33
<PAGE>
OTHER BUSINESS
At the date of this Proxy Statement, management has no knowledge of any
business, other than that described herein, which will be presented for
consideration at the Meeting. In the event any other business is properly
presented at the Meeting, it is intended that the persons named in the enclosed
proxy will have authority to vote such proxy in accordance with their judgment
on such business.
34
<PAGE>
APPENDIX A
COMPOSITE
ASSET PURCHASE AGREEMENT
(Including Amendment No. 1 dated as of October 13, 1998)
This ASSET PURCHASE AGREEMENT (the "Agreement") is made this 21st day
of August, 1998, by and among Menley & James, Inc., a Delaware corporation (the
"Company"), Menley & James Laboratories, Inc., a Delaware corporation (the
"Subsidiary"), and Numark Laboratories, Inc., a Delaware corporation (the
"Purchaser").
W I T N E S S E T H
WHEREAS, the respective Boards of Directors of the Company,
the Subsidiary and the Purchaser have determined that it is in the best
interests of the Company, the Subsidiary and the Purchaser and their respective
stockholders for the Subsidiary to sell for cash substantially all of the
Subsidiary's assets and assign substantially all of the Subsidiary's liabilities
to the Purchaser upon the terms and subject to the conditions set forth herein;
and
WHEREAS, the Board of Directors of the Company has resolved to
recommend the transaction set forth herein (the "Transaction") to the holders of
its shares of Common Stock, par value $0.01 per share (the "Company Common
Stock"), and has determined (x) that the transaction is in the best interests of
the holders of Company Common Stock and (y) to recommend that the holders of
Company Common Stock adopt and approve this Agreement; and
WHEREAS, to induce the Purchaser to enter into this Agreement,
the Purchaser has entered into a Stockholders' Agreement dated the date hereof
(the "Stockholders' Agreement") with Warburg, Pincus Investors, L.P. and
Lawrence D. White (together, the "Stockholders"), pursuant to which the
Stockholders have agreed to, among other things, vote shares of Company Common
Stock beneficially owned by them in favor of the adoption and approval of the
Agreement, upon the terms and subject to the conditions set forth in the
Stockholders' Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements herein contained, and intending to be legally
bound hereby, the Company, the Subsidiary and the Purchaser hereby agree as
follows:
ARTICLE I
SALE AND PURCHASE OF ASSETS
Section 1.1. Assets to be Acquired. Subject to the terms and
conditions contained herein, on the Closing Date (as defined in Section 8.4),
the Subsidiary shall sell, assign, transfer, convey and deliver to the
Purchaser, and the Purchaser shall purchase from the Subsidiary, all right,
title and interest of the Subsidiary in and to all of the properties, assets,
contracts, rights and choses in action of the Subsidiary, whether real,
personal, or mixed, and whether tangible or intangible, other than the Excluded
Assets, as defined herein (the "Purchased Assets"), including (without
limitation):
1.1.1. Tangible Personal Property. All furniture,
fixtures, inventory (including, work-in-progress, raw materials, boxes,
packaging and other supplies), machinery, and related equipment, spare parts,
office equipment and other tangible personal property located at, or used in,
intended for use in or required to be used in, connection with the operation of,
the Subsidiary's business, including any items purchased subject to any
conditional sales or title retention agreement in favor of any other Person (the
"Tangible Personal Property");
<PAGE>
1.1.2. Personal Property Leases. All leases, whether
capitalized or otherwise, of Tangible Personal Property, together with any
options to purchase the underlying property, used in, intended for use in or
required to be used in, connection with the operation of, the Subsidiary's
business;
1.1.3. Accounts Receivable, Cash and Cash
Equivalents. All accounts receivable and unbilled orders of the Subsidiary as of
the Closing Date, and all cash and cash equivalents, prepaid expenses, credits
and unused allowances of the Subsidiary as of the Closing Date, except to the
extent such assets are Excluded Assets;
1.1.4. Contracts. All contracts, agreements
arrangements, instruments and documents to which the Subsidiary is a party
relating to the Purchased Assets or otherwise appurtenant to the Subsidiary's
facilities or used in, intended for use in or required to be used in, connection
with the operation of the Subsidiary's business, except to the extent such
assets are Excluded Assets;
1.1.5. Intangible Property. All intellectual property
and other intangible property used in, intended for use in or required to be
used in connection with the operation of the Subsidiary's business, except to
the extent such assets are Excluded Assets;
1.1.6. Permits. All permits, approvals, regulatory
licenses and applications used in, intended for use in or required to be used
in, connection with the operation of the Subsidiary's business;
1.1.7. Bank, Investment and Other Accounts. All
property located in any bank, investment or other account maintained with a
third party which is used by, intended for use by or required to be used by, the
Subsidiary's business, except to the extent such assets are Excluded Assets;
1.1.8. Insurance Policies. All insurance policies
(including recall insurance policies) used in, intended for use in or required
to be used in, connection with the operation of the Subsidiary's business and
all rights under insurance policies previously maintained in connection with the
operation of the Subsidiary's business, except to the extent such assets are
Excluded Assets;
1.1.9. Licenses. All licenses used in, intended for
use in or required to be used in, connection with the operation of the
Subsidiary's business;
1.1.10. After Acquired Property. All of the assets,
whether real, personal, or mixed, and whether tangible or intangible, acquired
by the Subsidiary after the date hereof and prior to the Closing Date and which
are located at, or used or intended for use at, any of the Subsidiary's
facilities or in the Subsidiary's business and which are owned by the Subsidiary
on the Closing Date, except to the extent such assets are Excluded Assets;
1.1.11. Goodwill. All goodwill of the Subsidiary
generated by the business of the Subsidiary;
1.1.12. Software, etc.. To the extent transferable,
all computer software, computer databases, computer programs, application
software, source codes, and object codes owned by the Subsidiary and used, or
held for use, by the Subsidiary in connection with the operation of the
Subsidiary's business;
1.1.13. Books and Records. All data, books, records,
manuals, standard operating procedures, correspondence, production records,
employment records (but only with respect to employees of the Company or the
Subsidiary hired by the Purchaser immediately after the Closing), dealer and
distribution lists, credit information, customer relation information of the
A-2
<PAGE>
Subsidiary, in each case relating to the business of the Subsidiary and in the
possession of the Company or the Subsidiary, and any other confidential or
proprietary information of the Subsidiary and pertaining to its business (the
"Books and Records"); and
1.1.14. Regulatory Filings. All records relating to
regulatory filings, inspection reports and correspondence relating thereto (the
"Regulatory Filings"), including but not limited to food and drug administration
application(s), sales, distribution, advertising and marketing, including all
market research, artwork, advertising, marketing concepts, marketing materials
and market measurement data associated with the Subsidiary's products, and the
Company's and the Subsidiary's files, logs and other records, including
accounting records specifically relating to the operation of the Subsidiary's
business, but not including any corporate books or records of the Subsidiary.
Additionally, subject to the terms and conditions contained herein, on the
Closing Date, the Company shall sell, assign, transfer, convey and deliver to
the Purchaser, and the Purchaser shall purchase from the Company, all right,
title and interest of the Company in and to the trademark "AquaCare".
Section 1.2. Excluded Assets. Specifically excluded from the
assets sold and purchased pursuant hereto (the "Excluded Assets") are the
following assets and property of the Subsidiary:
(a) cash or cash equivalents on hand at the Closing
(as defined in Section 8.4 below) in the amount of $2.0 million (less the amount
actually paid between the date hereof and the Closing Date with respect to the
Excluded Liabilities referred to in Sections 3.1.2(a) and 3.1.2(c) below) (the
"Excluded Cash");
(b) the lease for the property known as Commonwealth
Corporate Center, 100 Tournament Drive, Horsham, Pennsylvania 19044 (the "Office
Lease");
(c) the officers and directors liability insurance
policies held for the benefit of the directors and certain officers of the
Company;
(d) the product liability insurance policies of the
Company and the Subsidiary;
(e) the automobile leases and that certain office
equipment lease (and the automobiles and equipment subject thereto) set forth on
Schedule 1.2(d); and
(f) the corporate names "Menley & James, Inc." and
"Menley & James Laboratories, Inc.," and all rights to sue for infringement or
other violations of the foregoing.
Section 1.3. Non-Transferable Assets.
1.3.1. Subject to the provisions of 1.3.3 below, to
the extent that any asset which would otherwise be a Purchased Asset is not
capable of being sold, assigned, transferred, conveyed or delivered without
obtaining a consent, or if such sale, assignment, transfer, conveyance or
delivery or attempted sale, assignment, transfer, conveyance or delivery would
result in a breach of or constitute a default under (or an event which, with
notice or lapse of time, or both, would constitute a default under, or give rise
in favor of any third party any right of cancellation or termination of, or
result in the creation of any lien or encumbrance on any of the properties or
assets of the Subsidiary) any contract or license relating specifically to such
Purchased Asset, or a violation of any law or permit, or would result in the
imposition of any additional material liability or obligation on the Company or
the Subsidiary on the one hand, or on the Purchaser or the Purchaser's
affiliates on the other hand, or a material diminution in the value or use of
A-3
<PAGE>
such Purchased Asset, this Agreement shall not constitute a sale, assignment,
transfer, conveyance or delivery of such Purchased Asset or an attempted sale,
assignment, transfer, conveyance or delivery thereof, nor shall it constitute an
assumption of any liability or obligation under any contract relating
specifically to such Purchased Asset. Any such Purchased Asset and any contract
or permit which relates exclusively to any such Purchased Asset or Assets shall
be a "Non-Transferable Asset."
1.3.2. To the extent any contract, license or permit
relates to both a Purchased Asset and a Non-Transferable Asset, the parties
shall reasonably cooperate to provide the Purchaser with the benefit of such
contract, license or permit with respect to such Purchased Asset or
Non-Transferable Asset, as appropriate.
1.3.3. Anything in this Agreement to the contrary
notwithstanding, the Subsidiary shall not be obligated to sell, assign,
transfer, convey or deliver, or cause to be sold, assigned, transferred,
conveyed or delivered to the Purchaser or the Purchaser's Affiliates, and the
Purchaser shall not be obligated to purchase, any Non-Transferable Asset without
first having obtained all required consents, removed or eliminated any such
potential default or prevented the imposition of significant liability or
obligation, or substantive diminution in value or use. Both before and after
Closing, the Subsidiary shall use reasonable efforts, and the Purchaser shall
cooperate with the Subsidiary, to obtain any required consents, to remove or
eliminate any such potential default or to prevent the imposition of any such
liability or obligation or any such diminution in value or use so as to transfer
each such Non-Transferable Asset to the Purchaser without adversely modifying,
amending or burdening such Non-Transferable Asset.
Section 1.4. Obligations for Non-Transferable Assets. To the
extent that at Closing there is any Non-Transferable Asset, the Subsidiary, from
and after Closing, at the cost and expense of the Purchaser, shall reasonably
cooperate with the Purchaser in any lawful arrangement designed to provide the
benefit of such Non-Transferable Asset to the Purchaser, and the Purchaser, so
long as such benefit is so provided, shall satisfy or perform any liabilities or
obligations under or in connection with such Non-Transferable Asset.
Section 1.5. Post Closing Transfers. At any time after
Closing, if any Non-Transferable Asset becomes capable of being sold, assigned,
transferred, conveyed or delivered to the Purchaser or, if the benefit can be
provided to the Purchaser without the required consent of any third party, and
if such sale, assignment, transfer, conveyance or delivery, or the provision of
such benefit would not result in any breach of or constitute a default under (or
an event which, with notice or lapse of time, or both, would constitute a
default under, or give rise in favor of any third party any right of
cancellation or termination of, or result in the creation of any lien or
encumbrance on any of the properties or assets of the Subsidiary) any contract
or license, or a default under any law or permit, or result in the imposition of
any material additional liability or obligation on the Company or the Subsidiary
on the one hand, or on the Purchaser or the Purchaser's affiliates on the other
hand, or a material diminution in the value or use of such asset, or if the
Purchaser shall so request and shall provide the Company with indemnities
reasonably satisfactory to the Company and the Subsidiary as to imposition of
liability or obligations on the Company and the Subsidiary by reason of such
transfer or the provision of such benefit, then, at such time, the Subsidiary
shall sell, assign, transfer, convey and deliver to the Purchaser, or cause to
be sold, assigned, transferred, conveyed and delivered to the Purchaser, or
provide to the Purchaser the benefit of, such asset and, if such asset is a
contract, license or permit, the Purchaser shall assume the liabilities and
obligations of the Subsidiary thereunder. The Purchaser and the Subsidiary shall
execute such further instruments, bills of sale or other documents or
conveyances necessary to effectuate the purpose of the immediately preceding
sentence.
A-4
<PAGE>
ARTICLE II
PURCHASE PRICE
The Purchase Price shall be determined and payable in accordance with
this Article II.
Section 2.1. Purchase Price. At the Closing, the Purchaser
shall pay a purchase price of $12,930,000, subject to adjustment as provided in
Section 2.2 hereof (the "Purchase Price"). The Purchase Price shall be paid in
the following manner: (a) $500,000 in cash deposited pursuant to the escrow
agreement in substantially the form of Exhibit A attached hereto (the "Escrow
Agreement") with an escrow agent mutually acceptable to the parties, to be
reserved for any Purchase Price Adjustment as provided in Section 2.2 hereof
(the "Escrow"); and (b) $12,430,000 by wire transfer of immediately available
funds to such accounts as shall be designated by the Subsidiary at least 3
business days prior to the Closing Date. The Company acknowledges that it will
receive substantial benefit from the Purchase Price being paid to the Subsidiary
and, accordingly, no additional consideration shall be paid to the Company for
the transfer of its right, title and interest in and to the trademark
"AquaCare".
Section 2.2. Adjustment of Purchase Price.
2.2.1. As soon as practicable following the Closing
Date, but not later than sixty (60) days after the Closing Date, the Company, at
its expense, shall cause to be delivered to the Purchaser an unaudited balance
sheet of the Subsidiary as of the Closing Date (the "Closing Date Balance
Sheet"). The Closing Date Balance Sheet shall be prepared in accordance with
U.S. generally accepted accounting principles, applied on a consistent basis
with the unaudited balance sheet of the Company as of May 31, 1998. In the event
that the Closing Date Net Assets (as defined below) as finally determined
pursuant to this Section 2.2 are less than $8,846,000, the Purchase Price will
be reduced, on a dollar for dollar basis, for the amount of such difference. In
the event that the Closing Date Net Assets as finally determined pursuant to
this Section 2.2 are more than $8,846,000, the Purchase Price will be increased,
on a dollar for dollar basis, for the amount of such excess. In no event,
however, shall any reduction or increase in the Purchase Price exceed $500,000.
Such reduction or increase in the Purchase Price shall be referred to herein as
the "Purchase Price Adjustment." The Closing Date Balance Sheet delivered to the
Purchaser shall be accompanied by the Company's calculation of the Purchase
Price Adjustment. For purposes hereof, "Closing Date Net Assets" means the
amount, calculated as of the Closing Date, equal to: (x) the sum of the
following assets: (1) cash and cash equivalents (including the Excluded Assets),
(2) accounts receivable, net, (3) inventory, net, (4) prepaid expenses, and (5)
property and equipment net; minus (y) the sum of the following liabilities
(without regard to the Excluded Liabilities): (1) accounts payable and (2)
accrued expenses.
2.2.2. Notice of Disagreement. The Closing Date
Balance Sheet and the Company's calculation of the Purchase Price Adjustment
shall become final and binding upon the Purchaser unless the Purchaser delivers
a written notice of disagreement in respect of the Closing Date Balance Sheet or
the Purchase Price Adjustment (a "Notice of Disagreement") to the Company prior
to the fifteenth Business Day following the receipt by Purchaser of the Closing
Date Balance Sheet and the Purchase Price Adjustment. A Notice of Disagreement
shall specify in reasonable detail the nature of any disagreement so asserted in
respect of the Closing Date Balance Sheet or the Purchase Price Adjustment.
During a period of ten (10) days following the receipt by the Company of a
Notice of Disagreement, if any, from the Purchaser, the parties in good faith
shall attempt to resolve any differences they may have with respect to the
matters specified in the Notice of Disagreement. If at the end of the aforesaid
10-day period, the parties have reached agreement with respect to all matters
covered by a Notice of Disagreement, the Closing Date Balance Sheet or the
Purchase Price Adjustment shall be adjusted to reflect such written agreement
and shall become final and binding upon the Company, the Subsidiary and the
Purchaser. If at the end of the aforesaid 10-day period, the parties shall have
failed to reach written agreement with respect to all matters covered by a
Notice of Disagreement, then all such matters as to which written agreement has
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not been reached (the "Disputed Matters") may be submitted, by either the
Purchaser, on the one hand, or the Company and the Subsidiary, on the other
hand, to and reviewed by an arbitrator (the "Arbitrator") which shall be a
national accounting firm jointly selected by the Purchaser and the Company and
not used by any party during the three-year period prior to the date of this
Agreement.
2.2.3. Arbitration of Disputed Matters. Each party
shall promptly submit to the Arbitrator a written statement summarizing each of
the Disputed Matters, such party's proposed resolution of each Disputed Matters,
and outlining the methodology utilized by such party in reaching the resolutions
reached by such party with respect to each Disputed Matter. Following the
Arbitrator's review of the written statements, each party shall have an
opportunity to make a brief oral presentation in support of that party's written
statement, and may respond to the Arbitrator's questions, if any. The Arbitrator
shall consider only the Disputed Matters and the Arbitrator shall act promptly
to resolve all Disputed Matters and, in any event, within forty-five (45) days
after its appointment as Arbitrator. Upon resolution by the Arbitrator of all
Disputed Matters, the Arbitrator shall prepare and deliver to the Purchaser and
the Company the final Closing Date Balance Sheet and the final Purchase Price
Adjustment (both of which shall be binding upon the Company, the Subsidiary and
the Purchaser). The expenses of the Arbitrator shall be borne equally by the
Company and the Purchaser unless the Arbitrator determines that one of the
parties has not proceeded in good faith with respect to the matter submitted for
arbitration, in which case such party shall fully bear the expenses of the
Arbitrator. Judgment upon the award of the Arbitrator may be entered by any
state or federal court of competent jurisdiction.
2.2.4. Payment of Purchase Price Adjustment. Any
Purchase Price Adjustment under this Section 2.2 shall be satisfied (x) within
three (3) business days following the delivery of the Closing Date Balance
Sheet, or (y) in the event a Notice of Disagreement is delivered, within three
(3) Business Days following the date on which (1) the parties execute a written
agreement adjusting the Closing Date Balance Sheet and the Purchase Price
Adjustment, or (2) with respect to any Disputed Matter, the Arbitrator delivers
to the parties a final determination of the Closing Date Balance Sheet and the
Purchase Price Adjustment. If the Purchase Price Adjustment is a reduction in
the Purchase Price, such Purchase Price Adjustment shall be satisfied with funds
from the Escrow. If the Purchase Price Adjustment is an increase in the Purchase
Price, such Purchase Price Adjustment shall be paid by the Purchaser by wire
transfer of immediately available funds to such accounts as shall be designated
by the Company; provided, however, that if the Purchaser fails to pay the
Purchase Price Adjustment within five (5) business days, such amounts shall
accrue interest at the "Prime Rate" of interest as published by The Wall Street
Journal on the Closing Date until paid in full.
2.2.5. Release of Escrow Funds. Any funds held by the
Escrow after payment of the Purchase Price Adjustment shall be disbursed
immediately to the Company.
Section 2.3. Allocation of Purchase Price. The Purchase Price
shall be allocated in the manner set forth on Schedule 2.3 attached hereto. The
Purchaser and the Company will file all tax returns and reports, including IRS
Form 8594, in accordance with this Section 2.3 and neither party will take a
contrary position for federal, state or local tax purposes that is not
consistent with this Section 2.3 and the specific allocations set forth in Form
8594 on any tax return or any documents filed by any of said parties with
federal, state or local authorities.
Section 2.4. Audited Balance Sheet. The Company shall cause to
be delivered, as soon as it is available, an audited consolidated balance sheet
of the Company as of September 30, 1998, accompanied by an opinion of Ernst &
Young LLP, which balance sheet shall be prepared from the books and records of
the Company and the Subsidiary in accordance with generally accepted accounting
principles consistently applied and maintained throughout the applicable period
since the last audited balance sheet of the Company as of December 31, 1997.
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ARTICLE III
LIABILITIES OF SELLERS
Section 3.1. Assignment and Assumption of Liabilities.
3.1.1. Liabilities. At the Closing, the Subsidiary
shall assign, and from and after the Closing, the Purchaser shall assume and be
obligated to pay and perform, all of the liabilities and obligations of the
Subsidiary (whether known or unknown, accrued, absolute, contingent or
otherwise), except Excluded Liabilities as defined in Section 3.1.2 (the
"Assumed Liabilities"), including, but not limited to the following:
(a) all liabilities and obligations set
forth on or reserved against the June 30, 1998 balance sheet of the Company
attached hereto as Schedule 3.1.1(a) (the "Balance Sheet");
(b) all liabilities and obligations of the
Subsidiary incurred since June 30, 1998 (the "Balance Sheet Date") and until and
including the Closing Date; and
(c) all liabilities of the Subsidiary under
any contract, agreement, license, permit, commitment or agreement entered into
on or before the Closing Date;
(d) all liabilities and obligations of the
Subsidiary arising from or out of any permit or similar governmental
authorizations in effect before, or in existence on, the Closing Date;
(e) all liabilities arising from or out of
any conduct by or on behalf of the Subsidiary on or prior to the Closing Date
which constitutes a default or violation of any term, condition or provision of
any Federal, state, local or foreign statute, law, ordinance, rule, regulation,
judgment, decree, order, concession, grant, franchise, permit or license or
other governmental authorization or approval applicable to the Subsidiary;
(f) all liabilities and obligations of the
Subsidiary for claims or litigation, which is pending or threatened against the
Subsidiary on or prior to the Closing Date, or which is brought or threatened to
be brought against the Subsidiary after the Closing Date, relating to facts and
circumstances occurring on or prior to the Closing Date;
(g) all liabilities and obligations of the
Subsidiary for any Taxes (as defined below) with respect to periods ending on or
prior to the Closing Date; and
(h) all liabilities arising from or based on
any tortious, unlawful or other conduct of the Subsidiary or any of its
officers, directors, shareholders, employees, contractors or agents (in their
respective capacities as such), including without limitation, liabilities based
upon theories of strict liability, product liability, breach of warranty,
negligence or misrepresentation (other than claims by employees for those items
which constitute an Excluded Liability under Section 3.1.2(a), (d) and (f)
below).
The Purchaser shall also be obligated to pay and perform, and shall be
responsible for, all liabilities and obligations incurred in connection with the
ownership and operation of the Purchased Assets from and after the Closing.
3.1.2. Excluded Liabilities. The Purchaser does not
and will not assume or become obligated to pay or perform the liabilities or
obligations of the Subsidiary set forth below (all such liabilities and
obligations being called collectively the "Excluded Liabilities"). The Excluded
Liabilities are limited to the following:
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(a) all amounts payable to the Subsidiary's
officers, directors and employees that become payable as a result of the
Transaction or a change of control of the Subsidiary, or that may become payable
as a result of termination of any such individual's status as an officer,
director or employee, including accrued vacation, sick pay and employee benefits
and perquisites;
(b) the Office Lease and the leases set
forth on Schedule 1.2(d);
(c) all costs and expenses incurred by the
Company or the Subsidiary in connection with the Transaction, including, without
limitation, accounting, legal, printing and investment banking fees (the
"Company Transaction Costs");
(d) all liabilities to employees, based on
actions or omissions of the Company, the Subsidiary or its employees occurring
on or prior to the Closing Date, including accrued vacation, sick pay and
employee benefits and perquisites;
(e) all costs associated with the
cancellation of any options, warrants, or convertible or exchangeable securities
issued by the Company;
(f) all liabilities to the stockholders of
the Company in connection with the costs of investigating, defending against and
settling claims and suits brought by its stockholders; and
(g) all liabilities under any Pennsylvania
bulk sales statutes.
3.1.3. Indemnification for Liabilities. From and
after the Closing Date, the Company and the Subsidiary, jointly and severally,
shall indemnify, defend and hold harmless the Purchaser, and its stockholders,
directors, officers and affiliates (collectively, the "Purchaser Indemnified
Parties"), and the Purchaser shall indemnify, defend and hold harmless the
Company and the Subsidiary, and their respective stockholders, directors,
officers and affiliates (collectively the "Seller Indemnified Parties"), from
and against any and all claims, suits, investigations, proceedings, judgments,
losses, damages (whether direct, consequential or special), diminution in value,
costs and expenses (including, without limitation, costs and expenses incurred
in investigating, defending or settling any claims, suits, investigations or
proceedings, such as the fees, expenses and disbursements of counsel,
accountants and other experts) which a Purchaser Indemnified Party or a Seller
Indemnified Party, respectively, may sustain, suffer or incur, resulting from,
related to, or arising out of the failure of the Subsidiary or the Purchaser,
respectively, to perform their obligations under Sections 3.1.2 and 3.1.1,
respectively. Any Person seeking indemnification hereunder shall promptly give
the other party written notice of the matter as to which indemnity is sought;
provided, however, the failure to provide such notice shall not relieve the
indemnifying party of its obligation to indemnify hereunder, except to the
extent it is finally determined that such indemnifying party was actually
prejudiced by any such failure. The indemnifying party shall have the right to
control the defense, at its own cost and expense, of any such matter as to which
indemnification by it is sought hereunder; provided, however, the indemnified
parties shall have the right to participate in such defense, with counsel of its
own choosing, and at its own cost and expense; provided, further, that if the
indemnifying party fails to notify the indemnified parties within 10 Business
Days after receipt of such notice of indemnification that it will defend such
matter, then the indemnified parties may control the defense thereof, with
counsel of its own choosing, but at the sole cost and expense of the
indemnifying party (it being understood that, with respect to each matter as to
which indemnity is sought, in no event shall an indemnifying party be
responsible for more than one counsel for all indemnified parties in such
matter, together with such local counsel as may be necessary or appropriate). In
the event that any party controlling the defense of a particular matter as to
which indemnification has been sought shall seek to compromise or settle such
matter, the indemnified parties shall have the right to approve any such
compromise or settlement unless such compromise or settlement involves solely
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the payment of damages which will be paid solely by the indemnifying party, and
includes a full and complete release of liability for the indemnified party, in
which case no approval of the indemnified party shall be required.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company as
follows:
Section 4.1. Corporate Organization. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite corporate power
and authority and any necessary governmental authority to own, operate or lease
the properties that it purports to own, operate or lease and to carry on its
business as it is now being conducted except for such failures which, when taken
together with all other such failures, would not have a Material Adverse Effect
(as defined below) on the Purchaser. When used in connection with the Purchaser,
the term "Material Adverse Effect" means any change in or effect on the business
of the Purchaser and its subsidiaries that is or is reasonably likely to be
materially adverse to (i) the business, properties, result of operations,
condition (financial or otherwise) or regulatory status of the Purchaser and its
subsidiaries taken as a whole, or (ii) the ability of the Purchaser to
consummate the Transactions contemplated hereby.
Section 4.2. Authority Relative to this Agreement. The
execution, delivery and performance by the Purchaser of this Agreement and the
documents, agreements, and instruments to be executed, delivered and performed
by the Purchaser in connection with this Agreement (the "Collateral Documents")
by the Purchaser and the consummation by the Purchaser, of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of the Purchaser, and no other corporate proceeding
is necessary for the execution and delivery by the Purchaser of this Agreement
or any of the Collateral Documents to which the Purchaser is a party, including
the approval of the stockholders of the Purchaser, the performance by the
Purchaser of its obligations hereunder and thereunder, and the consummation by
the Purchaser of the Transactions contemplated hereby and thereby. This
Agreement has been duly executed and delivered by the Purchaser and constitutes
a legal, valid and binding obligation of the Purchaser, enforceable against the
Purchaser in accordance with its terms.
Section 4.3. No Conflict; Required Filings and Consents. (a)
The execution and delivery by the Purchaser of this Agreement and the Collateral
Documents to which the Purchaser is a party do not, and the performance by the
Purchaser thereof (including the consummation of the Contemplated Transactions)
will not, (i) conflict with or violate any law, regulation, court order,
judgment or decree applicable to the Purchaser or by which any of their property
is bound or affected, (ii) violate or conflict with either the Certificate of
Incorporation or By-Laws of the Purchaser, or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination or
cancellation of, or result in the creation of a lien or encumbrance on any of
the property or assets of the Purchaser pursuant to, any contract, instrument,
permit, license or franchise to which the Purchaser is a party or by which the
Purchaser or any of its property is bound or affected; except, in each case, for
conflicts, violations, breaches or defaults which, individually or in the
aggregate, would not have a Material Adverse Effect.
(b) The Purchaser is not required to submit or obtain
any notice, permit, consent, authorization, approval, report or other filing
with any governmental authority, domestic or foreign, in connection with the
execution, delivery or performance of this Agreement or any of the Collateral
Documents to which the Purchaser is a party, or the consummation of the
Transactions contemplated hereby and thereby. No waiver, consent, approval or
authorization of any governmental or regulatory authority, domestic or foreign,
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is required to be obtained or made by the Purchaser in connection with its
execution, delivery or performance of this Agreement or any of the Collateral
Documents to which the Purchaser is a party.
Section 4.4. Financing. The Purchaser has received and entered
into a commitment letter from Summit Bank, an accurate and complete copy of
which has been made available to the Company (the "Financing Commitment"). The
Purchaser will have, on the Closing Date, the funds available to it sufficient
to pay the Purchase Price (including any increases thereto pursuant to Section
2.2 hereof) in accordance with the terms of this Agreement.
Section 4.5. Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by and on behalf of the Purchaser.
Section 4.6. Offer Documents; Proxy Statements. None of the
information to be supplied in writing by the Purchaser, its officers, directors,
representatives, agents or employees, specifically for inclusion in the Proxy
Statement (as defined in Section 5.13), or in any amendments thereof or
supplements thereto (the "Purchaser Information"), will, on the date the Proxy
Statement is first mailed to stockholders, at the time of the Company
Stockholders' Meeting (as defined in Section 5.13) or at the Closing, contain
any statement which, at such time and in light of the circumstances under which
it will be made, will be false or misleading with respect to any material fact,
or will omit to state any material fact necessary in order to make the
statements therein not false or misleading or necessary to correct any statement
in any earlier communication with respect to the solicitation of proxies for the
Company Stockholders' Meeting which has become false or misleading.
Notwithstanding the foregoing, the Purchaser does not make any representation or
warranty with respect to any information, other than the Purchaser Information,
including, without limitation, information that has been supplied by the Company
or its accountants, counsel or other authorized representatives for use in any
of the foregoing document.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Company Disclosure Schedule
previously delivered by the Company to the Purchaser (the "Company Disclosure
Schedule"), the Company hereby represents and warrants to the Purchaser as
follows:
Section 5.1. Organization and Qualification; Subsidiaries.
Each of the Company and the Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite corporate power and authority and any necessary governmental
authority to own, operate or lease the properties that it purports to own,
operate or lease and to carry on its business as it is now being conducted. Each
of the Company and the Subsidiary is duly qualified as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of its properties owned, operated or leased or the nature of its activities
makes such qualification necessary, except for such failure which, when taken
together with all other such failures, would not have a Material Adverse Effect
(as defined below). When used in connection with the Company or its Subsidiary,
the term "Material Adverse Effect" means any change in or effect on the business
of the Company and its Subsidiary that is or is reasonably likely to be
materially adverse to (i) the business, the Purchased Assets, results of
operations, condition (financial or otherwise) or regulatory status of the
Subsidiary taken as a whole, or (ii) the ability of the Company or the
Subsidiary to consummate the Transactions contemplated hereby. Other than the
Subsidiary, the Company does not own or control an equity interest in any other
entity.
Section 5.2. Certificate of Incorporation and By-Laws. Each of
the Company and the Subsidiary has made available to the Purchaser a complete
and correct copy of its Certificate of Incorporation
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and By-Laws, each as amended to the date hereof. Such Certificates of
Incorporation and By-Laws are in full force and effect. Neither the Company nor
its Subsidiary is in violation of any of the provisions of its Certificate of
Incorporation or By-Laws.
Section 5.3. Authority Relative to this Agreement. Each of the
Company and the Subsidiary has the necessary corporate power and authority to
enter into this Agreement and, subject to obtaining any necessary stockholder
approval of the Transaction, to carry out its obligations hereunder. The
execution, delivery and performance by each of the Company and the Subsidiary of
this Agreement and the Collateral Documents to which it is a party, and the
consummation by each of the Company and the Subsidiary of the Transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of each of the Company and the Subsidiary, subject
to the approval of the Transaction by the Company's stockholders in accordance
with Delaware Law. This Agreement has been duly executed and delivered by each
of the Company and the Subsidiary and constitutes a legal, valid and binding
obligation of each of the Company and the Subsidiary, enforceable against each
of the Company and the Subsidiary in accordance with its terms.
Section 5.4. No Conflict; Required Filings and Consents. (a)
The execution and delivery of this Agreement by each of the Company and the
Subsidiary do not, and the performance of this Agreement by each of the Company
and the Subsidiary will not, (i) conflict with or violate any law, regulation,
court order, judgment or decree applicable to the Company or its Subsidiary, as
applicable, or by which the Company's or the Subsidiary's respective properties
are bound or affected, (ii) violate or conflict with the Certificate of
Incorporation or By-Laws of the Company or the Subsidiary, as applicable, or
(iii) except as set forth on Schedule 5.4 of the Company Disclosure Schedule,
result in any breach of or constitute a default (or an event which with notice
or lapse of time of both would become a default) under, or give to others any
rights of termination or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of the Subsidiary pursuant to,
any contract, instrument, permit, license or franchise to which the Company or
the Subsidiary is a party or by which the Company or the Subsidiary, or the
Subsidiary's property, as applicable, is bound or affected; except in each of
clauses (i) and (iii), for conflicts, violations, breaches or defaults which, in
the aggregate, would not have a Material Adverse Effect.
(b) Except for applicable requirements, if any, of
the Exchange Act, neither the Company nor the Subsidiary is required to submit
or obtain any notice, permit, consent, authorization, approval, report or other
filing with any governmental authority, domestic or foreign, in connection with
the execution, delivery or performance of this Agreement. Except for applicable
requirements, if any, of the Exchange Act, no waiver, consent, approval or
authorization of any governmental or regulatory authority, domestic or foreign,
is required to be obtained or made by the Company or the Subsidiary in
connection with its execution, delivery or performance of this Agreement.
Section 5.5. SEC Filings; Financial Statements. (a) The
Company has filed all forms, reports and documents required to be filed with the
SEC since January 1, 1997, and has heretofore made available to the Purchaser,
in the form filed with the SEC, its (i) Annual Reports on Form 10-K for the
fiscal years ended December 31, 1996 and December 31, 1997, respectively, (ii)
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and June
30, 1998, (iii) all proxy statements relating to the Company's meetings of
stockholders (whether annual or special) held since January 1, 1997 and (iv) all
other reports or registration statements (other than Reports on Form 10-Q
referred to in clause (ii) above) filed by the Company with the SEC since
January 1, 1997 (collectively, the "SEC Reports"). The SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act of 1933, as
amended, or the Exchange Act, as the case may be, and (ii) did not at the time
they were filed contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The Subsidiary is not required to file any statements or
reports with SEC pursuant to Sections 13(a) or 15(d) of the Exchange Act.
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(b) The consolidated financial statements contained
in the SEC Reports have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and fairly present,
in all material respects, the consolidated financial position of the Company and
the Subsidiary as at the respective dates thereof and the consolidated results
of operations and consolidated statements of cash flows of the Company and the
Subsidiary for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount.
(c) Except as reflected or reserved against in the
consolidated financial statements contained in the SEC Reports, and except as
described on Schedule 5.5 of the Company Disclosure Schedule, the Subsidiary has
no liabilities of any nature (whether accrued, absolute, contingent or
otherwise) which were not incurred in the ordinary course of business consistent
with past practice. As of the date hereof, neither the Company nor the
Subsidiary has any outstanding borrowings under the Credit Facility (as defined
in Section 5.7 below).
Section 5.6. Absence of Certain Changes or Events. Since
January 1, 1998, the Subsidiary has conducted its business only in the ordinary
course and in a manner consistent with past practice. Except as contemplated in
this Agreement, as previously disclosed in the SEC Reports or as otherwise
disclosed on a Schedule to this Agreement, since January 1, 1998, there has not
been:
5.6.1. any Material Adverse Effect on the Subsidiary;
5.6.2. any strike, picketing, work slowdown or other
labor disturbance involving employees of the Subsidiary;
5.6.3. any damage, destruction or loss (whether or
not covered by insurance) with respect to any material portion of the assets of
the Subsidiary;
5.6.4. any redemption or other acquisition of Company
Common Stock by the Company or any capital stock of the Subsidiary or any
declaration or payment of any dividend or other distribution in cash, stock or
property with respect to Company Common Stock or the capital stock of the
Subsidiary;
5.6.5. any mortgage, pledge, security interest or
imposition of lien or other encumbrance on any asset of the Subsidiary;
5.6.6. any change by the Company in accounting
principles or methods except insofar as may have been required by a change in
generally accepted accounting principles and disclosed in the SEC Reports;
5.6.7. any transaction not in the ordinary course of
business of the Subsidiary, including, without limitation, any sale of all or
substantially all of the assets of the Subsidiary or any merger of the
Subsidiary and any other entity;
5.6.8. any unfulfilled commitments requiring
expenditures by the Subsidiary exceeding $50,000 (excluding commitments
expressly described elsewhere in this Agreement, the Schedules hereto or the
Company Disclosure Schedule or which were undertaken in the ordinary course of
business consistent with past practice);
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5.6.9. any revaluation of any assets or material
write down of the value of any inventory;
5.6.10. any loan or payment to any stockholder of the
Subsidiary or the Company (other than loans or payments from the Subsidiary to
the Company in the ordinary course of business consistent with past practices);
5.6.11. any amendment to the Subsidiary's Certificate
of Incorporation or By-laws;
5.6.12. any (a) disposition of or lapse of any
material patent, trademark, trade name, service mark or copyright or any
application for the foregoing, (b) disposition of any material technology,
software or know-how, or (c) disposition of any license, permit or authorization
to use any of the foregoing or any other material right;
5.6.13. any discharge or satisfaction of any lien or
encumbrance or payment or cancellation of any liability, other than payment of
current liabilities in the ordinary course of business consistent with past
practice;
5.6.14. any cancellation of any debt owed to the
Subsidiary or waiver or release of any material contract, right or claim, except
for cancellations, waivers and releases in the ordinary course of business which
do not exceed $50,000 in the aggregate;
5.6.15. any incurrence of indebtedness for borrowed
money or any commitment to borrow money, any capital expenditure or capital
commitment requiring an expenditure of monies in the future, any incurrence of a
contingent liability or any guaranty or commitment to guaranty the indebtedness
of others entered into, by the Subsidiary, other than transactions in the
ordinary course of business and not in excess of $100,000; or
5.6.16. any agreement or understanding to take any of
the actions described above in this Section 5.6.
Section 5.7. Title to Property. The Subsidiary has good and
marketable title, or valid leasehold rights in the case of leased property, to
all real property and all personal property purported to be owned or leased by
it, free and clear of all liens, security interests, claims, encumbrances,
options, rights to purchase and charges, excluding (i) liens for fees, taxes,
levies, imposts, duties or governmental charges of any kind which are not yet
delinquent or are being contested in good faith by appropriate proceedings which
suspend the collection thereof, (ii) liens for mechanics, materialmen, laborers,
employees, suppliers or other liens arising by operation of law for sums which
are not yet delinquent or are being contested in good faith by appropriate
proceedings, (iii) liens created in the ordinary course of business in
connection with the leasing or financing of office, computer and related
equipment and supplies, (iv) easements and similar encumbrances ordinarily
created for fuller utilization and enjoyment of property, (v) a security
interest in favor of First Union National Bank (successor to CoreStates Bank,
N.A., successor to Meridian Bank) created in connection with a credit facility
(the "Credit Facility"), and (vi) liens or defects in title or leasehold rights
that, in the aggregate, do not and will not have a Material Adverse Effect. The
only assets which the Company owns are (A) the equity interests in the
Subsidiary and (B) certain trademarks involving the "AquaCare" brand.
Section 5.8. Brand Intellectual Property. The Subsidiary is
the beneficial owner of all right, title and interest in the Brand Intellectual
Property (as such term is defined below) and the registered owner of all right,
title and interest in the items listed on Schedule 5.8 of the Company Disclosure
Schedule, except as otherwise noted therein, and has the right to use, license,
sublicense or assign the Brand Intellectual Property without liability to, or
any requirement to obtain the consent of, any other Person. To the best of the
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Company's knowledge and except as otherwise noted in such Schedule 5.8, there
are no infringements, threats of infringements, or asserted or unasserted claims
by the Subsidiary of infringements or misappropriation of any of the Brand
Intellectual Property in the United States nor are there any asserted or
unasserted claims by the Subsidiary contesting or challenging the right, title
or interest of any other Person in any of the Brand Intellectual Property which
would have a Material Adverse Effect. There are no outstanding or, to the
knowledge of the Company, threatened claims asserted against the Subsidiary
alleging the infringement or misappropriation by the Subsidiary of any
intellectual property of any other party. For the purposes of this Agreement the
term "Brand Intellectual Property" means (a) all trademarks (whether registered
or unregistered), trade names and applications therefor, brand names, logotypes
and symbols which are used in the manufacture or sale of the Subsidiary's brands
listed on such Schedule 5.8, all renewals, modifications or extensions thereof,
together with the goodwill of the business symbolized by and associated
therewith, and all copyrights (whether registered or unregistered), patents,
patent applications or inventions for which patent applications have not been
filed, including such of the foregoing as are listed or described in such
Schedule 5.8; and (b) all trade secrets, confidential or proprietary information
and other know-how, information, documents or materials owned, developed or
possessed by the Subsidiary, whether tangible or intangible in form, which are
used by the Subsidiary and are unique to the manufacture or the sale of such
brands, including those that are listed on Schedule 5.8 of the Company
Disclosure Schedule. Except as set forth on Schedule 5.8 of the Company
Disclosure Schedule, there are no royalties or other consideration required to
be paid by the Subsidiary in connection with its use of the Brand Intellectual
Property.
Section 5.9. Litigation. Except as set forth in the SEC
Reports or on Schedule 5.9 of the Company Disclosure Schedule, as of the date
hereof, there are no claims, actions, suits, proceedings or investigations
pending or, to the best knowledge of the Company, threatened against the
Subsidiary, or any properties or rights of the Subsidiary, before any court,
administrative, governmental or regulatory authority or body, domestic or
foreign. As of the date hereof, neither the Subsidiary nor any of its property
is expressly subject to any order, judgment, injunction or decree.
Section 5.10. Labor Matters. (a) Except as set forth on
Schedule 5.10 of the Company Disclosure Schedule, the Subsidiary is not a party
or subject to (i) any outstanding employment agreements or contracts with
officers or employees that are not terminable at will, or that provide for the
payment of any bonus or commission, (ii) any agreement, policy or practice that
requires it to pay termination or severance pay to salaried, non-exempt or
hourly employees (other than as required by law), or (iii) any collective
bargaining agreement or other labor union contract applicable to Persons
employed by the Subsidiary, nor does the Subsidiary know of any activities or
proceedings of any labor union to organize any such employees, in each of
clauses (i), (ii) and (iii), which will become a liability or obligation of the
Purchaser from and after the Closing.
(b) (i) The Subsidiary is in compliance, in all
material respects, with all applicable laws relating to employment and
employment practices, wages, hours, and terms and conditions of employment, (ii)
there is no unfair labor practice charge or complaint pending before the
National Labor Relations Board ("NLRB") involving the Subsidiary, (iii) there is
no labor strike, material slowdown or material work stoppage or lockout actually
pending or, to the Company's knowledge, threatened involving employees of the
Subsidiary, (iv) there is no representation claim or petition pending before the
NLRB relating to the employees of the Subsidiary and, to the Company's
knowledge, no question concerning representation exists relating to the
employees of the Subsidiary, (v) there are no material charges with respect to
or relating to employees of the Subsidiary pending before the Equal Employment
Opportunity Commission or any state, local or foreign agency responsible for the
prevention of unlawful employment practices, and (vi) the Subsidiary has not
received any formal notice from any Federal, state, local or foreign agency
responsible for the enforcement of labor or employment laws of an intention to
conduct an investigation of the Subsidiary and no such investigation is in
progress.
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Section 5.11. Proxy Statement. The proxy statement (such proxy
statement, as amended or supplemented, is herein referred to as the "Proxy
Statement") to be sent to the stockholders of the Company in connection with the
meeting of the Company's stockholders to consider the Transaction (the "Company
Stockholders' Meeting") will comply in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations thereunder,
except that no representation or warranty is being made by the Company with
respect to any information supplied to the Company by the Purchaser specifically
for inclusion in the Proxy Statement. The Proxy Statement will not, at the time
the Proxy Statement (or any amendment or supplement thereto) is filed with the
SEC or first sent to stockholders, at the time of the Company Stockholders'
Meeting or at the Closing, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, except that no representation or warranty is
being made by the Company with respect to any information supplied to the
Company by the Purchaser specifically for inclusion in the Proxy Statement.
Section 5.12. Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by and on behalf of the Company except for the fees and expenses of Howard,
Lawson & Co. which will be deemed an Excluded Liability hereunder.
Section 5.13. Conduct of Business. (a) The conduct of the
business of the Subsidiary is in compliance, in all material respects, with all
federal, state, local or foreign laws, rules, regulations or ordinances, or
judgments, injunctions, writs, decrees or orders of any court or governmental
entity (collectively, the "Orders"), and the Subsidiary has not received any
notice of any violation, in any material respect, of any Order which remains
outstanding. The Subsidiary is not subject to any Order currently in effect
which could individually or in the aggregate have a Material Adverse Effect.
(b) The Subsidiary possesses all licenses, permits,
consents, authorizations, registrations and approvals of, with or from
governmental entities which have jurisdiction over it, and occupancy, fire,
business and other permits from local officials necessary for the operation of
the Subsidiary's business as currently conducted ("Material Permits"), and is in
compliance with the terms thereof, except where any violations, or the absence
of such Material Permit, would not singly, or in the aggregate, have a Material
Adverse Effect. All of the Material Permits are valid and in full force and
effect.
(c) In connection with the operation of all employee
benefit plans, all employee welfare benefit plans, all employee pension benefit
plans, all multi-employer plans and all multi-employer welfare arrangements (as
defined in Sections 3(3), (1), (2), (37) and (40), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), currently
maintained and/or sponsored by the Subsidiary, or to which the Subsidiary
currently contributes, or has an obligation to contribute in the future
(including, without limitation, benefit plans or arrangements that are not
subject to ERISA) (the "Plans"), the Subsidiary has operated such Plans in
compliance, in all material respects, with all applicable provisions of ERISA
and the regulations issued thereunder, as well as with all other applicable
laws, and, in all material respects, have been administered, operated and
managed by in substantial accordance with the governing documents. The
Subsidiary does not maintain or sponsor, nor is a contributing employer to, any
defined benefit plan or multi-employer plan.
Section 5.14. Taxes. (a) The Subsidiary and the Company have
timely filed with the appropriate governmental authorities all Tax Returns (as
defined below) required to be filed by or with respect to it or its operations
or assets, and such Tax Returns are true, correct and complete in all material
respects; (b) all Taxes (as defined below) due by Subsidiary and the Company
(whether or not shown to be due on such Tax Returns), all Taxes required to be
paid on an estimated or installment basis, and all Taxes required to be withheld
with respect to the Company or the Subsidiary or its operations or assets have
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been timely paid or, if applicable, withheld and paid to the appropriate taxing
authority in the manner provided by law, (iii) the reserve for Tax liability (as
opposed to any reserve for deferred Taxes established to reflect timing
differences between book and tax income) set forth on the Balance Sheet is
adequate in all material respects for the payment of Taxes through the date
thereof, (iv) there are no liens for Taxes upon the assets of the Subsidiary or
the Company, (v) no Federal, state, local or foreign audits, administrative
proceedings or court proceedings are pending or, to the Company's knowledge,
threatened with regard to any Taxes or Tax Returns of the Subsidiary or the
Company, and there are no outstanding deficiencies or assessments asserted,
proposed or, to the Company's knowledge, threatened against the Subsidiary or
the Company, and (vi) there are no outstanding agreements, consents or waivers
extending the statutory period of limitations applicable to the assessment of
any Taxes or deficiencies against the Subsidiary or the Company or with respect
to its operations or assets, no power of attorney granted by the Subsidiary or
the Company with respect to any matter relating to Taxes is currently in force,
and neither the Subsidiary nor the Company is a party to any agreement providing
for the allocation, sharing or payment of Taxes.
(b) No property of the Subsidiary or the Company is
"tax exempt use property" within the meaning of Section 168(h) of the Code or
property that the Purchaser, the Subsidiary or the Company will be required to
treat as being owned by another Person pursuant to Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended, in effect immediately before the
enactment of the Tax Reform Act of 1986.
(c) Neither the Subsidiary nor the Company is or has
been a United States real property holding company (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(ii) of the Code, and neither the Subsidiary nor the Company is a
"foreign person" within the meaning of the Code.
(d) No claim has ever been made by an authority in a
jurisdiction where the Subsidiary or the Company does not file Tax Returns that
it is or may be subject to taxation by that jurisdiction that has not been
satisfactorily resolved.
(e) No indebtedness of the Subsidiary or the Company
is "corporate acquisition indebtedness" within the meaning of Section 279(b) of
the Code.
(f) Neither the Subsidiary nor the Company (i) has
ever been a member of an affiliated group (within the meaning of Section 1504 of
the Code, or any similar group as defined for state, local or foreign tax
purposes) (except for the affiliated group of the Company including only the
Company and the Subsidiary) filing a consolidated federal (or combined or
unitary state, local or foreign) income Tax Return, and (ii) has liability for
the taxes of any Person (other than the Company or the Subsidiary) under
Treasury Regulation ss. 1.1502-6 (or any similar provision of state, local or
foreign Law), as a transferee or successor, by contract, or otherwise.
(g) For purposes of this Section 5.14, references to
the Company or the Subsidiary shall also refer to any predecessor companies.
(h) For purposes of this Agreement, "Taxes" means all
taxes, charges, fees, levies or other assessments imposed by any United States
Federal, state, or local taxing authority or by any foreign taxing authority,
including but not limited to, income, gross receipts, excise, property, sales,
use, transfer, payroll, license, ad valorem, value added, withholding, social
security, national insurance (or other similar contributions or payments),
franchise, estimated, severance, stamp, and other taxes (including any interest,
fines, penalties or additions attributable to or imposed on or with respect to
any such taxes, charges, fees, levies or other assessments).
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(i) For purposes of this Agreement, "Tax Return"
means any return, report, information return or other document (including any
related or supporting information and, where applicable, profit and loss
accounts and balance sheets) with respect to Taxes.
Section 5.15. Disclosure. No representation or warranty by the
Company contained in this Agreement, and no statement contained in any
certificate or other instrument furnished or to be furnished to the Purchaser
pursuant hereto, or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact or omits to
state any material fact required to be stated herein or therein which is
necessary in order to make the statements contained herein or therein, in light
of the circumstances under which they were made, not misleading.
Section 5.16. Capitalization. The authorized and outstanding
capital stock of the Subsidiary as of the date hereof is as set forth on
Schedule 5.16 of the Company Disclosure Schedule. All of the outstanding shares
of the capital stock of the Subsidiary are validly issued, fully paid and
non-assessable, are owned by the Company, and on the Closing Date, will be owned
by the Company. There are no liens, claims, charges or encumbrances on or with
respect to any outstanding shares of capital stock of the Subsidiary. There are
no outstanding (i) securities convertible into or exchangeable for the
Subsidiary's capital stock; (ii) options, warrants or other rights to purchase
or subscribe for capital stock of the Subsidiary or (iii) contracts,
commitments, agreements, understandings or arrangements of any kind relating to
the issuance of any capital stock of the Subsidiary, any such convertible or
exchangeable securities or any such options, warrants or rights.
Section 5.17. Environmental Laws. The Subsidiary has complied
during the time the Subsidiary has operated its business and currently complies
with all Environmental Laws (as defined below) and the Subsidiary has not
received any communication (whether from a Governmental Entity, private party,
employee or otherwise) that alleges that the Subsidiary is not in such
compliance, except in each case where such noncompliance or violation would not
have a Material Adverse Effect. The Subsidiary has all permits and licenses
required under Environmental Laws in connection with the operations of the
Subsidiary's business including any permits or licenses relating to disposals or
emissions. The Subsidiary has not been named or threatened to be named a
"potentially responsible party" within the meaning of CERCLA or any similar
federal, state or local law. "Environmental Laws" means any applicable federal,
state, local or foreign laws, statutes, rules, regulations, orders, consent
decrees, judgments, permits or licenses, relating to prevention, remediation,
reduction or control of pollution, or protection of the environment, natural
resources and/or human health and safety, including, without limitation, such
applicable laws, statutes, rules, regulations, orders, consent decrees,
judgments, permits or licenses relating to (a) solid waste and/or Hazardous
Materials generation, handling, transportation, use, treatment, storage or
disposal, (b) air, water, and noise pollution, (c) soil, ground, water or
groundwater contamination, (d) the manufacture, generation, processing,
handling, distribution, use, treatment, storage, transportation or release,
emission or discharge into the environment of Hazardous Materials, (e)
regulation of underground and above ground storage tanks, (f) the obtaining,
sale, use, storage, disposal or testing of any human blood or blood product and
(g) the disposal of medical waste. "Hazardous Materials" means any flammable or
explosive materials, petroleum (including crude oil and its fractions),
radioactive materials, hazardous wastes, toxic substances or related hazardous
materials, chemicals, pollutants and contaminants, including, without
limitation, polychlorinated biphenyls, friable asbestos, and any substances
defined as, or included in the definition of toxic or hazardous substances,
wastes, or materials under any federal or applicable state, local or foreign
laws, ordinances, rules or regulations including Environmental Laws.
Section 5.18. Contracts.
5.18.1. Schedule 5.18 of the Company Disclosure
Schedule sets forth an accurate, correct and complete list of the following
binding contracts, agreements, arrangements or instruments (the "Contracts") in
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effect on the date hereof, to which the Subsidiary is a party, by which it is
bound or pursuant to which the Subsidiary is an obligor or a beneficiary:
(a) Any Contracts with affiliates, whether
or not material (other than employment
agreements providing for an annual
salary and bonus of less than
$100,000);
(b) Any Contract for capital expenditures
or services by the Subsidiary which
involves consideration payable by the
Subsidiary in excess of $50,000 in any
fiscal year;
(c) Any Contract evidencing any
indebtedness for borrowed money in
excess of $50,000 or obligation for the
deferred purchase price of assets in
excess of $50,000 (excluding normal
trade payables) or guaranteeing any
indebtedness, obligation or liability
in excess of $50,000;
(d) Any Contract wherein the Subsidiary has
agreed to a non-competition provision;
(e) Any joint venture, partnership,
cooperative arrangement or any other
Contract involving a sharing of
profits;
(f) Any Contract with any governmental
entity (other than for services in the
ordinary course of business);
(g) Manufacturers' representative, sales
agency, dealer or advertising Contract
which is not terminable on notice
without cost or other liability to the
Subsidiary;
(h) Settlement agreement of any material
administrative or judicial proceeding
within the past five years (other than
those the effect of which is reflected
in the financial statements included in
the SEC Reports);
(i) Any power of attorney, proxy or similar
instrument granted by or to the
Subsidiary (other than in the ordinary
course of business consistent with past
practice); and
(j) Any other material Contract related to
the business of the Subsidiary, as
currently conducted or any other
Contract not in the ordinary course of
business of the Subsidiary consistent
with past practice.
Accurate, correct and complete copies of each such Contract
have been made available by the Company to the Purchaser.
5.18.2. Each Contract listed or referred to on
Schedule 5.18 of the Company Disclosure Schedule is in full force and effect,
except where the failure to be in full force and effect will not have a Material
Adverse Effect. The Company and the Subsidiary has complied with all commitments
and obligations on its part to be performed or observed under each such
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Contract, except for such noncompliance which is not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect. To the
knowledge of the Company, each party to each such Contract other than the
Company or the Subsidiary has complied with all commitments and obligations on
its part to be performed or observed thereunder, except for such noncompliance
which is not reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect. The Subsidiary has not received any notice of a default
by it under any such Contract and no event or condition has happened or
presently exists which constitutes a default by it or, after notice or lapse of
time or both, would constitute a default by it under any such Contract, except
for such notices and defaults which are not reasonably likely, individually or
in the aggregate to have a Material Adverse Effect.
Section 5.19. Major Customers/Suppliers. Schedule 5.19 of the
Company Disclosure Schedule lists the names of the ten largest customers (by
revenues generated) and suppliers (by expenditure) for the Subsidiary and the
amount of revenues generated by each of them and expenditures incurred to them,
as appropriate, during the twelve months ended December 31, 1997. To the best
knowledge of the Company, except as set forth in Schedule 5.19 of the Company
Disclosure Schedule, there have been no material adverse changes in the
relationships between the Subsidiary and the customers or suppliers listed on
Schedule 5.19 of the Company Disclosure Schedule, from December 31, 1997 until
the date hereof.
Section 5.20. Accounts Payable. All accounts payable and
accrued expenses reflected in the financial statements included in the SEC
Reports arose from bona fide transactions in the ordinary course of the
Subsidiary's business.
Section 5.21. Accounts Receivable. All accounts receivable
reflected in the financial statements included in the SEC Reports arose from
bona fide transactions in the ordinary course of the Subsidiary's business.
Neither the Company nor the Subsidiary has received written notice of any claim
of recourse, defense, deduction, counterclaim or offset on part of the obligor
with respect to such accounts receivable.
Section 5.22. Bulk Sales. The bulk sales laws of the
Commonwealth of Pennsylvania are not applicable to the transactions contemplated
hereby.
Section 5.23. Insurance Policies. The Subsidiary maintains
insurance covering all risks customarily insured against and in amounts
reasonable and customary in light of the Subsidiaries' assets, properties,
business, operations, products and services as the same are presently owned or
conducted. Each current policy is in full force and effect and all premiums are
currently paid and no notice of cancellation or termination has been received
with respect to any such policy. Such policies have been sufficient for
compliance with all material requirements of law. Except as set forth on
Schedule 5.23 of the Company Disclosure Schedule, there are no material claims,
actions, suits or proceedings arising out of or based upon any of such policies
of insurance. The Subsidiary has not been refused any insurance with respect to
its assets and operations, nor has its coverage been limited by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance during the last five years.
Section 5.24. Inventory. All inventory of the Subsidiary,
whether existing now or at the Closing, consists or will consist of a quality
and quantity usable in the ordinary course of business, except for items of
obsolete materials, prior season, slow moving, irregular or defective stock and
materials of below-standard quality, all of which have been written off or down
to fair market value as reflected in the financial statements included in the
SEC Reports. The inventory reflected in the financial statements included in the
SEC Reports were on the date thereof properly recorded thereon and reflected at
such date proper reserves as determined in accordance with generally accepted
accounting principles, consistently applied, and stated, on an aggregate basis,
at the lower of cost (based on the first-in, first-out method) or market value.
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Section 5.25. Promotional Programs. Since January 1, 1997, the
promotional programs of the Subsidiary have been and are being conducted in the
ordinary course of business consistent with past practice. Schedule 5.25 of the
Company Disclosure Schedule describes all material binding obligations,
commitments, agreements and understandings with any Person having relations with
the Subsidiary relating to or involving advertising and promotional programs or
plans whether directed to customers, trade parties or others.
Section 5.26. Warranty Claims. The schedule of warranty
expenses of the Subsidiary for the two fiscal years ended December 31, 1997 as
described on Schedule 5.26 of the Company Disclosure Schedule is true, complete
and correct.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE TRANSACTION
Section 6.1. Acquisition Proposals. The Company will notify
the Purchaser promptly if any inquiries or proposals are received by, any
information is requested from, or any negotiations or discussions are sought to
be initiated or continued with the Company, in each case in connection with any
acquisition, business combination or purchase of all or any significant portion
of the assets of, or any equity interest in, the Company or the Subsidiary.
Section 6.2. Conduct of Business Pending the Sale. Each of the
Company and the Subsidiary covenants and agrees that, between the date of this
Agreement and the Closing, unless the Purchaser shall otherwise consent in
writing, the businesses of the Subsidiary shall be conducted only in, and the
Company and the Subsidiary shall not take any action except in, the ordinary
course of business and in a manner consistent with past practice. By way of
amplification and not limitation, except as contemplated by this Agreement,
neither the Company nor the Subsidiary shall, between the date of this Agreement
and the Closing, directly or indirectly do any of the following without the
prior written consent of the Purchaser:
(a) (i) amend or propose to amend the Certificate of
Incorporation or By-Laws of the Company or the Subsidiary; (ii) split, combine
or reclassify any outstanding shares of Company Common Stock, or declare, set
aside or pay any dividend or distribution payable in cash, stock, property or
otherwise with respect to the shares of Company Common Stock or shares of
capital stock of the Subsidiary; (iii) redeem, purchase or otherwise acquire or
offer to redeem, purchase or otherwise acquire any shares of its capital stock,
except in the performance of its obligations under existing Employee Plans; or
(iv) authorize or propose or enter into any contract, agreement, commitment or
arrangement with respect to any of the matters set forth in this Section 6.2(a);
(b) (i) acquire (by merger, consolidation, or
acquisition of stock or assets) any significant corporation, partnership or
other business organization or division thereof; (ii) except in the ordinary
course of business, sell, pledge, dispose of, or encumber or authorize or
propose the sale, pledge, disposition or encumbrance of any assets of the
Company or its Subsidiary; (iii) incur any indebtedness for borrowed money, or
enter into any contract or agreement, except in the ordinary course of business;
(iv) authorize any capital expenditure which individually is in excess of
$25,000 or in the aggregate in excess of $100,000; or (v) enter into or amend
any contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this Section 6.2(b);
(c) take any action except in the ordinary course of
business and in a manner consistent with past practice with respect to
accounting policies or procedures (including without limitation its procedures
with respect to the payment of accounts payable); or
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(d) take any action described in Sections 5.6.4,
5.6.5, 5.6.9, 5.6.10, 5.6.12, 5.6.13 and 5.6.14.
Section 6.3. No Shopping. The Company and its Subsidiary will
not, directly or indirectly, through any officer, director, agent, financial
adviser or otherwise, solicit, initiate or encourage submission of proposals or
offers from any Person relating to any acquisition or purchase of all or a
portion of the assets of (other than immaterial or insubstantial assets or
inventory in the ordinary course of business), or any equity interest in, the
Company or the Subsidiary or any business combination with the Company or the
Subsidiary, or participate in any negotiations regarding, or furnish to any
other Person any information (except for information which has been previously
publicly disseminated by the Company in the ordinary course of business) with
respect to, or otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other Person to do or seek
any of the foregoing. Notwithstanding the foregoing, the parties hereby agree
that the Board of Directors of the Company may review and act upon (which
actions may include, without limitation providing confidential information,
negotiating a transaction and entering into an agreement for a transaction) an
unsolicited proposal by any other Person relating to any of the transactions
referred to in the preceding sentence, if the Company's Board of Directors upon
the advice of counsel determines that failing to review and act would constitute
a breach of fiduciary duty. The Company shall use its best efforts to cause all
confidential materials previously furnished to any third parties to be promptly
returned to the Company and shall cease any negotiations conducted in connection
therewith or otherwise conducted with any such parties. In accordance with
Section 6.1 hereof, the Company shall promptly notify the Purchaser if any such
proposal or offer, or any inquiry or contact with any Person with respect
thereto, is made.
Section 6.4. Best Efforts. Each of the Company, the Subsidiary
and the Purchaser shall use all reasonable efforts to cause the conditions set
forth in Article VIII hereof to be satisfied, and shall cooperate with the other
parties hereto in obtaining third party consents required hereunder (including,
without limitation, providing to the third parties such information as they may
reasonably request).
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1. Proxy Statement. As promptly as practicable after
the date hereof, the Company shall prepare and file with the SEC, and shall use
all reasonable efforts to have cleared by the SEC, and promptly thereafter shall
mail to stockholders, the Proxy Statement. The Proxy Statement shall contain the
recommendation of the Company's Board of Directors in favor of the Transaction;
provided, however, that no director of the Company shall be required to take or
support any action that would violate its fiduciary duty to stockholders. The
Proxy Statement shall not be filed, and no amendment or supplement to the Proxy
Statement will be made by the Company, without consultation with Purchaser and
its counsel.
Section 7.2. Meeting of Stockholders of the Company. Following
the date hereof, the Company shall promptly take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and By-Laws to
convene the Company Stockholders' Meeting. The stockholder vote or consent
required for approval of the Transaction will be no greater than that set forth
in Delaware Law. The Company shall use its reasonable best efforts to solicit
from stockholders of the Company proxies in favor of the Transaction and shall
take all other action reasonably necessary to secure any vote or consent of
stockholders required by Delaware Law to effect the Transaction. The Purchaser
agrees that it shall vote, or cause to be voted, in favor of the Transaction all
shares of Company Common Stock directly or indirectly beneficially owned by it.
Notwithstanding anything to the foregoing, no director of either the Company or
the Subsidiary shall be required to take or support any action that would
violate its fiduciary duty to stockholders.
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Section 7.3. Additional Agreements. The Company and the
Purchaser will each comply in all material respects with all applicable laws and
with all applicable rules and regulations of any governmental authority in
connection with its execution, delivery and performance of this Agreement and
the transactions contemplated hereby. Each of the parties hereto agrees to use
all reasonable efforts to obtain in a timely manner all necessary waivers,
consents and approvals and to effect all necessary registrations and filings,
and to use all reasonable efforts to take, or cause to be taken, all other
actions and to do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement. The parties shall cooperate in
responding to inquiries from, and making presentations to, regulatory
authorities.
Section 7.4. Notification of Certain Matters. The Company
shall give prompt notice to the Purchaser, and the Purchaser shall give prompt
notice to the Company, of (i) the occurrence, or non-occurrence, of any event
whose occurrence, or non-occurrence, would be likely to cause either (A) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Closing or (B) any condition set forth in Article VIII to be unsatisfied in any
material respect at any time from the date hereof to the date of the Closing,
and (ii) any material failure of the Company or the Subsidiary on the one hand,
or the Purchaser on the other hand, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 7.4 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 7.5. Access to Information. (a) From the date hereof
to the Closing, the Company shall, and shall cause its Subsidiary, officers,
directors, employees, auditors and agents to, afford the officers, employees and
agents of the Purchaser reasonable access, at reasonable times and on reasonable
notice, to its officers, employees, agents, properties, offices and other
facilities and to all books and records, and shall furnish the Purchaser with
all financial, operating and other data and information as the Purchaser,
through its officers, employees or agents, may reasonably request, except that,
with respect to the workpapers of its independent accountants, the Company and
the Subsidiary shall only be required to provide access thereto, it being
understood that they may not be copied or reproduced in any manner without the
express written consent of such independent accountants.
(b) Any information obtained after the date hereof
pursuant to Section 7.5 shall be subject to the Confidentiality Agreement dated
May 12, 1998 by and between Purchaser and the Company (the "Confidentiality
Agreement") which agreement is hereby confirmed in all respects and shall
survive, in accordance with its terms, any termination of this Agreement.
Section 7.6. Public Announcements. The Purchaser and the
Company shall consult with each other before issuing any press release or
otherwise making any public statements with respect to the Offer or the
Transaction and shall not issue any such press release or make any such public
statement before such consultation, except as may be required by law or the
rules and regulations of any stock exchange or trading medium on or through
which the shares of Company Common Stock are then traded.
Section 7.7. INTENTIONALLY OMITTED.
Section 7.8. Obligations Relating to Subsidiary Employees. The
Purchasers shall have no obligations to hire or continue the employment of any
of the Subsidiary's employees. The Subsidiary shall be solely responsible for
the satisfaction of all claims for benefits brought by or in respect of any
individual who was an employee of the Subsidiary at any time prior to the
Closing under any Plan or any government mandated benefits (worker's
compensation and unemployment compensation) or otherwise, which claims are based
on occurrences prior to the Closing, or as a result of the Closing, regardless
of when notices of such claims were filed. The Subsidiary shall retain
responsibility for all compensation payable, including with respect to the
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benefits or other liabilities payable with respect to all Plans, relating to
employees of the Subsidiary who retired or terminated employment prior to the
Closing.
Section 7.9. Further Assurances. (a) Subject to the terms and
conditions hereof, the Subsidiary and the Company each agrees that after the
Closing Date it will execute and deliver such documents to the Purchasers as the
Purchasers may reasonably request in order to more effectively vest in the
Purchasers good title to the Purchased Assets and to consummate the transactions
contemplated hereby in the manner contemplated hereby.
(b) On and after the Closing Date, the Purchasers shall have
the sole right and authority to collect, for its own account and sole benefit,
all monies payable in respect of the Purchased Assets, no matter how or when
earned. If the Company or the Subsidiary shall receive any such monies, it shall
hold all such monies in trust for the sole benefit of the Purchasers. No later
than the 15th day of the month after the month in which receipt thereof
occurred, the Company and the Subsidiary shall cause the transfer and delivery
to the Purchasers of any monies or other property which the Company or
Subsidiary may receive after the Closing Date in payment of monies payable in
respect of the Purchased Assets or the business of the Subsidiary. The
Subsidiary authorizes the Purchasers to endorse in the Subsidiary's name all
notes, checks, drafts, money orders or other instruments of payment in respect
of the foregoing which may come into the possession of the Purchasers, and the
Subsidiary hereby ratifies all that the Purchasers shall lawfully do or cause to
be done by virtue hereof. This right shall become irrevocable upon Closing.
Section 7.10. Post-Closing Access. The Purchaser hereby agrees
to maintain all Books and Records and Regulatory Filings forming a part of the
Purchased Assets for a period of at least six years from the Closing Date and,
during such time, to provide the Company and the Subsidiary with full and
complete access to all such Books and Records and Regulatory Filings for any
lawful purpose, including to defend or prosecute any legal actions or government
proceedings (including tax audits) brought by or against the Company or any
Subsidiary. The Company and the Subsidiary agree to provide commercially
reasonable notice when making requests, and agree not to materially interfere
with the operations of the Purchaser in exercising its rights, under this
Section 7.10. The Purchaser agrees to cause any subsequent transferee of any of
the Purchased Assets to be bound by the terms and provisions of this section to
the extent it has possession of any Books and Records or Regulatory Filings.
Notwithstanding anything to the contrary, the Purchaser agrees that the Company
and the Subsidiary will retain a copy of the Books and Records and Regulatory
Filings forming a part of the Purchased Assets.
Section 7.11. INTENTIONALLY OMITTED.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE CLOSING; CLOSING
Section 8.1. Conditions to Obligation of Each Party to Effect
the Transaction. The respective obligations of each party to effect the
Transaction shall be subject to the following conditions:
8.1.1. Stockholder Approval. This Agreement shall
have been approved and adopted by the requisite vote of the stockholders of the
Company and the Subsidiary; and
8.1.2. No Challenge. There shall not be pending any
action, proceeding or investigation before any court or administrative agency by
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any governmental agency challenging, or seeking material damages in connection
with the Transaction or this Agreement, which (i) if adversely determined, would
have a Material Adverse Effect on the Purchaser, the Company or the Subsidiary,
or (ii) prohibits or makes illegal the Transaction.
8.1.3. No Statutes. There shall not be any statute,
rule, regulation, judgment, order or injunction enacted, enforced, promulgated,
issued or deemed expressly applicable to the Transaction or this Agreement which
would have a Material Adverse Effect on the Purchaser, the Company or the
Subsidiary.
8.1.4. Contractual Consents. The parties shall have
obtained all of the consents and approvals to the transfer of the Contracts
listed on Schedule 8.1.4.
Section 8.2. Additional Conditions to Obligations of the
Company and the Subsidiary. The obligation of the Company and the Subsidiary to
effect the Transaction is also subject to the satisfaction or the waiver by the
Company and the Subsidiary of the following conditions on the Closing Date:
8.2.1. (i) the representations and warranties of the
Purchaser set forth in this Agreement and the Collateral Documents shall be true
and correct as of the date of this Agreement and as of the Closing as though
made on and as of the Closing, except for such misstatements or omissions which,
individually or in the aggregate, would not have a Material Adverse Effect on
the Purchaser, (ii) the Purchaser shall have performed or complied in all
material respects with all agreements, conditions and covenants required by this
Agreement to be performed or complied with by it on or before the Closing, (iii)
the Purchaser shall have delivered to the Company and the Subsidiary a
certificate to such effect dated the Closing Date signed on behalf of the
Purchaser by its Chairman or President, which certificate shall be in form and
substance reasonably satisfactory to the Company and the Subsidiary, and (iv)
Swidler Berlin Shereff Friedman, LLP shall have delivered its opinion in form
and substance reasonably satisfactory to the Company and the Subsidiary
confirming the accuracy of the matters set forth in Sections 4.1 (first sentence
only), 4.2 and 4.3(a)(i) and (ii) of this Agreement (it being understood that no
opinion shall be required with respect to regulations administered by any state
or federal food and drug administrative agency); and
8.2.2. the Company and the Subsidiary shall have been
provided with the originally-executed documents, agreements and instruments
required to be delivered by the Purchaser pursuant to this Agreement and
pursuant to each of the Collateral Documents, including, but not limited to, a
Secretary's and incumbency certificate, a bill of sale for the tangible portion
of the Purchased Assets, an assignment and assumption agreement, an omnibus
intellectual property assignment, a patent assignment and the Escrow Agreement.
Section 8.3. Additional Conditions to Obligations of the
Purchaser. The obligation of the Purchaser to effect the Transaction is also
subject to the satisfaction or the waiver by the Purchaser of the following
conditions on the Closing Date:
8.3.1. (i) the representations and warranties of the
Company and the Subsidiary set forth in this Agreement and the Collateral
Documents shall be true and correct as of the date of this Agreement and as of
the Closing as though made on and as of the Closing, except for such
misstatements or omissions which, individually or in the aggregate, would not
have a Material Adverse Effect on the Subsidiary, (ii) the Company and the
Subsidiary shall have performed or complied in all material respects with all
agreements, conditions and covenants required by this Agreement to be performed
or complied with by them on or before the Closing, (iii) the Company and the
Subsidiary shall have delivered to the Purchaser a certificate to such effect
dated the Closing Date signed on behalf of each of the Company and the
Subsidiary by its President, which certificate shall be in form and substance
reasonably satisfactory to the Purchaser and (iv) Pepper Hamilton LLP shall have
delivered its opinion in form and substance reasonably satisfactory to the
Purchaser confirming the accuracy of the matters set forth in Sections
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5.1 (first sentence only), 5.3, 5.4(a)(i) and (ii) and 5.4(b) of this Agreement
(it being understood that no opinion shall be required with respect to
regulations administered by any state or federal food and drug administrative
agency);
8.3.2. the Purchaser shall have been provided with
the originally-executed documents, agreements and instruments required to be
delivered by the Company and the Subsidiary pursuant to this Agreement and
pursuant to each of the Collateral Documents, including, but not limited to, a
Secretary's and incumbency certificate, a bill of sale for the tangible portion
of the Purchased Assets, an assignment and assumption agreement, an omnibus
intellectual property assignment, a patent assignment, the Escrow Agreement and
a FIRPTA affidavit of the Subsidiary stating that the Subsidiary is not a
foreign person; and
8.3.3. INTENTIONALLY OMITTED.
8.3.4. the Purchaser shall have received a wire
transfer of the cash and cash equivalents of the Subsidiary on hand as of the
Closing Date, less the Excluded Cash.
Section 8.4. Closing. The closing of the Transaction (the
"Closing") shall take place at the offices of Pepper Hamilton LLP, 3000 Two
Logan Square, Philadelphia, PA 19103-2799 (i) at 10:00 A.M. on the first
business day on which the last to be fulfilled or waived of the conditions set
forth in this Agreement shall be fulfilled or waived in accordance with this
Agreement or (ii) at such other place and time and/or on such other date as the
Company and the Purchaser may agree (the "Closing Date").
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1. Termination. This Agreement may be terminated at
any time before the Closing:
9.1.1. By mutual consent of the respective Boards of
Directors of the Purchaser and the Company; or
9.1.2. By either the Purchaser or the Company if the
Transaction shall not have been consummated by December 31, 1998, provided,
however, that the right to terminate this Agreement under this Section 9.1.2
will not be available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the
Transaction to occur on or before such date; or
9.1.3. By either the Purchaser or the Company if a
court of competent jurisdiction or governmental, regulatory or administrative
agency or commission shall have issued an order, decree or ruling or taken any
other action (which order, decree or ruling the parties hereto shall use their
best efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and nonappealable;
or
9.1.4. By the Purchaser if the Board of Directors of
the Company (i) withdraws, modifies or changes its recommendation to its
stockholders of the approval and adoption of this Agreement in a manner adverse
to the Purchaser, (ii) recommends to the holders of shares of Company Common
Stock any proposal with respect to a merger, consolidation, share exchange or
similar transaction involving the Company or its Subsidiary, other than the
transactions contemplated by this Agreement, or (iii) resolves to do any of the
foregoing; or
9.1.5. By the Company if prior to the Closing, a
Person or group shall have made a bona fide offer that the Board of Directors of
the Company determines in its good faith judgment, upon the advice of counsel,
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that it is necessary for it to accept such bona fide offer in the exercise of
its fiduciary duties because it is more favorable to the Company's stockholders
than the Transaction;
9.1.6. By either the Purchaser or the Company if the
other party (i) has breached its representations or warranties contained herein
or (ii) has failed to perform any of its covenants and agreements contained
herein, in each case, in any material respect, and such breach or failure
continues for a period of ten days after the receipt of notice of the breach
from the non-breaching party; or
9.1.7. By the Company if the Closing shall not have
occurred by November 30, 1998 and, prior to such date, either (i) the
termination date of the Financing Commitment shall not have been extended to
December 31, 1998 or (ii) a substitute financing commitment satisfactory to the
Company shall not have been obtained by the Purchaser.
Section 9.2. Effect of Termination. In the event of
termination of this Agreement as provided in Section 9.1 hereof, this Agreement
shall forthwith become void and there shall be no liability on the part of the
Purchaser, the Company or the Subsidiary, except nothing herein shall relieve
any party from liability for any breach of any of its representations,
warranties, covenants or agreements contained in this Agreement. Notwithstanding
the foregoing, if this Agreement is terminated by the Purchaser pursuant to
Section 9.1.4 or by the Company pursuant to Section 9.1.5 hereof, then, within
five (5) Business Days after such termination, the Company shall pay the
Purchaser the sum of $150,000 in immediately available funds, and, upon receipt
of a reasonably detailed invoice therefor, reimburse the Purchaser for its
reasonable out-of-pocket expenses incurred in connection with this Transaction.
Section 9.3. Amendment. This Agreement may be amended by the
parties hereto by action taken by the Purchaser and by the Company and the
Subsidiary at any time before the Closing. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
Section 9.4. Waiver. At any time before the Closing, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties of the other parties contained herein or in any
document delivered pursuant hereto or (c) waive compliance by the other parties
with any of their agreements or conditions contained herein. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only
as against such party and only if set forth in an instrument in writing signed
by such party.
ARTICLE X
GENERAL PROVISIONS
Section 10.1. Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Closing or the termination of this Agreement pursuant to
Section 9.1, as the case may be, except that the agreements set forth in
Articles II and III, and in Sections 7.8 through 7.10 (inclusive) shall survive
the Closing indefinitely.
Section 10.2. Notices. All notices and other communications
given or made pursuant hereto shall be in writing and shall be deemed to have
been duly given or made as of the date delivered or mailed if delivered
personally, mailed by overnight U.S. Express Mail (postage prepaid, return
receipt requested) or delivered by a nationally-recognized courier service
guaranteeing next Business Day delivery to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notices of changes of address shall be effective upon
receipt):
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10.2.1. if to the Purchaser:
Numark Laboratories, Inc.
75 Mayfield Avenue
Edison, New Jersey 08818
Attention: Patrick M. Lonergan, President
Fax: (732) 225-0066
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022-9998
Attention: Scott Zimmerman, Esq.
Fax: (212) 758-9526
10.2.2. if to the Company or the Subsidiary:
Menley & James, Inc.
Commonwealth Corporate Center, Suite 210
100 Tournament Drive
Horsham, PA 19044
Attention: Lawrence D. White, President
Fax: (215) 441-6579
with a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103-2799
Attention: James D. Epstein, Esq.
Fax: (215) 981-4750
Section 10.3. Expenses. All costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such costs and expenses. All transfer and sales
taxes shall be the responsibility of the Purchaser
Section 10.4. Certain Definitions. For purposes of this
Agreement, the term:
10.4.1. "affiliate" of a Person means a Person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the first mentioned Person;
10.4.2. "Business Day" shall mean any day which is
not a Saturday, Sunday or other day during which banks in the State of New York
are authorized to close.
10.4.3. "control" (including the terms "controlled
by" and "under common control with") means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of stock, as trustee or executor, by
contract or credit arrangement or otherwise;
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10.4.4. "Person" means an individual, corporation,
partnership, association, trust or any unincorporated organization; and
10.4.5. "Knowledge" means, with respect to the
Company and its Subsidiary, the actual knowledge of the officers (as such term
is defined in Rule 16b-1(f) promulgated under the Exchange Act) of the Company
and the Subsidiary.
Section 10.5. Headings. The headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
Section 10.6. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the maximum
extent possible.
Section 10.7. Entire Agreement; No Third-Party Beneficiaries.
This Agreement constitutes the entire agreement and supersedes any and all other
prior agreements and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof and, except as otherwise
expressly provided herein, is not intended to confer upon any other Person any
rights or remedies hereunder.
Section 10.8. Assignment. This Agreement shall not be assigned
by operation of law or otherwise, except that the Purchaser may assign all or
any of their rights hereunder to any affiliate of the Purchaser provided that no
such assignment shall relieve the assigning party of its obligations hereunder.
Section 10.9. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York
applicable to contracts executed in and to be performed entirely within that
State.
Section 10.10. Counterparts. This Agreement may be executed in
one or more counterparts and by facsimile, and by the different parties hereto
in separate counterparts, each of which when executed shall be deemed to be an
original but all of which shall constitute one and the same agreement.
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<PAGE>
APPENDIX B
[HOWARD, LAWSON & CO. LETTERHEAD]
August 21, 1998
The Board of Directors
Menley & James, Inc.
Commonwealth Corporate Center
100 Tournament Drive
Suite 210
Horsham, PA 19044
Gentlemen:
We have been engaged by Menley & James, Inc. ("Menley & James" or the
"Company") in connection with a transaction (the "Transaction") whereby the
Company has agreed to sell for cash substantially all of its assets (excluding
$2 million in cash and certain other assets). Our engagement has been for the
purpose of rendering our opinion to the Board of Directors of the Company as to
the fairness of the Transaction, from a financial point of view, to the Company
and its stockholders.
The Transaction
The Company and Menley & James Laboratories, Inc., a wholly owned
subsidiary of the Company, have entered into an agreement with Numark
Laboratories, Inc. ("Numark"), whereby the Company and its subsidiary have
agreed to sell for cash substantially all of the subsidiary's assets (excluding
$2 million in cash and certain other assets) and assign substantially all of the
subsidiary's liabilities to the Purchaser. We understand that the Company has no
material assets or liabilities outside of its interest in the subsidiary.
The purchase price will be $12,930,000, subject to adjustment based on
the net assets of the Company as of closing. The purchase price will be adjusted
dollar-for-dollar based on the amount by which the net assets exceed or fall
short of $8,846,000. Net assets are defined as i) cash and cash equivalents, net
accounts receivable, net inventory, prepaid expenses, and net property and
equipment, less ii) accounts payable and accrued expenses. The adjustment cannot
exceed $500,000. Excluded from the liabilities that the Purchaser will be
assuming are i) all costs and expenses related to the Transaction; ii) any
payments to officers, directors and employees payable as a result of the
Transaction or termination of employment or under existing employee benefit
plans; iii) the leases on the Company's headquarters facility, certain
automobiles, and office equipment; and iv) certain other liabilities..
<PAGE>
The Board of Directors
Menley & James, Inc.
August 21, 1998
Page 2
Materials Reviewed and Activities Conducted
In arriving at our opinion, we reviewed and analyzed materials we
deemed relevant regarding the Company and the Transaction, including the
following:
1. The Menley & James Proxy Statement (draft dated August 21,
1998) regarding the Transaction;
2. The Asset Purchase Agreement dated as of August 21, 1998;
3. Menley & James Annual Reports and Forms 10-K for the fiscal
years ended December 31, 1992 through December 31, 1997,
Menley & James quarterly reports and Forms 10-Q for the
quarters ended March 31, 1998 and June 30, 1998;
4. 1998 Budget and Forecasted financial statements for the
Company for the fiscal year ending December 31, 1998;
5. Correspondence and other material exchanged with Numark and
other prospective purchasers of the common stock or assets of
the Company;
6. Minutes from meetings of the board of directors of the
Company;
7. Information on the historical trading prices and volume of the
common stock of the Company;
8. Publicly available financial and market price information
regarding certain companies which we believe share valuation
characteristics with the Company and for certain acquisitions
which we deemed relevant; and
9. Such other studies, analyses, inquiries and investigations as
we deemed appropriate for purposes of this opinion.
We also held meetings with certain members of the management Company to
discuss the Transaction, the events leading to the Transaction, the business and
operations of the Company, and historical and projected financial statements of
the Company.
<PAGE>
The Board of Directors
Menley & James, Inc.
August 21, 1998
Page 3
Limiting Conditions
In rendering our opinion, we have relied on the completeness and
accuracy of the information provided to us by the management of the Company
including the information listed earlier. We did not independently verify the
financial, legal, tax, operating and other information provided to us by the
Company or publicly available and relied on the completeness and accuracy of
such information in all respects. We did not make independent appraisals or
evaluations of the assets of the Company, and relied upon the representations of
management concerning information with respect to the Company and its financial
statements. We assumed that the information relating to the prospects of the
Company furnished by such companies reflects the best then currently available
estimates and judgments of management of the Company. We relied on the Company
to advise us promptly if any information previously provided became inaccurate
or was required to be updated. We did not contact any prospective acquirer of
the Company or any of its assets. Our analysis is necessarily based upon
economic, market and other conditions and the information made available to us
as of the date of our opinion. Our analysis does not incorporate or provide an
opinion on the effects of future transactions.
Opinion
Based upon and subject to the foregoing, it is our opinion that the
Transaction is fair, from a financial point of view, to the Company and its
stockholders.
/s/ Howard, Lawson & Co.
-------------------------------
HOWARD, LAWSON & CO.
<PAGE>
APPENDIX C
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number: 000-19788
MENLEY & JAMES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 23-2621602
(State of incorporation) (I.R.S. Employer Identification No.)
100 Tournament Drive
Horsham, Pennsylvania 19044
(Address of principal executive offices)
Registrant's telephone number: (215) 441-6500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, as of March 17, 1998, was $3,569,162.
The number of shares of the registrant's common stock, par value $.01
per share, outstanding as of March 17, 1998, was 6,163,518.
Documents Incorporated by Reference:
Document Part(s) Into Which Incorporated
(1) Proxy Statement to be used in connection Part III
with Part III the Annual Meeting of
Stockholders to be held May 21, 1998 (the
"Proxy Statement"). With the exception of the
pages of the Proxy Statement specifically
incorporated by reference herein, the Proxy
Statement is not deemed to be filed as a part
of this Form 10-K.
<PAGE>
Important Factors Relating to Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in such statements. In connection with certain
forward-looking statements contained in this Annual Report on Form 10-K and
those that may be made in the future by or on behalf of the Company, the Company
notes that there are various factors that could cause actual results to differ
materially from those set forth in any such forward-looking statements. Among
the most significant of these factors are: competition from major brand-name
product companies; increased destocking pressure and consolidation of major
customers; difficulty in identifying and supporting future acquisitions of
companies and/or new brands; material interruption of supply, or delay or
cessation of production by the Company's manufacturers; new or material
revisions to the Food and Drug Administrations' regulations. Readers of this
Annual Report should consider these facts in evaluating the information
contained herein. Accordingly, there can be no assurance that the
forward-looking statements contained in this Annual Report will be realized or
that actual results will not be significantly higher or lower. The inclusion of
the foreword-looking statements contained in this Annual Report should not be
regarded as a representation by the Company or any other person that the
forward-looking statements contained in this Annual Report will be achieved. In
light of the foregoing, readers of this Annual Report are cautioned not to place
undue reliance on the forward-looking statements contained herein.
PART I
Item 1. Business.
Menley & James, Inc., a Delaware corporation (the "Company"), was
incorporated in 1990. The Company's executive offices are located at 100
Tournament Drive, Horsham, Pennsylvania 19044, and its telephone number is (215)
441-6500. All references to the "Company" or "Menley & James" in this report
include Menley & James, Inc. and its wholly-owned operating subsidiary, Menley &
James Laboratories, Inc., except where the context requires otherwise. All
product designations in boldface type in this report are trademarks of the
Company, except for Garfield which is a trademark of PAWS Incorporated, Derifil,
which is a trademark of Rystan Company, Inc. and Humibid, which is a trademark
of Medeva Pharmaceuticals, Inc.
The Company produces and markets a diversified portfolio of
over-the-counter ("OTC") pharmaceutical and toiletry products, all of which have
recognized brand names. The products are sold in drugstores, supermarkets and
other mass merchandisers throughout the United States.
Industry Overview
The majority of the Company's products are classified as OTC drugs.
According to industry sources, in 1997 manufacturers' sales of OTC drugs
exceeded $16 billion, with over 300 companies competing in 41 separate product
categories.
The Company also offers products that compete in the toiletries market.
According to industry sources, in the toiletries industry, more than 65
companies had product offerings in the seven market segments in which the
Company offers products, with manufacturers' sales exceeding $8 billion in such
segments.
Company Background
The Company commenced operations in 1990 with the acquisition of
thirty-two brands from SmithKline Beecham Corporation ("SB"). The Company's
senior executives are former executives of SB Consumer Products Division with
expertise in marketing OTC drug and toiletry products.
1
<PAGE>
Company Strategy
During 1997, the Company executed trade promotions and radio campaigns
in support of Benzedrex and Humibid Guaifenesin Plus, along with establishing an
internal telemarketing group to contact the Directors of Nursing at nursing
facilities contacting more than 3,700 homes. The Company's future strategic
focus is to grow Menley & James by building a brand-name health care products
business. The Company intends to accomplish this by:
o Developing a lead product. The Company plans to develop at least
one brand name product into a significant lead product. Targeted
marketing programs will be executed against specific brands in
order to identify this lead product.
o Acquiring new companies or brands. The Company plans to devote
significant efforts on making acquisitions. The focus of the search
is centered on companies and brands in the nutraceutical field, a
segment of our industry that continues to experience significant
growth due to the aging of the baby boomers and their interest in
personal health care.
Brands
The Company's portfolio consists of the following brands:
Brand Product Description
----- -------------------
Acnomel.............................. Acne Medication
Acryline 2........................... Dental Aid/Device (Denture)
Albolene............................. Liquifying Skin Cleanser
Amitone.............................. Antacid
Aqua Care............................ Hand & Body Cream
A.R.M................................ Allergy Relief Caplet
AsthmaHaler.......................... Aerosol Bronchodilator
AsthmaNefrin......................... Liquid Bronchodilator
Avail................................ Calcium-Intensive Vitamin
Beau Kreml........................... Hair Tonic
Benzedrex............................ Decongestant Inhaler & Nasal Spray
B.F.I................................ Antiseptic Powder
Capsaicin (see note)................. Topical Analgesic Cream
Congestac............................ Cold Medication
Conti................................ Soap with Olive Oil
Derifil (see note)................... Internal Deodorant
Duo.................................. Eyelash Adhesive
5 Day................................ Deodorant/Antiperspirant
Femiron.............................. Vitamin Supplement for Women
Garfield Multivitamins............... Children's Chewable Multivitamins
Hold................................. Cough Suppressant Lozenge
Humibid Guaifenesin Plus (see note).. Cold Medication
Lady Esther.......................... Facial Cream & Powder
Liquiprin............................ Children's Analgesic
Ornex................................ Cold Medication Caplet
Plate Weld........................... Dental Aid/Device (Denture)
Rose Milk............................ Skin Care Moisturizer
S.T. 37.............................. Liquid Antiseptic Solution
Serutan.............................. Natural Fiber Laxative
Thermotabs........................... Buffered Salt Tablets
Venture.............................. Liquid Men's Hair Dressing
Yodora............................... Cream Deodorant
Zonite............................... Vaginal Douche
Note: The Company has sales and marketing agreements with three
pharmaceutical companies, under which it began, during 1996, to market these
brands.
2
<PAGE>
Distribution
The Company sells its products nationally through its own six-person
sales force and 39 independent brokerage organizations to approximately 2,000
customers. The Company's own sales force calls on approximately 30 of these
customers, including most of the major food and drug chains and drug
wholesalers, which account for over 50% of the Company's sales. The Company's
brokers are compensated by commissions.
The Company's major customers include drug wholesalers such as Bergen
Brunswig Corporation and McKesson Drug Company. McKesson is the Company's
largest customer and accounted for approximately 20% of the Company's net sales
in 1997. The Company's other customers include large drug chains such as
Walgreens and Osco, large food chains such as Kroger and Safeway, and mass
merchandisers such as Kmart and Wal-Mart.
The Company's sales force and independent brokers work directly with
the major retail customers to develop promotional programs for individual
products and to promote sales of the Company's entire product portfolio.
Depending upon the promotional program, the Company's sales force or brokers
will seek additional shelf space or "facings" and will develop advertising,
display or price discount programs at the store level to supplement a
Company-sponsored sales program.
Manufacturing
The Company currently has manufacturing arrangements in place with
contract manufacturers with respect to all of its products. All of the Company's
products are manufactured to the Company's specifications under agreements with
terms generally ranging from individual purchase orders to agreements with
one-year terms which renew automatically unless canceled by one of the parties.
Under certain agreements, the Company may purchase raw materials in various
forms to supply to the manufacturers. The Company believes that the raw
materials used in manufacturing its products are available in adequate
quantities from multiple sources.
The Company monitors the quality control of its manufacturers through a
system of outside third-party experts. All production facilities are visited at
least annually, and each production batch is approved prior to release of any
product for sale.
Following manufacturing, the Company's products are shipped to a public
warehouse facility outside St. Louis, Missouri that specializes in OTC drug and
toiletries packaged goods. Products are shipped from this public warehouse, as
needed, directly to the Company's customers.
The Company believes that contract manufacturing is generally equal to,
or less expensive than, in-house manufacturing for a variety of reasons
including the significant amount of over-capacity present in much of the
industry that has led to competition among manufacturers for contracts such as
those entered into by the Company. Although the Company typically has a
manufacturing agreement with a single source for each product, multiple sources
are generally available. The Company has never experienced a material
interruption of supply from any of its manufacturers. However, in those
instances in which it has only a single source of supply, any material delay or
cessation of production by the Company's contract manufacturers could have a
material adverse impact on the Company's results of operations. The Company does
not believe that the level of manufacturing over-capacity in the industry is
likely to change significantly in the near future and, accordingly, does not
believe that its reliance upon contract manufacturers will have a material
adverse effect on the Company's operations.
Trademarks
All of the Company's products have recognized trademarks associated
with them. The Company believes its trademarks have significant value in
marketing its products. Federally registered trademarks have a perpetual life as
long as they are timely renewed and used properly as trademarks, subject to the
right of third parties to seek cancellation of the marks.
3
<PAGE>
Garfield is a trademark of PAWS Incorporated, which has granted a
nonexclusive license to the Company for use of the mark in connection with
children's multivitamins in the United States.
Derifil is a trademark of Rystan Company, Inc. and Humibid is a
trademark of Medeva Pharmaceuticals, Inc. The Company markets these two brands
under sales and marketing agreements with the above-named companies.
Competition
The OTC pharmaceutical and toiletry products markets in which the
Company competes are highly competitive. While competition occurs on the basis
of product quality and price, the Company believes that brand loyalty and
consumer acceptance are also important factors. The Company's competitors
include other OTC pharmaceutical companies and large consumer products
companies, all of which have considerably greater financial and marketing
resources than the Company. The products offered by these companies are often
supported by significantly larger advertising and promotional expenditures and
are generally backed by a larger sales force than those of the Company. In
addition, the Company's competitors have often been willing to use aggressive
spending on trade promotions as a strategy for building market share at the
expense of their competitors, including the Company.
Government Regulation
The Company's products are generally subject to government regulations,
primarily by the Food and Drug Administration (the "FDA"). The majority of the
Company's products are regulated by the FDA as OTC drugs, with the rest of the
products being regulated as "cosmetics," "dietary" or "nutritional supplements,"
or "medical devices." All such products must comply with FDA regulations
governing the safety of the products themselves or the ingredients used in their
manufacture. FDA regulations for all products also include requirements for
product labeling and for adherence to "current good manufacturing practices"
(GMP's).
All of the Company's OTC drug products are regulated pursuant to the
FDA's "monograph" system for OTC drugs. The monographs set out the active
ingredients and labeling indications that are permitted for certain broad
categories of OTC drug products (e.g., nasal decongestants). Compliance with the
monograph provisions means that the product is generally recognized as safe and
effective and is not mislabeled. Future changes in the monographs could result
in the Company having to revise product labeling and formulations.
With regard to all of the Company's products, the FDA may revise
applicable regulations or provide new interpretations of existing regulations
which could necessitate product labeling changes, reformulations or other
changes in the Company's products or the conduct of its business. While it is
impossible to predict the impact of future FDA actions, to date the Company has
not been materially adversely affected as a result of compliance with FDA or
state regulations.
Product Liability and Insurance
An inherent risk of the Company's business is exposure to product
liability claims brought by users of the Company's products or others. While the
Company will continue to take what it considers to be appropriate precautions,
there can be no assurance that it will avoid significant product liability
exposure. The Company maintains product liability insurance that it believes to
be adequate; however, there can be no assurance that it will be able to retain
its existing coverage or that such coverage will be sufficient to satisfy future
product liability claims, if any.
Employees
As of December 31, 1997, the Company had twenty-seven full-time
employees, including seven sales and marketing personnel and twenty executive
and administrative employees. The Company believes its relations with its
employees are satisfactory.
4
<PAGE>
Item 2. Properties.
The Company's executive offices, consisting of an aggregate of
approximately 6,800 square feet, are located in Horsham, Pennsylvania, under a
lease which expires February 2001. The lease provides for annual rent ranging
from $146,000 for the period ending in February 1998 to $164,000 for the period
ending in February 2001. The Company believes these offices are adequate for its
current needs.
Item 3. Legal Proceedings.
There are no material legal proceedings pending against the Company or
to which the Company is a party, and to the knowledge of management, no such
proceedings are threatened or contemplated.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded under the symbol "MENJ." From
January 21, 1992 until November 10, 1994, the Company's Common Stock was traded
on the Nasdaq National Market System. As a result of the Company's aggregate
market value, trading with respect to the Company's Common Stock moved to the
Nasdaq SmallCap Market on November 11, 1994. The following table sets forth the
high and low bid prices for the Company's Common Stock on the Nasdaq SmallCap
Market. Prices represent quotations between dealers without adjustment for
retail markups, markdowns and commissions and may not represent actual
transactions.
Quarter ended High Low
------------- ---- ---
March 31, 1996.................... $ 1.56 $ .81
June 30, 1996..................... 1.56 1.19
September 30, 1996................ 1.50 .88
December 31, 1996................. 1.31 .88
March 31, 1997.................... 1.46 1.08
June 30, 1997..................... 1.52 1.30
September 30, 1997................ 1.90 1.38
December 31, 1997................. 1.59 1.21
On March 17, 1998, the last reported closing price of the Common Stock
on the Nasdaq SmallCap Market was $1.50 per share. As of March 17, 1998, there
were approximately 79 holders of record of the Common Stock.
The Company has never paid cash dividends on its capital stock and does
not anticipate paying cash dividends in the foreseeable future, but intends
instead to retain any future earnings for reinvestment in its business. The
Company's bank loan agreement restricts the payment of dividends on Common
Stock. Any future determinations to pay cash dividends will be at the discretion
of the Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant.
5
<PAGE>
Item 6. Selected Consolidated Financial Data.
The following table sets forth consolidated financial data with respect
to the Company for each of the years ended December 31, 1993 through 1997, which
have been derived from the Company's audited consolidated financial statements.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto appearing
elsewhere in this report.
SELECTED FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Consolidated Income Data:
Net sales.................................... $22,978 $18,843 $14,395 $14,297 $14,446
Cost of goods sold........................... 10,485 8,840 7,101 6,850 6,894
------- -------- -------- -------- -------
Gross profit................................. 12,493 10,003 7,294 7,447 7,552
Selling, general and administrative
expenses.................................... 10,831 7,595 4,914 5,463 6,079
Gain on sale of brand........................ -- 619 -- -- --
Valuation adjustment......................... -- 12,845 -- -- --
Depreciation and amortization................ 1,851 1,818 1,569 1,536 1,367
------- -------- -------- -------- ------
Income (loss) from operations................ (189) (11,636) 811 448 106
Lawsuit settlement........................... (1,600) -- -- -- --
Interest (expense) income.................... (996) (588) (237) (70) 73
-------- --------- -------- --------- -------
Income (loss) before income taxes and
cumulative effect of change in
accounting for income taxes................. (2,785) (12,224) 574 378 179
Provision (benefit) for income taxes ........ (576) 657 455 416 426
------- -------- --------- --------- -------
Income (loss) before cumulative effect of
change in accounting for income taxes ..... (2,209) (12,881) 119 (38) (247)
Cumulative effect as of January 1, 1993 of
change in method of accounting for
income taxes................................ 1,900 -- -- -- --
------- ---------- --------- --------- -------
Net income (loss) applicable to common
shares...................................... $ (309) $(12,881) $ 119 $ (38) $ (247)
======= ======== ======== ======= =======
Per share of common stock(1):
Basic income (loss) before cumulative effect
of change in accounting for income taxes ... $ (0.36) $ (2.10) $ 0.02 $ (0.01) $ (0.04)
Cumulative effect of accounting change ...... 0.31 -- -- -- --
------- -------- ------- ------- -------
Basic income (loss) per share................ $ (0.05) $ (2.10) $ 0.02 $ (0.01) $ (0.04)
======= ======== ======= ======= =======
Weighted average common shares
outstanding................................ 6,148 6,148 6,148 6,148 6,151
======= ======== ======== ======== =======
At December 31,
----------------------------------------------------------
Balance Sheet Data:
Working capital.............................. $ 9,055 $ 7,022 $ 6,697 $ 7,086 $ 8,372
Total assets................................. 47,129 27,473 24,755 23,527 22,453
Long-term debt (excluding current portion) .. 8,565 3,100 1,005 36 --
Stockholders' equity......................... 33,967 21,086 21,205 21,167 20,930
</TABLE>
(1) Amounts presented assuming dilution would remain the same.
6
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Company commenced operations on May 29, 1990 with the acquisition
from SmithKline Beecham of the trademarks, product formulations and production
methodologies, packaging artwork and related inventories for thirty-two OTC
pharmaceutical and toiletry products.
Prior to 1994 the Company made significant marketing and promotional
expenditures in connection with its strategy of building sales of certain
brands. The Company introduced Garfield Bath Products in the first quarter of
1994, Garfield Children's Chewable Multivitamins in June 1992, Benzedrex Spray
in July 1992, 5 Day Solid in February 1991 and Cherry Flavored Hold and Maximum
Strength Ornex in June 1991. The Company supported these new product
introductions with varying combinations of television advertisements in selected
markets, cents-off coupon inserts in Sunday newspapers, trade allowances to
support retailers' efforts to promote these products and "two-for-one" or "bonus
pack" offers directed at consumers. In 1994, the Company significantly reduced
marketing efforts, especially on the Garfield line, because the sales return on
the marketing investment was lower than anticipated and cash was required for
debt reduction. While the timing of the Company's marketing and promotional
expenditures may vary significantly from quarter to quarter and year to year,
the Company anticipates that it will continue to make investments in promotional
campaigns designed to stimulate sales of existing products or introduce new
ones.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 were $14.4 million
compared to $14.3 million for the comparable period of 1996. Sales for 1997
benefitted from the Company's sales and marketing agreements entered into during
1996. These agreements include Humibid Guaifenesin Plus, a nonprescription
formulation of the Rx drug, Humibid; Derifil, an internal deodorant; and
Capsaicin, a generic version of Zostrix(R) cream. Net sales for these brands
totaled $1.7 million, an increase of $762 thousand over the year ended December
31, 1996. Net sales of the Company's remaining brands decreased $612 thousand
compared to 1996. The decline in sales is due to continued competition and trade
destocking pressures.
Cost of goods sold for the year 1997 was $6.9 million, or 48% of net
sales, which is comparable to the 1996 cost of goods sold of $6.9 million, or
48% of net sales in 1996.
Selling, general and administrative expenses were $6.1 million, or 42%
of net sales for the year ended December 31, 1997, as compared to $5.5 million
or 38% for the prior year. The $616 thousand increase in expense is primarily a
result of an increase in Benzedrex advertising costs along with marketing costs
associated with the products under the Company's sales and marketing agreements.
The Company's own sales force, and its network of independent brokers, work
directly with the major retail customers to focus marketing support behind
individual Company products at the retail store level.
The Company, at December 31, 1997, had a net operating loss
carryforward for federal income tax purposes of approximately $5.7 million which
may be used to offset future taxable income. These net operating loss
carryforwards will expire during the years 2005 through 2008. The Company
recognized $426 thousand in tax expense, mostly noncash, for the year ended
December 31, 1997. The effective tax rate exceeds the statutory federal tax rate
primarily as a result of the amortization of product lines and trade names,
which is not deductible for tax purposes. The Company has net deferred tax
assets of $692 thousand in its consolidated balance sheet as of December 31,
1997, which is primarily made up of two items, net operating loss carryforwards
and future deductible expenses.
Management is satisfied that it is more likely than not that the
deferred tax assets will be realized primarily from future taxable income
expected to be earned from recurring operations over the next few years.
Management assesses the realizability of the Company's deferred tax assets on a
continuous basis and adjusts the valuation allowance in the event that
circumstances affecting the realization of the deferred tax assets change.
7
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 were $14.3 million
compared to $14.4 million for the comparable period of 1995. Sales for 1996
benefitted from the Company's 1996 sales and marketing agreements which include
Humibid GC, a nonprescription formulation of the Rx drug, Humibid; Derifil, an
internal deodorant; and Capsaicin, a generic version of Zostrix(R) cream. Net
sales for these brands totaled $968 thousand. Net sales of a majority the
Company's remaining brands decreased $1.1 million compared to 1995. The decline
in sales is due to continued competition and trade destocking pressures.
Cost of goods sold for the year 1996 was $6.9 million, or 48% of net
sales, compared to $7.1 million, or 49% of net sales in 1995. The decrease in
the cost of goods sold, as a percentage of sales, is primarily a result of the
effect of a decrease in returns and allowances.
Selling, general and administrative expenses were $5.5 million, or 38%
of net sales for the year ended December 31, 1996, as compared to $4.9 million
or 34% for the prior year. The $549 thousand increase in expense is primarily a
result of an increase in marketing costs associated with the products under the
Company's 1996 sales and marketing agreements. The Company's own sales force,
and its network of independent brokers, work directly with the major retail
customers to focus marketing support behind individual Company products at the
retail store level.
Interest expense, including finance cost amortization, was $70 thousand
for 1996 compared to $237 thousand for the prior year. The decrease is due to
lower outstanding debt. At December 31, 1996, the Company had $661 thousand of
bank debt outstanding. At December 31, 1995, the bank debt outstanding was $2.1
million.
The Company, at December 31, 1996, had a net operating loss
carryforward for federal income tax purposes of approximately $6.8 million which
may be used to offset future taxable income. These net operating loss
carryforwards will expire during the years 2005 through 2008. The Company
recognized $416 thousand in tax expense for the year ended December 31, 1996.
The effective tax rate exceeds the statutory federal tax rate primarily as a
result of the amortization of product lines and trade names, which is not
deductible for tax purposes. The Company has net deferred tax assets of $1.1
million in its consolidated balance sheet as of December 31, 1996, which is
primarily made up of two items, net operating loss carryforwards and future
deductible expenses.
Management is satisfied that it is more likely than not that the
deferred tax assets will be realized primarily from future taxable income
expected to be earned from recurring operations over the next few years.
Management assesses the realizability of the Company's deferred tax assets on a
continuous basis and adjusts the valuation allowance in the event that
circumstances affecting the realization of the deferred tax assets change.
Impact of Inflation
Management believes that, to date, inflation has not had a significant
impact on its operations.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $8.4 million.
Working capital was provided by operations and may also be provided by the
periodic use of its revolving credit facility. The revolving credit facility has
a maximum borrowing limit of $3.0 million and terminates on June 30, 1998,
unless extended. The Company has no bank debt outstanding at December 31, 1997.
The amount of borrowing, if any, and the subsequent repayments under the credit
facility would be a result of the seasonality of the Company's sales, marketing
plans and profits. Also, extended payment date terms that are consistent with
standard industry practice and are offered to the Company's customers under
marketing programs create seasonal changes in the Company's cash flow. These
extended payment programs are directly related to the seasonal promotion of the
Company's cough and cold brands.
At the present time, the Company's primary cash requirements are for
normal operating activities. The Company's strategic focus in the year ahead is
to grow Menley & James by building a brand-name health care products business.
8
<PAGE>
The Company's strategy is to develop a new product/revitalize an existing brand,
which will receive marketing funds from the cash flow generated from other
products, and to purchase a new brand or company, preferably in the
Nutraceutical vitamin and herb supplement market. Management believes that cash
flow from operations and current and future borrowing capacity will be
sufficient to fund the Company's operating and capital requirements for the
foreseeable future.
Impact of Year 2000
Some of the Company's older computer programs were written using two
digits rather than four digits to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. If left unchanged, this could cause
a system failure or miscalculations causing disruptions in operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in normal similar business activities.
The Company has completed an assessment and is in the process of
modifying portions of its software so that its computer system will function
properly with respect to dates in the year 2000 and thereafter. The total year
2000 project cost is not expected to be material and will be capitalized.
Earnings per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Earnings per common share amounts for all periods have been presented to conform
to Statement 128 requirements. There was no impact of restating earnings per
share under Statement 128.
Impact of Recent Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued
Statements No. 130, "Reporting Comprehensive Income" and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," both of
which are required to be adopted on January 1, 1998. Statement 130 requires
financial statement reporting of all nonowner related changes in equity for the
periods being presented. Statement 131 requires disclosure of revenue, earnings
and other financial information pertaining to business segments by which a
company is managed, as well as factors used by management to determine segments.
The Company believes adoption of Statement 130 and Statement 131 will have no
effect on its financial reporting.
9
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MENLEY & JAMES, INC.
We have audited the accompanying consolidated balance sheets of Menley
& James, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Menley & James, Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------------------
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 6, 1998
10
<PAGE>
MENLEY & JAMES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 2,205 $ 2,879
Accounts receivable, net of allowances of
$524 in 1996 and $464 in 1997 ...................................... 2,721 2,474
Inventory ............................................................ 3,402 2,844
Prepaid expenses ..................................................... 578 1,006
Deferred tax asset ................................................... 504 692
-------- --------
Total current assets ................................................. 9,410 9,895
Property and equipment, net .............................................. 1,360 1,435
Product lines, trade names and packaging designs, net .................... 12,168 11,123
Deferred tax asset ....................................................... 561 --
Other .................................................................... 28 --
-------- --------
Total assets ......................................................... $ 23,527 $ 22,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 1,109 $ 840
Accrued expenses ..................................................... 541 647
Current maturities of long-term debt ................................. 674 36
-------- --------
Total current liabilities ............................................ 2,324 1,523
Long-term debt ........................................................... 36 --
Preferred stock, $1 par value, authorized 5,000,000 shares,
none issued and outstanding .......................................... -- --
Stockholders' equity:
Common stock, $.01 par value, authorized 15,000,000 shares, issued and
outstanding was 6,148,518 in 1996 and 6,163,518 shares in 1997 .... 61 62
Additional paid-in capital ........................................... 45,454 45,463
Accumulated deficit .................................................. (24,348) (24,595)
-------- --------
Total stockholders' equity ............................................... 21,167 20,930
-------- --------
Total liabilities and stockholders' equity ........................... $ 23,527 $ 22,453
======== ========
</TABLE>
See accompanying notes.
11
<PAGE>
MENLEY & JAMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales .................................. $ 14,395 $ 14,297 $ 14,446
Cost of goods sold ......................... 7,101 6,850 6,894
-------- -------- --------
Gross profit ............................... 7,294 7,447 7,552
Selling, general and administrative expenses 4,914 5,463 6,079
Depreciation and amortization .............. 1,569 1,536 1,367
-------- -------- --------
Income from operations ..................... 811 448 106
Interest (expense) income .................. (237) (70) 73
-------- -------- --------
Income before income taxes ................. 574 378 179
Provision for income taxes ................. 455 416 426
-------- -------- --------
Net income (loss) .......................... $ 119 $ (38) $ (247)
======== ======== ========
Basic income (loss) per share .............. $ 0.02 $ (0.01) $ (0.04)
======== ======== ========
Diluted income (loss) per share ............ $ 0.02 $ (0.01) $ (0.04)
======== ======== ========
Weighted average number of common shares
outstanding - basic ...................... 6,148 6,148 6,151
======== ======== ========
Weighted average number of common shares
outstanding - diluted .................... 6,152 6,148 6,151
======== ======== ========
</TABLE>
See accompanying notes.
12
<PAGE>
MENLEY & JAMES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .. $ 61 $ 45,454 $(24,429) $ 21,086
Net income .............. 119 119
-------- -------- -------- --------
Balance, December 31, 1995 .. 61 45,454 (24,310) 21,205
Net loss ................ (38) (38)
-------- -------- -------- --------
Balance, December 31, 1996 .. 61 45,454 (24,348) 21,167
Net loss ................ (247) (247)
Exercise of stock options 1 9 10
-------- -------- -------- --------
Balance, December 31, 1997 .. $ 62 $ 45,463 $(24,595) $ 20,930
======== ======== ======== ========
</TABLE>
See accompanying notes.
13
<PAGE>
MENLEY & JAMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ 119 $ (38) $ (247)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ................ 1,569 1,536 1,367
Amortization of deferred financing costs ..... 37 38 28
Deferred income taxes ........................ 420 427 373
Changes in operating assets and liabilities:
Accounts receivable ........................ 572 412 247
Inventory .................................. 777 423 558
Prepaid expenses ........................... 40 (77) (428)
Accounts payable ........................... (243) 294 (269)
Accrued expenses ........................... (438) (32) 106
------- ------- -------
Net cash provided by operating activities ......... 2,853 2,983 1,735
Cash flows used in investing activities:
Property purchases, net of capital lease obligation (216) (314) (397)
------- ------- -------
Cash flows used in financing activities:
Proceeds from issuance of common stock, net ....... -- -- 10
Repayment of borrowings ........................... (2,200) (1,452) (674)
------- ------- -------
Net cash used in financing activities ............. (2,200) (1,452) (664)
------- ------- -------
Net increase in cash ................................. 437 1,217 674
Cash and cash equivalents, beginning of year ......... 551 988 2,205
------- ------- -------
Cash and cash equivalents, end of year ............... $ 988 $ 2,205 $ 2,879
======= ======= =======
</TABLE>
See accompanying notes.
14
<PAGE>
MENLEY & JAMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Basis of Presentation
Menley & James, Inc. ("the Company") and its wholly owned subsidiary,
Menley & James Laboratories, Inc. were incorporated in Delaware in 1990. The
Company, through Menley & James Laboratories, Inc., currently markets and
distributes a portfolio of over-the-counter pharmaceutical and toiletries
products to drugstores, supermarkets, and other mass merchandisers throughout
the United States.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Menley & James Laboratories, Inc. All
material intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized when products are shipped. Provisions for
estimated returns and cash discounts are made when revenues are recognized.
Cash Equivalents
Cash equivalents consist of highly liquid temporary cash investments
with original maturities less than three months which are valued at cost plus
accrued interest.
Inventories
Inventories are stated at the lower of cost or market by the first-in,
first-out method.
Product Lines, Trade Names and Packaging Designs
Substantially all of the product lines and trade names were recorded at
the time of the acquisition in 1990 and allocated among the brands based on
valuations performed at that time.
Packaging designs are being amortized over five years. Product lines
and trade names are being amortized over fourteen years. Accumulated
amortization at December 31, 1996 and 1997 was $8.7 million and $9.8 million,
respectively. Amortization expense relating to product lines, trade names and
packaging designs was $1.3 million, $1.2 million and $1.1 million for the years
1995, 1996 and 1997, respectively.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 121, "Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adoption of SFAS 121 did not have a
material effect on the Company's consolidated financial statements.
In the event that facts and circumstances indicate that intangible or
other assets may be impaired, an evaluation of the recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the assets carrying amount
to determine if a write-down to market value or discounted cash flow value is
required.
15
<PAGE>
MENLEY & JAMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2 - Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment is carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Accumulated depreciation at December 31,
1996 and 1997 was $1.6 million and $1.9 million, respectively. Depreciation
expense was $291,000, $380,000 and $280,000 for years 1995, 1996 and 1997,
respectively.
Consumer Promotions
The estimated redemption value of coupons is charged to marketing and
promotion expense when the coupons are distributed to the consumer. The
incremental product cost of "two-for-one" or "bonus pack" offers is charged to
advertising and promotion expense as sales of the related product occur.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards 109, "Accounting for Income Taxes." Under Statement 109,
the liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Stock-Based Compensation.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. The
effect of applying Statement No. 123's fair value method to the Company's
stock-based awards results in pro forma net loss and loss per share that are not
materially different from amounts reported.
Earnings per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Earnings per common share amounts for all periods have been presented to conform
to Statement 128 requirements. There was no impact of restating earnings per
share under Statement 128.
Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statements No. 130, "Reporting Comprehensive Income," and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," both of
which are required to be adopted on January 1, 1998. Statement 130 requires
financial statement reporting of all non-owner related changes in equity for the
periods being presented. Statement 131 requires disclosure of revenue, earnings
and other financial information pertaining to business segments by which a
company is managed, as well as factors used by management to determine segments.
The Company believes adoption of Statement 130 and Statement 131 will have no
effect on its financial reporting.
16
<PAGE>
MENLEY & JAMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3 - Inventories
Inventories consist of the following:
December 31,
1996 1997
---- ----
(In thousands)
Raw materials............................. $ 1,078 $ 1,095
Work in process........................... 191 280
Finished goods............................ 2,133 1,469
------- -------
$ 3,402 $ 2,844
======= =======
Note 4 - Long-Term Debt
Long-term debt consists of:
December 31,
1996 1997
---- ----
(In thousands)
Term loan................................. $ 661 $ --
Obligations under capital lease 49 36
-------- -------
710 36
Less: current maturities.................. 674 36
-------- -------
Total long-term debt...................... $ 36 $ --
======== =======
At December 31, 1997, the Company had no amounts outstanding under its
term loan. At December 31, 1996, the Company had $661 thousand outstanding under
its term loan which was paid on January 23, 1997. The term loan interest was at
a fixed rate of 6.65%, and was secured by a first lien on all assets of the
Company. At December 31, 1996 and 1997, there was no amount outstanding under
the revolving credit facility which has a maximum borrowing limit of $3.0
million and terminates on June 30, 1998, unless extended. The Company pays a
0.25% commitment fee on the unused portion of the credit facility. Letters of
credit may be issued under this facility up to a maximum of $1.0 million. No
letters of credit were issued during 1996 or 1997.
The Company is permitted to choose between various interest rate
options for the revolving credit facility, to specify the portion of the
borrowings to be covered by specific interest rate options and to specify the
interest period to which the interest rate options are to apply, subject to
certain parameters. The interest rate options available to the Company at
December 31, 1997 were Prime rate or LIBOR rate plus a borrowing margin of 0.75%
and 3.0%, respectively.
The Company's loan agreement contains financial and other covenants
including limitations on the payment of dividends, restrictions on the sale of
assets, limitations on capital expenditures and maintenance of minimum levels of
sales, working capital, net worth, and debt coverage ratios.
The Company leases computer equipment under a capital lease which
expires June 2000 and has been recorded at its fair market value. Future minimum
payments under this lease are as follows: years ending December 31, 1998 and
1999 - $13,500; five months ended June 30, 2000 - $8,000.
Interest payments for the years 1995, 1996 and 1997 were approximately
$217,000, $103,000 and $5,000 respectively.
17
<PAGE>
MENLEY & JAMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5 - Income Taxes
Significant components of the Company's deferred tax assets and
liabilities at December 31, were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax liabilities:
Prepaid expenses and other .................. $ 90 $ 155 $ 282
Amortization of organizational costs and
packaging designs ......................... 408 348 255
Depreciation ................................ 291 309 231
------- ------- -------
Total deferred tax liabilities ................ $ 789 $ 812 $ 768
------- ------- -------
Deferred tax assets:
Net operating loss carryforwards ............ 3,142 2,768 2,317
Promotional expenses ........................ 146 174 157
Nondeductible allowances and reserves ....... 334 245 220
Other ....................................... 49 80 75
------- ------- -------
Total deferred tax assets ..................... 3,671 3,267 2,769
Valuation allowance for deferred tax assets ... (1,390) (1,390) (1,309)
------- ------- -------
Deferred tax assets, net of valuation allowance 2,281 1,877 1,460
------- ------- -------
Net deferred tax assets ....................... $ 1,492 $ 1,065 $ 692
======= ======= =======
</TABLE>
Significant components of the provision for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal...................................................... $ 20 $ 9 $ 25
State........................................................ 15 (20) 28
------- ------ ------
Total current.................................................... 35 (11) 53
Deferred......................................................... 420 427 373
------ ------ -----
Provision for income taxes..................................... $ 455 $ 416 $ 426
====== ====== =====
</TABLE>
The reconciliation between the Company's provision for income taxes
and the U.S. federal statutory tax rates is (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rates.................................... $ 195 $ 129 $ 61
State taxes, net of federal tax benefit........................ 29 19 94
Product lines and other amortization
not deductible for tax....................................... 411 375 339
Valuation adjustment........................................... (192) -- --
Decrease in valuation reserve.................................. -- -- (81)
Other.......................................................... 12 (107) 13
------ ------ ------
Provision for income taxes..................................... $ 455 $ 416 $ 426
====== ====== ======
</TABLE>
The Company has approximately $5.7 million of tax return net operating
loss carryforwards currently available on an unlimited basis to offset federal
net taxable income. These loss carryforwards expire in the years 2005 through
2008.
18
<PAGE>
MENLEY & JAMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6 - Leases
The Company leases an office facility and automobiles under
noncancelable operating leases which expire at various dates through 2001.
Future minimum payments under these leases consist of the following at December
31, 1997: 1998 - $164,000; 1999 - $164,000; 2000 - $169,000; 2001 - $14,000.
Rental expense for operating leases for the years 1995, 1996 and 1997
was $282,000, $150,000 and $158,000 respectively.
Note 7 - Common Stock and Stock Options
In 1991, the Board of Directors adopted, and the stockholders approved,
a stock option plan which authorized the grant of stock options with respect to
380,000 shares of the Company's common stock and granted options to purchase
289,180 shares of common stock at an exercise price of $7.89 per share. During
1995, options were granted to purchase 30,000 shares of common stock at an
exercise price of $0.69 per share. On February 1, 1996, 224,960 options were
revalued reducing the exercise price from $7.89 per share to $1.25 per share,
which reflected the share price at the close of business February 1, 1996.
During 1996, options were granted to purchase 15,000 and 30,000 shares of common
stock at exercise prices of $1.19 and $1.56 respectively. During 1997, options
were granted to purchase 30,000 shares of common stock at an exercise price of
$1.38 per share. Additionally, during 1997, options to purchase 15,000 shares of
common stock were exercised at an exercise price of $0.69 per share and options
to purchase 30,000 shares of common stock expired. At December 31, 1997, 269,960
options are vested and exercisable. As of December 31, 1997 one half of the
options issued in 1997 were exercisable; the remaining options shall become
exercisable in two equal installments on January 1, and April 1, 1998.
Note 8 - Commitments
The Company has license and sales and marketing agreements to
manufacture and/or market certain products. Under these agreements the Company
is required to pay royalties based upon various percentages of net sales and/or
net profits. Additionally, pursuant to the above agreements, the Company may be
entitled to receive monies based on losses, if any, incurred during the year on
certain of the products. Net sales of all products under agreements, for the
years ended 1995, 1996 and 1997 were equal to 5.0%, 9.3% and 12.5% respectively,
of total net sales. Royalty expense, net, for the years 1995, 1996 and 1997 was
$48,000, $23,000 and $578,000, respectively.
Note 9 - Supplemental Information
Advertising expense for the years 1995, 1996 and 1997 was $1,000,
$613,000 and $1.0 million, respectively.
For each of the years 1995, 1996 and 1997, one customer accounted for
approximately 13%, 17% and 20%, respectively, of net sales. The Company operates
in the health and beauty care segments and primarily sells its products to eight
trade classes. These trade classes are drug wholesalers, drug chains, mass
merchandisers, food chains, grocery wholesalers, service merchandisers, barber
and beauty customers and the government. The largest of these are drug
wholesalers and drug chains, which account for approximately 46% and 28%,
respectively, of accounts receivable as of December 31, 1997. In the Company's
opinion, there is not a material risk of loss due to credit concentration.
19
<PAGE>
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 10. Directors and Executive Officers of the Company.
The information with respect to directors and executive officers of the
Company contained under the caption "Election of Directors" in the Company's
Proxy Statement to be used in connection with the Annual Meeting of Stockholders
to be held on May 21, 1998, is incorporated herein by reference in response to
this item.
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Lawrence D. White............................... 52 Director, Chairman of the Board, President and
Chief Executive Officer
Greg L. Kearl................................... 47 Director, Executive Vice President, Chief
Operating Officer, Secretary and Treasurer
William W. Yeager............................... 57 Chief Financial Officer
Peter J. Carr (2)............................... 42 Director
James T. McMillan, II (1)....................... 51 Director
Bruce W. Simpson (2)............................ 56 Director
James E. Thomas (1) (2)......................... 37 Director
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Lawrence D. White has served as Director, Chief Executive Officer and
President of the Company since its inception in 1990 and as Chairman of the
Board since November 1990. From January 1986 to May 1990 he was Vice President
of Marketing and Sales for SmithKline Consumer Products, a division of SB. Prior
to working at SB, Mr. White was at Revlon's Norcliff Thayer Division as Vice
President of Marketing from 1982 to 1985, as Director of Brand Management from
1981 to 1982, as Marketing Group Director from 1978 to 1981, and as a Brand
Manager from 1977 to 1978.
Greg L. Kearl has served as Executive Vice President and Secretary of
the Company since its inception in 1990, as Chief Operating Officer since
January 1991 and as Treasurer and a Director since April 1991. From 1984 until
May 1990 he was employed by SmithKline Consumer Products in a variety of
positions, including Vice President of Sales from August 1986 until May 1990,
Director -- New Products from August 1986 to November 1986, and National Sales
Director from 1984 to August 1986. Prior to working at SB, Mr. Kearl was at
McNeil Consumer Products Company in a variety of positions including Eastern
Regional Sales Manager from 1983 to 1984, as Director of Special Markets Region
from 1982 to 1983, and as Director of Sales Administration from 1981 to 1982.
William W. Yeager has served as Chief Financial Officer of the Company
since July 1991. Mr. Yeager is a Certified Public Accountant. From October 1990
to June 1991 he was Director of Finance and Controller at Davco Food Inc., a
restaurant chain. From 1982 to 1990 he served as Executive Vice President and
Chief Financial Officer for Frycor Inc., a restaurant operating concern.
Peter J. Carr has served as a Director of the Company since its
inception. He has been a principal of Carr & Company, LLC, an investment and
financial advisory company, since January 1990. Mr. Carr was formerly a
20
<PAGE>
Managing Director and a member of the Board of Directors of Dean Witter Capital
Corporation and Dean Witter Realty Inc., where he was employed from September
1982 to December 1989. Mr. Carr is also President and Chairman of Empyrean
Holdings Corporation, a private equity investment company.
James T. McMillan, II was elected a Director July, 1996. Mr. McMillan
is the Chairman and Chief Executive Officer of Ferndale Laboratories, Inc. Mr.
McMillan has served as Chairman of Ferndale Laboratories since 1990. He joined
Ferndale Laboratories, Inc. in 1985 as Vice Chairman and Chief Executive
Officer.
Bruce W. Simpson was elected a Director July, 1996. Mr. Simpson is the
President and Chief Executive Officer of Medeva Pharmaceuticals, Inc. (formerly
Adams Laboratories, Inc.), a division of Medeva Plc. From 1973 to 1992 he was
employed by Fisons Corporation in a variety of positions including Executive
Vice President and General Manager of U.S. Operations from October 1988 to
February 1992 and Vice President Sales and Marketing from June 1982 to October
1988.
James E. Thomas has served as a Director of the Company since 1992. He
has been employed since 1989 by E. M. Warburg, Pincus & Co., LLC, where he
currently serves as a Managing Director. Prior to that, he was Vice-President
with Goldman Sachs International. Mr. Thomas is a Director of Anergen, Inc.,
Celtrix Pharmaceuticals, Inc., Transkaryotic Therapies, Inc., Xomed Surgical
Products, Inc., and a number of privately-held companies.
The Board of Directors currently consists of six directors. All
directors are elected by the stockholders at each annual meeting to serve until
the next annual meeting and until their successors are elected and qualified.
The Company has agreed that, so long as Warburg, Pincus Investors, L.P., holds
at least 20% of the outstanding Common Stock, Warburg will have the right to
designate up to two directors and the Company will use its best efforts to cause
such persons to remain on the Board of Directors, provided, however, that in no
event does Warburg have the right under the agreement to designate more than
one-half of the number of directors serving at any time. Currently, only one
director serves as a designee of Warburg, although Warburg has the right to
nominate a second director. If Warburg owns less than 20%, but more than 5% of
the Common Stock, Warburg will have the right to designate one director.
Officers are selected by and serve at the discretion of the Board of Directors.
The Company's Restated Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, its directors shall not be liable
for monetary damages for breach of the directors' fiduciary duty of care to the
Company and its stockholders. This provision in the Restated Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances, equitable remedies such as injunction, rescission or other forms
of nonmonetary relief would remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Company, for acts or omissions not taken or
made in good faith or involving intentional misconduct, for knowing violations
of law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director's
liabilities under any other laws, such as the federal securities laws.
Item 11. Executive Compensation.
The information with respect to executive compensation is contained
under the caption "Executive Compensation" in the Company's Proxy Statement to
be used in connection with the Annual Meeting of Stockholders to be held on May
21, 1998, and is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information with respect to security ownership of certain
beneficial owners and management contained under the caption "Security Ownership
of Management and Others" in the Company's Proxy Statement to be used in
connection with the Annual Meeting of Stockholders to be held on May 21, 1998 is
incorporated herein by reference in response to this item.
21
<PAGE>
Item 13. Certain Relationships and Related Transactions.
The information with respect to certain relationships and related
transactions contained under the caption "Certain Transactions" in the Company's
Proxy Statement, to be used in connection with the Annual Meeting of
Stockholders to be held on May 21, 1998, is incorporated herein by reference in
response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits
(1) The following Consolidated Financial Statements of the Company are
included in Item 8 of this report: Consolidated Balance Sheets as of
December 31, 1996 and 1997. Consolidated Statements of Operations for
the years ended December 31, 1995, 1996 and 1997. Consolidated
Statements of Stockholders' Equity for the years ended December 31,
1995, 1996 and 1997. Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997. Notes to Consolidated
Financial Statements.
(2) The following Consolidated Financial Statement Schedule of the Company
as required by Item 8 of Form 10-K and Item 14(d) of Form 10-K for the
years ended December 31, 1995, 1996 and 1997 is filed as part of this
report:
Page Schedule
---- --------
25 Schedule II -- Valuation and Qualifying
Accounts and Reserves.
All supporting schedules other than the above have been omitted,
because they are not required or the information to be set forth
therein is included in the financial statements or in the notes
thereto.
(3) Listing of Exhibits (An exhibit index immediately preceding the
exhibits indicates the page number where each exhibit can be found):
The Company will furnish, upon request, any exhibit listed herein upon
the payment of a fee not to exceed reasonable expenses incurred by the
Company in furnishing such exhibit.
*3.1 Restated Certificate of Incorporation of the Company, as amended on
March 19, 1991
*3.2 By-Laws of the Company, amended as of November 26, 1991
*4.1 Specimen Stock Certificate for Common Stock $.01 par value
*10.1 Lease between Commonwealth Corporate Center Associates and the
Company, dated April 30, 1990 and First Amendment, dated as of May 24,
1991, relating to property at 100 Tournament Drive, Horsham,
Pennsylvania
*10.2 1991 Stock Option Plan of the Company, amended as of November 20,
1991
*10.5 Asset Purchase Agreement, dated as of April 9, 1990, among the
Company, SmithKline Beecham Corporation and SmithKline Beecham
Americas Inc., including as Exhibit B thereto the Transitional
Services Agreement between the Company and SB
*10.8 Shareholder Agreement, dated as of November 6, 1990, among the
Company, Warburg, Pincus Investors, L.P., William Learnard, Lawrence
D. White, Walter W. Witoshkin, Greg L. Kearl, M&J Holdings L.P. and
The Witoshkin 1990 Trust; Amendment No. 1 thereto, dated as of March
22, 1991 and Amendment No. 2 thereto, dated as of November 22, 1991.
*10.9 Form of Agreement, dated as of November 20, 1991, by and between the
Company and Warburg, Pincus Investors, L.P.
*10.10 License Agreement for Garfield multivitamin products dated as of
March 22, 1991, by and between the Company and United Feature
Syndicate, Inc.
*10.11 License Agreement dated as of May 29, 1990, by and between the
Company and SmithKline Beecham Corporation, as amended on October 31,
1991.
*10.12 Form of Executive Stock Purchase Agreement
22
<PAGE>
10.13 Loan Agreement, dated as of December 2, 1993, between Menley & James
Laboratories, Inc. and Meridian Bank. (Incorporated by reference to
the Company's Current Report on Form 8-K filed December 20, 1993)
10.14 Security Agreement, dated as of December 2, 1993, between Menley &
James Laboratories, Inc. and Meridian Bank. (Incorporated by reference
to the Company's Current Report on Form 8-K filed December 20, 1993)
10.15 Trademark Security Agreement, dated as of December 1, 1993, between
Menley & James Laboratories, Inc. and Meridian Bank. (Incorporated by
reference to the Company's Current Report on Form 8-K filed December
20, 1993)
10.16 Guaranty, dated as of December 2, 1993, between the Registrant and
Meridian Bank (Incorporated by reference to the Company's Current
Report on Form 8-K filed December 20, 1993)
10.17 First Amendment to Loan Agreement and Guaranty, dated as of February
6, 1995, between the Company and Meridian Bank. (Incorporated by
reference to the Company's Annual Report on Form 10-K filed March 30,
1995. Commission File No. 000-19788).
10.18 License Agreement for Garfield bath products, dated as of October 26,
1992, and amended as of July 7, 1993 and June 16, 1994, by and between
the Company and PAWS Incorporated. (Incorporated by reference to the
Company's Annual Report on Form 10-K filed March 30, 1995. Commission
File No. 000-19788).
10.19 Amendment for Garfield multivitamin products, dated as of June 16,
1994 to License Agreement between the Company and PAWS Incorporated.
(Incorporated by reference to the Company's Annual Report on Form 10-K
filed March 30, 1995. Commission File No. 000-19788).
10.20 Stock Option Agreement, dated as of April 7, 1995, between the Company
and Alan J. Dalby (Director). (Incorporated by reference to the
Company's Annual Report on Form 10-K filed March 27, 1996.
Commission File No. 000-19788).
10.21 Stock Option Agreement, dated as of April 7, 1995, between the Company
and Franklin W. Krum (Director). (Incorporated by reference to the
Company's Annual Report on Form 10-K filed March 27, 1996.
Commission File No. 000-19788).
10.22 Severance Agreement, dated as of October 15, 1995, between the Company
and Greg L. Kearl. (Incorporated by reference to the Company's Annual
Report on Form 10-K filed March 27, 1996.
Commission File No. 000-19788).
10.23 Severance Agreement, dated as of October 15, 1995, between the Company
and Lawrence D. White. (Incorporated by reference to the Company's
Annual Report on Form 10-K filed March 27, 1996.
Commission File No. 000-19788).
10.24 Second Amendment to Lease dated, as of December 20, 1995, relating to
property at 100 Tournament Drive, Horsham, Pennsylvania. (Incorporated
by reference to the Company's Annual Report on Form 10-K filed March
27, 1996. Commission File No. 000-19788).
10.25 Revisions, dated as of May 1, 1995, October 11, 1995 and November 16,
1995 to the Loan Agreement between the Company and Meridian Bank.
(Incorporated by reference to the Company's Annual Report on Form 10-K
filed March 27, 1996. Commission File No. 000-19788).
10.26 Letter, dated as of February 13, 1996, repricing outstanding stock
options under the Company's 1991 Stock Option Plan. (Incorporated by
reference to the Company's Annual Report on Form 10-K filed March 27,
1996. Commission File No. 000-19788).
10.27 Form of Director Stock Option Agreement. (Incorporated by reference to
the Company's Annual Report on Form 10-K filed March 28, 1997.
Commission File No. 000-19788)
10.28 Revisions, dated as of June 24, 1996 and October 7, 1996 to the Loan
Agreement between the Company and CoreStates Bank. (Incorporated by
reference to the Company's Annual Report on Form 10-K filed March 28,
1997. Commission File No. 000-19788)
*22.1 List of Subsidiaries
27.1 Financial Data Schedule for the year ended December 31, 1997,
submitted electronically to the Securities and Exchange Commission.
* Filed as an exhibit to the Registration Statement on Form S-1, Registration
No. 33-44260, declared effective by the Securities and Exchange Commission
on January 17, 1992, which is incorporated by reference herein.
(b) No reports on Form 8-K were filed during the period covered by this
report.
(c) Exhibits -- The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules -- The response to this portion of
Item 14 is submitted as a separate section of this report.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MENLEY & JAMES, INC.
/s/ Lawrence D. White
--------------------------------------
Lawrence D. White
President and Chief Executive Officer
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lawrence D. White Director, Chairman of the Board, March 27, 1998
- ------------------------------------ President and Chief Executive Officer
(Lawrence D. White) (Principal Executive Officer)
/s/ Greg L. Kearl Director, Executive Vice President, March 27, 1998
- ------------------------------------ Chief Operating Officer, Secretary and
(Greg L. Kearl) Treasurer
/s/ William W. Yeager Chief Financial Officer (Principal Financial March 27, 1998
- ------------------------------------ Officer and Principal Accounting Officer)
(William W. Yeager)
/s/ Peter J. Carr Director March 27, 1998
- ------------------------------------
(Peter J. Carr)
/s/ James T. McMillan, II Director March 27, 1998
- ------------------------------------
(James T. McMillan, II)
/s/ Bruce W. Simpson Director March 27, 1998
- ------------------------------------
(Bruce W. Simpson)
/s/ James E. Thomas Director March 27, 1998
- ------------------------------------
(James E. Thomas)
</TABLE>
<PAGE>
SCHEDULE II
MENLEY & JAMES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
The Company's valuation accounts were as follows:
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
--------- -------- ---------- ------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts.................... $ 169 $ 109 $ 108 $ 170
Reserve for cash discounts......................... 75 313 340 48
Reserve for returns and allowances................. 415 2,313 2,293 435
Reserve for inventory obsolescence................. 36 191 222 5
Valuation allowance for deferred tax assets 1,582 -- 192 1,390
------ ------- ------ ------
Totals........................................... $2,277 $2,926 $3,155 $2,048
====== ====== ====== ======
For the year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts.................... $ 170 $ 50 $ 208 $ 12
Reserve for cash discounts......................... 48 328 330 46
Reserve for returns and allowances................. 435 1,938 1,907 466
Reserve for inventory obsolescence ................ 5 112 112 5
Valuation allowance for deferred tax assets 1,390 -- -- 1,390
------ ------- ------ ------
Totals........................................... $2,048 $2,428 $2,557 $1,919
====== ====== ====== ======
For the year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts.................... $ 12 $ 38 $ 24 $ 26
Reserve for cash discounts......................... 46 331 329 48
Reserve for returns and allowances................. 466 1,558 1,634 390
Reserve for inventory obsolescence................. 5 257 201 61
Valuation allowance for deferred tax assets ....... 1,390 -- 81 1,309
------ ------- ------ ------
Totals............................................ $1,919 $2,184 $2,269 $1,834
====== ====== ====== ======
</TABLE>
Deductions from the allowance for doubtful accounts represent
uncollectible accounts written off, net of recoveries. Deductions from the
reserve for cash discounts represent discounts taken by customers during the
periods. Deductions from the reserve for returns and allowances represent claims
authorized during the periods. Deductions from the reserve for inventory
obsolescence represent inventories written off.
<PAGE>
EXHIBIT 99.1
MENLEY & JAMES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF MENLEY & JAMES, INC.
IN CONNECTION WITH THE
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 23, 1998
The undersigned stockholder of Menley & James, Inc. (the "Company") hereby
appoints Lawrence D. White and Greg L. Kearl, or either of them, the true and
lawful attorneys, agents and proxies of the undersigned, each with full power
of substitution to vote all the shares of the Company's common stock, par value
$.01 per share, which the undersigned may be entitled to vote at the Special
Meeting of Stockholders of the Company to be held on November 23, 1998, and at
any adjournment or postponement of such meeting, with all powers which the
undersigned would possess if personally present, in the manner indicated on the
reverse side of this proxy and upon such other business as may lawfully
come before the meeting. IF NO DIRECTION AS TO THE MANNER OF VOTING THE PROXY
IS MADE, THE PROXY WILL BE VOTED AGAINST ITEM 1 AS INDICATED ON THE REVERSE
SIDE HEREOF.
(Continued on reverse side)
-FOLD AND DETACH HERE-
<PAGE>
Please
mark
your votes as /X/
indicated in
this example
If no direction is made, this proxy will be voted against proposal 1.
Please mark your votes as indicated in this example [x]
1. The approval and adoption of the Asset Purchase Agreement dated as of August
21, 1998, by and among Menley & James, Inc., its wholly-owned subsidiary,
Menley & James Laboratories, Inc. (the "Subsidiary"), and Numark
Laboratories, Inc. (the "Purchaser"), and as amended by Amendment No. 1 dated
as of October 13, 1998, involving the proposed sale of substantially all of
the assets, and the assignment of substantially all of the liabilities, of
the Subsidiary to the Purchaser, for a purchase price of $12,930,000, subject
to an increase or decrease of up to $500,000, including authorization of
the Company, without further shareholder approval, to make such modifications
and amendments to the terms and conditions of the Sale, including changes in
the amount or type of consideration to be received or the assets to be sold,
as the Board of Directors of the Company may deem appropriate.
FOR AGAINST ABSTAIN
/ / / / / /
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: , 1998
-------------------
-------------------------------
(Signature)
-------------------------------
(Signature if held jointly)
PLEASE COMPLETE, SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
-FOLD AND DETACH HERE-
ADMISSION TICKET
Special Meeting
of
Menley & James, Inc.
Monday, November 23, 1998
10:00 a.m.
Hotel Inter-Continental New York
111 East 48th Street
(between Park Ave. and Lexington Ave.)
New York, New York
===============================================================================
Agenda
* Proposal to approve and adopt the Sale Agreement
* Report on the progress of the corporation
* Discussion on matters of current interest
* Informal discussion among stockholders in attendance
===============================================================================
<PAGE>
EXHIBIT 99.2
STOCKHOLDERS' AGREEMENT
This STOCKHOLDERS' AGREEMENT (this "Agreement"), dated as of August 21,
1998 by and among Warburg, Pincus Investors, L.P., a Delaware limited
partnership (the "Primary Stockholder"), Numark Laboratories, Inc., a Delaware
corporation (the "Purchaser"), and Lawrence D. White, a resident of the
Commonwealth of Pennsylvania (the "Executive Stockholder," and together with the
Primary Stockholder, the "Stockholders").
W I T N E S S E T H:
WHEREAS, concurrently herewith, Purchaser, Menley & James Laboratories,
Inc., a Delaware corporation (the "Subsidiary"), and Menley & James, Inc., a
Delaware corporation (the "Company"), are entering into an Asset Purchase
Agreement of even date herewith (as it may be amended or modified from time to
time, the "Acquisition Agreement"), pursuant to which Purchaser will acquire
from the Company substantially all of the Company's assets and assume
substantially all of the Subsidiary's liabilities (as it may be amended or
modified from time to time the "Transaction");
WHEREAS, each Stockholder owns, as of the date hereof, that number of
shares of the Company's common stock (the "Common Stock"), par value $0.01 per
share (the "Existing Shares," together with any shares of Common Stock
beneficial ownership (as defined in Section 2.1 below) of which is acquired by
such Stockholder after the date hereof and prior to the earlier of (i) the date
of the Company's stockholders meeting contemplated by the Acquisition Agreement
(including as may be postponed or adjourned the "Meeting Date"), and (ii)
termination hereof, hereinafter collectively referred to as the "Shares") set
forth opposite his or its name on Annex I hereto; and
WHEREAS, as a condition to their willingness to enter into the
Acquisition Agreement, and in reliance upon each Stockholder's representations,
warranties, covenants and agreements hereunder, Purchaser has requested that
each Stockholder agree, and each Stockholder has agreed, to enter into this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and for such other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, and intending to be legally
bound hereby, it is agreed as follows:
1. Agreement to Vote.
1.1. Each Stockholder hereby agrees that during the time this Agreement
is in effect, subject to Section 6.1(c) below, at any meeting of the
stockholders of Company, however called, and in any action by consent of the
stockholders of Company, the Stockholder shall: (a) vote his or its Shares in
favor of the approval and adoption of the Acquisition Agreement; (b) vote his or
its Shares against any action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
Company under the Acquisition Agreement; and (c) vote his or its Shares against
(i) any proposal from a Person, other than the Transaction, relating to a
merger, business combination, recapitalization, reorganization or liquidation
involving Company or the Subsidiary (as defined in the Acquisition Agreement),
or the sale or transfer of a material amount of assets of Company or the
Subsidiary (each an "Acquisition Proposal"), or (ii) any change in the
management or board of directors of Company, except as may otherwise be agreed
to in writing by Purchaser. Each Stockholder acknowledges receipt and review of
a copy of the Acquisition Agreement.
2. Representations and Warranties of Stockholders. Each Stockholder represents
and warrants to Purchaser as follows:
<PAGE>
2.1. Ownership of Shares. On the date hereof, the Existing Shares are
all of the Shares currently owned of record or beneficially owned (which, for
purposes of this Agreement, shall be determined in accordance with Rule
13d-3(a)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) by such Stockholder or any Affiliates (as defined in the Acquisition
Agreement) of such Stockholder. Such Stockholder has, with respect to the
Existing Shares, and on the Meeting Date will have, with respect to the Shares,
good, valid and marketable title, and the right to vote such Common Stock in
accordance with the terms of this Agreement, in each case free and clear of all
liens, claims, encumbrances, voting agreements, voting trusts or proxies which
would interfere with such Stockholder's ability to vote the Shares in accordance
with the terms of this Agreement.
2.2. Power; Binding Agreement. Such Stockholder has the full legal
right, power and authority to enter into and perform all of such Stockholder's
obligations under this Agreement. The execution and delivery of this Agreement
by such Stockholder will not violate any other agreement to which such
Stockholder is a party including, without limitation, any voting agreement,
stockholder agreement or voting trust. This Agreement has been duly executed and
delivered by such Stockholder and constitutes a legal, valid and binding
agreement of such Stockholder, enforceable in accordance with its terms. Neither
the execution or delivery of this Agreement nor the consummation by such
Stockholder of the transactions contemplated hereby will (a) require any consent
or approval of or filing with any governmental or other regulatory body other
than filings required under the federal securities laws, or (b) constitute a
violation of, conflict with or constitute a default under, any material
contract, commitment, agreement, understanding, arrangement or other restriction
of any kind to which such Stockholder is a party or by which such Stockholder is
bound.
2.3. Finder's Fees. No person is, or will be, entitled to any
commission or finder's fees from either Stockholder in connection with this
Agreement or the transactions contemplated hereby exclusive of any commission or
finder's fees referred to in the Acquisition Agreement.
3. Representations and Warranties of Purchaser. Purchaser represents and
warrants to the Stockholders as follows:
3.1. Authority. Purchaser has full legal right, power and authority to
enter into and perform all of its obligations under this Agreement. The
execution and delivery of this Agreement by Purchaser will not violate any other
agreement to which Purchaser is a party. This Agreement has been duly executed
and delivered by Purchaser and constitutes a legal, valid and binding agreement
of Purchaser, enforceable in accordance with its terms. Neither the execution of
this Agreement nor the consummation by Purchaser of the transactions
contemplated hereby will (a) require any consent or approval of or filing with
any governmental or other regulatory body other than filings required under the
federal securities laws, or (b) constitute a violation of, conflict with or
constitute a default under, any material contract, commitment, agreement,
understanding, arrangement or other restriction of any kind to which Purchaser
is a party or by which it is bound.
3.2. Finder's Fees. No person is, or will be, entitled to any
commission or finder's fee from Purchaser in connection with this Agreement or
the transactions contemplated hereby exclusive of any commission or finder's
fees referred to in the Acquisition Agreement.
4. Termination. This Agreement shall terminate on the earlier of (a) the Closing
(as defined in the Acquisition Agreement), and (b) the termination of the
Acquisition Agreement.
5. Expenses. Each party hereto will pay all of its expenses in connection with
the transactions contemplated by this Agreement, including, without limitation,
the fees and expenses of its counsel and other advisers.
- 2 -
<PAGE>
6. Covenants
6.1. Except in accordance with the provisions of this Agreement, each
Stockholder agrees, while this Agreement is in effect, not to, directly or
indirectly:
(a) sell, transfer, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, encumbrance,
assignment or other disposition of, any of the Shares;
(b) grant any proxies, deposit any Shares into a voting trust
or enter into a voting agreement with respect to any Shares;
(c) take any action to encourage, initiate or solicit any
inquiries or the making of any Acquisition Proposal or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal or
otherwise assist or facilitate any effort or attempt by any person or entity
(other than Purchaser, or its officers, directors, representatives, agents,
affiliates or associates) to make or implement an Acquisition Proposal. Such
Stockholder will immediately cease and cause to be terminated any existing
activities, discussions or negotiations on its part with any parties conducted
heretofore with respect to any of the foregoing, and will notify Purchaser
promptly if it becomes aware of any such inquiries or that any proposals are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be instituted or continued with, the Company (or its
officers, directors, representatives, agents, affiliates or associates), such
notice to include the material terms communicated; provided, however, that the
foregoing shall not restrict the Stockholder (in his capacity as a director of
the Company) or any of its representatives on the Company's board of directors
from taking actions to the same extent and in the same circumstances permitted
for the Company and the Company's board of directors under Section 6.3 of the
Acquisition Agreement; or
(d) enter into any agreement which would interfere with its
obligations under this Agreement or the Transaction.
6.2. Such Stockholder agrees, while this Agreement is in effect, to
notify Purchaser promptly of the number of any shares of Common Stock acquired
by such Stockholder after the date hereof.
7. Survival of Representations and Warranties. All representations, warranties,
covenants and agreements made by each Stockholder or the Purchaser in this
Agreement shall survive the Closing and any investigation at any time made by or
on behalf of any party.
8. Notices. All notices or other communications required or permitted hereunder
shall be in writing (except as otherwise provided herein), given in the manner
provided in the Acquisition Agreement, and shall be deemed duly given when
received, addressed as follows:
(a) If to the Purchaser:
Numark Laboratories, Inc.
75 Mayfield Avenue
Edison, New Jersey 08837
Attention: Patrick M. Lonergan, President
Facsimile: (732) 225-0066
- 3 -
<PAGE>
With a required copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Scott Zimmerman, Esq.
Facsimile: (212) 758-9526
(b) If to the Principal Stockholder:
Warburg, Pincus Investors, L.P.
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, New York 10017-3147
Attention: James E. Thomas, Managing Director
Facsimile: (212) 878-9361
If to Lawrence D. White:
26 Springton Pointe Drive
Newtown Square, PA 19073
In each case with a required copy to:
Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103-2799
Attention: James D. Epstein, Esq.
Facsimile: (215) 981-4750
9. Entire Agreement; Amendment. This Agreement, together with the documents
expressly referred to herein, constitute the entire agreement among the parties
hereto with respect to the subject matter contained herein and supersede all
prior agreements and understandings among the parties with respect to such
subject matter. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by Purchaser and the
Stockholders.
10. Obligations of Stockholders. The representations, warranties, covenants,
agreements and obligations of the Stockholders contained in this Agreement shall
be deemed to be several, and not joint with any other Stockholder, and made with
respect to itself, himself, its Shares or his Shares only.
11. Assigns. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, assigns and personal
representatives, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties.
12. Governing Law. Except as expressly set forth below, this Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof. In addition, each of the Stockholders and
Purchaser hereby agree that any dispute arising out of this Agreement shall be
heard in the Supreme Court of the State of New York or in the United States
District Court for the Southern District of New York and, in connection
therewith, each party to this Agreement hereby consents to the jurisdiction of
such courts and
- 4 -
<PAGE>
agrees that any service of process in connection with any dispute arising out of
this Agreement may be given to any other party hereto by certified mail, return
receipt requested, at the respective addresses set forth in Section 8 above.
13. Injunctive Relief. The parties agree that in the event of a breach of any
provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. The parties therefore agree that in the event of a breach of any
provision of this Agreement, the aggrieved party shall be entitled to obtain in
any court of competent jurisdiction a decree of specific performance or to
enjoin the continuing breach of such provision, in each case without the
requirement that a bond be posted, as well as to obtain damages for breach of
this Agreement. By seeking or obtaining such relief, the aggrieved party will
not be precluded from seeking or obtaining any other relief to which it may be
entitled.
14. Counterparts; Facsimile Signatures. This Agreement may be executed,
including execution by facsimile, in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same document.
15. Severability. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, such provision shall be interpreted to be only
so broad as is enforceable.
16. Further Assurances. Each party hereto shall execute and deliver such
additional documents as may be necessary or desirable to consummate the
transactions contemplated by this Agreement.
17. Third Party Beneficiaries. Nothing in this Agreement, expressed or implied,
shall be construed to give any person other than the parties hereto any legal or
equitable right, remedy or claim under or by reason of this Agreement or any
provision contained herein.
[Execution Page Follows]
- 5 -
<PAGE>
IN WITNESS WHEREOF, the Purchaser and the Stockholders have caused this
Agreement to be executed by their duly authorized officers, each as of the date
and year first above written.
Numark Laboratories, Inc.
By: /s/ BENJAMIN M. DEAVENPORT
---------------------------
Name: Benjamin M. Deavenport
Title: Vice President
Warburg, Pincus Investors, L.P.
By: E.M. Warburg, Pincus & Co., LLC,
its general partner
By: /s/ RODMAN W. MOORHEAD, III
----------------------------
Name: Rodman W. Moorhead, III
Title: Partner
/s/ LAWRENCE D. WHITE
-----------------------------
Lawrence D. White
- 6 -
<PAGE>
ANNEX I
Name of Stockholder Number of Existing Shares
- ------------------- -------------------------
Warburg, Pincus Investors, L.P. 3,020,478
Lawrence D. White 295,121
- 7 -
