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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
[ ] TRANSITION REPORT UNDER TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 1-11836
STYLES ON VIDEO, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 95-4389082
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
667 Rancho Conejo Boulevard, Newbury Park, California 91320
(Address of Principal Executive Offices) (Zip Code)
(805) 375-0996
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on which Registered
Common Stock None
Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 .
-- --
Concurrent with the filing of this Report on Form 10-KSB, the registrant is
filing all previously unfiled reports required to be filed under Section 13 or
15(d) of the Exchange Act as of February 28, 1997.
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]
Issuer's revenues for its year ended December 31, 1995 were $4,967,000.
At March 21, 1997, the day immediately preceding the filing of the
Registrant's Report on Form 10-KSB for the year ended December 31, 1995, there
were outstanding 8,852,759 shares of the Common Stock of Registrant of which
4,359,332 shares were held by non-affiliates. Trading of the Registrant's
Common Stock on the American Stock Exchange was halted on December 27, 1994 and
has not resumed. Consequently, it is not possible to determine the value of
shares held by non-affiliates of the Registrant. For purposes of this
computation, it has been assumed that the shares beneficially held by directors
and officers of the Registrant were "held by affiliates"; this assumption is not
to be deemed to be an admission by such persons that they are affiliates of the
Registrant.
Transitional Small Business Disclosure Format? Yes No X.
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
General
Styles on Video, Inc. ("SOV") and its subsidiaries (collectively, the
"Company") currently produce and distribute color digital cameras together with
related software and support products and services, and operate a hospital
newborn baby portrait service. Historically, SOV has been known primarily for
the production and distribution of turnkey hairstyle and beauty-related computer
imaging systems.
The Company was incorporated in May 1992 as a wholly-owned subsidiary of New
Image Industries, Inc. ("New Image"). From January 1, 1992 until the
incorporation of the Company on May 20, 1992, the Company's business was
conducted by New Image. This business consisted primarily of product
development activities, the development of a marketing strategy for the SOV
Video-Maker System, a turnkey haircare computer imaging system, and the
establishment of a marketing organization. On March 29, 1993, New Image
distributed all of the common stock of the Company held by New Image to its
stockholders (the "Distribution") on the basis of one share of common stock of
the Company for each five shares of New Image common stock held by a
stockholder. Immediately following the Distribution, the Company effected a
rights offering (the "Rights Offering") pursuant to which each Company
stockholder received, for each share of the Company's common stock held, the
right to purchase one share of the Company's common stock for $6.00 per share.
Upon completion of the Distribution and the Rights Offering, the Company became
a publicly-owned company. On October 14, 1993, the Company effected a 3 for 2
stock split in the form of a stock dividend.
On February 7, 1994, the Company acquired Dycam Inc. ("Dycam"), which
designs, develops and manufactures digital cameras for use with computers. In
July 1994, the Company completed an underwritten rights offering of 1,000,000
shares of Dycam's common stock (the "Dycam Offering"). As of the date hereof,
the Company owns approximately 61 percent of the shares of outstanding common
stock of Dycam.
On April 5, 1994, the Company acquired 80% of the outstanding stock of
Forever Yours, Inc. ("FYI"), a corporation which engages in the hospital newborn
baby photography business.
On April 25, 1994, the Company established Styles Servicing, Inc. ("SSI"), a
wholly-owned subsidiary, to offer franchises to operate its hairstyle imaging
systems.
During the fourth quarter of 1994, the Company's stock price declined 78%,
from a high closing price of $12.75 on October 21, 1994 to a closing price of
$2.81 on December 27, 1994. In mid-December 1994 several suits were filed
against the Company and members of its Board of Directors by its stockholders,
alleging violations of the federal securities laws. The suits were settled in
April 1995 and received final approval by the District Court in July 1996. See
"Legal Proceedings."
Trading of the Company's common stock on the American Stock Exchange, Inc.
(the "AMEX"), which had commenced on April 8, 1993, was halted on December 27,
1994, and has not resumed. On July 18, 1996, the AMEX determined to remove the
Company's common stock from listing and registration thereon effective August 2,
1996. There is currently no active public trading market for any outstanding
security of the Company. Dycam's common stock remains separately traded on the
AMEX.
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In late December 1994, the Company began to take steps to address its
problems. On December 28, 1994, the Company hired Charles Plumb, a specialist
in turnaround situations, to serve as the Company's acting President and to
develop and implement a plan designed to restore confidence in the Company.
During the term of Mr. Plumb's engagement, Guy de Vreese, the Company's initial
Chief Executive Officer, continued to serve in that capacity. In February 1995,
Mr. Plumb resigned his engagement with the Company. Concurrently with Mr.
Plumb's departure, the Company's Board of Directors sought and obtained Mr. de
Vreese's resignation. In late February 1995, the Board of Directors asked Dana
I. Arnold, President of FYI, to become Acting Chief Executive Officer of the
Company. Mr. Arnold served in such capacity through November 1995.
The Company's new management spent the remainder of 1995 operating the
Company while evaluating and accounting for the causes of the Company's 1993 and
1994 financial irregularities. In May 1995, the Company engaged Coopers &
Lybrand L.L.P. ("C&L") to serve as the outside accountants for the Company's
1994 fiscal year. During the course of their work, management and C&L
discovered various accounting irregularities in previously reported operating
results for 1993 and the first three quarters of 1994. To adjust for these
irregularities, the Company has filed certain amended reports on Form 10-KSB/A
and Form 10-QSB/A with the Securities and Exchange Commission (the "SEC")
pursuant to which it has restated its financial statements as of and for the
year ended December 31, 1993 and for the quarterly periods ended March 31, June
30, and September 30, 1994.
During the latter part of 1994 and throughout 1995 and 1996, the Company's
primary source of operating funds, in addition to cash on hand, was loans
received from various affiliated and non-affiliated parties. In December 1994,
Dycam made a secured loan of $500,000 to the Company, followed by an additional
$500,000 advance in January 1995. The loans totaling $1,000,000 are secured by
1,916,667 shares of Dycam's stock owned by SOV. See "Certain Relationships and
Related Party Transactions." In September 1995, the Company and FYI received
bridge financing of $300,000 from Multinational Trading Corp., a Florida
corporation ("MTC"). MTC made additional advances of $75,000 in October 1995.
In November 1995, the Company, FYI and International Digital Investors, L.P., a
Delaware limited partnership ("IDI") entered into a Note and Preferred Stock
Purchase Agreement (the "1995 Agreement"). Pursuant to the 1995 Agreement, in
consideration for its $3,000,000 investment in the Company, IDI received
warrants for the Company's common stock which would amount to forty percent of
the Company's outstanding common stock if exercised, a secured note for
$2,950,000, and $50,000 in convertible preferred stock. In May 1996, the
Company, FYI and IDI entered into an additional Note and Preferred Stock
Purchase Agreement (the "1996 Agreement"). Pursuant to the terms of the 1996
Agreement, in consideration for its additional investment in the Company, IDI
received additional warrants for the Company's Common Stock, a secured note for
up to $1,200,000, and $50,000 in convertible preferred stock. Together with the
warrants received pursuant to the 1995 Agreement, IDI had warrants amounting to
seventy-five percent of the Company's outstanding common stock on a fully
diluted basis, if exercised. From September 1996 through January 1997, the
Company and FYI received bridge financing of $927,000 pursuant to a $977,000
Bridge Note.
On January 15, 1997, the Company, FYI and IDI entered into several agreements
(the "January 1997 Agreements") which provided for the issuance of 4,347,427
shares of its Common Stock to IDI in exchange for all of the 1995 Warrants and
for 1996 Warrants with respect to 1,867,029 shares of Common Stock. IDI remains
the holder of 1996 Warrants for 51,419,199 shares of Common Stock. The Company
also issued a Series D Warrant (the "Series D Warrant") to IDI which is
exercisable for up to 61,803,805 shares of the Company's Common Stock at an
exercise price of $.075 per share. The Series D Warrants are contingent upon
the occurrence of a proposed reverse stock split. If the reverse stock split is
approved and the Company and IDI complete the second exchange of securities
described below, then the Series D Warrants will not be exercisable. However,
if the reverse stock split is not approved by April 15, 1997,
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then the Series D Warrants may be exercised by IDI prior to November 20, 2005.
If the proposed reverse stock split is approved by the stockholders, the Company
intends to complete a second exchange of securities with IDI pursuant to which
the Company will issue an additional 39,342,461 (pre-reverse split) shares of
its Common Stock to IDI in exchange for all of the remaining 1996 Warrants with
respect to 51,419,199 (pre-reverse split) shares of the Company's Common Stock,
together with the surrender of the Series D Warrants. After the second security
exchange, IDI would continue to hold 500 shares of the Company's Series A
Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's Common Stock, equivalent
to 67% of the shares anticipated to be outstanding on the date of the second
exchange, April 15, 1997.
In conjunction with the IDI financings, IDI acquired the right to elect the
majority of the Company's Board of Directors. See "Certain Relationships and
Related Party Transactions." Subsequent to IDI's 1995 investment, Jeffrey A.
Safchik, the President of IDI's general partner, was elected as the Company's
Chief Executive Officer and Chairman of the Board. Mr. Safchik served in such
capacity through July 1996.
In January 1996 the Company's Board of Directors determined that it was in
the best interests of the Company and its stockholders to eliminate the
Company's hairstyle and beauty imaging systems operations, as well as its
franchising operations. The Company promptly commenced the wind-down of SOV's
hairstyle and beauty imaging systems operations and SSI's operations. SOV has
ceased the marketing and sales of its hairstyle and beauty imaging systems, and
terminated the employment of all employees involved in the marketing and sales
of such systems. SOV continues to sell access disks (software required to
continue operating certain SOV hairstyle and beauty imaging systems, which
permits the user to conduct a specific number of imaging sessions) and those
ancillary products which are currently part of its inventory, and acts as a
holding company for the Company's remaining operating subsidiaries, Dycam and
FYI. SOV intends to continue to sell access disks for the foreseeable future as
it winds down and attempts to sell its hairstyle and beauty imaging systems
operations.
All SSI employees have been terminated and, during 1996, the Company entered
into discussions with SSI's eighteen Area Developers regarding the cancellation
of their Area Development Agreements in exchange for consideration primarily
consisting of canceling the Area Developers' notes payable to SSI and of the
issuance of access disks to the Area Developers by SSI. As of August 31, 1996,
the Company has entered into cancellation agreement with fifteen of SSI's Area
Developers.
Although there can be no assurances, management does not expect to incur
substantial liability with respect to the wind-down or sale of SOV's hairstyle
and beauty imaging systems operations, or of SSI's operations.
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco International, Inc. ("Hasco"). Hasco operates First Foto,
a competitor of FYI in the hospital newborn photography business. In January
and February 1997, FYI borrowed a total of $360,000 from Hasco pursuant to a
loan agreement whereby Hasco will lend to FYI up to a total of $540,000 prior to
the closing. The proceeds of the FYI sale, net of transaction costs and
satisfaction of FYI's obligations (excluding its indebtedness to IDI), will not
be sufficient to fully repay the Company's and FYI's obligations to IDI, or to
fully satisfy the Company's other liabilities to its creditors. The FYI Sale is
expected to close in April 1997, subject to the approval of the Company's
stockholders and other customary terms and conditions.
As discussed in the Report of Independent Accountants, which is included in
Item 7 -- Financial Statements of this Report, the Company has suffered
recurring losses from operations, has an accumulated deficit, and faces certain
contingencies that raise doubt about its ability to continue as a going concern.
The Company's ability to continue as a going concern will depend upon the
success achieved by Dycam and a
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number of other factors, many of which are beyond the Company's control. For a
discussion of liquidity and management's plans, see Note 2 in Notes to
Consolidated Financial Statements included elsewhere in this report. For
information regarding potential factors that may affect the future business,
operating results and financial condition of the Company, see "Management's
Discussion and Analysis or Plan of Operation -- Factors That May Affect Future
Results and Financial Condition."
The current business and operations of the Company and its subsidiaries are
discussed below.
SOV Products
The Company's original business primarily consisted of the sale of computer-
based imaging systems designed to show customers what they look like "wearing"
various hairstyles. Throughout 1993 and 1994, the Company's primary product was
the video based SOV Video-Maker System. In the fourth quarter of 1994, the
Company began development work on a hairstyle imaging system, the Redken System,
which was created for use in Redken-owned hair salons. In 1995, the Company
began development work on a related hairstyle imaging system, the Electric Hair
System, a lower cost version of the Redken System. During 1994, the Company
also worked on the Tryuson System, an imaging system designed for use by optical
retailers which allows the consumer to use the computer to "try on" different
styles of eyeglasses. Additionally in late 1994, the Company began development
of a poster printing system, the Big Picture. The Company abandoned its plans
for the Big Picture in early 1995. In addition to its hairstyle imaging
systems, SOV marketed various ancillary products, including blank video tapes,
promotional materials, and access discs which are necessary for the operation of
the SOV Video Maker and Electric Hair Systems. Throughout 1994 and 1995, SOV's
systems and products sales yielded only a low sales volume. The low sales
volume and margins on the systems sales did not justify expenditures on their
continued promotion, manufacture or distribution. In January 1996 the Company
promptly began the orderly termination of SOV's hairstyle and beauty imaging
systems business. SOV intends to sell only access disks (which have high
margins), and those ancillary products which are currently part of its
inventory, and will expend no additional monies in the development, marketing or
sales of existing or new SOV hairstyle and beauty imaging products. See
"Marketing and Sales."
Dycam Products and Services
Dycam introduced one of the first digital cameras in 1991 and today assembles
and markets several models of digital cameras. Dycam also provides extensive
software support for its cameras. These include basic applications that load,
display and save images for DOS, Windows, and MacIntosh computers. Dycam also
produces image editing software which has the ability to enlarge, reduce, frame
and tone the images produced by its cameras. Additionally, Dycam develops
unique software packages which allow various digital cameras to be utilized for
individualized client-mandated functions.
Current Products.
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The Modular Digital Cameras. Dycam's first modular digital camera, known as
the Gator, was developed as a joint effort among Dycam, IBM and the University
of Florida Research Foundation and introduced in September 1993. Since that
time, Dycam's modular digital camera designs have evolved considerably, and have
become the primary vehicle for Dycam's custom engineering work. Dycam's modular
digital cameras can be easily reconfigured or adapted for use with a variety of
optical systems, computer interfaces and power supplies, and are versatile
enough to stand alone, function as a component of a system, or attach to
notebook, tablet and desktop computers. As the camera is pointed at the desired
subject, a smaller-sized image is displayed on the computer's screen. For stand
alone applications, a digital to video subsystem and standard video monitor can
be used to preview images. When the user is satisfied
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with the image, he or she may take a full size picture. Dycam manufactures and
markets both gray scale and color versions of the modular camera which retail
for between $495 and $1,995.
The Model 3 Digital Cameras. The Model 3 was introduced in 1992, and
represents the second generation of gray-scale digital cameras developed by
Dycam. The Model 3XL, which has increased battery capacity and more image
memory than the Model 3, is capable of taking and storing up to 500 pictures on
a single battery charge. A color filter system is available for use with both
the Model 3 and Model 3XL, which provides 24 bit color images with very good
quality. The Model 3 sells for a list price of approximately $695 and the Model
3XL sells for a list price of approximately $895; such prices include the
camera, MacIntosh, DOS or Windows imaging software, host adapter, cables and
battery charger.
The Model 4 Digital Camera. The Model 4 was introduced in October 1993 and
represents the second generation of color digital camera developed by Dycam.
The Model 4 is pocket sized and self-contained. The Model 4 currently sells for
a list price of approximately $795, which includes the camera, Macintosh, DOS or
Windows imaging software, host adaptor, cables and battery charger. Dycam also
sells the Model 4XL digital camera, a variant of the Model 4 digital camera,
with additional features, including increased memory. The Model 4XL currently
sells for a list price of approximately $995.
The Model 10-C Camera. The Model 10-C was introduced in July 1995. A color
digital camera with a power zoom lens and removable memory cards, it is intended
to provide a solution for professional markets requiring the use of images with
documentation such as property appraisal, insurance claims and law enforcement.
The retail price of the basic camera is $999, and a variety of accessories are
offered. In the February 6, 1996 issue of PC Magazine, competing against
products such as the Kodak DC-40, Logitech Fotoman Pixtura, Casio QV-10, Chinon
ESC-3000, and Apple Quicktake 150, the Dycam Model 10-C won the prestigious PC
Magazine Editors Choice award for digital cameras selling at less than $1,000.
Although Dycam continues to sell the Model 10-C, the Company is actively
searching for a follow on product to serve this market segment.
Accessory Products. Dycam continues to offer a variety of accessory products
designed to fulfill the needs of the digital photographer. These products
include flash memory cards, carrying cases, editing software, portable power
supplies, cable adapters, a portable desk stand which connects the camera to the
host computer, and a complement of lenses. The lenses range in price from $89
for a wide angle or telephoto lens to $159 for a super close-up lens kit which
includes 3 lenses.
Product Development Activities. Dycam's product development activities are
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centered around the development of more highly integrated standard and custom
cameras, as well as lower cost cameras. Dycam is currently working on the
development of the following products:
Enhanced Modular Camera. Since the first quarter of 1995, Dycam has devoted
its primary product development activities to software enhancements, custom
versions of the existing products, and the development of higher resolution
models. Certain versions of this camera have been completed, while others
remain in development. Dycam expects that cameras in this line will retail for
between $695 and $1,995, depending on the camera's configuration. Development
of a color version of the 640 X 480 modular camera is expected to be completed
in the second half of 1997, and higher resolution grayscale and color versions
are in the planning stages.
Model 5 and Model 6 Cameras. During 1996, Dycam continued the development of
the next generation of cameras, the Model 5 gray-scale camera and the Model 6
color camera. These cameras are intended to offer a higher level of component
integration, a lower level of power consumption and resolution
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which is comparable to the Model 3 and Model 4 cameras. During the fourth
quarter of 1996, Dycam consolidated the development of these cameras with the
Model 5v and Model 6v platform cameras.
Model 5v and Model 6v Cameras. During 1996 Dycam continued development of
enhanced versions of the Model 5 and Model 6 camera platforms to include video
output, allowing images captured by these cameras to be directly displayed on a
television or video monitor. Images (including real time images) can be
captured and displayed anywhere that a television or video monitor is available,
with no need for a host computer. Additionally, the images can be stored either
on digital or video recording media. This camera platform is designed for
general purpose and specialty applications, including security or surveillance
purposes, that require both digital and video output capability. Dycam
anticipates that the development of certain specialized versions of these
cameras will be completed in 1997.
PCMCIA Camera. Dycam is researching the feasibility of developing a camera
which can attach to mobile computers via a PCMCIA card. The PCMCIA card was
established by an industry association, the Personal Computer Memory Card
International Association, to provide a universal slot for optional functions on
mobile computers, including connectivity, additional memory, modems and other
purposes.
Model 7v and Model 8v Cameras. The battery powered Model 7v grayscale and
Model 8v color cameras will feature the integration and improved performance of
the Model 5v and Model 6v line but will use the enhanced CCD chips currently
being developed for use in the modular camera platform. Dycam cannot predict
when Model 7v and Model 8v cameras will be available.
ADC Cameras. During 1995, Dycam developed a specialized digital camera
(Agricultural Digital Camera or ADC) and supporting software combination which
allows the user to perform visible and near visible light spectrum band ratio
analysis, an emerging science for determining the relative health of vegetation
and for improving the management of water resources, pesticides, and fertilizers
with agricultural crops. The ADC product was the result of ongoing product
development and research activity with the United States Department of
Agriculture ("USDA") and certain Universities.
Multi-detector cameras. During 1996 Dycam developed a three detector (3CCD)
optical assembly for use with its modular digital camera platforms. The
addition of this capability to the modular camera platforms has the potential to
expand the applications served by Dycam's custom products, particularly where
multi-spectral or high quality digital imaging is required. Dycam is currently
conducting field trials of multi-detector digital cameras with certain customers
and anticipates that development of a platform suitable for industrial or
scientific imaging will be completed in the first half of 1997.
Custom Services. In 1994 and the early part of 1995, Dycam shifted its focus
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away from the pursuit of custom and contract engineering projects towards direct
camera sales, and Dycam's camera sales increased during both 1994 and 1995. In
1996, Dycam continued to sell standard camera products, and sales again
increased. Dycam, however, believes that its primary strength lies in its
ability to facilitate the use of both standard and custom digital cameras in a
wide range of digital imaging applications. This is often accomplished by
providing expertise and engineering services to parties who desire additional
features, functions and modifications to existing camera designs. Dycam has
focused its custom design work on customers who have the potential to develop
new markets, or where the application yields technology that Dycam's management
believes has long-term value. Dycam is currently engaged in custom project work
for a variety of customers. Dycam has helped to develop a digital camera and
imaging system for FYI, a subsidiary of the Company, which is designed to be
used for taking pictures of newborn babies. This product is a dedicated digital
camera system designed for use in hospital environments, which produces digital
images for transfer to a remote production site. This system allows the
system's operators to rapidly
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and efficiently produce customized, text enhanced images on high quality color
photographic paper. See "Certain Relationships and Related Party Transactions."
FYI Products
Portraits.
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FYI's primary products are photographic portraits of newborn infants taken
while the infant is still in the hospital. FYI currently offers four main
packages of portraits, which range in price from $21.95 to $54.95. Each package
features a varied selection of items which may include 5" x 7" photos, 3.5" x 5"
photos, wallet-size photos, postcards, a BabySafe (described below) booklet with
I.D. photo, and/or a "Celebration of Life" certificate. In addition, FYI offers
personalized birth announcements (at typical prices of eight for $14.95) which
can be customized with the infant's photo and a message from the parents, and
customized postcards (at a typical price of eight for $12.95).
BabySafe.
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BabySafe is a photographic identification program developed by FYI. Newborn
infants in most hospitals which FYI serves are photographed with FYI's digital
camera and such infants' photographic image is stored in the FYI electronic
archive system. When and if necessary, with the parents' authorization, the
image of the infant can be made immediately available to the appropriate
authorities. FYI provides this service to interested parents at most hospitals
which FYI serves, regardless of whether they purchase an FYI photo package.
SSI
SSI was established in April 1994 to facilitate the sale of franchises for
the operation of SOV Video-Maker Systems. SSI sold no franchises after January
1995. In early 1996 the Company terminated SSI's operations.
Manufacturing and Electronic Imaging Processing
SOV. In connection with the termination of the SOV hairstyle and beauty
---
imaging business, the Company has terminated the employment of all employees
involved in the assembly, marketing and sales of such systems. The Company does
not intend to manufacture hairstyle or beauty imaging systems in the future.
Dycam. Dycam relies on outside electronic subassembly manufacturers to
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perform the majority of the subassembly work related to its camera. Currently,
this electronic subassembly is conducted by a manufacturer located near Dycam's
headquarters. Dycam, however, believes that there are several manufacturers
capable of performing this function. Dycam's manufacturing operations consist
of final assembly (including the integration of proprietary software), testing
and quality control. The majority of the components used in the Dycam cameras
are purchased from outside vendors. Certain digital camera components and
assemblies used by Dycam, including standard digital cameras private labeled for
Dycam, are sole sourced and must be ordered up to four months in advance to
assure timely delivery. A strategic inventory of such components and assemblies
is maintained by Dycam, however, any disruptions in delivery or in the
relationships with suppliers of such components could cause substantial delays
in Dycam's camera production activities. Dycam believes that its relations with
its strategic suppliers are good.
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FYI.
---
Camera Assembly. FYI relies upon Dycam and third party manufacturers to
perform the electronic subassembly of its cameras and fabricate the FYI system
housings. Final assembly, testing and quality control inspections of the FYI
system are performed by Dycam. With the exception of certain proprietary
components for which FYI owns all necessary molds and tools, all components used
in the FYI System are off-the-shelf components for which there are multiple
sources of supply. FYI's equipment meets relevant FCC certification Class A
Device standards, and ETL (Electronic Testing Labs, Inc.) standards, which are
equivalent to UL (Underwriters Laboratory) and ANSI (American National Standards
Institute) standards and complies with local regulations regarding safety
standards for electrical equipment in a hospital environment.
Image Processing. The photographic images which form the basis of FYI's
products are taken at hospital rooms and nurseries and then transmitted to FYI's
Newbury Park, California facilities for processing. The image processing
facility (the "Facility") is highly automated and currently operates 7 days a
week, up to 24 hours per day. The principal items of equipment used in the
Facility are powerful personal computers which are linked with the modems and
data storage equipment required for electronic image processing. The Facility's
hardware equipment is assembled from off-the-shelf systems which are readily
available at reasonable cost. The Facility has the ability to expand its
production capacity at any time by adding additional hardware equipment. The
software used in the Facility, which handles not only image processing but also
supports FYI's accounting department, was developed by FYI's in-house
engineering team. The software allows the on-site hospital camera to transmit
to the Facility's central computer system all data necessary for the service
technicians to receive and manipulate the images necessary to produce FYI's
finished photographic product, store these images in the archival system, and
interface with FYI's accounting department.
Marketing and Sales
SOV. In connection with the termination of the SOV imaging systems business,
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the Company has ceased all marketing and sales efforts related to SOV's
hairstyle and beauty imaging systems and terminated the employment of all
employees involved in the marketing and sales of such systems.
Dycam Digital Cameras. Historically, Dycam has focused its marketing efforts
---------------------
on licensing its technology to third parties and, to a lesser extent, on direct
sales of its cameras. As a consequence of the monies raised in the Dycam
Offering, during the second half of 1994 Dycam greatly expanded its direct sales
marketing efforts. Dycam anticipated that it would be able to sell various
standardized camera products to those industries which require a high volume of
photographic documentation (i.e., real estate appraisal, law enforcement,
insurance claims adjustment, oil and gas exploration and government). To that
end, Dycam contacted independent software developers and value added resellers
who service those industries to help determine the imaging needs and special
requirements of such industries. As a consequence of such contacts, Dycam
developed its Model 3XL and model 4XL cameras to service the needs of the real
estate appraisal industry. During the final quarter of 1994, Dycam found that,
although its new marketing strategy was generating interest in its products,
only modest sales were being achieved. After reviewing its sales performance,
Dycam determined that, in most cases, the targeted industries are not yet
technologically mature enough to absorb Dycam's products on a wholesale basis
because such absorption requires extensive training and additional computer
technology. In light of such determination, Dycam elected to reorient its
marketing strategy and to de-emphasize internally developed standard products in
favor of purchased standard products wherever possible. To this end, in July
1995, Dycam announced the availability of the Model 10-C, a 640 X 480 color
digital camera with power zoom lens and removable memory cards. This product,
built to Dycam's specifications by a major camera manufacturer, is intended to
provide a solution
9
<PAGE>
for the professional markets requiring the use of images with documentation such
as property appraisal, insurance claims, and law enforcement. The Model 10-C
has been well received. During 1996 approximately 35 new digital cameras were
introduced to the business professional and consumer markets, and several large
multi-national consumer electronics and photographic products companies
introduced their first digital cameras. Dycam continues to believe that, where
a clear cost and performance advantage can be shown, many customers within the
targeted industries will prefer Dycam branded products. However, in order to
economically provide a range of digital camera products suitable for specific
industry applications, Dycam has expanded its support for the resale of digital
camera products manufactured and branded by third parties such as Kodak and
Sony. Dycam continues to use the knowledge gained in 1995 and 1996 to pin-point
specific companies which may require Dycam's specialty services. Although Dycam
will continue to provide standard products and expects such standard product
sales to grow, its internal development resources will be largely focused on the
provision of specialty imaging solutions.
Domestic Market. During 1995, Dycam's direct sales of cameras and other
products accounted for approximately $1,673,000 in revenues (approximately 96%
of Dycam's total revenues), an increase of 47% over direct sales of $1,140,000
in 1994. Dycam attributes this growth in sales to the general emergence of a
market for digital cameras. Dycam currently offers for sale the Model 3, Model
3XL, Model 4, Model 4XL, Model 10-C, and modular cameras. Dycam has sold
approximately 8,000 digital cameras since the introduction of its initial
digital camera. In addition to its direct marketing efforts, Dycam also sells
its camera products through resellers and value added resellers (such as The
Programmers Shop, a technical mail order catalog for scientists and engineers).
During 1995, Dycam performed custom engineering work for several customers,
which resulted in revenues of $34,000 (approximately 2% of Dycam's total
revenues), a decrease of 90% compared to custom engineering revenues of $340,000
in 1994. In 1994, and in the early part of 1995, Dycam shifted its focus away
from the pursuit of custom and contract engineering projects towards direct
camera sales.
Additionally, Dycam licensed the right to use its technology to Logitech and
FYI. Under its arrangement with Logitech, Dycam granted Logitech the
nonexclusive right to manufacture and sell digital cameras utilizing Dycam's
technology. The camera marketed by Logitech as the Fotoman Plus was Logitech's
version of Dycam's Model 3 camera. The arrangement provided for certain up-
front royalty payments and continuing royalties equal to .5% of sales. For the
year ended December 31, 1995, Dycam had revenues of approximately $9,000.
Logitech has informed Dycam that it has ceased production of the Fotoman Plus
and as a consequence Dycam's royalty stream will cease as soon as Logitech's
remaining inventory is sold. In the second quarter of 1995, Dycam entered into
an agreement with FYI relating to the digital camera used in FYI's operations.
Under its arrangement with FYI, Dycam is to receive revenues from camera sales
to FYI, as well as a royalty of 7.5% of FYI's sales. At the closing of the FYI
Sale, FYI and Dycam will terminate their existing contractual relationships and
Dycam will enter into a Dycam Master Agreement with Hasco. See "Certain
Relationships and Related Party Transactions."
International Markets. During 1995, Dycam's international sales accounted
for approximately $205,000 (approximately 12% of Dycam's total revenues).
International sales have resulted from OEM agreements between Dycam and computer
industry resellers located in Australia, Germany, Japan, Sweden, Denmark, and
the United Kingdom. Pursuant to these agreements, the resellers purchase
Dycam's products at a substantial discount and have no minimum sales
requirements.
Forever Yours, Inc. FYI's first sales occurred in March 1995. Effective
-------------------
January 31, 1997, the Company and FYI executed definitive agreements to sell
substantially all of the assets, together with the assumption of certain
liabilities, of FYI to Hasco. Hasco operates First Foto, a competitor of FYI in
the hospital newborn infant photographic business. The FYI Sale is expected to
close in April 1997, subject to the approval of the Company's stockholders and
other customary conditions.
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Direct Sales Strategy. FYI employs a multi-pronged marketing strategy to
solicit hospital accounts in the United States. FYI delivers its marketing
materials to industry decision makers through national and regional trade shows,
direct mail, and personal sales visits at hospitals throughout the country.
FYI's marketing materials emphasize FYI's status as the first new major
competitor in the industry in roughly three decades and the speed and cost
advantages offered by FYI's digital technology. As of January 1996, FYI sales
representatives had personally contacted more than 1,200 hospitals and had
exposed more than 2,000 hospitals to FYI through trade show opportunities. The
baby portrait industry currently serves more than 3,000 hospitals. Because
industry contracts generally have a maximum term of 36 months, FYI believes in
excess of as many as 1,000 hospitals annually may be able to switch to a new
service provider if supplied with the appropriate information and opportunity.
Acquisition Strategy. In addition to its direct marketing strategy, FYI
believes that its business can be expanded through the acquisition of small to
medium size firms currently engaged in the newborn baby portrait industry. As
part of its initial marketing efforts FYI acquired the right to install its
systems in those hospitals which had contractual relationships with a baby photo
service operated by Jack West ("Jack West Service"). This arrangement provides
FYI with access to six hospitals in exchange for an ongoing commission to the
Jack West Service.
SSI. SSI has not sold any franchises since January 1995, and its Uniform
---
Franchise Operating Circular has not been updated. Since the last quarter of
1995 it has had no employees. In January 1996 the Company decided to eliminate
SSI and has commenced the final wind-down of its operations.
Advertising and Promotion
SOV. During the year ended December 31, 1994, the Company promoted the sale
---
of imaging systems through advertising in trade publications, attendance at
trade shows and telemarketing. During 1995, SOV made substantial reductions in
its advertising and promotional expenditures. In connection with the wind-down
of SOV's hairstyle and beauty imaging systems operations, the Company has
eliminated all remaining employees involved in the advertising and promotion of
SOV's hairstyle and beauty imaging systems.
Dycam. Historically, Dycam relied on word of mouth advertising, press
-----
releases, editorials, and reviews in trade publications to promote its products.
During the second half of 1994, Dycam substantially expanded its advertising and
promotional activities. These expanded efforts were targeted towards potential
customers of the Model 3 and Model 4 in those industries in which Dycam
perceived the greatest need for the products (e.g., property appraisal and
insurance claims). Dycam advertised its products in various trade journals and
government publications. Dycam also made substantial revisions to its
promotional materials. During 1995, Dycam attended four trade shows, including
COMDEX, the largest domestic computer trade fair. Dycam's products were also
represented at CeBit, the largest international computer industry trade fair, by
Dycam's German OEM reseller. Dycam expended approximately $102,000 on
advertising and promotional activities in 1995 (32% decrease when compared to
advertising and promotional expenditures in 1994). Dycam's current advertising
and promotional strategy is directed towards identifying and developing
relationships with potential customers who have a need for specific digital
imaging solutions, although recent sales of the standard products has indicated
that sales increases may be generated by advertising in selected wide
distribution computer publications, which may be due to the general emergence of
the digital camera market and increased consumer awareness of the technology.
FYI. FYI promotes its system and services via attendance at trade shows,
---
promotional visits to hospitals, and follow-up marketing presentations and
demonstrations. The Company has produced several brochures which explain the
FYI program in detail and include color photographs of the digital camera
11
<PAGE>
system and full-color examples of customized infant portraits. Certain of
FYI's promotional materials have been produced in both English and Spanish
language versions.
SSI. The Company promoted SSI via advertising in magazines oriented towards
---
entrepreneurs and by franchise trade shows. In January 1996, the Company began
the orderly termination of SSI's operations.
Training, Customer Support and Product Service
SOV. All systems purchased from SOV included a training manual or tape.
---
Since the third quarter of 1995 the majority of the systems sold by SOV included
a 90 day parts and labor standard limited warranty. Prior to that time, systems
sold by SOV included a one-year standard limited warranty. In connection with
the wind-down of SOV's hairstyle and beauty imaging systems operations, SOV
eliminated all warranty services relating to its products in 1996.
Dycam. Dycam is committed to providing timely, high quality technical
-----
support, which Dycam believes is an important component of maintaining customer
satisfaction. Although Dycam offers no formal training in the use of its
cameras, one of Dycam's employees, who is a trained software engineer, devotes
his time to customer support related activities, including telephonic support
relating to camera operation. Each camera sold by Dycam comes with a 180-365
day standard limited warranty. Dycam attempts to complete all repairs or send
out replacement products within 72 hours of the receipt of the defective product
by Dycam. The Model 3, 3XL, 4, and 4XL camera batteries require replacement
approximately every 24-36 months.
FYI. FYI's staff continually monitors and evaluates camera performance and
---
recommends service action when required. Many simple camera service functions
(such as an exchange of the camera head) can be performed by hospital staff.
More complex maintenance or repair functions are performed by Dycam, the
manufacturer of the FYI Camera System, which has entered into a long-term
production and service relationship agreement with FYI which should assure
continuing production of the system and availability of field service and
support. At the closing of the FYI Sale, FYI and Dycam will terminate their
existing contractual relationships and Dycam will enter into a Dycam Master
Agreement with Hasco. See "Certain Relationships and Related Party
Transactions."
Governmental Regulation
Dycam. Dycam cameras are covered by a Federal Communications Commission
-----
Grant of Equipment Authorization for Class A and Class B Computing Device
Peripherals which pertains to radio emissions from electronic products.
Applications for such grants are made on a voluntary basis.
FYI. FYI does not believe that its business is subject to a material level
---
of governmental regulation. FYI's equipment meets relevant FCC certification
Class A Device standards, and Electronic Testing Labs, Inc. standards, which are
equivalent to UL (Underwriter's Laboratory) and ANSI (American National
Standards Institute) standards, and complies with local regulations regarding
safety standards for electrical equipment in the hospital environment.
SSI. In implementing its 1994 franchising strategy and its concurrent
---
establishment of SSI, the Company became subject to Federal Trade Commission
("FTC") regulations which regulate the offer and sale of franchises and business
opportunities. The FTC's Trade Regulation Rule on Franchising (the "FTC Rule")
requires that the Company furnish prospective franchisees with an offering
circular containing information proscribed by the FTC Rule. The Company
prepared an offering circular, which the Company believed was in compliance with
the FTC Rule, for delivery to prospective purchasers of the marketing
12
<PAGE>
program. SSI's offering circular has not been updated and SSI has not sold any
franchises since the first quarter of 1995. In January 1996, the Company began
the orderly termination of SSI's operations.
Patents and Proprietary Rights
SOV. The Company has been issued a registered trademark on the names "Styles
---
on Video" and "Tryuson" and has applied for such protection for the name
"Cosmo." No assurance can be given that such trademark will be issued. The
Company intends to take all steps necessary to cause any trademarks it is issued
to have a perpetual existence, although the Company believes any such trademarks
have limited value.
Dycam. Dycam relies on a combination of patent, copyright and trademark
-----
protection and non-disclosure agreements to protect its proprietary rights.
Dycam is the assignee of United States Patent 5,249,093, which covers certain
technologies related to filmless digital cameras with selective image
compression. In addition, Dycam has filed applications for several patents on
the design of its camera, including applications covering camera flash and
sequential color technologies; however, no assurance can be given that any such
patents will be issued. Dycam also has domestic and international protection
under copyright law for certain of the specialized components and software
included in its cameras. Dycam regards its non-patented and non-copyrighted
technology and know-how related to its products as proprietary trade secrets and
attempts to protect them with confidentiality agreements with its employees and
confidentiality provisions in its employee handbook and its various agreements
with licensees and customers. Despite these precautions, however, it may be
possible for third parties to copy aspects of Dycam's products or to obtain and
use without authorization information which Dycam regards as proprietary. The
Company believes that the technical and creative skills and expertise of Dycam's
technical staff and marketing and management personnel are more critical to
Dycam's success than patent, copyright or trademark protection.
FYI. FYI has applied for a trademark for the name "Forever Yours" and the
---
"Forever Yours" design, which features a stork with a baby portrait suspended
from its beak. FYI has been challenged on its trademark application by Hasco,
its largest competitor, which claims to use the name Forever Yours in connection
with a baby photo project in Canada. The terms of the FYI Sale to Hasco provide
that upon closing this claim will be dismissed. In addition, FYI has received a
trademark for the name "BabySafe", its unique archiving baby imaging system.
FYI has also applied for a patent for its digital camera system for infant
photography; however, no assurance can be given that such patent will be issued.
FYI regards its non-patented and non-copyrighted technology and know-how related
to its products as proprietary trade secrets and attempts to protect them with
confidentiality agreements with its employees and confidentiality provisions in
its employee handbook and its various agreements with licensees and customers.
Despite these precautions, however, it may be possible for third parties to copy
aspects of FYI's products or, without authorization, to obtain and use
information which FYI regards as proprietary. FYI believes that the technical
and creative skills and expertise of its technical staff and marketing and
management personnel are more critical to its success than patent, copyright or
trademark protection.
Competition
Dycam. Dycam faces substantial competition in the design, manufacture and
-----
sale of digital cameras. The market for digital photography products is only
beginning to emerge and Dycam expects that a number of competitors with
substantially greater financial, technical, distribution and other resources
will attempt to dominate the various segments of this market. Dycam believes
that the digital photography market will be divided into three basic segments:
(i) custom products (ii) document quality and consumer products and (iii)
professional products.
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<PAGE>
The custom products market segment consists of products which are custom
engineered to meet the unique image capturing needs of specific clients. Dycam
believes that it is the only major manufacturer of digital cameras which devotes
and intends to continue to devote a substantial portion of its resources to the
production of custom products and that it is the only company in the marketplace
today which is dedicated only to marketing digital cameras and providing digital
imaging services. Dycam believes that its experience in custom designing
cameras and imaging solutions for a variety of applications will allow it to
compete effectively in this market segment. Nevertheless, there can be no
assurance that the other major digital camera companies will not establish
custom products divisions or that no other specialty camera companies will
emerge.
The document quality and consumer products (standard products) market segment
consists of products which produce images which offer substantially less
resolution than the images produced by traditional film cameras. Nevertheless,
the images captured by products in this market segment are sufficiently legible
to be used in lieu of traditional film photographs for documentation (e.g.,
appraisal reports, insurance adjusters' reports, personnel records, referring
physician reports, newsletters and general databasing) and snap-shot purposes,
and total industry sales of products designed to serve these markets increased
substantially in 1996. Dycam's major competitors in this market segment include
Apple, Canon, Kodak, Casio, Fuji, Olympus, Sony, Epson and Ricoh, all of which
announced new products in this segment during 1996. Although Dycam's Model 10-C
cameras, which compete in this market, have been highly rated in independent
editorial reviews, there can be no assurance that competitive pressures will not
result in further price reductions or other developments in the market segments
in which Dycam competes. Consequently, there can be no assurance that Dycam
will continue to compete effectively or that its products under development will
continue to be competitive in this market segment. In order to continue to
effectively serve the standard products market for digital cameras, Dycam has
determined that it is in the best interests of the Company to either private
label commercially available products or resell products manufactured by third
parties.
The professional products market segment consists of products which produce
images with resolution comparable or superior to traditional film cameras. The
products in this category are primarily designed to meet the needs of
professional or studio photographers and currently includes Digital SLR products
from Kodak, Canon, Nikon, Fuji, Minolta, and Sony. Kodak's DCS series of
Professional Digital Cameras, which retail for $7,500 to $27,000 and are
currently used primarily by photojournalists and professional photographers, ar
capable of quickly capturing high resolution color images and are good examples
of this class of product. Digital Camera Backs such as those offered by Leaf
and Dicomed, attach to the back of a large format camera and produce extremely
high resolution color images; however, due to the lengthy image capture time
required by these devices they are only useful for photographing still images.
While Dycam does not presently intend to internally develop products to compete
in this market segment, it will continue to add value to the above products and
others to satisfy business opportunities in the professional segment.
Although Dycam believes that digital photography is the wave of the future,
digital cameras today compete with film photography, camcorders, digital
camcorders, and still video cameras. Current competition also comes from
alternative techniques for capturing an image into the computer such as flatbed
scanners and hand scanners. Scanners can be expensive and complicated to use;
however, they are capable of producing very high quality images. A "frame
grabber" or "digitizer" is a board that may be installed in a computer to
digitize a video image produced by a camcorder or still video camera. The
resulting image is typically of relatively poor quality, however inexpensive
versions sell for less than $200. Digital camcorders offer a combination of
motion pictures and the capability of recording digital stills on analog tape,
or connecting directly to a computer, but they are expensive, physically large,
and complex when compared to digital still cameras. Kodak produces the Kodak
Photo CD system which provides a mechanism for converting analog images (film)
into digital images for storage on compact discs. Dycam believes that
14
<PAGE>
the Photo CD technology presents too many obstacles for the typical consumer
because it requires not only the time and expense of film processing, but the
further problem of locating a photo processor that has the expensive equipment
required to copy the images to the CD. It is, however, a good solution for the
commercial distribution of digital images, and business use has been increasing.
Despite the various disadvantages of these alternative methods of image capture,
there can be no guarantee that digital photography will gain widespread consumer
acceptance.
FYI. The hospital newborn portrait industry is currently dominated by three
---
large firms, each of which has a national presence and both a substantially
greater number of hospital installations and a longer history in the industry
than FYI. These national firms are Hasco of St. Louis which serves hospitals in
the United States and Canada with estimated total annual births in excess of 2.5
million, Hospital Baby Portraits, Inc. of Port Chester, NY, which serves
hospitals with estimated total annual births of approximately 400,000, and
Hospital Baby Picture Service of Aliquippa, PA, which serves hospitals with
total annual births of approximately 200,000. Approximately 50 smaller firms
across the country serve one or more hospitals in their local community.
In the hospital newborn photo industry, a hospital typically enters into an
exclusive photo service agreement with one portrait company. The majority of
such contracts are for a 12 month period, although some may extend up to 36
months or more. Most such agreements contain automatic renewal clauses.
In most instances, the three larger baby portrait services offer mothers a
standard package consisting of pictures of various sizes which is mailed to the
mother's home within two to three weeks after the picture is taken. The smaller
firms often offer a more individualized range of packages. The portrait firm
typically pays the hospital or its auxiliary a commission of approximately 20
percent to 40 percent on the net sales generated by the portrait program.
FYI believes that all of the other firms in the industry are primarily
utilizing traditional photographic methods. In many instances, the camera
equipment being used by firms in the industry today is the same type of
equipment that was used in the 1960s. In contrast, FYI uses digital cameras
which enable the photographs to be transmitted immediately via high-speed modem
from the hospital room or nursery to FYI's image processing lab, thus allowing
FYI to deliver its products within 48 hours of the image having been taken.
Hasco, FYI's primary competitor, has announced it has entered into a purchasing
agreement with Kodak to develop digital systems in competition with FYI. Hasco
has introduced digital camera equipment on a limited basis at hospitals it
serves.
FYI believes that its competitive position within the hospital newborn
portrait industry is determined as much by trends in the general retail
photography industry as it is by the actions of any of its competitors.
Specifically, two developments have altered the retail consumer's perception of
the photography market in recent years: first, as high quality technically
superior cameras have become more widely accessible and easier to use by the
novice photographer, individual consumers have acquired greater confidence in
their own ability to capture satisfactory photographs without relying on a
professional photographer; and second, the widespread proliferation of 30-minute
or one-hour retail developing facilities has, FYI believes, drastically reduced
the amount of time that the typical consumer is willing to wait to view the
results of any photograph, whether taken personally or professionally.
Accordingly, FYI believes that the ability of parents to bring their own camera
into the hospital and take relatively satisfactory photographs of their infant,
which they can view the same day, has rendered the prospect of paying roughly
$30 to an infant portrait service for the right to receive similar photos two to
three weeks later significantly less attractive. FYI believes that these trends
highlight the importance of a two to three day turnaround it is able to offer to
parents and also mean that the customized options made possible by its digital
technology represent an important element of added value which the consumer is
unable to provide on his or her own.
15
<PAGE>
FYI believes that its digital photography system provides it with several
other competitive advantages, which include the following: the system's
simplicity enables parents to become involved in the photography process (in
some cases actually taking the pictures themselves); and because hospital staff
are able to immediately see the results of the photography, they are likely to
be more involved in and committed to the sale of the photos. The FYI program
also includes two marketing innovations: "Speedy's Card Shoppe," a section in
the order catalog offering custom birth announcements, and post cards, featuring
the newborn baby's image surrounded by unique designs and/or customized messages
from the parents; and the "BabySafe" program, which stores newborn images for
one year and provides a national database of baby images for use by law
enforcement authorities should the need arise.
While FYI believes that its digital photography process affords it
competitive advantages allowing it to offer significantly faster delivery and a
greater variety of customized imprinting options, there can be no assurance that
FYI's competitors or a new entrant into the industry will not adopt the same
technology and thereby reduce or eliminate FYI's digital technology advantages,
or that FYI will be able to successfully exploit its opportunities. FYI,
however, believes that its competitive advantage is dependent on its commitment
to provide superior service to the hospitals it serves, and to provide
innovative competitively priced products to its photographic customers, which
includes but is not solely dependent on its digital technology.
Employees
As of January 31, 1997, the Company had sixty-two full-time employees. Of
this number, one was employed by SOV, twenty were employed by Dycam and forty-
one were employed by FYI. In addition, FYI had eighty-eight part-time
employees. Neither the Company nor any of its subsidiaries has had a work
stoppage and no employees are represented by a collective bargaining agreement.
The Company believes that its relations with its employees are good.
16
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
In May 1995, the Company (excluding Dycam) moved its principal executive
offices and manufacturing facilities to 667 Rancho Conejo Boulevard, Newbury
Park, California 91320. The new premises are approximately 12,000 square feet
and are held under a lease which expires on May 31, 2000. The rental payments
under this lease are approximately $8,500 per month. From January 1996 through
April, 1996, FYI maintained its executive offices to 101 Hodencamp Road,
Thousand Oaks, California 91360, pursuant to a month-to-month lease with rental
payments of approximately $1,000 per month, after which time it relocated its
executive offices to 667 Rancho Conejo Boulevard, Newbury Park, CA 91320. See
"Certain Relationships and Related Party Transactions". The Company believes
that its facilities are sufficient for its current needs. For the year ended
December 31, 1995, the Company (excluding Dycam) had facilities lease costs of
approximately $159,000.
In April 1995, Dycam moved its principal executive offices and manufacturing
facilities to 9414 Eton Avenue, Chatsworth, California 91311. The new premises
are approximately 15,000 square feet and are held under a lease which expires on
January 31, 1998. The rental payments under this lease are approximately $7,000
per month. Dycam believes that its new premises are sufficient for its current
needs. For the year ended December 31, 1995, Dycam had lease costs of
approximately $66,000.
Effective January 31, 1997, the Company and FYI executed definitive
agreements with Hasco International, Inc. ("Hasco") to sell substantially all of
the net assets of FYI to Hasco (the "FYI Sale"). In connection with the FYI
Sale, Hasco and FYI will enter into a sublease pursuant to which Hasco will
sublet FYI's principal operating facility in Newbury Park, California form the
date of the closing through December 31, 1998. The rental payments under the
sublease will be approximately equal to FYI's occupancy costs under the primary
lease agreement during that period. The primary lease agreement expires May 31,
2000. The Company intends either to negotiate an early termination of the lease
with the landlord or to seek a subtenant for the remaining balance of the lease.
17
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ITEM 3. LEGAL PROCEEDINGS.
During 1995, the Company was party to the following legal proceedings:
(a) Jack Kassindorf v. Styles On Video, Inc., et al., U.S.D.C. (C.D. Ca),
-----------------------------------------------
Case No. 94-8342 ER (Ex) (the "Kassindorf" lawsuit);
----------
Lynn Robbins v. Styles On Video, Inc., et al., Case No. 94-8362 SVW (Shx)
--------------------------------------------
(the "Robbins" lawsuit) (RDR, KMD);
-------
Donald & Co. Securities, Inc. v. Styles On Video, Inc., et al. U.S.D.C.
-------------------------------------------------------------
(C.D. Ca), Case No. 94-8637 RG (Jrx) (the "Donald" lawsuit) (RDR, KMD);
------
Dennis Ratner v. Styles On Video, Inc. et al. U.S.D.C. (C.D. Ca), Case
--------------------------------------------
No. 94-8719, JGD (Kx) (The "Ratner" lawsuit), (consolidated under Jack
------ ----
Kassindorf v. Styles On Video, Inc., et al., Case No. 94-8342 ER (Ex)
------------------------------------------
(the "Consolidated Class Action") (RDR, KMD); and
Neil Cohen v. Guy De Vreese, et al., U.S.D.C. (C.D. Ca), Case No. 95-1980
-----------------------------------
ABC (Jrx) (the "Cohen" lawsuit) (RDR, KMD).
The Kassindorf, Robbins, Donald, and Ratner suits were filed on December 13,
---------- ------- ------ ------
14, 27 and 30, 1994, respectively. The plaintiffs thereafter, on or about March
17, 1995, filed a Consolidated First Amended Complaint For Violations of the
Federal Securities Laws. On March 28, 1995, plaintiff Neil Cohen filed a
derivative action.
The suits alleged various claims based in part on violations of the federal
securities laws by the Company and/or certain of its officers and directors. In
the Consolidated Class Action, the named plaintiffs alleged that the Company and
the defendant officers and directors violated Section 10(a) of the Securities
Exchange Act and Rule 10b-5, by issuing false and misleading statements that
portrayed the Company's financial condition and future prospects in a falsely
optimistic manner. Plaintiffs further alleged that the class they purport to
represent -- the purchasers of the Company's stock during the class period --
were damaged as a result of the falsely optimistic statements. The plaintiffs
sought an undetermined amount of damages on behalf of the class.
The suits were settled in April 1995, and the settlement was approved by the
U.S. District Court in July 1996. Pursuant to the terms of the final
settlement, the Company agreed to deliver to the plaintiff class warrants to
purchase 1,750,000 shares of the Company's common stock and a promissory note in
the principal amount of $250,000, payable in 3 equal installments over 12
months. As of August 31, 1996, the Company has not made any payments on the
obligation. The Company will not have sufficient authorized shares of Common
Stock to issue upon exercise of these warrants unless it obtains stockholder
approval of a reverse stock split. The exercise price of the warrants is $.075
per share. Also as part of the settlement, the Company's director and officer's
liability insurance carriers agreed to pay $2,250,000. In addition, Guy de
Vreese, the former Chairman and Chief Executive Officer of the Company,
surrendered 250,000 shares of the Company's common stock held by him and options
for 150,000 shares of the Company's common stock held by him. The shares
surrendered by Mr. de Vreese are to be distributed to the class plaintiffs and
the options have been canceled.
(b) Thomas D. Leaper v. Styles On Video, et al., Los Angeles County Superior
------------------------------------------
Court, Case No. BC 121801 (RDR, KMD)
18
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On February 10, 1995, Thomas D. Leaper ("Leaper") the Company's former Chief
Operating Officer and Chief Financial Officer, filed a complaint against SOV for
breach of contract, emotional distress and wrongful termination. The case was
dismissed in July 1996 concurrent with the settlement of Styles on Video, Inc.
---------------------
v. Kellogg & Andelson, et al.
- -----------------------------
(c) Durian Technologies, Inc., et al. v. Styles On Video, Inc., Los Angeles
----------------------------------------------------------
County Superior Court, Case No. BC 137544 (RDR, KMD)
On October 20, 1995, Durian Technologies, Inc. and Durian Finance
(collectively, "Durian") filed a complaint against SOV for breach of contract,
fraud and negligent representation in connection with financing arrangements
with Durian for the benefit of Styles and seeks an accounting and declaratory
relief. Durian also seeks an unspecified amount of damages. The Company
responded to the complaint in January 1996. In late 1996, the parties agreed to
a conditional settlement of this action, under the terms of which the action was
dismissed without prejudice and the plaintiffs received an option to obtain the
Company's interest in the "Try Us On System." The parties continue to discuss
this matter.
(d) Styles on Video, Inc., v. Kellogg & Andelson, et al., Los Angeles County
----------------------------------------------------
Superior Court, Case No. BC 142968
On January 22, 1996, the Company filed a suit against its former independent
accountants, the accounting firm of Kellogg & Andelson, along with individual
accountants James Walters, William Wall, Frederick Flax, and Thomas Leaper, who
also served as the Company's former Chief Operating Officer and Chief Financial
Officer. The suit asserted claims for professional negligence, breach of
contract and breach of fiduciary duty against these defendants arising out of
the services rendered by Kellogg & Andelson in connection with the Company's
1993 year-end audit and 1994 quarterly reports. The Company sought compensatory
damages in excess of $54 million, as well as punitive damages and injunctive
relief. The suit was settled and the settlement received final approval in July
1996. Pursuant to the settlement, the accounting firm paid $1,700,000 to the
Company.
(e) Forever Yours, Inc. v. Hasco, Inc., U.S.D.C. (C.D.Ca), Case No. 96-1696
----------------------------------
KMW (Jgx)
On March 8, 1996, FYI filed a suit against a competitor, Hasco, Inc. The
suit asserted claims for, among other things, unreasonable restraint of trade,
monopolistic practices, unfair competition, trade libel, and false and
misleading advertising. FYI sought compensatory damages relief in excess of $10
million, as well as punitive damages and injunctive relief. In the last quarter
of 1996, the suit was dismissed without prejudice and the parties entered into a
tolling agreement with respect to the statute of limitations. The terms of the
FYI Sale provide that upon closing this suit will be dismissed with prejudice.
(f) Agricultural Excess and Surplus Insurance Company (AESIC) v. Styles on
----------------------------------------------------------------------
Video, Inc.
- -----------
In 1996, a previous provider of the Company's excess director's and officer's
liability insurance filed a suit claiming that they are entitled to $1,000,000
of the $1,700,000 received by the Company in connection with the settlement of
Styles on Video, Inc. v. Kellogg & Andelson, et al. In October 1996, the
- ---------------------------------------------------
Company filed a cross-complaint alleging bad faith and seeking declaratory
relief. SOV intends to vigorously defend the suit.
(g) The Company is also a party to various other actions arising in the
ordinary course of business which, in the opinion of management, will not have a
material adverse impact on the Company's financial condition.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
During the last quarter of the Company's fiscal year ended December 31, 1994
and since that time, no matter was submitted to a vote of the security holders
of the Company.
20
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Commencing on April 8, 1993 the common stock of the Company was listed for
trading on the AMEX under the symbol "SOV." Trading of the Company's common
stock was halted on December 27, 1994, and has not resumed. On July 18, 1996,
the AMEX determined to remove the Company's common stock from listing and
registration thereon effective August 2, 1996. There is currently no active
public trading market for any outstanding security of the Company. The Company
has never paid a cash dividend on the Company's common stock. The following
table sets forth, for the periods indicated, the high and low closing prices of
the Company's common stock as reported by the AMEX:
<TABLE>
<CAPTION>
Fiscal 1994 HIGH(1) LOW(1)
----------- --------- --------
<S> <C> <C>
First Quarter $17.625 $12.250
Second Quarter 15.000 9.125
Third Quarter 13.125 8.875
Fourth Quarter (through December 27, 1994) 12.750 2.500
</TABLE>
(1) The Company effected a 3 for 2 stock split in the form of a stock dividend
on October 14, 1993. All stock prices have been adjusted to give effect to this
stock split as if it had occurred on April 8, 1993.
On December 27, 1994, the last day the Company's common stock traded on the
AMEX, the closing price for the Company's common stock as reported by the AMEX
was $2.81.
As of January 31, 1997, there were approximately 220 holders of record of the
Company's common stock.
The present policy of the Company is to retain earnings to provide funds for
use in its business. The Company has not paid cash dividends on its common
stock and does not anticipate that it will do so in the foreseeable future.
21
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS AND ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND THE
COMPANY'S CONTROL. SUCH FACTORS INCLUDE, AMONG OTHER THINGS, OVERALL ECONOMIC
CONDITIONS, THE IMPACT OF COMPETITION, DEVELOPMENTS WHICH MAY RENDER THE
COMPANY'S PRODUCTS AND SERVICES OBSOLETE OR LESS ATTRACTIVE, AND THE COMPANY'S
FINANCIAL CONSTRAINTS. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS AND
FINANCIAL CONDITION" BELOW.
IN FEBRUARY 1995, THERE WAS A COMPLETE CHANGE IN THE SENIOR MANAGEMENT AND KEY
ACCOUNTING PERSONNEL OF THE COMPANY. AS A CONSEQUENCE OF THIS CHANGE IN
PERSONNEL, CERTAIN INDIVIDUALS ARE NO LONGER AVAILABLE TO PROVIDE INFORMATION
WHICH THE COMPANY'S CURRENT MANAGEMENT BELIEVES MAY BE NECESSARY TO FULLY
EXPLAIN THE COMPANY'S ANNUAL OPERATING RESULTS FOR 1994. THE COMPANY'S
FINANCIAL POSITION AND RESULTS OF OPERATIONS AS OF DECEMBER 31, 1994 AND FOR THE
YEARS THEN ENDED ARE BASED UPON THE BEST INFORMATION WHICH WAS REASONABLY
AVAILABLE TO THE COMPANY'S CURRENT MANAGEMENT.
The Company was incorporated in May 1992 as a wholly-owned subsidiary of New
Image. From January 1, 1992 until the incorporation of the Company, the
Company's business was conducted by New Image. This business consisted
primarily of product development activities, the development of a marketing
strategy for the Company's original video imaging system, the SOV Video Maker
System, and the establishment of a marketing organization. On March 29, 1993,
New Image distributed all of the common stock of the Company held by it to its
stockholders (the "Distribution") on the basis of one share of common stock of
the Company for each five shares of New Image common stock held by a
stockholder. Immediately following the Distribution, the Company effected a
rights offering (the "Rights Offering") pursuant to which each Company
stockholder received, for each share of the Company's common stock held, the
right to purchase one share of the Company's common stock for $6.00 per share.
Upon completion of the Distribution and the Rights Offering, the Company became
a publicly owned company.
On October 14, 1993, the Company effected a 3 for 2 stock split in the form
of a stock dividend. The results for the year ended December 31, 1993 and all
subsequent periods reflect this stock split.
On February 7, 1994 the Company acquired all of the outstanding stock of
Dycam. In July 1994, the Company's ownership of Dycam was reduced to
approximately 61% as a result of the issuance by Dycam of 1,000,000 shares of
its common stock in connection with the completion of an underwritten rights
offering, and the issuance of 204,169 shares of Dycam common stock in connection
with the exercise of stock options.
On April 5, 1994, the Company purchased 80% of the outstanding stock of FYI
for cash consideration of $100,000. The 20% of FYI stock not purchased by the
Company was held by FYI's then-President until May 1996, at which time he
surrendered his entire 20% interest in FYI in exchange for a warrant certificate
issued by the Company.
In April 1994, the Company established SSI as a wholly-owned subsidiary.
The operations of Dycam, FYI and SSI are reflected in the results of the
Company's operations for 1994 from the dates of their respective acquisition or,
in the case of SSI, commencement of operations.
22
<PAGE>
Factors That May Affect Future Results and Financial Condition
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, without limitation, the
following factors:
Dependence on Third Party Financing. In November 1995, the Company entered
into a Note and Preferred Stock Purchase Agreement (the "1995 Agreement") with
International Digital Investors L.P. ("IDI") that provided the Company with $3
million of financing. In May 1996, the Company entered into a Note and
Preferred Stock Purchase Agreement with IDI (the "1996 Agreement") that provided
the Company with additional financing up to $1,250,000. Pursuant to the
agreements, the Company is subject to various restrictive covenants including
limitations on the incurrence of additional indebtedness, capital expenditures,
investments, transactions with affiliates, and consolidation merger and sale
actions. The Company must also satisfy certain financial tests during the terms
of the agreements including the maintenance of certain mandatory net worth and
earnings levels. The failure to achieve these levels constitutes an event of
default under the agreements. In the event the Company defaults, IDI has the
right to accelerate the Company's obligations under the agreements and seize and
liquidate substantially all of SOV's and FYI's major assets. At December 31,
1995 and 1996, the Company was not in compliance with certain of the financial
covenants, however, a waiver of these defaults was obtained from IDI. The
Company may require additional covenant relief in the future. There can be no
assurance that IDI will grant a waiver for any future noncompliance. If (a)
future defaults occur, (b) waivers are not obtained, (c) SOV's and/or FYI's
assets are taken in satisfaction of the amounts due pursuant to the IDI
financing, and (d) no excess remains, funds will not be available to meet SOV's
obligations, including, without limitation, the repayment of a $1,000,000 note
owed to Dycam.
From September 1996 through January 1997, the Company and FYI borrowed an
additional $927,000 from IDI pursuant to a Bridge Note that provided additional
financing up to $977,000.
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco. In January 1997, FYI borrowed $180,000 from Hasco
pursuant to the Loan Agreement whereby Hasco will lend to FYI up to a total of
$540,000 prior to the closing. The proceeds of the FYI sale, net of transaction
costs and satisfaction of FYI's obligations (excluding its indebtedness to IDI),
will not be sufficient to fully repay the Company's and FYI's obligations to
IDI, or to fully satisfy the Company's other liabilities to its creditors.
After the closing of the FYI Sale, IDI will continue to have a first priority
security interest in all remaining assets of the Company, including the
remaining net proceeds from the FYI sale, except for the second priority
position it holds on the shares of Dycam common stock owned by the Company, as
to which Dycam has a first priority security interest.
In order for the Company to continue its operations after the FYI sale, it
will be required to obtain additional financing from IDI or other sources, or
IDI will need to consent to postpone the repayments due from the Company and FYI
on all or part of the Company's and FYI's notes payable to IDI. Neither IDI nor
any other sources have indicated a willingness to loan additional funds to the
Company. Additionally, IDI has not indicated an intention to consent to the
postponement of the repayment it is entitled to on the Notes payable to IDI from
the Company and IDI.
Controlling Stockholder; Affiliated Party Transactions; Conflict of Interest.
Dycam became a wholly-owned subsidiary of SOV in February 1994. Immediately
following the sale of the shares of Dycam's common stock in a rights offering,
SOV owned approximately 61% of Dycam's common stock and remains in a position to
control the policies and operations of Dycam. SOV owns 100% of the common stock
of FYI and is in a position to control the policies and operations of FYI.
Certain officers and directors of SOV are directors and officers of Dycam and/or
FYI. SOV, Dycam and FYI have engaged in, and will continue
23
<PAGE>
to engage in, certain transactions with each other. See "Certain Relationships
and Related Party Transactions."
There are potential conflicts of interest inherent in such relationships and
transactions. The respective Boards of Directors of SOV and Dycam have
established a Policy Review Committee to review transactions between these
corporations. The purpose of the Policy Review Committee, which has advisory
authority only, is to review any transaction proposed to be entered into between
SOV and Dycam to determine whether a conflict of interest exists and the manner
in which any such conflict can be resolved. The Policy Review Committee then
makes a recommendation to each of the Boards of Directors as to the course of
action which should be taken. The Policy Review Committee consists of one
director each of SOV and Dycam who is not also an officer or employee of either
company, and a non-voting chairman.
Termination of Certain Operations. In January 1996, the Company determined
to terminate its hairstyle and beauty imaging operations and its franchising
operations. In January 1997, the Company and FYI entered into definitive
agreements to sell the FYI business. The FYI Sale is expected to close in April
1997, subject to the approval of the Company's stockholders, and other customary
conditions. The termination of these operations may result in significant costs
and liabilities to the Company, including, the satisfaction of outstanding
accounts payable relating to these operations, possible claims asserted by
former franchisees and area developers and possible claims asserted by certain
of the Company's current product warranty holders. Moreover, the termination of
these operations will require continuing attention by management. The Company's
future operating results and financial condition could be adversely affected by
management's inability to successfully terminate or sell its hairstyle and
beauty imaging operations, its franchising operations and its newborn infant
photography operations.
History of Losses; Variability of Operating Results; Limited Operating
History. The Company has experienced operating losses in 1994, 1995, and 1996.
The Company's revenues and operating results have varied substantially from
period to period. In addition, FYI has a limited operating history and was in
the development stage from April 1994 (inception) until March 1995 when it
recognized its first revenues. There can be no assurance that the Company will
be profitable in the future or that future revenues and operating results will
not also vary substantially. The Company's financial problems (see "Description
of Business") may have had a negative impact on FYI's ability to gain acceptance
in the marketplace despite the products and services it offers. Management has
been expending substantial time and resources in attempting to resolve these
problems and restore confidence in the Company. Future revenues and profits, if
any, will depend upon various factors, including, but not limited to,
management's ability to restore confidence in the Company, continued market
acceptance of the Company's current products, the ability of the Company to
develop and introduce new products or to develop new markets for its existing
products, the successful implementation of its planned marketing strategies, and
the Company's ability to successfully terminate SOV's hairstyle and beauty
imaging operations, SSI's franchising operations, and to close the sale of FYI's
newborn infant photography operations. If the Company is not able to achieve
its operating objectives or is unable to obtain the additional financing it
requires, the Company may be otherwise unable to achieve its goals or continue
its operations.
Certain Litigation Matters. The Company is currently party to certain
litigation which, if adversely determined, may have a material adverse impact on
the Company. The Company expects that it may need to expend substantial legal
fees in connection with these matters. See "Legal Proceedings."
Competition. The Company anticipates that both of its operating
subsidiaries, Dycam and FYI, will experience substantial competition. Dycam
believes that it is the only company in existence today which focuses entirely
upon the design, development, manufacture and sale of digital cameras,
supporting software and digital imaging solutions. However, other companies do
manufacture and market digital cameras.
24
<PAGE>
Dycam recognizes that as digital photography achieves increasing acceptance and
the industry grows, competition will become increasingly intense. Existing
competitors can be expected to expand their digital camera operations and new
competitors may enter the market. Many existing competitors have significantly
greater financial, marketing and technological resources than Dycam. Some of
the products manufactured by Dycam's competitors are significantly more
expensive than Dycam's cameras and provide features (including higher quality
resolution) that make these products appropriate for applications for which
Dycam's products are not intended. Dycam believes that the flexibility of its
products combined with Dycam's experience in developing custom imaging solutions
for its customers will enable it to work with its customers to design digital
photography-based systems which serve their specific needs. Nevertheless, there
can be no assurance that Dycam will be able to compete effectively or that
competition will not have a material adverse effect on Dycam's business,
operating results and financial condition.
The newborn infant photography market is extremely competitive. FYI
primarily faces competition from three large established competitors who
collectively control more than 75% of the market. In addition, many smaller
companies service the market. Many of the hospitals serviced by FYI's large
competitors are party to long-term service agreements. FYI's ability to
effectively compete in this market is dependent upon its ability to enter into
relationships with hospitals and to provide rapid, quality service to its
customers. FYI believes that it is unique in its use of digital photography as
a primary means to produce newborn infant photographs, and that digital
photography enhances its ability to deliver its product. If FYI's competitors
adopt digital photography systems as their primary systems, or otherwise
increase their product delivery time, or improve their service, FYI's ability to
enter into arrangements with new hospitals and its future operating results may
be adversely effected. In January 1997, the Company and FYI entered into an
agreement to sell the FYI business to Hasco. Hasco operates First Foto, a
competitor of FYI in the newborn hospital photographic business.
Rapid Technological Change and New Products. As a growth industry, digital
still photography can be expected to be characterized by rapid technological
change and new product introductions. As technological changes occur and as
other applications for the Company's products develop, Dycam may have to modify
its technology in order to keep pace with these changes and developments.
Although Dycam intends to continue to improve and add to its existing products,
there can be no assurance that Dycam's competitors will not develop products
with superior capabilities and/or market them at lower prices or that Dycam will
be able to identify, develop, manufacture or support new products successfully.
There can also be no assurance that any such new products introduced by Dycam
will gain market acceptance, or that Dycam will be able to respond effectively
to technological changes or the introduction of new products by competitors.
Reliance on Third Parties for Component Parts. Dycam relies on third parties
to supply the components which comprise its cameras. While there are several
sources of supply for the majority of these component parts, the Company is
dependent upon single overseas sources for both the main optics of the cameras
and Charge-Coupled Devices ("CCDs"), the image sensor used in digital cameras.
In addition, the microprocessor that operates the camera is a custom part
manufactured for the Company by a major U.S. corporation. Any disruption of the
operations of these third party manufacturers or discontinuance of the supply of
the optics, the CCDs or the microprocessors could cause substantial production
delays and materially and adversely affect the Company's business, financial
condition and results of operations. Additionally, the overseas manufacture of
the optics and CCD components of the cameras may subject the Company to
additional risks, including import and export controls and changes in
governmental policies.
Reliance on Related Party and Third Party Manufacturers. FYI relies upon
Dycam and third party manufacturers to perform the electronic subassembly of its
cameras and fabricate the FYI system housings. Final assembly, testing and
quality control inspections of the FYI system are performed by Dycam. With
25
<PAGE>
the exception of certain proprietary components for which FYI owns all necessary
molds and tools, all components used in the FYI System are off-the-shelf
components for which there are multiple sources of supply. Any disruption of
the operations of Dycam or these third party manufacturers, or discontinuance of
the supply of the component parts of FYI's camera systems could cause
substantial production delays and materially and adversely affect FYI's
projected future business, financial condition and results of operations.
Financial Data
The historical selected financial data of the Company set forth below has
been derived from the Company's Consolidated Financial Statements included
elsewhere in this Report on Form 10-KSB. The consolidated financial statements
as of December 31, 1995 and 1994 have been audited by Corbin & Wertz and Coopers
& Lybrand L.L.P., respectively, independent accountants whose reports with
respect thereto appear elsewhere in this Report on Form 10-KSB. The December
31, 1995 and 1994 financial statements of Dycam were audited by Corbin & Wertz,
independent accountants, whose report with respect thereto appears elsewhere in
this Report on Form 10-KSB. The following financial information and the
accompanying Managements' Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report on Form 10-KSB. The Company's financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP").
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
Income Statement Data 1995 1994
------------ ------------
<S> <C> <C>
Revenues.......................................... $ 4,967,000 $ 5,706,000
Cost of revenues.................................. 2,749,000 3,371,000
------------ ------------
Gross profit...................................... 2,218,000 2,335,000
------------ ------------
Selling, general and administrative expenses...... 7,365,000 8,158,000
Research and development expenses................. 881,000 835,000
Depreciation and amortization..................... 428,000 373,000
------------ ------------
Total operating expenses.......................... 8,674,000 9,366,000
------------ ------------
Interest income................................... 8,000 152,000
Other income (expense)............................ (8,000) 2,000
Minority interests................................ 370,000 558,000
------------ ------------
Loss before income taxes and extraordinary item... (6,086,000) (6,319,000)
Provision for income taxes........................ 9,000 9,000
------------ ------------
Loss before extraordinary item.................... (6,095,000) (6,328,000)
Forgiveness of debt, net of tax................... 255,000 -
------------ ------------
Net loss.......................................... $ (5,840,000) $(6,328,000)
============ ============
Net loss per common share......................... $ (1.30) $ (1.52)
============ ============
Weighted average shares of common stock
outstanding...................................... 4,505,000 4,162,000
============ ============
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Balance Sheet Data
Working capital................................. $ 1,566,000 $ 5,386,000
Total assets.................................... 10,741,000 13,803,000
Accumulated deficit............................. (12,527,000) (6,687,000)
Stockholders' equity............................ 3,664,000 9,454,000
</TABLE>
Results of Operations
The following table sets forth the percentages of net revenues of certain
income and expense items of the Company for the years ended December 31, 1995
and 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994
------------ -----------
<S> <C> <C>
Revenues.......................................... 100% 100%
Cost of revenues.................................. 55 59
------------ -----------
Gross profit...................................... 45 41
Selling, general and administrative expenses...... 148 143
Research and development expenses................. 18 15
Depreciation and amortization..................... 9 7
------------ -----------
Total operating expenses.......................... 175 165
Interest income.................................. - 3
Other income (expense)............................ - -
------------ -----------
Minority interests................................ 7 10
------------ -----------
Loss before taxes and extraordinary item.......... (123) (111)
------------ -----------
Provision for income taxes........................ - -
------------ -----------
Loss before extraordinary item.................... (123) (111)
Forgiveness of debt, net of tax................... 5 -
------------ -----------
Net loss.......................................... (118)% (111)%
============ ===========
</TABLE>
Revenues
The following table summarizes the Company's revenues for the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION> Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------------------ --------------------------------
Percentage of Percentage of
Company Company
Revenues Revenues Revenues Revenues
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Consolidated $4,967,000 100% $5,706,000 100%
SOV 2,815,000 56 3,926,000 69
Dycam 1,677,000 34 1,700,000 30
FYI 436,000 9 - -
SSI 39,000 1 80,000 1
</TABLE>
27
<PAGE>
Consolidated Operations. In January 1996, the Company elected to wind-down
-----------------------
its hairstyle and beauty imaging systems and franchising operations. During 1996
and the first quarter of 1997, the Company focused its resources on its
operating subsidiaries, FYI and Dycam. In January 1997, the Company and FYI
entered into definitive agreements to sell the FYI business to Hasco (see Notes
to Consolidated Financial Statements - Subsequent Events), subject to the
approval of the Company's stockholders, and other customary conditions. The FYI
Sale is expected to close in April 1997. After the wind-down and sale are
completed, SOV intends to sell access disks and act as a holding company. The
Company believes that its future revenues will be primarily derived from the
operations of its Dycam subsidiary.
SOV. SOV's revenues for the year ended December 31, 1995 decreased
---
$1,111,000 (28%) from $3,926,000 for the year ended December 31, 1994. During
fiscal 1995, SOV experienced a decline in the sales of both imaging systems and
software and support products. System and software related product sales
continued to decline throughout fiscal 1995. The Company attributes this
continued revenue decline to the general lack of market interest in SOV's
existing products at their current price point, the reduction of marketing
efforts, and the damage done to the Company's reputation as a result of the halt
in the trading of the Company's common stock. In early 1996, the Company
terminated its hairstyle and beauty imaging systems line of business. The
Company anticipates that the SOV line of business will generate only a minimal
portion of the Company's revenues in 1996 and later years.
Dycam. Dycam's revenues are derived from sales of digital cameras and
-----
supporting software and accessory products, contract engineering and technology
licensing fees. Dycam's revenues for the year ended December 31, 1995 decreased
$23,000 (1%) from $1,700,000 for the year ended December 31, 1994. This
decrease was primarily associated with the reduction of license fees from
Logitech, which manufactured and marketed a Dycam designed camera. License fees
under the agreement with Logitech accounted for revenues of $9,000 (less than 1%
of Dycam's revenues) in the year ended December 31, 1995 compared to $220,000
(13% of Dycam's revenues) in the year ended December 31, 1994. Dycam's
arrangement with Logitech provided that Logitech would make a one-time royalty
payment of approximately $1,000,000 in 1993, and thereafter pay Dycam a .5%
royalty fee on future sales of the licensed product. Subsequent to December 31,
1994, Logitech informed the Company that it had ceased to manufacture the camera
for which it held a license and as a consequence revenues from this license will
cease as soon as Logitech exhausts its current supplies of the subject product.
During 1995, revenues from camera sales were $1,634,000 (97% of Dycam's revenue)
compared to $1,140,000 (67% of Dycam's revenues) in 1994. The increase in
camera revenues is attributed to the general emergence of the digital camera
market as a whole in 1995. Revenues from contract engineering were $34,000 (2%
of Dycam's revenues) in 1995 compared to $340,000 (20% of Dycam's revenues) in
1994. In 1994 and the early part of 1995, Dycam shifted its focus away from the
pursuit of custom and contract engineering projects towards direct camera sales,
and Dycam's camera sales increased during 1994 and 1995. Dycam intends to
continue to sell stock camera products. Dycam, however, believes that its
strength lies in the custom and contract engineering of digital imaging systems
and intends to devote a substantial portion of its resources in the future to
pursuing the custom and contract engineering business. One example of this is
Dycam's relationship with FYI. The core element of the FYI camera system is a
specialized digital camera subsystem engineered and produced by Dycam under an
exclusive contract with FYI. In addition to the sale/lease of cameras to FYI,
Dycam's arrangements with FYI provide that, in exchange for certain development
and maintenance services, Dycam is entitled to a 7.5% fee on all FYI sales.
Pursuant to a deferral agreement executed in May 1996 between Dycam and FYI,
certain development and maintenance revenues due to Dycam from FYI may be
accrued by FYI until April 30, 1997. Dycam intends to defer the recognition of
the related revenues until payment is received from FYI. Intercompany revenues
are eliminated for consolidated reporting purposes. At the closing of the FYI
Sale, FYI and Dycam will terminate their existing contractual relationships and
Dycam will enter into a Dycam Master Agreement with Hasco. See Notes to
Consolidated Financial Statements - Subsequent Events.
28
<PAGE>
FYI. FYI's revenues are derived from sales of newborn baby photographs and
---
ancillary products. During the year ended December 31, 1994 and the first two
months of 1995, FYI products were in a development stage. Since its first sales
in March 1995, revenues have consistently grown as the customer base has
increased to over one-hundred twenty-five hospital accounts by January 31, 1997.
The Company has devoted significant marketing efforts and financial resources to
the development and growth of the FYI business. In January 1997, the Company
and FYI entered into an agreement to sell the FYI business to Hasco. The
Company anticipates that FYI will generate revenues through the closing of the
FYI Sale, which is anticipated to occur in April 1997, after which time no
revenues will be generated from FYI.
SSI. SSI's revenues are primarily derived from the sale of franchises. The
---
first SSI franchises were sold during the last quarter of 1994. SSI has not
sold any franchises since January 1995. In January 1996, the Company began the
wind-down of SSI's operations. The Company anticipates that the SSI line of
business will generate only a minimal portion of the Company's revenues in 1996
and in later years.
Gross Profit
Gross profit is comprised of revenues less direct costs and expenses. The
following table summarizes the Company's gross profit for the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION> Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------------------ --------------------------------
Gross Profit as Gross Profit as
Percentage of Percentage of
Gross Profit Revenues Gross Profit Revenues
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Consolidated $2,218,000 45% $2,335,000 41%
SOV 1,491,000 53 1,388,000 35
Dycam 520,000 31 867,000 51
FYI 168,000 39 - -
SSI 39,000 100 80,000 100
</TABLE>
SOV. The increase in SOV's gross profit during the year ended December 31,
---
1995 compared to the year ended December 31, 1994 was primarily due to fourth
quarter 1994 write-offs of obsolete inventory totaling $245,000 and the
establishment of valuation reserves of $160,000 for returned merchandise. There
were fewer write-offs and reserves in 1995. The Company believes that the
remainder of the variance in gross profit is due to inaccuracies and
inconsistent methodology in the cost accounting system and shrinkage which were
present in 1994. During the three months ended March 31, 1995, the Company took
steps to correct the inaccuracies by performing quarterly physical inventory
counts, and standardizing its cost accounting methodology. Additionally, with
the change in senior management and key accounting personnel in the first
quarter of 1995, improved purchasing, requisition and tracking procedures were
implemented and standardized. In June 1995 physical security over inventories
was improved at the Company's new facilities.
Dycam. For the year ended December 31, 1994, Dycam's gross profit margin was
-----
51%. During 1995, the decline in gross profit to 31% was primarily attributable
to an increase in the percentage of revenues derived from camera sales, which
have a lower margin than supporting software sales, licenses, and contract
engineering work. Also contributing to the decline in gross margins were the
lower average
29
<PAGE>
sales prices for the cameras being sold. Gross margins may continue to remain
at lower levels, or decrease further, if Dycam's custom business does not
contribute a greater portion of revenues to Dycam's total revenues.
FYI. FYI recognized its first sales of newborn baby photographs in March
---
1995. FYI's gross profit increased as FYI emerged from its start-up phase of
operations. FYI's gross profit excludes intercompany cost of revenues of
$32,000 related to Dycam.
SSI. There are no significant direct costs associated with the sale of
---
franchises.
Selling, General and Administrative
Selling, general and administrative expenses consist of administrative
expenses, the salaries of corporate officers and sales personnel, advertising
and promotion, accounting, legal and other professional expenses and rent and
occupancy costs. They exclude depreciation and amortization, which are stated
separately. The following table summarizes the Company's selling, general and
administrative expenses for the years ended December 31, 1995, and 1994:
<TABLE>
<CAPTION> Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------------------ --------------------------------
Percentage of Percentage of
Expenses Revenues Expenses Revenues
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Consolidated $7,365,000 148% $8,158,000 143%
SOV 3,128,000 111 5,998,000 153
Dycam 1,140,000 68 924,000 54
FYI 2,729,000 626 727,000 -
SSI 368,000 944 509,000 636
</TABLE>
SOV. Selling, general and administrative expenses for the year ended
---
December 31, 1995 decreased $2,870,000, or 48%, from the year ended December 31,
1994, and represented 42% of the Company's total selling, general and
administrative expenses. During 1995, salaries and benefits decreased $598,000,
or 32%, compared to 1994. This decrease is attributable to a decrease in the
number of employees at all levels in all departments. The total number of
employees decreased from 54 at December 31, 1994 to 10 at December 31, 1995.
Marketing and advertising decreased $350,000, or 63%, in 1995 compared to 1994.
This decrease was primarily due to cut backs on the design and placement of
advertisements and attendance at trade shows. Bad debt expense decreased
$1,249,000, or 102% in 1995 compared to 1994 due to reserves set up in 1994 for
potentially uncollectible receivables, including fully reserving for a $450,000
note receivable from a corporation organized under the laws of Belgium, which
note was issued in a transaction relating to the development of business in
Europe. Reserves were also established in 1994 for past due trade receivables
and receivables from foreign licensees. Legal and professional expenses
increased $123,000, or 16% in 1995 as compared to 1994. Legal costs in 1995
decreased $99,000 to $445,000. Other professional expenses increased $222,000.
These increased expenses included accounting fees of $80,000, which primarily
related to fees for the audit of the year ended December 31, 1994 and
restatements of the financial statements for the year ended December 31, 1993
and the first three quarters of 1994. In addition, the Company incurred
additional public relations fees of $50,000, Board fees of $37,000, and general
consulting fees of $55,000 in 1995.
30
<PAGE>
SOV made efforts to reduce selling, general and administrative expenses
throughout 1995. The total personnel employed by SOV was reduced from 54
employees on January 1, 1995 to 10 employees by December 31, 1995. During 1995,
SOV moved from its facility in Chatsworth, California to a shared facility with
FYI in Newbury Park, California. Certain members of the Company's management
team divided their time between SOV and FYI to reduce costs and maximize
resources. Additional reductions were made in SOV's advertising and marketing
costs as a consequence of cut backs on the design and placement of
advertisements and attendance at trade shows. Despite the steps taken to reduce
costs, SOV's selling, general and administrative costs continued to exceed its
gross profit throughout 1995. In January 1996, the Company decided to terminate
SOV's hairstyle and beauty imaging systems operations. Selling, general and
administrative expenses related to SOV's operations continue to exceed the gross
profit derived therefrom. The Company continues to make efforts to keep SOV's
expenses to a minimal level consistent with its current operations, including
its activities as a holding company. The total personnel employed by SOV was
reduced to one employee by August 1, 1996. SOV continues to sell access disks
as ancillary products remaining in stock, and intends to do so for the
foreseeable future.
Dycam. Dycam's selling, general and administrative expenses for 1995
-----
increased 23% to $1,140,000 compared to 1994. This increase resulted primarily
from increased sales and marketing expenditures in the 1995 period, increased
legal, professional and insurance costs and, an increase in the average employee
base of Dycam. Dycam took steps throughout 1995 towards the reduction of these
expenditures, including reducing the number of employees, and expects that such
expenditures will decrease as a percentage of sales in future periods.
FYI. Selling, general and administrative expenses for the year ended
---
December 31, 1995 increased $2,002,000, or 275%, from the year ended December
31, 1994, and represented 37% of the Company's total selling, general and
administrative expenses. During 1995, salaries and benefits increased
$1,113,000, or 263%, due to the addition of personnel to accommodate growth.
Marketing and advertising increased $239,000, or 285%, as FYI continued its
marketing efforts to introduce itself to the marketplace throughout 1995.
Marketing and advertising costs include costs associated with trade show
attendance and the production and distribution of promotional materials. Other
selling, general and administrative costs, including commissions paid to
hospitals, which typically are based on a percentage of FYI's revenues derived
from each hospital, increased primarily based on FYI's growth in 1995. FYI
continued to add personnel in 1996 as hospital accounts were added. In January
1997, the Company and FYI entered into an agreement to sell the FYI business.
The FYI Sale is expected to close in April 1997.
SSI. Selling, general and administrative expenses for the year ended
---
December 31, 1995, decreased $141,000, or 28%, from the year ended December 31,
1994. The Company took steps towards the reduction of SSI's expenditures in
1995. During 1995, advertising and marketing expenses decreased $77,000, or 79%
compared to 1994 due to the Company's decision to halt the sale of franchises at
the end of the first quarter of 1995. As of December 31, 1995, there were no
direct employees at SSI and marketing costs were reduced to zero. In January
1996, the Company decided to terminate SSI's operations.
Research and Development
Consolidated research and development expenses for the year ended December
31, 1995 were $881,000, an increase of $46,000, or 6%, compared to the year
ended December 31, 1994.
SOV. Research and development expenses for SOV for 1995 were $56,000, an
---
increase of $4,000, or 8% compared to 1994 and represented 6% of the Company's
total research and development expenses. SOV's research and development costs
for 1995 were primarily related to the development of the Electric Hair System,
a lower priced version of SOV's beauty imaging systems. Costs in 1994 related
primarily to
31
<PAGE>
the development of The Big Picture System, an imaging system which was designed
to produce large scale posters which was abandoned in the first quarter of 1995,
and the development of SOV's Redken hairstyle imaging system. SOV's product
development activities ceased in January 1996 with the Company's decision to
eliminate SOV's hairstyle and beauty imaging systems operations.
Dycam. Research and development expenses for Dycam for 1995 were $754,000 an
-----
increase of $151,000, or 25%, compared to 1994, and represented 86% of the
Company's total research and development expenses. This increase is
attributable to new product development activities associated with lower cost
and higher resolution digital camera models, and expenses associated with the
development of products introduced for sale in 1995, including the first
commercial installations of the camera developed in conjunction with Forever
Yours. Also during 1995, Dycam introduced and began shipping two new versions
of its modular digital cameras, primarily designed for use in security and
observation systems. Dycam continued to have a high level of research and
development expenses during 1996. Dycam believes that continuing research and
development is essential to maintaining its competitive position, and expects to
continue to expend funds in this area.
FYI. Research and development expenses for FYI for 1995 were $71,000, a
---
decrease of $109,000 or 61% compared to 1994, and represented 8% of the
Company's total research and development expenses. FYI's 1994 costs were
attributable to FYI's share of new product development activities associated
with the design and manufacture of the prototype digital camera system for the
photography of newborn babies. FYI's research and development activities during
1994 were carried out in conjunction with related activities at Dycam, which
incurred additional research and development expenses related to the FYI
project. FYI's research and development expenses decreased during 1995 due to
the completion of the development of the camera system. All intercompany
research and development expenses have been eliminated upon consolidation.
FYI's research and development activities ceased in December 1996 with the
Company's and FYI's decision to sell the FYI business.
SSI. There were no research and development expenses associated with SSI's
---
operations.
Depreciation and Amortization
Depreciation and amortization expense increased $55,000 to $428,000 for the
year ended December 31, 1995 from $373,000 for the year ended December 31, 1994.
The increase resulted from an increase in amortization costs of $29,000 to
$278,000 for the year ended December 31 1995 from $249,000 for the year ended
December 31, 1994 relating to goodwill of $5,554,000 which arose in February
1994 from the acquisition of Dycam by SOV. Such goodwill is being amortized
over a twenty year term at the rate of $23,000 per month. The remaining
increase was primarily due to depreciation of fixed assets acquired by FYI.
Liquidity and Capital Resources
During 1995 and 1994, the Company relied primarily upon cash on hand, cash
received from sales, intercompany advances, and proceeds from the issuance of
common stock of SOV and Dycam, and financing from outside parties, to finance
its cash operating losses and the expansion of FYI. Additionally, FYI's capital
expenditures were financed in part by capital leases.
At December 31, 1995, the Company had consolidated cash and cash equivalents
of $2,778,000, a decrease of $1,583,000 from $4,361,000 at December 31, 1994.
The Company's working capital at December 31, 1995 was $1,566,000, a decrease of
$3,691,000 when compared to $5,386,000 at
32
<PAGE>
December 31, 1994. The current ratio at December 31, 1995 was 1.6 to 1 compared
to 3.1 to 1 at December 31, 1994.
SOV. SOV's cash and cash equivalents at December 31, 1995 were $3,000, a
---
decrease of $576,000 from $579,000 at December 31, 1994. Accounts receivable
decreased $188,000. Loans receivable from stockholders decreased $450,000 due
to repayment. Income taxes receivable decreased $929,000 due to receipt of
income tax refunds. Accounts payable and accrued expenses increased $129,000
due to growth in accounts payable. Advance from stockholder decreased $152,000
due to repayment. SOV's working capital (excluding intercompany balances) at
December 31, 1995 was $(1,545,000) compared to $1,267,000 at December 31, 1994.
The current ratio was 0.3 to 1 at December 31, 1995 compared to 1.6 to 1 at
December 31, 1994. The working capital reduction was primarily the result of a
decrease in cash which was used to fund SOV's cash operating losses, net of
changes in other current assets and current liabilities described above, and
intercompany advances. SOV continued to use cash to fund its cash operating
losses during 1996.
In December 1994, Dycam made a secured loan of $500,000 to SOV. In January
1995, Dycam made an additional secured loan of $500,000 to SOV. These advances
were memorialized in a secured promissory note in the principal amount of
$1,000,000 which was originally due in September 1995 and later extended until
December 1998. The purpose of the loan was to enable SOV to continue funding
FYI, and thus the development and manufacture of the FYI digital camera by FYI
and Dycam. For additional information regarding the terms of the promissory
note, refer to the discussion that follows regarding the liquidity and capital
resources of Dycam.
In September 1995, SOV and FYI received financing of $300,000 from
Multinational Trading Corp., a Florida corporation ("MTC"), pursuant to a short-
term financing agreement (the "Bridge Financing"). Additional advances of
$75,000 were made pursuant to the Bridge Financing in October 1995. In November
1995, SOV, FYI and International Digital Investors, L.P., a Delaware limited
partnership ("IDI") entered into a Note and Preferred Stock Purchase Agreement
(the "1995 Agreement"). Pursuant to the 1995 Agreement, IDI invested $3,000,000
in SOV and FYI. In consideration for such investment, SOV and FYI issued 10%
secured notes in the original principal amount of $2,950,000, with interest
payable monthly, and quarterly principal payments of $500,000 commencing March
31, 1997 (the "1995 Notes"). In addition, SOV issued $50,000 worth of 10%
Senior Series A Convertible Preferred Stock, $100 par value. Moreover, the 1995
Agreement requires the Company to issue sufficient warrants so that when they
are exercised, IDI will control 40% of the Company's common stock on a fully
diluted basis (the "1995 Warrants"). FYI received net proceeds of $2,307,000
from the $3,000,000 financing, after repayment of the Bridge Financing, its
associated interest, and transaction fees. Additionally, SOV received $50,000
for the issuance of 10% Senior Series A Convertible Preferred Stock. Pursuant
to the 1995 Agreement, as amended March 1996, funds totaling $750,000 are
available to SOV, all of which had been advanced to SOV by FYI as of August 31,
1996. The remaining funds were used for the furtherance of FYI's expansion.
The 1995 Agreement was amended again in May 1996 and January 1997 to provide,
among other things, for the deferral of interest to not later than May 1, 1997,
less restrictive covenants and a lower exercise price of the 1995 Warrants. At
December 31, 1995 and 1996, the Company was not in compliance with certain of
the 1995 Agreement's financial covenants, however, the Company has obtained a
waiver of these defaults from IDI. The Company may require additional covenant
relief in the future. There can be no assurance that IDI will grant a waiver
for any future noncompliance. If defaults occur in future periods, and waivers
are not obtained, and the Company's assets are taken in satisfaction of the
amounts due pursuant to the 1995 Agreement, and no excess remains, funds will
not be available to meet SOV's obligations, including, without limitation, the
repayment of a $1,000,000 note owed to Dycam. For additional information see
"Certain Relationships and Related Party Transactions -- Financing Transactions
with Multinational Trading Corp. and International Digital Investors, L.P."
33
<PAGE>
In 1995, SOV entered into a settlement of certain class action and derivative
suits, whereby SOV agreed to deliver to the plaintiff class warrants to purchase
750,000 shares of the Company's common stock and a $250,000 promissory note
payable in three equal semi-annual installments commencing July 1996. The
number of warrants was increased to 1,750,000 in May 1996 prior to the final
settlement in July 1996. As of January 31, 1997, no payments have been made
towards the debt. See "Legal Proceedings."
In January 1996, the Company decided to discontinue SOV's hairstyle and
beauty imaging systems operations. During the wind-down of these operations,
the Company anticipates that SOV's operating activities will continue to use
cash and that its minimal cash balance will continue to decline. Since the last
quarter of 1995, the Company has successfully negotiated significant discounts
of certain of its accounts payable balances, and intends to negotiate a
reduction in its remaining accounts payable. No guarantee, however, can be made
that the Company will be able to successfully negotiate reductions on its
remaining outstanding accounts payable.
In May 1996, pursuant to a Note and Preferred Stock Purchase Agreement, dated
as of May 14, 1996 (the "1996 Agreement"), as amended, SOV and FYI agreed to
issue up to $1,200,000 aggregate principal amount of 10% Senior Notes due June
30, 1998 (the "1996 Notes" and together with the 1995 Notes, the "Notes") in a
series of purchases of such 1996 Notes between the Closing Date (as defined) and
September 15, 1996. Each purchase of 1996 Notes is contingent upon the Company
and FYI meeting certain minimum performance targets. IDI also purchased 500
shares of Series B Preferred, for $50,000 and received Common Stock Purchase
Warrants (the "1996 Warrants" and together with the 1995 Warrants, the
"Warrants"). Payment of interest is deferred to not later than May 1, 1997.
In May 1996, IDI purchased $520,000 principal amount of the 1996 Notes, of
which $270,000 was used to repay principal and interest on certain interim loans
made to the Company and FYI by IDI and IDI-related entities in April 1996. IDI
purchased an additional $250,000, $100,000 and $150,000 principal amount of the
1996 Notes in June, July and August 1996, respectively. The Company did not
meet the September 15, 1996 minimum performance targets and IDI did not purchase
the final series of 1996 Notes totaling $180,000 until January 1997.
The 1995 Agreement and the 1995 Warrants were amended in May 1996 to conform
to the provision of the 1996 Agreement and the 1996 Warrants, and the exercise
price of the 1995 Warrants was reduced to $0.075, the exercise price of the 1996
Warrants.
From September 1996 through January 1997, the Company and FYI borrowed an
additional $927,000 from IDI pursuant to a $977,000 Bridge Note.
In July 1996, the K & A suit was settled and the accounting firm agreed to
pay $1,700,000 to the Company. See "Contingencies." Of the proceeds, $870,000
was applied to the repayment of the 1996 Notes. After partial repayment of the
1996 Notes, and payment of certain legal expenses in connection with the 1996
Agreement, the net proceeds of the settlement to the Company were $430,000,
which was added to the Company's general working capital, and used to fund the
operations of SOV and FYI.
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco. In January and February 1997, FYI borrowed a total of
$360,000 from Hasco pursuant to the Loan Agreement whereby Hasco will lend to
FYI up to a total of $540,000 prior to the closing (see Notes to Consolidated
Financial Statements - Subsequent Events). The proceeds of the FYI sale, net of
transaction costs and satisfaction of FYI's obligations (excluding its
indebtedness to IDI), will not be sufficient to fully repay the Company's and
FYI's obligations to IDI, or to fully satisfy the Company's other liabilities to
its creditors. IDI has a first priority security interest in all remaining
assets of the Company, including the
34
<PAGE>
remaining net proceeds from the FYI sale, except for the second priority
position it holds on the shares of Dycam common stock owned by the Company, as
to which Dycam has a first priority security interest.
In order for the Company to continue its operations after the FYI sale, it
will be required to obtain additional financing from IDI or other sources, or
IDI will need to consent to postpone the repayments due from the Company and FYI
on all or part of the Company's and FYI's notes payable to IDI. Neither IDI nor
any other sources have indicated a willingness to loan additional funds to the
Company. Additionally, IDI has not indicated an intention to consent to the
postponement of the repayment it is entitled to on the Notes payable to IDI from
the Company and IDI.
In addition, the Company believes that the combined cash impact of a
settlement of the Durian and AESIC loss contingencies, more fully described in
"Contingencies" will not be significant. If (a) a significant negative result
is achieved with respect to the Durian and/or AESIC matters, (b) management
cannot achieve its operating plan or (c) funding is not available or proves
insufficient to cover the shortfalls, SOV will find it necessary to obtain
additional financing or undertake other such actions as may be appropriate, and
will be otherwise unable to achieve its goals or continue its operations.
Dycam. At December 31, 1995, Dycam had cash and short-term investments on
-----
hand of $1,374,000, a decrease of $2,341,000 from $3,715,000 at December 31,
1994. Accounts receivable increased $63,000 during the year ended December 31,
1995. Inventories increased $89,000 due to build ups for planned sales.
Current liabilities decreased by $273,000 to $199,000, primarily as a result of
a decrease in accounts payable. Dycam's working capital (excluding intercompany
balances) at December 31, 1995 was $2,025,000, a decrease of $2,415,000 when
compared to $4,440,000 at December 31, 1994. The working capital reduction was
primarily the result of the decrease in cash which was used to fund Dycam's cash
operating losses, and net changes in other current assets and liabilities
described above. Dycam continued to use cash to fund operating losses during
the first two quarters of 1996. The current ratio at December 31, 1995 was 11.1
to 1 compared to 10.4 to 1 at December 31, 1994. Dycam does not have any long-
term indebtedness and does not currently maintain any credit facilities.
In December 1994, Dycam made a secured loan of $500,000 to SOV. Dycam
determined that it was in the best interests of Dycam and its shareholders that
it make this loan, which enabled SOV to continue funding FYI, and thus the
development and manufacture of the FYI digital camera by FYI and Dycam. In
January 1995 Dycam approved an additional secured loan to SOV of $500,000. The
two loans totaling $1,000,000 have been memorialized in a single note which
originally provided that the entire principal balance plus accrued and unpaid
interest thereon were due and payable on September 1, 1995. Dycam subsequently
extended the maturity date of the note to December 31, 1998. All interest
payments have been made in a timely fashion by SOV. The note is secured by
1,916,667 shares of Dycam's common stock owned by SOV. If SOV is unable to
satisfy its obligations pursuant to the Agreement, and IDI exercises its rights,
Dycam may not be repaid and will be entitled to receive back the 1,916,667
shares of Dycam's common stock owned by SOV.
Dycam believes that its operating and research and development activities in
1997 will continue to use cash and expects its cash balance will continue to
decline. However, Dycam also believes that its existing cash balances, interest
payments due from SOV under the intercompany loan, payments due from FYI for
deferred license fees, and cash flow from operations will be sufficient to meet
its cash requirements through September 1997, after which time it may be
required to raise capital. In addition, to the extent Dycam experiences growth
in the future, or its cash flow from operations is less than anticipated, Dycam
may be required to obtain additional sources of cash. There is no assurance
that additional sources of cash will be available.
35
<PAGE>
FYI. FYI's cash and cash equivalents at December 31, 1995 were $1,400,000,
---
an increase of $1,334,000 from $66,000 at December 31, 1994. Accounts
receivable increased $58,000 and inventories increased $35,000 due to sales
which began in 1995. Prepaid expenses decreased $198,000 due to the utilization
of prepaid costs including marketing materials used while introducing FYI to the
marketplace. Accounts payable and accrued expenses increased $238,000 due to
growth. Current portion of obligations under capital leases increased $121,000
due to the acquisition of additional equipment under lease. FYI's working
capital (excluding intercompany balances) at December 31, 1995 was $1,129,000
compared to $168,000 at December 31, 1994. The current ratio was 3.6 to 1 at
December 1995 compared to 2.0 to 1 at December 31, 1994. The increase in
working capital was primarily the result of an increase in cash from a November
1995 financing transaction with International Digital Investors, L.P., discussed
below, net of a decrease in cash to fund FYI's cash operating losses, net of
changes in other current assets and current liabilities discussed above and
advances to/from SOV.
In April 1994, SOV acquired an 80% interest in FYI. The purchase price for
this interest was $100,000 cash. In addition, SOV agreed to provide FYI with a
credit line of $1,100,000 over the next 15 months. The total amount advanced by
SOV to FYI during 1994 was $1,133,000. In November 1995, the total advances
outstanding of $2,700,000 were contributed by SOV to FYI equity in conjunction
with the IDI Agreement.
As described above, in September 1995, SOV and FYI received bridge financing
of $300,000 from MTC, pursuant to the Bridge Financing. Additional advances of
$75,000 were made pursuant to the Bridge Financing in October 1995. In November
1995, SOV, FYI and International Digital Investors, L.P., a Delaware limited
partnership ("IDI"), entered into the 1995 Agreement. FYI received net proceeds
of $2,307,000 from the $2,950,000 financing, after repayment of the Bridge
Financing, its associated interest, and transaction fees. Pursuant to the
transaction as amended in March 1996, up to $750,000 of the funds are available
to SOV of which approximately $742,000 had been advanced to SOV as of August 31,
1996. As discussed above, the Company was not in compliance with certain of the
Agreement's financial covenants at December 31, 1995, however, the Company has
obtained waiver for these violations from IDI. In May 1996, SOV, FYI and IDI
entered into the 1996 Agreement, providing additional financing up to
$1,200,000. Additionally, from September 1996 through January 1997, IDI
advanced $927,000 to SOV and FYI pursuant to a $977,000 Bridge Note due not
later than May 1, 1997.
FYI was in a development stage during 1994 and the first two months of 1995.
Revenues commenced in March 1995 and were at a level consistent with the
Company's expectations of revenues during FYI's start-up phase. FYI's revenues
have continued to grow and contribute an increasing amount of cash to fund
operations. FYI expects that working capital requirements through the closing
of the FYI Sale, which is expected to occur on or about April 15, 1997, will
continue to be funded through a combination of cash on hand, cash receipts from
product sales and additional advances pursuant to the Hasco Loan. The Hasco
Loan provides for funds to FYI up to $540,000 prior to the closing of the FYI
Sale. As of February 28, 1997, $360,000 had been advanced to FYI pursuant to
the Hasco Loan. Management believes that the Hasco Loan currently in place will
be sufficient to allow for FYI to continue to meet its cash flow requirements
through the planned closing of the FYI Sale. To the extent cash flow from
operations is less than anticipated, or if amounts available under the Hasco
Loan prove insufficient to cover the shortfalls, or if the FYI Sale is not
consummated, FYI will be required to obtain additional financing, scale back its
marketing activities to a level sustainable under such circumstances or
undertake other such actions as may be appropriate, and will be otherwise unable
to achieve its goals or continue its operations.
SSI. At December 31, 1995, SSI had cash and short term investments on hand
---
of $1,000. During 1995, SSI relied primarily upon advances totaling $228,000
from SOV to finance its introduction and operations, although SSI had some
limited cash receipts from the sale of franchises. SSI's working capital
36
<PAGE>
at December 31, 1995 was $(31,000). SSI's current ratio was .03 to 1 at
December 31, 1995 compared to 2.8 to 1 at December 31, 1994.
In 1995, SSI used cash in operations, primarily as a result of continued cash
operating losses. SSI has not sold any franchises since January 1995. SSI no
longer has any employees, and any corporate administrative matters are handled
by SOV on behalf of SSI. In January 1996, the Company commenced the orderly
termination of SSI's operations, and expects cash provided and used by SSI to
comprise a minimal portion of the Company's cash flow in 1996 and subsequent
periods.
37
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
STYLES ON VIDEO, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants 39
Consolidated Balance Sheets at December 31, 1995 and 1994 41
Consolidated Statements of Operations for the Years Ended December 31,
1995 and 1994 42
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995 and 1994 43
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995 and 1994 44
Notes to Consolidated Financial Statements 46
</TABLE>
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Styles on Video, Inc.
We have audited the accompanying consolidated balance sheet of Styles on Video,
Inc. and subsidiaries (the "Company") as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Styles
on Video, Inc. and subsidiaries as of December 31, 1995 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered substantial
recurring losses from operations, has an accumulated deficit and is subject to
certain contingencies that raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
CORBIN & WERTZ
Irvine, California
August 2, 1996, except as to Note 18
which is as of January 31, 1997
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Styles on Video, Inc.
We have audited the accompanying consolidated balance sheet of Styles on Video,
Inc. and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of
Dycam Inc., a 61%-owned subsidiary, which statements reflect total assets and
revenues constituting 75% and 30%, respectively, of the related consolidated
totals. Those financial statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Dycam Inc., is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Styles on Video, Inc. as of December 31,
1994, and the consolidated results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has an accumulated deficit and is subject to certain
contingencies that raise substantial doubt about its ability to continue as a
going concern. Management's plan in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
August 28, 1995, except for Notes 2 and 17
which are dated March 12, 1996
40
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,778,000 $ 4,361,000
Accounts receivable, less allowance for
doubtful accounts of $267,000 and
$510,000 at December 31, 1995 and 1994,
respectively 200,000 184,000
Loans receivable from stockholders - 450,000
Income taxes receivable 327,000 1,256,000
Inventories 806,000 1,318,000
Prepaid expenses and other current assets 225,000 377,000
------------ -----------
Total current assets 4,336,000 7,946,000
Property and equipment, net 991,000 459,000
Long-term receivables, less allowance for
doubtful accounts of $577,000 at December 31,
1995 and 1994 1,000 44,000
Goodwill, net of accumulated amortization
of $527,000 and $249,000 at December 31,
1995 and 1994, respectively 5,027,000 5,305,000
Debt issuance costs, net of accumulated
amortization of $13,000 in 1995 279,000 -
Other assets 107,000 49,000
------------ -----------
Total assets $ 10,741,000 $13,803,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,327,000 $ 1,192,000
Accrued expenses 388,000 274,000
Customer advances 868,000 868,000
Advance from stockholder 48,000 200,000
Current portion of notes payable and
obligations under capital leases 139,000 26,000
------------ -----------
Total current liabilities 2,770,000 2,560,000
Notes payable 3,117,000 250,000
Obligations under capital leases 89,000 68,000
Minority interests in consolidated subsidiaries 1,101,000 1,471,000
------------ -----------
Total liabilities 7,077,000 4,349,000
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000
shares authorized; 500 shares of Series A
issued and outstanding at December 31, 1995;
$50,000 liquidation preference - -
Common stock, $.001 par value; 10,000,000 shares
authorized; 4,505,000 shares issued and
outstanding at December 31, 1995 and 1994 4,000 4,000
Additional paid-in capital 16,187,000 16,137,000
Accumulated deficit (12,527,000) (6,687,000)
------------ -----------
Total stockholders' equity 3,664,000 9,454,000
------------ -----------
$ 10,741,000 $13,803,000
============ ===========
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
41
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ -------------
Revenues:
<S> <C> <C>
Systems and related software sales $ 2,854,000 $ 3,983,000
Camera sales 1,634,000 1,140,000
Photography sales 436,000 -
Other revenues 43,000 583,000
----------- -----------
Total revenues 4,967,000 5,706,000
----------- -----------
Cost of revenues:
Cost of systems and software sold and leased 1,324,000 2,538,000
Cost of camera sales 1,157,000 767,000
Cost of photography sales 268,000 -
Other costs - 66,000
----------- -----------
Total cost of revenues 2,749,000 3,371,000
----------- -----------
Gross profit 2,218,000 2,335,000
----------- -----------
Operating expenses:
Selling, general and administrative 7,365,000 8,158,000
Research and development 881,000 835,000
Depreciation and amortization 428,000 373,000
----------- -----------
Total operating expenses 8,674,000 9,366,000
----------- -----------
Loss from operations (6,456,000) (7,031,000)
Interest income 107,000 153,000
Interest expense (99,000) (1,000)
Other income (expense) (8,000) 2,000
Minority interests in net losses of
consolidated subsidiaries 370,000 558,000
----------- -----------
Loss before income taxes and extraordinary
item (6,086,000) (6,319,000)
Provision for income taxes 9,000 9,000
----------- -----------
Loss before extraordinary item (6,095,000) (6,328,000)
Forgiveness of debt, net of tax of $0 255,000 -
----------- -----------
Net loss $(5,840,000) $(6,328,000)
=========== ===========
Net loss per common share $(1.30 ) $(1.52 )
=========== ===========
Weighted average common shares outstanding 4,505,000 4,162,000
=========== ===========
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
42
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Series A Preferred Stock Common Stock
------------------------ ---------------------- Additional
Number of Number of Paid-in Accumulated Stockholders'
Shares Par Value Shares Par Value Capital Deficit Equity
------------- ---------- ---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 - $ - $3,195,000 $3,000 $ 5,373,000 $ (359,000) $ 5,017,000
Exercise of warrants in
exchange for note
receivable from stockholder - - 135,000 - 648,000 - 648,000
Issuance of common stock in
exchange for technology
acquired - - 10,000 - 100,000 - 100,000
Exercise of stock options - - 819,000 1,000 1,385,000 - 1,386,000
Issuance of common stock for
acquisition of Dycam Inc. - - 346,000 - 5,495,000 - 5,495,000
Net proceeds from issuance
of stock of subsidiary, net
of minority interest - - - - 3,136,000 - 3,136,000
Net loss - - - - (6,328,000) (6,328,000)
------------- ---------- ----------- ----------- ------------ -----------
Balance, December 31, 1994 - - 4,505,000 4,000 16,137,000 (6,687,000) 9,454,000
Issuance of Series A
preferred stock 500 - - - 50,000 - 50,000
Net loss - - - - - (5,840,000) (5,840,000)
------------- ---------- ---------- ----------- ----------- ------------ -----------
Balance, December 31, 1995 500 $ - $4,505,000 $4,000 $16,187,000 $(12,527,000) $ 3,664,000
============= ========== ========== =========== =========== ============ ===========
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
43
<PAGE>
STYLES ON VIDEO,INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,840,000) $(6,328,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 196,000 124,000
Amortization 315,000 249,000
Provision for bad debts 17,000 1,165,000
Settlement of stockholder lawsuit - 250,000
Forgiveness of debt, net of tax (255,000) -
Discount on note receivable from
stockholder - 123,000
Write-off of acquired technology - 100,000
Minority interests in consolidated
subsidiaries (370,000) (558,000)
Loss on disposal of equipment 8,000 -
Changes in operating assets and liabilities:
Accounts receivable (33,000) 13,000
Income taxes receivable 929,000 (176,000)
Other receivables - 149,000
Inventories 512,000 (487,000)
Prepaid expenses and other current assets 152,000 (150,000)
Long-term receivables and other assets (39,000) 1,000
Accounts payable and accrued expenses 504,000 927,000
Customer advances - 243,000
Accrued interest on stockholder note - (25,000)
----------- -----------
Net cash used in operating activities (3,904,000) (4,380,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (652,000) (544,000)
Minority interest investment in subsidiaries - 28,000
Acquisition of business, net of cash
acquired - 165,000
----------- -----------
Net cash used in investing activities (652,000) (351,000)
----------- -----------
Cash flows from financing activities:
Net proceeds received from issuance of
stock of subsidiary - 5,137,000
Proceeds received from common stock
issuances upon exercise of stock
options - 1,386,000
Proceeds received from issuance of
preferred stock 50,000 -
Advance from stockholder (152,000) 200,000
Repayment of loan receivable from
stockholder 450,000 314,000
Repayment of loan from stockholder - (50,000)
Proceeds received from issuance of
note payable 2,950,000 -
Debt issuance costs (292,000) -
Payments on capital lease obligations (33,000) (2,000)
----------- -----------
Net cash provided by financing activities 2,973,000 6,985,000
----------- -----------
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
44
<PAGE>
STYLES ON VIDEO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Net change in cash and cash equivalents (1,583,000) 2,254,000
Cash and cash equivalents, beginning of year 4,361,000 2,107,000
----------- ----------
Cash and cash equivalents, end of year $ 2,778,000 $4,361,000
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Income taxes $ 9,000 $ 182,000
=========== ==========
Interest $ 56,000 $ 1,000
=========== ==========
</TABLE>
See independent auditors' report.
The accompanying notes are an integral part of
these consolidated financial statements.
45
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Year Ended December 31, 1995
NOTE 1 - DESCRIPTION OF BUSINESS
Styles on Video, Inc. ("SOV") was originally incorporated as a California
corporation in May 1992 as a wholly-owned subsidiary of New Image Industries,
Inc. ("New Image") and in January 1993 was reincorporated as a Delaware
corporation. On March 29, 1993, New Image distributed all of SOV's common stock
held by it to its stockholders (the "Distribution") on the basis of one share of
SOV's common stock for each five shares of New Image common stock held by a
stockholder. Immediately following the Distribution, SOV effected a rights
offering (the "Rights Offering") pursuant to which each stockholder received,
for each share of SOV common stock held, the right to purchase one share of SOV
common stock for $6.00 per share. Upon completion of the Distribution and the
Rights Offering, SOV became a publicly owned company.
On February 7, 1994, SOV acquired all of the outstanding stock of Dycam Inc.
("Dycam") for 346,140 shares of common stock of SOV. SOV's ownership of Dycam
was subsequently reduced to 61% as of December 31, 1994 (see Note 4). In April
1994, SOV purchased an 80% interest in Forever Yours, Inc. ("FYI") for $100,000
(see Note 4). SOV's ownership of FYI was subsequently increased to 100% as of
May 1996 (see Note 18). Additionally, during the third quarter of 1994, SOV
formed a wholly-owned franchising subsidiary, Styles Servicing, Inc. ("SSI").
However, SSI has not sold any franchises since January 1995, and its Uniform
Franchising Offering Circular has not been updated.
SOV's original business primarily consisted of the sale of computer-based
imaging systems ("Systems") designed to show customers what they look like
"wearing" various hairstyles. In addition to its hairstyle imaging systems, SOV
marketed various ancillary products, including blank video tapes, promotional
materials, and access discs which are necessary for the operation of certain
Systems. The Company's management does not believe that there is a sufficient
market for these products at their current price points to justify expenditures
on their continued promotion, manufacture or distribution. Consequently, in
January 1996 the Company began a complete wind-down of SOV's hairstyle and
beauty imaging business. During the wind-down period, the Company intends to
sell only those ancillary products which are currently part of its inventory and
does not intend to develop, market or sell existing or new SOV hairstyle and
beauty imaging systems.
Dycam designs and develops digital cameras and associated hardware and software
products primarily for use with personal computers. Dycam also performs
engineering and consulting services for FYI and for unrelated third parties.
FYI is a newborn baby photography business that was incorporated in April 1994.
FYI's primary products are digital newborn photographic portraits of newborns
which are taken while the newborns are still in the hospital nursery. The
photographs can be enhanced using image editing software. Sales at FYI
commenced in the first quarter of 1995. In January 1997, SOV and FYI entered
into an agreement to sell the FYI business to Hasco International, Inc.
("Hasco") (see Note 18). The sale is expected to close in April 1997, subject
to the approval of SOV's stockholders and other customary conditions. The
operating results of FYI have been shown in continuing operations for purposes
of these consolidated financial statements because FYI was part of the
consolidated business for all of 1996.
46
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended December 31, 1995
NOTE 2 - LIQUIDITY AND MANAGEMENT'S PLANS
SOV's consolidated financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. During 1995, SOV
experienced cash liquidity shortfalls resulting from operating deficiencies at
SOV's level and from the development and expansion of the business operated by
SOV's majority-owned subsidiary, FYI, which were funded primarily through the
IDI financing of $3,000,000 in November 1995 as described in Note 11. These
proceeds were primarily used to fund the operating requirements of SOV and FYI,
to reduce accounts payable of SOV, and to further the growth of the FYI
business.
The continued existence of SOV and its subsidiaries (collectively the "Company")
is dependent upon its ability to (a) achieve its 1996/1997 operating plan, (b)
obtain sufficient additional financing and (c) successfully resolve certain
contingencies (see Note 17). Management began the first half of fiscal year
1996 with the following positive events to assist the Company in the achievement
of this plan:
A. In January 1996, the Company decided to terminate its beauty imaging and
franchising systems operations and to significantly reduce the majority of
corporate overhead at the SOV level. The Company will continue to sell its
beauty imaging ancillary products for the foreseeable future.
B. FYI and Dycam each reported increased revenues in 1996. FYI achieved a
steady growth in revenues during 1996.
C. In May 1996, the Company entered into a financing agreement with IDI for
additional financing of $1,250,000 (see Note 18).
From September 1996 through January 1997, the Company and FYI borrowed an
additional $927,000 from IDI pursuant to a $977,000 Bridge Note (see Note 18).
Effective January 31, 1997, SOV and FYI entered into an agreement to sell the
FYI business to Hasco. In January 1997, FYI borrowed $180,000 from Hasco
pursuant to the Loan Agreement whereby Hasco will lend to FYI up to a total of
$540,000 prior to the closing (see Note 18). The proceeds of the FYI sale, net
of transaction costs and satisfaction of FYI's obligations (excluding its
indebtedness to IDI), will not be sufficient to fully repay the Company's and
FYI's obligations to IDI, or to fully satisfy the Company's other liabilities to
its creditors. IDI has a first priority security interest in all remaining
assets of the Company, including the remaining net proceeds from the FYI sale,
except for the second priority position it holds on the shares of Dycam common
stock owned by the Company, as to which Dycam has a first priority security
interest.
The Company's current liabilities exceeded its current assets as of January 31,
1997. In order for the Company to continue its operations after the FYI sale,
it will be required to obtain additional financing from IDI or other sources, or
IDI will need to consent to postpone the repayments due from the Company and FYI
on all or part of the Company's and FYI's notes payable to IDI. Neither IDI nor
any other sources have indicated a willingness to loan additional funds to the
Company. Additionally, IDI has not indicated an intention to consent to the
postponement of the repayment it is entitled to on the notes payable to IDI from
the Company and FYI.
The consolidated financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is
47
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended December 31, 1995
NOTE 2 - LIQUIDITY AND MANAGEMENT'S PLANS, continued
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to achieve profitable operations.
The Company has defaulted on its notes payable to IDI (see Notes 12 and 18), and
has historically received waivers for such defaults. There can be no assurance
that the Company will receive future waivers, if needed, from IDI. If future
defaults occur, and waivers are not obtained, the notes payable could become
immediately due, SOV's and/or FYI's assets could be taken in satisfaction of the
amounts due pursuant to the IDI financing, and, if no excess remains, funds
might not be available to meet SOV's obligations, including, without limitation,
the repayment of the $1,000,000 note owed to Dycam.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Minority Interests
- ------------------------------------
The consolidated financial statements include the accounts of the Company. All
significant intercompany balances and transactions have been eliminated. The
minority interests represent the 39% separate public ownership of Dycam and the
20% ownership of FYI by its President through May 1996, at which time FYI became
a wholly-owned subsidiary.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, accounts receivable, long-term debt and accounts payable. The
carrying amounts of the Company's financial instruments generally approximate
their fair values at December 31, 1995.
Cash and Cash Equivalents
- -------------------------
The Company considers cash on hand, cash in banks, certificates of deposit, time
deposits and U.S. government and other short-term securities with remaining
maturities of three months or less when purchased to be cash and cash
equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost or market using the first-in, first-
out method. Inventories for SOV consist of mostly purchased finished
components. Inventories for Dycam consist of cameras and camera components,
image editing software and camera accessories.
48
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended December 31, 1995
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and gains or losses from retirements and dispositions are credited or
charged to income. Depreciation and amortization are computed using the
straight-line method over the shorter of the estimated useful lives of the
respective assets or terms of the related leases. The useful lives and lease
terms range from three to ten years.
Goodwill
- --------
Goodwill, which represents the excess of the purchase price over the fair value
of net assets acquired resulting from the Dycam acquisition, is amortized on a
straight-line basis over the expected periods to be benefitted. Dycam assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted future cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted future cash
flows and is charged to operations in the period in which goodwill impairment is
determined by management. Goodwill has been amortized in 1995 and 1994 on a
straight-line basis over the expected twenty-year life. During 1995 and 1994,
Dycam recorded $278,000 and $249,000 of amortization expense, respectively. At
December 31, 1995 and 1994, management of Dycam determined that there was no
impairment of goodwill.
Capitalized Software Development Costs
- --------------------------------------
The Company capitalizes costs incurred for the development of certain computer
software in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise
Marketed." Capitalization of computer software development costs begins upon
the establishment of technological feasibility. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs requires external factors,
including, but not limited to, technological feasibility and obsolescence,
anticipated future gross revenues, estimated economic life, changes in software
and hardware technology, and patent and trademark law and litigation.
Amortization of capitalized computer software costs is provided for on a
product-by-product basis at the greater of the amount computed using a ratio of
current gross revenues for a product to the total of current anticipated future
gross revenues or the straight-line method over the remaining estimated economic
life of the product. Generally, an original estimated economic life of two
years (SOV) or five years (Dycam) is assigned to capitalized computer software
development costs. During the years ended December 31, 1995 and 1994, no
software development costs were capitalized or amortized.
Debt Issuance Costs
- -------------------
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the lives of the
related debt.
49
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Sale of Subsidiary Stock
- ------------------------
The Company accounts for a change in its proportionate share of a subsidiary's
equity resulting from the issuance by the subsidiary of its stock as an equity
transaction in the consolidated financial statements.
Revenue Recognition
- -------------------
The Company recognizes revenue from System and software sales at the time of
shipment in accordance with the requirements of AICPA Statement of Position 91-1
on Software Revenue Recognition. The Company has no obligation to customers
after delivery of its Systems except for warranty related work described below.
Any follow-up work performed is billed when the services are performed, and the
related revenue is recognized upon completion of services.
The Company has exclusive licensing agreements covering the Styles on Video
automated software with numerous international distributors. In general, a
licensee signs an agreement to purchase a minimum number of software packages at
a specified price and is concurrently granted an exclusive right to operate the
Systems and offer Styles on Video services in their territory. Continuing
exclusivity is dependent on meeting subsequent yearly sales quotas. Failure to
meet or exceed the established yearly quotas for sales can result in the license
being revoked. Revenue is recognized upon shipment of the software packages.
Revenues from camera sales and sales of portraits of newborns are recognized
upon shipment of products. Contract engineering fees are recognized when the
service is performed. License fee revenues are recognized when earned.
Revenue from the franchising of Systems is recorded using the installment
method. The franchise fee is based on the population of a given area, and
exclusivity is maintained by selling a minimum number of franchises each year.
A small cash down payment is required and the balance of the franchise fee is
financed by the Company. Payment on the unsecured franchise notes receivable is
only required to be made from a percentage of the commissions earned by
franchisees for the sale of Styles on Video franchises, equipment or supplies.
As a result of the limited operating history of the franchisees, their inability
to sell the minimum number of franchises, and their current inability to sell
franchises, only the cash down payment and percentage of commissions received
are reflected as revenues in the consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company has
stopped selling Systems effective January 1996 and intends to be out of the
hospital newborn baby photography business in April 1997, subject to the closing
of the FYI Sale (see Note 18). Accordingly, future revenues will be those
generated primarily from Dycam.
Warranty Expense
- ----------------
The Company generally warrants its Systems for up to one year. A provision for
estimated future costs related to warranty and training is recorded when Systems
are shipped. The provision in these consolidated financial statements is not
significant; however, management believes that it is adequate for anticipated
future costs.
50
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Advertising
- -----------
The Company reports the costs of all advertising as expense in the period in
which those costs are incurred. Advertising expense was $262,000 and $588,000
for the years ended December 31, 1995 and 1994, respectively.
Income Taxes
- ------------
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109") effective January 1, 1993. SFAS 109
requires the asset and liability method of accounting for income taxes. Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established, when
necessary to reduce deferred tax assets to the amount expected to be realized.
Loss Per Common Share
- ---------------------
Net loss per common share is computed on the basis of the weighted average
number of common and dilutive common equivalent shares outstanding. Common
stock equivalents consist of options and warrants outstanding. No common stock
equivalents were included in the computation of net loss per common share for
1995 and 1994 as they would have decreased the loss per share.
Reclassifications
- -----------------
Certain 1994 amounts were reclassified to conform to the 1995 presentation.
NOTE 4 - ACQUISITIONS
Dycam Inc.
- ----------
On February 7, 1994, the Company acquired all of the outstanding shares of Dycam
in exchange for 346,140 shares of the Company's common stock valued at
$5,495,000, plus acquisition costs of $108,000. The acquisition was accounted
for using the purchase method, and the purchase price was allocated to assets
and liabilities based on their estimated fair values as of the date of
acquisition. The cost in excess of net assets acquired of $5,554,000 was
allocated to goodwill. In accordance with Staff Accounting Bulletin No. 54, the
financial statements of Dycam as of the acquisition date were adjusted to "push-
down" the Company's cost of acquiring the common stock of Dycam.
51
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 4 - ACQUISITIONS, continued
Additionally, in connection with the above acquisition, Dycam issued 142,742
shares of common stock, totaling $137,000, in connection with the exercise of
options by employees (at exercise prices ranging from $.80 to $2.01) and 114,532
shares of common stock to two unrelated parties as fees in connection with the
acquisition.
In April 1994, Dycam declared a dividend distribution consisting of the right to
purchase 1,000,000 shares of its common stock at $6.00 per share. The Company
distributed to its stockholders one right for each five shares of SOV common
stock held of record as of May 27, 1994. The rights offering closed on July 12,
1994, and Dycam's common stock began trading on July 18, 1994. The Company
retained an approximate 66% majority interest in Dycam, which was reduced to
approximately 61% by December 31, 1994 as a result of the issuance by Dycam of
204,169 shares of its common stock upon the exercise of stock options at $6 per
share (consisting of $25,000 cash and the settlement of a related put obligation
in the amount of $1,199,832). At December 31, 1995, the Company held 1,916,667
shares of Dycam's 3,120,836 shares of common stock then outstanding. Dycam has
issued options for 502,079 shares of its common stock, of which 271,079 were
exercisable at December 31, 1995. Had the options for the remaining 502,079
shares been exercised in 1995 (average exercise price of $3.91), the Company's
equity interest in Dycam would have been reduced from 61% to 53%. The net
proceeds of the rights offering of $4,976,000 (net of offering costs and
underwriting fees and expenses) were retained by Dycam.
The pro forma results of the Dycam acquisition for 1994 would be approximately
the same as the 1994 actual results, since the acquisition was made near the
beginning of fiscal 1994.
Forever Yours, Inc.
- -------------------
In April 1994, the Company purchased an 80% interest in FYI for $100,000. The
20% minority interest in FYI was held by the President of FYI until May 1996, at
which time FYI became a wholly-owned subsidiary of SOV (see Note 18). FYI was
in the development stage until the first quarter of fiscal 1995, at which time
revenues from product sales commenced.
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Company maintains cash and cash equivalents with high credit quality
financial institutions. At times such investments in any one institution may
exceed the federally insured limit of $100,000.
Concentration of credit risk with respect to accounts receivable is generally
limited due to the diversity of the Company's customer base. The Company
provides credit, in the normal course of business, to individuals and
corporations who purchase digital cameras and related products. Sales of
hairstyle beauty systems and related products and newborn portraits are
generally made on a credit card or C.O.D. basis. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses. The Company generally does not obtain collateral to secure its
receivables.
52
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 6 - STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
During 1995, the Company wrote-off $243,000 of accounts receivable as
uncollectible.
In 1995 and 1994, the Company entered into capital lease obligations of $84,000
and $96,000, respectively to acquire equipment.
In 1995, certain vendors forgave approximately $255,000 of accounts payable owed
to them, which has been reflected as an extraordinary item in the accompanying
statement of operations, net of tax of $0.
In 1994, the Company acquired Dycam in exchange for shares of the Company's
common stock (see Note 4). Additionally, the Company issued shares of its
common stock upon the exercise of warrants in exchange for a note receivable for
$648,000 (see Note 15). The Company also entered into capital lease obligations
of $96,000 to acquire equipment and issued 10,000 shares of the Company's common
stock to acquire technology valued at $100,000, which was subsequently written
off as of December 31, 1994.
NOTE 7 - INVENTORIES
- --------------------
The components of inventory at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Raw materials $ 579,000 $ 459,000
Work-in-process 145,000 129,000
Finished goods 82,000 730,000
---------- ----------
$ 806,000 $1,318,000
========== ==========
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment at December 31 is comprised of the following:
1995 1994
---------- ----------
Machinery and equipment $ 884,000 $ 466,000
Office equipment and furniture 317,000 130,000
Leasehold improvements 93,000 -
---------- ----------
1,294,000 596,000
Less accumulated deprecation
and amortization (303,000) (137,000)
---------- ----------
$ 991,000 $ 459,000
========== ==========
</TABLE>
53
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 9 - LONG-TERM RECEIVABLES
Long-term receivables at December 31, 1995 and 1994 include $450,000 due from a
corporation organized under the laws of Belgium, due October 1996, bearing
interest at 10% payable monthly, and collateralized by equipment and software.
The entire $450,000 is reserved at December 31, 1995 and 1994.
NOTE 10 - INCOME TAXES
The provision for income taxes for the years ended December 31 consists of the
following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Current:
Federal $ - $ -
State 9,000 9,000
------ -------
$9,000 $9,000
====== =======
</TABLE>
The Company has recorded income taxes receivable relating to the restatement of
its 1993 financial statements.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31 are presented below:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful accounts $ 339,000 $ 524,000
Inventory 37,000 154,000
Net operating loss carryforwards 7,359,000 4,695,000
Tax credit carryforwards 70,000 40,000
Litigation settlement - 108,000
Other 22,000 49,000
----------- -----------
Total gross deferred tax assets 7,827,000 5,570,000
Less valuation allowance (7,787,000) (5,570,000)
----------- -----------
Net deferred tax assets 40,000 -
Deferred tax liability -
Depreciation (40,000) -
----------- -----------
Net deferred tax liability $ - $ -
=========== ===========
</TABLE>
During 1995 and 1994, the deferred tax assets valuation allowance increased
$2,217,000 and $5,179,000, respectively, due primarily to the increase in the
net operating loss carryforwards, which will be realized only if the Company
generates net taxable income in future years.
54
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 10 - INCOME TAXES, continued
The differences between total income tax expense and the income tax benefit
computed by applying the U.S. Federal income tax rate of 34 percent to loss
before income taxes and extraordinary item from operations are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Computed "expected" tax benefit $(2,069,000) $(2,148,000)
Change in valuation allowance for
deferred tax assets 1,962,000 2,060,000
State taxes, net of benefit 6,000 6,000
Goodwill 103,000 85,000
Other 7,000 6,000
----------- -----------
$ 9,000 $ 9,000
=========== ===========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for
Federal and California franchise tax purposes totaling $19,875,000 and
$9,800,000, respectively, which begin expiring in the years 2008 and 1998,
respectively. Included in the Federal and California net operating loss
carryforwards is $6,056,000 and $3,028,000, respectively, resulting from the
deduction for tax purposes of compensation expense relating to the exercise
during 1994 of nonqualified stock options. Upon realization, the related tax
benefit will be added to additional paid-in capital and will not impact the
Company's future earnings.
In general, Section 382 of the Internal Revenue Code includes provisions which
may limit the amount of net operating loss carryforwards and other tax
attributes that may be used annually in the event that a greater than 50%
ownership change (as defined) takes place in any three-year period. Such
limitations can result in limitations on the parties' use of net operating loss
carryforwards.
NOTE 11 - FINANCING AGREEMENT
In November 1995, the Company executed a Financing Agreement with International
Digital Investors, L.P. ("IDI"), a Delaware limited partnership. The Financing
Agreement was amended in March and May 1996 and in January 1997. Pursuant to
the terms of the Financing Agreement, as amended (the "1995 Agreement"):
A. SOV and FYI co-issued $2,950,000 of 10% notes due June 30, 1998 (the "1995
Notes"). Interest on the 1995 Notes is payable monthly, and quarterly
principal payments of $500,000 commence no later than May 1, 1997. Payment
of unpaid interest accruing on the outstanding 1995 Notes is deferred to
not later than May 1, 1997 if operating cash flows are not positive. The
1995 Notes are redeemable, in whole or in part, by SOV and FYI prior to
maturity without penalty. They are subject to mandatory redemption, at
par, under certain conditions specified in the 1995 Agreement, which
include net cash proceeds from the issuance of equity and the sale or other
disposition of certain assets. The 1995 Note holders have the option to
put the Senior Notes, at par, in the event of a sale, merger, change of
control or public offering involving SOV or FYI.
55
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 11 - FINANCING AGREEMENT, continued
Substantially all assets of SOV and FYI are pledged as collateral on the
1995 Notes, except for the 1,916,667 shares of Dycam common stock owned by
SOV which collateralize the $1,000,000 note payable to Dycam, and FYI's
hospital contracts and proceeds thereof which collateralize the Hasco Loan
(see Note 18). The 1995 Notes make SOV and FYI subject to restrictive
covenants, including the incurrence of additional indebtedness, maintenance
of net worth and other financial covenants, and limitations on capital
expenditures, investments, transactions with affiliates, and consolidation,
merger and sales of assets. At December 31, 1996 and 1995, the Company was
in default of certain restrictive covenants, which defaults have been
waived by the 1995 Note holders. Compliance with the terms of the
Agreement is determined as of the end of each calendar quarter. Should the
Company be in violation of any of the covenants at a future date, waiver of
such violation is at the sole discretion of the 1995 Note holders. If
future defaults occur, waivers are not obtained, SOV's and/or FYI's assets
are taken in satisfaction of the amounts due pursuant to the IDI financing,
and no excess remains, funds might not be available to meet SOV's
obligations, including, without limitation, the repayment of the $1,000,000
note owed to Dycam.
B. The Company issued 500 shares 10% Senior Series A Convertible Preferred
Stock (the "Series A Preferred Stock") at $100 per share, for total
consideration of $50,000. Dividends are payable quarterly and will accrue
whether or not declared by the Board of Directors. The liquidation
preference is $50,000 plus accrued dividends. The Series A Preferred Stock
is convertible at any time, in whole or in part, at the option of the
holder into shares of the Company's common stock, at a per share conversion
price equal to the higher of the current market or book value of the common
stock at the date of conversion. As long as the common stock warrants (see
C. below) remain unexercised, the Series A Preferred Stock, voting as a
class, is entitled to elect four of the Company's seven directors. In the
event of a change of control, as defined in the 1995 Agreement, the Company
must offer to purchase all outstanding Series A Preferred Stock at a price
equal to the liquidation preference thereof at that time, and pay all
unpaid accrued dividends.
C. The Company was required to issue common stock purchase warrants which
entitle IDI to purchase 3,914,882 shares of the Company's common stock
equivalent to 40% of the fully diluted common shares outstanding on the
date of the Agreement (the "1995 Warrants"). The exercise price was $1.12
per warrant, which management believes represented the fair market value at
the date of issuance. Such warrants were repriced in May 1996 to $.075 per
warrant in conjunction with the 1996 Agreement (see Note 18). The warrants
may be exercised at any time at the option of the holder prior to
expiration ten years from the date of issuance. On January 15, 1997, the
Company issued 4,347,427 shares of its common stock to IDI in exchange for
all of the 1995 Warrants and a portion of the warrants issued to IDI in
connection with the May 1996 financing (see Note 18).
Use of the funds under the 1995 Agreement was limited to the repayment of bridge
financing obtained in 1995 and related accrued interest, transaction costs and
furtherance of the Company's business plans, specifically the expansion of FYI's
business (see Note 18).
56
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 12 - LONG-TERM DEBT
Long-term debt at December 31, 1995 consists of the long-term portions of a
$2,950,000 10% 1995 Note payable to IDI (see Note 11) and a $250,000 9% note
payable issued in connection with the settlement of the stockholder class action
and derivative lawsuits (see Note 17).
In May 1996, IDI agreed to loan to SOV and FYI up to $1,200,000 (the "1996
Notes") (see Note 18). As of August 15, 1996, $1,020,000 was borrowed under the
1996 Notes, of which $870,000 was repaid with funds received from the settlement
of a lawsuit against the Company's former independent accountants. As of
January 31, 1997, the amount outstanding under the 1996 Notes was $29,000 (see
Note 18).
Principal payments required on long-term debt (other than capital leases),
including the 1996 Notes, for each of the next three years ending December 31
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 83,000
1997 2,257,000
1998 1,010,000
----------
$3,350,000
==========
</TABLE>
The Company leases certain equipment under noncancelable capital leases.
Subsequent to December 31, 1995, the Company entered into one new noncancelable
capital lease for additional equipment with net future minimum lease payments of
$47,000 over the next five years. Future minimum lease payments under these
leases, including the one new capital lease, for each of the next five years
ending December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 98,000
1997 99,000
1998 47,000
1999 5,000
--------
Total 249,000
Less amounting representing interest (57,000)
--------
Net minimum lease payments $192,000
========
</TABLE>
NOTE 13 - STOCKHOLDERS' EQUITY
On February 7, 1994, the Company completed the acquisition of Dycam by issuing
346,140 shares of the Company's common stock having a value of approximately
$5,495,000. Acquisition costs, including attorney fees and other related
expenses, totaled $108,000.
In October 1994, the Company issued 10,000 shares of its common stock to another
corporation for $100,000 in exchange for the U.S. retail distribution rights to
the Starmaker product. The rights were terminated in 1995 in accordance with a
letter agreement whereby the Company paid $25,000 and the other corporation
also retained the 10,000 shares.
57
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 13 - STOCKHOLDERS' EQUITY, continued
In March 1993, the Company sold to the underwriter in its public offering
warrants at a price of $.001 each to purchase 135,000 shares of common stock at
a price of $4.80 per share. These warrants were exercised during 1994 (see Note
14).
NOTE 14 - STOCK INCENTIVE PLANS
In January 1993, the Company adopted a stock incentive plan (the "1992 Plan")
which provides for the granting of (i) incentive stock options to employees,
(ii) stock purchase rights to employees, or (iii) nonqualified stock options to
employees, officers and, under certain circumstances, directors. The Company
has reserved 450,000 shares of common stock for issuance under this plan.
Options granted under the 1992 Plan may be granted at prices not less than 100%
of the then fair market value of the common stock and expire not more than five
years from the date of grant.
In January 1993, the Company adopted a stock option plan for directors (the
"Directors' Plan") of the Company. The Company has reserved 150,000 shares of
common stock under the Directors' Plan. Options granted under the Directors
Plan may be granted at prices not less than 100% of the then fair market value
of the common stock and expire not more than ten years from the date of grant.
In June 1993, the Company adopted a stock incentive plan (the "1994 Plan")
pursuant to which there are 450,000 shares of common stock reserved. The 1994
Plan is substantially identical in terms to the 1992 Plan. Options granted
under the 1994 Plan may be granted at prices not less than 85% of the then fair
market value of the common stock and expire not more than ten years from the
date of grant.
Option activity for the years ended December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1992 1994 Directors' Total Exercise
Plan Plan Plan Other Options Price
-------- -------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 1, 1994 441,541 30,000 37,236 730,344 1,239,121 $ .075-$8.67
Options granted - 232,000 44,824 100,000 376,824 $.075-$11.00
Options exercised (61,000) (15,000) (12,412) (730,344) (818,756) $ .24-$8.67
Options canceled or
surrendered (17,300) - - - (17,300) $ 4.00
------- ------- ------- -------- ---------
Options outstanding at
January 1, 1995 363,241 247,000 69,648 100,000 779,889 $.075-$11.00
Options granted - 180,000 - - 180,000 $.075-$ 1.12
Options exercised - - - - - -
Options canceled or
surrendered (24,750) - (69,648) (100,000) (194,398) $2.94-$11.00
------- ------- ------- -------- --------
Options outstanding at
December 31, 1995 338,491 427,000 - - 765,491 $.075-$ 9.88
======= ======= ======= ======== =======
</TABLE>
58
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 14 - STOCK INCENTIVE PLANS, continued
Certain shares were repriced to $3.00 in 1995 and $.075 in May of 1996 (see Note
18). The above table reflects both repricings.Options exercisable at December
31, 1995 were 460,000 at prices ranging from $.075 to $9.88.
Options available for grant were 150,000 shares at December 31, 1995.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25. The disclosure
requirements for the Company required by Statement No. 123 will be effective for
the Company's 1996 financial statements.
NOTE 15 - RELATED PARTY TRANSACTIONS
At December 31, 1994, the Company was owed $450,000 on an original $648,000
note, including accrued interest, by a Company affiliated with a former SOV
board member, who was the underwriter for the Company, for the exercise of
warrants issued pursuant to the initial public offering of the Company. The
note bore interest of 6% per annum, was collateralized by 62,000 shares of SOV
common stock held by the underwriter, and was due March 31, 1995. This note,
net of discount of $123,000, was repaid in April 1995.
In December 1994, the Company received a $200,000 advance from its former Chief
Executive Officer. Of this amount, $48,000 was outstanding as of December 31,
1995. In July 1996, in connection with the settlement of the Stockholder Class
Action and Derivative Lawsuits (see Note 17), the Company was released from
obligation of the outstanding balance.
At January 1, 1994, a stockholder owed the Company $214,000. The loan was
extended on a non-interest, uncollateralized basis, principally to purchase
common stock of the Company. This stockholder repaid this loan on April 14,
1994.
In May 1995, the Board granted 50,000 options each to the Company's Chief
Financial Officer and Acting Chief Operating Officer at an original exercise
price of $3.00 (subsequently repriced to $.075). The options vested 25%
immediately and 2% per month thereafter.
In October 1995, the Board approved the grant of 40,000 fully vested options
each to two directors, who subsequently resigned from the Company's Board of
Directors in November 1995, at an exercise price of $1.12.
In November 1995, total intercompany advances outstanding of $2,700,000 were
contributed by SOV to FYI equity in conjunction with the Financing Agreement
(see Note 11).
59
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 16 - 401(k) PLAN
The Company, Dycam and FYI have 401(k) plans for their employees which went into
effect August 1, 1994. All individuals already employed on that date were
considered eligible for the plans. Individuals employed subsequent to that date
are eligible upon completing two months of service. In accordance with the
terms of the plans, employees may contribute up to 15% of their pretax earnings
to the plans. The Company may make a discretionary contribution of up to 6% of
the employee's pretax earnings. The Company's contributions for the years ended
December 31, 1995 and 1994 for all plans were $51,000 and $24,000, respectively.
On April 1, 1995, the Company's plan was amended whereby employees are eligible
to participate upon completing six months of service.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Facilities Leases
- -----------------
During 1994, the Company leased its office facilities under operating leases
that expired in 1995. During 1995, the Company entered into new operating
leases for its new facilities that expire through 2000.
The minimum annual future rental commitments for the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
<S> <C>
1996 $198,000
1997 207,000
1998 110,000
1999 101,000
2000 42,000
--------
$658,000
========
</TABLE>
Rent expense for the years ended December 31, 1995 and 1994 was $225,000 and
$159,000, respectively.
Employment Agreements
- ---------------------
Dycam has employment agreements with four key employees for three-year terms
which expire in February 1997. The agreements call for annual compensation to
be paid to these four employees aggregating $378,000 a year for each of the
three years.
In April 1994, FYI entered into an employment agreement with its then-Chief
Executive Officer which covered a three-year term expiring on April 5, 1997 for
which the annual compensation to be paid was $180,000, $225,000 and $260,000,
respectively. The agreement was canceled in May 1996 and FYI entered into a new
employment agreement with its then-Chief Executive Officer which covers a two-
year term expiring in May 1998 for which the base annual compensation to be paid
is $100,000. If certain cash flow conditions were met, compensation increased
to $175,000 per annum. If he were terminated without cause, he would be
entitled to receive a lump-sum payment equal to the aggregate salary due to
60
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 17 - COMMITMENTS AND CONTINGENCIES, continued
him for the then remaining term of the agreement and immediate vesting of any
unvested options and warrants (see Note 18).
Stockholder Class Action and Derivative Lawsuits
- ------------------------------------------------
The Company entered into a settlement of a class action lawsuit which was filed
against the Company and certain of its officers and directors in December 1994,
as well as a stockholders' derivative lawsuit which named the directors and
certain of the officers of the Company. Pursuant to the terms of the final
settlement, the Company agreed to deliver to the plaintiff class warrants to
purchase 1,750,000 shares of the Company's common stock and agreed to issue a 9%
promissory note in the principal amount of $250,000, payable in three equal
installments on July 1, 1996, January 1, 1997 and July 1, 1997. The exercise
price of the warrants is $.075 per warrant share. The warrants have a five-year
life and are redeemable by the Company at any time for $5 per warrant. The
Company does not have sufficient authorized share capital to reserve for
1,000,000 of the 1,750,000 warrants it intends to issue to the plaintiff class.
The Company is seeking stockholder approval of a reverse stock split in April
1997 in order to have a sufficient number of shares available for issuance.
Also as part of the settlement, the Company's director and officer liability
insurance carriers agreed to pay $2,250,000. In the derivative case, the former
Chairman and Chief Executive Officer of the Company, agreed to the surrender of
250,000 shares of the Company's common stock held by him and to the cancellation
of options for 150,000 shares of the Company's common stock held by him. The
surrendered shares are to be distributed to the class plaintiffs and the options
have been canceled. The settlement received final approval by the District
Court in July 1996.
Durian Lawsuit
- --------------
On October 20, 1995, Durian Technologies, Inc. and Durian Finance (collectively,
"Durian") filed a complaint against SOV for breach of contract, fraud and
negligent representation in connection with financing arrangements with Durian
for the benefit of SOV and seeks an accounting and declaratory relief. Durian
also seeks an unspecified amount of damages. SOV responded to the complaint in
January 1996. In late 1996, the parties agreed to a conditional settlement of
this action, under the terms of which the action was dismissed without prejudice
and the plaintiffs received an option to obtain the Company's interest in the
"Try Us On System." The parties continue to discuss this matter.
Other Legal Matters
- -------------------
The Company is also a party to other actions arising in the ordinary course of
business which, in the opinion of management, will not have a material adverse
impact on the Company's consolidated financial condition.
Note Payable to Dycam
- ---------------------
In December 1994, Dycam made a loan of $500,000 to the Company. In January
1995, the note was increased to $1,000,000. The note is collateralized by the
1,916,667 shares of Dycam common stock owned by the Company. The note, which
was originally due on September 1, 1995, was extended in 1995 to December 1998,
and the annual interest rate was fixed at 10%. All other provisions of the note
remained substantially the same.
61
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
At December 31, 1995, Dycam's cash and cash equivalents were $1,374,000. Except
for the advances described above, Dycam is not obligated to transfer any cash to
the Company and its other subsidiaries, and the management of Dycam has
expressed its intent to utilize its liquid assets solely to fund the future
operations of Dycam.
NOTE 18 - SUBSEQUENT EVENTS
Additional Financing Agreement
- ------------------------------
In May 1996, the Company executed a series of agreements which included an
Additional Financing Agreement (the "1996 Agreement") with IDI. The 1996
Agreement was amended in January 1997. Pursuant to the terms of the 1996
Agreement, as amended:
A. SOV and FYI co-issued and are entitled to borrow up to $1,200,000 pursuant
to 10% notes due June 30, 1998 (the "1996 Notes"). The loans are to be
funded in varying increments between May and September 1996, contingent
upon SOV and FYI reaching certain specified performance goals. Interest on
the 1996 Notes is payable monthly, however, may be deferred through up to
May 1, 1997 provided operating cash flows, as defined, is not positive.
Equal quarterly principal payments of one-fifth of the outstanding
principal amount of the 1996 Notes as of June 30, 1997 commence June 30,
1997. The 1996 Notes are redeemable, in whole or in part, by SOV and FYI
prior to maturity without penalty. They are subject to mandatory
redemption, at par, under certain conditions specified in the 1996
Agreement, which include net cash proceeds from the issuance of equity and
the sale or other disposition of certain assets. The 1996 Note holders
have the option to put the 1996 Notes, at par, in the event of a sale,
merger, change of control or public offering involving SOV or FYI.
Substantially all assets of SOV and FYI are pledged as collateral on the
1996 Notes and 1995 Notes (see Note 11), except for the 1,916,667 shares of
Dycam common stock owned by SOV which collateralize the $1,000,000 note
payable to Dycam, and FYI's hospital contracts and proceeds thereof which
collateralize the Hasco Loan. The 1996 Notes are subject to restrictive
covenants, including the incurrence of additional indebtedness, maintenance
of net worth and other financial covenants, and limitations on capital
expenditures, investments, transactions with affiliates, and consolidation,
merger and sales of assets. At December 31, 1996, the Company was in
default of certain restrictive covenants, which defaults have been waived
by the 1996 Note holders. Compliance with the terms of the 1996 Agreement
is determined as of the end of each calendar quarter. Should the Company
be in violation of any of the covenants at a future date, waiver of such
violation is at the sole discretion of the 1996 Note holders. If future
defaults occur, waivers are not obtained, SOV's and/or FYI's assets are
taken in satisfaction of the amounts due pursuant to the IDI financing, and
no excess remains, funds will not be available to meet SOV's obligations,
including, without limitation, the repayment of the $1,000,000 note owed to
Dycam.
B. The Company issued 500 shares of 10% Senior Series B Convertible Preferred
Stock (the "Series B Preferred Stock") at $100 per share, for total
consideration of $50,000. Dividends are payable quarterly and will accrue
whether or not declared by the Board of Directors. The liquidation
preference is $50,000 plus accrued dividends. The Series B Preferred Stock
is convertible at any time after October 31, 1996 (earlier if certain
conditions are met), in whole or in part, at the option of the holder into
shares of the Company's common stock, at a beginning per share
62
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 18 - SUBSEQUENT EVENTS, continued
conversion price equal to $.075 subject to adjustments as defined in the
preferred stock certificate. In the event of a change of control, as
defined in the Additional Agreement, the Company must offer to purchase all
outstanding Series B Preferred Stock at a price equal to the liquidation
preference thereof at that time, and pay all unpaid accrued dividends.
C. The Company is required to issue 53,286,228 common stock purchase warrants
(the "1996 Warrants") which together with the warrants issued in connection
with the 1995 Agreement and the Series A Preferred Stock and Series B
Preferred Stock entitle IDI to purchase shares of the Company's common
stock equivalent to 75% of the fully diluted common shares outstanding on
the date of the 1996 Agreement. The exercise price is $.075 per warrant,
which management believes represents the fair market value at the date of
issuance. The warrants may be exercised at any time after stockholder
approval of a proposed reverse stock split is obtained, which is expected
to be not later than May 1, 1997 at the option of the holder prior to
expiration ten years from the date of issuance. On January 15, 1997, the
Company issued 4,347,427 shares of its common stock to IDI in exchange for
all of the 1995 Warrants and a portion of the 1996 Warrants exercisable for
1,867,029 shares of the Company's common stock. After the share exchange,
IDI remains the holder of 1996 Warrants exercisable for 51,419,199 shares
of the Company's common stock.
D. The minority shareholder of FYI, who was also the President of FYI until
his resignation in December 1996, surrendered all of the shares of common
stock of FYI held by him, in exchange for a warrant certificate issued by
SOV, evidencing warrants to purchase 7,747,449 shares of SOV's common
stock. The shares of FYI previously owned by him were canceled. As a
result of the transaction, FYI is now a wholly-owned subsidiary of the
Company. The exercise price is $.075 per warrant, which management
believes represents the fair market value at the date of issuance. The
warrants vest 25% May 1996, 25% November 1996, 25% May 1997 and 25% May
1998. Vested warrants may be exercised after stockholder approval of a
proposed reverse stock split is obtained, which is expected to be not later
than May 1, 1997 and prior to their expiration in November 2005.
E. The Company issued warrants to purchase 80,000 shares of SOV's common stock
to one of its directors in connection with the 1996 Agreement. The
exercise price is $.075 per warrant, which management believes represents
the fair market value at the date of issuance. The warrants vest 40,000 in
May 1996 and 40,000 in April 1997. Vested warrants may be exercised after
stockholder approval of a proposed reverse stock split is obtained, which
is expected to be not later than May 1, 1997 and prior to their expiration
in November 2005. The Company has granted the warrant holder certain
registration rights related to these warrants.
F. The Company entered into a consulting agreement (the "Consulting
Agreement") with an individual who later became its Chief Executive Officer
for services relating to the Company's business. In exchange for the
services, the Company is obligated to pay the consultant $12,500 per month
plus expenses. In addition, pursuant to the Consulting Agreement, the
Company issued warrants to purchase 250,000 shares of SOV's common stock at
an exercise price of $.075 per share, which management believes represents
the fair market value at the date of issuance.
63
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 18 - SUBSEQUENT EVENTS, continued
The warrants vest 100,000 in April 1996 and the remaining 150,000 on a pro-rata
basis over the subsequent twelve month period. The Company has granted the
warrant holder certain registration rights related to these warrants.
Use of the funds under the 1996 Agreement is limited to the repayment of interim
financing obtained in 1996 and related accrued interest, transaction costs, and
furtherance of the Company's business plans, specifically the expansion of FYI's
business. The Company does not have sufficient authorized share capital to
reserve for the warrants issued in connection with the May 1996 transactions.
The Company is seeking stockholder approval of a reverse stock split in April
1997 in order to have a sufficient number of shares available for issuance.
As of January 31, 1997, SOV and FYI had borrowed all available funds under the
1996 Notes.
In September 1996, the Company received a state income tax refund totaling
$301,000 which was used to repay IDI debt.
Suit Against the Company's Former Independent Accountants
- ---------------------------------------------------------
On January 22, 1996, the Company filed a suit against its former independent
accounting firm, along with certain individual accountants of the accounting
firm including Thomas Leaper, who also served as the Company's former Chief
Operating Officer and Chief Financial Officer. The suit asserts claims for
professional negligence, breach of contract and breach of fiduciary duty against
these defendants arising out of the services rendered in connection with the
Company's 1993 year-end audit and 1994 quarterly reports.
The suit was settled and received final approval in July 1996. Pursuant to the
settlement, the accounting firm agreed to pay $1,700,000 to the Company. A
portion of the $1,700,000 received in July 1996 was used to repay prior loans
from IDI (see "1996 Agreement" and Note 11), pay certain legal expenses, and the
balance will be used for operating expenses of SOV and FYI.
Insurance Provider
- ------------------
In 1996, a previous provider of the Company's excess director's and officer's
liability insurance has filed a suit claiming that they are entitled to
$1,000,000 of the $1,700,000 recovery received by the Company in connection with
the settlement to the suit against the Company's former independent accountants.
In October 1996, the Company filed a cross-complaint alleging bad faith and
seeking declaratory relief. SOV intends to vigorously defend the suit.
Suit Against the Company's Competitor
- -------------------------------------
On March 8, 1996, FYI filed a suit against a competitor. The suit asserts
claims for, among other things, unreasonable restraint of trade, monopolistic
practices, unfair competition, trade libel, and false and misleading
advertising. FYI seeks compensatory damages relief in excess of $10 million, as
well as punitive damages and injunctive relief. During the last quarter of
1996, the suit was dismissed without prejudice and the parties entered into a
tolling agreement with respect to the statute of limitations. The terms of the
FYI Sale provide that upon closing this suit will be dismissed with prejudice.
64
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 18 - SUBSEQUENT EVENTS, continued
Employment Agreements
- ---------------------
In August 1996, the Company entered into an employment agreement with its new
Chief Executive Officer. The agreement has an initial two-year term and
contains certain renewal provisions. Pursuant to the agreement, the Company
will pay its Chief Executive Officer an annual base salary of $230,000, subject
to increase at the sole discretion of the Board of Directors. In addition, the
Chief Executive Officer will be eligible to receive a one-time bonus of $50,000
if certain cash flow conditions are met. If the Chief Executive Officer's
employment is terminated, under certain circumstances, the Chief Executive
Officer is entitled to a termination payment of up to 100% of his annual base
salary.
Concurrently with the execution of the employment agreement, the Chief Executive
Officer was granted warrants to purchase an aggregate number of shares at an
exercise price of $.075 per share of the Company's common stock constituting 5%
of the Company's common stock on a fully-diluted basis. In addition, the
Company terminated its prior Consulting Agreement with its new Chief Executive
Officer.
On December 20, 1996, Dycam entered into an employment agreement contract with
one key employee for a three-year term which expires December 31, 1999. The
agreement calls for annual compensation of $120,000 a year for each of the three
years. Pursuant to the employment agreement, Dycam issued 90,000 stock options
that vest at a rate of 8.33% per calendar quarter. Additionally, Dycam issued
60,000 stock options to the employee that vest 8.33% per calendar quarter if
certain conditions are met.
1996 Stock Incentive Plan
- -------------------------
On August 26, 1996, the Company adopted a stock option plan (the "1996 Plan")
which provides for the granting of incentive or non-statutory options to
employees, consultants, officers and directors who will contribute to the
Company's long-range success. The Company has reserved 4,646,601 shares of
common stock for issuance under the plan. Such options generally will be
granted at fair market value at the date of grant and vest over time.
In September 1996, the Company granted 2,922,000 options under the 1996 Plan to
employees at an exercise price of $0.75 per share. The options have a ten year
term and vest 25% on grant and the remaining 75% over three years ratably per
month.
Full implementation of the 1996 Plan and related transactions is subject to
stockholder approval of the adoption of the 1996 Plan and a proposed reverse
stock split.
Termination and Settlement Agreement
- ------------------------------------
In December 1996, FYI's Chief Executive Officer resigned from FYI pursuant to a
termination and settlement agreement. The agreement provides that he shall
receive his current salary until no later than March 31, 1997. On the closing
of the FYI Sale, he is entitled to receive all unpaid salary due to him under
the employment agreement expiring in May 1998 at an annual base compensation of
$100,000. In addition, all of the warrants to purchase shares of the Company's
common stock held by him fully vest on the closing of the FYI Sale.
65
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
For The Year Ended December 31, 1995
NOTE 18 - SUBSEQUENT EVENTS, continued
IDI January 1997 Agreements
- ---------------------------
On January 15, 1997, the Company, FYI and IDI entered into several agreements
(the "January 1997 Agreements"). The Company and IDI entered into a Securities
Exchange Agreement (the "Exchange Agreement") which provided for the issuance of
4,347,427 shares of its common stock to IDI in exchange for all of the 1995
Warrants and for 1996 Warrants with respect to 1,867,029 shares of common stock.
IDI remains the holder of 1996 Warrants for 51,419,199 shares of common stock.
In addition, the Company, FYI and IDI agreed to increase the amounts borrowed
under the 1996 Notes by $180,000 to a total of $1,200,000. At the same time,
the obligation represented a new note dated September 19, 1996, as amended, (the
"Bridge Note") between the Company, FYI and IDI, was decreased by $180,000 under
the Seventh Amendment to Bridge Note, dated January 15, 1997 (the "Seventh
Amendment"), from up to $1,157,000 to up to $977,000. Each successive amendment
to the Bridge Note, including the Seventh Amendment, amended the due date and
the amounts due pursuant to the Bridge Note. The due date of the Seventh
Amendment was extended to not later than May 1, 1997. As of January 31, 1997,
the Company has borrowed $927,000 pursuant to the Bridge Note and is entitled to
draw the remaining $50,000 upon receipt by the Company of certain income tax
refunds. Substantially all of the assets of the Company and FYI are pledged as
collateral for the Bridge Note, except for the 1,916,667 shares of Dycam common
stock owned by SOV which collateralize the $1,000,000 note payable to Dycam.
IDI has the right to foreclose on such assets or take other protective measures
upon the occurrence of an event of default under the Bridge Note which is not
timely cured or waived. In January 1997, IDI subordinated its first priority
security interest in FYI's hospital contracts and proceeds thereof to Hasco (see
"FYI Sale").
The Company, FYI and IDI also entered into a General Amendment and Waiver
Agreement to (i) amend specific provisions of the 1995 Agreement, the 1996
Agreement, the 1996 Warrants, and the Certificate of Designation for Series B
Preferred Stock of SOV (collectively, the "Agreements"), and (ii) waive each of
the breaches or defaults with respect to specific provisions of the Agreements
as of January 15, 1997. The amendments extended: (i) the date by which the
Company must take all corporate action necessary to authorize and reserve for
issuance the number of shares of common stock into which the Series B preferred
stock and 1996 Warrants may be converted or exercised from October 31, 1996 to
no later than May 1, 1997; (ii) the deferral of interest payments due pursuant
to the Notes from December 31, 1996 to not later than May 1, 1997; and (iii)
extended the first principal repayment date of the 1995 Notes from March 1, 1997
to not later than May 1, 1997. In addition, the amendments reduced certain
minimum performance targets in the 1995 Agreement and 1996 Agreement.
The Company also issued a Series D Warrant (the "Series D Warrant") to IDI which
is exercisable for up to 61,803,805 shares of the Company's common stock at an
exercise price of $.075 per share. The Series D Warrants are contingent upon
the occurrence of a proposed reverse stock split. If the reverse stock split is
approved by the Company's stockholders and the Company and IDI complete the
second exchange of securities described below, then the Series D Warrants will
not be exercisable. However, if the reverse stock split is not approved by
April 15, 1997, then the Series D Warrants may be exercised by IDI prior to
November 20, 2005.
If the proposed reverse stock split is approved by the stockholders, the Company
intends to complete a second exchange of securities with IDI pursuant to which
the Company will issue an additional 39,342,461 (pre-reverse split) shares of
its common stock to IDI in exchange for all of the remaining 1996 Warrants with
respect to 51,419,199 (pre-reverse split) shares of the Company's common stock,
together with the surrender of the Series D Warrants. After the second security
exchange, IDI would continue to hold 500 shares of the Company's Series A
Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's common stock, equivalent
to 67% of the shares anticipated to be outstanding on the date of the second
exchange, which is anticipated to be April 15, 1997.
66
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 18 - SUBSEQUENT EVENTS, continued
FYI Sale
- --------
On December 13, 1996, the Company and FYI signed a letter of intent to sell
substantially all of the net assets of FYI to Hasco (the "FYI Sale"). Hasco
operates First Foto, a competitor of FYI in the newborn hospital photography
business. Effective January 31, 1997, the Company and FYI executed definitive
agreements with Hasco for the FYI Sale, which is expected to close in April 1997
subject to the approval of the Company's stockholders and other customary terms
and conditions. The sale price of $4,533,060 is payable $3,468,060 in cash at
the closing and $1,065,000 in twelve equal quarterly installments of $88,750
commencing three months after the closing. The sale price is subject to
adjustment for certain hospital contract terminations and certain operating
results prior to closing. The obligation of Hasco to make the installment
payments is unsecured and non-interest bearing.
The assets of FYI to be sold to Hasco (the "Purchased Assets") include
substantially all of the operating assets of FYI, excluding certain intellectual
property rights owned by FYI. With certain exceptions, Hasco will assume
substantially all obligations that arise after the closing under all hospital
and other specified contracts of FYI that are included in the Purchased Assets,
all of FYI's capital lease obligations, and all trade payables and commissions
arising after the closing. Hasco will not assume, and FYI will remain liable
for, all obligations and liabilities arising prior to the closing, and certain
hospital guarantee and commission payments, and certain payments related to
operations after the closing.
The Company has agreed to deliver to Hasco an option permitting Hasco to
purchase from the Company that number of shares of Dycam common stock equal to
4.9% of the outstanding shares of the common stock of Dycam on the closing date
(approximately 152,921 shares as of January 31, 1997). The exercise price of
this three-year option to be granted to Hasco will be equal to the average
closing price for Dycam common stock during the period from January 31, 1997
through the closing date.
Hasco and FYI will enter into a sublease pursuant to which Hasco will sublet
FYI's principal operating facility in Newbury Park, California from the date of
the closing through December 31, 1998. The rental payments under the sublease
will be approximately equal to FYI's occupancy costs under the primary lease
agreement during that period. The primary lease agreement expires May 31, 2000.
The Company intends either to negotiate an early termination of the lease with
the landlord or to seek a subtenant for the remaining balance of the lease.
At the closing, FYI and Dycam will terminate their existing contractual
relationships involving the use by FYI of Dycam's cameras, software and other
supporting goods and services, and Hasco and Dycam will enter into a Dycam
Master Agreement (the "Dycam Master Agreement"), with respect to the assumption
of FYI's digital camera lease obligations to Dycam, the leasing by Hasco of
additional Dycam digital cameras, and a royalty-free license of certain digital
camera technology by Dycam to Hasco, certain hardware and software support
services to be provided by Dycam for a three-year period commencing on the
closing date and certain additional terms. Under the Dycam Master Agreement,
Hasco will be required to pay Dycam specified leasehold payments for leased
cameras, a $300,000 fee (payable quarterly over a three-year period) for the
support services and the cost of certain hardware upgrades.
On January 22, 1997, Hasco loaned FYI $60,000 pursuant to a 10% promissory note
due January 31, 1997. On January 31, 1997, Hasco and FYI entered into a loan
agreement (the "Loan Agreement") pursuant to which Hasco will lend to FYI up to
$180,000 per month, up to a maximum of $540,000, at
67
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 18 - SUBSEQUENT EVENTS, continued
an interest rate of 10% per annum (the "Hasco Loan"). As of January 31, 1996,
FYI has borrowed $180,000 pursuant to the Loan Agreement, including $60,000 on
the prior promissory note which was added to the Hasco Loan balance. Borrowings
under the Loan Agreement are secured by a first priority security interest in
FYI's hospital contracts and proceeds thereof. IDI agreed to subordinate its
rights to the rights of Hasco in connection with this loan. The Company
executed the Hasco Loan Agreement and related promissory note as co-borrower and
co-maker. All amounts due under the Loan Agreement will be canceled at closing
through the assumption of these liabilities by Hasco. The purchase price will
not be subject to reduction for the amount canceled, except under certain
circumstances. If the FYI Sale is terminated or if the closing has not occurred
by April 22, 1997, all amounts under the Loan Agreement will become due and
payable ninety days following the terminating event.
The FYI Sale is subject to the approval of the stockholders of the Company. The
Company expects to receive the requisite approval of its stockholders, and other
customary conditions, at a meeting planned to be held in April 1997.
In connection with the FYI Sale, each of the Company, FYI and Dycam entered into
a mutual release with Hasco with respect to all claims arising between them
prior to the execution of the FYI Sale agreements, including those claims
asserted in certain litigation then pending between FYI and Hasco.
Revenues of FYI were $436,000 in 1995, and none in 1994. Net loss from FYI
amounted to $2,791,000 in 1995, and $911,000 in 1994. Income taxes associated
with the operations of FYI in each of 1995 and 1994 were $1,000. Net assets of
FYI attributable to the pending FYI Sale were $1,913,000 in 1995, and $493,000
in 1994.
68
<PAGE>
STYLES ON VIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For The Year Ended December 31, 1995
NOTE 19 - LINES OF BUSINESS
The Company operates in three major lines of business: systems and related
software, camera and imaging. Information regarding these segments as of and
for the years ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Net sales:
Systems and related software $ 2,854,000 $ 4,006,000
Camera 1,677,000 1,700,000
Imaging 436,000 -
----------- -----------
Total $ 4,967,000 $ 5,706,000
=========== ===========
Loss from operations:
Systems and related software $(2,055,000) $(5,182,000)
Camera (1,656,000) (940,000)
Imaging (2,745,000) (909,000)
----------- -----------
Total $(6,456,000) $(7,031,000)
=========== ===========
Identifiable assets:
Systems and related software $ 680,000 $ 3,355,000
Camera 7,543,000 9,861,000
Imaging 2,518,000 587,000
----------- -----------
Total $10,741,000 $13,803,000
=========== ===========
Depreciation and amortization expense:
Systems and related software $ 33,000 $ 91,000
Camera 341,000 280,000
Imaging 137,000 2,000
----------- -----------
Total $ 511,000 $ 373,000
=========== ===========
Capital expenditures:
Systems and related software $ 3,000 $ 217,000
Camera 208,000 148,000
Imaging 441,000 179,000
----------- -----------
Total $ 652,000 $ 544,000
=========== ===========
</TABLE>
69
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 22, 1994, Kellogg & Andelson, the Company's former independent
public accountants, resigned their engagement. Kellogg & Andelson advised the
Company that its resignation was the result of the loss of independence on the
part of Kellogg & Andelson. Thomas Leaper, the former Chief Financial Officer
of the Company, was employed by Kellogg & Andelson beginning in early 1995. Mr.
Leaper resigned his position with the Company effective November 22, 1994. In
connection with its audits for the years ended December 31, 1993 and 1992 and
for the period commencing on January 1, 1994 and ending on December 22, 1994,
there have been no disagreements with Kellogg & Andelson on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Kellogg & Andelson would have caused them to make reference in connection with
their report to the subject matter. The reports of Kellogg & Andelson on the
financial statements for the years ended December 31, 1993 and 1992, contained
no adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles. In May 1995, Coopers &
Lybrand L.L.P. ("C&L") accepted an engagement by the Company to serve as the
independent auditors for the Company's financial statements as of and for the
year ended December 31, 1994.
During the course of the audit of the Company's 1994 financial results, C&L,
along with the Company's new management, identified two primary areas where the
Company's previously reported financial statements diverged from generally
accepted accounting principles. The first area related to the recognition of
software licensing revenues that did not meet the revenue recognition
requirements of AICPA Statement of Position 91-1 on Software Revenue Recognition
which generally requires the recognition of revenues at the time of shipment.
The second area related to the treatment of capitalized assets which were
determined to have no value and which should have been characterized as
expenses.
On March 29, 1996, Coopers & Lybrand L.L.P., the Company's former
independent public accountants, resigned their engagement. In connection with
their audit for the year ended December 31, 1994 and for the period May 5, 1995
and ending March 29, 1996, there were no disagreements with C&L on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
C&L would have caused them to make reference in connection with their report to
the subject matter. Their report on the consolidated financial statements for
the year ended December 31, 1994 included an explanatory paragraph concerning
substantial doubt about the ability of the Company to continue as a going
concern, otherwise, during the time period which C&L were engaged as independent
accountants for the Company, C&L's report contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. In June 1996, Corbin & Wertz accepted an
engagement by the Company to serve as the independent auditors for the Company's
financial statements as of and for the year ended December 31, 1995.
70
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of January 31, 1997:
<TABLE>
<CAPTION>
YEAR
NAME AGE PRINCIPAL OCCUPATION TERM
EXPIRES
---------------------- --- ---------------------------------------- -------
<S> <C> <C> <C>
DIRECTORS:
K. Eugene Shutler 58 Chief Executive Officer and Chairman of 1998
the Board of the Company and FYI,
Secretary of FYI
John A. Edling 42 Chief Executive Officer, President, 1996
Treasurer and Secretary of Dycam
Ann Ehringer 58 Chairman, Chief Executive Officer and 1996
owner, of S. P. Land, Inc. and S. P.
Lodge, Inc.
Marshall Geller 58 Chairman and Chief Executive Officer of 1997
Geller & Friend Capital Partners, Inc.
Barry Porter 39 Partner and Managing Director of Pacific 1998
Capital Group
OTHER EXECUTIVE OFFICERS:
James E. O'Brien 49 Chief Operating Officer of FYI
Nancy H. Galgas 37 Chief Financial Officer and Secretary of
the
Company; Chief Financial Officer of FYI
Peter Ritchie 45 Vice President of FYI
George Ismael 48 Vice President of Engineering of Dycam
</TABLE>
In accordance with the Certificate of the Voting Powers, Designation,
Preferences and Relative, Participating, Optional or Other Special Rights
relating to the Company's Series A Preferred Stock, the holders of the Company's
Series A Preferred Stock, voting as a single class, are allowed to elect four of
the Company's seven directors. As of December 31, 1995, the holders of the
Company's Series A Preferred Stock elected Messrs. Safchik, Geller and Porter to
the Board of Directors. Mr. Safchik resigned from the Company's Board on July
22, 1996. On August 26, 1996, Mr. Shutler was elected by the holders of the
Company's Series A Preferred Stock to fill the vacancy created by Mr. Safchik's
resignation. The holders of the Company's common stock are permitted to elect
three members of the Board. In accordance with the Certificate of Incorporation
of the Company, the Directors to be elected by the holders of the Company's
common stock are divided into three classes, Class I, Class II and Class III.
At each annual meeting of the Stockholders of the Company, directors
constituting one class are elected for three-year terms. The term of the Class
I Director expires in 1998; the term of the Class II Director expires in 1997;
and the term of the Class III Director expires in 1996.
71
<PAGE>
Mr. Shutler was elected to the Board of Directors as a Class I member by the
-----------
holders of the Company's Series A Preferred Stock in August 1996. Mr. Shutler
was Executive Vice President and a Director of MGM Grand, Inc. from February
1991 to November 1995. Thereafter, he was of counsel to the law firm of
Beckley, Singleton, Jennison & List, Chartered from April to August 1996, when
he was elected Chairman of the Board and Chief Executive Officer of the Company.
Mr. Shutler is a graduate of the University of Pennsylvania and Yale Law School.
Mr. Edling was appointed to the Board of Directors as a Class III member in
----------
November 1995. Mr. Edling is the Chief Executive Officer, President, Treasurer,
Secretary and a member of the Board of Directors of Dycam. Mr. Edling was a co-
founder of Dycam and served as its Chief Operating Officer from March 1991 until
he became Chief Executive Officer and President in December 1991. Mr. Edling
resigned as Chief Executive Officer of Dycam effective November 1994 and was
reappointed to that position effective March 1995. Since the Company's
acquisition of Dycam in February 1994, Mr. Edling has also served as Dycam Chief
Financial Officer. From November 1988 until March 1991 he was Development
Engineering Manager for Dataproducts Corporation ("Dataproducts"), where he had
responsibility for the design and marketing of the Dataproducts line of laser
printers. Mr. Edling holds a B.S. in Finance from California State University,
Northridge.
Dr. Ehringer has served on the Board of Directors since August 1994, and is
------------
currently a Class III Director. Dr. Ehringer has been Chairman, CEO and Owner
of S.P. Land, Inc., a real estate holding since 1992 and S.P. Lodge, Inc. dba
Saddle Peak Lodge, a find-dining restaurant entity, since 1993. Since July
1996, she has served as Director of the Family & Closely-Held Business Program
and Associate Professor of Entrepreneurship of the Marshall School of Business
Program of the University of Southern California. From 1990 to 1996, she was a
management consultant and chairman of the Executive Committee, an executive
education organization of 4,000 chief executive officers. Dr. Ehringer also is
a director of Ustel, Inc., Dycam, Guggenheim Dental Supply, Inc., Quality
Transport, Inc. & Truck Rail Handling, Inc., American Etching & Manufacturing,
Inc. and United Ad Label, Inc. She a;so participates as an advisor to non-
profit organizations, including the California Heritage Museum Advisory Council
and the Pepperdine University Crest Associates Advisory Board. Dr. Ehringer
received a B.A. from the University of Hawaii (1960), an M.A. from Stanford
University (1967), a diploma from the Owner/President Management Program of the
Harvard Business School (1982), and a Ph.D. from the University of Southern
California (1992).
Mr. Geller was elected to the Board of Directors as a Class II member by the
----------
holders of the Company's Series A Preferred Stock in November 1995. Since
November 1995, Mr. Geller has served as Chairman, Chief Executive Officer, and
Founding Partner of Geller & Friend Capital Partners, Inc. From 1991 to October
1995, Mr. Geller was the Senior Managing Partner and founder of Golenberg &
Geller, Inc., a merchant banking investment company. From 1988 to 1990, he was
the Vice Chairman of Gruntal & Company, a New York Stock Exchange listed
investment banking firm. From 1967 through 1988, Mr. Geller was a Senior
Managing Director of Bear, Stearns & Co. Inc. Mr. Geller formerly served as
Interim Co-Chairman of Hexcel Corporation. Mr. Geller also serves on the Board
of Directors of Players International, Inc., Value Vision International, Inc.,
Ballantyne of Omaha, Inc., Cabletel Communications Corp., and Dycam.
Mr. Porter was elected to the Board of Directors as a Class I member by the
----------
holders of the Company's Series A Preferred Stock in November 1995. Since
December 1993, Mr. Porter has served as a Managing Director of Pacific Capital
Group, Inc., a private merchant banking firm. Prior thereto, Mr. Porter was a
Senior Managing Director in the investment banking group of Bear, Stearns & Co.
Inc., a firm he joined in 1986. Prior to 1986, Mr. Porter practiced corporate,
securities and entertainment law with the Los Angeles firm of Wyman, Bautzer,
Rothman, Kuchel and Silbert. Mr. Porter serves on the Board of
72
<PAGE>
Directors of OpTel, Inc., Campuslink Communications Systems, Inc. and Dycam.
Mr. Porter is a graduate of the Wharton School of the University of
Pennsylvania, he earned an M.B.A. at the University of California at Berkeley
Graduate School of Business Administration and a J.D. from UC Berkeley's Boalt
Hall School of Law.
Mr. O'Brien has served as the Chief Operating Officer of FYI since April
-----------
1994. Mr. O'Brien has served as President of FYI since December 1996. From
April 1988 to April 1994, Mr. O'Brien served as Senior Vice President and Chief
Operating Officer of The Pacifica Corporation. Mr. O'Brien holds a B.A. in
Economics from the University of Cincinnati.
Ms. Galgas has served as Chief Financial Officer of the Company since March
----------
1995. Since April 1994, Ms. Galgas has served as Chief Financial Officer of
FYI. From 1989 to April 1994, Ms. Galgas served as Controller and Vice
President of Finance of The Pacifica Corporation. From 1984 to 1989, Ms. Galgas
was with Ernst & Young's Los Angeles based Entrepreneurial Services Group. Ms.
Galgas holds a B.A. in Business Economics from the University of California at
Santa Barbara. She is a certified public accountant.
Mr. Ritchie has served as a Vice President of FYI since September 1994. From
-----------
July through September 1994, Mr. Ritchie was the Marketing Director of
Supercolor 2000. From March 1989 until December 1993, Mr. Ritchie served as the
Western Region Manager of Hasco International.
Mr. Ismael is Vice President of Engineering and a member of the Board of
----------
Directors of Dycam. Mr. Ismael was a co-founder of Dycam and has served as Vice
President of Engineering since November 1990. Between 1987 and 1990, Mr. Ismael
was Director of Engineering for Genicom Corporation ("Genicom"), where he was
responsible for a team of engineers developing non-impact printer systems. Prior
to joining Genicom, Mr. Ismael worked in engineering management positions at
Dataproducts. Mr. Ismael holds a B.A. in English from California State
University, Northridge.
Mr. Jones has been Dycam's Vice President of Sales and Marketing since May
---------
1994. From September 1993 until May 1994, Mr. Jones was responsible for new
systems sales of computer output microfilm systems for Anacomp, Inc. During 1992
and 1993, Mr. Jones was the California District Sales Manager for QMS, Inc.
From 1991 until 1992, Mr. Jones was the Vice President of Sales for Template
Graphics Software. From 1989 to 1991, Mr. Jones was employed by Pacific Hills
Mortgage Company as a mortgage loan officer. From 1976 until 1989, Mr. Jones
was employed by CalComp where he served as the Western Area Director of Sales -
North American Operations and later as the Director of Marketing Operations. Mr.
Jones received his B.S. in Marketing from the University of Utah in 1974.
Subject to the terms of applicable employment agreements, officers of the
Company are appointed by and serve at the discretion of the Board of Directors.
There are no family relationships among any of the officers or directors of the
Company. Certain directors and officers of the Company are affiliated with the
Company's largest stockholder. See "Certain Relationships and Related Party
Transactions."
The Board of Directors held a total of sixteen meetings during the year ended
December 31, 1995. The Company has an Audit Committee, a Compensation
Committee, and a Policy Review Committee. Prior to November 1995, the Company
also had an Executive Committee and a Stock Option Committee.
The Audit Committee's functions include recommending to the Board of
Directors the engagement of the Company's independent certified public
accountants, review with such accountants of the Company's business plan and
results of their examination of the financial statements of the Company and
determining the independence of such accountants. From January through late
November 1995, the Audit Committee
73
<PAGE>
consisted of Harold J. Meyers and Thomas Lenagh. Messrs. Meyers and Lenagh are
no longer affiliated with the Company. From late November 1995, the Audit
Committee currently consists of Marshall Geller, Barry Porter, and Jeffrey A.
Safchik. Mr. Safchik resigned as a director in July 1996. The Audit Committee
met on five occasions in 1995.
The Compensation Committee reviews and makes recommendations with respect to
compensation of officers and directors of the Company. From January through
late November, 1995, the Compensation Committee consisted of Harold J. Meyers
and Ann Ehringer. Mr. Meyers is no longer affiliated with the Company.
Beginning in late November 1995, the Compensation Committee has consisted of
Marshall Geller, Ann Ehringer and Barry Porter. The Compensation Committee met
on two occasions in 1995.
The Policy Review Committee reviews transactions between the Company and
Dycam for potential conflicts of interest and advises the companies with respect
to the possible resolutions of any conflict. The Policy Review Committee is
comprised of one member from each of the Company and Dycam and a non-voting
chairman. Through late November 1995, Thomas Lenagh served as the Company's
representative and Jim Alexiou served as Dycam's representative. Messrs. de
Vreese, Verhaeghe and Lenagh are no longer affiliated with the Company. From
late November 1995, the Policy Review Committee consisted of Jim Alexiou as
Dycam's representative. The Policy Review Committee did not meet in 1995.
The Executive Committee's duties included among other things, review of
management's performance. From January through November, 1995, the Executive
Committee consisted of Guy de Vreese (through February 1995), Ann Ehringer and
Harold J. Meyers. Messrs. de Vreese and Meyers are no longer affiliated with
the Company. The Executive Committee, which was disbanded on November 28, 1995,
met on two occasions in 1995.
The Stock Option Committee's duties included the review of the grant of
options under the Company's various stock incentive plans. From January through
late November 1995, the Stock Option Committee consisted of Thomas Lenagh and
Frank Verhaeghe (through February 1995). Messrs Lenagh, Verhaeghe are no longer
affiliated with the Company. The Stock Option Committee met on three occasions
in 1995. Since late November 1995, the Company has not maintained a Stock
Option Committee, and its duties have been performed by the Compensation
Committee.
In April 1996, the Board of Directors appointed Ann Ehringer, Dana Arnold and
John Edling as members of an Independent Committee to review the terms of a
financing transaction with IDI. Mr. Arnold is no longer affiliated with the
Company. The Independent Committee met on two occasions in 1996 and was
disbanded upon completion of the IDI transaction. See "Certain Relationships
and Related Party Transactions."
For the fiscal year ended December 31, 1995, each Director attended 100% of
the meetings of the Board of Directors and all of the meetings of the committees
of the Board of Directors to which she or he was assigned.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Executive
officers, directors and stockholders with more than 10% of a registered class
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the
74
<PAGE>
copies of such forms received by it and written representations from certain
reporting persons that they have complied with the relevant filing requirements,
the Company believes that during the year ended December 31, 1995, all relevant
Section 16(a) filing requirements were complied with, except as follows: Mr.
Dana Arnold filed a late Form 3 (Initial Statement of Beneficial Ownership of
Securities); Mr. James O'Brien filed a late Form 3 (Initial Statement of
Beneficial Ownership of Securities); Ms. Nancy Galgas filed a late Form 3
(Initial Statement of Beneficial Ownership of Securities).
75
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning compensation for
services in all capacities to the Company and its subsidiaries for the three
years ended December 31, 1995, 1994 and 1993 of those persons who were (1) the
Chief Executive Officer of the Company and (2) executive officers of the Company
whose total salary and bonus exceeded $100,000 for services performed by such
persons for the Company during 1995 (collectively the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ---------------
Securities
Name & Principal Underlying All Other
Position Year Salary Bonus Options/SARs(1) Compensation(2)
---------------- ---- ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Jeffrey A. Safchik (3) 1995 - - - -
Former Chairman of the Board, 1994 - - - -
CEO, Treasurer and Secretary of 1993 - - - -
the Company
Dana I. Arnold (4) 1995 $219,000(5) - - -
Former Director, Asst. Secy. and 1994 125,967 - - -
Former Acting CEO of the 1993 - - - -
Company; Former CEO, Treasurer
and Secretary of FYI
Guy de Vreese(6) 1995 $ 93,896 - - $6,686(8)
Former Chairman of 1994 275,000 - -
the Board and CEO of the Company 1993 175,000 - 600,000(7)
Jerry Krant (9) 1995 $120,000 - 112,240
Former V.P. of Software of 1994 101,000 - - -
the Company 1993 100,000 - - -
James E. O'Brien (10) 1995 $122,000 $25,000 50,000 -
Chief Operating Officer of the 1994 72,000 - - -
Company; President and Chief 1993 - - - -
Operating Officer of FYI
Nancy H. Galgas (11) 1995 $118,000(12) $25,000 50,000 -
CFO, Secretary and Treasurer of the 1994 48,000 - - -
Company; CFO of FYI 1993 - - - -
John E. Edling(13) 1995 $120,000 - - (14) $3,600(15)
Director of the Company; Director, 1994 120,000 $ 6,725 45,000(14) 1,500(15)
CEO, President, Treasurer, and 1993 80,700 - - -
Secretary of Dycam
</TABLE>
- ----------------------
(1) All numbers reflect the number of shares of the Company's Common Stock
subject to options granted during the fiscal year.
(2) Does not include compensation paid to individuals in consideration for
serving on the Company's Board of Directors. See "Compensation of Directors."
76
<PAGE>
(3) Mr. Safchik joined the Company in November 1995. In January 1996, the
Company's Board of Directors elected to provide Mr. Safchik with an annual base
salary of $125,000, which was reduced to zero in April 1996. In July 1996, Mr.
Safchik resigned from all positions with the Company.
(4) Mr. Arnold served as Acting Chief Executive Officer of the Company from
March 1995 through November 1995. Mr. Arnold's current responsibilities with
FYI commenced in April 1994. All salary shown as having been received by Mr.
Arnold in 1994 and 1995 was paid by FYI, however, a portion of such compensation
was allocated to the Company. In December 1996, Mr. Arnold resigned from all
positions with the Company and FYI.
(5) Mr. Arnold's responsibilities with FYI commenced in April 1994. His 1994
annual base salary was set at $180,000, and his 1995 annual base salary was
$225,000. In May 1996, Mr. Arnold's annual base compensation was reduced to
$100,000.
(6) Mr. de Vreese served as Chief Executive Officer of the Company from its
inception (July 1, 1992) until his resignation in February 1995.
(7) Mr. de Vreese surrendered options to purchase 37,500 shares in 1993. He
was granted options to purchase an additional 450,000 shares of the Company's
common stock in 1993; and surrendered 187,500 of such options in March 1993.
Further, Mr. de Vreese was granted options to purchase an additional 150,000
shares of the Company's Common Stock in June 1993, pursuant to the Company's
1992 Stock Incentive Plan. He exercised options to purchase 300,000 shares in
1993 and 37,500 shares in 1994.
(8) Consists of a car allowance.
(9) Mr. Krant served as Vice President of Software of the Company from
inception (July 1, 1992) until January 1996. During 1995, Mr. Krant received an
annual base salary of $120,000.
(10) Mr. O'Brien serves as Chief Operating Office of the Company. Mr.
O'Brien has served as President of FYI since December 1996. Mr. O'Brien
continues to serve as the Chief Operating Office of FYI, where his current
responsibilities commenced on April 1, 1994. In March 1995 Mr. O'Brien received
an annual base salary of $125,000 and a bonus of $25,000. In addition, during
1995, Mr. O'Brien received options to purchase 50,000 shares of the Company's
Common Stock. In May 1996, Mr. O'Brien's annual base compensation was reduced
to $100,000. In September 1996, Mr. O'Brien received options to purchase
814,000 shares of the Company's Common Stock which vest over three years.
(11) Ms. Galgas has served as Chief Financial Officer of the Company since
March 1995. In addition, Ms. Galgas' current responsibilities as Chief
Financial Officer of FYI commenced on April 1, 1994.
(12) All salary shown in this chart as having been received by Ms. Galgas in
1994 was paid by FYI and represents nine months part-time salary at an annual
full-time base rate of $108,000. A portion of such compensation expense was
allocated to the Company. In March 1995, Ms. Galgas received from the Company
an annual base salary of $125,000 and a bonus of $25,000. In addition, during
1995, Ms. Galgas received options to purchase 50,000 shares of the Company's
Common Stock. In May 1996, Ms. Galgas' annual base compensation was reduced to
$100,000. In September 1996, Ms. Galgas received options to purchase 814,000
shares of the Company's Common Stock which vest over three years.
(13) All monies shown in this chart as having been received by Mr. Edling in
1992 through 1995 were paid by Dycam.
(14) Does not include options to purchase 100,000 shares of Dycam Common
Stock granted to Mr. Edling in 1994 or 100,000 shares of Dycam Common Stock
granted to Mr. Edling in 1995.
(15) Consists of Dycam's contributions to Mr. Edling's 401(k) plan account.
77
<PAGE>
Option Grants in Last Fiscal Year
Set forth below is information regarding options or warrants granted to the
Named Executives during the 1995 fiscal year.
<TABLE>
<CAPTION>
Potential
Realizable Value
Number of Percentage of at Assumed
Shares Total Options Annual Rates of
Underlying Granted to Exercise or Stock Price
Options Employees in Base Price Expiration Appreciation For
Name Granted (#) Fiscal 1995 ($/Share) Date Option Term(1)
- ------------------- ------------ -------------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
------ ------
Nancy H. Galgas 50,000 50% $.075 5/05 $2,355 $5,963
James E. O'Brien 50,000 50% $.075 5/05 $2,355 $5,963
</TABLE>
- -----------------------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises and Common Stock holdings are
dependent upon the future performance of the Common Stock and overall stock
market conditions.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
Set forth below is information with respect to options or warrants exercised
by the Named Executives during the 1995 fiscal year and the number and value of
unexercised stock options or warrants held by the Named Executives at the end of
the fiscal year.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised In-The-
Options Held at Money Options at
Shares Value Fiscal Year End Fiscal Year End(1)
Acquired on Realized --------------------------- -------------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
----- ------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey A. Safchik -0- $- - - -0- -0-
Dana I. Arnold -0- - - - -0- -0-
Guy de Vreese -0- - - - -0- -0-
Jerry Krant -0- - - - -0- -0-
John A. Edling -0- - 30,000 15,000 -0- -0-
Nancy H. Galgas -0- - 20,000 30,000 -0- -0-
James E. O'Brien -0- - 20,000 30,000 -0- -0-
</TABLE>
- ----------------
(1) None of the unexercised options were in-the-money at fiscal year end. The
exercise price on all outstanding options was reduced to $.075 in May 1996.
78
<PAGE>
Compensation of Directors
In October 1995, the Board of Directors approved the grant of options to
acquire 40,000 shares of Common Stock to each of Harold J. Meyers and Thomas
Lenagh, directors of the Company who resigned from the Board of Directors in
November 1995.
Ann Ehringer was paid $1,000 for each day she performed services as a
member of the Independent Committee in connection with the 1996 financing
transaction with IDI, for an aggregate of $6,000. In addition, in April 1996,
the Board of Directors granted to Dr. Ehringer warrants to acquire 80,000 shares
of Common Stock in consideration for her services as Chairman of the Independent
Committee. The exercise price of the warrants is $.075 per share. The warrants
vest 40,000 in May 1996 and 40,000 in May 1997. The Company has granted the
warrant holder certain registration rights related to these warrants.
From January through November 1995, non-employee directors received $500
per meeting of the Board of Directors that they attended. Additionally, non-
employee members of the Board's Executive Committee received $1,000 for each
meeting of the Executive committee that they attended. Commencing in November
1995, the Board's compensation was revised. Non-employee directors now receive
$2,500 per calendar quarter for serving on the Board of Directors and $500 for
each meeting of the Board or any of its committees that they attend. The
amounts payable to two non-employee directors since January 1996 remain unpaid
as of January 31, 1997.
Employment Agreements
Effective as of April 5, 1994, FYI entered into an employment agreement
with Dana I. Arnold. This agreement provided that Mr. Arnold would serve as
Chairman of the Board, Chief Executive Officer, President and Secretary of FYI.
In addition, the agreement covered a three-year term expiring in April 1997, for
which the annual base compensation to be paid was $180,000. The agreement was
canceled in May 1996, and FYI entered into a new employment agreement with Mr.
Arnold, expiring in May 1998, with an annual base compensation of $100,000.
Under the latter agreement, if certain cash flow conditions were met, the annual
base compensation to be paid would be increased to $175,000. The agreement also
provided that Mr. Arnold would continue to serve as Chairman of the Board, Chief
Executive Officer, President and Secretary of FYI and that if Mr. Arnold were
terminated without cause, he would be entitled to receive a lump sum payment
equal to the aggregate salary due to him for the then remaining term of the
agreement and immediate vesting of any unvested options and warrants. In
December 1996, Mr. Arnold resigned from all positions with the Company and FYI
pursuant to a termination and settlement agreement. The agreement provides that
Mr. Arnold shall receive his current salary until no later than March 31, 1997.
On the closing of the FYI Sale (see Notes to Consolidated Financial Statements -
Subsequent Events), Mr. Arnold is entitled to receive all unpaid salary due to
him under the employment agreement expiring in May 1998 at an annual base
compensation of $100,000. In addition, all of the warrants to purchase shares
of the Company's Common Stock held by Mr. Arnold fully vest on the closing of
the FYI Sale. See "Certain Related Party and Other Transactions."
In August 1996, the Company entered into an employment agreement with K.
Eugene Shutler, whereby Mr. Shutler was employed by the Company as its Chief
Executive Officer. The agreement has an initial two-year term and is
automatically renewed thereafter for successive one-year periods, provided
neither the Company nor Mr. Shutler notifies the other that the agreement shall
not be so extended. Pursuant to the agreement, the Company will pay Mr. Sutler
an annual base salary of $230,000, subject to increase from time to time in the
sole discretion of the Board of Directors. In
79
<PAGE>
addition, Mr. Shutler will be eligible to receive a one-time bonus (the
"Incentive Bonus") of $50,000 if the unaudited accounts of the Company reflect a
cash-flow break even for any consecutive three-month period during the term of
the agreement. Mr. Shutler shall also be eligible to receive discretionary
bonuses in the sole discretion of the Board of Directors. In the event Mr.
Shutler's employment is terminated without cause (as defined), Mr. Shutler will
be entitled to a termination benefit equal to (i) 50% of his annual base salary
then in effect, subject to reduction to the extent of earnings from other
employment or self-employment, plus (ii) any Incentive Bonus accrued but unpaid.
In the event, Mr. Shutler's employment is terminated within six months following
a change of control (as defined), he will be entitled to receive (i) the lesser
of 100% of his annual base salary then in effect or, if the unexpired portion of
the term of the agreement is less than twelve months, such portion of the annual
base salary as would be payable through the end of such term, plus (ii) any
Incentive Bonus accrued but unpaid.
On February 7, 1994, Dycam entered into an employment agreement with
John A. Edling. This agreement provided that Mr. Edling would serve as
President of Dycam and provided for (a) an initial three-year term, (b) a base
salary of $120,000 per annum and (c) options to purchase 45,000 shares of the
Company's Common Stock at $8.67 per share, which were repriced during 1996 to
$.075 per share. The agreement expired in February 1997.
Dycam also has employment agreements with three other key employees for
three year terms which expired in February 1997. The agreements called for
annual compensation to be paid to those three employees aggregating $258,000 per
year for each of the three years.
On December 20, 1996, Dycam entered into an employment agreement
contract with one key employee for a three-year term which expires December 31,
1999. The agreement calls for annual compensation of $120,000 a year for each of
the three years. Pursuant to the employment agreement, Dycam issued 90,000 stock
options that vest at a rate of 8.33% per calendar quarter. Additionally, Dycam
issued 60,000 stock options to the employee that vest 8.33% per calendar quarter
if certain conditions are met.
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<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of February 28, 1997, certain
information regarding the ownership of the Common Stock and the Preferred Stock
by (i) each person known by the Company to be the beneficial owner of more than
5% of the outstanding shares of the Common Stock or more than 5% of the
outstanding shares of the Preferred Stock, (ii) each of the Named Executives (as
defined below), (iii) each of the Company's directors, and (iv) all of the
Company's executive officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, each of such persons has the sole voting and investment power
with respect to the shares owned. Beneficial ownership has been determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Under this Rule, certain shares may be deemed to be
beneficially owned by more than one person (such as where persons share voting
power or investment power). Unless otherwise stated, the address of each person
is c/o Styles on Video, Inc., 667 Rancho Conejo Boulevard, Newbury Park,
California 91320.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF PREFERRED
COMMON STOCK PERCENT OF STOCK PERCENT OF
BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING
NAME OWNED SHARES(1) OWNED SHARES
- --------------------------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
K. Eugene Shutler 1,603,306(2) 15.3% - -
John A. Edling 45,000(3) 0.5% - -
Ann Ehringer 80,000(4) 0.9% - -
Marshall Geller - - - -
Barry Porter - - - -
James E. O'Brien 357,706(5) 3.9% - -
Nancy H. Galgas 357,706(5) 3.9% - -
Jeffrey A. Safchik 56,803,387(6) 86.5% 500/Series A 100%
500/Series B 100%
Dana I. Arnold 7,597,508(7) 46.2%
International Digital 56,803,387(6) 86.5% 500/Series A 100%
Investors, L.P. 500/Series B 100%
All Directors and 2,443,718(8) 21.6% - -
Executive Officers as a
Group (7) persons
</TABLE>
- -----------------------------
(1) Based upon 8,852,759 shares of Common Stock outstanding. Shares are
deemed to be beneficially owned by a person if the person has the right
to acquire the shares (for example, upon exercise of an option) within
60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the number of shares
outstanding is deemed to include the number of shares beneficially owned
by such person (and only such person) by reason of such acquisition
rights. As a result, the percentage of outstanding shares beneficially
owned by any person as shown in the table does not necessarily reflect
the person's actual ownership or voting power.
(2) Includes 1,603,306 shares of Common Stock issuable upon the exercise of
warrants which are or will become exercisable on or prior to April 30,
1997, subject to stockholder approval of a proposed reverse stock split.
81
<PAGE>
(3) Includes 45,000 shares of Common Stock issuable upon exercise of Stock
Options which are or will become exercisable on or prior to April 30,
1997.
(4) Includes 80,000 shares of Common Stock issuable upon exercise of
warrants which are or will become exercisable on or prior to April 30,
1997, subject to stockholder approval of a proposed reverse stock split.
(5) Includes 357,706 shares of Common Stock issuable upon exercise of stock
options which are or will become exercisable on or prior to April 30,
1997, of which options for 322,206 shares are exercisable subject to
stockholder approval of a proposed reverse stock split.
(6) Includes 51,419,199 shares of Common Stock issuable upon exercise of the
Series B Warrants which are or will become exercisable on or prior to
April 30, 1997; 238,095 shares of Common Stock issuable upon conversion
of the Series A. Preferred; 666,666 shares of Common Stock issuable upon
conversion of the Series B Preferred; 4,347,427 shares of Common Stock
held by International Digital Investors, L.P. ("IDI"); and 132,000
shares of Common Stock held by Greenstreet Partners, an affiliate of
IDI. Mr. Safchik is the President of IDI's managing general partner and
Messrs. Geller and Porter are partners of one of IDI's limited partners.
Messrs. Safchik, Geller and Porter disclaim beneficial ownership of the
securities held by IDI and its affiliates. This number does not include
61,803,805 shares of Common Stock issuable upon conversion of the Series
D Warrants which will become exercisable in the event a proposed reverse
stock split does not receive stockholder approval.
(7) Includes: 7,597,508 shares of Common Stock issuable upon exercise of
warrants which are or will become exercisable on or prior to April 30,
1997; subject to stockholder approval of a proposed reverse stock split.
(8) Includes 2,443,718 shares of Common Stock issuable upon exercise of
stock options which are or will become exercisable on or prior to April
30, 1997, subject to stockholder approval of a proposed reverse stock
split.
82
<PAGE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Related Party Transactions
IDI Financing Transactions. The Company and FYI have entered into a
series of transactions with IDI and certain related entities for the purpose of
raising capital to fund the Company's operations and those of FYI. Jeffrey A.
Safchik is Chief Executive Officer of IDI's corporate general partner and was
appointed as Chief Executive Officer of the Company after the series of
transactions in 1995 described below which gave IDI a majority of seats on the
Company's Board of Directors. Mr. Safchik resigned all positions with the
Company in July 1996. IDI beneficially owns approximately 50.1% of the
Company's outstanding Common Stock, including 132,000 shares of Common Stock
held by Greenstreet Partners, an affiliate of IDI. Additionally, upon exercise
of warrants and conversion of the Preferred Stock, IDI will own approximately
71% of the Company's outstanding Common Stock on a fully diluted basis.
In September 1995, the Company and FYI received short-term bridge
financing of $300,000 form Multinational Trading Corp., a Florida corporation
("MTC"), MTC and IDI are companies with overlapping but not identical
management. In October 1995, MTC made additional advances of $75,000 to the
Company. The Company repaid the $375,000, plus interest accrued thereon and
transaction fees, with a portion of the $3,000,000 it received from IDI in the
transaction described immediately below. In November 1995, pursuant to a Note
and Preferred Stock Purchase Agreement, dated as of November 20, 1995 (the "1995
Agreement"), the Company and FYI issued to IDI $2,950,000 principal amount of
10% Senior Notes due June 30, 1998 (the "1995 Notes"). Additionally, the
Company issued to IDI 500 shares of Series A Preferred for $50,000 and Common
Stock Purchase Warrants (the "1995 Warrants") entitling IDI to purchase shares
of the Company's Common Stock equivalent to 40% of the fully diluted shares of
Common Stock outstanding on November 20, 1995. The exercise price of the 1995
Warrants was $1.12 per warrant share, which represented the estimated
consolidated per share book value per issued and outstanding share of the
Company on the date of the 1995 Agreement. The exercise price of the 1995
Warrants was $1.12 per warrant share, which represented the estimated
consolidated per share book value per issued and outstanding share of the
Company on the date of the 1995 Agreement. The exercise price of the 1995
Warrants was subsequently reduced to $.075 per warrant share as described below.
The 1995 Warrants may be exercised at any time prior to November 20, 2005.
The terms of the Series A Preferred give the holder of the Series A
Preferred the right to designate four of the Company's Board of Directors. IDI
has appointed Messrs. Geller, Porter and Shutler as its designees on the Board
of Directors and has the right to elect a director to fill one of the two
current vacancies on the Board.
Pursuant to a Note and Preferred Stock Purchase Agreement, dated as of
May 14, 1996 (the "1996 Agreement"), as amended, the Company and FYI agreed to
issue up to $1,200,000 aggregate principal amount of 10% Senior Notes Due June
30, 1998 (the "1996 Notes" and together with the 1995 Notes, the "Notes") in a
series of purchases of such 1996 Notes between the Closing Date (as defined) and
September 15, 1996. Each purchase of 1996 Notes was contingent upon the Company
and FYI meeting certain minimum performance targets.
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<PAGE>
IDI also purchased 500 shares of Series B Preferred, for $50,000 and received
Common Stock Purchase Warrants (the "1996 Warrants" and together with the 1995
Warrants, the "Warrants"). The 1996 Warrants have an exercise price of $.075
per warrant share and are exercisable until November 20, 2005.
On May 30, 1996, IDI purchased $371,712 principal amount of 1996 Notes,
of which $271,712 was used to repay principal and interest on certain interim
loans made to the Company and FYI by IDI and IDI-related entities in April 1996.
IDI purchased an additional $250,000, $100,000, $150,000 and $180,000 principal
amount of 1996 Notes in June, July, and August, 1996 and January 1997,
respectively.
The 1995 Agreement and the 1995 Warrants were amended in 1996 to conform
to the provisions of the 1996 Agreement and the 1996 Warrants, and the exercise
price of the 1995 Warrants was reduced to $.075, the exercise price of the 1996
Warrants.
The issuance of the 1996 Warrants and the Series B Preferred triggered
the anti-dilution provisions of the 1995 Warrants and the Series A Preferred,
resulting in the 1995 Warrants and the Series A Preferred being exercisable for
and convertible into 3,914,882 shares of Common Stock and 238,095 shares of
Common Stock, respectively, as of May 14, 1996. Additionally, the 1996 Warrants
were exercisable for 53,286,228 shares of Common Stock, and the Series B
Preferred was convertible into 666,666 shares of Common Stock. On a fully-
diluted basis, IDI held Warrants and Preferred Stock exercisable for and
convertible into 58,105,871 shares of Common Stock.
The authorized Common Stock of the Company consists of 10,000,000
shares, all of which are issued and outstanding or reserved for issuance
pursuant to outstanding warrants or stock option plans, before taking into
account the Preferred Stock and the 1996 Warrants.
Pursuant to the terms of the 1996 Agreement, the Company agreed that by
October 31, 1996 it would take all corporate action, including stockholder
action including obtaining stockholder approval, necessary to authorize and
reserve for issuance a number of shares of Common Stock at least equal to the
number of shares of Common Stock into which the Series A Preferred, Series B
Preferred, 1996 Warrants as well as the other outstanding warrants may be
converted or exercised. Originally, failure of the Company to take all
corporate action necessary to authorize and reserve for issuance the number of
share of Common Stock underlying all of the foregoing Stock by October 31, 1996
constituted a breach of a restrictive covenant in the 1996 Agreement, which
could have caused, among other things, acceleration of the 1996 Notes. The
October 31, 1996 deadline has been extended to May 1, 1997.
In addition, the 1996 Warrants and the other warrants issued in
connection with the 1996 financing transaction were to become exercisable upon
the earlier to occur of October 31, 1996 and the date on which all such
corporate and stockholder actions were taken by the Company. The October 31,
1996 date has been extended to May 1, 1997.
The Notes bear interest at the rate of 10% per annum, payable monthly.
The 1996 Notes provide for principal payments of $500,000 on March 31, June 30,
September 30 and December 31, 1997 and March 31, 1998. On January 15, 1997, the
due date for the March 31,
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1997 principal payment was extended to no later than May 1, 1997. The 1996
Notes are payable in five equal quarterly installments commencing June 30, 1997.
The remaining principal is due and payable on June 30, 1998. The 1996 Agreement
amended the 1995 Agreement to allow the Company to defer interest payments due
between May 31, 1996 and December 31, 1996, if the combined operating cash flow
of the Company and FYI is negative, provided that monthly interest payments must
be made in months where the combined operating cash flow of the Company and FYI
is positive and that all deferred accrued and unpaid interest shall be paid in
full on or before December 31, 1996. On January 15, 1997, the interest deferral
was extended from December 31, 1996 to not later than May 1, 1997.
The Notes are subject to mandatory redemption (in whole or in part)
under certain circumstances, including upon receipt of proceeds from the
issuance of equity by the Company or FYI (subject to certain exceptions) or
proceeds of a sale or other disposition of assets (other than sales of inventory
in the ordinary course of business, certain sales of obsolete or worn out
equipment and certain approved sales). Holders of the Notes have a put right
enabling them to cause the Company and FYI to repurchase the Notes, at par, in
the event of a sale, merger, change of control or the public offering of
securities involving the Company of FYI.
Substantially all of the assets of the Company and FYI are pledged as
collateral for the Notes. The holder of the Notes has the right to foreclose on
such assets or take other protective measures upon the occurrence of an event of
default under 1995 Agreement or the 1996 Agreement which is not timely cured or
waived. The Company and FYI are subject to various restrictive covenants,
including limitations on the incurrence of additional indebtedness, capital
expenditures, investments, transactions with affiliates and consolidation,
merger and sale of assets. The Company and FYI also must satisfy certain
financial tests during the term of the Agreement, including the maintenance of
certain mandatory net worth and earnings levels, determined at the end of each
calendar quarter. The failure to comply with the restrictive covenants or pass
the financial tests constitute an event of default under the 1995 Agreement and
the 1996 Agreement. In January 1997, IDI subordinated its first priority
security interest in FYI's hospital contracts and proceeds thereof to Hasco
International, Inc. (see Notes to Consolidated Financial Statements - Subsequent
Events).
The holders of the Preferred Stock are entitled to receive dividends of
$10 per share per annum prior to the distribution of any dividends to the
holders of Common Stock. Dividends accrue whether or not declared by the Board
of Directors of the Company. The Preferred Stock is subject to optional
redemption by the Company, at a redemption price of $100 per share plus any
accrued dividends. The Preferred Stock is convertible at any time, in whole or
in part, into shares of Common Stock, at a per share conversion equal to the
higher of the current market or book value of the Common Stock at the date of
conversion. The holders of the Series A Preferred, voting as a class, are
entitled to elect four of the Company's directors. In the event of a change of
control, as defined in the 1995 Agreement and the 1996 Agreement, the Company
must offer to redeem the Preferred Stock. The sale of the FYI assets
constitutes a change of control because the Company is selling a substantial
amount of its assets. If a change of control occurs, the Company must offer to
redeem the Series A Preferred and the Series B Preferred for $100 per share in
addition to any accrued dividends, which currently amount to $7,500 for the
Series A Preferred and $5,000 for the Series B Preferred. The stockholder of
the Series A Preferred and the Series B Preferred has 30 days from the date of
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<PAGE>
the change of control to elect redemption of the Preferred shares.
IDI also received certain registration rights with respect to the
Warrants, the shares of Common Stock issuable upon conversion of the Preferred
Stock and the shares of Common Stock issuable upon exercise of the Warrants.
The 1996 Agreement was conditioned upon settlement of a suit brought by
the Company against its former outside accounting firm and certain individual
defendants entitled Styles On Video, Inc. v. Kellogg & Andelson, et al.,
---------------------------------------------------
Superior Court of the State of California, County of Los Angeles, Case No. BC
14268. Pursuant to the settlement of such suit, Kellogg & Andelson agreed to
pay $1,700,000 to the Company (the "Kellogg Settlement"). The funds were
released from escrow upon the settlement of the Class Action, as described
below, in July 1996. Of the Kellogg Settlement proceeds, $870,000 was applied
to repayment of the 1996 Notes. After partial repayment of the 1996 Notes, and
payment of certain legal expenses in connection with the 1996 Agreement, the net
proceeds of the Kellogg Settlement to the Company were $430,000, which was added
to the Company's general working capital. In April 1995, the Company settled a
class action suit which was filed against the Company and certain of its
officers and directors in 1994 (the "Class Action") as well as a shareholders'
derivative suit which named the directors and certain of the officers of the
Company (the "Class Action Settlement"). Pursuant to the Class Action
Settlement, the Company agreed to deliver to the plaintiff class warrants to
purchase 1,750,000 shares of Common Stock and the Company recorded a promissory
note in the principal amount of $250,000. The exercise price on the warrants is
$.075 per share and the warrants are redeemable by the Company at any time over
the five-year life of the warrants for $5 per warrant. The Company's director
and officer liability insurance carriers also agreed to pay to the plaintiff
class $2,250,000. With regard to the derivative suit, Guy de Vreese surrendered
250,000 shares of the Company's Common Stock and options for 150,000 shares of
the Company's Common Stock. The shares of Common Stock are to be distributed to
the plaintiff class and the options were canceled.
The Company and FYI have guaranteed each other's obligations under the
1995 Agreement and the 1996 Agreement.
On January 15, 1997, the Company, FYI and IDI entered into several
agreements (the "January 1997 Agreements"). The Company and IDI entered into a
Securities Exchange Agreement (the "Exchange Agreement") which provided for the
issuance of 4,347,427 shares of its Common Stock to IDI in exchange for all of
the 1995 Warrants and for 1996 Warrants with respect to 1,867,029 shares of
Common Stock. IDI remains the holder of 1996 Warrants for 51,419,199 shares of
Common Stock.
In addition, the Company, FYI and IDI agreed to increase the amounts
borrowed under the 1996 Notes by $180,000 to a total of $1,200,000. At the same
time, the obligation represented by the Bridge Note dated September 19, 1996, as
amended (the "Bridge Note"), between the Company, FYI and IDI, was decreased by
$180,000 under the Seventh Amendment to Bridge Note, dated January 15, 1997 (the
"Seventh Amendment"), form up to $1,157,000 to up to $977,000. Each successive
amendment to the Bridge Note, including the Seventh Amendment, amended the due
date and the amounts due pursuant to the Bridge Note. The due date of the
Seventh Amendment was extended to not later than May 1, 1997. As of January 31,
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1997, the Company has borrowed $927,000 pursuant to the Bridge Note and is
entitled to draw the remaining $50,000 upon receipt by the Company of certain
income tax refunds. Substantially all of the assets of the Company and FYI are
pledged as collateral for the Bridge Note. IDI has the right to foreclose on
such assets or take other protective measures upon the occurrence of an event of
default under the Bridge Note which is not timely cured or waived. In January
1997, IDI subordinated its first priority security interest in FYI's hospital
contracts and proceeds thereof to Hasco in connection with the sale of the FYI
business. See Notes to Consolidated Financial Statements - Subsequent Events.
The Company, FYI and IDI also entered into a General Amendment and
Waiver Agreement to (i) amend specific provisions of the 1995 Agreement, the
1996 Agreement, the 1996 Warrants, and the Certificate of Designation for Series
B Preferred Stock of SOV (collectively, the "Agreements"), and (ii) waive each
of the breaches or defaults with respect to specific provisions of the
Agreements as of January 15, 1997. The amendments extended: (i) the date by
which the Company must take all corporate action necessary to authorize and
reserve for issuance the number of shares of Common Stock into which the Series
B Preferred Stock and 1996 Warrants may be converted or exercised from October
31, 1996 to not later than May 1, 1997; (ii) the deferral of interest payments
due pursuant to the Notes from December 31, 1996 to not later than May 1, 1997;
and (iii) extended the first principal repayment date of the 1995 Notes from
March 1, 1997 to no later than May 1, 1997. In addition, the amendments reduced
certain minimum performance targets in the 1995 Agreement and 1996 Agreement.
The Company also issued a Series D Warrant (the "Series D Warrant") to
IDI which is exercisable for up to 61,803,805 shares of the Company's Common
Stock at an exercise price of $.075 per share. The Series D Warrants are
contingent upon the occurrence of a proposed reverse stock split. If the
reverse stock split is approved and the Company and IDI complete the second
exchange of securities described below, then the Series D Warrants will not be
exercisable. However, if the reverse stock split is not approved by 5:00 p.m.,
Los Angeles time, on April 15, 1997, then the Series D Warrants may be exercised
by IDI prior to November 20, 2005.
If the proposed reverse stock split is approved by the stockholders, the
Company intends to complete a second exchange of securities with IDI pursuant to
which the Company will issue an additional 39,342,461 (pre-reverse split) shares
of its Common Stock to IDI in exchange for all of the remaining 1996 Warrants
with respect to 51,419,199 (pre-reverse split) shares of the Company's Common
Stock, together with the surrender of the Series D Warrants. After the second
security exchange, IDI would continue to hold 500 shares of the Company's Series
A Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's Common Stock, equivalent
to 67% of the shares anticipated to be outstanding on the date of the second
exchange, April 15, 1997.
Cancellation of Certain FYI Common Stock. In connection with the
transactions contemplated by the 1996 Agreement, Dana Arnold, the then-President
of FYI, exchanged his shares of FYI common stock (20% of the outstanding shares)
for warrants exercisable for 7,749,449 shares of the Common Stock of the
Company. The shares of FYI previously held by Arnold were canceled. As a
result of such transaction, FYI is now a wholly owned subsidiary of the Company.
Due to the triggering of certain provisions by the Exchange
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Agreement, the warrants became exercisable for 7,597,508 shares of the Company's
Common Stock.
Loan to Affiliate of Former Director. In April 1995, H.J. Meyers & Co.
("Meyers Co."), the underwriter of the Company's initial public offering (and
of which Harold J. Meyers, a former Board member, was chairman), repaid the
remaining outstanding amount of a $648,000 loan, which was collateralized by
62,000 shares of Common Stock (the "Warrant Loan"). The Warrant Loan was made
so that Meyers & Co. might exercise certain common stock purchase warrants which
it was issued in connection with the Company's initial public offering.
Loan Transaction With Former Chief Executive Officer. In December
1994, the Company received a $200,000 advance from Guy de Vreese, the then-Chief
Executive Officer of the Company. Approximately $150,000 was repaid during the
three months ended March 31, 1995 and approximately $50,000 of this advance,
which was not memorialized in a written document, was outstanding as of December
31, 1995. In July 1996, the Company was released from the obligation in
connection with the Class Action Settlement.
Consulting Agreement. The Company entered into a consulting agreement
(the "Consulting Agreement") with an individual who later became its Chief
Executive Officer, for services relating to the Company's business. In exchange
for the services, the Company is obligated to pay the consultant $12,500 per
month plus expenses. In addition, pursuant to the Consulting Agreement, the
Company issued warrants to purchase 250,000 shares of SOV's common stock at an
exercise price of $0.75 per share, which management believes represents the fair
market value at the date of issuance. The warrants vest 100,000 in April 1996
and the remaining 150,000 on a pro-rata basis over the subsequent twelve month
period. The Company has granted the warrant holder certain registration rights
related to these warrants. The Consulting Agreement terminated and warrants
ceased vesting on August 1, 1996, at which time the Company entered into an
employment agreement with the consultant.
Loan Transaction with Dycam. In December 1994, Dycam made a secured
loan of $500,000 to the Company. Dycam determined that extending this loan was
in the best interest of Dycam and its stockholders, as the loan enabled the
Company to continue funding FYI, and thereby supported the development and
manufacture of the specialized digital camera which FYI would purchase from
Dycam. In January 1995, Dycam made an additional secured loan of $500,000 to
the Company. The two loans have been memorialized in a single note (the
"Secured Note") which bears interest at the prime rate plus two percentage
points and called for payments of interest only for eight months with all
principal and accrued interest due and payable on September 1, 1995. In
connection with the 1995 Agreement, Dycam extended the maturity date of the
Secured Note to December 31, 1998. The Company has made all interest payments
on the Secured Note in a timely fashion. The note is secured by a first
priority interest in the 1,916,667 shares of Dycam's common stock owned by the
Company. If the Company should default on its obligation pursuant to the Notes,
Dycam may not be repaid under the Secured Note and will be entitled to receive
back up to the 1,916,667 shares of Dycam's common stock held by the Company.
Issuance of Warrants to Director. In May 1996, the Company issued
warrants to purchase 80,000 shares of SOV's common stock to Ann Ehringer
representing the Independent
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Committee in connection with the 1996 Agreement. The exercise price is $.075
per warrant. The warrants vest 40,000 in May 1996 and 40,000 in April 1997.
The Company has granted the warrant holder certain registration rights related
to these warrants.
Intercompany Transactions Between FYI and Dycam. Under the terms of an
agreement with FYI, Dycam has agreed to provide FYI an exclusive right to use
Dycam technology in the hospital baby portrait market through April 2005. FYI
has received the option to purchase up to 5,000 Dycam cameras at predetermined
prices and to receive continual upgrades of camera technology and has agreed to
pay Dycam fees of 7.5% of net sales from all hospitals using FYI portrait
services. Dycam agreed to defer this fee until the earlier of the first month
in which FYI has positive operating cash flow and April 30, 1997. If FYI has
its camera system manufactured by someone other than Dycam, FYI has agreed to
pay to Dycam a "Camera Technology Fee" for each camera installed in a hospital
served by FYI, instead of the 7.5% royalty described above. Dycam earned
approximately $32,000 under this agreement in the year ended December 31, 1995.
Dycam has also agreed to finance the first 150 cameras bought by FYI for terms
of 36-48 months with equal monthly payments of principal and interest, with
interest computed at a rate of 2% over the Wall Street Journal prime rate. At
the closing of the FYI Sale, FYI and Dycam will terminate their existing
contractual relationships. See Notes to Consolidated Financial Statements -
Subsequent Events.
Employees' Salary Deferral. From August 1, 1995 to October 15, 1995,
eight FYI employees, including the Chief Executive Officer, Chief Financial
Officer, Chief Operating Officer, and three Vice Presidents, agreed to defer
100% of their salaries to improve FYI's cash flow and provide funds needed for
operations as negotiations were occurring between the Company and MTC and IDI
for the Companies to secure the financing described above. In November 1995,
the employees were repaid the amounts advanced in full, together with accrued
interest calculated at the rate of 10% per annum.
Stock Options. In May 1996, certain stock options previously granted to
certain of the Company's officers, and employees were repriced from $3.00-$8.67
to $.075 per share, the fair market value as determined at the date of the
repricing.
Lease of Executive Offices. From January to April 1996, the Company's
executive offices were located at 101 Hodencamp Road, Thousand Oaks, CA 91360,
pursuant to a month-to-month sublease with rental payments of approximately
$1,000 per month, which approximated the current market rental rate for such
space. FYI's then-Chief Executive Officer is a significant stockholder and
officer of the privately-held company which subleases the executive offices to
FYI. The lease was terminated in April 1966.
Other. For other Related Party Transactions see "Item 10 - Executive
Compensation."
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See the Exhibit Index hereto which begins on p. 92.
(b) Reports on Form 8-K.
Since the end of the Company's fiscal year ended December 31, 1994, the
Company has filed the following reports on Form 8-K:
Form 8-K, dated November 21, 1995, reporting IDI's investment in the
Company.
Form 8-K, dated March 29, 1996, reporting the resignation of Coopers &
Lybrand L.L.P., the Company's independent public accountants. The report
provides that there have been no disagreements with respect to accounting
principles, in connection with Coopers and Lybrand's audits for the year ended
December 31, 1994, or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved, would have caused Coopers & Lybrand
to make reference to such disagreements in their report.
Form 8-K, dated May 14, 1996 reporting IDI's additional investment in
the Company.
Form 8-K, dated June 17, 1996 reporting the engagement of Corbin & Wertz
as the Company's independent accountants.
Form 8-K, dated July 18, 1996 reporting the Company's delisting from the
American Stock Exchange effective August 2, 1996; and the resignation of Jeffrey
Safchik as the Company's Chief Executive Officer, Treasurer, Secretary and
Chairman of the Board. Mr. Safchik also resigned from the Boards of Directors
of the Company's subsidiaries Dycam and FYI.
Form 8-K, dated August 26, 1996 reporting the appointment of K. Eugene
Shutler as the Company's Chief Executive Officer, President and Chairman of the
Board; and the appointment of Nancy H. Galgas as the Company's Secretary and
Treasurer and James E. O'Brien as the Company's Vice President.
Form 8-K, dated December 19, 1996, reporting the resignation of Dana I.
Arnold as the Chief Executive Officer, President, Secretary and Member and
Chairman of the Board of the Company's subsidiary FYI; the appointment of K.
Eugene Shutler as FYI's Chief Executive Officer, Secretary and Chairman of the
Board; and the appointment of James E. O'Brien as FYI's President and Nancy H.
Galgas as FYI's treasurer. Mr. Arnold also resigned as a member of the
Company's Board of Directors.
Form 8-K, dated January 15, 1997, reporting a change in control
resulting from the Exchange of 4,347,427 shares of the Company's stock for
Series A and B warrants, held by IDI.
Form 8-K, dated February 4, 1997, reporting the execution of definitive
agreements with an effective date of January 31, 1997 to sell the assets of FYI
to Hasco International, Inc.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STYLES ON VIDEO, INC.
(Registrant)
By: /s/ K. Eugene Shutler
--------------------------------
K. Eugene Shutler
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints K. Eugene Shutler and Nancy H. Galgas, or any one
of them, their attorney-in-fact and agent, with full power of substitution, for
them in any and all capacities, to sign any amendments to this Annual Report,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, may do or
cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ K. Eugene Shutler Chairman of the Board and March 21, 1997
- ---------------------- Chief Executive Officer
K. Eugene Shutler (Principal Executive Officer)
/s/ Nancy H. Galgas Chief Financial Officer March 21, 1997
- ---------------------- (Principal Accounting Officer
Nancy H. Galgas and Secretary)
/s/ Marshall Geller Director March 21, 1997
- ----------------------
Marshall Geller
/s/ John A. Edling Director March 21, 1997
- ----------------------
John A. Edling
/s/ Barry Porter Director March 21, 1997
- ----------------------
Barry Porter
/s/ Ann Ehringer Director March 21, 1997
- ----------------------
Ann Ehringer
</TABLE>
91
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit No. Document Page No.
- ----------- -------- ----------
<C> <S> <C>
3.1 Certificate of Incorporation of Styles on Video, Inc. (Incorporated by
reference to Exhibit 3.1 to Styles on Video, Inc.'s Registration
Statement on Form SB-2 (File No. 3357706LA)
3.2 By-Laws of Styles on Video, Inc. (Incorporated by reference to Exhibit
3.4 Styles on Video, Inc, issued in the name of International Digital
Investors, L.P., dated as of May 15, 1996 (Incorporated by reference to
Exhibit K to International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996)
3.3 Amended Certificate of Designation of Series B Preferred Stock of Styles
on Video, Inc., dated as of May 28, 1996 (Incorporated by reference to
Exhibit J to International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996)
3.4 Certificate of Designation of Series A Preferred Stock of Styles on
Video, Inc., dated November 9, 1995 (Incorporated by reference to
Exhibit 4.3 to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994)
4.1 Form of Warrant Certificate for Series B Warrants, representing
Warrants to purchase shares of Common Stock of Styles on Video, Inc.,
issued in the name of International Digital Investors, L.P. (Incorporated
by reference to Exhibit L to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996), see Schedule 4.1
4.2 Amended and Restated Warrant Certificate for Series A Warrants,
representing Warrants to purchase 3,914,882 shares of Common Stock of
Styles on Video, Inc, issued in the name of International Digital
Investors, L.P., dated as of May 15, 1996 (Incorporated by reference to
Exhibit K to International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996)
4.3 Warrant Certificate, representing 7,747,449 Warrants to purchase the
Common Stock of Styles on Video, Inc., issued in the name of Dana I.
Arnold, dated as of May 15, 1996 (Incorporated by reference to Exhibit C
to Exhibit H to International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996)
4.4 Form of Warrant Certificate, representing Warrants to purchase the
Common Stock of Styles on Video, Inc., see Schedule 4.4
10.1 Note and Preferred Stock Purchase Agreement, dated as of May 14, 1996,
by and among Styles on Video, Inc., Forever Yours, Inc. and
International Digital Investors, L.P. (Incorporated by reference to
Exhibit H to International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996)
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
Sequential
Exhibit No. Document Page No.
- ----------- -------- ----------
<C> <S> <C>
10.2 10% Bridge Note, dated as of September 19, 1996, by Styles on Video,
Inc. and Forever Yours, Inc., in favor of International Digital
Investors, L.P.
10.3 Amended and Restated Registration Rights Agreement, dated as of May 15,
1996, by and between Styles on Video, Inc. and International Digital
Investors, L.P. (Incorporated by reference to Exhibit M to International
Digital Investors, L.P.'s Form 13-D, dated June 5, 1996)
10.4 Security Agreement, dated as of May 15, 1996, by and between Styles on
Video, Inc. and International Digital Investors, L.P. (Incorporated by
reference to Exhibit I to Exhibit H to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996)
10.5 Security Agreement, dated as of May 15, 1996, by and between Forever
Yours, Inc. and International Digital Investors, L.P. (Incorporated by
reference to Exhibit H to Exhibit H to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996)
10.6 Pledge Agreement by and between Styles on Video, Inc., and International
Digital Investors, L.P., dated as of May 15, 1996 (Incorporated by
reference to Exhibit C to Exhibit H to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996)
10.7 Guaranty by Styles on Video, Inc. in favor of International Digital
Investors, L.P., dated as of May 15, 1996 (Incorporated by reference to
Exhibit K to Exhibit H to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996)
10.8 Employment Agreement, dated as of August 1, 1996, by and between Styles
on Video, Inc. and K. Eugene Shutler
10.9 Styles on Video, Inc. 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit B to Styles on Video, Inc.'s Preliminary Proxy
Statement, as filed with the SEC on February 21, 1997)
10.10 Amended and Restated Employment Agreement, dated as of May 15, 1996, by
and between Dana I. Arnold and Forever Yours, Inc (Incorporated by
reference to Exhibit O to Exhibit H to International Digital Investors,
L.P.'s Form 13-D, dated June 5, 1996).
10.11 Guaranty by Forever Yours, Inc. in favor of International Digital
Investors, L.P. dated as of May 15, 1996 (Incorporated by reference to
Exhibit J to Exhibit H to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996)
</TABLE>
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<TABLE>
<CAPTION>
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<C> <S> <C>
10.12 Second Amendment to Note and Preferred Stock Purchase Agreement and
Waiver, dated as of May 15, 1996, by and among Styles on Video, Inc.,
Forever Yours, Inc. and International Digital Investors, L.P.
(Incorporated by reference to Exhibit G to International Digital
Investors, L.P.'s Form 13-D, dated June 5, 1996)
10.13 First Amendment to Additional Note and Preferred Stock Purchase Agreement
and Waiver, dated as of May 15, 1996, by and among Styles on Video, Inc.,
Forever Yours, Inc. and International Digital Investors, L.P.
(Incorporated by reference to Exhibit I to International Digital
Investors, L.P.'s Form 13-D, dated June 5, 1996)
10.14 Registration Rights Agreement, dated as of May 14, 1996, by and between
Styles on Video, Inc. and Dana I. Arnold
10.15 Dycam Override Deferral Agreement, dated as of May 15, 1996, by and among
Styles on Video, Inc., Forever Yours, Inc., International Digital
Investors, L.P. and Dycam Inc. (Incorporated by reference to Exhibit N to
Exhibit H to International Digital Investors, L.P.'s Form 13-D, dated
June 5, 1996)
10.16 Consulting Agreement, dated as of April 19, 1996, by and among Styles on
Video, Inc., Forever Yours, Inc. and K. Eugene Shutler (Incorporated by
reference to Exhibit O to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996)
10.17 Consulting Agreement, dated as of May 15, 1996, by and among Styles on
Video, Inc., Forever Yours, Inc. and Brymarc Management (Incorporated by
reference to Exhibit N to International Digital Investors, L.P.'s Form
13-D, dated June 5, 1996)
10.18 10% Senior Note, dated as of May 14, 1996, by Styles on Video, Inc. and
Forever Yours, Inc. in favor of International Digital Investors, L.P.
(Incorporated by reference to Exhibit B to Exhibit H to International
Digital Investors, L.P.'s Form 13-D, dated June 5, 1996)
10.19 Form of Registration Rights Agreement, see Schedule 10.19
10.20 Full Release and Settlement Agreement, dated as of May 29, 1996, by and
among Styles Video, Inc., Dycam Inc. Styles Servicing, Inc., Forever
Yours, Inc. International Digital Investors, L.P., Kellogg & Andelson,
Thomas D. Leaper, James F. Walters, William T. Wall, Fred S. Flax and CPA
Mutual Insurance Company of America Risk Retention Group
</TABLE>
94
<PAGE>
Sequential
Exhibit No. Document Page No.
- ----------- -------- ----------
10.21 Stipulation of Settlement of Class Action and Derivative Claims, dated
as of April 14, 1995, by and between Styles On Video, Inc. and The Class
Members and Derivative Claims.
10.22 Amendment and Waiver Agreement to 10% Bridge Note, dated as of October
15, 1996, by and among Styles on Video, Inc., Forever Yours, Inc. and
International Digital Investors,
L.P..................................................................
10.23 Second Amendment to Bridge Note, by and among Styles on Video, Inc,
Forever Yours, Inc, and International Digital Investors, L.P., dated
October 25, 1996
10.24 Third Amendment to Bridge Note, by and among Styles on Video, Inc,
Forever Yours, Inc, and International Digital Investors, L.P., dated
November 18, 1996
10.25 Fourth Amendment to Bridge Note, by and among Styles on Video, Inc,
Forever Yours, Inc, and International Digital Investors, L.P., dated
December 11, 1996
10.26 Fifth Amendment to Bridge Note, by and among Styles on Video, Inc,
Forever Yours, Inc, and International Digital Investors, L.P., dated
December 27, 1996
10.27 Sixth Amendment to Bridge Note, by and among Styles on Video, Inc,
Forever Yours, Inc, and International Digital Investors L.P., dated
January 13, 1997
10.28 10% Promissory Note, dated as of January 21, 1997, by and between
Forever Yours, Inc. and Hasco International, Inc.
10.29 Amendment and Waiver Agreement, dated as of February 13, 1997, by
and among Styles on Video, Inc., Forever Yours, Inc., and K. Eugene
Shutler
10.30 Amendment and Waiver Agreement, dated as of February 13, 1997, by and
among Styles on Video, Inc., Forever Yours, Inc. and Ann Graham Ehringer
10.31 Letter Agreement dated as of January 15, 1997 by and among Styles on
Video, Inc., Forever Yours, Inc. and International Digital Investors,
L.P increasing the principal amount borrowed pursuant to the Note and
Preferred Stock Purchase Agreement, dated as of May 14, 1996
95
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Sequential
Exhibit No. Document Page No.
- ----------- -------- ----------
10.32 Securities Exchange Agreement by and between Styles on Video, Inc.
and International Digital Investors, L.P., dated as of January 15,
1997
10.33 Seventh Amendment to Bridge Note, by and among Styles on Video,
Inc., Forever Yours, Inc., and International Digital Investors,
L.P., dated as of January 15, 1997
10.34 General Amendment and Waiver Agreement, dated as of January 15
1997, by and among Styles on Video, Inc., Forever Yours, Inc. and
International Digital Investors, L.P.
10.35 Letter Agreement, dated as of January 15, 1997, by and between
Styles on Video, Inc. and International Digital Investors, L.P.
regarding Warrants exercised in excess of authorized and unissued
shares of Common Stock
10.36 Warrant Certificate for Series D Warrants representing Warrants
to purchase 61,803,850 shares of Common Stock of Styles on
Video, Inc., issued in the name of International Digital Investors,
L.P., dated as of January 15, 1997
10.37 Termination and Settlement Agreement by and among Forever Yours,
Inc., Styles on Video, Inc. and Dana I. Arnold, dated as of December 19,
1996
10.38 Asset Purchase Agreement by and among Forever Yours, Inc., Styles on
Video, Inc. and Hasco International Inc., dated as of January 31, 1997
10.39 Mutual Release by and between Forever Yours, Inc. and Hasco
International, Inc., dated as of February 4, 1997
10.40 Mutual Release by and between Styles on Video, Inc. and Hasco
International, Inc., dated as of February 4, 1997
10.41 Mutual Release by and between Dycam, Inc. and Hasco International,
Inc. dated as of February 4, 1997
10.42 Loan Agreement by and among Forever Yours, Inc., Styles on Video,
Inc. and Hasco International, Inc., dated as of January 31,
1997
10.43 Revolving Note by and between Forever Yours, Inc. and Hasco
International, Inc. dated as of January 31, 1997
10.44 Security Agreement by Forever Yours, Inc. in favor of Hasco
International, Inc. dated as of January 31, 1997
96
<PAGE>
Sequential
Exhibit No. Document Page No.
- ----------- -------- ----------
10.45 Note and Preferred Stock Purchase Agreement, dated as of
November 20, 1995, between Styles on Video, Inc., Forever
Yours, Inc. and International Digital Investors, L.P.
(Incorporated by reference to Exhibit 10.1 to Styles on
Video, Inc.'s Form 10-KSB, for the period ending December 31,
1994)
10.46 10% Senior Note, dated November 20, 1995, by Styles on Video, Inc. and
Forever Yours, Inc. in favor of International Digital Investors, L.P.
(Incorporated by reference to Exhibit 10.2 to Styles on Video, Inc.'s
Form 10-KSB, for the period ending December 31, 1994)
10.47 Registration Rights Agreement, dated November 20, 1995, between Styles on
Video, Inc. and International Digital Investors, L.P. (Incorporated by
reference to Exhibit 10.3 to Styles on Video, Inc.'s Form 10-KSB, for the
period ending December 31, 1994)
10.48 Security Agreement, dated as of November 20, 1995, between Styles on
Video, Inc. and International Digital Investors, L.P. (Incorporated by
reference to Exhibit 10.4 to Styles on Video, Inc.'s Form 10-KSB, for the
period ending December 31, 1994)
10.49 Pledge Agreement between Styles on Video, Inc. and International Digital
Investors, L.P., dated as of November 20, 1995 (Incorporated by reference
to Exhibit 10.8 to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994)
10.50 Guaranty by Styles on Video, Inc. in favor of International Digital
Investors, L.P., dated as of November 20, 1995 (Incorporated by reference
to Exhibit 10.9 to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994)
10.51 Amended and Restated Promissory Note, dated January 25, 1995, by Styles
on Video, Inc. in favor of Dycam Inc. (Incorporated by reference to
Exhibit 10.10 to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994)
10.52 Letter Agreement, dated April 12, 1995 by and among Dycam Inc., Forever
Yours, Inc. and Styles on Video, Inc. (Incorporated by reference to
Exhibit 10.50 to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994)
10.53 Letter Agreement, dated May 10, 1995, by and among Dycam Inc., Forever
Yours, Inc. and Styles on Video, Inc. (Incorporated by reference to
Exhibit 10.51 to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994)
97
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Exhibit No. Document Page No.
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10.54 Letter Agreement between Styles on Video, Inc. and Dycam re: Extension of
Dycam Note, dated November 9, 1995 (Incorporated by reference to Exhibit
10.57 to Styles on Video, Inc.'s Form 10-KSB, for the period ending
December 31, 1994)
10.55 Assignment of Patent Application from Dana Arnold to Forever Yours, Inc.,
dated November 18, 1995 (Incorporated by reference to Exhibit 10.66 to
Styles on Video, Inc.'s Form 10-KSB, for the period ending December 31,
1994)
10.56 Guaranty by Forever Yours, Inc. in favor of International Digital
Investors, L.P., dated as of November 20, 1995 (Incorporated by reference
to Exhibit 10.67 to Styles on Video, Inc.'s Form 10-KSB, for the period
ending December 31, 1994)
10.57 First Amendment to Note and Preferred Stock Purchase Agreement and
Waiver, dated March 12, 1996, between Styles on Video, Inc., Forever
Yours, Inc. and International Digital Investors, L.P. (Incorporated by
reference to Exhibit 10.70 to Styles on Video, Inc.'s Form 10-KSB, for
the period ending December 31, 1994)
10.58 Form of Master Lease Agreement, see Schedule 10.58
10.59 Letter Agreement dated as of May 24, 1995, by and between Styles on
Video, Inc. and Interactive Video Systems, Inc.
10.60 Employment Agreement dated as of December 20, 1996, by and between Dycam
Inc. and Ronald N. Iverson
16.1 Letter from Coopers & Lybrand L.L.P., dated March 29, 1996, resigning as
accountants for Styles on Video, Inc.
21.1 List of Subsidiaries of Styles on Video, Inc.
23.1 Consent of Corbin & Wertz
23.2 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
98
<PAGE>
SCHEDULE 4.1
Form:
Warrant Certificate for Series B Warrants, representing Warrants to purchase
53,286,228 shares of Common Stock of Styles on Video, Inc., issued in the name
of International Digital Investors, L.P., dated as of May 15, 1996.
(a) Warrant Certificate for Series B Warrants representing Warrants to purchase
51,419,199 shares of Common Stock of Styles on Video, Inc., issued in the
name of International Digital Investors, L.P., dated as of January 15,
1997.
Differences from Form Warrant Certificate are:
(1) Date: January 15, 1997
(2) Number of Shares Underlying the Warrants: 51,419,199
(3) Language stating that the 51,419,199 Warrants to replace the
53,286,228 Warrants issued on May 15, 1996.
99
<PAGE>
SCHEDULE 4.4
Form:
Warrant Certificate, representing C-2 Warrants to purchase 250,000 shares of
Common Stock of Styles on Video, Inc., issued in the name of K. Eugene Shutler,
dated as of May 15, 1996.
(a) Warrant Certificating, representing C-1 Warrants to purchase 80,000 shares
of Common Stock of Styles on Video, Inc., issued in the name of Dr. Ann
Graham Ehringer, dated as of May 15, 1996.
Differences from Form Warrant Certificates are:
(1) Name: Dr. Ann Graham Ehringer
(2) Number of Shares Underlying the Warrants: 80,000
(3) Consideration for Warrants: Services as Chairman of the Joint
Independent Committee of Directors of the Company and its subsidiary,
Forever Yours, Inc., a Delaware Corporation, established to review
certain transactions with International Digital Investors, L.P.
(4) Type of Warrants: C-1
(5) Vesting Schedule: 40,000 Warrants vested on May 15, 1996 and $40,000
Warrant will vest on April 18, 1997.
(b) Warrant Certificate, representing C-3 Warrants to purchase 4,071,684 shares
of Common Stock of Styles on Video, Inc., issued in the name of K. Eugene
Shutler, dated August 1, 1996.
Differences from Form Warrant Certificate are:
(1) Date: August 1, 1996
(2) Number of Shares Underlying the Warrants: 4,071,684
(3) Consideration of Warrants: Executive services in connection with his
Employment Agreement.
(4) Type of Warrants: C-3
100
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(5) Vesting Schedules: Four percent (4%) of the Warrants vested on August
1, 1996; and, so long as Initial Holder is employed by the Company
pursuant to the Employment Agreement, four percent (4%) of the Warrants
have vested and shall vest on the first day of each month thereafter,
until all of the Warrants shall have vested, provided however: (i) in
the event the Initial Holder's employment under the Employment Agreement
is terminated for cause (as defined in the Employment Agreement) or
Initial Holder terminates his employment voluntarily in the absence of a
breach of the Employment Agreement by the Company, no further vesting of
the Warrants shall occur from and after the date of such termination;
(ii) in the event Initial Holder's employment by the Company pursuant to
the Employment Agreement is terminated without cause, or if Initial
Holder terminates his employment pursuant to the Employment Agreement
voluntarily because of a breach of the Employment Agreement by the
Company, all of the Warrants shall vest immediately; and (iii) in the
event the Employment of the Initial Holder is terminated within six
months after the occurrence of a Change of Control (as defined in the
Employment Agreement), the Warrants shall continue to vest in accordance
with the vesting schedule set forth above and the requirement that
Initial Holder be employed by the Company shall be waived.
101
<PAGE>
SCHEDULE 10.19
Form:
Registration Rights Agreement, dated as of May 15, 1996, by and between Styles
on Video, Inc. and K. Eugene Shutler.
(a) Registration Rights Agreement, dated as of May 15, 1996, by and between
Styles on Video, Inc. and Dr. Ann Graham Ehringer.
Differences from Form Registration Rights Agreement are:
(1) Name: Dr. Ann Graham Ehringer
(2) Consideration for Warrants: Services as Chairperson of the Independent
Committee to review certain transactions with International Digital
Investors, L.P.
(3) Number of Shares Underlying Warrant: 80,000
(b) Registration Rights Agreement, dated as of August 1, 1996, by and between
Styles on Video, Inc. and K. Eugene Shutler.
Differences from Form Registration Rights Agreement are:
(1) Date: August 1, 1996
(2) Number of Shares Underlying Warrants: 4,071,684
(3) Reference to Warrants as "New Warrants" issued pursuant to his
Employment Agreement.
102
<PAGE>
SCHEDULE 10.58
Form:
Master Lease Agreement, dated December 21, 1994, between Forever Yours, Inc.
and Balboa Capital Corporation (Incorporated by reference to Exhibit 10.62 to
Styles on Video, Inc.'s Form 10-KSB, for the period ending December 31, 1994.)
(a) Master Lease Agreement, dated October 10, 1995, among Forever Yours, Inc.,
Styles on Video, Inc. and Balboa Capital Corporation.
Differences from Form Master License Agreement are:
(1) Lessee: Styles on Video, Inc. added as co-lessee
(2) Date: October 10, 1995
(3) Exhibit A: (i) FP100 Fotoprint Printer S/N 00246AK95
(ii) X-RITE Densitometer P/N 16828562-005
(b) Master Lease Agreement, dated March 8, 1996, among Forever Yours, Inc.,
Styles on Video, Inc. and Balboa Capital Corporation.
Differences from Form Master License Agreement are:
(1) Lessee: Styles on Video, Inc. added as co-lessee
(2) Date: March 8, 1996
(3) Exhibit A: (i) IP4000 Color Imager/Processor
(ii) High Performance Windows Toolkit
(iii) Spare Parts Kit
103
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EXHIBIT 4.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THAT
ACT AND UNDER APPLICABLE STATE SECURITIES LAW OR REGISTRATION OF
SUCH SECURITIES UNDER THAT ACT AND UNDER THE PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED OR UNLESS THE
SALE OR TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 OR 144A
PROMULGATED UNDER SUCH ACT AND, IF REASONABLY REQUESTED BY STYLES
ON VIDEO, INC. (THE "COMPANY"), THE COMPANY HAS RECEIVED AN
OPINION OF ITS COUNSEL THAT THE SECURITIES OR THE SALE OR
TRANSFER ARE EXEMPT FROM REGISTRATION.
STYLES ON VIDEO, INC.
WARRANT CERTIFICATE
Dated as of May 15, 1996
SERIES C-2 WARRANTS TO PURCHASE COMMON STOCK
--------------------------------------------
No. C-2 Certificate for 250,000 Warrants
STYLES ON VIDEO, INC., a Delaware corporation (the "Company"),
hereby certifies that in partial consideration for the rendition of
consulting services pursuant to his Consulting Agreement with the Company
dated as of April 19, 1996 and for other value received, K. Eugene
Shutler, an individual ("Initial Holder"), or registered assigns, is the
registered owner of the number of Series C-2 Warrants of the Company set
forth above. This Warrant Certificate evidences 250,000 Series C-2
Warrants (the "Warrants").
Each Warrant entitles the registered owner thereof to purchase one
share (each such share being referred to herein as a "Warrant Share" and
all such shares being referred to herein, collectively, as the "Warrant
Shares"), as adjusted from time to time as provided in Section 7 hereof,
of Common Stock, $.001 par value per share, of the Company ("Common
Stock"). Each Vested Warrant (as defined below) may be exercised from
time to time, but subject to the limitations on exercisability
hereinafter set forth, prior to 5:00 P.M. on November 20, 2005 (the
"Expiration Date"), subject to the following terms and conditions.
Section 1. Registration and Vesting.
------------------------
(a) The Company shall register each Warrant, upon records to be
maintained by the Company for such purpose (such records being referred
to herein as the "Register"), in the name of the record holder of such
Warrant from time to time. The Company may deem and treat the registered
holder of each Warrant as the absolute owner thereof for the purpose of
any exercise thereof or
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<PAGE>
any distribution thereof, and for all other purposes, and the Company
shall not be affected by any notice to the contrary.
(b) The holder's right to purchase shares of Common Stock pursuant
to this Warrant Certificate shall vest in accordance with the following
schedule: 100,000 Warrants shall vest as of April 19, 1996; and 12,500
Warrants shall vest on May 19, 1996, and monthly thereafter until all
250,000 Warrants shall have vested on April 19, 1997.
Section 2. Registration of Transfers and Exchanges.
---------------------------------------
(a) Registration Issuance Of New Warrant Certificates. The Company
-------------------------------------------------
shall register in the Register the transfer of any Warrants upon the
surrender of this Warrant Certificate, with the Form of Assignment
attached as Annex A hereto duly filled in and signed (and with a
signature guarantee for the transfer of any Warrants by a registered
holder which is not the initial registered holder of this Warrant
Certificate), to the Company at the office of the Company set forth in
Section 3(c) hereof. Upon any such registration of transfer, a new
Warrant Certificate, in substantially the form of this Warrant
Certificate, evidencing the Warrants so transferred shall be issued to
the transferee of such Warrants and a new Warrant Certificate, in
substantially the form of this Warrant Certificate, evidencing the
remaining Warrants, if any, not so transferred, shall be issued to the
then-registered holder thereof. The Company shall at no time close the
Register against the permitted transfer of any Warrant or Warrant Share
in any manner which materially interferes with the timely exercise of
such Warrant.
(b) Warrants Exchangeable for Different Denominations. This Warrant
-------------------------------------------------
Certificate is exchangeable, upon the surrender hereof by the holder
hereof at the office of the Company set forth in Section 3(c) hereof, for
new Warrant Certificates, in substantially the form of this Warrant
Certificate, evidencing in the aggregate the right to purchase the number
of Warrant Shares which may then be purchased under this Warrant
Certificate. Each such new Warrant Certificate shall be dated the date of
such exchange and represent the right to purchase such number of Warrant
Shares as shall be designated by the holder of this Warrant Certificate
at the time of such surrender.
Section 3. Duration. Termination and Exercise of Warrants.
----------------------------------------------
(a) Vested Warrants shall be exercisable by the registered holder
thereof from Time to time on any business day, (x) on or prior to 5:00
P.M. Los Angeles time on the Expiration Date, but only (y) on or after
the earlier to occur of (i) October 31, 1996, (ii) the date on which all
corporate and shareholder action on the part of the Company shall have
been taken to authorize and reserve for issuance a number of shares of
Common Stock at least
-2-
<PAGE>
equal to the product of the number of Warrants evidenced hereby times the
Adjusted Warrant Share Amount (as defined below) and (iii) the first date
on which any of the Series B Warrants (originally issued to International
Digital Investors, L.P.("IDI")), the Series C Warrants (originally issued
to Dana I. Arnold), the Settlement Warrants {issued in connection with
the settlement of various lawsuits against the Company) or the Series C-1
Warrants (originally issued to Dr. Ann Graham Ehringer) (collectively,
the "Other Warrants") becomes exercisable, in whole or in part. At 5:00
P.M., Los Angeles time, on the Expiration Date, each Warrant not
exercised prior thereto shall be and become void and of no value.
(b) Subject to the provisions of this Warrant Certificate, including
adjustments to the Exercise Price and to the number of Warrant Shares
issuable upon the exercise of each Warrant pursuant to Section 7 hereof,
each holder of a Vested Warrant on or prior to the Expiration Date shall
have the right to purchase from the Company (and the Company shall be
obligated to issue and sell to such holder of a Vested Warrant) at the
Exercise Price one fully-paid Warrant Share which is nonassessable.
(c) Subject to Sections 4, 10 and 11 hereof, upon (i) surrender of
this Warrant Certificate, with the Form of Election to Purchase attached
as Annex B hereto (the "Form of Election to Purchase") duly filled in and
signed, to the Company at its office at 667 Rancho Conejo, Newbury Park,
California 91320. Attention: President, or at such other address as the
Company may specify in writing to the then-registered holder of the
Vested Warrants, and (ii) payment of the Exercise Price, multiplied by
the number of Warrant Shares then issuable upon exercise of the Vested
Warrants being so exercised, the Company shall promptly, but in any event
within three days of its receipt of the Form of Election to Purchase,
together with the Warrant Certificate and receipt of payment of the
Exercise Price, issue and cause to be delivered to or upon the written
order of the registered holder of the Vested Warrants being so exercised,
and in such name or names as such registered holder may designate
(subject to Section 4 hereof and to the Note Purchase Agreement), a
certificate for the Warrant Shares issued upon such exercise of such
Vested Warrants, provided that any and all such certificates shall bear a
legend regarding the transferability of the Warrant Shares substantially
similar to the legend appearing on the first page of this Warrant
Certificate. Any person so designated to be named in such certificate for
such Warrant Shares shall be deemed to have become the holder of record
of such Warrant Shares as of the Date of Election to Purchase such
Vested Warrants. The "Date of Election to Purchase" any Vested Warrant
means the date on which the Company shall have received (1) this Warrant
Certificate, with the Form of Election to Purchase duly filled in and
signed, and (2) payment of the Exercise Price for such Vested Warrant.
-3-
<PAGE>
(d) In lieu of delivering the Exercise Price in cash, a holder may,
at its option, instruct the Company in the Form of Election to Purchase
to retain, in payment of the Exercise Price, a number of Warrant Shares
(the "Payment Shares") equal to the quotient of the aggregate Exercise
Price of the Vested Warrants then being exercised divided by the Market
Price of such shares as of the date of exercise, and to deduct the number
of Payment Shares from the Warrant Shares to be delivered to such holder.
(e) The Warrants evidenced by this Warrant Certificate shall be
exercisable either as an entirety or, from time to time, for part only of
the number of Vested Warrants evidenced hereby. If fewer than all of the
Warrants evidenced by this Warrant Certificate are exercised at any time,
the Company, at its expense, shall issue to the registered holder a new
Warrant Certificate, in substantially the form of this Warrant
Certificate, for the remaining number of Warrants evidenced by this
Warrant Certificate.
Section 4. Payment of Taxes. The Company shall pay all issuance
----------------
and transfer taxes and charges that may be imposed on the Company or on
the Warrants or the Warrant Shares in respect of the transfer of
Warrants, or the issuance or delivery of the Certificates for Warrant
Shares or other securities in respect of the Warrant Shares upon the
exercise or conversion of Warrants; provided, however, that the Company
-------- -------
shall not be required to pay any such tax or other charge imposed in
respect of the transfer of Warrants, or the issuance or delivery of
certificates for Warrant Shares or other securities in respect of the
Warrant Shares upon the exercise of Warrants, to a person or entity other
than a then-existing registered holder of Warrants.
Section 5. Mutilated or Missing Warrant Certificate. If this
----------------------------------------
Warrant Certificate shall be mutilated, lost, stolen or destroyed, upon
request by the registered holder of the Warrants, the Company shall
issue, in exchange for and upon cancellation of the mutilated Warrant
Certificate, or in substitution for the lost, stolen or destroyed Warrant
Certificate, a new Warrant Certificate, in substantially the form of this
Warrant Certificate, of like tenor and representing the equivalent number
of Warrants, but, in the case of loss, theft or destruction of this
Warrant Certificate and, if requested by the Company, indemnity also
satisfactory to it.
Section 6. Reservation and Issuance of Warrant Shares.
------------------------------------------
(a) The Company shall on or prior to October 31, 1996 and at all
times thereafter have authorized, and reserve and keep available, for the
purpose of enabling it to satisfy any obligation to issue Warrant Shares
upon the exercise of the Warrants, the number of Warrant Shares
deliverable upon exercise of the Warrants. The Company shall take any
further corporate action which may be necessary in order that the Company
may
-4-
<PAGE>
validly and legally issue at the Exercise Price, Warrant Shares that are
fully-paid and nonassessable.
(b) The Company covenants that all Warrant Shares will upon issuance
in accordance with the terms of this Warrant Certificate, be (i) duly
authorized, validly issued fully-paid and nonassessable and (ii) free
from all taxes or other governmental charges with respect to the issuance
thereof (not including (y) income taxes payable by the holders of
Warrants being exercised in respect of gains thereon, and (z) transfer
taxes, in accordance with the provisions of Section 4 above) and from all
liens, charges and security interests created by the Company.
(c) If the issuance of any Warrant Shares required to be reserved
pursuant to paragraph (a) of this Section 6 requires registration with or
approval of any governmental authority under any Federal or state law
(other than the Securities Act and state securities laws), before such
Warrant Shares may be issued upon the exercise thereof, the Company
shall, at its expense and as expeditiously as possible, use its best
efforts to cause such Warrant Shares to be duly registered or approved,
as the case may be, provided, however, that the Company will not be
-------- -------
required to qualify generally to do business in any jurisdiction where it
is not then so qualified, to subject itself to taxation in any
jurisdiction where it is not then subject to taxation, or take any action
which would subject it to general service of process in any jurisdiction
where it is not then so subject.
Section 7. Adjustments.
-----------
(a) Adjustments of Number of Warrant Shares. The number of Warrant
---------------------------------------
Shares issuable upon the exercise of each Warrant shall be subject to
adjustment from time to time as hereinafter provided. Upon each
adjustment pursuant to any of paragraphs (b), (c), (d) or (e) of this
Section 7, each Warrant shall thereafter entitle the holder thereof to
purchase at the Exercise Price the number of Warrant Shares resulting
from such adjustment (the "Adjusted Warrant Share Amount")
(b) Adjustment upon Issuance of Common Stock. If at any time after
----------------------------------------
the date hereof, the Company shall issue or sell any shares of Common
Stock for a consideration per share less than the Market Price (as
hereinafter defined) immediately prior to the time of such issue or sale,
then, forthwith upon such issue or sale, the Adjusted Warrant Share
Amount shall be equal to the product of the Adjusted Warrant Share Amount
in effect immediately prior to the time of such issue or sale multiplied
by a fraction, the numerator of which shall be the product of
(x) the total number of shares of Common Stock outstanding immediately
after such issue or sale multiplied by (y) the Market Price immediately
prior to such issue or sale, and the denominator of which shall be the
sum of (A) the number of shares
-5-
<PAGE>
of Common Stock outstanding immediately prior to such issue or sale
multiplied by the Market Price immediately prior to such issue or sale
plus (B) the aggregate consideration received by the Company upon such
issue or sale.
(c) Other Adjustment Events and Provisions. For the purposes of
--------------------------------------
this Section 7, the following clauses shall also be applicable.
(i) Issuance of Rights, Warrant or Options. Except as provided
--------------------------------------
in clauses (iii) and (xii) of this Section 7(c) hereof, in case at
any time the Company shall grant, issue or sell (whether directly or
by assumption in a merger or otherwise) any rights or warrants
(other than the Warrants) to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such convertible
or exchangeable stock or securities being herein called "Convertible
Securities") whether or not such rights or warrants or options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such rights or warrants or
options or upon conversion or exchange of such Convertible
Securities (determined as provided below) shall be less than the
Market Price determined as of the date of granting such rights or
warrants or options, as the case may be, then the total maximum
number of shares of Common Stock issuable upon the exercise of such
rights (other than rights issued pursuant to a stockholders' rights
plan adopted by the Company pursuant to which the acquisition by any
third party of a specified percentage of shares of Common Stock
triggers the exercisability of such rights to purchase Common Stock
for so long as no event has occurred triggering such right to
exercise) or warrants or options or upon conversion or exchange of
the total maximum amount of such Convertible Securities issuable
upon the exercise of such rights or warrants or options shall (as of
the date of granting of such rights or warrants or options) be
deemed to be outstanding and to have been issued for such price per
share. Except as provided in clause (v) of this Section 7(c), no
further adjustment of the Adjusted Warrant Share Amount shall be
made upon the actual issue of such Common Stock or such Convertible
Securities upon exercise of such rights or warrants or options or
upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, for the purposes of this
clause (i), the price per share for which Common Stock is issuable
upon the exercise of any such rights or warrants or options or upon
conversion or exchange of any such Convertible Securities shall be
determined by dividing (A) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
rights of warrants or
-6-
<PAGE>
options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such
rights or warrants or options, plus, in the case of such rights or
warrants or options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities and
upon the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the exercise of such
rights or warrants or options or upon the conversion or exchange of
all such Convertible Securities issuable upon the exercise of such
rights or warrants or options.
(ii) Issuance of Convertible Securities. In case the Company
----------------------------------
shall issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities (other than the Series
B Preferred Stock or the Other Warrants), whether or not the rights
to exchange or convert thereunder are immediately exercisable, and
the price per share for which Common Stock is issuable upon the
conversion or exchange of such Convertible Securities (determined as
provided below) shall be less than the Market Price determined as of
the date of such issue or sale of such Convertible Securities, then
the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall (as
of the date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued for such price per
share, provided that (A) except as provided in clause (v) of this
Section 7(c), no further adjustments of the Adjusted Warrant Share
Amount shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities and (B) if any
such issue or sale of such Convertible Securities is made upon
exercise of any rights or warrants to subscribe for or to purchase
or any option to purchase any such Convertible Securities for which
adjustments of the Adjusted Warrant Share Amount have been or are
to be made pursuant to clause (i) of this Section 7(c), no further
adjustment of the Adjusted Warrant Share Amount shall be made by
reason of such issue or sale. For the purposes of this clause (ii),
the price per share for which Common Stock is issuable upon
conversion or exchange of Convertible Securities shall be determined
by dividing (1) the total amount received or receivable by the
Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (2) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such
Convertible Securities.
(iii) [Intentionally omitted].
-7-
<PAGE>
(iv) Misstatement of Outstanding Common Stock. If the number
----------------------------------------
of shares of Common Stock issued and outstanding as of the date on
which the Company has given its representation pursuant to Section
3.2(a) of the Note Purchase Agreement or if the number of shares of
Common Stock issuable pursuant to outstanding warrants, options, or
rights including conversion or preemptive rights) or agreements for
the purchase or acquisition from the Company of any of its shares of
capital stock on which the Company has given its representation
pursuant to Section 3.2(d) of the Note Purchase Agreement is greater
than the respective number set forth in such representations, the
Adjusted Warrant Share Amount shall be equal to the product of the
Adjusted Warrant Share Amount immediately prior to any adjustment
hereunder, multiplied by a fraction the numerator of which is the
total number of shares of Common Stock actually outstanding or
issuable as of the date of such representation and the denominator
of which is the total number of shares of Common Stock that the
Company represented were outstanding or issuable.
(v) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any rights or warrants or options referred to
in clause (i) above, or the additional consideration, if any,
payable upon the conversion or exchange of Convertible Securities
referred to in clause (i) or (ii) above, or the date at which any
Convertible Securities referred to in clause (i) or (ii) above are
convertible into or exchangeable for Common Stock, shall change
(other than under or by reason of an event resulting in a change
pursuant to provisions set forth in the documents governing such
rights, warrants, options or Convertible Securities designed to
protect against dilution, to the extent such event also results in
an adjustment pursuant to this Section 7), then the Adjusted Warrant
Share Amount in effect at the time of such event shall forthwith be
readjusted to the Adjusted Warrant Share Amount which would have
been in effect at such time had such rights, warrants, options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold. On the
expiration of any such option or warrant or right or the termination
of any such right to convert or exchange such Convertible
Securities, the Adjusted Warrant Share Amount then in effect
hereunder shall forthwith be decreased to the Adjusted Warrant Share
Amount which would have been in effect at the time of such
expiration or termination had such right, warrant, option or
convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Common
Stock issuable thereunder shall no longer be deemed to be
outstanding. If the purchase price provided for in any such
-8-
<PAGE>
right or warrant or option referred to in clause (ii) above or the
rate at which any Convertible Securities referred to in clause (i)
or (ii) above are convertible into or exchangeable for Common Stock
shall change at any time under or by reason of provisions set forth
in the documents governing such rights, warrants, options or
Convertible Securities designed to protect against dilution, then in
case of the delivery of Common Stock upon the exercise of any right
or warrant or option or upon conversion or exchange of any Such
Convertible Security, the Adjusted Warrant Share Amount then in
effect hereunder shall forthwith be adjusted to such respective
amount as would have obtained had such right, warrant, option or
Convertible Security never been issued as to such Common Stock and
had adjustments been made upon the issuance of the shares of Common
Stock delivered as aforesaid, but only if as a result of such
adjustment the Adjusted Warrant Share Amount then in effect
hereunder is thereby increased.
(vi) Stock Dividends. In case the Company shall declare a
---------------
dividend or make any other distribution upon any stock of the
Company payable in Common Stock or Convertible Securities, any
Common Stock or Convertible Securities, as the case may be, issuable
in payment of such dividend or distribution shall be deemed to have
been issued or sold without consideration.
(vii) Consideration for Stock. In case any shares of
-----------------------
Common Stock or Convertible Securities or any right or warrants or
options to purchase any such Common Stock or Convertible Securities
shall be issued or sold
(A) for cash, the consideration received therefor shall
be deemed to be the amount received by the Company therefor,
without deduction therefrom of any expenses incurred or any
underwriting commission or concessions paid or allowed by the
Company in connection therewith.
(B) for a consideration other than cash, the amount of
the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration as
determined by the Board of Directors of the Company, in good
faith and in the exercise of reasonable business judgment,
without deduction of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in
connection therewith, which determination shall be conclusive
and which determination of valuation shall be sent in writing
by the Boards of Directors to the registered holders of
Warrants; provided, however, that if the fair value of the
-------- ---------
non-cash consideration the value of which is being
-9-
<PAGE>
determined exceeds $1,000,000, the Board of Directors of the
Company shall provide written notice of its valuation to the
Warrantholders, and in the event that the holders of at least
thirty-three percent (33%) of the then-outstanding Warrants
disagree with such valuation, such Warrantholders may provide
written notice of such disagreement (which notice shall
include such Warrantholder's valuation and the basis therefor)
to the Company within 15 days following such notice from the
Board of Directors. For a period of 15 days following the
delivery of the last timely delivered notice of disagreement,
the Company and such Warrantholders shall in good faith seek
to agree upon a valuation. If at the end of such 15 day period
the Company and such Warrantholders have not agreed upon a
valuation, then the value of the non-cash consideration the
value of which is being determined shall be determined in an
arbitration conducted in the same manner as an arbitration
conducted to determine Market Price as provided in 7(c)(x)(B).
(C) in connection with any merger or consolidation in
which the Company is the surviving corporation (other than any
consolidation or merger in which the previously outstanding
shares of Common Stock of the Company shall be changed into or
exchanged for the stock or other securities of another
corporation), the amount of consideration therefor shall be
deemed to be the fair value as determined reasonably and in
good faith by the board of directors of the Company of such
portion of the assets and business of the non-surviving
corporation as such board may determine to be attributable to
such shares of Common Stock, Convertible Securities, rights or
warrants or options, as the case may be.
In the event of any consolidation or merger of the Company in which the
Company is not the surviving corporation or in which the previously
outstanding shares of Common Stock of the Company shall be changed into
or exchanged for the stock or other securities of another corporation or
in the event of any sale of all or substantially all of the assets of the
Company for stock or other securities of any corporation, the Company
shall be deemed to have issued a number of shares of its Common Stock for
stock or securities or other property of the other corporation computed
on the basis of the actual exchange ratio on which the transaction was
predicated and for a consideration equal to the fair market value on the
date of such transaction of all such stock or securities or other
property of the other corporation, and if any such calculation results in
adjustment of the Adjusted Warrant Share amount, the determination of the
number of shares of Common Stock issuable upon exercise of the Warrants
immediately prior to the merger, consolidation or sale, for
-10-
<PAGE>
purposes of paragraph (f) of this Section 7, shall be made after giving
effect to such adjustment of the Adjusted Warrant Share Amount.
(viii) Record Date. In case the Company shall take a
-----------
record of the holders of its Common Stock for the purpose of
entitling them (A) to receive a dividend or other distribution
payable in Common Stock or in Convertible Securities, or (B) to
subscribe for or purchase Common Stock or Convertible Securities,
then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
(ix) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held
by or for the account of the Company, but the disposition of any
such shares shall be considered an issue or sale of Common Stock for
the purposes of this Section 7(c).
(x) Definition of Market Price. "Market Price" shall mean the
-------------------------- ------------
greater of:
(A) $0.075, and
(B) (I) if shares of the Common Stock are listed or
admitted to trading on any exchange or quoted through NASDAQ
or any similar organization, the average of the daily closing
prices per share of the Common Stocks for the 20 consecutive
trading days immediately preceding the date of public
announcement of the event giving rise to adjustment under this
Section 7 or, if no such public announcement is made with
respect to such event, the average of the daily closing prices
per share of the Common Stock for the 20 consecutive trading
days immediately preceding the day as of which "Market Price"
is being determined. The closing price of each day shall be
the last sale price regular way or, in case no such sale takes
place on such day, the average of the closing bid and asked
prices regular way, in either case on the New York Stock
Exchange, or, if shares of the Common Stock are not listed or
admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which the shares are
listed or admitted to trading, or if the shares are not so
listed or admitted to trading, the average of the highest
reported bid and lowest reported asked prices as furnished by
the National Association of Securities Dealers, Inc. through
NASDAQ or through a
-11-
<PAGE>
similar organization if NASDAQ is no longer reporting such
information.
(II) if such shares of Common Stock are not listed or
admitted to trading on any exchange or quoted through NASDAQ
or any similar organization, such value shall be determined by
the Board of Directors of the Company, in good faith and in
the exercise of reasonable business judgment, without taking
into consideration any premium for shares representing control
of the Company, any discount for any minority interest therein
or any restrictions on transfer under Federal and applicable
state securities laws or otherwise, which determination shall
be conclusive, and which determination of valuation shall be
sent in writing by the Board of Directors to the registered
holders of Warrants, provided, however, that if the Market
-------- -------
Price of the shares of Common Stock the value of which is
being determined exceeds $1,000,000, the Board of Directors of
the Company shall provide written notice of its determination
of Market Price and in the event that the holders of at
least thirty-three percent (33%) of the then-outstanding
Warrants disagree with such valuation, such Warrantholders may
provide written notice of such disagreement (which notice
shall include such Warrantholder's valuation and the basis
therefor) to the Company within 15 days following such notice
from the Board of Directors. For a period of 15 days following
the delivery of the last timely delivered notice of
disagreement, the Company and such Warrantholders shall in
good faith seek to agree upon a valuation. If at the end of
such 15 day period the Company and such Warrantholders have
not agreed upon a valuation, then, to the fullest extent
permitted by law, the value of the shares of Common Stock
shall be determined, at the request of any party, by
arbitration conducted in the English language in Los Angeles,
California in accordance with and to the extent permitted by
the Delaware Arbitration Act and, to the extent not
inconsistent therewith, the Rules for Large, Complex Cases of
the American Arbitration Association. The parties to the
arbitration shall attempt to select an arbitrator from such
members. If the parties to the arbitration do not agree on the
selection of an arbitrator within twenty (20) days after the
date demand for the arbitration is filed, an arbitrator having
such experience shall be selected in accordance with such
Rules of the American Arbitration Association. The arbitrator
shall set forth his or her determination in writing (which
shall be sent to each party to such arbitration) and shall
enumerate in reasonable detail the basis of his or her
determination. No party to the arbitration may seek,
-12-
<PAGE>
and the arbitrator shall not award, punitive or exemplary
damages. To the fullest extent permitted by applicable law,
any judgment or award rendered by the arbitrator shall be
final, conclusive and binding. Judgment may be entered on any
final, unappealable arbitration award by any state or federal
court having jurisdiction thereof. To the fullest extent
permitted by applicable law, any controversy concerning
whether a dispute is an arbitrable dispute or as to the
interpretation or enforceability of this Section
7(c)(x)(B)(II) shall be determined by the arbitrator. The
arbitration proceedings as well as the fact such proceedings
occur, shall be kept confidential by the parties hereto and
may only be disclosed to their personal representatives and
advisors or as required by law and insofar as is necessary to
confirm, correct, vacate or enforce the award. In the event of
a breach of this provision, the arbitrator is expressly
authorized to assess damages and each of the parties hereto
consents to the expansion of the scope of arbitration for such
purpose. The pendency of any arbitration under this Section
7(c)(x)(B)(II) shall not relieve any party hereto of its
obligations under this Agreement. To the fullest extent
permitted by applicable law, if the Company or any
Warrantholder shall resort to legal proceedings for injunctive
or other similar relief pending the outcome of any such
arbitration proceeding or prior to the initiation thereof,
such party shall not be deemed to have waived Its rights to
cause such matter or any other mater to be referred to
arbitration pursuant to this Section 7(c)(x)(B)(II). The
parties intend that this agreement to arbitrate be valid,
enforceable and irrevocable. The designation of situs or a
governing law for this Warrant Certificate or the arbitration
shall not be deemed an election to preclude application of the
Federal Arbitration Act if it would be applicable. The
arbitrator shall have authority in his or her discretion to
grant injunctive relief, award specific performance and impose
sanctions upon any party to any such arbitration. The fees,
expenses and charges of any arbitration pursuant to this
Section 7(c)(x)(B)(II) shall be borne (1) by the Company, if
the arbitrator renders a valuation of the shares of Common
Stock that is higher than the valuation rendered by the Board
of Directors or (2) by the Warrantholders who have notified
the Company in writing of their objection to the valuation of
the Board of Directors, pro rata in proportion to the number
of shares of Common Stock issuable upon exercise of their
respective Warrants, if the arbitrator renders a valuation of
the shares of Common Stock that is equal to or less than the
valuation rendered by the Board of Directors.
-13-
<PAGE>
(xi) Determination of Market Price under Certain
-------------------------------------------
Circumstances. Anything herein to the contrary
-------------
notwithstanding, in case the Company shall issue any shares of
Common Stock or Convertible Securities in connection with the
acquisition by the Company of the stock or assets of any other
corporation or the merger of any other corporation into the
Company, the Market Price shall be determined as of the date
the number of shares of Common Stock or Convertible Securities
(or in the case of Convertible Securities other than stock,
the aggregate principal amount of Convertible Securities) was
determined (as set forth in a written agreement between the
Company and the other party to the transaction) rather than on
the date of issuance of such shares of Common Stock or
Convertible Securities.
(xii) Certain Issues Excepted. Anything herein to the
-----------------------
contrary notwithstanding, the Company shall not be required to
make any adjustment of the Adjusted Warrant Share Amount
whatsoever upon the issuance of
(A) (i) Up to 593,741 shares of Common Stock, net
of repurchases, issuable to employees, directors,
consultants or advisors under options presently
outstanding which were issued prior to the date of
the Warrants pursuant to stock option and restricted
stock purchase agreements approved by the
stockholders and directors of this corporation
(excluding the options for 150,000 shares to be
surrendered by Guy de Vreese and canceled in
connection with settlement of pending litigation),
(ii) up to 1,750,000 shares of Common Stock issued or
issuable to present or former shareholders of the
corporation pursuant to Warrants anticipated to be
issued in connection with settlement of pending
litigation, (iii) up to 7,747,499 shares of Common
Stock usable to Dana I. Arnold pursuant to the Series
C Warrants in consideration for the return and
cancellation of his holdings of common stock of FYI,
(iv) up to 53,286,228 shares of Common Stock issued
or issuable to IDI pursuant to the Series B Warrants,
(v) the 200,000 shares of Common Stock issued or
issuable to IDI upon conversion of the Series B
Preferred Stock, (vi) up to 80,000 shares of Common
Stock issued or issuable to Dr. Ann Graham Ehringer
pursuant to the Series C-1 Warrants issued in
consideration for her services on the Independent
Committee established to review the transaction
contemplated by the Note Purchase Agreement with IDI,
(vii) shares of Common Stock usable upon the exercise
of the Settlement Warrants, and (viii) such
additional number of shares of Common Stock as may be
fixed by the Board of Directors of this corporation
issuable or issued to employees, directors,
consultants or advisors of this corporation pursuant
to stock option or restricted
-14-
<PAGE>
stock purchase plans approved by the stockholders and
directors of this corporation provided that the aggregate
number of shares of Common Stock issuable upon the exercise of
options or other rights issued pursuant to such plans,
exclusive of any options or other rights that have been
exercised, plus the aggregate number of share of Common Stock
issued upon exercise of such options or rights or otherwise
issued pursuant to such plans, shall not exceed 400,000 (as
such number may be proportionally adjusted upon any stock
split or combination or upon a merger or other corporate
reorganization).
(B) Common Stock issued or issuable upon conversion of
the Series A Preferred Stock and Series B Preferred Stock, or
(C) Common Stock issued or issuable upon exercise of the
Warrants, the Series A Warrants, the Series B Warrants, the
Settlement Warrants, the Series C-1 Warrants, or any other
warrants outstanding on the date hereof.
The Company shall not be required to make any such adjustment
upon the issuance of shares or the granting of any options or
Warrants or rights referred to in Section 7(c)(xii)(A), (B) and (C)
if and to the extent that the Issuance of the shares covered thereby
is expected by this use.
(d) Certain Special Dividends. In case the Company shall declare a
-------------------------
dividend or make any other distribution (other than a distribution
referred to in paragraph (c) of this Section 7) upon the Common Stock
(other than regular periodic cash dividends), then in each case the
Adjusted Warrant Share Amount in effect immediately prior to the
declaration of such dividend or making of such distribution shall be
adjusted so that such Adjusted Warrant Share Amount shall equal the
number of Warrant Shares determined by multiplying the Adjusted Warrant
Share Amount in effect immediately prior to the close of business on the
date fixed for the determination of stockholders entitled to receive such
dividend or distribution by a fraction, the numerator of which shall be
the Market Price on the date fixed for such determination and the
denominator of which shall be the Market Price on the date fixed for such
determination less, in the case of a dividend or distribution in cash,
the amount per share of Common Stock so declared or, in the case of any
other dividend or distribution, the then fair market value (as determined
reasonably and in good faith by the Board of Directors of the Company) of
the portion of the property so distributed applicable to one share of
Common Stock, such adjustment to become effective immediately prior to
the opening of business on the day following the date fixed for the
determination of stockholder, entitled to
-15-
<PAGE>
receive such distribution, provided, however that for this purpose,
Market Price shall be determined as provided in Section 7(c)(x) without
regard to Section 7(c)(x)(A).
(e) Subdivision or Combination of Stock. In case the Company shall
-----------------------------------
at any time subdivide the outstanding shares of Common Stock into a
greater number of shares, the Adjusted Warrant Share Amount in effect
immediately prior to such subdivision shall be proportionately increased,
and conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares, the Adjusted Warrant Share
Amount in effect immediately prior to such combination shall be
proportionately reduced.
(f) Adjustment for Consolidation, Merger, Sale of Assets,
-----------------------------------------------------
Reorganization, etc. In case the Company (i) consolidates with or merges
-------------------
into any other corporation and is not the continuing or surviving
corporation of such consolidation or merger, or (ii) permits any other
corporation to consolidate with or merge into the Company and the Company
is the continuing or surviving corporation but, in connection with such
consolidation or merger, the Common Stock is changed into or exchanged
for stock or other securities of any other corporation or cash or any
other assets, or (iii) transfers all or substantially all of its
properties and assets to any other corporation, or (iv) effects a capital
reorganization or reclassification of the capital stock of the Company in
such a way that holders of Common Stock shall be entitled to receive
stock, securities, cash or assets with respect to or in exchange for
Common Stock, then, and in each such case, proper provision shall be made
so that, upon the basis and upon the terms and in the manner provided in
this Section 7(f), the holder of this Warrant Certificate, upon the
exercise of each Warrant at any time after the consummation of such
consolidation, merger, transfer, reorganization or reclassification,
shall be entitled to receive (at the aggregate Exercise Price in effect
for all shares of Common Stock issuable upon such exercise immediately
prior to such consummation as adjusted to the time of such transaction),
in lieu of the Adjusted Warrant Share Amount prior to such consummation,
the stock and other securities, cash and assets to which a holder of a
number of shares of Common Stock equal to the Warrant Share Amount would
have been entitled upon such consummation (subject to adjustments
subsequent to such corporate action as nearly equivalent as possible to
the adjustments provided for in this Section 7).
(g) Notice Of Adjustment. Whenever the Adjusted Warrant Share Amount
--------------------
is adjusted then and in each such case the Company shall promptly, but in
no event later than 20 days after the date of occurrence of the event
causing such adjustment, deliver a certificate of an officer of the
Company (the "Officer's Certificate") to the registered holder of the
Warrants, which Officer's Certificate shall state the Adjusted Warrant
Share
-16-
<PAGE>
Amount resulting from such adjustment and or the increase or decrease, if
any, in the number of shares of Common Stock or other stock or property
issuable upon the exercise of each Warrant, setting forth in reasonable
detail the method of calculation and the facts upon which such
calculation is based, including, if applicable, the Market Price as
determined in accordance with paragraph (c)(x) of this Section 7. The
Company shall keep at its office copies of all certificates and cause the
same to be available for inspection at said office during normal business
hours by any holder of a Warrant or any prospective purchaser of a
Warrant designated by a holder thereof.
(h) Other Notices. In case at any time:
-------------
(i) the Company shall declare or pay any cash dividend on the
Common Stock (other than a regular periodic cash dividend);
(ii) the Company shall declare or pay any dividend payable in
stock upon the Common Stock or make any distribution (other than a
regular periodic cash dividend) to the holders of the Common Stock;
(iii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any
class or other rights;
(iv) the Company shall authorize the distribution to all
holders of the Common Stock of evidence of its indebtedness or
assets (other than a regular periodic cash dividend);
(v) there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or
consolidation or merger of the Company with another corporation
(other than a subsidiary of the Company in which the Company is the
surviving or continuing corporation and no change occurs in the
Common Stock of the Company), or sale of all or substantially all of
the Company's assets to, another corporation;
(vi) there shall be a voluntary or involuntary dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors or
winding up of the Company, or
(vii) the Company proposes to take any other action or an event
occurs which would require an adjustment pursuant to paragraph (i)
of this Section 7, then, in any one or more of such cases, the
Company shall give written notice, addressed to the holder of this
Warrant Certificate at the address of such holder as shown on the
books of the Company, of (A) the date on which the books of the
Company shall close or a record shall be taken for any such
dividend,
-17-
<PAGE>
distribution or subscription rights, as the case may be, or
(B) the date (or, if not then known, a reasonable approximation
thereof by the Company) on which any such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors,
winding up or other action, as the case may be, shall take place.
Such notice shall also specify (or, if not then known, reasonably
approximate) the date as of which the holders of Common Stock of
record shall participate in any such dividend, distribution or
subscription rights, as the case may be, or shall be entitled to
exchange their Common Stock for securities or other property
deliverable upon any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, bankruptcy
assignment for the benefit of creditors, winding up, or other
action, as the case may be. Such written notice shall also state
that the action in question or the record date is subject to the
effectiveness of a registration statement under the Securities Act
or to a favorable vote of security holders, if either is required.
Such written notice shall be given (1) at least 15 days prior to any
event specified in any of clauses (i), (ii) or (iv) of this Section
7(h) and, with respect to any event specified in clause (i) of this
Section 7(h), at least five days prior to the date on which the
books of the Company shall close or a record shall be taken for such
event, (2) at least 20 days prior to any event specified in clauses
(iii), (v) and (vii} of this Section 7(h) and (3) with respect to
events specified in clause (i) of this Section 7(h), (x) at least 30
days prior to a voluntary dissolution or liquidation of the Company
(y) at least three days prior to a voluntary bankruptcy, assignment
for the benefit of creditors or winding up of the Company, or (z)
promptly after an involuntary bankruptcy, assignment for the benefit
of creditors or winding up of the Company. The failure to give such
written notice required by this Section 7(h) or any defect therein
shall not affect any vote upon, or the taking of, any such action.
(i) Certain Events. If any event occurs as to which in the
--------------
reasonable opinion of the Company or the holder of this Warrant
Certificate, in good faith, the other provisions of this Section 7 are
not strictly applicable but the lack of any adjustment would not in the
opinion of the Company or such holder fairly protect the purchase rights
of the holder of this Warrant Certificate in accordance with the basic
intent and principles of such provisions, or if strictly applicable would
not fairly protect the purchase rights of the holder of this Warrant
Certificate in accordance with the basic intent and principles of such
provisions, then the Company shall appoint a firm of independent
certified public accountants (which may be the regular auditors of the
Company) of recognized national standing, which shall give the opinion
upon the adjustment, if any, on a
-18-
<PAGE>
basis consistent with the basic intent and principles established in the
other provisions of this Section 7, necessary to preserve, without
dilution, the exercise rights of the registered holder of this Warrant
Certificate. Upon receipt of such opinion, the Company shall forthwith
make the adjustments described therein.
(j) Prohibition of Certain Action. The Company shall not, by
-----------------------------
amendment of its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek
to avoid the observance or performance of any of the terms to be observed
or performed under this Warrant Certificate by the Company, but shall at
all times in good faith assist in the carrying out of all the provisions
of this Section 7. Without limiting the generality of the foregoing the
Company (a) shall not increase the par value of any shares of Common
Stock receivable upon the exercise of the Warrants to an amount that is
greater than the Exercise Price then in effect, (b) shall take all such
action as may be necessary or appropriate in order that the Company may
validly and legally issue fully-paid and nonassessable shares of Common
Stock upon the exercise of all Warrants from time to time outstanding and
(c) shall not take any action which results in any adjustment of the
Adjusted Warrant Share Amount if such Adjusted Warrant Share Amount
issuable after the action would exceed the total number of shares of
Common Stock then authorized by the Company's certificate of
incorporation and available for the purpose of issue upon such exercise.
Section 8. Exercise Price. The Exercise Price of each Warrant
--------------
shall be $0,075.
Section 9. No Stock Rights. Except as may be provided in the
---------------
Stockholders Agreement, no holder of this Warrant Certificate, as such,
shall be entitled to vote or be deemed the holder of Common Stock or any
other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained herein be construed to
confer upon the holder of this Warrant Certificate, as such, the rights
of a stockholder of the Company or the right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action, to
exercise any preemptive right, to receive notice of meetings or other
actions affecting stockholders (except as provided herein), or to receive
dividends or subscription rights or otherwise, until the Date of Election
to Purchase Warrants shall have occurred.
Section 10. Fractional Warrant Shares. No fractional Warrant
-------------------------
Shares shall be issued upon exercise of the Warrants, and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole
share. Whether or not fractional shares are issuable upon such exercise
shall be determined on the
-19-
<PAGE>
basis of the total number of shares of the Warrant the holder is at that
time exercising and the number of shares of Common Stock issuable upon
such aggregate exercise.
Section 11. Absence of Registration. Neither the Warrants nor
-----------------------
the Warrant Shares have been registered under the Securities Act. The
holder of this Warrant Certificate, by acceptance hereof, represents that
such holder is acquiring the warrants to be issued to such holder for
such holder's own account and not with a view to the distribution
thereof, and agrees not to sell, transfer, pledge or hypothecate any
Warrants or any Warrant Shares except in accordance with applicable law
and the legend on the first page of this Warrant Certificate to the
extent that such legend complies with applicable law.
Section 12. Notices. All notices, requests, demands and other
-------
communications relating to this Warrant Certificate shall be in writing,
including by telecopier, addressed, if to the registered owner hereof, to
it at the address furnished by the registered owner to the Company, and
if to the Company, at its office at 667 Rancho Conejo, Newbury Park,
California 91320. Attention President, Telecopier (805) 376-8364 or to
such other address as any party shall notify the other part in writing,
and shall be effective, upon receipt and, in the case of written notice
by mail, three days after placement into the mails (first class, postage
prepaid), and in the case of notice by telecopier on the same day as sent
if the transmission is confirmed at or before 5:00 p.m. local time in the
place of receipt, otherwise on the next business day.
Section 13. Binding Effect. This Warrant Certificate shall be
--------------
binding upon and inure to the sole and exclusive benefit of the Company,
its successors and assigns, and the registered holder or holders from
time to time of the Warrants and the Warrant Shares.
Section 14. Survival of Rights and Duties. This Warrant
-----------------------------
Certificate shall terminate and be of no further force and effect on the
earlier of 5:00 p.m., Los Angeles time, on the Expiration Date or the
date on which all of the Warrants have been exercised, except that the
provisions of Sections 6(b) and 11 of this Warrant Certificate shall
continue in full force and effect after such termination date.
Section 15. Governing Law. This Warrant Certificate shall be
-------------
construed in accordance with and governed by the laws of the State of
California without regard to principles of conflicts of laws.
Section 16. Modification and Waiver. This Warrant Certificate
-----------------------
and any term hereof may be changed, waived, discharged or terminated only
by an instrument in writing signed
-20-
<PAGE>
by the part against which enforcement of such change, waiver, discharge
or termination is sought.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be executed under its corporate seal by its officers thereunto duly
authorized as of the date hereof.
STYLES ON VIDEO, INC.
By: /s/ N.H. Galgas
--------------------------
Name: N.H. Galgas
------------------------
Title: CFO
-----------------------
-21-
<PAGE>
ANNEX A
-------
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, ________________________________ hereby sells,
assigns and transfers to each assignee set forth below all of the rights
of the undersigned in and to the number of Warrants (as defined in and
evidenced by the foregoing Warrant Certificate) set opposite the name of
such assignee below and in and to the foregoing Warrant Certificate with
respect to such Warrants and the Warrant Shares (as defined in the
Warrant Certificate) issuable upon exercisable of such Warrants.
Name of Assignee Address Number of Warrants
---------------- ------- ------------------
If the aggregate number of such Warrants shall not constitute all
the Warrants evidenced by the foregoing Warrant Certificate, the
undersigned requests that a new Warrant Certificate evidencing the
Warrants not so assigned be issued in the name of and delivered to the
undersigned.
Name of
Warrantholder (Print)
-----------------------
Dated (By)
------------- -----------------------------------------
[SIGNATURE GUARANTEE] ATTEST
(Not Required for
Initial Registered
Warrantholder) --------------------------------------------
Secretary
-22-
<PAGE>
ANNEX B
-------
FORM OF ELECTION TO PURCHASE
(To Be Executed by the Warrantholder if the Warrantholder Desires
to Exercise ________ Warrants Evidenced by the foregoing Warrant
Certificate)
To Styles on Video, Inc.:
The undersigned hereby irrevocably elects to exercise Warrants (as
defined in and evidenced by the foregoing Warrant Certificate) for, and
to purchase thereunder, Warrant Shares issuable upon exercise of such
Warrants and payment by the Warrantholder of the Exercise Price.
The Warrantholder hereby elects to pay the Exercise Price by
complying with clause ____ below.
A. the delivery of $___________ in cash and any applicable taxes,
subject to Section 4 of the Warrant Certificate, payable by the
undersigned pursuant to such Warrant Certificate, or
B. instructing Styles on Video, Inc. to retain a number of Warrant
Shares (the "Payment Shares") equal to the quotient of the aggregate
Exercise Price of the Warrants hereby exercised divided by the Market
Price of such shares as of the date of exercise, and to deduct the number
of Payment Shares from the Warrant Shares to be delivered.
The undersigned requests that certificates for such shares be issued
in the name of the following:
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
-----------------------------------------
-------------------------------
(Please print name and address)
-------------------------------
- -------------------------------------------------------------------------------
If such number of Warrants shall not constitute all the Warrants
evidenced by the foregoing Warrant Certificate, the undersigned requests
that a new Warrant Certificate evidencing the Warrants not so exercised
be issued in the name of and delivered to the following:
- -------------------------------------------------------------------------------
(Please print name and address)
-23-
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Capitalized terms used herein but not otherwise defined shall have the meanings
ascribed to them in the Warrant Certificate.
Dated Name of
------------- Warrantholder (Print)
----------------------
[SIGNATURE GUARANTEE] (By) /s/
(Not Required for --------------------------------------
Initial Registered
Warrantholder) (Title)
-24-
<PAGE>
EXHIBIT 10.2
THIS BRIDGE NOTE HAS BEEN ISSUED BY STYLES ON VIDEO, INC. AND FOREVER YOURS,
INC. WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 PURSUANT TO THE
EXEMPTION PROVIDED BY SECTION 4(2) OF THAT ACT AND CANNOT BE RESOLD WITHOUT
REGISTRATION UNDER SAID ACT OR AN EXEMPTION THEREFROM.
STYLES ON VIDEO, INC. AND FOREVER YOURS, INC.
10% BRIDGE NOTE DUE OCTOBER 1, 1996
$180,000 Newbury Park, California
September 19, 1996
FOR VALUE RECEIVED, the undersigned, Styles on Video, Inc., a
Delaware corporation ("SOV") and Forever Yours, Inc., a California Corporation
("FYI") and, together with SOV, the "Companies"), hereby jointly and severally
promise to pay INTERNATIONAL DIGITAL INVESTORS, L.P. or its registered assigns
(the "Payee"), the principal amount of ONE HUNDRED EIGHTY THOUSAND AND
NO/DOLLARS ($180,000.00) (or so much thereof as shall not have been prepaid) on
October 3, 1996, with interest (computed on the basis of a 360-day year of
twelve 30-day months) on the unpaid principal balance hereof at the rate equal
to the lesser of 10% per annum or the maximum rate permitted by law, from the
date hereof or the default date, payable upon any payment of this Bridge Note to
the extent accrued on the amount paid. Payments of principal of, and interest
on, this Bridge Note shall be made in lawful money of the United States of
America in same day funds at the offices of International Digital Investors,
L.P., 701 Brickell Avenue, Ste. 2424, MIAMI, FL 33131, or at such other place a
Payee may direct.
This Bridge Note is secured by that certain Security Agreement, dated as
of the date hereof among the Companies and Payee and is entitled to the benefits
thereof.
Payee hereby agrees, by its acceptance hereof, that before disposing of
this Bridge Note or any part hereof it will make a notation hereon of all
principal payments previously made hereunder and of the date to which interest
hereon has been paid; provided, however, that the failure to make a notation of
-------- -------
any payment made on this Bridge Note shall not limit or otherwise affect the
obligations of the Companies hereunder with respect to payments of principal of
or interest on this Bridge Note.
Upon surrender of this Bridge Note for registration of transfer, duly
endorsed, or accompanied by a written instrument of transfer duly executed by,
the registered holder hereof or such holder's attorney duly authorized in
writing, a new Bridge Note or Notes aggregating a like outstanding principal
amount will be issued to, and at the option of the holder, registered in the
name of, the transferee. The Companies may deem and treat the person in whose
name this Bridge Note is registered as the holder and owner hereof for the
<PAGE>
purpose of receiving payments and for all other purposes whatsoever, and the
Companies shall not be affected by any notice to the contrary.
Whenever any payment on this Bridge Note shall be stated to be due on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of the payment of interest on this Note. As used herein, "Business
Day" shall mean any day excluding Saturday, Sunday and any day which is a legal
holiday under the laws of the States of California or Florida or is a day on
which banking institutions located in such states are authorized or required by
law or other governmental action to close.
THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.
Upon the failure of the Companies to pay any principal, interest or other
amount due under this Bridge Note when due, whether at stated maturity, by
declaration, acceleration, demand or otherwise, the unpaid balance of the
principal amount of this Bridge Note, together with all accrued and unpaid
interest thereon, shall become immediately due and payable, without presentment,
demand, notice, protest or other requirements of any kind (all of which are
hereby expressly waived by the Companies.) THE COMPANIES WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY JUDICIAL PROCEEDING RELATING TO THIS BRIDGE NOTE.
If all principal, interest and/or other amounts due are not paid prior to
or on October 1, 1996, the interest rate payable on the Bridge Note shall be
increased to the Default Rate. The Default Rate shall be 12.5 per annual for the
period October 1996 through December 31, 1996 thereafter the interest rate shall
increase to 15%.
No provision of this Bridge Note shall alter or impair the obligations of
the Companies, which are absolute and unconditional, to pay the principal of,
and interest on, this Bridge Note at the place, at the respective times, and in
the currency herein prescribed.
The Companies jointly and severally promise to pay all costs and expenses,
including reasonable attorneys' fees, incurred in the negotiation, drafting,
execution, delivery, collection or enforcement of this Bridge Note. The
Companies and any endorsers of this Bridge Note hereby consent to renewals and
extensions of time at or after the maturity hereof, without notice, and hereby
waive diligence, presentment, protest, demand and notice of every kind and, to
the full extent permitted by law, the right to plead any statute of limitations
as a defense to any demand hereunder.
This Bridge Note may be signed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
2
<PAGE>
IN WITNESS WHEREOF, the Companies have caused this Bridge Note to be duly
executed and delivered by this respective officers thereunto duly authorized as
of the date at the place first written above.
STYLES ON VIDEO, INC
By: /s/ K. Eugene Shutler
-----------------------------------
Name: K. Eugene Shutler
-----------------------------
Title: C.E.O.
----------------------------
FOREVER YOURS, INC.
By: /s/ N.H. Galgas
-----------------------------------
Name: N.H. Galgas
-----------------------------
Title: C.F.O.
----------------------------
<PAGE>
TRANSACTIONS
ON
BRIDGE
NOTE
<TABLE>
<CAPTION>
Outstanding Principal
Amount of Bridge Amount of Balance On Such Date
Note Purchased On Principal Paid After Such Purchase Notation
Date Such Date On Such Date Or Payment Made By
- ------- ----------------- -------------- --------------------- ---------
<S> <C> <C> <C> <C>
09/17/96 $180,000.00
</TABLE>
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") is dated as of September 17,
1996, and entered into by and among STYLES ON VIDEO, INC,. a Delaware
corporation ("SOV") FOREVER YOURS, INC., a California corporation ("FYI"; and,
together with SOV, the "Debtors"), and INTERNATIONAL DIGITAL INVESTORS, L.P.
(the "Secured Party").
R E C I T A L S
WHEREAS, On the date hereof, Debtors have issued a promissory note (the
"Bridge Note") to Secured Party and the Debtors wish to pledge to Secured Party,
on a first priority basis (subject to the prior security interests (the "Prior
Interests") granted under that certain SOV Security Agreement dated as of May
15, 1996 between SOV and the Secured Party, and that certain FYI Security
Agreement dated as of May 15, 1996 between FYI and the Secured Party), all
Debtors' respective right, title and interest in the Collateral (as defined
herein) as security for Debtors' obligations to Secured Party pursuant to the
Bridge Note.
In consideration of the premises and mutual covenants herein contained and
for other good and valuable consideration the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF SECURITY. Each Debtor hereby assigns to the Secured Party,
-----------------
and hereby grants to the Secured Party a security interest in, all of such
Debtor's right, title and interest in and to the items of property listed in
Schedule I annexed hereto, in each case whether now or hereafter existing and
wherever the same may be located (the "Collateral").
2. PURPOSE OF GRANT. This Agreement secures, and the security interest
----------------
in the Collateral granted to the Secured Party pursuant hereto is collateral
security for, the Secured Obligations. The term "Secured Obligations" shall
mean and include the full and timely payment and performance by Debtors when due
of all of Debtors' joint and several obligations hereunder and under the Bridge
Note.
3. RIGHTS OF THE SECURED PARTY. The Secured Party and its successors and
---------------------------
assigns shall at all times be entitled to exercise in respect of the Collateral
all of the rights available to a secured party under the California Uniform
Commercial Code (the "Code"). (A) Upon the occurrence of any of the following:
(i) the commencement of a proceeding by or against either Debtor of any of its
subsidiaries or affiliates under federal or state bankruptcy, insolvency,
reorganization or similar law or (ii) the default by Debtors in paying to
Secured Party the amounts due to Secured Party under the
1
<PAGE>
Bridge Note, (B) the Secured Party may exercise in respect of the Collateral,
(i) all the rights and remedies of a secured party in default under the Code
(whether or not the Code applies to the affected Collateral), (ii) all of the
rights and remedies provided for in this Agreement, and (iii) such other rights
and the remedies as may be provided by law or otherwise (such rights and
remedies of the Secured Party to be cumulative and non-exclusive). Each Debtor
hereby waives all rights of redemption, stay and/or appraisal which it now has
or may at any time in the future have under any rule of law or statute now
existing or hereafter enacted.
4. REPRESENTATIONS AND WARRANTIES. Each Debtor represents
------------------------------
and warrants that (a) this Agreement creates a valid, perfected and first
priority security interest in the Collateral (subject to the Prior Interests),
securing the payment of the Secured Obligations, and all filings and other
actions necessary or desirable to perfect and protect such security interest
have been duly taken or will be taken as soon as reasonably practicable after
the date hereof, (b) the chief place of business, the chief executive office and
the office where each keeps its records is 667 Rancho Conejo Boulevard, Newbury
Park, California 91320, and (c) neither Debtor does any business under any
tradename or fictitious business name and has not had any other name.
5. FURTHER ASSURANCES. Each Debtor agrees that from time to
------------------
time, at the expense of the Debtors, such Debtor will promptly execute and
deliver all further instruments and documents, and take all further action, that
may be necessary or desirable, or that the Secured Party may request, in order
to perfect, protect, evidence, renew and/or continue the security interest
granted or purported to be granted hereby or to enable the Secured Party to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral or otherwise effectuate the purposes and intents of this Agreement,
including without limitation, the filing of financing statements for all
jurisdictions designated by Secured Party. Each Debtor will also apply the
proceeds of the Collateral to the repayment of the Bridge Note immediately upon
receipt of such proceeds.
6. THE SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Each Debtor
--------------------------------------------
hereby irrevocably appoints the Secured Party as such Debtor's attorney-in-fact,
with full authority in the place and stead of such Debtor and in the name of
such Debtor, the Secured Party or otherwise, from time to time in the Secured
Party's discretion to take any action and to execute any instrument that the
Secured Party may deem necessary or advisable to accomplish the purposes of this
Agreement, and such Debtor agrees that such appointment constitutes a power
coupled with an interest and is irrevocable throughout the term of this
Agreement.
7. THE SECURED PARTY'S DUTIES AND LIABILITIES. The powers
------------------------------------------
conferred on the Secured Party hereunder are solely to protect its interest in
the Collateral and shall not impose any duty upon it to exercise any such
powers. The Secured Party shall have no duty as to any Collateral or as to the
taking of any necessary steps to preserve rights against prior parties or any
other rights pertaining to any Collateral. The Secured
2
<PAGE>
Party shall be deemed to exercise reasonable care in the custody and
preservation of such Collateral if such Collateral is accorded treatment
substantially equal to that which the Secured Party accords its own property.
8. INDEMNITY AND EXPENSES.
----------------------
(a) The Debtors jointly and severally agree to indemnify the
Secured Party from and against any and all claims, losses and liabilities
growing out of or resulting from this Agreement (including without
limitation, enforcement of this Agreement), except claims, losses or
liabilities resulting from the Secured Party's gross negligence or willful
misconduct as finally determined by a court of competent jurisdiction.
(b) The Debtors jointly and severally will upon demand pay
to the Secured Party the amount of any and all reasonable expenses,
including the reasonable fees and disbursements of its counsel and of any
experts and agents, that the Secured Party may incur in connection with (i)
the administration of this Agreement, (ii) the custody, preservation, use
or operation of, or the sale of, collection from, or other realization
upon, any of the Collateral, (iii) the exercise or enforcement of any of
the rights of the Secured Party hereunder or (iv) the failure by the Debtor
to perform or observe any of the previsions hereof .
9. COUNTERPARTS. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10. WAIVER OF JURY TRIAL. THE DEBTORS AND THE SECURED PARTY
--------------------
HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT.
11. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
-------------
OBLIGATIONS OF THE DEBTORS AND SECURED PARTY HEREUNDER SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
[remainder of page intentionally left blank]
3
<PAGE>
IN WITNESS WHEREOF, the Debtors and the Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.
STYLES ON VIDEO, INC.
By: /s/ K. Eugene Shutler
--------------------------------
Name: K. Eugene Shutler
---------------------------
Title: CEO
--------------------------
FOREVER YOURS, INC.
By: /s/ N.H. Galgas
--------------------------------
Name: N.H. Galgas
---------------------------
Title: CEO
--------------------------
INTERNATIONAL DIGITAL INVESTORS,
L.P.
By: IDI Corp., a Delaware corporation,
its general partner
By:
----------------------------
Name:
------------------------
Title:
-----------------------
S-1
<PAGE>
SCHEDULE I
TO SECURITY AGREEMENT
DESCRIPTION OF COLLATERAL
The "Collateral" shall mean all (except as otherwise provided below) of
each Debtor's right, title and interest of every kind and nature in and to the
following items (but none of such Debtor's duties or obligations with respect
thereto), tangible or intangible, whether now owned or in existence or hereafter
acquired and all products and proceeds thereof, wherever the same may be
located:
1. Any rights, claims, judgments, awards, orders or decrees arising
out of or in connection with any judicial action, litigation, arbitration,
mediation or other proceedings;
2. Any rights, claims, judgments, awards, orders or decrees
arising out of or in connection with any tax refund or credit by the Internal
Revenue Service or any state taxing authority to any Debtor with respect to any
fiscal year of any Debtor or under any tax return that has been or is filed with
respect to any fiscal year of any Debtor;
3. Any and all rights to payment for goods sold or leased or for
services rendered, including any such rights evidenced by Chattel Paper, whether
due or to become due and whether or not earned by performance (excluding any
such rights evidenced by Notes Receivable, the "Accounts");
--------
4. Any and all negotiable instruments, promissory notes,
acceptances, drafts, checks, certificates of deposit and other writings that
evidence a right to the payment of money by any other person or entity (the
"Notes Receivable");
----------------
5. Any and all chattel paper, including writings that evidence both
a monetary obligation and a security interest in or lease of specific goods (the
"Chattel Paper");
-------------
6. Any and all rights to payment;
I-1
<PAGE>
7. Any and all goods that may at any time be held for sale or lease or to
be furnished under any contract of service, be so leased or furnished, or
constitute raw materials, work in process, parts, supplies or materials that are
or might be used or consumed in a business or in connection with the
manufacture, selling or leasing of such goods ("Inventory").
8. Any and all equipment and other goods (excluding Inventory), including
the following personal property: machinery, machine tools, office machinery
(including computers, typewriters and duplicating machines), motor vehicles,
trailers, rolling stock, motors, pumps, controls, tools parts, works of art,
furniture, furnishings and trade fixtures, all athletic equipment and supplies,
and all molds, dies, drawings, blueprints, reports, catalogs and computer
programs related to any of the above (together with all related property
described in paragraph 14, the "Equipment");
---------
9. Any and all fixtures, including machinery, equipment or appliances for
generating, storing or distributing air, water, heat, electricity, light, fuel
or refrigeration, for ventilating or sanitary purposes, elevators, safes,
laundry, kitchen and athletic equipment, trade fixtures, and telephone,
television and other communications equipment (the "Fixtures");
--------
10. Any and all documents, whether or not negotiable, including bills of
lading, warehouse receipts, trust receipts and like (the "Documents");
---------
11. Any and all stocks, bonds, general and limited partnership interests,
joint venture interests and other securities, subscription rights, options,
warrants, puts, calls and other rights with respect thereto, and investment and
brokerage accounts (the "Securities");
----------
12. Any and all general intangibles, contract rights and other property
described below (together with any property listed under paragraph 6 above, the
"General Intangibles"), including the following:
-------------------
(a) deposit and other accounts, including demand, time savings,
passbook and like accounts maintained with any bank, savings and loan
association, credit union, brokerage or other institution, and any and all
money, instruments and other property from time to time deposited therein
or credited thereto, or received, receivable or otherwise distributed
therefrom, in respect thereof in exchange therefor, including all interest
accruing thereon;
(b) insurance policies and all rights and claims therein or
thereunder (including prepaid and unearned premiums), including insurance
against casualty (including by fire and earthquake) or liability
(including against environmental cleanup costs), title insurance, business
1-2
<PAGE>
interruption insurance and builders risk insurance, whether covering
personal or real property;
(c) any and all leases of real or personal property, licensing
agreements and other contracts, and all guarantees, warranties,
royalties, license fees and rights under such contracts;
(d) any and all governmental approvals, including permits,
licenses, certificates of use and occupancy (or their equivalents) and
zoning and other approvals, and tax and other refunds, compensation,
awards, payments and relief given or made by any governmental authority
(including condemnation awards);
(e) deposits, surety and other bonds, choses and things in
action, goodwill, computer programs, computer software (including all
source and object codes, all media of any type or nature on which source
or object codes are reproduced, copied, stored or maintained),
technology processes, proprietary information, patents, patent
applications, copyrights, copyright applications, trademarks, trademark
applications, service marks, trade and other names, trade secrets and
customer lists;
13. Any and all books and records (including ledgers,
correspondence, credit files, computer software, computer storage media and
electronically recorded data) pertaining to any Debtor or any of the foregoing
and all equipment, receptacles, containers and cabinets therefor;
14. Any and all accessions, appurtenances, components, repairs,
repair parts, spare parts, renewals, improvements, replacements, substitutions
and additions to, of or with respect to any of the foregoing;
15. Any and all rights, remedies, powers and privileges of any
Debtor with respect to any of the foregoing.
I-3
<PAGE>
STATE OF DELAWARE
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT - FORM UCC - 1
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
This FINANCING STATEMENT is presented to a Filing Officer for filing If to be filed with Recorder of Deeds indicate Tax
pursuant to the Uniform Commercial Code. Parcel No.(s). ______________________________________
No. of additional sheets presented__________________.
- ----------------------------------------------------------------------------------------------------------------------------------
PARTIES PARTIES
- ----------------------------------------------------------------------------------------------------------------------------------
Debtor (or Assignor) (last name first if individual) and mailing address: Secured Party(ies) (last name first if individual) and
address:
Styles on Video, Inc. International Digital Investors, L.P.
667 Rancho Conejo Drive 40304 Fisher Island Drive
Newbury Park, California 91320 Fisher Island, Florida 33109
- ----------------------------------------------------------------------------------------------------------------------------------
Debtor (or Assignor) (last name first if individual) and mailing address: Assignee (if any) of Secured Party(ies) and address of
Assignee:
- ----------------------------------------------------------------------------------------------------------------------------------
This statement is filed without the Debtor's signature to perfect a Special Types of Parties (check X in applicable box(es))
security interest in collateral (check X in applicable box(es)) [_] The terms "Debtor" and "Secured Party" mean
[_] Already subject to a security interest in another jurisdiction "Lessee" and "Lessor", respectively.
when it was brought into this State. [_] The terms "Debtor" and "Secured Party" mean
[_] Already subject to a security interest in another jurisdiction when "Consignee" and "Consignor", respectively.
the Debtor's location changed to this State. [_] Debtor is a Transmitting Utility.
[_] Which is proceeds of the original collateral described below in [_] Debtor acting in representative capacity
which a security interest is perfected. (e.g., as trustee).
[_] Acquired after a change of name, identity or corporate structure ------------------------------------------------------
of Debtor. Filed With: Secretary of State
[_] As to which the filing has lapsed. ------------------------------------------------------
- ------------------------------------------------------------------------ Prepared By (Name and Address):
By: ____________________________________________________________________ Angela M. Bellanca, Esq.
Signature of Secured Party(ies) Title O'Melveny & Myers LLP
(Required only if item is checked) 400 S. Hope St.
Los Angeles, CA 90071
- ------------------------------------------------------------------------ ------------------------------------------------------
[_] Check to request Continuation Statement notice
for additional fee.
- ----------------------------------------------------------------------------------------------------------------------------------
This Financing Statement covers the following types (or items) of property: Check only if applicable: [_] Products of collateral
are also covered.
All of the Collateral described in Schedule I attached hereto which is incorporated herein and made a part hereof by this
reference.
- ---------------------------------------------------------------------------------------------------------------------------------
If the collateral is crops, the crops are growing or to be grown on the following described real estate:
- ---------------------------------------------------------------------------------------------------------------------------------
If the collateral is (a) goods that are or are to become fixtures; (b) timber to be cut; or (c) minerals or the like (including oil
and gas) or accounts resulting from the sale thereof at the wellhead or minehead, the description of the real estate concerned
is: (check X in applicable box(es))
[_] Fixtures [_] Timber [_] Minerals or accounts resulting from sale thereof at wellhead or minehead
And this Financing Statement is to be filed in the real estate records where a mortgage on such real estate would be recorded. If
the Debtor does not have an interest of record, the name of a record owner is:
- ------------------------------------------------------------------------------------------------------------------------------------
THIS SPACE FOR USE OF FILING OFFICER
- ----------------------------------------------------------------- (DATE, TIME, NUMBER, FILING OFFICER)
By: /s/ K. Eugene Shutler C.E.O.
____________________________________________________________
Signature of Debtor (or Assignor) Title
- -----------------------------------------------------------------
By:
____________________________________________________________
Signature of Debtor (or Assignor) Title
</TABLE>
<PAGE>
DEBTOR: STYLES ON VIDEO, INC.
667 RANCHO CONEJO DRIVE
NEWBURY PARK, CA 91320
SCHEDULE I
DESCRIPTION OF COLLATERAL
The "Collateral" shall mean all (except as otherwise provided below) of
each Debtor's right, title and interest of every kind and nature in and to the
following items (but none of such Debtor's duties or obligations with respect
thereto), tangible or intangible, whether now owned or in existence or
hereafter acquired and all products and proceeds thereof, wherever the same may
be located:
1. Any rights, claims, judgments, awards, orders or decrees arising out of
or in connection with any judicial action, litigation, arbitration, mediation or
other proceedings (including any claims or rights to payment or proceeds under
any insurance policy insuring any Debtor, any defendant in such action or any
other person, agency or entity)(this provision being intended to create a lien
on such property under Sections 2881 and 2883 of the California Civil Code, in
addition to any liens under the Code.).
2. Any rights, claims, judgments, awards, orders or decrees arising out
of in connection with any tax refund or credit by the Internal Revenue Service
or any state taxing authority to any Debtor with respect to any fiscal year of
any Debtor or under any tax return that has been or is filed with respect to any
fiscal year of any Debtor.
3. Any and all rights to payment for goods sold or leased or for services
rendered, including any such rights evidenced by Chattel Paper, whether due or
to become due and whether or not earned by performance (excluding any such
rights evidenced by Notes Receivable, the "Accounts");
--------
4. Any and all negotiable instruments, promissory notes, acceptances,
drafts, checks, certificates of deposit and other writings that evidence a right
to the payment of money by any other person or entity (the "Notes Receivable");
----------------
5. Any and all chattel paper, including writings that evidence both a
monetary obligation and a security interest in or lease of specific goods (the
"Chattel Paper");
-------------
6. Any and all rights to payment;
I-1
<PAGE>
7. Any and all goods that may at any time be held for sale or
lease or to be furnished under any contract of service, be so leased or
furnished, or constitute raw materials, work in process, parts, supplies or
materials that are or might be used or consumed in a business or in connection
with the manufacture, selling or leasing of such goods ("Inventory");
8. Any and all equipment and other goods (excluding
Inventory), including the following personal property: machinery, machine tools,
office machinery (including computers, typewriters and duplicating machines),
motor vehicles, trailers, rolling stock, motors, pumps, controls, tools, parts,
works of art, furniture, furnishings and trade fixtures, all athletic equipment
and supplies, and all molds, dies, drawings, blueprints, reports, catalogs and
computer programs related to any of the above (together with all related
property described in paragraph 14, the "Equipment");
---------
9. Any and all fixtures, including machinery, equipment or
appliances for generating, storing or distributing air, water, heat,
electricity, light, fuel or refrigeration, for ventilating or sanitary
purposes, elevators, safes, laundry, kitchen and athletic equipment, trade
fixtures, and telephone, television and other communications equipment (the
"Fixtures");
--------
10. Any and all documents, whether or not negotiable, including
bills of lading, warehouse receipts and the like (the "Documents");
---------
11. Any and all stocks, bonds, general and limited partnership
interests, joint venture interests and other securities, subscription rights,
options, warrants, puts, calls and other rights with respect thereto, and
investment and brokerage accounts (the "Securities");
----------
12. Any and all general intangibles, contract rights and other
property described below (together with any property listed under paragraph 6
above, the "General Intangibles"), including the following:
-------------------
(a) deposit and other accounts including demand, time
savings, passbook and like accounts maintained with any bank,
savings and loan association, credit union, brokerage or other
institution, and any and all money, instruments and other property
from time to time deposited therein or credited thereto, or
received, receivable or otherwise distributed therefrom, in respect
thereof or in exchange therefore, including all interest accruing
thereon;
(b) insurance policies and all rights and claims therein
or thereunder (including prepaid and unearned premiums), including
insurance against casualty (including by fire or earthquake) or
liability (including against environmental cleanup costs), title
insurance, business
I-2
<PAGE>
interruption insurance and builders risk insurance, whether
covering personal or real property;
(c) any and all leases of real or personal property,
licensing agreements and other contracts, and all guarantees,
warranties, royalties, license fees and rights under such
contracts;
(d) any and all governmental approvals, including permits,
licenses, certificates of use and occupancy (or their
equivalents) and zoning and other approvals, and tax and other
refunds, compensation, awards, payments and relief given or
made by any governmental authority (including condemnation
awards);
(e) deposits, surety and other bonds, chooses and things in
action, goodwill, computer programs, computer software
(including all source and object codes, all media of any type or
nature on which such source or object codes are reproduced,
copied, stored or maintained), technology processes, proprietary
information, patents, patent applications, copyrights, copyright
applications, trademarks, trademark applications, service marks,
trade and other names, trade secrets and customer lists;
13. Any and all books and records (including ledgers,
correspondence, credit files, computer storage media and electronically
recorded data) pertaining to any Debtor or any of the foregoing and all
equipment, receptacles, containers and cabinets therefore;
14. Any and all accessions, appurtenances, components, repairs,
repair parts, spare parts, renewals, improvements, replacements, substitutions
and additions to, of or with respect to any of the foregoing;
15. Any and all rights, remedies, powers and privileges of any
Debtor with respect to any of the foregoing.
I-3
<PAGE>
Debtor: Styles on Video, Inc.
667 Rancho Conejo Drive
Newbury Park, CA 91320
SCHEDULE I
DESCRIPTION OF COLLATERAL
The "Collateral" shall mean all (except as otherwise provided
below) of each Debtor's right, title and interest of every kind and nature in
and to the following items (but none of such Debtor's duties or obligations with
respect thereto), tangible or intangible, whether now owned or in existence or
hereafter acquired and all products and proceeds thereof, wherever the same may
be located:
1. Any rights, claims, judgments, awards, orders or decrees
arising out of or in connection with any judicial action litigation,
arbitration, mediation or other proceedings (including any claims or rights to
payment or proceeds under any insurance policy insuring any Debtor, any
defendant in such action or any other person, agency or entity) (this provision
being intended to create a lien on such property under Sections 2881 and 2883 of
the California Civil Code, in addition to any liens under the Code.).
2. Any rights, claims, judgments, awards, orders or decrees
arising out of or in connection with any tax refund or credit by the Internal
Revenue Service or any state taxing authority to any Debtor with respect to any
fiscal year of any Debtor or under any tax return that has been filed with
respect to any fiscal year of any Debtor.
3. Any and all rights to payment for goods sold or leased or
for services rendered, including any such rights evidenced by Chattel Paper,
whether due or to become due and whether or not earned by performance (excluding
any such rights evidenced by Notes Receivable, the "Accounts");
--------
4. Any and all negotiable instruments, promissory notes,
acceptances, drafts, checks, certificates of deposit and other writings that
evidence a right to the payment of money by any other person or entity (the
"Notes Receivable");
----------------
5. Any and all chattel paper, including writings that evidence
both a monetary obligation and a security interest in or lease of specific goods
(the "Chattel Paper");
-------------
6. Any and all rights to payment;
<PAGE>
7. Any and all goods that may at any time be held for sale or lease or
to be furnished under any contract of service, be so leased or furnished, or
constitute raw materials, work in process, parts, supplies or materials that are
or might be used or consumed in a business or in connection with the
manufacture, selling or leasing of such goods ("Inventory");
8. Any and all equipment and other goods (excluding Inventory),
including the following personal property; machinery, machine tools, office
machinery (including computers, typewriters and duplicating machines), motor
vehicles, trailers, rolling stock, motors, pumps, controls, tools, parts, works
of art, furniture, furnishings and trade fixtures, all athletic equipment and
supplies, and all molds, dies, drawings, blueprints, reports, catalogs and
computer programs related to any of the above (together with all related
property described in paragraph 14, the "Equipment");
---------
9. Any and all fixtures, including machinery, equipment or appliances
for generating, storing or distributing air, water, heat, electricity, light,
fuel or refrigeration, for ventilating or sanitary purposes, elevators, safes,
laundry, kitchen and athletic equipment, trade fixtures, and telephone,
television and other communications equipment (the "Fixtures") ;
--------
10. Any and all documents, whether or not negotiable, including bills of
lading, warehouse receipts, trust receipts and the like (the "Documents");
---------
11. Any and all stocks, bonds, general and limited partnership interests,
joint venture interests and other securities, subscription rights, options,
warrants, puts, calls and other rights with respect thereto, and investment and
brokerage accounts (the "Securities");
----------
12. Any and all general intangibles, contract rights and other property
described below (together with any property listed under paragraph 6 above, the
"General Intangibles"), including the following:
-------------------
(a) deposit and other accounts, including demand, time savings,
passbook and like accounts maintained with any bank, savings and loan
association, credit union, brokerage or other institution, and any and all
money, instruments and other property from time to time deposited therein
or credited thereto, or received, receivable or otherwise distributed
therefrom, in respect thereof or in exchange therefor, including all
interest accruing thereon;
(b) insurance policies and all rights and claims therein or
thereunder (including prepaid and unearned premiums), including insurance
against casualty (including by fire or earthquake) or liability (including
against environmental cleanup costs), title insurance, business
I-2
<PAGE>
interruption insurance and builders risk insurance, whether covering
personal or real property;
(c) any and all leases of real or personal property, licensing
agreements and other contracts, and all guarantees, warranties,
royalties, license fees and rights under such contracts;
(d) any and all governmental approvals, including permits,
licenses, certificates of use and occupancy (or their equivalents) and
zoning and other approvals, and tax and other refunds, compensation,
awards, payments and relief given or made by any governmental
authority (including condemnation awards);
(e) deposits, surety and other bonds, choses and things in
action, goodwill, computer programs, computer software (including all
source and object codes, all media of any type or nature on which such
source or object codes are reproduced, copied, stored or maintained),
technology processes, proprietary information, patents, patent
applications, copyrights, copyright applications, trademarks,
trademark applications, service marks, trade and other names, trade
secrets and customer lists;
13. Any and all books and records (including ledgers, correspondence,
credit files, computer software, computer storage media and electronically
recorded data) pertaining to any Debtor or any of the foregoing and all
equipment, receptacles, containers and cabinets therefor;
14. Any and all accessions, appurtenances, components, repairs,
repair parts, spare parts, renewals, improvements, replacements, substitutions
and additions to, of or with respect to any of the foregoing;
15. Any and all rights, remedies, powers and privileges of any Debtor
with respect to any of the foregoing.
I-3
<PAGE>
Debtor: Forever Yours, Inc.
667 Rancho Conejo Drive
Newbury Park, CA 91320
SCHEDULE I
Description of Collateral
The "Collateral" shall mean all (except as otherwise provided below)
of each Debtor's right, title and interest of every kind and nature in and to
the following items (but none of such Debtor's duties or obligations with
respect thereto), tangible or intangible, whether now owned or in existence or
hereafter acquired and all products and proceeds thereof, wherever the same may
be located:
1. Any rights, claims, judgments, awards, orders or decrees arising
out of or in connection with any judicial action, litigation, arbitration,
mediation or other proceedings (including any claims or rights to payment or
proceeds under any insurance policy insuring any Debtor, any defendant in such
action or any other person, agency or entity) (this provision being intended to
create a lien on such property under Sections 2881 and 2883 of the California
Civil Code, in addition to any liens under the Code.).
2. Any rights, claims, judgments, awards, orders or decrees arising
out of or in connection with any tax refund or credit by the Internal Revenue
Service or any state taxing authority to any Debtor with respect to any fiscal
year of any Debtor or under any tax return that has been or is filed with
respect to any fiscal year of any Debtor.
3. Any and all rights to payment for goods sold or leased or for
services rendered, including any such rights evidenced by Chattel Paper, whether
due or to become due and whether or not earned by performance (excluding any
such rights evidenced by Notes Receivable, the "Accounts");
--------
4. Any and all negotiable instruments, promissory notes,
acceptances, drafts, checks, certificates of deposit and other writings that
evidence a right to the payment of money by any other person or entity (the
"Notes Receivable");
----------------
5. Any and all chattel paper, including writings that evidence both
a monetary obligation and a security interest in or lease of specific goods (the
"Chattel Paper");
-------------
6. Any and all rights to payment;
I-1
<PAGE>
7. Any and all goods that may at any time be held for sale or lease
or to be furnished under any contract of service, be so leased or furnished, or
constitute raw materials, work in process, parts, supplies or materials that
are or might be used or consumed in a business or in connection with the
manufacture, selling or leasing of such goods ("Inventory");
8. Any and all equipment and other goods (excluding Inventory),
including the following personal property: machinery, machine tools, office
machinery (including computers, typewriters and duplicating machines), motor
vehicles, trailers, rolling stock, motors, pumps, controls, tools, parts, works
of art, furniture, furnishings and trade fixtures, all athletic equipment and
supplies, and all molds, dies, drawings, blueprints, reports, catalogs and
computer programs related to any of the above (together with all related
property described in paragraph 14, the "Equipment");
---------
9. Any and all fixtures, including machinery, equipment or
appliances for generating, storing or distributing air, water, heat,
electricity, light, fuel or refrigeration, for ventilating or sanitary purposes,
elevators, safes, laundry, kitchen and athletic equipment, trade fixtures, and
telephone, television and other communications equipment (the "Fixtures");
--------
10. Any and all documents, whether or not negotiable, including bills
of lading, warehouse receipts, trust receipts and the like (the "Documents");
---------
11. Any and all stocks, bonds, general and limited partnership
interests, joint venture interests and other securities, subscription rights,
options, warrants, puts, calls and other rights with respect thereto, and
investment and brokerage accounts (the "Securities");
----------
12. Any and all general intangibles, contract rights and other
property described below (together with any property listed under paragraph 6
above, the "General Intangibles"), including the following:
-------------------
(a) deposit and other accounts, including demand, time savings,
passbook and like accounts maintained with any bank, savings and loan
association, credit union, brokerage or other institution, and any and
all money, instruments and other property from time to time deposited
therein or credited thereto, or received, receivable or otherwise
distributed therefrom, in respect thereof or in exchange therefor,
including all interest accruing thereon;
(b) insurance policies and all rights and claims therein or
thereunder (including prepaid and unearned premiums), including
insurance against casualty (including by fire or earthquake) or
liability (including against environmental cleanup costs), title
insurance, business
I-2
<PAGE>
interruption insurance and builders risk insurance, whether covering
personal or real property;
(c) any and all leases of real or personal property, licensing
agreements and other contracts, and all guarantees, warranties,
royalties, license fees and rights under such contracts;
(d) any and all governmental approvals, including permits,
licenses, certificates of use and occupancy (or their equivalents) and
zoning and other approvals, and tax and other refunds, compensation,
awards, payments and relief given or made by any governmental
authority (including condemnation awards);
(e) deposits, surety and other bonds, choses and things in
action, goodwill, computer programs, computer software (including all
source and object codes, all media of any type or nature on which such
source or object codes are reproduced, copied, stored or maintained),
technology processes, proprietary information, patents, patent
applications, copyrights, copyright applications, trademarks,
trademark applications, service marks, trade and other names, trade
secrets and customer lists;
13. Any and all books and records (including ledgers, correspondence,
credit files, computer software, computer storage media and electronically
recorded data) pertaining to any Debtor or any of the foregoing and all
equipment, receptacles, containers and cabinets therefor;
14. Any and all accessions, appurtenances, components, repairs,
repair parts, spare parts, renewals, improvements, replacements, substitutions
and additions to, of or with respect to any of the foregoing;
15. Any and all rights, remedies, powers and privileges of any Debtor
with respect to any of the foregoing.
I-3
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of the 1st day
of August, 1996 is by and between Styles on Video, Inc., a California
corporation ("Employer"), and K. Eugene Shutler, an individual ("Employee").
WITNESSETH:
WHEREAS, in recognition of the valuable nature of Employee's financial
and management capabilities to the business of Employer, Employer desires to
enter into this Agreement with Employee to be effective as of the date above
first written (the "Effective Date"); and
WHEREAS, Employee desires to enter into this Agreement with Employer
and to be employed by Employer in the capacity, for the period, and on the terms
and conditions set forth herein;
NOW THEREFORE, for and in consideration of the mutual covenants,
agreements and conditions contained herein, the parties hereto intending to be
legally bound do hereby covenant and agree as follows:
1. EMPLOYMENT
----------
(a) Employer hereby agrees to employ Employee, and Employee hereby
agrees to serve Employer, as Chief Executive Officer of Employer, and, subject
to the direction of the Board of Directors of Employer to perform such duties,
functions and responsibilities commensurate with and appropriate to such
position, and as the same may be from time to time set forth in the Bylaws of
Employer or otherwise delegated to Employee by the Board of Directors of
Employer.
(b) Employee shall receive from Employer the necessary power and
authority to carry out and discharge such duties, functions and
responsibilities.
(c) Employee shall be a full time employee of Employer and shall
devote his best efforts to the performance, discharge and fulfillment of all
such duties, functions and responsibilities.
(d) Employee will perform his services in the greater Los Angeles
metropolitan area (including, without limitation, Ventura County), or at such
other location as may be mutually agreed upon by Employee and the Board of
Directors of Employer.
(e) Employee shall be appointed to the Board of Directors of Employer
and each of its subsidiaries (including majority-owned subsidiaries).
<PAGE>
2. TERM OF EMPLOYMENT
------------------
(a) Employment of Employee hereunder shall be effective on the
Effective Date and shall, subject to earlier termination pursuant to Section 6
hereof, continue for a period of two (2) years thereafter, provided that this
Agreement shall renew automatically for successive one year periods, unless
during the thirty (30) day period commencing one hundred and twenty (120) days
prior to the applicable termination date, either the Employer or Employee
notifies the other in writing that this Agreement shall not be so extended. The
period during which this Agreement shall be in effect, including any extensions,
is referred to as "Term." The covenants and obligations of Employee pursuant to
Sections 7 and 8 hereof shall survive the expiration of this Agreement.
(b) In the event of the termination of Employee's employment without
Cause (as defined below), Employer shall pay to Employee a termination benefit
equal to (i) 50% of the Annual Base Salary in effect as of the date of
termination (payable in accordance with Section 3(b) hereof), plus (ii) any
Incentive Bonus accrued and unpaid as of the date of such termination. Employee
shall have no obligation to seek other employment, but the Employer's obligation
to pay the benefit described in clause (i) above shall be reduced dollar for
dollar to the extent of Employee's earnings from employment or self-employment
(not including investment income) during the six-month period following such
termination. Upon any termination without Cause, all of the Warrants (as
defined below), shall become immediately fully vested and exercisable.
(c) In the event of the termination of Employee's employment for
Cause, Employer shall pay to Employee the unpaid portion of the Annual Base
Salary through the effective date of termination and the Incentive Bonus, to the
extent it is accrued and unpaid as of such date. On a termination for Cause,
further vesting of the Warrants shall cease, but such termination shall not
affect Warrants vested prior to such termination.
(d) In the event the employment of Employee is terminated within six
months following a Change of Control (as hereinafter defined) other than a
voluntary termination by Employee in the absence of a breach of this Agreement
by Employer, the Employer shall pay to the Employee on the thirtieth (30th) day
following such termination a termination benefit equal to (i) the greater of
100% of the Annual Base Salary in effect as of the date of termination through
the end of the Term or, if the unexpired portion of the Term is less than twelve
(12) months, the Annual Base Salary for a full twelve (12) month period
regardless of the length of the unexpired Term, plus (ii) any Incentive Bonus
then accrued and unpaid. The Employee agrees that his right to receive the
termination benefit described in this Section 2(d) shall be the sole and
exclusive remedy of Employee against the Employer or any successor in
-2-
<PAGE>
respect of a termination by the Employer or any successor of Employee's
employment upon a Change of Control and the Employee hereby waives any and all
claims (other than for recovery of such termination benefit and pursuant to
stock options and warrants (including the Warrants) he may hold) against the
Employer or any successor arising from the termination of Employee's employment
upon a Change of Control. For purposes of this Agreement, "Change of Control"
means (i) the transfer of more than fifty percent (50%) of the capital stock of
Employer (on a fully-diluted basis) (other than on exercise of outstanding
warrants) or all or substantially all of the Employer's assets; (ii) the merger
or consolidation of Employer or any of its subsidiaries with, any one or more
persons or entities other than subsidiaries of Employer; or (iii) the merger or
consolidation of Employer with Dycam, Inc. if immediately following such merger
or consolidation, Employee is not chief executive officer of the surviving
company.
3. COMPENSATION
------------
(a) In consideration for all of the services to be rendered by
Employee to Employer, Employer shall pay Employee an annual base salary of Two
Hundred Thirty Thousand and No/100 Dollars ($230,000) (the "Annual Base Salary")
subject to increase from time to time in the sole discretion of Employer's Board
of Directors.
(b) The Annual Base Salary shall be paid to Employee in periodic
installments throughout the year in accordance with Employer's normal and
customary pay policy for executive officers of Employer.
(c) In addition to the Annual Base Salary, Employee shall be eligible
to receive a one time bonus (the "Incentive Bonus") of $50,000. The Incentive
Bonus shall be deemed accrued if the unaudited accounts of the Employer reflect
a Cash-Flow Break Even for any three consecutive month period during the Term.
The Incentive Bonus shall be paid as promptly as practicable following its
accrual. "Cash-Flow Break Even" shall mean a positive operating monthly cash
flow of the Employer determined in accordance with GAAP before interest expense
but after capital expenditures. Employee shall also be eligible to receive
discretionary bonuses in the sole discretion of Employer's Board of Directors.
(d) The amount of the Annual Base Salary and any other cash amounts
payable pursuant to this Agreement are gross amounts due by Employer to Employee
hereunder, and Employer shall have the right to deduct therefrom all taxes and
other amounts which may be required to be deducted or withheld by law
(including, but not limited to, federal income tax withholding and social
security payments), whether such law is now in effect or becomes effective after
the date of this Agreement.
-3-
<PAGE>
(e) Concurrently herewith, Employer and Employee have entered into a
Warrant Agreement in the form of Exhibit A hereto pursuant to which the Employer
has granted Employee warrants (the "Warrants") to purchase an aggregate of
4,071,684 shares of the Employer's common stock constituting 5% of the
Employee's common stock on a fully-diluted basis, taking into account all
outstanding shares, warrants and options and options issuable under the
Employer's stock option plan and have entered into an amendment, in the form of
Exhibit "B" hereto, to the Registration Rights Agreement dated as of May 15,
1996 between Employer and Employee.
4. EMPLOYEE BENEFITS AND BUSINESS EXPENSES.
---------------------------------------
(a) During the term hereof, Employee shall be entitled to participate
in such employee benefit plans and programs maintained by the Employer for the
benefit of its executive officers and to participate in applicable new or
amended programs, including, but not limited to, medical, dental, health, life,
accident and disability insurance programs, savings for retirement plans, bonus,
stock option plans, and any other incentive compensation plans, provided that
the Employer is not obligated to provide any particular plan or program and may
adopt, terminate or modify any such plan or program in its sole discretion.
(b) Employee shall be reimbursed $27,500 in non-accountable moving
expenses in connection with his re-location to Ventura County, California or its
environs.
(c) Employee shall be reimbursed for any necessary business expenses
reasonably incurred by Employee in carrying out Employee's duties, functions and
responsibilities hereunder, subject to providing the Employer with reasonable
documentation in support thereof.
5. VACATION AND SICK LEAVE TIME
----------------------------
Employee shall be entitled to four (4) weeks vacation annually,
commencing on his first day of employment hereunder, which shall be taken at
such time or times as are approved by the Chairman of the Board of Directors (if
other than Employee), or if Employee is acting as Chairman, by the Chairman of
the Audit Committee or the full Board of Directors. Employee shall also be
entitled to such holiday and sick leave time pursuant to the plan or policy
currently in effect, or as hereafter may be amended, available for other
executive officers of Employer. Vacation time shall not carry over from year to
year in excess of one week per year.
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<PAGE>
6. TERMINATION OF EMPLOYMENT
-------------------------
(a) Death or Disability. The Term shall terminate automatically upon
-------------------
Employee's death. If, in the good faith opinion of the Board of Directors
(excluding Employee), Employee shall be prevented from performing his duties and
responsibilities hereunder as a result of physical or mental illness, injury or
other incapacity for a period of ninety (90) days in the aggregate in any
twelve-month ("Disability"), then, to the extent permitted by law, the Employer
may, at the election and in the sole discretion of the Board of Directors
(excluding Employee), terminate the Term effective upon the date specified for
such termination in written notice thereof delivered to Employee. In the event
that Employee shall dispute the determination of the Board of Directors as to
the Disability of Employee, Employee may appeal the determination to a panel of
three doctors, one to be selected by Employee, one to be selected by the Board
of Directors (excluding Employee) and one to be selected by the doctors chose by
Employee and the Board of Directors. The decision of the panel of doctors shall
be final. Any termination for Disability under this Agreement shall not affect
the rights, if any, that Employee may otherwise have under any disability plan
the Company may have in effect at the date of such termination and in which
Employee is then participating.
(b) Cause. Employer may, at the election and in the sole discretion
-----
of the Board of Directors (excluding Employee), terminate the Term for "Cause"
effective on the date specified for termination in written notice thereof
delivered to Employee. For purposes of this Agreement, "Cause" shall mean that,
in the good faith judgment of the Board of Directors (excluding Employee), one
or more of the following events shall have occurred: (i) Employee's habitual or
willful neglect of any of his material duties, responsibilities or obligations
hereunder provided that such neglect shall continue for ten days following
written notice to Employee; (ii) Employee's refusal to follow reasonable and
lawful directions of the Board of Directors provided that such refusal shall
continue for ten days following written notice to Employee; (iii) Employee's
conviction of, or pleading of nolo contendere to, (x) any felony of any type or
---- ----------
(y) any misdemeanor involving acts of moral turpitude or financial wrongdoing,
including without limitation, bribery, fraud, securities laws violations or
embezzlement or any other acts which could result in material damage to
Employer's reputation or otherwise have a material adverse effect on Employer;
and (v) Employee's breach of any confidentiality, nondisclosure, noncompetition,
or other agreement as may be entered into by Employee from time to time in
connection with Employee's employment.
7. COVENANT NOT TO COMPETE. Employee covenants and agrees that
-----------------------
Employee will not during the Term, directly or indirectly in
-5-
<PAGE>
the United States of America or Canada, as a principal, partner, agent,
consultant or otherwise of any person, partnership, corporation or other entity,
engage in or be financially interested in any business or group of affiliated or
unaffiliated businesses (other than Employer) that engages in any business which
is in competition with any material line or business in which the Employer or
its affiliates then currently engages or which the Employer or its affiliates
are then currently developing. This Section 7 shall not prohibit Employee from
investing in less than three percent (3%) of any class of equity security of a
company that has a class of equity security registered pursuant to Section 12(b)
of the Securities Exchange Act of 1934, so long as Employer is not actively
involved in any capacity with the operation or management of such business.
8. CONFIDENTIALITY, PROPRIETARY INFORMATION AND TRADE SECRETS.
----------------------------------------------------------
(a) During the Term and at all times thereafter, Employee shall not
use for his personal benefit, or disclose, communicate or divulge to, or use for
the direct or indirect benefit of any person, firm, association or company other
than Employer, any material referred to in subsections (f) and (g) of this
Section 8, or any proprietary information regarding the business methods,
business policies, procedures, techniques, research or development projects or
results, trade secrets or other knowledge or processes of, or developed by,
Employer or any names and addresses of customers or clients or any data on or
relating to past, present or prospective customers or clients or any other
confidential information relating to or dealing with the business operations or
activities of Employer, made known to Employee or learned or acquired by
Employee while employed by Employer.
(b) During the Term of this Agreement and for a period of two (2)
years after the termination of this Agreement, Employee shall not, directly or
indirectly, in any geographic area served by Employer or its affiliates induce
or attempt to influence any employee of Employer or its affiliates to terminate
his or her employment with Employer or its affiliates or to hire any such
employee of Employer or its affiliates.
(c) Employee acknowledges and agrees that the restrictions contained
in Section 7 hereof and in subsections (a) and (b) of this Section 8 (the
"Restrictions"), in view of the nature of the business in which Employer is
engaged, are reasonable and necessary in order to protect the legitimate
business interests of Employer, and Employee therefore further acknowledges and
agrees that, in the event Employee violates, or threatens to violate, any of
such Restrictions, Employer shall be entitled to obtain from any court of
competent jurisdiction, without the posting of any bond or other security,
preliminary and permanent injunctive or equitable relief as well as damages
-6-
<PAGE>
and an equitable accounting of all earnings, profits and other benefits arising
from such violation, which rights shall be cumulative and in addition to any
other rights or remedies at law or in equity to which Employer may be entitled.
(d) If any Restriction, or any part thereof, is determined in any
judicial or administrative proceeding to be invalid or unenforceable by reason
of duration, geographical scope, or otherwise, the intention of the parties is
that the Court or administrative officer reduce such Restriction to those which
it deems to be valid and enforceable and that the remainder of the Restrictions
shall not thereby be affected and shall be given full effect, without regard to
the invalid or unenforceable provisions.
(e) If Employee violates any of the Restrictions, the restrictive
period shall not run in favor of Employee from the time of the commencement of
any such violation until such time as such violation shall be cured by Employee
to the satisfaction of Employer.
(f) It is recognized that Employee will have access to certain
confidential information of Employer and its affiliates, and that such
information constitutes valuable, special and unique property of Employer and
its affiliates. Employee shall not at any time during the term of this
Agreement disclose any such confidential information to any party for any reason
or purpose except as may be made in the normal cause of business of Employer and
for its benefit.
(g) All advertising, sales, and other materials including, without
limitation, customer sales analyses, invoices, or any other materials, designs
or data of any kind furnished to Employee by Employer or developed by Employee
on behalf of Employer or at Employer's direction or for Employer's use or
otherwise in connection with Employee's employment hereunder, are and shall
remain the sole, exclusive and confidential property of Employer. In the event
that Employer requests the return of such materials at any time during, upon or
after the termination of Employee's employment, Employee shall immediately
deliver the same, and any and all copies thereof, to Employer.
9. Successors.
----------
(a) This Agreement shall inure to the benefit of and be binding upon
Employer and Employee. This Agreement and the benefits and obligations of
Employer hereunder may be assigned by Employer to any person acquiring all or
substantially all of the assets or all of the issued and outstanding equity
securities of Employer.
(b) This Agreement shall inure to the benefit of and be binding upon
Employee and Employee's executors,
-7-
<PAGE>
administrators, trustees, heirs and legal representatives. Because Employee's
duties, functions, responsibilities, and services hereunder are special,
personal and unique in nature, Employee shall not transfer, sell or assign, by
operation of law or otherwise, Employee's obligations under this Agreement.
10. Waivers. Neither the failure nor any delay on the part of either
-------
party hereto to exercise any right, remedy, power or privilege (collectively,
"Right") under this Agreement shall operate as a waiver, abandonment or release
thereof, nor shall any single or partial exercise of any Right preclude any
other or further exercise of the same or of any other Right, nor shall any
waiver of any Right with respect to any occurrence by construed as a waiver of
such Right with respect to any other occurrence.
11. Severability. If any provision of this Agreement shall be held to be
------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
or impair the validity or enforceability of the remaining provisions of this
Agreement, which provisions shall remain in full force and effect, and the
parties hereto shall continue to be bound thereby.
12. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties relating to the subject matter hereof and supersedes all
previous agreements and understandings between the parties, whether written or
oral, with respect to the subject matter hereof, including without limitation
that certain Consulting Agreement dated as of April 19, 1996; provided, however,
that 137,500 warrants granted pursuant to such Consulting Agreement are vested
and not included in the Warrants. This Agreement shall not be modified, altered
or amended except by a writing executed by both parties. Employee acknowledges
and agrees that no such agreement will be effective unless it is approved by
formal resolution of the Board of Directors of Employer.
13. Notices. Any notice or other communication provided for in this
-------
Agreement or contemplated hereby shall be sufficiently given if given in writing
and delivered personally or by certified mail, return receipt requested, and
addressed, in the case of the Employer, to the Employer at:
Styles on Video, Inc.
667 Rancho Conejo Blvd.
Newbury Park, CA 91320
and in case of Employee, to him at:
K. Eugene Shutler
667 Rancho Conejo Blvd.
Newbury Park, CA 91320
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<PAGE>
Notice shall be effective when so delivered personally or, if mailed, three days
after deposit thereof with postage prepaid in the U.S. mail. Either party may
designate a different address by giving notice of change of address in the
manner provided above.
14. Arbitration. Any disputes under this Agreement shall be resolved by
-----------
binding arbitration in Los Angeles, California in accordance with the rules and
procedures of the American Arbitration Association as then in effect provided
that neither party shall be precluded from obtaining provisional relief in any
court of competent jurisdiction. In any such dispute, the arbitrators or court
may award the prevailing party its reasonable fees and costs incurred in
connection therewith.
15. Construction of Agreement. This Agreement shall be governed by,
-------------------------
construed and enforced in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year above first written.
STYLES ON VIDEO, INC.,
a Delaware corporation
By:
-----------------------------------------------
Name:
Title:
-----------------------------------------------
K. Eugene Shutler
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<PAGE>
EXHIBIT 10.14
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT is made as of the 14th day of May
1996 (this "Agreement"), between Styles on Video, Inc., a Delaware corporation
(the "Company"), and Dana I. Arnold, an individual ("Arnold").
WITNESSETH:
WHEREAS, the Company has entered into a Note and Preferred Stock
Purchase Agreement, dated May 14, 1996 (the "Note Agreement"), among the
Company, Forever Yours, Inc., a California corporation and subsidiary of the
Company ("FYI"), and International Digital Investors, L.L.P., a Delaware limited
partnership ("IDI").
WHEREAS, in connection with the Note Agreement, and in exchange for
the surrender for cancellation by Arnold of 20,000 shares of common stock of FYI
previously held by him, the Company issued to Arnold warrants to purchase
7,747,449 shares of the Common Stock of the Company (the "Warrants"), subject to
downward adjustment to 1,631,042 shares as provided in the Warrant Certificate
evidencing the Warrants.
WHEREAS, the Company desires to grant to Arnold, as provided herein,
certain registration rights with respect to the Warrants and the shares of
Common Stock issuable to the Arnold upon exercise of the Warrants.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and subject to and
on the terms and conditions herein set forth, the parties hereto agree as
follows:
ARTICLE 1
CERTAIN DEFINITIONS
Terms with initial capital letters not otherwise defined in this
Agreement have the meanings set forth in Exhibit A to the Note Agreement. In
addition, the following terms with initial capital letters have the following
meanings:
1.1 "Business Day" means any day on which the American Stock Exchange
is open for trading.
1.2 "Closing Date" means the date of this Agreement.
1.3 "Common Stock" means the Common Stock, par value $.001 per share
of the Company, and any securities of the Company or any successor which may be
issued on or after the date hereof in respect of, or in exchange for, shares of
Common Stock pursuant to merger, consolidation, stock split, stock dividend,
recapitalization of the Company or otherwise.
1.4 "Eligible Securities" means any and all of the Warrants and any
shares of Common Stock issuable upon exercise of the Warrants, whether held by
the Arnold or any direct or indirect transferee of Arnold.
As to any proposed offer or sale of Eligible Securities, such
securities shall cease to be Eligible Securities with respect to such proposed
offer or sale when (i) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and
<PAGE>
such securities shall have been disposed of in accordance with such registration
statement or (ii) all of such securities are permitted to be distributed
concurrently pursuant to Rule 144 (or any successor provision to such Rule)
under the Securities Act or are otherwise freely transferable to the public
without registration pursuant to Section 4(1) of the Securities Act. In the
event the Company prepares a registration statement pursuant to Article 3 hereof
which becomes effective and the Holder fails to dispose of Eligible Securities
included therein at the request of such Holder, such securities shall remain
Eligible Securities but the Holder shall be responsible for assuming that
portion of the Registration Expenses in connection with such registration as
equals that portion of Eligible Securities originally to be sold pursuant to
such registration which were included therein at the request of such Holder but
were not so sold.
1.5 "Holder" means Arnold and each of Arnold's successive successors
and assigns who acquires Eligible Securities, directly or indirectly, from the
Arnold or from any successive successor or assign of Arnold.
1.6 "Person" means an individual, a partnership (general or limited),
corporation, joint venture, business trust, cooperative, association or other
form of business organization, whether or not regarded as a legal entity under
applicable law, a trust under vivos or testamentary), an estate of a deceased,
insane or incompetent person, a quasi-governmental entity, a government or any
agency, authority, political subdivision or other instrumentality thereof, or
any other entity.
1.7 "Registration Expenses" means all expenses incident to the
Company's performance of or compliance with the registration requirements set
forth in this Agreement including, without limitation, the following: (a) the
fees, disbursements and expenses of the Company's counsel(s) and accountants in
connection with the registration of Eligible Securities to be disposed of under
the Securities Act, (b) all expenses in connection with the preparation,
printing and filing of the registration statement, any preliminary prospectus or
final prospectus, any other offering document and amendments and supplements
thereto and the mailing and delivering of copies thereof to the underwriters and
dealers, (c) the cost of printing or producing any agreement(s) among
underwriters, underwriting agreement(s) and blue sky or legal investment
memoranda, any selling agreements and any other documents in connection with the
offering, sale or delivery of Eligible Securities to be disposed of, (d) all
expenses in connection with the qualification of Eligible Securities to be
disposed of for offering and sale under state securities laws, including the
fees and disbursements of counsel for the underwriters in connection with such
qualifications and in connection with any blue sky and legal investment surveys,
(e) the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc., of the terms of the sale of Eligible
Securities to be disposed of, and (f) fees and expenses incurred in connection
with the listing of Eligible Securities on each securities exchange on which
securities of the same class are then listed; provided, however, that
Registration Expenses with respect to any registration pursuant to this
Agreement shall not include (x) underwriting discounts or commissions
attributable to Eligible Securities, (y) transfer taxes applicable to Eligible
Securities or (z) SEC filing fees with respect to Eligible Securities to be sold
by the Holder thereof.
1.8 "SEC" means the Securities and Exchange Commission.
1.9 "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the SEC promulgated thereunder, all as
the same shall be in effect at the relevant time.
1.10 "Additional Registrable Securities" means any securities of the
Company, including the IDI Securities, the holders of which have been granted
registration rights by the Company.
<PAGE>
1.11 "IDI Securities" means "Eligible Securities" as defined in that
certain Amended and Restated Registration Rights Agreement, dated as of the date
hereof, by and between the Company and IDI, as the same may be amended or
modified from time to time.
ARTICLE 2
EFFECTIVENESS
2.1 Effectiveness of Registration Rights. The registration rights
granted pursuant to Article 3 hereof shall become effective on the Closing date
and terminate when there cease to be Eligible Securities.
ARTICLE 3
PIGGYBACK REGISTRATION
3.1 Notice and Registration. If the Company proposes to register any
of its securities under the Securities Act (whether for its own account or for
the account of any other Person, or both) (the "Primary Securities") on a form
and in a manner which would permit registration of Eligible Securities for sale
to the public under the Securities Act, it will give prompt written notice to
all Holders of its intention to do so. Such notice shall specify, at a minimum,
the number and class of the Primary Securities so proposed to be registered, the
proposed date of filing of such registration statement, and proposed means of
distribution of such Primary Securities, any proposed managing underwriter or
underwriters of such Primary Securities and a good faith estimate by the Company
of the proposed maximum offering price thereof, as such price is proposed to
appear on the facing page of such registration statement. Upon the written
request of any Holder delivered to the Company within 5 Business Days after the
giving of any such notice (which request shall specify the number of Eligible
Securities intended to be disposed of by such Holder and the intended method of
disposition thereof), the Company will use reasonable efforts to effect, in
connection with the registration of the Primary Securities, the registration
under the Securities Act of all Eligible Securities which the Company has been
so requested to register by such Holder (the "Selling Stockholder"), to the
extent required to permit the disposition (in accordance with the intended
method or methods thereof as aforesaid) of Eligible Securities so to be
registered, provided that
(a) if, at any time after giving such written notice of its
intention to register any Primary Securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall be unable to or shall determine for any
reason not to register such Primary Securities, the Company may, at its
election, give written notice of such determination to such Holder and
thereupon the Company shall be relieved of its obligation to register such
"Eligible Securities" in connection with the registration of such Primary
Securities (but not from its obligation to pay Registration Expenses to the
extent incurred in connection therewith as provided in Section 3.2);
(b) In the event that any managing underwriter of the Primary
Securities shall advise the Company, any holders for whose account any such
Primary Securities are being registered (the "Requesting Stockholders"),
the Selling Stockholders and any holders requesting to have Additional
Registrable Securities included in such registration (the "Additional
Stockholders") in writing that, in its opinion, the inclusion in the
registration statement of all of the Primary Securities, Eligible
Securities and Additional Registrable Securities sought to be registered by
the respective holders thereof creates a substantial risk
<PAGE>
that the price per unit that the Company and such holders will derive from
such registration will be materially and adversely affected or that the
offering would otherwise be materially and adversely affected, then the
Company will include in such registration statement such number of Primary
Securities, Eligible Securities and Additional Registrable Securities as
the Company, the Requesting Stockholders, the Selling Stockholders and the
Additional Stockholders are so advised can be sold in such offering without
such an effect (the "Maximum Number"), as follows and in the following
order of priority: (i) first, the number of Primary Securities, if any,
that the Company, in its reasonable judgment and acting in good faith and
in accordance with sound financial practice, shall have determined to
include in such registration, (ii) second, if and to the extent that the
number of Primary Securities sought to be registered under clause (i) is
less than the Maximum Number, the number of Primary Securities sought to be
registered by each Requesting Stockholder, if any, the number of Eligible
Securities sought to be registered by each Selling Stockholder and the
number of IDI Securities, if any, sought to be registered by each holder
thereof, pro rata, if necessary, in proportion to the number sought to be
registered by such Requesting Stockholder, a Selling Stockholder or holder
of IDI Securities, as applicable, relative to the number sought to be
registered by all Requesting Stockholders, Selling Stockholders and holders
of IDI Securities and (iii) third, if and to the extent that the number of
Primary Securities, Eligible Securities and IDI Securities sought to be
registered under clauses (i) and (ii) is less than the Maximum Number, any
Additional Registrable Securities sought to be registered by the Additional
Stockholders, if any.
(c) The Company shall not be required to effect any registration
of Eligible Securities under this Article 3 incidental to the registration
of any of its securities in connection with mergers, acquisitions, exchange
offers, subscription offers, dividend reinvestment plans or stock options
or other employee benefit plans, and
(d) The Company shall not be required to register any Eligible
Securities if the intended method or methods of distribution for the
Eligible Securities is from time to time in multiple transactions.
3.2 Registration Expenses. The Company (as between the Company and
any Holder) shall be responsible for the payment of all Registration Expenses in
connection with any registration pursuant to this Article 3.
ARTICLE 4
REGISTRATION PROCEDURES
4.1 Registration and Qualification. If and whenever the Company is
required to use reasonable efforts to effect the registration of any Eligible
Securities under the Securities Act as provided in Article 3, the Company will
as promptly as is practicable:
(a) prepare, file and use reasonable efforts to cause to become
effective a registration statement under the Securities Act regarding the
Eligible Securities to be offered.
(b) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective
and to comply with the provisions of the Securities Act with respect to the
disposition of all Eligible Securities until the earlier of such time as
all of such Eligible Securities have been disposed of in accordance with
the intended methods of disposition by the Holders set forth in such
registration statement or the expiration of six (6) months after such
registration statement becomes effective.
<PAGE>
(c) furnish to all Holders and to any underwriter (which term for
purposes of this Agreement shall include a person deemed to be an
underwriter within the meaning of Section 2(11) of the Securities Act and
any placement agent or sales agent of such Eligible Securities) one
executed copy each and such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus included
in such registration statement (including each preliminary prospectus and
any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such
registration statement or prospectus, and such other documents as any
Holder or such underwriter may reasonably request.
(d) use reasonable efforts to register or qualify all Eligible
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as any Holder or any
underwriter of such Eligible Securities shall reasonably request, and do
any and all other acts and things which may be necessary or advisable to
enable any Holder or any underwriter to consummate the disposition in such
jurisdictions of the Eligible Securities by such registration statement,
except the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified, or to subject itself to taxation in any
such jurisdiction, or to consent to general service of process in any such
jurisdiction.
(e) promptly notify the selling Holders of Eligible Securities
and the managing underwriters, if any, thereof and confirm such advice in
writing, (i) when such registration statement or the prospectus included
therein or any prospectus amendment or supplement or post-effective
amendment has been filed, and, with respect to such registration statement
or any post-effective amendment, when the same has become effective, (ii)
of any comments by the SEC and by the blue sky or securities commissioner
or regulator of any state with respect thereto or any request by the SEC or
such commissioner for amendments or supplements to such registration
statement or prospectus or for additional information, (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of such
registration statement or the initiation or threatening of any proceedings
for that purpose, (iv) if at any time the representations and warranties by
the Company contemplated by Section 4.1(h) or Section 4.2 hereof cease to
be true and correct in all material respect, (v) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Eligible Securities for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose, or (vi)
at any time when a prospectus is required to be delivered under the
Securities Act, that such registration statement, prospectus, prospectus
amendment or supplement or post-effective amendment, or any document
incorporated by reference in any of the foregoing, contains an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circum stances then existing (it being
understood that the Company shall file any necessary amendments or take any
other action necessary to correct such misleading information).
(f) use its reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of such registration statement or any
post-effective amendment thereto at the earliest practicable date.
(g) use its reasonable efforts to obtain the consent or approval
of each governmental agency or authority, whether federal, state or local,
which may be required to effect such registration or the offering or sale
in connection therewith or to enable the Holders to offer, or to consummate
the disposition of, the Eligible Securities.
<PAGE>
(h) whether or not an agreement of the type referred to in
Section 4.2 hereof is entered into and whether or not any portion of the
offerings contemplated by such registration statement is an underwritten
offering or is made through a placement or sales agent or and other entity,
(i) make such representations and warranties to the Holders and the
underwriters, if any thereof in form, substance and scope as are
customarily made in connection with an offering of common stock or other
equity securities pursuant to any appropriate agreement and/or a
registration statement filed on the form applicable to such registration,
(ii) obtain opinions of inside and outside counsel to the Company in
customary form and covering such matters, of the type customarily covered
be such opinions as the managing underwriters, if any, and as the Holders
may reasonably request, (iii) obtain a "cold comfort" letter or letters
from the independent certified public accountants of the Company addressed
to the Holders and the underwriters, if any, thereof dated (I) the
effective date of such registration statement and (II) the date of the
closing under the underwriting agreement relating thereto, such letter or
letters to be in customary form and covering such matters of the type
customarily covered, from time to time by letters of such type and such
other financial matters as the managing underwriters, if any, and as the
Holders may reasonable request, (iv) deliver such documents and
certificates, including officers' certificates, as may be reasonably
requested by the Holders and the placement or sales agent, if any, therefor
and the managing underwriters, if any, thereof to evidence the accuracy of
the representations and warranties made pursuant to clause (i) above and
the compliance with or satisfaction of any agreements or conditions
contained in the underwriting agreement or other agreement entered into by
the Company, and (v) undertake such obligations relating to expense
reimbursement, indemnification and contribution as are provided Article 6
hereof.
(i) comply with all applicable rules and regulations of the SEC,
and make generally available to its securityholders, as soon as practicable
but in any event not later than eighteen months after the effective date of
such registration statement, an earnings statement of the Company and its
subsidiaries complying with Section 11(a) of the Securities Act (including,
at the option of the Company, Rule 158 thereunder), and
(j) use its best efforts to list prior to the effective date of
such registration statement, subject to notice of issuance, the Eligible
Securities covered by such registration statement on any securities
exchange on which securities of the same class are then listed or if such
class is not then so listed, to have the Eligible Securities accepted for
quotation for trading on the Nasdaq National Market (or a comparable
interdealer quotation system then in effect).
The Company may require any Holder to furnish the Company such information
regarding such Holder and the distribution of such securities as the Company may
from time to time reasonably request in writing and as shall be required by law
or by the SEC in connection with any registration.
4.2 Underwriting. In the event that any registration pursuant to
Article 3 hereof shall involve, in whole or in part, an underwritten offering,
the Company may require Eligible Securities requested to be registered pursuant
to Article 3 to be included in such underwriting on the same terms and
conditions as shall be applicable to the Primary Securities being sold through
underwriters under such registration. In such case, the Holders of Eligible
Securities on whose behalf Eligible Securities are to be distributed by such
underwriters shall be parties to any such underwriting agreement. Such
agreement shall contain such representations and warranties by the Holders and
such other terms and provisions as are then customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities and contribution to the effect and to the extent
provided in Article 6. The representations and warranties in such underwriting
agreement by, and the other agreements on the part of, the
<PAGE>
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Eligible Securities.
4.3 Withdrawals. Any Holder having notified the Company of its
desire to include any or all of its Eligible Securities in a registration
statement pursuant to Article 3 hereof shall have the right to withdraw such
notice with respect to any or all of the Eligible Securities designated for
registration thereby by giving written notice to such effect to the Company at
least two Business Days prior to the anticipated effective date of such
registration statement. In the event of any such withdrawal, the Company shall
amend such registration statement and take such other actions as may be
necessary so that such Eligible Securities are not included in the applicable
registration and not sold pursuant thereto, and such Eligible Securities shall
continue to be Eligible Securities in accordance herewith. The withdrawing
Holder shall be responsible for assuming that portion of the Company's expenses
in connection with such registration as equals the portion of Eligible
Securities originally to be sold pursuant to such registration which were to be
sold by the withdrawing Holder. No such withdrawal shall affect the obligations
of the Company with respect to Eligible Securities not so withdrawn.
ARTICLE 5
PREPARATION; REASONABLE INVESTIGATION
5.1 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Eligible
Securities under the Securities Act, the Company will give all Holders and the
underwriters, if any, and their respective counsel and accountants, such
reasonable and customary access to its books and records and such opportunities
to discuss the business of the Company with its directors, officers, employees,
counsel and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinion of any Holder and such
underwriters or their respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.
ARTICLE 6
INDEMNIFICATION AND CONTRIBUTION
6.1 Indemnification and Contribution. (a) In the event of any
registration of any Eligible Securities hereunder, the Company will enter into
customary indemnification arrangements to indemnify and hold harmless all
selling Holders, their directors and officers, if any, each Person who
participates as an underwriter in the offering or sale of such securities, each
officer and director of each underwriter, and each Person, if any, who controls
such seller or any such underwriter within the meaning of the Securities Act
against any losses, claims, damages, and expenses joint or several, to which
such Person may be subject under the Securities Act or otherwise insofar as such
losses, claims, damages, liabilities or expenses (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus or final prospectus included therein, or any
amendment or supplement thereto, or any document incorporated be reference
therein, or (ii) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and the Company will periodically reimburse each such Person for
and legal or any other expenses reasonably incurred by such Person in connection
with investigating or defending and such loss, claim, liability, action or
proceeding, provided that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out
<PAGE>
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement, and such preliminary
prospectus or final prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any selling
Holder or such underwriter for use in the preparation thereof. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of any Holder or any such Person and shall survive the transfer of
such securities by such selling Holder. The Company also shall agree to make
provision for contribution as shall be reasonably requested be such selling
Holder or any underwriter in circumstances where such indemnity is held
unenforceable.
(b) All selling Holders, by virtue of exercising their registration
rights hereunder, agree and undertake to enter into customary indemnification
arrangements to indemnify and hold harmless (in the same manner and to the same
extent as set forth in clause (a) of this Article 6) the Company, each director
of the Company, each officer of the Company who shall sign such registration
statement, each Person who participates as an underwriter in the offering or
sale of such securities, each officer and director of each underwriter, each
Person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act, with respect to any statement in or omission from
such registration statement, any preliminary prospectus or final prospectus
included therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with written information
concerning such Holder furnished by it to the Company for use in the preparation
thereof. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any such director, officer
or controlling Person and shall survive the transfer of the registered
securities by any Holder. Holders also shall agree to make provision for
contribution as shall be reasonably requested by the Company or any underwriters
in circumstances where such indemnity is held unenforceable. The
indemnification and contribution obligations of any Holder shall in every case
be limited to the aggregate proceeds received (net of any underwriting fees and
expenses and other transaction costs) by such Holder in such registration.
ARTICLE 7
TRANSFER OF REGISTRATION RIGHTS
7.1 Transfer of Registration Rights. Any Holder may transfer the
registration rights granted hereunder to any other Person in respect of Eligible
Securities held by such Holder; provided that such Holder (or and such permitted
transferee) shall retain registration rights as to any retained Eligible
Securities.
ARTICLE 8
RULE 144
8.1 Rule 144. The Company covenants to and with each Holder of
Eligible Securities that to the extent it shall be required to do so under the
Exchange Act, the Company shall use its best efforts timely to file the reports
required to be filed by it under the Exchange Act or the Securities Act
(including, but not limited to, the reports under Section 13 and 15(d) of the
Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted by the SEC
under the Securities Act) and the rules and regulations adopted by the SEC
thereunder, and shall use its best efforts, to take such further action as any
Holder may reasonably request, all to the extent required from time to time to
enable the Holders to sell Eligible Securities without registration under the
Securities
<PAGE>
Act within the limitations of the exemption provided by Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the SEC. Upon the request of any Holder
of Eligible Securities, the Company shall deliver to such Holder a written
statement as to whether it has complied with such requirements.
ARTICLE 9
MISCELLANEOUS
9.1 Captions. The captions or headings in this Agreement are for
convenience and reference only, and in no way define, describe, extend or limit
the scope or intent of this Agreement.
9.2 Severability. If any clause, provision or section of this
Agreement shall be invalid, illegal or unenforceable, the invalidity, illegality
or unenforceability of such clause, provision or section shall not affect the
enforceability or validity of any of the remaining clauses, provisions or
sections hereof to the extent permitted by applicable law.
9.3. Governing Law. This Agreement shall be governed by and be
construed and enforced in accordance with the laws of the State of California
without giving effect to conflicts of law principles.
9.4 Consent to Jurisdiction; Service of Process; Waiver of Jury
Trial. (a) The parties to this Agreement hereby irrevocably submit to the
exclusive jurisdiction of any Federal court located in Los Angeles, California
over any suit, action or proceeding arising out of or relating to this
Agreement. The parties hereby irrevocably waive, to the fullest extent permitted
by applicable law any objection which they may now or hereafter have to the
laying of venue of any such suit, action or proceeding brought in such court.
The parties agree that, to the fullest extent permitted by applicable law, a
final and nonappealable judgment in any such action or proceeding brought in
such court shall be conclusive and binding upon the parties.
(b) The parties hereby irrevocably waive any rights they may have in
any court, state or federal, to a trial by jury in any case of any type that
relates to or arises out of this Agreement or the transactions contemplated
herein.
9.5 Specific Performance. The Company acknowledges that it would be
impossible to determine the amount of damages that would result from any breach
by it of any of the provisions of this Agreement and that the remedy at law for
any breach, or threatened breach, of any of such provisions would likely be
inadequate and, accordingly, agrees that each Holder shall, in addition to and
other debts or remedies which it may have, be entitled to seek such equitable
and injunctive relief as may be available from any court of competent
jurisdiction to compel specific performance of, or restrain the Company from
violating any of such provisions. In connection with any action or proceeding
for injunctive relief the Company hereby waives the claim or defense that a
remedy at law alone is adequate and agrees, to the maximum extent permitted by
law, to have each provision of this Agreement specifically enforced against it,
without the necessity of posting bond or other security against it, and consents
to the entry of injunctive relief against it enjoining or restraining any breach
or threatened breach of this Agreement.
9.6 Modification of Amendment. This Agreement may not be changed,
modified, discharged or amended, except by an instrument signed by all of the
parties hereto.
9.7 Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
<PAGE>
9.8 Entire Agreement. This Agreement constitutes the entire
agreement and understanding among the parties and supersedes any prior
understandings and or written or oral agreements among them respecting the
subject matter herein.
9.9 Notices. All notices, requests, demands, consents and other
communications required or permitted to be given pursuant to this Agreement
shall be in writing and delivered by hand, by telecopy, by overnight courier,
delivery service or by certified mail return receipt requested, postage prepaid.
Notices shall be deemed given when actually received, which shall be deemed to
be not later than the next Business Day if sent by overnight courier or after
five Business Days if sent by mail.
9.10 Successor to Company, Etc. This Agreement shall be binding upon,
and inure to the benefit of the Company's successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed as of the day and year first above written.
THE COMPANY
STYLES ON VIDEO, INC.
By:
-------------------------------------
Name: Nancy Galgas
Title: Chief Financial Officer
-----------------------------------------
Dana I. Arnold
<PAGE>
EXHIBIT 10.19
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT is made as of the 15th day of May,
1996 (this "Agreement") between Styles On Video, Inc., a Delaware corporation
(the "Company"), and K. Eugene Shutler, an individual ("Shutler").
WITNESSETH:
----------
WHEREAS, the Company has entered into a Note and Preferred Stock Purchase
Agreement, dated May 14, 1996 (the "Note Agreement"), among the Company, Forever
Yours, Inc., a California corporation and subsidiary of the Company ("FYI"), and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
WHEREAS, the Company issued to Shutler warrants to purchase 250,000
shares of the Common Stock of the Company (the "Warrants"), pursuant to
Shutler's Consulting Agreement with the Company dated as of April 19, 1996.
WHEREAS, the Company desires to grant to Shutler, as provided herein,
certain registration rights with respect to the Warrants and the shares of
Common Stock issuable to the Shutler upon exercise of the Warrants.
NOW, THEREFORE, in consideration of the mutual covenants and undertaking
contained herein, and for other good and valuable
<PAGE>
consideration, the receipt and sufficiency of which are hereby acknowledged, and
subject to and on the terms and conditions herein set forth, the parties hereto
agree as follows:
ARTICLE 1
---------
CERTAIN DEFINITIONS
-------------------
Terms with initial capital letters not otherwise defined in this
Agreement have the meanings set forth in Exhibit A to the Note Agreement. In
addition, the following terms with initial capital letters have the following
meanings:
1.1 "BUSINESS DAY" means any day on which the American Stock Exchange
is open for trading.
1.2 "CLOSING DATE" means the date of this Agreement.
1.3 "COMMON STOCK" means the Common Stock, par value $.001 per share
of the Company, and any securities of the Company or any successor which may be
issued on or after the date hereof in respect of, or in exchange for, shares of
Common Stock pursuant to merger, consolidation, stock split, stock dividend,
recapitalization of the Company or otherwise.
1.4 "ELIGIBLE SECURITIES" means any and all of the Warrants and any
shares of Common Stock issuable upon exercise of
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<PAGE>
the Warrants, whether held by Shutler or any direct or indirect transferee of
Shutler.
As to any proposed offer or sale of Eligible Securities, such
securities shall cease to be Eligible Securities with respect to such proposed
offer or sale when (i) registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement or (ii) all of such securities are permitted to be distributed
concurrently pursuant to Rule 144 (or any successor provision to such Rule)
under the Securities Act or are otherwise freely transferable to the public
without registration pursuant to Section 4(1) of the Securities Act. In the
event the Company prepares a registration statement pursuant to Article 3 hereof
which becomes effective and the Holder fails to dispose of Eligible Securities
included therein at the request of such Holder, such securities shall remain
Eligible Securities but the Holder shall be responsible for assuming that
portion of the Registration Expenses in connection with such registration as
equals that portion of Eligible Securities originally to be sold pursuant to
such registration which were included therein at the request of such Holder but
were not so sold.
1.5 "HOLDER" means Shutler and each of Shutler's successive successors
and assigns who acquires Eligible
-3-
<PAGE>
Securities, directly or indirectly, from Shutler or from any successive
successor or assign of Shutler.
1.6 "PERSON" means an individual, a partnership (general or limited),
corporation, joint venture, business trust, cooperative, association or other
form of business organization, whether or not regarded as a legal entity under
applicable law, a trust under vivos or testamentary), an estate of a deceased,
insane or incompetent person, a quasi-governmental entity, a government entity,
a government or any agency, authority, political subdivision or other
instrumentality thereof, or any other entity.
1.7 "REGISTRATION EXPENSES" means all expenses incident to the
Company's performance of or compliance with the registration requirements set
forth in this Agreement including, without limitation, the following: (a) the
fees, disbursements and expenses of the Company's counsel(s) and accountants in
connection with the registration of Eligible Securities to be disposed of under
the Securities Act, (b) all expenses in connection with the preparation,
printing and filing of the registration statement, any preliminary prospectus or
final prospectus, any other offering document and amendments and supplements
thereto and the mailing and delivering of copies thereof to the underwriters and
dealers, (c) the cost of printing or producing any agreement(s) among
underwriters, underwriting agreement(s) and blue sky or legal investment
memoranda, any
-4-
<PAGE>
selling agreements and any other documents in connection with the offering, sale
or delivery of Eligible Securities to be disposed of, (d) all expenses in
connection with the qualification of Eligible Securities to be disposed of for
offering and sale under state securities laws, including the fees and
disbursements of counsel for the underwriters in connection with such
qualifications and in connection with any blue sky and legal investment surveys,
(e) the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc., of the terms of the sale of Eligible
Securities to be disposed of and (f) fees and expenses incurred in connection
with the listing of Eligible Securities on each securities exchange on which
securities of the same class are then listed; provided, however, that
Registration Expenses with respect to any registration pursuant to this
Agreement shall not include (x) underwriting discounts or commissions
attributable to Eligible Securities, (y) transfer taxes applicable to Eligible
Securities or (z) SEC filing fees with respect to Eligible Securities to be sold
by the Holder thereof.
1.8 "SEC" means the Securities and Exchange Commission.
1.9 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the SEC promulgated thereunder, all as
the same shall be in effect at the relevant time.
-5-
<PAGE>
1.10 "ADDITIONAL REGISTRABLE SECURITIES" means any securities of the
Company, including the IDI Securities, the holders of which have been granted
registration rights by the Company.
1.11 "IDI SECURITIES" means "Eligible Securities" as defined in that
certain Amended and Restated Registration Rights Agreement, dated as of the date
hereof, by and between the Company and IDI, as the same may be amended or
modified from time to time.
ARTICLE 2
---------
EFFECTIVENESS
-------------
2.1 Effectiveness of Registration Rights. The registration rights
------------------------------------
granted pursuant to Article 3 hereof shall become effective on the Closing date
and terminate when there cease to be Eligible Securities.
ARTICLE 3
---------
PIGGYBACK REGISTRATION
----------------------
3.1 NOTICE AND REGISTRATION. If the Company proposes to register any
of its securities under the Securities Act (whether for its own account or for
the account of any other Person, or both) (the "Primary Securities") on a form
and in a manner which would permit registration of Eligible Securities for
-6-
<PAGE>
sale to the public under the Securities Act, it will give prompt written notice
to all Holders of its intention to do so. Such notice shall specify, at a
minimum, the number and class of the Primary Securities so proposed to be
registered, the proposed date of filing of such registration statement, and
proposed means of distribution of such Primary Securities, any proposed managing
underwriter or underwriters of such Primary Securities and a good faith estimate
by the Company of the proposed maximum offering price thereof, as such price is
proposed to appear on the facing page of such registration statement. Upon the
written request of any Holder delivered to the Company within 5 Business Days
after the giving of any such notice (which request shall specify the number of
Eligible Securities intended to be disposed of by such Holder and the intended
method of disposition thereof), the Company will use reasonable efforts to
effect, in connection with the registration of the Primary Securities, the
registration under the Securities Act of all Eligible Securities which the
Company has been so requested to register by such Holder (the "Selling
Stockholder"), to the extent required to permit the disposition (in accordance
with the intended method or methods thereof as aforesaid) of Eligible Securities
so to be registered, provided that
(a) if, at any time after giving such written notice of its
intention to register any Primary Securities and prior to the effective
date of the registration statement filed in connection with such
registration, the
-7-
<PAGE>
Company shall be unable to or shall determine for any reason not to
register such Primary Securities, the Company may, at its election, give
written notice of such determination to such Holder and thereupon the
Company shall be relieved of its obligation to register such "Eligible
Securities" in connection with the registration of such Primary
Securities (but not from its obligation to pay Registration Expenses to
the extent incurred in connection therewith as provided in Section 3.2);
(b) In the event that any managing underwriter of the Primary
Securities shall advise the Company, any holders for whose account any
such Primary Securities are being registered (the "Requesting
Stockholders"), the Selling Stockholders and any holders requesting to
have Additional Registrable Securities included in such registration (the
"Additional Stockholders") in writing that, in its opinion, the inclusion
in the registration statement of all of the Primary Securities, Eligible
Securities and Additional Registrable Securities sought to be registered
by the respective holders thereof creates a substantial risk that the
price per unit that the Company and such holders will derive from such
registration will be materially and adversely affected or that the
offering would otherwise be materially and adversely affected, then the
Company will include in such registration statement such number of
Primary Securities, Eligible Securities and
-8-
<PAGE>
Additional Registrable Securities as the Company, the Requesting
Stockholders, the Selling Stockholders and the Additional Stockholders
are so advised can be sold in such offering without such an effect (the
"Maximum Number"), as follows and in the following order of priority:
(i) first, the number of Primary Securities, if any, that the Company, in
its reasonable judgment and acting in good faith and in accordance with
sound financial practice, shall have determined to include in such
registration, (ii) second, if and to the extent that the number of
Primary Securities sought to be registered under clause (i) is less than
the Maximum Number, the number of Primary Securities sought to be
registered by each Requesting Stockholder, if any, the number of Eligible
Securities sought to be registered by each Selling Stockholder and the
number of IDI Securities, if any, sought to be registered by each holder
thereof, pro rata, if necessary, in proportion to the number sought to
be registered by such Requesting Stockholder, a Selling Stockholder or
holder of IDI Securities, as applicable, relative to the number sought to
be registered by all Requesting Stockholders, Selling Stockholders and
holders of IDI Securities and (iii) third, if and to the extent that the
number of Primary Securities, Eligible Securities and IDI Securities
sought to be registered under clauses (i) and (ii) is less than the
Maximum Number, any
-9-
<PAGE>
Additional Registrable Securities sought to be registered by the
Additional Stockholders, if any.
(c) The Company shall not be required to effect any registration
of Eligible Securities under this Article 3 incidental to the
registration of any of its securities in connection with mergers,
acquisitions, exchange offers, subscription offers, dividend reinvestment
plans or stock options or other employee benefit plans, and
(d) The Company shall not be required to register any Eligible
Securities if the intended method or methods of distribution for the
Eligible Securities is from time to time in multiple transactions.
3.2 REGISTRATION AND QUALIFICATION. The Company (as between the
Company and any Holder) shall be responsible for the payment of all Registration
Expenses in connection with any registration pursuant to this Article 3.
ARTICLE 4
---------
REGISTRATION PROCEDURES
-----------------------
4.1 REGISTRATION AND QUALIFICATION. If and whenever the Company is
required to use reasonable efforts to effect the registration of any Eligible
Securities under the Securities Act
-10-
<PAGE>
as provided in Article 3, the Company will as promptly as is practicable:
(a) prepare, file and use reasonable efforts to cause to become
effective a registration statement under the Securities Act regarding the
Eligible Securities to be offered.
(b) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with
respect to the disposition of all Eligible Securities until the earlier
of such time as all of such Eligible Securities have been disposed of in
accordance with the intended methods of disposition by the Holders set
forth in such registration statement or the expiration of six (6) months
after such registration statement becomes effective.
(c) furnish to all Holders and to any underwriter (which term for
purposes of this Agreement shall include a person deemed to be an
underwriter within the meaning of Section 2(11) of the Securities Act and
any placement agent or sales agent of such Eligible Securities) one
executed copy each and such number of
-11-
<PAGE>
conformed copies of such registration statement and of each such
amendment and supplement thereto (in each case including all exhibits),
such number of copies of the prospectus included in such registration
statement (including each preliminary prospectus and any summary
prospectus), in conformity with the requirements of the Securities Act,
such documents incorporated by reference in such registration statement
or prospectus, and such other documents as any Holder or such underwriter
may reasonably request.
(d) use reasonable efforts to register or qualify all Eligible
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as any Holder or any
underwriter of such eligible Securities shall reasonably request, and do
any and all other acts and things which may be necessary or advisable to
enable any Holder or any underwriter to consummate the disposition in
such jurisdictions of the eligible Securities by such registration
statement, except the Company shall not for any such purpose be required
to qualify generally to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified, or to subject itself to
taxation in any such jurisdiction, or to consent to general service of
process in any such jurisdiction.
-12-
<PAGE>
(e) promptly notify the selling Holders of Eligible Securities and
the managing underwriters, if any, thereof and confirm such advice in
writing, (i) when such registration statement or the prospectus included
therein or any prospectus amendment or supplement or post-effective
amendment has been filed, and, with respect to such registration
statement or any post-effective amendment, when the same has become
effective, (ii) of any comments by the SEC and by the blue sky or
securities commissioner or regulator of any state with respect thereto or
any request by the SEC Of such commissioner for amendments or supplements
to such registration statement or prospectus or for additional
information, (iii) of the issuance by the SEC of any stop order
suspending the effectiveness of such registration statement or the
initiation or threatening of any proceedings for that purpose, (iv) if at
any time the representations and warranties by the Company contemplated
by Section 4.1(h) or Section 4.2 hereof cease to be true and correct in
all material respect, (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Eligible Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, or (vi) at any time when
a prospectus is required to be delivered under the Securities Act, that
such registration statement, prospectus, prospectus amendment or
supplement or post-
-13-
<PAGE>
effective amendment, or any document incorporated by reference in any of
the foregoing, contains an untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to
make the statement therein not misleading in light of the circumstances
then existing (it being understood that the Company shall file any
necessary amendments or take any other action necessary to correct such
misleading information),
(f) use its reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of such registration statement or any
post-effective amendment thereto at the earliest practicable date.
(g) use its reasonable efforts to obtain the consent or approval
of each governmental agency or authority whether federal, state or local,
which may be required to effect such registration or the offering or sale
in connection therewith or to enable the Holders to offer, or to
consummate the disposition of, the Eligible Securities.
(h) whether or not an agreement of the type referred to in Section
4.2 hereof is entered into and whether or not any portion of the
offerings contemplated by such registration statement is an underwritten
offering
-14-
<PAGE>
or is made through a placement or sales agent or and other entity, (i)
make such representations and warranties to the Holders and the
underwriters, if any thereof in form, substance and scope as are
customarily made in connection with an offering of common stock or other
equity securities pursuant to any appropriate agreement and/or a
registration statement filed on the form applicable to such registration,
(ii) obtain opinions of inside and outside counsel to the Company in
customary form and covering such matters, of the type customarily covered
be such opinions as the managing underwriters, if any, and as the Holders
may reasonably request, (iii) obtain a "cold comfort" letter or letters
from the independent certified public accountants of the Company
addressed to the Holders and the underwriters, if any, thereof dated (I)
the effective date of such registration statement and (II) the date of
the closing under the underwriting agreement relating thereto, such
letter or letters to be un customary form and covering such matters of
the type customarily covered, from time to time by letters of such type
and such other financial matters as the managing underwriters, if any,
and as the Holders may reasonable request, (iv) deliver such documents
and certificates, including officers' certificates, as may be reasonably
requested by the Holders and the placement or sales agent, if any,
therefor and the managing underwriters, if any, thereof to evidence the
accuracy of the representations
-15-
<PAGE>
and warranties made pursuant to clause (i) above and the compliance with
or satisfaction of any agreements or conditions contained in the
underwriting agreement or other agreement entered into by the Company,
and (v) undertake such obligations relating to expense reimbursement,
indemnification and contribution as are provided Article 6 hereof.
(i) comply with all applicable rules and regulations of the SEC,
and make generally available to its securityholders, as soon as
practicable but in any event not later than eighteen months after the
effective date of such registration statement, an earnings statement of
the Company and its subsidiaries complying with Section 11(a) of the
Securities Act (including, at the option of the Company, Rule 158
thereunder), and
(j) use its best efforts to list prior to the effective date of
such registration statement subject to notice of issuance, the Eligible
Securities covered by such registration statement on any securities
exchange on which securities of the same class are then listed or if such
class is not then so listed, to have the Eligible Securities accepted for
quotation for trading on the Nasdaq National Market (or a comparable
interdealer quotation system then in effect).
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The Company may require any Holder to furnish the Company such information
regarding such Holder and the distribution of such securities as the Company may
from time to time reasonably request in writing and as shall be required by law
or by the SEC in connection with any registration.
4.2 UNDERWRITING. In the event that any registration pursuant to
Article 3 hereof shall involve, in whole or in part, an underwritten offering,
the Company may require Eligible Securities requested to be registered pursuant
to Article 3 to be included in such underwriting on the same terms and
conditions as shall be applicable to the Primary Securities being sold through
underwriters under such registration. In such case, the Holders of Eligible
Securities on whose behalf Eligible Securities are to be distributed by such
underwriters shall be parties to any such underwriting agreement. Such
agreement shall contain such representations and warranties by the Holders and
such other terms and provisions as are then customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities and contribution to the effect and to the extent
provided in Article 6. The representations and warranties in such underwriting
agreement by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the benefit of
such holders of Eligible Securities.
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4.3 WITHDRAWALS. Any Holder having notified the Company of its desire
to include any or all of its Eligible Securities in a registration statement
pursuant to Article 3 hereof shall have the right to withdraw such notice with
respect to any or all of the Eligible Securities designated for registration
thereby by giving written notice to such effect to the Company at least two
Business Days prior to the anticipated effective date of such registration
statement. In the event of any such withdrawal, the Company shall amend such
registration statement and take such other actions as may be necessary so that
such Eligible Securities are not included in the applicable registration and not
sold pursuant thereto, and such Eligible Securities shall continue to be
Eligible Securities in accordance herewith. The withdrawing Holder shall be
responsible for assuming that portion of the Company's expenses in connection
with such registration as equals the portion of Eligible Securities originally
to be sold pursuant to such registration which were to be sold by the
withdrawing Holder. No such withdrawal shall affect the obligations of the
Company with respect to Eligible Securities not so withdrawn.
ARTICLE 5
---------
PREPARATION; REASONABLE INVESTIGATION
-------------------------------------
5.1 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement registering Eligible
Securities under the Securities
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Act, the Company will give all Holders and the underwriters, if any, and their
respective counsel and accountants, such reasonable and customary access to its
books and records and such opportunities to discuss the business of the Company
with its directors, officers, employees, counsel and the independent public
accountants, who have certified its financial statements as shall be necessary,
in the opinion of any Holder and such underwriters or their respective counsel,
to conduct a reasonable investigation within the meaning of the Securities Act.
ARTICLE 6
---------
INDEMNIFICATION AND CONTRIBUTION
--------------------------------
6.1 INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION AND CONTRIBUTION. In the event of any
registration of any Eligible Securities hereunder, the Company will enter
into customary indemnification arrangements to indemnify and hold
harmless all selling Holders, their directors and officers, if any, each
Person who participates as an underwriter in the offering or sale of such
securities, each officer and director of each underwriter, and each
Person, if any, who controls such seller or any such underwriter within
the meaning of the Securities Act against any losses, claims, damages,
and expenses joint or several, to which such Person may be subject under
the
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Securities Act or otherwise insofar as such losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in any registration statement
under which such securities were registered under the Securities Acts any
preliminary prospectus or final prospectus included therein, or any
amendment or supplement thereto, or any document incorporated be
reference therein, or (ii) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and the Company will
periodically reimburse each such Person for and legal or ally other
expenses reasonably incurred by such Person in connection with
investigating or defending and such loss, claim, liability, action or
proceeding, provided that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, and such
preliminary prospectus or final prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any selling Holder or such underwriter for use in the
preparation thereof. Such indemnity shall
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remain in full force and effect regardless any investigation made by or
on behalf of any Holder or any such Person and shall survive the transfer
of such securities by such selling Holder. The Company also shall agree
to make provision for contribution as shall be reasonably requested by
such selling Holder or any underwriter in circumstances where such
indemnity is held unenforceable.
(b) All selling Holders, by virtue of exercising their
registration rights hereunder, agree and undertake to enter into
customary indemnification arrangements to indemnify and hold harmless (in
the same manner and to the same extent as set forth in clause (a) of this
Article 6) the Company, each director of the Company, each officer of the
Company who shall sign such registration statement, each Person who
participates as an underwriter in the offering or sale of such
securities, each officer and director of each underwriter, each Person,
if any, who controls the Company or any such underwriter within the
meaning of the Securities Act, with respect to any statement in or
omission from such registration statement, any preliminary prospectus or
final prospectus included therein, or any amendment or supplement
thereto, if such statement or omission was made in reliance upon and in
conformity with written information concerning such Holder furnished by
it to the Company for use in the preparation
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thereof. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Company or any such
director, officer or controlling Person and shall survive the transfer of
the registered securities by any Holder. Holders also shall agree to
make provision for contribution as shall be reasonably requested by the
Company or any underwriters in circumstances where such indemnity is held
unenforceable. The indemnification and contribution obligations of any
Holder shall in every case be limited to the aggregate proceeds received
(net of any underwriting fees and expenses and other transaction costs)
by such Holder in such registration,
ARTICLE 7
---------
TRANSFER OF REGISTRATION RIGHTS
-------------------------------
7.1 TRANSFER OF REGISTRATION RIGHTS. Any Holder may transfer the
registration rights granted hereunder to any other Person in respect of Eligible
Securities held by such Holder; provided that such Holder (or and such permitted
transferee) shall retain registration rights as to any retained Eligible
Securities.
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ARTICLE 8
---------
RULE 144
--------
8.1 RULE 144. The Company covenants to and with each Holder of
Eligible Securities that to the extent it shall be required to do so under the
Exchange Act, the Company shall use its best efforts timely to file the reports
required to be filed by it under the Exchange Act or the Securities Act
(including, but not limited to, the reports under Section 13 and 15(d) of the
Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted by the SEC
under the Securities Act) and the rules and regulations adopted by the SEC
thereunder, and shall use its best efforts, to take such further action as any
Holder may reasonably request, all to the extent required from time to time to
enable the Holders to sell Eligible Securities without registration under the
Securities Act within the limitations of the exemption provided by Rule 144
under the Securities Act, as such Rule may be amended from time to time or any
similar rule or regulation hereafter adopted by the SEC. Upon the request of
any Holder of Eligible Securities, the Company shall deliver to such Holder a
written statement as to whether it has complied with such requirements.
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ARTICLE 9
---------
MISCELLANEOUS
-------------
9.1 CAPTIONS. The captions or headings in this Agreement are for
convenience and reference only, and in no way define, describe, extend or limit
the scope or intent of this Agreement.
9.2 SEVERABILITY. If any clause, provision or section of this
Agreement shall be invalid, illegal or unenforceable, the invalidity, illegality
or unenforceability of such clause, provision or section shall not affect the
enforceability or validity of any of the remaining clauses, provisions or
sections hereof to the extent permitted by applicable law.
9.3 GOVERNING LAW. This Agreement shall be governed by and be
construed and enforced in accordance with the laws of the State of California
without giving effect to conflicts of law principles.
9.4 CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY TRIAL.
(a) The parties to this Agreement hereby irrevocably submit to the
exclusive jurisdiction of any Federal court located in Los Angeles,
California over any suit, action or proceeding arising out of or relating
to
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this Agreement. The parties hereby irrevocably waive, to the fullest
extent permitted by applicable law any objection which they may now or
hereafter have to the laying of venue of any such suit, action or
proceeding brought in such court. The parties agree that, to the fullest
extent permitted by applicable law, a final and nonappealable judgment in
any such action or proceeding brought in such court shall be conclusive
and binding upon the parties.
(b) The parties hereby irrevocably waive any rights they may have
in any court, state or federal, to a trial by jury in any case of any
type that relates to or arises out of this Agreement or the transactions
contemplated herein.
9.5 SPECIFIC PERFORMANCE. The Company acknowledges that it would be
impossible to determine the amount of damages that would result from any breach
by it of any of the provisions of this Agreement and that the remedy at law for
any breach or threatened breach, of any of such provisions would likely be
inadequate and, accordingly, agrees that each Holder shall, in addition to and
other debts or remedies which it may have, be entitled to seek such equitable
and injunctive relief as may be available from any court of competent
jurisdiction to compel specific performance of, or restrain the Company from
violating any of such provisions. In connection with any action or
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proceeding for injunctive relief the Company hereby waives the claim or defense
that a remedy at law alone is adequate and agrees, to the maximum extent
permitted by law, to have each provision of this Agreement specifically enforced
against it, without the necessity of posting bond or other security against it,
and consents to the entry of injunctive relief against it enjoining or
restraining any breach or threatened breach of this Agreement.
9.6 MODIFICATION OF AMENDMENT. This Agreement may not be changed,
modified, discharged or amended, except by an instrument signed by all of the
parties hereto.
9.7 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
9.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding among the parties and supersedes any prior understandings and
or written or oral agreements among them respecting the subject matter herein.
9.9 NOTICES. All notices, requests, demands, consents and other
communications required or permitted to be given pursuant to this Agreement
shall be in writing and delivered by hand, by telecopy, by overnight courier,
delivery service or by certified mail return receipt requested, postage prepaid.
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Notices shall be deemed given when actually received, which shall be deemed to
be not later than the next Business Day if sent by overnight courier or after
five Business Days if sent by mail.
9.10 SUCCESSOR TO COMPANY, ETC. This Agreement shall be binding upon,
and inure to the benefit of the Company's successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
cause this Agreement to be executed as of the day and year first above written.
The Company
STYLES ON VIDEO, INC.
By:
---------------------------------------------
Name: Nancy Galgas
Title: Chief Financial Officer
--------------------------------------------------
K. Eugene Shutler
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<PAGE>
EXHIBIT 10.20
FULL RELEASE AND SETTLEMENT AGREEMENT
1. This Agreement is entered into by and between the following parties:
STYLES ON VIDEO, INC., ("STYLES"), DYCAM, INC. ("DYCAM"), STYLES SERVICING, INC.
("SSI") and FOREVER YOURS, INC. ("FYI) (collectively referred to as the "STYLES
ENTITIES"); INTERNATIONAL DIGITAL INVESTORS, L.P. ("IDI"); KELLOGG & ANDELSON,
THOMAS D. LEAPER ("LEAPER"), JAMES F. WALTERS, WILLIAM T. WALL, and FRED S. FLAX
(collectively referred to as the "ACCOUNTANTS"); and CPA MUTUAL INSURANCE
COMPANY OF AMERICA RISK RETENTION GROUP ("CPA MUTUAL").
RECITALS AND DEFINITIONS
2. STYLES has sued the ACCOUNTANTS in an action now pending in the Superior
Court of the State of California for the County of Los Angeles, case number BC
142968 (the "LAWSUIT"). STYLES has claimed, inter alia, that: the ACCOUNTANTS
negligently audited the financial statements of STYLES as of, and for the year
ended, December 31, 1993 (the "1993 FINANCIAL STATEMENTS"); the ACCOUNTANTS
subsequently learned of deficiencies in said audit and errors in the 1993
FINANCIAL STATEMENTS, yet failed to report them to appropriate people at STYLES,
or to take any action to correct such errors; that the ACCOUNTANTS negligently
provided services and advice regarding STYLES' quarterly financial statements in
1993 and 1994, and related Form 10-Qs filed with the Securities and Exchange
Commission; and that the ACCOUNTANTS wrongfully resigned from their capacity as
STYLES' auditors. STYLES has claimed damages in excess of 50 million dollars.
The ACCOUNTANTS have denied these allegations, and have denied causing STYLES
damages. CPA MUTUAL provides professional liability coverage for the ACCOUNTANTS
subject to policy terms and conditions.
3. As used in this Agreement, the "SHAREHOLDER LITIGATION" shall mean the
following cases: a) Donald & Co. Securities, Inc., et al. v. Styles On Video,
Inc. et al.; b) Lynn Robbins, et al. v. Styles On Video, Inc. et al.; c) Dennis
Ratner, et al. v. Styles On Video, Inc. et al.; d) Jack Kassindorf, et al. v.
Styles On Video, Inc. et al.; e) Neil Cohen, et al. v. Guy De Vreese, et al.;
and f) any action which is a consolidation of one or more of the preceding
cases.
4. As used in this Agreement, the "LEAPER ACTION" shall mean the case
entitled Leaper v. Styles on Video, Inc. et al., case number BC121801 in the
California Superior Court for the County of Los Angeles, Central District.
5. As used herein, the "STIPULATION OF SETTLEMENT" shall mean the
Stipulation of Settlement filed on or about February 29, 1996 in case number CV-
94-8342-R (Ex), in the United States
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District Court for the Central District of California, Western District, and
attached hereto as Exhibit A.
6. As used in this Agreement, the "SUBJECT CLAIMS" shall mean all claims
which in any way relate to any of the following: the LAWSUIT; the 1993 FINANCIAL
STATEMENTS; any quarterly financial statements for the STYLES ENTITIES or any
corporation or entity affiliated with, owned by, or related to the STYLES
ENTITIES; or any other services or advice provided by any of the ACCOUNTANTS
(including, but not limited to, services by THOMAS D. LEAPER as an officer and
employee of STYLES), at any time, to the STYLES ENTITIES, or any other
corporation or entity affiliated with, owned by, or related to the STYLES
ENTITIES.
7. The parties desire to finally settle and resolve all disputes between
them related to the SUBJECT CLAIMS and all other possible disputes between the
parties.
NOW, THEREFORE, for good and valuable consideration, the parties hereby
agree as follows:
WARRANTIES
8. Attached hereto are the following exhibits: the STIPULATION OF
SETTLEMENT (Exhibit A); waivers and consents from Agricultural Excess and
Surplus Insurance Company ("AESIC"), Certain Underwriters at Lloyds and London
Companies ("LLOYDS"), and The Home Insurance Company ("HOME") (Exhibits B
through D respectively); a release (including a release of the "Notice of
Attorney Lien", dated May 2, 1996, and all other lien rights) from Troop
Meisinger Steuber Pasich, LLP (which shall contain a representation that they
are the successor in interest to Hill, Wynne, Troop & Meisinger) (Exhibit E); a
release from Multinational Trading Corp. (Exhibit F); and releases from Jeffrey
Safchik, Barry Porter, John Edling, Marshall Geller, Dana Arnold, and Ann Graham
Ehringer (Exhibits G through L, respectively). The documents described above in
this paragraph, shall hereinafter be collectively referred to as the "THIRD
PARTY RELEASES". No later than June 1, 1996, the STYLES ENTITIES shall provide
fully-executed Exhibits C through L.
9. The STYLES ENTITIES acknowledge that the ACCOUNTANTS have entered into
this Agreement in reliance upon the THIRD PARTY RELEASES, and that the
ACCOUNTANTS would not have entered into this Agreement without them. The STYLES
ENTITIES hereby represent and warrant the following: that the signatures on all
of the THIRD PARTY RELEASES are authentic and not forgeries; that, with respect
to the THIRD PARTY RELEASES by corporations or partnerships, the signatories
were duly authorized and empowered to enter into those releases on behalf of
those entities; that AESIC, LLOYDS and HOME are all of the insurers who made any
payments, or are obligated to make any payments, for the
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SHAREHOLDER LITIGATION; that Jeffrey Safshik, Barry Porter, John Edling,
Marshall Geller, Dana Arnold, and Ann Graham Ehringer are all of the current
directors of STYLES; that, except for the SHAREHOLDER LITIGATION, none of the
STYLES ENTITIES has been sued in any class action or shareholder derivative suit
at any time; that the STYLES ENTITIES are unaware of any claims which may result
in the filing of any class action or shareholder derivative suit against any of
the STYLES ENTITIES or the ACCOUNTANTS, other than the SHAREHOLDER LITIGATION;
and that the STYLES ENTITIES have not been sued in any type of action seeking
damages related to false or misleading information in any of its annual or
quarterly financial statements, or any of its SEC filings, other than the
SHAREHOLDER LITIGATION.
10. If any of the foregoing warranties or representations by the STYLES
ENTITIES is untrue, the ACCOUNTANTS shall have the right, at their sole option,
to declare this Agreement and the THIRD PARTY RELEASES null and void by giving
written notice to the STYLES ENTITIES and IDI within 60 days after discovery
that such warranty or representation is untrue; in that event, the STYLES
ENTITIES shall repay the entire amount of the settlement payment to the
ACCOUNTANTS, this Agreement and the THIRD PARTY RELEASES shall become null and
void (see paragraph 23 for effect on the LAWSUIT), and the parties shall be
deemed to enjoy their respective positions as of the date of this Agreement as
if this Agreement had never been made.
DEFENSE AND INDEMNITY
11. The STYLES ENTITIES shall indemnify and hold harmless the ACCOUNTANTS
from any and all claims brought by or on behalf of any past, present or future
shareholders of the STYLES ENTITIES related to any alleged damages resulting
from their ownership, purchase, or sale of stock in the STYLES ENTITIES. The
STYLES ENTITIES shall defend, indemnify and hold harmless the ACCOUNTANTS from
any breach of any and all claims which appear to be released pursuant to the
THIRD PARTY RELEASES.
CONDITION PRECEDENT
12. This Agreement is expressly conditioned upon the issuance and entry of
a valid and final judicial order ("ORDER OF FINAL APPROVAL") granting final
approval of the STIPULATION OF SETTLEMENT. If an ORDER OF FINAL APPROVAL is
issued and filed, then STYLES (or IDI on behalf of STYLES) shall give notice to
the ACCOUNTANTS, including the following: a certified copy of said order; and a
written representation and warranty that no appeal has been filed, or
threatened, with respect to said order, and that said Order has been entered by
the court and is final, valid and enforceable.
13. Within 3 business days after the DATE OF NOTICE from
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STYLES (or IDI on behalf of STYLES), CPA MUTUAL and IDI shall send (via Federal
Express) instructions, pursuant to the ESCROW INSTRUCTIONS (attached as Exhibit
M), authorizing the immediate disbursement of all the ESCROW FUNDS (defined in
the ESCROW INSTRUCTIONS) as follows: $250,000 to Troop Meisinger Steuber Pasich,
LLP; and the entire balance to IDI. Notwithstanding the foregoing sentence,
neither CPA MUTUAL nor the ACCOUNTANTS shall have any obligation to send such
instructions unless the ACCOUNTANTS have received fully-executed Exhibits C
through L to this Agreement. (See paragraph 8, above.)
14. Notwithstanding the first sentence of the preceding paragraph, if
STYLES (or IDI on behalf of STYLES) does not give notice to the ACCOUNTANTS
(pursuant to paragraph 12, above) by November 1, 1996, then CPA MUTUAL shall
have the sole option, to be exercised in its discretion at any time after
November 1, 1996, to declare this Agreement and the THIRD PARTY RELEASES null
and void by providing notice to the STYLES ENTITIES and IDI. Within 3 business
days after the DATE OF NOTICE of said elect-on, IDI and CPA MUTUAL shall send
(via Federal Express) instructions, pursuant to the ESCROW INSTRUCTIONS,
authorizing the immediate disbursement of all the ESCROW FUNDS to CPA MUTUAL. In
that event, this Agreement shall become null and void (see paragraph 23 for
effect on the LAWSUIT), and the parties shall be deemed to enjoy their
respective positions as of the date of this Agreement as if this. Agreement had
never been made.
SETTLEMENT PAYMENTS
15. The ACCOUNTANTS (through their insurer, CPA MUTUAL) shall pay ONE
MILLION SEVEN HUNDRED THOUSAND DOLLARS AND NO CENTS ($1,700,000.00) to the
ESCROW AGENT (defined in ESCROW INSTRUCTIONS attached as Exhibit M) by a check
made payable to "Bank of San Francisco, Escrow Agent". Said payment shall be
sent via Federal Express no later than five (5) days after this Agreement has
been fully executed by all of the parties and an original of the fully-executed
agreement has been sent to Farley J. Neuman at Jenkins, Goodman & Neuman, Two
Embarcadero Center, Suite 1780, San Francisco, CA 94111 by personal delivery.
Said settlement payment shall be subject to the instructions, terms and
conditions set forth in the ESCROW INSTRUCTIONS (Exhibit M). The ACCOUNTANTS
represent and warrant that no part of such payment is made by or on behalf of
CAMICO Mutual Insurance Company. CPA MUTUAL waives any subrogation or other
rights it may have to recover costs of the defense or settlement of the LAWSUIT
from the STYLES ENTITIES.
RELEASE
16. The parties hereby release and forever discharge each other, including
their agents, partners, employees, shareholders,
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officers, directors, attorneys, insurers and affiliated entities of and from all
claims, demands, actions, and causes of action arising out of or in any way
connected with any matter or thing whatsoever, including without limitation the
SUBJECT CLAIMS, any stock options, or any other accounting services, tax
services, advice or other services provided by any of the ACCOUNTANTS to the
STYLES ENTITIES at any time. Notwithstanding anything to the contrary in this
Agreement, neither the ACCOUNTANTS nor the STYLES ENTITIES release Guy de Vreese
in any manner, and each reserves the right to assert any and all claims or
causes of action which any of them has against him.
17. This is a full and final release of any and all claims arising out of
said matters and the parties hereto agree as further consideration and
inducement for this compromise and settlement that said release shall apply to
all unknown and unanticipated damages or injuries. The parties hereby waive and
relinquish any rights they may have pursuant to section 1542 of the Civil Code
of the State of California which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected the
settlement with the debtor."
18. This release is freely and voluntarily entered into, and the STYLES
ENTITIES hereby agree to enter a dismissal with prejudice of the LAWSUIT. LEAPER
agrees to enter a dismissal with prejudice of the LEAPER ACTION. Each party
shall bear its own costs and attorneys fees.
19. It is understood and agreed that this is a compromise settlement of a
disputed claim and that the consideration for this release shall not be deemed
or construed as an admission of any liability by any of the parties to any other
party.
20. The parties represent to each other that no claim released pursuant to
paragraph 16 hereof has been assigned or hypothecated to any person or entity,
and each agrees to indemnify, defend and hold harmless the other(s) from any
loss, cost or damage resulting from the breach of the representation in this
paragraph.
REPRESENTATION BY COUNSEL
21. The parties hereby acknowledge and warrant that they have consulted
their own lawyers regarding the terms of this agreement and that they each
execute this-agreement following full consultation with their counsel.
CONFIDENTIALITY
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22. The parties hereto further agree that they will not hereinafter
disclose, release, publicize or cause to be publicized, in any manner
whatsoever, the terms, covenants, conditions or provisions of this Agreement, or
the payments made hereunder, to any person or entity other than the parties to
this Agreement, their insurers, their attorneys, IDI and/or as may be required
for the following: preparation of tax returns; financial statements prepared in
accordance with generally accepted accounting principles; or to comply with any
statute, rule, regulation, order, subpoena or other process of any court,
governmental or administrative entity or any securities exchange, including,
without limitation, any disclosure or reporting requirements under applicable
securities law.
MISCELLANEOUS
23. Void. If this Agreement does become null and void pursuant to
paragraphs 10 or 14 hereof, or for any other reason, it is the intent of the
parties that they be deemed to enjoy their respective positions as of the date
hereof, and the period equal to the interval between the date of the Agreement
until a date 30 days after the DATE OF NOTICE to the STYLES ENTITIES and IDI
that the Agreement is null and void (the TOLLING PERIOD"), shall be treated as
follows: the TOLLING PERIOD (and any even-s occurring during the TOLLING PERIOD)
shall not be considered or included in determining the application of any
statute of limitations, the doctrine of laches, or estoppel, or any doctrines of
similar purpose or effect, to any claims released by this Agreement or the THIRD
PARTY RELEASES.
24. Notices. Notices pursuant to this Agreement shall be in writing and
delivered, or mailed (first class, postage prepaid) as follows:
If to the STYLES ENTITIES:
Eric N. Landau
Christensen, Miller, Fink, Jacobs,
Glaser, Weil & Shapiro
2121 Avenue of the Stars
18th Floor Los Angeles, CA 90067;
with a copy (which may be mailed even if the original
is delivered) to:
Styles on Video, Inc.
Attn: Chief Executive Officer/General Counsel
667 Rancho Conejo Boulevard
Newbury Park, CA 91320;
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If to IDI:
O'Melveny & Myers
400 South Hope Street
Los Angeles, CA 90071-2899
Attn: Ted McAniff
If to the ACCOUNTANTS:
Farley J. Neuman
Two Embarcadero Center
Suite 1780
San Francisco, CA 94111;
with a copy (which may be mailed even if the original is delivered) to:
James Hill
Claims Professionals Associated, Inc.
850 E. Higgins Road, Suite 128
Schaumburg, IL 60173
Any party may designate a new address by providing proper notice to the other
party. The "DATE OF NOTICE" shall mean: the date when personally delivered or
five (5) days after mailing. Notice shall be deemed given or made as of the
DATE OF NOTICE.
25. Joint and several obligations. All duties and obligations of the STYLES
ENTITIES shall be joint and several obligations of STYLES, FYI, SSI, and DYCAM.
26. No tax representation. The ACCOUNTANTS have made no representation or
warranty regarding the appropriate tax treatment by the STYLES ENTITIES for the
settlement payment provided by this Agreement, or any other tax issue arising
out of this Agreement.
27. Invalidity. If any provision of this contract is held to be invalid or
is invalid for any reason, the remainder shall not be invalid and shall remain
in full force and in effect.
28. Binding Effect. This Agreement shall be binding upon the parties and
their respective legal representatives, heirs, successors, and assigns.
29. Paragraph Headings. The paragraph and section headings in this
Agreement are for purposes of convenience and ease of reference only and shall
not be construed to limit or otherwise affect the meaning of any part of this
agreement.
30. Entire Agreement. This Agreement constitutes the entire agreement among
the parties hereto relating to the subject
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matter hereof. All prior agreements, correspondence, discussions and
understandings of the parties are merged herein and made a part hereof, with the
intention of the parties hereto that this agreement shall serve as the complete
and exclusive statement of the terms of their agreement. No amendment, waiver or
modification hereto or hereunder shall be valid unless in writing, signed by an
authorized signatory of the party or parties or to be affected thereby and IDI,
which is an intended third party beneficiary of this Agreement.
31. Governing Law and Jurisdiction. This Agreement shall be governed and
construed according to the laws of the State of California. All of the
undersigned people and entities consent to the jurisdiction of courts of the
State of California for any lawsuit related to, or arising out of, this
Agreement, including, but not limited to the ESCROW INSTRUCTIONS.
32. Attorneys Fees. If either party brings an action, at law, or in
equity, against the other party arising out of or in connection with this
Agreement, the prevailing party shall be entitled to recover from the other
party the costs of suit incurred and reasonable attorney fees.
33. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be read together and construed as one and the
same agreement.
34. Cooperation. Each party to this Agreement agrees to perform any
further acts and execute and deliver any additional documents that may be
reasonably necessary to carry out the provisions and intent of this Agreement.
IN WITNESS WHEREOF, the undersigned have hereby executed this Release and
Settlement Agreement.
DATED: STYLES ON VIDEO, INC.
BY:
Print Name
Title: Chief Executive Officer
DATED: STYLES ON VIDEO, INC.
BY:
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Print Name
Title: Corporate Secretary
DATED: DYCAM, INC.
BY:
Print Name
Title: President
DATED: DYCAM, INC.
BY:
Print Name
Title: Corporate Secretary
DATED: STYLES SERVICING, INC.
BY:
Print Name
Title: President
DATED: STYLES SERVICING, INC.
BY:
Print Name
Title: Corporate Secretary
DATED: FOREVER YOURS, INC.
BY:
Print Name
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Title: President
DATED: FOREVER YOURS, INC.
BY:
Print Name
Title: Corporate Secretary
DATED: INTERNATIONAL DIGITAL INVESTORS, L.P.
BY: IDI CORP., its general partner
BY:
JEFFREY SAFCHIK, president of
IDI Corp.
DATED: KELLOGG & ANDELSON
BY:
Print Name
Title: President
DATED: KELLOGG & ANDELSON
BY:
Print Name
Title: Corporate Secretary
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DATED:
THOMAS D. LEAPER
DATED:
JAMES F. WALTERS
DATED:
WILLIAM T. WALL
DATED:
FREDERICK FLAX
DATED: CPA MUTUAL INSURANCE COMPANY
OF AMERICA RISK RETENTION
GROUP
BY:
DOUGLAS H. THOMPSON, JR.
Title: President
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EXHIBIT 10.21
CHRISTENSEN, MILLER, FINK, JACOBS,
GLASER, WEIL & SHAPIRO, LLP
2121 Avenue of the Stars
18th Floor
Los Angeles, California 90067-5010
(310) 553-3000
Attorneys for
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
Plaintiff,
v.
Defendant.
_________________________________ )
)
)
)
)
)
)
)
)
)
) Case No.
STIPULATION OF SETTLEMENT OF CLASS ACTION
AND DERIVATIVE CLAIMS
This Stipulation of Settlement (the "Stipulation"), dated as
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of April 14, 1995 is made and entered into by and among the following parties
(as defined further in (S)V hereof) to the above-entitled Litigation and the
derivative action defined below: (1) the Plaintiffs, on behalf of themselves and
each of the Settlement Class Members, Styles on Video, Inc. ("SOV" or the
"Company") Stockholders and derivatively on behalf of nominal defendant SOV, by
and through their counsel of record in Litigation; (ii) the Defendants, by and
through their counsel of record in the Litigation; and (iii) SOV as defendant,
by and through its counsel of record. The Stipulation is entered into by the
Settling Parties pursuant to the settlement memorialized in part, in a
transcript of proceedings before the Honorable Manual Real on April 7, 1995, and
pursuant to subsequent settlement conferences before his Honor. The Stipulation
is intended by the Settling Parties to fully, finally and forever resolve,
discharge and settle the Release Class and Derivative Claims (as defined
herein), upon and subject to the terms and conditions hereof.
I. THE LITIGATION
On and after December 13, 1994, the following actions (the "Litigation")
were filed in this Court on behalf of a class of purchasers of SOV common stock
during a defined period of time or derivatively on behalf of SOV:
The Class Actions
Kassindorf v. Styles on Video, Inc., et al., Civil No. 9-8342-R(Ex)
Robbins v. Styles on Video, Inc., et al., Civil No. 94-8362-R (Ex)
Donald & Co. Securities, Inc. v. Styles on Video, Inc., et al., Civil No.
94-8632-R (Ex)
Ratner, et al. v. Styles on Video, Inc., et al., Civil No. 94-8719-R (Ex)
On March 17, 1995, a Consolidated First Amended Class Action complaint for
Violations of the Federal Securities Laws (the "Class Complaint") was filed. The
Class Complaint alleges claims for violations of 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
On April 21, 1995, upon this Stipulation of the parties, the Court ordered
the Robbins, Donald & Co. Securities, Inc., and Ratner complaints dismissed
without prejudice.
The Derivative Action
On March 28, 1995 a derivative action (the "Derivative Complaint") entitled
Cohen v. De Vreese, Civil No. 95-1980-R (Ex)
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was filed with the Court. The Derivative Complaint alleged claims on behalf of
SOV for breach of fiduciary duty and abuse of control.
II. PRETRIAL PROCEEDINGS AND DISCOVERY IN THE LITIGATION
Discovery, Investigation and Research
Plaintiffs' counsel have conducted formal and informal discovery in this
case. Plaintiffs' counsel have (i) reviewed and analyzed extensive
documentation obtained informally during the Litigation; (ii) consulted with
experts in economics and accounting; (iii) reviewed and investigated defendants'
public filings, annual reports and other public statements made during the time
period at issue; and (iv) researched the applicable law with respect to the
claims asserted in the Class and Derivative Complaints and any potential
defenses to those claims.
III. DEFENDANTS' STATEMENTS AND DENIALS OF WRONGDOING AND LIABILITY
The Defendants have denied and continue to deny each and all of the claims
and contentions alleged by the Plaintiffs on behalf of the Settlement Class
and/or SOV or SOV Stockholders in the Litigation. The Defendants expressly have
denied and continue to deny all charges of wrongdoing or liability against them
arising out of any of the conduct, statements, acts or omissions alleged, or
that could have been alleged, in the Litigation. The Defendants also have denied
and continue to deny, inter alia, the allegations that the Plaintiffs, the
Settlement Class or SOV or SOV Stockholders have suffered damage or that the
Plaintiffs, the Settlement Class, or SOV, or SOV Stockholders or any other
person or entity were harmed by the conduct alleged in the Class and Derivative
Complaints.
Nonetheless, the Defendants have concluded that it is desirable that the
Litigation be fully and finally settled in the manner and upon the terms and
conditions set forth in this Stipulation and order to avoid further expense,
inconvenience and distraction, and to dispose of burdensome and protracted
litigation. The Defendants also have taken into account the uncertainty and
risks inherent in any litigation, especially in complex cases like this
Litigation. The Defendants have, therefore, determined that it is desirable and
beneficial to them that the Litigation be settled in the manner and upon the
terms and conditions set forth in this Stipulation.
IV. CLAIMS OF THE PLAINTIFFS AND BENEFITS OF SETTLEMENT
The Plaintiffs and their counsel believe that the claims asserted in the
Litigation have merit and that the evidence developed to date supports the
claims asserted. However, Plaintiffs and counsel for the Plaintiffs recognize
and acknowledge
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the expense and length of continued proceedings necessary to prosecute the
Litigation against the Defendants through trial and through appeals. Counsel for
the Plaintiffs also have taken into account the uncertain outcome and the risk
of any litigation, especially in complex actions such as this Litigation, the
difficulties and delays inherent in such litigation, as well as the financial
condition of the Defendants, including SOV. Counsel for the Plaintiffs believe
that the settlement set forth in the Stipulation confers substantial benefits
upon the Settlement Class, each of the Settlement Class Members, SOV and SOV
Stockholders. Based on their evaluation, counsel for the Plaintiffs have
determined that the settlement set forth in the Stipulation is in the best
interests of the Plaintiffs, the Settlement Class, each of the Settlement Class
Members, SOV and SOV Stockholders.
V. TERMS AND STIPULATION AND AGREEMENT OF SETTLEMENT
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and amount the
Plaintiffs (for themselves and the Settlement Class Members, SOV and SOV
Stockholders) and the Defendants by and through their respective counsel or
attorneys of record, that subject to the approval of the Court, the Litigation
and the Released Class Claims and Released Derivative Claims shall be finally
and fully compromised, settled and released, and the Litigation shall be
dismissed on the merits and with prejudice, as to all Settling Parties, upon and
subject to the terms and conditions of the Stipulation, as follows:
1. Definitions
As used in the Stipulation, the following terms have the meanings specified
below:
1.1 "SOV" means Styles on Video, Inc.
1.2 "SOV Stockholders" means the current holders of the common stock of
SOV.
1.3 "SOV Stock" means each and all of the shares of common stock of SOV,
issued at any time.
1.4 "Authorized Claimant" means any Settlement Class Member
whose claim for recovery has been allowed pursuant to the terms of the
Stipulation.
1.5 "Claimant" means any Settlement Class Member who files a Proof of
Claim in such form and manner, and within such time, as the Court shall
prescribe.
1.6 "Defendants" means Styles on Video, Inc., Guy De Vreese, Jerry Krant,
Katherine L. Duncan, Harold J. Meyers, H.J. Meyers & Co., Inc., Fredericus L.
Kolsteeg, Thomas N. Lenagh, Franck Verhaeghe and Ann Graham Ehringer.
1.7 "Effective Date" means the first date by which all of the events and
conditions specified in (P) 8.1 of the Stipulation have
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been met and have occurred.
1.8 "Final" means: (i) The date of final affirmance on any appeal of the
Judgment, or the expiration of the time for a petition for a write of certiorari
to review the Judgment and, if certiorari be granted, the date of final
affirmance of the Judgment following review pursuant to that grant; or (ii) the
date of final dismissal of any appeal of the Judgment or the final dismissal of
any proceeding on certiorari to review the Judgment; or (iii) if no appeal is
filed, the expiration date of the time for the filing or noticing of any appeal
from the Court's Judgment, i.e., thirty (30) days after entry of the Judgment.
An appeal or petition for a writ of certiorari pertaining solely to any plan of
allocation and/or application for attorney's fees, cots or expenses, shall not
in any way delay or preclude the Judgment from becoming final.
1.9 "Judgment" means the judgment to be rendered by the Court,
substantially in the form attached hereto as Exhibit "B."
1.10 "Person" means an individual, corporation, partnership,
limited partnership, association, joint stock company, estate, legal
representative, trust, unincorporated association, government or any political
subdivision or agency thereof, and any business or legal entity and their
spouses, heirs, predecessors, successors, representatives, or assignees.
1.11 "Plaintiffs" means Jack Kassindorf, Lynn Robbins, Dennis Ratner, Peter
Grela, Donald & Co. Securities, Inc,, Jerry Hatfield, Ronald Phillips and Neil
Cohen.
1.12 "Plaintiffs' Settlement Counsel" means the law firm of Milberg Weiss
Bershad Hynes & Lerach LLP, William S. Lerach, Keith F. Park, Blake M. Harper,
600 W. Broadway, Suite 1800, San Diego, California, 92101-5050, Telephone (619)
231-1058; Weiss & Youngman, Kevin Yourman, 10940 Wilshire Blvd., Suite 2300, Los
Angeles, California, 90024, Telephone (310) 208-2800; and Abbey & Ellis, Mark C.
Gardy, 212 East 39th Street, New York, New York, 10016, Telephone (212)889-3700.
"Plaintiffs' Derivative Counsel" means the law firm of Stull, Stull & Brody,
Edward Dietrich, 10940 Wilshire Blvd., Suite 2300, Los Angeles, California,
90024, Telephone (310) 209-2468.
1.13 "Plan of Allocation" means a plan or formula of allocation of the
Settlement Fund which shall separately be submitted by Plaintiffs' Settlement
Counsel to the Court, whereby the Settlement Fund shall be distributed to
Authorized Claimants. Any Plan of Allocation is not part of the Stipulation.
1.14 "Related Parties" means each of a Person's past or present directors,
officers, employees, partners, principals, agents (except does not include
securities brokers and dealers), insurer, co-insurers, reinsurers, controlling
shareholders, attorneys and accountants, auditors, advisors, personal or legal
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representatives, predecessors, successors, parents, subsidiaries, divisions,
joint ventures, assignees, spouses, heirs, associates, related or affiliated
entities, any members of their immediate families, or any trust of which any
Person is the settlor or which is for the benefit of any Person and/or member(s)
of his or her family, except that neither Thomas D. Leaper nor Kellogg &
Andelson (and its officers, shareholders and employees in their capacity with
Kellogg & Andelson) are Related Parties for purposes of the "Released Derivative
Claims" as defined in 1.16. In no event shall any language in this agreement be
interpreted to have waived any rights belonging to SOV against Kellogg &
Andelson (and its officers, shareholders and employees in their capacity with
Kellogg & Andelson) or Thomas D. Leaper.
1.15 "Released Class Claims" means and includes any and all claims or
causes of action, including "Unknown Claims" as defined in 1.22 hereof, that
have been or could have been asserted by the Plaintiffs or the Settlement Class
Members, or any of them, against the Released Persons in the Litigation, which
are based upon or related to both the purchase and/or sale of SOV common stock
by the Plaintiffs or a Settlement Class Member during the Settlement Class
Period and the facts, transactions, events, occurrences, acts, disclosures,
statements, omissions or failures to act which were alleged or could have been
alleged in the Litigation or any other forum or based upon or related to the
conduct or resolution of the Litigation.
1.16 "Released Derivative Claims" means and includes any and all claims or
causes of action, including unknown Claims as defined in 1.22 hereof, that have
been or could have been asserted by SOV against the Released Persons in the
Litigation, except Thomas D. Leaper and Kellogg & Andelson (and its officers,
shareholders and employees in their capacity with Kellogg & Andelson), who are
expressly not released by SOV, which are based upon or related to the facts,
transactions, events, occurrences, acts, disclosures, statements, omissions or
failures to act which were alleged or could have been alleged in the Litigation
or any other forum or based upon or related to the conduct or resolution of the
Litigation. "Released Derivative Claims" further means and includes any and all
claims or causes of action, including unknown Claims" as defined in 1.22 hereof,
that have been or could have been asserted by SOV Stockholders on behalf of SOV
against the Released Persons, except Thomas D. Leaper and Kellogg & Andelson
(and its officers, shareholders and employees in their capacity with Kellogg &
Andelson), who are expressly not released by SOV in this paragraph, which are
based upon or related to the facts, transactions, events, occurrences, acts,
disclosures, statements, omissions or failures to act which were alleged or
could have been
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alleged in the Litigation or based upon or related to the conduct or resolution
of the Litigation.
1.17 "Released Persons" means each and all of the Defendants and their
Related Parties, except that Thomas D. Leaper and Kellogg & Andelson (and its
officers, shareholders and employees in their capacity with Kellogg & Andelson),
are expressly not released from the Released Derivative Claims as defined in
1.16 above).
1.18 "Settlement Class" means all persons who purchased SOV common stock
during the period April 15, 1994 through and including December 28, 1994 (the
"Settlement Class Period"). Excluded from the class are the Released Persons,
members of the immediate family of any Released Person who is an individual, any
entity in which any Defendant has or had a controlling interest, current and
former directors and officers of SOV, and the legal representatives, heirs,
successors, or assigns of any such excluded person or entity. Also excluded from
the Settlement Class are those persons who timely and validly request exclusion
from the Settlement Class pursuant to the "Notice of Pendency and Settlement of
Class and Derivative Action" (substantially in the form of Exhibit A-1 hereto)
to be sent to the Settlement Class. The Parties hereto agree to the
certification of the Settlement Class for settlement purposes only.
1.19 "Settlement Class Member" or "Member of the Settlement Class" means a
Person who falls within the definition of the Settlement Class as set forth in
1.18 of the stipulation.
1.20 "Settlement Fund" means:
(a) Two million two hundred twenty five thousand dollars ($2,225,000)
in cash contributed by SOV's insurers reimbursing SOV for its indemnity
obligations. Said sum shall be deposited with the Escrow Agent on or before ten
(10) business days after the Defendants and their insurers receive notice of
preliminary court approval of the Settlement.
(b) A note for the principal amount of two hundred fifty thousand
dollars ($250,000) which, beginning on its execution date, shall bear simple
interest at 9% per annum from SOV payable to the Escrow Agent in three equal
installments on July 1, 1996, January 1, 1997, and July 1, 1997.
(c) Seven hundred fifty thousand (750,000) warrants (the "Settlement
Warrants") to purchase SOV stock (as further defined and described in 2.1-2.4
hereof);
(d) Two hundred-fifty thousand (250,000) shares of SOV common stock
(the "Settlement Stock") which shall be contributed by Guy De Vreese to SOV and
by SOV to the Settlement Fund; and
(e) The cancellation of De Vreese's option to purchase 150,000 shares
of SOV common stock.
1.21 "Settling Parties" means, collectively, each of the
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Defendants, and the Plaintiffs on behalf of themselves, the Members of the
Settlement Class, SOV and SOV Stockholders.
1.22 "Unknown Claims" means any Released Class Claims or Released
Derivative Claims which the Plaintiffs, any Settlement Class Member, SOV or SOV
Stockholder does not know or suspect to exist in his, her or its favor at the
time of the release of the Released Persons pursuant to 1.15 and 1.16 above
which, if known by him, her or it, might have affected his, her or its
settlement with and release of the Released Persons, or might have affected his,
her or its decision not to object to this settlement. Solely with respect to any
and all Released Class Claims and Released Derivative Claims, the Settling
Parties stipulate and agree that, upon the Effective Date, the Plaintiffs, each
of the Settlement Class Members, SOV and SOV Stockholders shall be deemed to
have, and by operation of the Judgment shall have, waived and relinquished, to
the fullest extent permitted by law, the provisions, rights, and benefits of
1542 of the California Civil Code, which provides:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement
with the debtor.
The Plaintiffs, each of the Settlement Class Members, SOV and SOV Stockholders,
upon the Effective Date, shall be deemed to have, and by operation of the
Judgment shall have waived any and all provisions, rights and benefits conferred
by any law of any state or territory of the United States, or principle of
common law, which is similar, comparable or equivalent to 1542 of the California
Civil Code. The Plaintiffs, each of the Settlement Class Members, SOV and SOV
Stockholders may hereafter discover facts in addition to or different from those
which he, she or it now knows or believes to be true with respect to the subject
matter of the Released Class Claims and Released Derivative Claims, but the
Plaintiffs, each of the Settlement Class Members, SOV and SOV Stockholders, upon
the Effective Date, shall be deemed to have, and by operation of the Judgment
shall have, fully, finally, and forever settled and released any and all
Released Class Claims and Released Derivative Claims, known or unknown,
suspected or unsuspected, contingent or non-contingent, whether or not concealed
or hidden, which now exist, or heretofore have existed upon any theory of law or
equity now existing or coming into existence in the future, including, but not
limited to, conduct which is negligent, intentional, with or without malice, or
a breach of any duty, law or rule, without regard to the subsequent discovery or
existence of such different or additional facts. Releasers acknowledge that the
foregoing waiver was separately bargained for
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and is an integral element of the settlement of which this release is a part.
2. The Settlement
2.1 Pursuant to the Plan of Allocation to be approved by the Court, SOV
shall issue and distribute to Authorized Claimants, the Settlement Stock and the
Settlement Warrants to purchase a like number of shares of SOV Stock. Each
Settlement Warrant shall be exercisable for one share of SOV Stock at an
exercise price per share equal to the average market price of SOV Stock for the
twenty trading days preceding the date nine months after the recommencement of
trading of SOV common stock. The Settlement Warrants will expire five years from
the date of distribution of the Settlement Warrants to the Authorized Claimants
and shall each be redeemable by SOV at any time prior to exercise at five
dollars per warrant.
2.2 The Settlement Warrants and Settlement Stock issued shall be either
registered or exempt from registration under the Securities Act of 1933
("Securities Act"), as amended, and shall be freely tradeable such that the
Settlement Warrants and Settlement Stock shall not constitute "restricted
securities" for purposes of the Securities Act of 1933. The Settlement Warrants
and Settlement Stock shall be listed and tradeable on the same stock exchange as
SOV Stock.
2.3 Ten (10) days before the scheduled date of the hearing for final
approval of this Stipulation, SOV shall provide Plaintiffs' Settlement Counsel
with the written opinion of outside counsel substantially to the effect that
subject to a fairness hearing on the terms and conditions of the issuance of all
securities, related approval by the Court, notice of the hearing and the right
of persons to be heard, and advisement to the Court that if the terms of
settlement are approved that the registration of securities will not be required
under the Securities Act by virtue of the Court's approval: (1) that the
Settlement Warrants and Settlement Stock will be exempt from registration under
5 of the Securities Act pursuant to 3(a)(10) of the Securities Act; and (2) that
the shares to be issued upon exercise of the Settlement Warrants will be validly
issued, fully paid and non-assessable. In addition, SOV shall at the same time
as the opinions are delivered, provide a memorandum prepared by outside counsel
setting forth the applicable legal requirements for registration or exemption of
the Settlement Stock and Settlement Warrants in each state where such
registration or exemption is so required. Plaintiffs' Settlement Counsel shall
provide SOV or its transfer agent with a payment list identifying each
Authorized Claimant who is to receive Settlement Warrants or Settlement Stock,
providing an address for such Person and the number of warrants to be issued to
such Person. SOV
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shall thereafter direct its transfer agent to distribute the Settlement Warrants
and Settlement Stock to Authorized Claimants at the address provided. All costs
associated with the distribution of the Settlement Warrants and Settlement
Stock, including any fees charged by the transfer agent shall be borne by SOV.
The Settlement Warrants and Settlement Stock to be distributed to each
Authorized Claimant will be equitably adjusted such that no Authorized Claimant
will be issued a fraction of a Settlement Warrant and Settlement Stock, and any
Authorized Claimants who are allocated a fraction of fifty percent (50%) or less
will not be allocated a share or warrant for the same, and Authorized Claimants
who are allocated more than fifty percent (50%) will be allocated one share or
warrant for the same. SOV shall direct its transfer agent to issue and
distribute the Settlement Warrants and Settlement Stock within 30 days of
receipt of the payment list to the Authorized Claimants in the amounts shown on
said list.
2.4 Pursuant to the Plan of Allocation to be approved by this Court, the
Escrow Agent shall also distribute the cash portion of the Settlement Fund to
Authorized Claimants.
2.5 Upon the Effective Date, each Defendant hereby releases, waives and
relinquishes any and all right, title and interest to or in the cash portion of
the Settlement Fund.
2.6 Corporate Governance
Regardless of whether SOV previously had policies or practices such as
those described below, it agrees for the purpose of this settlement, without
admitting any prior negligence, fault or culpable conduct, to the following:
(a) With respect to SOV's recognition of revenues in its quarterly
statements, any revenue based upon non-recurring items shall be clearly and
prominently disclosed in the quarterly statements.
(b) At each regularly scheduled Board of Directors meeting following
each quarter end, SOV's chief financial officer or his designee shall provide a
report as to SOV's financial condition and prospects, including but not limited
to, a discussion of all reasons for material increases in expenses and
liabilities, if any, and material decreases in revenues and earnings, if any,
management plans for ameliorating or reversing such negative trends and the
success or failure of any such plans presented in the past.
(c) To the extent they do not already exist, within 30 days
after the entry of the Judgment, SOV's Board of Directors will adopt resolutions
or amendments to SOV's By-Laws or Articles of Incorporation to implement the
following, which shall remain in effect for a period of no less than five years
after such adoption;
i) Internal Audit Function
SOV shall implement an internal audit function.
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The Internal Auditor, who shall be appointed by the Board and who will report to
the Audit Committee at least twice a year, shall monitor SOV's internal control
environment, revenue recognition practices and its accounting practices with
respect to acquisitions. The Internal Auditor shall be responsible for devising
an Internal Audit Plan for each fiscal year which will be presented to the Audit
Committee of the board of directors. The Internal Audit Plan shall include
assessment of the internal controls environment in order to ensure that
appropriate financial reporting procedures are in place and being followed by
SOV employees. SOV shall be subject to an internal audit review each year. A
written report shall be prepared for each internal audit performed describing
the internal audit's findings, opinions and recommendations, if any. These
written reports shall be directed to the Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer and the Audit Committee of the Board
of Directors for their review, and, if necessary, remedial action.
ii) Revenue Recognition Policy
The Chief Financial Officer shall be responsible for
ensuring that SOV's revenue recognition policy, which conforms to the
requirements of GAAP as currently in effect or as amended, is implemented and
utilized throughout the Company. The CFO shall report to the Board of Directors
on a semi-annual basis regarding the implementation and operation of this
policy. The CFO shall ensure that the SOV revenue recognition policy is
distributed to each SOV employee who records or reviews the recording of
revenue. Any questions regarding that policy, or its application, shall be
directed to SOV's CFO. The policy shall be adopted by SOV's Board of Directors
and provided to Plaintiffs' Settlement Counsel prior to the entry of the
Judgment.
iii) Annual Audit of Financial Statements By Independent Auditor
So long as the Company remains a publicly traded company,
the Company shall engage an independent auditing firm to perform an annual audit
of its financial statements. The annual audit will encompass a review of the
financial results reported by each SOV office to SOV headquarters. A written
report of the results of each annual audit, including any findings, opinions or
recommendations by the independent auditor shall be provided to the Chief
Executive Officer, the Chief Operating Officer, the Chief Financial Officer and
the Audit Committee of the Board of Directors for review and remedial action, if
necessary.
In addition, each year the Company shall request that the independent
auditor perform specific tests of annual revenue including but not limited to,
testing to ensure that all contracts in excess of $500,000 are in compliance
with GAAP as then
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in effect as part of its audit.
(iv) Insider Trading Controls
The Board of Directors will appoint a senior officer of the
Company who will be responsible for effecting compliance with Stock trading and
market communications policy. That individual will be designated the "Trading
Compliance Officer," and will be responsible for developing (with Board
involvement), presenting to the Board for approval, monitoring and updating
(with Board involvement and approval) a comprehensive program (the "Trading
Compliance Program") designed to ensure compliance with SOV's trading policies.
The Board will be responsible for direct oversight of the Trading Compliance
Program and the Trading Compliance Officer, and the outside director
(nonmanagement) members of the Board will have direct access to the Trading
Compliance Officer, including the opportunity to meet with the Trading
Compliance Officer outside the presence of any other member of management. At
least once yearly, the outside director members of the Board will receive a
report from the Trading Compliance Officer outside the presence of any other
members of management.
Any director, officer or executive employee of SOV who possesses
material inside information, as defined by applicable SEC regulations and court
decisions, concerning SOV's financial results shall be prohibited by SOV from
trading in SOV securities from the fifteenth day of the last month of each
quarter through the close of trading on the day of SOV's public disclosure of
its financial results for that quarter; provided, however, that such restriction
shall not apply if SOV publicly discloses such material inside information
through a press release disseminated by means of a nationally recognized wire
service, including but not limited to Business Wire, Inc. or PR Newswire
Association, Inc. or through any non-confidential filing with the SEC, in which
event trading will be allowed on the day following SOV's public disclosure of
the material inside information.
The Trading Compliance Program shall contain provisions with
respect to transactions in SOV's securities by directors and officers of SOV
which are no less restrictive than those set forth in the New York Stock
Exchange Listed Company Manual and shall take into account applicable federal
security laws and regulations.
Failure to comply with the Company's trading policy will result in
appropriate sanctions, as determined by the Board, including disgorgement by the
individual to SOV of all profits from the transaction, termination, or other
appropriate disciplinary action.
The Company shall use reasonable efforts to ensure that all directors
and officers file all trading forms required by
Page 12
<PAGE>
them to be filed by the SEC concerning trading by directors, officers, and
executive employees of SOV.
2.7 The Escrow Agent shall invest the cash portion of the Settlement Fund
deposited pursuant to (P) 1.20 above in instruments backed by the full faith and
credit of the United States Government or fully insured by the United States
Government or an agency thereof and shall reinvest the proceeds of these
instruments as they mature in similar instruments at their then current market
rates.
2.8 The Escrow Agent shall not disburse the Settlement Fund except as
provided in the Stipulation, or with the written agreement of counsel for
Defendants and Plaintiffs' Settlement Counsel or an order of the Court.
2.9 Subject to further order and/or directions as may be made by the
Court, the escrow Agent is authorized to execute such transactions on behalf of
the Settlement Class Members as are consistent with the terms of the
Stipulation.
2.10 All funds held by the Escrow Agent shall be deemed and considered to
be in custodia leqis of the Court, and shall remain subject to the jurisdiction
of the Court, until such time as such funds shall be distributed pursuant to the
Stipulation and/or further order(s) of the Court.
2.11 (a) The Defendants and the Escrow Agent agree to treat the Settlement
Fund as being at all times a "qualified settlement fund" within the meaning of
Treas. Reg. Section 1.468B-1. In addition, the Escrow Agent and, as required,
the Defendants shall jointly and timely make such elections as necessary or
advisable to carry out the provisions of this 2.11, including the relationback
election" (as defined in Treas. Reg. Section 1.468B-1) back to the earliest
permitted date. Such elections shall be made in compliance with the procedures
and requirements contained in such regulations. It shall be the responsibility
of the Escrow Agent to timely and properly prepare, and deliver the necessary
documentation for signature by all necessary parties, and thereafter to cause
the appropriate filing to occur.
(b) For the purpose of Section 468B of the Internal Revenue Code of
1986, as amended, and the regulations promulgated thereunder, the
"administrator" shall be the Escrow Agent. The Escrow Agent shall timely and
properly file all informational and other tax returns necessary or advisable
with respect to the Settlement Fund (including without limitation the returns
described in Treas. Reg. Section 1.468B-2(k)). Such returns (as well as the
election described in 2.11 (a)) shall be consistent with this 2.11 and in all
events shall reflect that all taxes (including any interest or penalties) on the
income earned by the Settlement
Page 13
<PAGE>
Fund shall be paid out of the Settlement Fund as provided in 2.11(c) hereof.
(c) All (a) taxes (including any interest or penalties) arising with
respect to the income earned by the Settlement Fund, including any taxes or tax
detriments that may be imposed upon the Defendants with respect to any income
earned by the Settlement Fund for any period during which the Settlement Fund
does not qualify as a "qualified settlement fund" for federal or state income
tax purposes ("Taxes") and (b) expenses and costs incurred in connection with
the operation and implementation of this 2.11) (including, without limitation,
expenses of tax attorneys and/or accountants and mailing and distribution costs
and expenses relating to filing (or failing to file) the returns described in
this 2.11) ("Tax Expenses"), shall be paid out of the Settlement Fund; in all
events the Defendants and their insurers shall have no liability or
responsibility for the Taxes or the Tax Expenses. The Escrow Agent shall
indemnify and hold Defendants and their insurers harmless for Taxes and Tax
Expenses (including, without limitation, taxes payable by reason of any such
indemnification). Further, Taxes and Tax Expenses shall be treated as, and
considered to be, a cost of administration of the Settlement and shall be timely
paid by the Escrow Agent out of the Settlement Fund without prior order from the
Court and the Escrow Agent shall be obligated (notwithstanding anything herein
to the contrary) to withhold from distribution to class members any funds
necessary to pay such amounts including the establishment of adequate reserves
for any Taxes and Tax Expenses (as well as any amounts that may be required to
be withheld under Treas. Reg Section 1.468B-2(1) (2)); the Defendants and their
insurers are not responsible and shall have no liability therefor. The parties
hereto agree to Cooperate with the Escrow Agent, each other, and their tax
attorneys and accountants to the extent reasonably necessary to carry out the
provisions of this 2.11.
(d) For the purpose of this 2.11, references to the Settlement Fund
shall include both the Settlement Fund and the Class Notice and Administration
Fund and shall also include any earnings thereon.
2.12 In the event that the Stipulation is not approved, or is terminated,
canceled, or fails to become effective for any reason, the Settlement Fund
(including accrued interest) less expenses actually incurred or due and owing in
connection with the settlement provided for herein (not including attorneys'
fees), shall be refunded to counsel for Defendants as described in 8.4
below.
3. Notice And Administration Fund
3.1 The Escrow Agent shall establish a "Notice and
Page 14
<PAGE>
Administration Fund," and shall deposit up to $100,000 out of the Settlement
Fund into it. The Notice and Administration Fund may be used by Plaintiffs'
Settlement Counsel to pay costs and expenses reasonably and actually incurred in
connection with providing notice to the Class, locating Class members,
soliciting Class claims, assisting with the filing of class, administering and
distributing the Settlement Fund to Authorized Claimants, processing Proofs of
Claim and Release and paying escrow fees and costs, if any. The Class Notice and
Administration Fund may also be invested and earn interest as provided for in
2.7 of this Stipulation. Any unused portion of the Class Notice and
Administration Fund shall be returned to the Settlement Fund.
4. Notice Order And Settlement Hearing
4.1 Promptly after execution of the Stipulation, the Settling Parties
shall submit the Stipulation together with its Exhibits to the Court and shall
jointly apply for entry of an order (the "Notice Order"), substantially in the
form of Exhibit "A" hereto, requesting, inter alia, the preliminary approval of
the settlement set forth in the Stipulation, and approval for the mailing and
publication of the Notice, which shall include the general terms of the
settlement set forth in the Stipulation, the proposed Plan of Allocation, and
the date of the Settlement Hearing.
4.2 The Settling Parties shall request that, after notice is given, the
Court hold the Settlement Hearing and finally approve the settlement of the
Litigation as set forth herein. At or after the Settlement Hearing, Plaintiffs'
Settlement Counsel also will request that the Court approve the proposed Plan of
Allocation.
5. Releases
5.1 Upon the Effective Date, as defined in 1.7, each of the Settlement
Class Members shall be deemed to have, and by operation of the Judgment shall
have, fully, finally, and forever released, relinquished and discharged all
Released Class Claims against the Released Persons, whether or not such
Settlement Class Member executes and delivers the Proof of Claim and Release.
5.2 Upon the Effective Date, as defined in 1.7, SOV and SOV Stockholders in
their capacities as stockholders only, shall be deemed to have, and by operation
of the Judgment shall have, fully, finally and forever released, relinquished
and discharged all Released Derivative Claims against the Released Persons,
except Thomas D. Leaper and Kellogg & Andelson and its officers, shareholders
and employees.
5.3 Upon the Effective Date, as defined in 1.7, each of the Released
Persons shall be deemed to have, and by operation of the Judgment shall have,
fully, finally, and forever released, relinquished and discharged each and all
of the Settlement Class Members, SOV, SOV Stockholders and counsel to the
Plaintiffs from
Page 15
<PAGE>
all claims (including "Unknown Claims"), arising out of, relating to, or in
connection with the institution, prosecution, assertion or resolution of the
Litigation or the Released Class or Derivative Claims.
6. Administration And Calculation Of Claims, Final Awards And
Supervision And Distribution Of Settlement Fund
6.1 Plaintiffs' Settlement Counsel, or their authorized agents, acting on
behalf of the Settlement Class, and subject to such supervision and direction of
the Court as may be necessary or as circumstances may require, shall calculate
the claims submitted by Settlement Class Members and shall oversee distribution
of the Settlement Fund to Authorized Claimants.
6.2 Upon the Effective Date and thereafter, and in accordance with the
terms of the Stipulation, the Plan of Allocation, or such further approval and
further order(s) of the Court as may be necessary or as circumstances may
require, the Settlement Fund shall be distributed to Authorized Claimants
subject to and in accordance with the following:
(a) Within one hundred and twenty (120) days after the mailing of the
Notice or such other time as may be set by the Court, each Person claiming to be
an Authorized Claimant shall be required to submit to the claims administrator a
completed Proof of Claim and Release (substantially in the form of Exhibit A-2
hereto) and supported by such documents as specified in the Proof of Claim and
Release and as are reasonably available to the Authorized Claimant.
(b) Except as otherwise ordered by the Court, all Settlement Class
Members who fail to timely submit a Proof of Claim and Release within such
period, or such other period as may be ordered by the Court, or otherwise
allowed, shall be forever barred from receiving any payments pursuant to the
Stipulation and the settlement set forth herein, but will in all other respects
be subject to and bound by the provisions of the Stipulation, the settlement and
releases contained herein, and the Judgment.
(c) The Settlement Fund shall be distributed to the Authorized
Claimants substantially in accordance with a Plan of Allocation to be described
in the Notice and approved by the Court.
6.3 The Defendants and their insurers shall have no responsibility for,
interest in, or liability whatsoever with respect to the Plan of Allocation, the
determination or calculation of claims.
6.4 No Person shall have any claim against Plaintiffs' Settlement Counsel
or any claims administrator or other agent designated by Plaintiffs Settlement
Counsel or Defendants or their counsel or insurers and their counsel based on
the distributions
Page 16
<PAGE>
made substantially in accordance with the stipulation and the settlement
contained herein, the Plan or Allocation, or further orders of the Court.
6.5 It is understood and agreed by the Settling Parties that any proposed
Plan of Allocation of the Settlement Fund including, but not limited to, any
adjustments to an Authorized Claimant's Claim set forth therein, is not a part
of the Stipulation and is to be considered by the Court separately from the
Court's consideration of the fairness, reasonableness and adequacy of the
settlement set forth in the Stipulation, and any order or proceedings relating
to the Plan of Allocation shall not operate to terminate or cancel the
Stipulation or affect the finality of the Court's Judgment approving the
stipulation and the settlement set forth herein, or any other orders entered
pursuant to the Stipulation.
7. Representative Plaintiffs' Counsel's Attorneys' Fees And
Reimbursement Of Expenses
7.1 The Representative Plaintiffs or their counsel, including Derivative
Counsel, may submit an application or applications (the "Fee and Expense
Application") for distributions to them from the Settlement Fund for: (i) an
award of attorneys' fees of up to 33-1/3 percent of the Settlement Fund; plus
(ii) reimbursement of actual expenses and costs, including the fees of any
experts or consultants incurred in connection with prosecuting the Litigation,
plus any interest on such attorneys' fees, costs and expenses at the same rate
and for the same periods as earned by the Settlement Fund as may be awarded by
the Court.
7.2 The attorneys' fees, expenses and costs, including the fees of experts
and consultants, as awarded by the Court, shall be paid to Plaintiffs'
Settlement counsel and Derivative Counsel from the Settlement Fund, as ordered,
within three (3) business days after the Court executes an order awarding such
fees and expenses and Plaintiffs' Settlement counsel and Derivative Counsel
shall thereafter allocate the attorneys' fees amongst Representative Plaintiffs'
Counsel in a manner in which they in good faith believe reflects the
contributions of such counsel to the prosecution and settlement of the
Litigation. In the event that the Effective Date does not occur, or the Judgment
or the Order making the fee and expense award is reversed or modified on appeal,
and in the event that the fee and expense award has been paid to any extent,
then Plaintiffs' Representative Counsel shall within five (5) business days from
receiving notice from Defendants' counsel or from a court of appropriate
jurisdiction, refund to the settlement Fund the fees, expenses and costs
previously paid to them from the Settlement Fund plus interest thereon at the
same rate as earned on
Page 17
<PAGE>
the Settlement Fund in an amount consistent with such reversal or modification.
7.3 The procedure for the allowance or disallowance by the Court of any
applications by any of the counsel to the Representative Plaintiffs for
attorneys' fees, costs and expenses, including the fees of experts and
consultants, to be paid out of the Settlement Fund, are not part of the
settlement set forth in the Stipulation, and are to be considered by the Court
separately from the Court's consideration of the fairness, reasonableness and
adequacy of the settlement set forth in the Stipulation, and any order or
proceedings relating to the Fee and Expense Application, or any appeal from any
order relating thereto or reversal or modification thereof, shall not operate to
terminate or cancel the Stipulation, or affect or delay the finality of the
Judgment approving the Stipulation and the settlement of the Litigation set
forth herein.
8. Condition Of Settlement, Effect Of Disapproval, Cancellation Or
Termination
8.1 The Effective Date of the Stipulation shall be conditioned on the
occurrence of all of the following events:
(a) Defendants have timely made their contributions to the Settlement
Fund as required by 1.20 above;
(b) The Court has entered the Notice Order, as required by (P) 4,
above;
(c) Plaintiffs' Settlement Counsel and Derivative Counsel and
Defendants counsel shall not have exercised their right to terminate the
Stipulation under the circumstances set forth in Exhibit C which shall either
not be filed with the Court or, if filed, shall be filed and maintained under
seal;
(d) The Court has entered the Judgment, or a judgment substantially in
the form of Exhibit "B" ; and
(e) The Judgment has become Final, as defined in 8.1, above.
8.2 If all of the conditions specified in 8.1 are not met, then the
Stipulation shall be canceled and terminated unless Plaintiffs' Settlement
Counsel and Derivative counsel and counsel for Defendants mutually agree in
writing to proceed with or amend the Stipulation.
8.3 In the event that the Stipulation is not approved by the Court or the
settlement set forth in the Stipulation is terminated or fails to become
effective in accordance with its terms, the Settling Parties shall be restored
to their respective positions in the Litigation as of November 15, 1994. In such
event, the terms and provisions of the Stipulation, with the exception of
8.2-8.3, 9.2-9.3, and 9.9-9.12 herein, shall have no further
Page 18
<PAGE>
force and effect with respect to the Settling Parties and shall not be used in
this Litigation or in any other proceeding far any purpose and any Judgment or
Order entered by the Court in accordance with the terms of the Stipulation shall
be treated as vacated, nunc pro tunc.
8.4 In the event the Stipulation shall terminate, or be canceled, or shall
not become effective for any reason, within five (5) business days after written
notification of such event is sent by counsel for Defendants or Plaintiffs
Settlement Counsel to the Escrow Agent, the Settlement Fund (including accrued
interest), plus any amount then remaining in the Notice and Administration Fund
(including accrued interest), legs expenses and any costs which have either been
disbursed pursuant to 3.1 hereto, or are determined to be chargeable to the
Notice and Administration Fund, shall be refunded by the Escrow Agent to counsel
for the Defendants and their insurers pursuant to written instructions from
counsel for the Defendants and their insurers. In such event the Defendants and
their insurers shall be entitled to any tax refund owing to the Settlement Fund.
At the request of the Defendants, the Escrow Agent or its designee shall apply
for any such refund and pay the proceeds, after deduction of any fees or
expenses incurred in connection with such application(s) for refund, to the
Defendants and their insurers in proportion to their respective contributions.
Defendants and their insurers shall each receive the amount that each
contributed to the settlement fund plus accrued interest and less the pro rata
share of costs disbursed pursuant to 3.1 hereto.
9. Miscellaneous Provisions
9.1 The Settling Parties (a) acknowledge that it is their intent to
consummate this agreement; and (b) agree to reasonably cooperate to the extent
necessary to effectuate and implement all terms and conditions of the
Stipulation and to exercise their best efforts to accomplish the foregoing terms
and conditions of the Stipulation.
9.2 The parties intend this settlement to be a final and complete
resolution of all disputes between them with respect to the Litigation.
Further, Defendants agree that the amounts paid to the Settlement Fund and the
other terms of the settlement reflect a good faith settlement of the claims
asserted by the Plaintiffs, reached voluntarily after consultation with
experienced legal counsel.
9.3 Neither the Stipulation nor the settlement, nor any act performed or
document executed pursuant to or in furtherance of the Stipulation or the
settlement: (i) is or may be deemed to be or may be used as an admission of, or
evidence of, the validity of any Released Class or Derivative Claim, or of any
wrongdoing or
Page 19
<PAGE>
liability of the Released Persons; or (ii) is or may be deemed to be or may be
used as an admission of, or evidence of, any fault or omission of any of the
Released Persons in any civil, criminal or administrative proceeding in any
court, administrative agency or other tribunal, other than in such proceedings
as may be necessary to consummate or enforce the stipulation. The settlement or
the Judgment. Notwithstanding any other provision hereof, the Released Persons
may file the Stipulation and/or the Judgment in any action that may be brought
against them in order to support a defense or counterclaim based on principles
of res judicata, collateral estoppel, release, good faith settlement, judgment
bar or reduction or any other theory of claim preclusion or issue preclusion or
similar defense or counterclaim.
9.4 All of the Exhibits to the Stipulation are material and integral parts
hereof and are fully incorporated herein by this reference.
9.5 The Stipulation may be amended or modified only by a written
instrument signed by or on behalf of all Settling Parties or their respective
successors-in-interest.
9.6 The Stipulation and the Exhibits attached hereto constitute the entire
agreement among the parties hereto and no representations, warranties or
inducements have been made to any party concerning the Stipulation or its
Exhibits other than the representations, warranties and covenants contained and
memorialized in such documents.
9.7 Plaintiffs' Settlement Counsel and Derivative Counsel, on behalf of the
Settlement Class, SOV and SOV Stockholders, are expressly authorized by the
Plaintiffs to take all appropriate action required or permitted to be taken by
the Settlement Class, SOV or SOV Stockholders pursuant to the Stipulation to
effectuate its terms and also are expressly authorized to enter into any
modifications or amendments to the Stipulation on behalf of the Settlement
Class, SOV or SOV Stockholders which they deem appropriate.
9.8 Each counsel or other Person executing the Stipulation or any of its
Exhibits on behalf of any party hereto hereby warrants that such person has the
full authority to do so.
9.9 The Stipulation may be executed in one or more counterparts. All
executed counterparts and each of them shall be deemed to be one and the game
instrument. Counsel for the parties to the Stipulation shall exchange among
themselves original signed counterparts and a complete set of original executed
counterparts shall be filed with the Court.
9.10 The Stipulation shall be binding upon, and inure to the benefit of,
the successors and assigns of the parties hereto.
9.11 The Court shall retain jurisdiction with respect to
Page 20
<PAGE>
implementation and enforcement of the terms of the Stipulation, and all parties
hereto submit to the jurisdiction of the Court for purposes of implementing and
enforcing the settlement embodied in the Stipulation.
9.12 The Stipulation and the Exhibits hereto shall be considered to have
been negotiated, executed and delivered, and to be wholly performed, in the
State of California, and the rights and obligations of the parties to the
stipulation shall be construed and enforced in accordance with, and governed by,
the internal, substantive laws of the State of California without giving effect
to that State's choice of law principles.
IN WITNESS WHEREOF, the parties hereto have caused the Stipulation to
be executed, by their duly authorized attorneys.
Page 21
<PAGE>
EXHIBIT 10.22
AMENDMENT AND WAIVER AGREEMENT
------------------------------
THIS AMENDMENT AND WAIVER AGREEMENT (this "Agreement") is made as of the 15 day
of October, 1996, by and between Styles on Video, Inc., a Delaware corporation
("SOV"), Forever Yours, Inc., a California Corporation ("FYI") and International
Digital Investors, L.P., a Delaware limited partnership ("IDI").
RECITALS
--------
WHEREAS, SOV, FYI, and IDI entered into a 10% Bridge Note Due October 3, 1996,
dated September 19, 1996 ("the Bridge Note");
WHEREAS, it would be a violation of the terms of the Bridge Note were SOV and
FYI to fail to pay the principal and unpaid interest due on October 3, 1996;
WHEREAS, SOV an FYI did not repay the principal and unpaid interest due on
October 3, 1996;
WHEREAS, IDI wishes to advance and SOV and FYI wish to receive an additional
$100,000 pursuant to the Bridge Note;
WHEREAS, the parties wish to amend all of the relevant documentation to avoid
violations or default of the Bridge Note by virtue of such failure, and to
increase the amount of the Bridge Note;
NOW, THEREFORE, IN CONSIDERATION of the premises and for good and valuable
consideration, the parties hereby agree as follows:
1. Due Date. The due date of the Bridge Note is hereby amended from October
--------
3, 1996 to October 29, 1996. It shall not be a violation of the terms and
conditions, nor shall it be a default, under the Bridge Note that the initial
$180,000 advance made pursuant to the Bridge Note was not repaid on October 3,
1996.
2. Note Amount. The amount of the Bridge Note is hereby amended from $180,000
-----------
to $280,000.
3. Default Interest Commencement Date. The date of commencement of the
----------------------------------
Default Rate of interest is hereby amended from October 3, 1996 to October 29,
1996.
<PAGE>
4. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of California without regard to
conflicts of laws principles.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
STYLES ON VIDEO
By:
---------------------------------------
Name:
------------------------------------
Title:
------------------------------------
FOREVER YOURS, INC.
By:
---------------------------------------
Name:
------------------------------------
Title:
------------------------------------
INTERNATIONAL DIGITAL INVESTORS, L.P.
By IDI Corp., a Delaware corporation,
its General Partner
By:
---------------------------------------
Name:
------------------------------------
Title:
------------------------------------
<PAGE>
EXHIBIT 10.23
SECOND AMENDMENT TO BRIDGE NOTE
-------------------------------
THIS SECOND AMENDMENT TO BRIDGE NOTE (this "Agreement") is made as of the 25
day of October, 1996, by and between Styles on Video, Inc., a Delaware
corporation ("SOV"), Forever Yours, Inc., a California Corporation ("FYI") and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
RECITALS
--------
WHEREAS, SOV, FYI, and IDI entered into a 10% Bridge Note Due October 3, 1996,
dated September 19, 1996, ("the Bridge Note");
WHEREAS, SOV, FYI and IDI entered into an Amendment and Waiver Agreement dated
October 15, 1996, which, among other things, increased the amount of the
financing available to $280,000 and extended the due date of the Bridge Note to
October 29, 1996 ("the Amended Bridge Note");
WHEREAS, it would be a violation of the terms of the Amended Bridge Note were
SOV and FYI to fail to pay the principal and unpaid interest due on October 29,
1996;
WHEREAS, IDI wishes to advance and SOV and FYI wish to receive an additional
$135,000 pursuant to the Amended Bridge Note;
WHEREAS, the parties wish to amend all of the relevant documentation to avoid
violations or default of the Amended Bridge Note by virtue of such failure, and
to increase the amount and extend the due date of the Amended Bridge Note;
NOW, THEREFORE, IN CONSIDERATION of the premises and for good and valuable
consideration, the parties hereby agree as follows:
1. Due Date. The due date of the Amended Bridge Note is hereby amended from
--------
October 29, 1996 to November 8, 1996.
2. Note Amount. The amount of the Amended Bridge Note is hereby amended from
-----------
$280,000 to $415,000.
3. Default Interest Commencement Date. The date of commencement of the
----------------------------------
Default Rate of interest is hereby amended from October 29, 1996 to November 8,
1996.
<PAGE>
4. Warrants. Should the parties fail to enter into a permanent financing
--------
arrangement with IDI which repays the amounts advanced pursuant to the Bridge
Note, as amended, on or before November 30, 1996, SOV shall issue to IDI
Warrants to purchase shares of SOV's common stock equal to 3% of the fully
diluted shares of SOV's common stock outstanding. The terms and conditions of
the warrants shall be the same as those of the warrants issued to IDI in
connection with the May 15, 1996 financing, including subsequent amendments.
5. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of California without regard to
conflicts of laws principles.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
STYLES ON VIDEO
By:
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
FOREVER YOURS, INC.
By:
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
INTERNATIONAL DIGITAL INVESTORS, L.P.
By IDI Corp., a Delaware corporation,
its General Partner
By:
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE>
EXHIBIT 10.24
THIRD AMENDMENT TO BRIDGE NOTE
------------------------------
THIS THIRD AMENDMENT TO BRIDGE NOTE (this "Agreement") is made as of the 18th
day of November, 1996, by and between Styles on Video, Inc., a Delaware
corporation ("SOV"), Forever Yours, Inc., a California Corporation ("FYI") and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
RECITALS
--------
WHEREAS, SOV, FYI, and IDI entered into a 10% Bridge Note Due October 3, 1996,
dated September 19, 1996, ("the Bridge Note");
WHEREAS, SOV, FYI and IDI entered into an Amendment and Waiver Agreement dated
October 15, 1996, which, among other things, increased the amount of the
financing available to $280,000 and extended the due date of the Bridge Note to
October 29, 1996;
WHEREAS, SOV, FYI and IDI entered into a Second Amendment and Waiver Agreement
dated October 25, 1996, which, among other things, increased the amount of the
financing available to $415,000, extended the due date of the Bridge Note to
November 8, 1996, and provided for the issuance of warrants equal to 3% of the
fully diluted shares of SOV's common stock outstanding should the parties fail
to enter into a permanent financing arrangement with IDI by November 30, 1996
("the Amended Bridge Note");
WHEREAS, it would be a violation of the terms of the Amended Bridge Note were
SOV and FYI to fail to pay the principal and unpaid interest due on November 8,
1996;
WHEREAS, IDI wishes to advance and SOV and FYI wish to receive an additional
$250,000 pursuant to the Amended Bridge Note;
WHEREAS, the parties wish to amend all of the relevant documentation to avoid
violations or default of the Amended Bridge Note by virtue of such failure, and
to increase the amount and extend the due date of the Amended Bridge Note and to
increase the timing and number of warrants issued should the parties fail to
enter into a permanent financing arrangement with IDI;
<PAGE>
NOW, THEREFORE, IN CONSIDERATION of the premises and for good and valuable
consideration, the parties hereby agree as follows:
1. Due Date. The due date of the Amended Bridge Note is hereby amended from
--------
November 8, 1996 to December 9, 1996.
2. Note Amount. The amount of the Amended Bridge Note is hereby amended from
-----------
$415,000 to $665,000. Additional advances pursuant to the Amended Bridge Note
shall be funded via wire transfer from IDI to FYI in accordance with the
following schedule:
<TABLE>
<CAPTION>
Amount Funding Date
------ -----------------
<S> <C>
$125,000 November 15, 1996
$125,000 November 25, 1996
</TABLE>
3. Default Interest Commencement Date. The date of commencement of the
----------------------------------
Default Rate of interest is hereby amended from November 8, 1996 to December 9,
1996.
4. Warrants. The date the parties must enter into a permanent financing
--------
arrangement with IDI to avoid the issuance of warrants is hereby amended from
November 30, 1996 to December 31, 1996.
The number of warrants SOV shall issue to IDI to purchase shares of SOV's common
stock is hereby amended from 3% of the fully diluted shares of SOV's common
stock outstanding to 4% of the fully diluted shares of SOV's common stock
outstanding should the parties fail to enter into a permanent financing
arrangement with IDI by the requisite date.
5. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of California without regard to
conflicts of laws principles.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
STYLES ON VIDEO
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
FOREVER YOURS, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
INTERNATIONAL DIGITAL INVESTORS, L.P.
By IDI Corp., a Delaware corporation,
its General Partner
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
<PAGE>
EXHIBIT 10.25
FOURTH AMENDMENT TO BRIDGE NOTE
-------------------------------
THIS FOURTH AMENDMENT TO BRIDGE NOTE (this "Agreement") is made as of the 9th
day of December, 1996, by and between Styles on Video, Inc., a Delaware
corporation ("SOV"), Forever Yours, Inc., a California Corporation ("FYI") and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
RECITALS
--------
WHEREAS, SOV, FYI, and IDI entered into a 10% Bridge Note Due October 3, 1996,
dated September 19, 1996, ("the Bridge Note");
WHEREAS, SOV, FYI and IDI entered into an Amendment and Waiver Agreement dated
October 15, 1996, which, among other things, increased the amount of the
financing available to $280,000 and extended the due date of the Bridge Note to
October 29, 1996;
WHEREAS, SOV, FYI and IDI entered into a Second Amendment and Waiver Agreement
dated October 25, 1996, which, among other things, increased the amount of the
financing available to $415,000, extended the due date of the Bridge Note to
November 8, 1996, and provided for the issuance of warrants equal to 3% of the
fully diluted shares of SOV's common stock outstanding should the parties fail
to enter into a permanent financing arrangement with IDI by November 30, 1996;
WHEREAS, SOV, FYI and IDI entered into a Third Amendment and Waiver Agreement
dated November ___, 1996, which, among other things, increased the amount of the
financing available to $665,000, extended the due date of the Bridge Note to
December 9, 1996, and increased the number of warrants issuable from 3% to 4% of
the fully diluted shares of SOV's common stock outstanding should the parties
fail to enter into a permanent financing arrangement with IDI by December 31,
1996 ("the Amended Bridge Note");
WHEREAS, it would be a violation of the terms of the Amended Bridge Note were
SOV and FYI to fail to pay the principal and unpaid interest due on December 9,
1996;
WHEREAS, IDI wishes to advance and SOV and FYI wish to receive up to an
additional $190,000 plus pursuant to the Amended Bridge Note;
<PAGE>
WHEREAS, the parties wish to amend all of the relevant documentation to avoid
violations or default of the Amended Bridge Note by virtue of such failure, and
to increase the amount and extend the due date of the Amended Bridge Note and to
modify the conditions under which warrants are issuable to IDI;
NOW, THEREFORE, IN CONSIDERATION of the premises and for good and valuable
consideration, the parties hereby agree as follows:
1. Due Date. The due date of the Amended Bridge Note is hereby amended from
--------
December 9, 1996 to December 31, 1996.
2. Note Amount. The amount of the Amended Bridge Note is hereby amended from
-----------
$665,000 to up to $855,000. Additional advances pursuant to the Amended Bridge
Note shall be funded via wire transfer from IDI to SOV or FYI in accordance with
the following schedule:
Amount Funding Date
------ --------------
$140,000 December 10, 1996
up to $50,000 upon SOV's receipt of pending tax refunds.
3. Default Interest Commencement Date. The date of commencement of the
----------------------------------
Default Rate of interest is hereby amended from November 8, 1996 to December 31,
1996.
4. Warrants. The conditions under which the issuance of warrants to IDI may
--------
be avoided are hereby amended in their entirety as follows:
To avoid the issuance of warrants to IDI, the parties must enter into a
permanent financing arrangement with IDI or complete an exchange of
--------------------------
warrants held by IDI for substantially all authorized unreserved unissued
-------------------------------------------------------------------------
shares of SOV common stock at a conversion ratio agreed upon by SOV and IDI
---------------------------------------------------------------------------
by December 31, 1996.
5. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of California without regard to
conflicts of laws principles.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
STYLES ON VIDEO
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
FOREVER YOURS, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
INTERNATIONAL DIGITAL INVESTORS, L.P.
By IDI Corp., a Delaware corporation,
its General Partner
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
<PAGE>
EXHIBIT 10.26
FIFTH AMENDMENT TO BRIDGE NOTE
------------------------------
THIS FIFTH AMENDMENT TO BRIDGE NOTE (this "Agreement") is made as of
the 27th day of December, 1996, by and between Styles on Video, Inc., a Delaware
corporation ("SOV"), Forever Yours, Inc., a California corporation ("FYI"), and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
RECITALS
--------
WHEREAS, SOV, FYI, and IDI entered into a 10% Bridge Note due October
3, 1996, dated September 19, 1996 ("the Bridge Note");
WHEREAS, SOV, FYI and IDI entered into an Amendment and Waiver
Agreement dated October 15, 1996, which, among other things, increased the
amount of the financing available to $280,000 and extended the due date of the
Bridge Note to October 29, 1996;
WHEREAS, SOV, FYI AND IDI entered into a Second Amendment to Bridge
Note dated October 25, 1996, which, among other things, increased the amount of
the financing available to $415,000, extended the due date of the Bridge Note,
as amended, to November 8, 1996, and provided for the issuance of warrants equal
to 3% of the fully diluted shares of SOV's common stock outstanding should the
parties fail to enter into a permanent financing arrangement with IDI by
November 30, 1996;
WHEREAS, SOV, FYI and IDI entered into a Third Amendment to Bridge
Note dated November __, 1996, which, among other things, increased the amount of
the financing available to $665,000, extended the due date of the Bridge Note,
as amended, to December 9, 1996, and increased the number of warrants issuable
from 3% to 4% of the fully diluted shares of SOV's common stock outstanding
should the parties fail to enter into a permanent financing arrangement with IDI
by December 31, 1996;
WHEREAS, SOV, FYI and IDI entered into a Fourth Amendment to Bridge
Note dated December __, 1996 (the "Fourth Amendment"), which, among other
things, increased the amount of the financing available to $855,000 and extended
the due date of the Bridge Note, as amended, to December 31, 1996;
1
<PAGE>
WHEREAS, SOV, FYI and IDI desire to further amend the Bridge Note, as
amended, to (i) increase the amount of funding available thereunder, (ii) extend
the due date thereof and (iii) include therein a new provision for the issuance
of Company warrants.
TERMS
-----
In consideration of the mutual covenants contained herein and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I.
1. Amendment to Bridge Note Amount. The amount of funds that may be
-------------------------------
borrowed pursuant to the Bridge Note, as amended, is hereby amended from up to
$855,000 to up to $991,000.
2. Amendment to Bridge Note Due Date. The due date of the Bridge
---------------------------------
Note, as amended, is hereby amended from December 31, 1996 to January 15, 1997.
3. Issuance of Warrants. Should the parties hereto fail to (i)
--------------------
enter into a definitive financing agreement which provides for the repayment by
SOV of the total funding advanced under the Bridge Note, as amended, and (ii)
complete an exchange of warrants held by IDI for substantially all authorized
unreserved and unissued shares of SOV common stock at a conversion ratio agreed
upon by SOV and IDI (this provision to supersede Section 4 of the Fourth
Amendment), in each case on or before January 15, 1997 (the "Determination
Date"), SOV shall issue to IDI warrants to purchase such number of shares of
SOV's common stock equal to eight percent (8%) of the total number of shares of
issued and outstanding SOV common stock on the Determination Date assuming full
dilution thereof. The terms and conditions of such warrants shall be
substantially the same as those set forth in the warrant certificate issued by
SOV to IDI in connection with that certain Note and Preferred Stock Purchase
Agreement dated May 14, 1996.
ARTICLE II.
2.1 Effect of Amendment. Except as expressly provided in Article I
-------------------
of this Amendment, nothing shall affect or be deemed to affect any provisions of
the Bridge Note, as amended. Accordingly, interest expense incurred with
respect to the $136,000 advanced pursuant to this Amendment shall accrue as of
the date hereof.
2
<PAGE>
2.2 Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
2.3 Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the internal laws of the State of California without giving
effect to principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Amendment to be executed by their duly authorized representatives as of the day
and year first above written.
STYLES ON VIDEO, INC.
By: /s/ N. H. Galgas
----------------------------------------
CFO
FOREVER YOURS, INC.
By: /s/ N. H. Galgas
-----------------------------------------
CFO
INTERNATIONAL DIGITAL INVESTORS, L.P.
By: /s/ Jeffrey Safchik
------------------------------------------
3
<PAGE>
EXHIBIT 10.27
SIXTH AMENDMENT TO BRIDGE NOTE
------------------------------
THIS SIXTH AMENDMENT TO BRIDGE NOTE (this "Agreement") is made as of
the 13 day of January, 1997, by and between Styles on Video, Inc., a Delaware
corporation ("SOV"), Forever Yours, Inc., a California corporation ("FYI"), and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
RECITALS
--------
WHEREAS, SOV, FYI, and IDI entered into a 10% Bridge Note due October
3, 1996, dated September 19, 1996 ("the Bridge Note");
WHEREAS, SOV, FYI and IDI entered into an Amendment and Waiver
Agreement dated October 15, 1996, which, among other things, increased the
amount of the financing available to $280,000 and extended the due date of the
Bridge Note to October 29, 1996;
WHEREAS, SOV, FYI and IDI entered into a Second Amendment to Bridge
Note dated October 25, 1996, which, among other things, increased the amount of
the financing available to $415,000, extended the due date of the Bridge Note,
as amended, to November 8, 1996, and provided for the issuance of warrants equal
to 3% of the fully diluted shares of SOV's common stock outstanding should the
parties fail to enter into a permanent financing arrangement with IDI by
November 30, 1996;
WHEREAS, SOV, FYI and IDI entered into a Third Amendment to Bridge
Note dated November __, 1996, which, among other things, increased the amount of
the financing available to $665,000, extended the due date of the Bridge Note,
as amended, to December 9, 1996, and increased the number of warrants issuable
from 3% to 4% of the fully diluted shares of SOV's common stock outstanding
should the parties fail to enter into a permanent financing arrangement with IDI
by December 31, 1996;
WHEREAS, SOV, FYI and IDI entered into a Fourth Amendment to Bridge
Note dated December __, 1996, which, among other things, increased the amount of
the financing available to $855,000 and extended the due date of the Bridge
Note, as amended, to December 31, 1996;
WHEREAS, SOV, FYI and IDI entered into a Fifth Amendment to Bridge
Note dated December __, 1996, which, among other things, increased the amount of
the financing available from up to $855,000 to up to $991,000 and extended the
due date of the Bridge Note, as amended, to January 15, 1997;
<PAGE>
WHEREAS, SOV, FYI and IDI desire to further amend the Bridge Note, as
amended, to increase the amount of funding available thereunder.
TERMS
-----
In consideration of the mutual covenants contained herein and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I.
Amendment to Bridge Note Amount. The amount of funds that may be
-------------------------------
borrowed pursuant to the Bridge Note, as amended, is hereby amended from up to
$991,000 to up to $1,157,000.
ARTICLE II.
2.1 Effect of Amendment. Except as expressly provided in Article I
-------------------
of this Amendment, nothing shall affect or be deemed to affect any provisions of
the Bridge Note, as amended. Accordingly, interest expense incurred with
respect to the $166,000 advanced pursuant to this Amendment shall accrue as of
the date hereof.
2.2 Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
2.3 Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the internal laws of the State of California without giving
effect to principles of conflicts of laws.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Amendment to be executed by their duly authorized representatives as of the day
and year first above written.
STYLES ON VIDEO, INC.
By: /s/ K. Eugene Shutler
-------------------------------------
FOREVER YOURS, INC.
By: /s/ Nancy H. Galgas
-------------------------------------
INTERNATIONAL DIGITAL INVESTORS, L.P.
By: /s/ Jeffrey Safchik
-------------------------------------
<PAGE>
EXHIBIT 10.28
THE SECURITY REPRESENTED BY THIS INSTRUMENT WAS
ORIGINALLY ISSUED ON JANUARY 21, 1997, AND HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT 0F 1933, AS AMENDED.
FOREVER YOURS, INC.
PROMISSORY NOTE
---------------
January 21, 1997 $60,000.00
FOREVER YOURS, INC., a California corporation (the "Borrower"), hereby
--------
promises to pay to the order of Hasco International, Inc., a Missouri
corporation ("Hasco"), as the initial holder of this Note (as such registered
-----
holder may change from time to time under the terms of this Note, the
"Noteholder"), the principal amount of SIXTY THOUSAND DOLLARS ($60,000.00) (the
----------
"Principal Amount") on the Maturity Date (as defined in Section 2(a) hereof) in
----------------
accordance with the provisions of this Note.
Capitalized terms used in this Note have the meanings set forth in
section 5 hereof.
1. Interest. Interest on the Principal Amount of this Note shall
--------
accrue daily at a rate of 10% per annum. Borrower agrees to a rate of interest
that is the rate stated above (as such rate may be adjusted pursuant to the
terms of this Note).
2. Payment of Principal on Note.
----------------------------
(a) Mandatory Payments. On Friday, January 31, 1997 (the "Maturity
------------------ --------
Date") the Borrower shall pay the Principal Amount, together with all accrued
- ----
but unpaid interest hereon, to the Noteholder.
(b) Prepayments. This Note may be prepaid in whole or in part
-----------
without penalty or premium.
(c) Payments by IDI. International Digital Investors, L.P. ("IDI")
--------------- ---
shall have the right to satisfy any and all of the obligations under this Note
(including, without limitation, the payment of the Principal Amount and any
accrued or unpaid interest thereon); provided, however, that nothing contained
in this Note shall obligate IDI to fulfill any obligations under this Note.
3. Events of Default.
-----------------
1
<PAGE>
(a) Definition. For purposes of this Note and the Security
----------
Agreement, dated as of January 21, 1997 (the "Security Agreement"), among the
------------------
Borrower and Hasco, an "Event of Default" shall be deemed to have occurred if
----------------
any of the following events shall occur:
(i) Nonpayment. The Borrower fails to make any payment
----------
due hereunder.
(ii) Nonperformance. The Borrower fails to perform or
--------------
observe any material provision contained in this Note or the Security
Agreement.
(iii) Material Breach of Representation or Warranty. Any
---------------------------------------------
representation or warranty made by the Borrower in the Security Agreement
is not true in any material respect when made or deemed made.
(iv) Termination of Existence. The termination of
------------------------
existence, liquidation or dissolution of the Borrower or Styles On Video,
Inc., a Delaware corporation ("SOV").
---
(v) Bankruptcy/Liquidation. If the Borrower, SOV or
----------------------
any of their Subsidiaries: (i) files a voluntary petition in bankruptcy
or a petition or answer seeking or acquiescing in any reorganization or
for an arrangement, imposition, readjustment, liquidation, dissolution,
or similar relief for itself pursuant to the United States Bankruptcy
Code or any similar law or regulation, federal or state relating to any
relief for debtors, now or hereafter in effect; (ii) make an assignment
for the benefit of creditors or admits in writing its inability to pay or
fails to pay its debts as they become due; (iii) consents to or
acquiesces in the appointment of a receiver, trustee, custodian,
conservator, liquidator or other similar official of such party, for all
or substantially all of the assets of Borrower, SOV or any of their
Subsidiaries; (iv) suspends payment of substantially all of its
obligations for more than five (5) days or takes any action in
furtherance of the foregoing; (v) has filed against it an involuntary
petition, arrangement, composition, readjustment, liquidation,
dissolution, or an answer proposing an adjudication of it as bankrupt or
insolvent, or is subject to a reorganization pursuant to the United
States Bankruptcy Code, an action seeking to appoint a trustee, receiver,
custodian, or conservator or liquidator, or any similar law or
regulation, federal or state, now or hereafter in effect, and such action
is approved by any court of competent jurisdiction and the order
approving the same shall not be vacated or stayed within five (5) days
from entry; or (vi) fails to deny the material allegations of a filing of
any such petition or answer in a timely manner.
(vi) Cross-Default. If the Borrower shall fail to make
-------------
any payment when due in respect of any indebtedness having an aggregate
principal amount outstanding in excess of $50,000 and such payment has
not been waived by the lender of such indebtedness, or any event shall
occur or condition shall exist that with or without the giving of notice
or the passage of time or both would result in the acceleration of the
maturity of any such debt or enable the holder thereof to cause such debt
to become due before its stated maturity.
2
<PAGE>
The foregoing shall constitute Events of Default whatever the
reason or cause for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
(b) Consequences of Events of Default.
---------------------------------
(i) Upon the occurrence of an Event of Default, the
interest rate on the Note shall increase immediately by an increment of
two (2) percentage points to the extent permitted by law. Any such
increase of the interest rate resulting from the operation of this
subparagraph shall terminate as of the close of business on the first
subsequent date on which no Events of Default exist (subject to
subsequent increases pursuant to this subparagraph).
(ii) If an Event of Default has occurred, the Principal
Amount, together with all accrued but unpaid interest of the Note on such
date shall become immediately due and payable without any action on the
part of the Noteholder, and the Borrower shall immediately pay to the
Noteholder all amounts due and payable with respect to the Note.
(iii) The Noteholder shall also have any other rights which
such holder may have been afforded under Security Agreement, any other
contract or agreement and any other rights which such holder may have
pursuant to applicable law.
(iv) The Borrower hereby waives diligence, presentment,
protest and demand and notice of protest and demand, dishonor and
nonpayment of this Note, and expressly agrees that this Note, or any
payment hereunder, may be extended from time to time and that the
Noteholder may accept security for this Note or release security for this
Note, all without in any way affecting the liability of the Borrower
hereunder.
(v) The Noteholder's right and remedies shall be
cumulative. No exercise by the Noteholder of one right or remedy shall be
deemed an election which precludes other remedies, and no waiver by the
Noteholder of any Event of Default on the Borrower's part shall be deemed
made unless done in a writing signed by the Noteholder. No delay by the
Noteholder shall constitute a waiver, election, or acquiescence by it.
(vi) The Borrower shall pay, or reimburse the Noteholder
for all reasonable out-of-pocket costs and expenses (including, without
limitation, reasonable attorneys fees and expenses) paid or incurred by
the Noteholder before and after judgment in enforcing, protecting or
preserving its rights under this Note and as a Noteholder under the
Security Agreement.
(vii) If the Borrower becomes aware of the occurrence of an
Event of Default, it shall give notice of such Event of Default to the
Noteholder and IDI. If the Noteholder believes that an Event of Default
has occurred and has not received notice to that effect from the
Borrower, it shall give notice of such Event of Default to the Borrower
and IDI.
3
<PAGE>
4. Amendment and Waiver. Except as otherwise expressly
--------------------
provided herein, the provisions of the Note may be amended and the Borrower may
take any action herein prohibited or omit to perform any act herein required to
be performed by it, only if the Borrower has obtained the written consent of the
Noteholder.
5. Definitions. For purposes of the Note, the following
-----------
capitalized terms have the following meaning:
"Person" means an individual, a partnership, a corporation, a
------
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one of more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
6. Cancellation. After the Principal Amount, together with
------------
all accrued but unpaid interest heron, at any time owed on this Note has been
paid in full this Note shall be surrendered to the Borrower for cancellation and
shall not be reissued.
7. Payments. Unless otherwise expressly provided herein,
--------
all payments to be made to the Noteholder shall be made in the lawful money of
the United States of America in immediately available funds to such account as
designated from time to time by the Noteholder.
8. Business Days. If any payment is due, or any time period
-------------
for giving notice or taking action expires, on a day which is a Saturday, Sunday
or legal holiday in the United States of America or the State of California, the
payment shall be due and payable on, and the time period shall automatically be
extended to, the next business day immediately following such Saturday, Sunday
or legal holiday, and interest shall continue to accrue at the required rate
hereunder until any such payment is made.
9. Successors and Assigns. This Note shall bind and inure
----------------------
to the benefit of the respective successors and assigns of each of the parties;
provided, however, that neither this Note nor any rights hereunder may be
assigned by either party without the other party's written consent,
4
<PAGE>
which consent may be granted or withheld in such party's sole discretion. This
Note is only transferable on the Note Registry of the Borrower upon surrender of
this Note for Registration of transfer at the principal office of Borrower at
667 Rancho Conejo Boulevard, Newbury Park, CA 91320, whereupon a new Note shall
be issued to the designated registered transferee.
10. Investment Representations. This Note is being acquired by
--------------------------
Hasco solely for its own account, for investment and is not being purchased for
or on behalf of any other person or for or with a view to the resale,
distribution, subdivision or fractionalization therein. Each Noteholder, by
accepting this Note, represents and warrants to the Borrower that this Note is
being acquired solely for its own account, for investment and is not being
purchased for or on behalf of any other person or for or with a view to the
resale, distribution, subdivision or fractionalization thereof.
11. Severability. Whenever possible, each provision of this
------------
Note shall be interpreted in such a manner as to be valid, legal and enforceable
under applicable law. Without limiting the generality of the foregoing sentence,
in case any provision of this Note shall be invalid, illegal or unenforceable
under the applicable law, the validity, legality and enforceability of the
remaining provisions, or of such provision in any other jurisdiction, shall not
in any way be affected or impaired thereby.
12. Usury Laws. It is the intention of the Borrower and the
----------
Noteholder to conform strictly to all applicable usury laws now or hereafter in
force, and any interest payable under this Note shall be subject to reduction to
the amount not in excess of the maximum legal amount allowed under the
applicable usury laws as now or hereafter construed by the courts having
jurisdiction over such matters. If the maturity of this Note is accelerated by
reason of an election by the Noteholder resulting from an Event of Default,
voluntary prepayment by the Borrower or otherwise, then earned interest may
never include more than the maximum amount permitted by law, computed from the
date hereof until payment, and any interest in excess of the maximum amount
permitted by law shall be canceled automatically and, if theretofore paid, shall
at the option of the Noteholder either be rebated to the Borrower or credited on
the principal amount of this Note, or if this Note has been paid, then the
excess shall be rebated to the Borrower. The aggregate of all interest (whether
designated as interest, service charges, points or otherwise) contracted for,
chargeable, or receivable under this Note shall under no circumstances exceed
the maximum legal rate upon the unpaid principal balance of this Note remaining
unpaid from time to time. If such interest does exceed the maximum legal rate,
it shall be deemed a mistake and such excess shall be canceled automatically
and, if theretofore paid, rebated to the Borrower or credited on the principal
amount of this Note, or if this Note has been repaid, then such excess shall be
rebated to the Borrower.
13. Governing Law. All issues and questions concerning the
-------------
construction, validity, interpretation and enforcement of this note shall be
governed by, and construed in accordance with, the laws of the State of
California, without giving effect to any choice of law or conflict of law
provisions of such state.
5
<PAGE>
14. Guarantee By SOV. SOV, as a principal obligor and not as a
----------------
surety, covenants with the Noteholder:
(a) to cause the Borrower to effect prompt and complete
performance of all the terms, covenants, conditions and provisions of this Note
and the agreements contemplated hereby that are to be kept, observed and
performed by the Borrower;
(b) that, if for any reason whatsoever, including the
insolvency or bankruptcy of the Borrower, the Borrower shall at any time or from
time to time fail to keep, perform or observe any term, covenant, condition or
provision of this Note or any of the agreements contemplated hereby that is to
be kept, observed or performed by the Borrower, then SOV shall forthwith on
demand of the Noteholder, perform or observe, as the case may be, such term,
covenant, condition or provision in accordance with the relevant provisions of
this Note and the agreements contemplated hereby; and
(c) that SOV is jointly and severally bound with the Borrower
to perform the terms, covenants, conditions and provisions of this Note and the
agreements contemplated hereby that are to be kept, observed and performed by
the Borrower and, in the enforcement of its rights pursuant to this Sections 14
the Noteholder may proceed against SOV as if SOV were a principal party under
this Agreement with respect to such terms, covenants, conditions and provisions
applicable to the Borrower.
In the event of a default by the Borrower under this Note or
the agreements contemplated hereby, SOV waives any right to require the
Noteholder to:
(i) proceed against the Borrower or pursue any rights or
remedies with respect to this Note or the agreements contemplated hereby
against the Borrower, or
(ii) pursue any other remedy whatsoever in the power of the
Borrower prior to the Borrower pursuing any rights it may have under
this Note or the agreements contemplated hereby against SOV.
Without limiting the generality of the foregoing, the liability
of SOV shall not be deemed to have been waived, released, discharged,impaired
or affected by reason of the release or discharge of the Borrower in any
receivership, bankruptcy, winding-up or other creditors' proceedings or the
rejection, disaffirmance or disclaimer of this Note or any of the agreements
contemplated hereby in any proceeding, and shall continue with respect to the
periods prior thereto and thereafter, for and with respect to this Note and the
agreements contemplated hereby.
15. Acknowledgment. The Borrower and SOV acknowledge
--------------
and agree that (i) the loan to the Borrower contemplated under this Note has
been made to fund the Borrower's short-term cash needs, (ii) Hasco shall have no
obligation to proceed with the proposed acquisition of Borrower's assets except
as specifically set forth in that certain letter of intent dated December 13,
1996, (iii) Hasco has not made any representations or warranties regarding the
status of its diligence of the Borrower in connection with such letter of intent
or other conditions set forth therein and (iv) this Note shall become due and
payable in accordance with its terms regardless of the status of the
negotiations, documentation or status relating to such proposed acquisition.
6
<PAGE>
IN WITNESS WHEREOF, the Borrower has executed and delivered this
Note on January 21, 1997.
FOREVER YOURS, INC.
Attest: BY: /s/ James E. O'Brien
/s/ J. Barker ---------------------
- ------------------------ Name: James E. O'Brien
Title: President
STYLES ON VIDEO, INC.
Attest: By: /s/ K. Eugene Shutler
---------------------
Name: K. Eugene Shutler
Title: CEO
/s/ J. Barker
- ------------------------
HASCO INTERNATIONAL, INC.
By: --------------------
Name:
Title:
7
<PAGE>
EXHIBIT 10.29
AMENDMENT AND WAIVER AGREEMENT
------------------------------
THIS AMENDMENT AND WAIVER AGREEMENT (this "Agreement") is made as of
the 13th day of February, 1997, by and between Styles On Video, Inc., a
Delaware corporation ("SOV"), Forever Yours Inc., a California Corporation
("FYI"), and K. Eugene Shutler, an individual ("Shutler").
R E C I T A L S
---------------
WHEREAS, in connection with a Consulting Agreement, dated as of April
19, 1996, and an Employment Agreement, dated as of August 1, 1996, between SOV
and Shutler, Shutler received from SOV Warrants to purchase shares of common
stock of SOV collectively, (the "Shutler Warrants");
WHEREAS, it would be a violation of the terms of the Shutler Warrants
were SOV to fail to take all corporate action and shareholder action necessary
on or prior to October 31, 1996 to authorize and reserve for issuance a number
of shares of common stock at least equal to the number of shares of common stock
into which the Shutler Warrants may be exercised;
WHEREAS, the parties wish to avoid a violation of the Shutler Warrants
by virtue of such failure and the disruption of the business of SOV and FYI
thereby;
WHEREAS, the parties wish to amend all of the relevant documentation
to avoid violations or default of such agreements by virtue of such failure;
NOW, THEREFORE, IN CONSIDERATION of the premises and for good and
valuable consideration, the parties hereby agree as follows:
<PAGE>
1. Waiver and Amendment Regarding Authorization of Shares. It shall
------------------------------------------------------
not be a violation of the terms and conditions, nor shall it be a default, under
the Shutler Warrants if SOV fails to take all corporate action and shareholder
action necessary to authorize and reserve for issuance sufficient shares for the
exercise of the Shutler Warrants on or prior to October 31, 1996, and that the
Shutler Warrant, hereby are amended to delete references to October 31, 1996 and
replace them with such date ("the Critical Date") that is the later of (i)April
15, 1997 or (ii) such date that the Management Agreement between Hasco
International, Inc. and FYI is terminated or expires, but in no event shall the
Critical Date be later than May 1, 1997. Any breach or default triggered by the
measurement date of October 31, 1996 is hereby waived. The parties agree that
SOV shall be required to take all such corporate and stockholder action on or
before the Critical Date. Each and every agreement or certificate requiring SOV
to take such actions is hereby amended to effectuate the intent of the parties.
2. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one in the same instrument.
3. Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the internal laws of the State of California without regard
to conflicts of laws principles.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
STYLES ON VIDEO, INC.
a Delaware corporation
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
FOREVER YOURS, INC.
a California corporation
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
--------------------------------------------
K. EUGENE SHUTLER, an individual
-3-
<PAGE>
EXHIBIT 10.30
AMENDMENT AND WAIVER AGREEMENT
------------------------------
THIS AMENDMENT AND WAIVER AGREEMENT (this "Agreement") is made as of
the 13 day of February, 1997, by and between Styles On Video, Inc., a Delaware
corporation ("SOV"), Forever Yours Inc., a California Corporation ("FYI"), and
Ann Graham Ehringer, an individual ("Ehringer").
R E C I T A L S
---------------
WHEREAS, SOV, FYI and International Digital Investors, L.P. entered
into a Note and Preferred Stock Purchase Agreement, dated as of May 14, 1996
(the "1996 Agreement");
WHEREAS, in connection with the 1996 Agreement, Ehringer, as Chairman
of the Independent Committee of SOV's Board of Directors appointed April 18,
1996, received from SOV warrants to purchase shares of common stock of SOV (the
"Ehringer Warrants");
WHEREAS, it would be a violation of the terms of the Ehringer Warrants
were SOV to fail to take all corporate action and shareholder action necessary
on or prior to October 31, 1996 to authorize and reserve for issuance a number
of shares of common stock at least equal to the number of shares of common stock
into which the Ehringer Warrants may be exercised;
WHEREAS, the parties wish to avoid a violation of the Ehringer
Warrants by virtue of such failure and the disruption of the business of SOV and
FYI thereby;
WHEREAS, the parties wish to amend all of the relevant documentation
to avoid violations or default of such agreements by virtue of such failure;
<PAGE>
NOW, THEREFORE, IN CONSIDERATION of the premises and for good and
valuable consideration, the parties hereby agree as follows:
1. Waiver and Amendment Regarding Authorization of Shares. It shall
------------------------------------------------------
not be a violation of the terms and conditions, nor shall it be a default, under
the Ehringer Warrants if SOV fails to take all corporate action and shareholder
action necessary to authorize and reserve for issuance sufficient shares for the
exercise of the Ehringer Warrants on or prior to October 31, 1996, and the
Ehringer Warrants are hereby amended to delete references to October 31, 1996
and replace them with such date ("the Critical Date") that is the later of
(i)April 15, 1997 or (ii) such date that the Management Agreement between Hasco
International, Inc. and FYI is terminated or expires, but in no event shall the
Critical Date be later than May 1, 1997. Any breach or default triggered by the
measurement date of October 31, 1996 is hereby waived. The parties agree that
SOV shall be required to take all such corporate and stockholder action on or
before The Critical Date. Each and every agreement or certificate requiring SOV
to take such actions is hereby amended to effectuate the intent of the parties.
2. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one in the same instrument.
3. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws of the State of California
without regard to conflicts of laws principles.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
STYLES ON VIDEO, INC.
a Delaware corporation
By:_____________________________________
Name:___________________________________
Title:__________________________________
FOREVER YOURS, INC.
a California corporation
By:_____________________________________
Name:___________________________________
Title:__________________________________
________________________________________
ANN GRAHAM EHRINGER, an individual
-3-
<PAGE>
EXHIBIT 10.31
International Digital Investors, L.P.
January 15, 1997
Page 1
- --------------------------------------
STYLES ON VIDEO, INC.
667 RANCHO CONEJO BOULEVARD
NEWBURY PARK, CALIFORNIA 91320
January 15, 1997
International Digital Investors, L.P.
701 Brickell Avenue, Suite 2420
Miami, Florida 33131
Gentlemen:
Reference is made to that certain Note and Preferred Stock Purchase
Agreement (the "Purchase Agreement") dated May 14, 1996 by and among Styles on
Video, Inc. ("SOV"), a Delaware corporation, Forever Yours, Inc. ("FYI"), a
California corporation, and International Digital Investors, L.P. ("IDI"), a
Delaware limited partnership, which provides for the purchase of certain
promissory notes, preferred stock and warrants of SOV in accordance with certain
terms and conditions contained therein. Each of the parties to said Purchase
Agreement have agreed to increase the principal amount of funds borrowed under
the Purchase Agreement in accordance with that certain Letter Agreement dated
November 21, 1996 among IDI, SOV and FYI.
The execution of this Letter Agreement will serve as the acknowledgment by
the undersigned that the principal amount borrowed pursuant to the Purchase
Agreement is hereby increased $180,000 from $1,020,000 to $1,200,000. The
accrual of interest expense with respect to such $180,000 increase in amount
borrowed under the Purchase Agreement shall commence on the date of this Letter
Agreement.
The execution of this Letter Agreement shall in no way limit or waive any
responsibilities, obligations or claims of each of the parties hereto with
respect to the terms, conditions and related agreements existing under and/or
created in connection with the Purchase Agreement.
This letter may be executed in one or more counterparts.
<PAGE>
International Digital Investors, L.P.
January 15, 1997
Page 2
- --------------------------------------
Please indicate your agreement and consent to the foregoing by signing the
enclosed copy of this letter where indicated below and return the same to the
attention of the undersigned on behalf of SOV.
Sincerely,
STYLES ON VIDEO, INC.
By:__________________________________
FOREVER YOURS, INC.
By:__________________________________
AGREED TO and ACCEPTED this
15th day of January 1997.
INTERNATIONAL DIGITAL INVESTORS, L.P.
By:_______________________________
<PAGE>
EXHBIT 10.32
SECURITIES EXCHANGE AGREEMENT
-----------------------------
This Securities Exchange Agreement is entered into this 15th day of
January, 1997 between Styles on Video, Inc. ("SOV"), a Delaware corporation, and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
R E C I T A T I O N S
---------------------
Pursuant to the certain Series A Warrant Certificate (the "Series A
Warrant Certificate") and Series B Warrant Certificate (the "Series B Warrant
Certficate") each dated May 15, 1996, SOV has granted to IDI warrants (the
"Warrants") to purchase an aggregate of 57,201,110 shares (the "Warrant Shares")
of SOV common stock, par value $.001 per share (the "Common Stock"), at an
exercise price of $.075 for each Warrant Share so acquired.
IDI has agreed to (i) waive those certain covenant defaults currently
existing under (a) the Series B Warrant Certificate; (b) those certain Note and
Preferred Stock Purchase Agreements, as amended, dated November 20, 1995 and May
14, 1996, respectively, by and among SOV, Forever Yours, Inc., a California
corporation ("FYI"), and IDI; and (c) the Certificate of Designation for Series
B Preferred Stock of SOV and (ii) extend the due date on that certain 10% Bridge
Note between SOV, FYI and IDI, originally dated September 19, 1996 and recently
amended for the seventh time on January 15, 1997, each in consideration of the
action described in paragraph C below.
C. SOV desires to exchange 4,347,427 shares of Common Stock (the
"Exchange Shares") for such portion of the Warrants that is equivalent to the
right to acquire 5,781,911 Warrant Shares (the "Warrant Interest", which is
comprised of 3,914,882 Warrants from the Series A Warrant Certificate and
1,867,029 Warrants from the Series B Warrant Certificate).
O P E R A T I V E P R O V I S I O N S:
---------------------------------------
In consideration of the foregoing, the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending legally to be
bound, hereby covenant and agree as follows:
EXCHANGE OF SECURITIES.
----------------------
Interests Being Transferred. At the closing hereunder (the
---------------------------
"Closing"), SOV shall exchange with IDI the Exchange Shares for the transfer by
IDI to SOV of the Warrant Interest.
REPRESENTATIONS AND WARRANTIES OF SOV. In order to induce IDI to
-------------------------------------
enter into this Agreement, and to consummate the transaction contemplated
hereby, SOV hereby represents and warrants to IDI:
Authorization of Agreement, Etc.
-------------------------------
(a) The execution and delivery by SOV of this Agreement, and the
performance of its obligations hereunder, have been duly authorized by all
requisite corporate action and will not violate any provision of law, any order
of any court or other agency of government, the Certificate of Incorporation or
By-laws of SOV, or any provision of any
<PAGE>
indenture, agreement or other instrument to which it or any of its properties or
assets is bound, or conflict with, result in a breach of or constitute a default
under any such indenture, agreement or other instrument, or result in the
creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company.
(b) The Exchange Shares have been duly authorized by the
Company, and when transferred to IDI in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable shares of
Common Stock of the Company.
Enforceability. This Agreement constitutes a legal, valid
--------------
and binding obligation of SOV enforceable in accordance with its terms, except
as enforceability hereof may be limited by the provisions of applicable
bankruptcy, reorganization, insolvency, moratorium or similar laws affecting
creditors' rights generally.
REPRESENTATIONS AND WARRANTIES OF IDI. In order to induce SOV to
-------------------------------------
enter into this Agreement, and to consummate the transaction contemplated
hereby, IDI assumes each of the applicable representations and warranties
contained in this Agreement and hereby represents and warrants to SOV:
Enforceability. This Agreement constitutes the legal, valid and
--------------
binding obligation of IDI, enforceable in accordance with its terms, except as
enforceability hereof may be limited by the provisions of applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights generally.
Investment by IDI. IDI has been informed that the Exchange
-----------------
Shares have not been registered under the Securities Act of 1933, as amended
(the "Act"), or under any applicable state securities laws. IDI is acquiring
the Exchange Shares for IDI's own account, for investment, and not with a view
toward any resale or distribution within the meaning of the Act or any
applicable state securities laws. IDI will not sell or otherwise dispose of the
Exchange Shares without first fully complying with all applicable Federal and
state laws, rules and regulations.
CLOSING.
-------
Timing and Location. The Closing shall take place on or before
-------------------
January 15, 1997, via fax and telephone.
Closing Transaction Steps. At the Closing, subject to all the
-------------------------
terms, conditions, and provisions of this Agreement, the following shall take
place as a single integrated transaction:
SOV shall deliver to IDI the Exchange Shares.
IDI shall deliver to SOV the Warrant Interest.
The parties hereto shall deliver any and all other
instruments or documents required to be delivered pursuant to, or necessary or
proper in order to give effect to, all of the terms and provisions of this
Agreement.
Conditions to SOV's Obligation to Close. SOV's obligation to
---------------------------------------
close the transaction contemplated by this Agreement shall be conditioned upon
fulfillment of all of the following conditions:
<PAGE>
All of the representations and warranties of IDI set forth
in Section 3 hereof shall be true, complete and accurate in all respects.
IDI shall have delivered to SOV all of the items that IDI is
required to deliver pursuant to this Agreement.
Conditions to IDI's Obligations to Close. IDI's obligations to
----------------------------------------
close the transaction contemplated by this Agreement shall be conditioned upon
fulfillment of all of the following conditions:
All of the representations and warranties of SOV set forth
in Section 2 hereof shall be true, complete and accurate in all respects.
SOV shall have delivered to IDI all of the items that SOV is
required to deliver pursuant to this Agreement.
MISCELLANEOUS.
-------------
Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California without
reference to that state's laws regarding choice of law.
Notices. Any notices, requests, demands and other communications
-------
required or permitted to be given hereunder shall be given in writing and shall
be deemed to have been duly given when delivered by hand, five days following
the date of deposit in the United States mail by registered or certified mail,
postage prepaid, return receipt requested, or on the delivery date shown on a
written verification of delivery provided by a reputable private delivery
service, if addressed to the last address provided to the sender by the
addressee.
Entire Agreement. This Agreement constitutes the entire
----------------
agreement among the parties hereto and supersedes all prior agreements,
understandings, negotiations and discussions, both written and oral, between the
parties hereto with respect to the subject matter hereof. This Agreement may not
be amended or modified in any way except by a written instrument executed by the
parties hereto.
Benefits; Binding Effect. This Agreement shall be for the
------------------------
benefit of and binding upon the parties hereto, their respective heirs, personal
representatives and assigns.
No Waiver. No waiver of any of the provisions of this Agreement
---------
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar), nor shall any such waiver constitute a continuing
waiver unless otherwise expressly so provided.
No Third Party Beneficiary. Nothing expressed or implied in this
--------------------------
Agreement is intended, or shall be construed, to confer upon or give any person,
firm, corporation, partnership, association or other entity, other than the
parties hereto and their respective heirs, personal representatives, legal
representatives and assigns, any rights or remedies under or by reason of this
Agreement.
Severability. The invalidity of any one or more of the words,
------------
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the enforceability of the remaining portions of this Agreement
or any part hereof, all of which are inserted conditionally on their being valid
in law, and, in the event that any one or more of the words, phrases, sentences,
clauses, sections or subsections contained in this Agreement shall be declared
invalid, this Agreement shall be construed as if such invalid word or words,
phrase or
<PAGE>
phrases, sentence or sentences, clause or clauses, section or sections, or
subsection or subsec tions had not been inserted.
Section Headings. The section and other headings contained in
----------------
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of any provisions of this Agreement.
Counterparts. This Agreement may be executed in multiple
------------
counterparts and all such counterparts shall collectively constitute an original
Agreement, which may be evidenced by any one or more counterparts.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each executed and delivered
this Agreement as of the day and year first written above.
STYLES ON VIDEO, INC.
By:_____________________________________
INTERNATIONAL DIGITAL INVESTORS, L.P.
By:_____________________________________
<PAGE>
EXHIBIT 10.33
SEVENTH AMENDMENT TO BRIDGE NOTE
--------------------------------
THIS SEVENTH AMENDMENT TO BRIDGE NOTE (this "Agreement") is made as of
the 15th day of January, 1997 by and between Styles on Video, Inc., a Delaware
corporation ("SOV"), Forever Yours, Inc., a California corporation ("FYI"), and
International Digital Investors, L.P., a Delaware limited partnership ("IDI").
RECITALS
--------
WHEREAS, SOV, FYI, and IDI entered into a 10% Bridge Note due October
3, 1996, dated September 19, 1996 ("the Bridge Note");
WHEREAS, SOV, FYI and IDI entered into an Amendment and Waiver
Agreement dated October 15, 1996, which, among other things, increased the
amount of the financing available to $280,000 and extended the due date of the
Bridge Note to October 29, 1996;
WHEREAS, SOV, FYI AND IDI entered into a Second Amendment to Bridge
Note dated October 25, 1996, which, among other things, increased the amount of
the financing available to $415,000, extended the due date of the Bridge Note to
November 8, 1996, and provided for the issuance of warrants equal to 3% of the
fully diluted shares of SOV's common stock outstanding should the parties fail
to enter into a permanent financing arrangement with IDI by November 30, 1996;
WHEREAS, SOV, FYI and IDI entered into a Third Amendment to Bridge
Note dated November 18, 1996, which, among other things, increased the amount
of the financing available to $665,000, extended the due date of the Bridge Note
to December 9, 1996, and increased the number of warrants issuable from 3% to 4%
of the fully diluted shares of SOV's common stock outstanding should the parties
fail to enter into a permanent financing arrangement with IDI by December 31,
1996;
WHEREAS, SOV, FYI and IDI entered into a Fourth Amendment to Bridge
Note dated December 11, 1996, which, among other things, increased the amount of
the financing available to up to $855,000 and extended the due date of the
Bridge Note to December 31, 1996;
WHEREAS, SOV, FYI and IDI entered into a Fifth Amendment to Bridge
Note dated December 27, 1996, which, among other things, increased the amount of
the financing available from up to $855,000 to up to $991,000 and extended the
due date of the Bridge Note, as amended, to January 15, 1997;
1
<PAGE>
WHEREAS, SOV, FYI and IDI entered into a Sixth Amendment to Bridge
Note dated January 13, 1997, which, among other things, increased the amount of
the financing available from up to $991,000 to up to $1,157,000;
WHEREAS, SOV, FYI and IDI desire to reduce the outstanding obligation
represented by the Bridge Note, as amended, in recognition of the increase in
funds borrowed pursuant to that certain Note and Preferred Stock Purchase
Agreement dated May 14, 1996, as amended.
TERMS
-----
In consideration of the mutual covenants contained herein and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I.
1.1 Amendment to Bridge Note Amount. The obligation represented by
-------------------------------
the Bridge Note, as amended, is hereby reduced an aggregate of $180,000; such
reduction shall have the additional effect of reducing the amount that may be
borrowed pursuant to the Bridge Note, as amended, from up to $1,157,000 to up
to $977,000.
1.2 Amendment to Bridge Note Due Date. The due date of the Bridge
---------------------------------
Note, as amended, is hereby amended from January 15, 1997 to such date (the
"Critical Date") that is the later of (i) April 15, 1997 or (ii) such date that
the Management Agreement between Hasco International, Inc. and FYI is terminated
or expires, but in no event shall the Critical Date be later than May 1, 1997.
ARTICLE II.
2.1 Effect of Amendment. Except as expressly provided in Article I
-------------------
of this Amendment, nothing shall affect or be deemed to affect any provisions of
the Bridge Note, as amended. Accordingly, interest expense incurred with respect
to the $180,000 so reduced from the existing principal amount balance of the
Bridge Note, as amended, shall have been accrued from September 19, 1996 through
the date of this Amendment.
2.2 Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
2
<PAGE>
2.3 Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the internal laws of the State of California without giving
effect to principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Amendment to be executed by their duly authorized representatives as of the day
and year first above written.
STYLES ON VIDEO, INC.
By:
---------------------------------
FOREVER YOURS, INC.
By:
---------------------------------
INTERNATIONAL DIGITAL INVESTORS, L.P.
By:
----------------------------------
3
<PAGE>
EXHIBIT 10.34
GENERAL AMENDMENT AND WAIVER AGREEMENT
This GENERAL AMENDMENT AND WAIVER AGREEMENT is executed this 15th day of
January, 1997 between Styles on Video, Inc. ("SOV"), a Delaware corporation,
Forever Yours, Inc. ("FYI"), a California corporation, and International Digital
Investors, L.P. ("IDI"), a Delaware limited partnership.
TERMS
In consideration of the mutual covenants contained herein and intending to
be legally bound hereby, each of the parties hereto agree to (i) amend each of
the provisions contained in the certain (a) Note and Preferred Stock Purchase
Agreements dated November 20, 1995, as amended (the "November 95 Purchase
Agreement"), and May 14, 1996, as amended (the "May 96 Purchase Agreement"),
respectively, (b) Warrant Certificate dated as of May 15, 1996 for Series B
Warrants to Purchase Common Stock issued by SOV (the "Series B Warrant
Certificate") and (c) Certificate of Designation for Series B Preferred Stock of
SOV (the "Series B Preferred Stock Designation Certificate"), and (ii) waive
each of the breaches or defaults with respect to the November 95 Purchase
Agreement, the May 96 Purchase Agreement, the Series B Warrant Certificate and
Series B Preferred Stock Designation Certificate, SOLELY AS SET FORTH BELOW; any
such waiver made with respect to any breach or default of the November 95
Purchase Agreement, the May 96 Purchase Agreement, the Series B Warrant
Certificate and Series B Preferred Stock Designation Certificate shall be deemed
to waive any such breach or default occurring during such period of time
commencing on the date that any such breach or default first arose through the
date hereof:
I. NOVEMBER 95 PURCHASE AGREEMENT AMENDMENTS AND WAIVERS
1.1 Amendment and Waiver with Respect to Section 2.1.
------------------------------------------------
(i) The sole reference to the date March 31, 1997 in Section 2.1(a)
is hereby amended to be replaced with such date (the "Critical
Date") that is the later of (i) April 15, 1997 or (ii) such
date that the Management Agreement between Hasco International,
Inc. and FYI is terminated or expires, but in no event shall
the Critical Date be later than May 1, 1997. Any breach or
default triggered by the measurement date of March 31, 1997 is
hereby waived.
(ii) Each of the references to the date December 31, 1996 in Section
2.1(c) is hereby amended to be replaced with the Critical Date.
Any breach or default triggered by the measurement date of
December 31, 1996 is hereby waived.
1.2 Amendment and Waiver with Respect to Section 8.1. Section 8.1(d) is
------------------------------------------------
hereby amended in its entirety and restated as follows: "Liens
securing the Notes, the Additional Notes and the 10% Bridge Note dated
September 19, 1996 between SOV and IDI, as amended (the "New Bridge
Note").
1.3 Amendment and Waiver with Respect to Section 8.2. Section 8.2 is
-------------------------------------------------
hereby amended in its entirety and restated as follows:
1
<PAGE>
Maintenance of Certain Financial Conditions. The Companies will
-------------------------------------------
cause the following financial conditions to exist at all times:
(a) Consolidated Net Worth shall equal or exceed $(3,540,000) on
December 31, 1996 and $(6,500,000) on December 31, 1997; any
breach or default triggered by a Consolidated Net Worth below
$(3,540,000) at December 31, 1996 is hereby waived.
(b) Consolidated Net Worth shall not be less than the corresponding
amount on the last day of any two consecutive fiscal quarters
ending on the dates set forth below:
<TABLE>
<CAPTION>
Quarter Ending Amount
-------------- ------
<S> <C>
June 30, 1996 $(3,950,000)
September 30, 1996 $(4,490,000)
December 31, 1996 $(4,720,000)
March 31, 1997 $(5,300,000)
June 30, 1997 $(5,800,000)
September 30, 1997 $(6,200,000)
December 31, 1997 $(6,500,000)
March 31, 1998 $(6,700,000)
June 30, 1998 $(6,800,000)
</TABLE>
(c) EBITDA of FYI shall equal or exceed $(2,000,000) for the year
ended December 31, 1996 and $(1,050,000) for the year ended
December 31, 1997; any breach or default triggered by an EBITDA
of FYI below $(2,000,000) at December 31, 1996 is hereby waived.
(d) EBITDA of FYI shall not be less than the corresponding amount
during any two consecutive fiscal quarters ending on the dates
set forth below; any breach or default triggered by an EBITDA of
FYI below $(340,000) and $17,000 for the fiscal quarters ended
September 30, 1996 and December 31, 1996, respectively, are
hereby waived:
<TABLE>
<CAPTION>
Quarter Ending Amount
-------------- ------
<S> <C>
June 30, 1996 $(811,000)
September 30, 1996 $(340,000)
December 31, 1996 $ 17,000
March 31, 1997 $(420,000)
June 30, 1997 $(330,000)
September 30, 1997 $(210,000)
December 31, 1997 $ (90,000)
March 31, 1998 $ 0
June 30, 1998 $ 100,000
</TABLE>
1.4 Amendment with Respect to Section 8.3. Section 8.3(a) is hereby
-------------------------------------
amended as follows: (a) Debt under the Notes, the Additional Notes and
the New Bridge Note.
1.5 Amendment and Waiver with Respect to Section 8.12.
-------------------------------------------------
2
<PAGE>
(i) The sole parenthetical in Section 8.12(a) is hereby amended and
restated as follows: "(or, in the case of the 1995 and 1996
fiscal years, 270 days after the end of such fiscal years)".
Any breach or default with respect to the failure to deliver
any required report or statement with respect to fiscal 1995 is
hereby waived.
(ii) Any breach or default with respect to the failure to deliver
any required report or statement for the quarterly fiscal
periods ending March 31, 1996, June 30, 1996 and September 30,
1996 pursuant to Sections 8.12(b)&(c) are hereby waived.
(iii) Any breach or default with respect to the failure to deliver
any certificate, registration statements or reports pursuant to
Sections 8.12(d)&(e) are hereby waived.
1.6 Amendment and Waiver with Respect to Section 8.15. The sole
-------------------------------------------------
reference in Section 8.15 to the date October 31, 1996 is hereby
amended and replaced with the Critical Date. Any breach or default
triggered by the measurement date of October 31, 1996 is hereby
waived.
1.7 Amendment and Waiver with Respect to Section 8.17. The sole
-------------------------------------------------
reference in Section 8.17 to the date October 31, 1996 is hereby
amended and replaced with the Critical Date. Any breach or default
triggered by the measurement date of October 31, 1996 is hereby
waived.
1.8 Amendment and Waiver with Respect to Section 9.1. Any breach or
------------------------------------------------
default with respect to Section 9.1(j) is hereby waived.
II. MAY 96 PURCHASE AGREEMENT AMENDMENTS AND WAIVERS
2.1 Amendment and Waiver with respect to Section 2.1. Each of the
------------------------------------------------
references to the date December 31, 1996 in Section 2.1(b) are hereby
amended to be replaced with the Critical Date. Any breach or default
triggered by the measurement date of December 31, 1996 is hereby
waived.
2.2 Amendment and Waiver with respect to Section 3.5. The sole reference
------------------------------------------------
to the date October 31, 1996 in Section 3.5(c) is hereby amended to be
replaced with the Critical Date. Any breach or default triggered by
the measurement date of October 31, 1996 is hereby waived.
2.3 Amendment and Waiver with Respect to Section 8.1. Section 8.1(d) is
------------------------------------------------
hereby amended in its entirety and restated as follows: (d) Liens
securing the Existing Notes, the Additional Notes and the New Bridge
Note."
2.4 Amendment and Waiver with Respect to Section 8.2. Section 8.2 is
-------------------------------------------------
hereby amended in its entirety and restated as follows:
Maintenance of Certain Financial Conditions. The Companies will
-------------------------------------------
cause the following financial conditions to exist at all times:
(a) Consolidated Net Worth shall equal or exceed $(3,540,000) on
December 31, 1996 and $(6,500,000) on December 31, 1997; any
3
<PAGE>
breach or default triggered by a Consolidated Net Worth below
$(3,540,000) at December 31, 1996 is hereby waived.
(b) Consolidated Net Worth shall not be less than the corresponding
amount on the last day of any two consecutive fiscal quarters
ending on the dates set forth below:
<TABLE>
<CAPTION>
Quarter Ending Amount
-------------- ------
<S> <C>
June 30, 1996 $(3,950,000)
September 30, 1996 $(4,490,000)
December 31, 1996 $(4,720,000)
March 31, 1997 $(5,300,000)
June 30, 1997 $(5,800,000)
September 30, 1997 $(6,200,000)
December 31, 1997 $(6,500,000)
March 31, 1998 $(6,700,000)
June 30, 1998 $(6,800,000)
</TABLE>
(c) EBITDA of FYI shall equal or exceed $(2,000,000) for the year
ended December 31, 1996 and $(1,050,000) for the year ended
December 31, 1997; any breach or default triggered by an EBITDA
of FYI below $(2,000,000) is hereby waived.
(d) EBITDA of FYI shall not be less than the corresponding amount
during any two consecutive fiscal quarters ending on the dates
set forth below; any breach or default triggered by an EBITDA of
FYI below $(340,000) and $17,000 for the fiscal quarters ended
September 30, 1996 and December 31, 1996, respectively, are
hereby waived:
<TABLE>
<CAPTION>
Quarter Ending Amount
-------------- ------
<S> <C>
June 30, 1996 $(811,000)
September 30, 1996 $(340,000)
December 31, 1996 $ 17,000
March 31, 1997 $(420,000)
June 30, 1997 $(330,000)
September 30, 1997 $(210,000)
December 31, 1997 $ (90,000)
March 31, 1998 $ 0
June 30, 1998 $ 100,000
</TABLE>
2.5 Amendment with Respect to Section 8.3. Section 8.3(a) is hereby
-------------------------------------
amended as follows: (a) Debt under the Existing Notes, the Additional
Notes and the New Bridge Note.
2.6 Amendment and Waiver with Respect to Section 8.12.
-------------------------------------------------
(i) The sole parenthetical in Section 8.12(a) is hereby amended and
restated as follows: "(or, in the case of the 1995 and 1996
fiscal years, 270 days after the end of such fiscal years)".
Any breach or default with respect to the failure to deliver
any required report or statement with respect to fiscal 1995 is
hereby waived.
4
<PAGE>
(ii) Any breach or default with respect to the failure to deliver
any required report or statement for the quarterly fiscal
periods ending June 30, 1996 and September 30, 1996 pursuant to
Sections 8.12(b)&(c) are hereby waived.
(iii) Any breach or default with respect to the failure to deliver
any certificate, registration statements or reports pursuant to
Sections 8.12(d)&(e) are hereby waived.
2.7 Amendment and Waiver with Respect to Section 8.15. The sole
-------------------------------------------------
reference in Section 8.15 to the date October 31, 1996 is hereby
amended and replaced with the Critical Date. Any breach or default
triggered by the measurement date of October 31, 1996 is hereby
waived.
2.8 Amendment and Waiver with Respect to Section 8.17. The sole
-------------------------------------------------
reference in Section 8.17 to the date October 31, 1996 is hereby
amended and replaced with the Critical Date. Any breach or default
triggered by the measurement date of October 31, 1996 is hereby
waived.
2.9 Waiver with Respect to Section 10.1. Any breach or default with
-----------------------------------
respect to Sections 10.1(j)&(k) is hereby waived.
2.10 Waiver with Respect to Section 4.7 of Exhibit H. Any breach or
-----------------------------------------------
default with respect to Section 4.7(i) of Exhibit H is hereby waived
so long as such breach or default (i) does not involve a sale, lease
or other disposition of any Collateral with a value in excess of
$5,000 or (ii) arises due to a sale, lease or other disposition
solely between SOV and FYI.
2.11 Waiver with Respect to Section 4.7 of Exhibit I. Any breach or
-----------------------------------------------
default with respect to Section 4.7(i) of Exhibit I is hereby waived
so long as such breach or default (i) does not involve a sale, lease
or other disposition of any Collateral with a value in excess of
$5,000 or (ii) arises due to a sale, lease or other disposition of
any Collateral between SOV and FYI.
III. SERIES B WARRANT CERTIFICATE AMENDMENTS AND WAIVERS
3.1 Amendment and Waiver with Respect to Section 3. The sole reference
----------------------------------------------
in Section 3(a) to the date October 31, 1996 is hereby amended and
replaced with the Critical Date. Any breach or default triggered by
the measurement date of October 31, 1996 is hereby waived.
3.2 Amendment and Waiver with Respect to Section 6. The sole reference
----------------------------------------------
in Section 6(a) to the date October 31, 1996 is hereby amended and
replaced with the Critical Date. Any breach or default triggered by
the measurement date of October 31, 1996 is hereby waived.
IV. SERIES B PREFERRED STOCK DESIGNATION CERTIFICATE AMENDMENTS AND WAIVERS
4.1 Amendment and Waiver with Respect to Section 4. The sole reference
----------------------------------------------
in Sections 4(a)&(i) to the date October 31, 1996 is hereby amended
and replaced with the Critical Date. Any breach or default triggered
by the measurement date of October 31, 1996 is hereby waived.
5
<PAGE>
4.2 Amendment and Waiver with Respect to Section 6. The sole reference
----------------------------------------------
in Section 6(b) to the date October 31, 1996 is hereby amended and
replaced with the Critical Date. Any breach or default triggered by
the measurement date of October 31, 1996 is hereby waived.
V. MISCELLANEOUS.
5.1 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without reference
to that state's laws regarding choice of law.
5.2 Notices. Any notices, requests, demands and other communications
-------
required or permitted to be given hereunder shall be given in writing
and shall be deemed to have been duly given when delivered by hand,
five days following the date of deposit in the United States mail by
registered or certified mail, postage prepaid, return receipt
requested, or on the delivery date shown on a written verification of
delivery provided by a reputable private delivery service, if
addressed to the last address provided to the sender by the addressee.
5.3 Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties hereto and supersedes all prior agreements,
understandings, negotiations and discussions, both written and oral,
between the parties hereto with respect to the subject matter hereof.
This Agreement may not be amended or modified in any way except by a
written instrument executed by the parties hereto.
5.4 Benefits; Binding Effect. This Agreement shall be for the benefit of
------------------------
and binding upon the parties hereto, their respective heirs, personal
representatives and assigns.
5.5 No Waiver. No waiver of any of the provisions of this Agreement
---------
shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall any such waiver constitute
a continuing waiver unless otherwise expressly so provided.
5.6 No Third Party Beneficiary. Nothing expressed or implied in this
--------------------------
Agreement is intended, or shall be construed, to confer upon or give
any person, firm, corporation, partnership, association or other
entity, other than the parties hereto and their respective heirs,
personal representatives, legal representatives and assigns, any
rights or remedies under or by reason of this Agreement.
5.7 Severability. The invalidity of any one or more of the words,
------------
phrases, sentences, clauses, sections or subsections contained in this
Agreement shall not affect the enforceability of the remaining
portions of this Agreement or any part hereof, all of which are
inserted conditionally on their being valid in law, and, in the event
that any one or more of the words, phrases, sentences, clauses,
sections or subsections contained in this Agreement shall be declared
invalid, this Agreement shall be construed as if such invalid word or
words, phrase or phrases, sentence or sentences, clause or clauses,
section or sections, or subsection or subsections had not been
inserted.
5.8 Section Headings. The section and other headings contained in this
----------------
Agreement are for reference purposes only and shall not affect the
meaning or interpretation of any provisions of this Agreement.
5.9 Counterparts. This Agreement may be executed in multiple
------------
counterparts and all such counterparts shall collectively constitute
an original Agreement, which may be evidenced by any one or more
counterparts.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each executed and delivered
this Agreement as of the day and year first written above.
STYLES ON VIDEO, INC.
By:_____________________________________
FOREVER YOURS, INC.
By:_____________________________________
INTERNATIONAL DIGITAL INVESTORS, L.P.
By:_____________________________________
7
<PAGE>
EXHIBIT 10.35
International Digital Investors, Inc.
January 15, 1997
Page 1
- ---------------------------------------
INTERNATIONAL DIGITAL INVESTORS, L.P.
701 BRICKELL AVENUE, SUITE 2420
MIAMI, FLORIDA 33131
January 15, 1997
STYLES ON VIDEO, INC.
667 Rancho Conejo Boulevard
Newbury Park, California 91320
Gentlemen:
Reference is hereby made to that certain Securities Exchange Agreement
dated January 15, 1997 between Styles on Video, Inc. ("SOV"), a Delaware
corporation, and International Digital Investors, L.P. ("IDI"), a Delaware
limited partnership, pursuant to which SOV agreed to exchange 2,943,605 shares
(the "Initial Shares") of its common stock, par value $.001 per share (the
"Common Stock"), for the Series A Warrant held by IDI representing the right to
acquire 3,914,882 shares of Common Stock, and to exchange 1,403,882 shares (the
"Remaining Shares") of Common Stock for such portion of the Series B Warrant
held by IDI equal to the right to acquire 1,867,029 shares of Common Stock.
Reference is further made to the fact that certain holders of SOV warrants (the
"Qualified Warrants"), including IDI, may be entitled to exchange such Qualified
Warrants for a pro rata portion of the Remaining Shares.
It is our understanding that SOV intends to seek, and expects to receive,
timely shareholder approval to increase the number of authorized but unissued
shares of Common Stock to such number equal to or in excess of the number of
shares of Common Stock underlying SOV's currently outstanding warrants. The
execution of this Letter Agreement will serve as the acknowledgment by the
undersigned that in the event any holders of Qualified Warrants wish to exercise
such warrants in such amounts as would exceed the number of authorized and
unissued shares of Common Stock, IDI shall return to SOV such percentage of the
Remaining Shares equal to the quotient of (x) the number of Qualified Warrants
exercised divided by (y) the total number of Qualified Warrants.
This letter may be executed in one or more counterparts.
<PAGE>
International Digital Investors, Inc.
January 15, 1997
Page 2
- ---------------------------------------
Please indicate your agreement and consent to the foregoing by signing the
enclosed copy of this letter where indicated below and return the same to the
attention of the undersigned on behalf of IDI.
Sincerely,
INTERNATIONAL DIGITAL INVESTORS, L.P.
By:_____________________________________
AGREED TO and ACCEPTED this
____ day of January 1997.
STYLES ON VIDEO, INC.
By:__________________________________
<PAGE>
EXHIBIT 10.36
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER
THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE
SECURITIES LAW OR REGISTRATION OF SUCH SECURITIES UNDER THAT ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED OR UNLESS THE
SALE OR TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 OR 144A PROMULGATED UNDER
SUCH ACT AND, IF REASONABLY REQUESTED BY STYLES ON VIDEO, INC. (THE "COMPANY"),
THE COMPANY HAS RECEIVED AN OPINION OF ITS COUNSEL THAT THE SECURITIES OR THE
SALE OR TRANSFER ARE EXEMPT FROM REGISTRATION.
STYLES ON VIDEO, INC.
WARRANT CERTIFICATE
Dated as of January 15, 1997
Series D Warrants to Purchase Common Stock
------------------------------------------
No. R-4 Certificate for 61,803,850 Warrants
STYLES ON VIDEO, INC., a Delaware corporation (the "Company"), hereby
-------
certifies that, for value received, International Digital Investors, L.P., a
Delaware limited partnership ("Initial Holder"), or registered assigns, is the
--------------
registered owner of the number of Series D Warrants of the Company set forth
above. This Warrant Certificate evidences 61,803,850 Series D Warrants (the
"Warrants"). All capitalized terms used herein without definition shall have
- ---------
the meanings assigned thereto as set forth in the Company's Warrant Certificate
for Series B Warrants to Purchase Common Stock dated May 15, 1996.
Each Warrant entitles the registered owner thereof to purchase one share
(each such share being referred to herein as a "Warrant Share" and all such
-------------
shares being referred to herein, collectively, as the "Warrant Shares"), as
--------------
adjusted from time to time as provided in Section 7 hereof, of Common Stock,
$.001 par value per share, of the Company ("Common Stock"). Each Warrant may be
------------
exercised, from time to time, (a) on or after the earlier to occur of (i) the
Company's failure to consummate the First Exchange (as such term is defined in
that certain Letter Agreement (the "Letter Agreement") dated November 21, 1996
----------------
between the Company, Forever Yours, Inc. ("FYI"), a California corporation, and
the Initial Holder) on or before January 15, 1997, (ii) the Company's failure to
consummate the Second Exchange (as such term is defined in the Letter Agreement)
on or before such date (the "Critical Date") that is the later of (A) April 15,
-------------
1997 or (B) such date that the Management Agreement between Hasco International,
Inc. and FYI is terminated or expires, but in no event shall the Critical Date
be later than May 1, 1997, or (iii) the first date on which any of the
Settlement Warrants, the Arnold Warrant, the Shutler Warrant or the Independent
Committee Warrant becomes exerciseable,
1
<PAGE>
in whole or in part, and (b) prior to 5:00 p.m., Los Angeles time, on November
20, 2005 (the "Expiration Date"), subject to the following terms and conditions.
---------------
Section . Registration. The Company shall register each Warrant,
------------
upon records to be maintained by the Company for such purpose (such records
being referred to herein as the "Register"), in the name of the record holder of
--------
such Warrant from time to time. The Company may deem and treat the registered
holder of each Warrant as the absolute owner thereof for the purpose of any
exercise thereof or any distribution to the holder thereof, and tar all other
purposes, and the Company shall not be affected by any notice to the contrary.
Section . Registration of Transfers and Exchanges.
---------------------------------------
() Registration, Issuance of New Warrant Certificates. The Company
--------------------------------------------------
shall register in the Register the transfer of any Warrants upon the surrender
of this Warrant Certificate, with the Form of Assignment attached as Annex A
hereto duly filled in and signed (and with a signature guarantee for the
transfer of any Warrants by a registered holder which is not the initial
registered holder of this Warrant Certificate), to the Company at the office of
the Company set forth in Section 3(c) hereof. Upon any such registration of
transfer, a new Warrant Certificate, in substantially the form of this Warrant
Certificate, evidencing the Warrants so transferred shall be issued to the
transferee of such Warrants and a new Warrant Certificate, in substantially the
form of this Warrant Certificate, evidencing the remaining Warrants, if any, not
so transferred, shall be issued to the then-registered holder thereof. The
Company shall at no time close the Register against the permitted transfer of
any Warrant or Warrant Share in any manner which materially interferes with the
timely exercise of such Warrant.
() Warrants Exchangeable for Different Denominations. This Warrant
-------------------------------------------------
Certificate is exchangeable, upon the surrender hereof by the holder hereof at
the office of the Company set forth in Section 3(c) hereof, for new Warrant
Certificates, in substantially the form of this Warrant Certificate, evidencing
in the aggregate the right to purchase the number of Warrant Shares which may
then be purchased under this Warrant Certificate. Each such new Warrant
Certificate shall be dated the date of such exchange and represent the right to
purchase such number of Warrant Shares as shall be designated by the holder of
this Warrant Certificate at the time of such surrender.
Section . Duration, Termination and Exercise of Warrants.
----------------------------------------------
() Each Warrant may be exercised, from time to time, (a) on or after
the earlier to occur of (i) the Company's failure to consummate the First
Exchange on or before January 15, 1997, (ii) the Company's failure to consummate
the Second Exchange on or before the Critical Date, or (iii) the first date on
which any of the Settlement Warrants, the Arnold Warrant, the Shutler Warrant or
the Independent Committee Warrant becomes exerciseable, in whole or in part, and
(b) prior to 5:00 p.m., Los Angeles time, on the Expiration Date. At 5:00 P.M.,
Los Angeles time, on the Expiration Date, each Warrant not exercised prior
thereto shall be and become void and of no value.
() Subject to the provisions of this Warrant Certificate, including
adjustments to the Exercise Price and to the number of Warrant Shares issuable
upon the exercise of each Warrant pursuant to Section 7 hereof, each holder of a
Warrant on or prior to the Expiration Date shall have the right to purchase from
the Company (and the Company shall be obligated to issue and sell to such holder
of a Warrant) at the Exercise Price one fully-paid Warrant Share which is
nonassessable.
2
<PAGE>
() Subject to Sections 4, 10 and 11 hereof, upon (i) surrender of
this Warrant Certificate, with the Form of Election to Purchase attached as
Annex B hereto (the "Form of Election to Purchase") duly filled in and signed,
----------------------------
to the Company at its office at 667 Rancho Conejo, Newbury Park, California
91320. Attention: President, or at such other address as the Company may specify
in writing to the then-registered holder of the Warrants, and (ii) payment of
the Exercise Price, multiplied by the number of Warrant Shares then issuable
upon exercise of the Warrants being so exercised, the Company shall promptly,
but in any event within three days of its receipt of the Form of Election to
Purchase, together with the Warrant Certificate and receipt of payment of the
Exercise Price, issue and cause to be delivered to or upon the written order of
the registered holder of the Warrants being so exercised, and in such name or
names as such registered holder may designate (subject to Section 4 hereof and
to the Note Purchase Agreement), a certificate for the Warrant Shares issued
upon such exercise of such Warrants, provided that any and all such certificates
shall bear a legend regarding the transferability of the Warrant Shares as
provided in the Note Purchase Agreement. Any person so designated to be named in
such certificate for such Warrant Shares shall be deemed to have become the
holder of record of such Warrant Shares as of the Date of Election to Purchase
such Warrants. The "Date of Election to Purchase" any Warrant means the date on
which the Company shall have received (1) this Warrant Certificate, with the
Form of Election to Purchase duly filled in and signed, and (2) payment of the
Exercise Price for such Warrant.
() In lieu of delivering the Exercise Price in cash, a holder may, at
its option, instruct the Company in the Form of Election to Purchase to retain,
in payment of the Exercise Price, a number of Warrant Shares (the "Payment
-------
Shares") equal to the quotient of the aggregate Exercise Price of the Warrants
- ------
then being exercised divided by the Market Price of such shares as of the date
of exercise, and to deduct the number of Payment Shares from the Warrant Shares
to be delivered to such holder.
() The Warrants evidenced by this Warrant Certificate shall be
exercisable either as an entirety or, from time to time, for part only of the
number of Warrants evidenced hereby. If fewer than all of the Warrants evidenced
by this Warrant Certificate are exercised at any time, the Company, at its
expense, shall issue to the registered holder a new Warrant Certificate, in
substantially the form of this Warrant Certificate, for the remaining number of
Warrants evidenced by this Warrant Certificate.
Section . Payment of Taxes. The Company shall pay all issuance and
----------------
transfer taxes and charges that may be imposed on the Company or on the Warrants
or the Warrant Shares in respect of the transfer of Warrants, or the issuance or
delivery of the Certificates for Warrant Shares or other securities in respect
of the Warrant Shares upon the exercise or conversion of Warrants; provided,
--------
however, that the Company shall not be required to pay any such tax or other
- -------
charge imposed in respect of the transfer of Warrants, or the issuance or
delivery of certificates for Warrant Shares or other securities in respect of
the Warrant Shares upon the exercise of Warrants, to a person or entity other
than a then-existing registered holder of Warrants.
Section . Mutilated or Missing Warrant Certificate. If this Warrant
----------------------------------------
Certificate shall be mutilated, lost, stolen or destroyed, upon request by the
registered holder of the Warrants, the Company shall issue, in exchange for and
upon cancellation of the mutilated Warrant Certificate, or in substitution for
the lost, stolen or destroyed Warrant Certificate, a new Warrant Certificate, in
substantially the form of this Warrant Certificate, of like tenor and
representing the equivalent number of Warrants, but, in the case of loss, theft
or destruction of this Warrant Certificate and, if requested by the Company,
indemnity also satisfactory to it.
3
<PAGE>
Section . Reservation and Issuance of Warrant Shares.
------------------------------------------
() The Company shall on or prior to the date the Warrants become
exercisable and at all times thereafter have authorized, and reserve and keep
available, for the purpose of enabling it to satisfy any obligation to issue
Warrant Shares upon the exercise of the Warrants, the number of Warrant Shares
deliverable upon exercise of the Warrants. The Company shall take any further
corporate action which may be necessary in order that the Company may validly
and legally issue, at the Exercise Price, Warrant Shares that are fully-paid and
nonassessable.
() The Company covenants that all Warrant Shares will, upon issuance
in accordance with the terms of this Warrant Certificate, be (i) duly
authorized, validly issued, fully-paid and nonassessable and (ii) free from all
taxes or other governmental charges with respect to the issuance thereof (not
including (y) income taxes payable by the holders of Warrants being exercised in
respect of gains thereon, and (z) transfer taxes, in accordance with the
provisions of Section 4 above) and from all liens, charges and security
interests created by the Company.
() If the issuance of any Warrant Shares required to be reserved
pursuant to paragraph (a) of this Section 6 requires registration with or
approval of any governmental authority under any Federal or state, before such
Warrant Shares may be issued upon the exercise thereof, the Company shall, at
its expense and as expeditiously as possible, use its best efforts to cause such
Warrant Shares to be duly registered or approved, as the case may be, provided,
--------
however, that the Company will not be required to qualify generally to do
- -------
business in any jurisdiction where it is not then so qualified, to subject
itself to taxation in any jurisdiction where it is not then subject to taxation,
or take any action which would subject it to general service of process in any
jurisdiction where it is not then so subject.
() To the extent that any exercise of Warrants is subject to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and related
regulations (the "HSR Act"), the Company shall promptly upon the request of the
-------
holder of this Warrant Certificate, cooperate with such holder in complying with
the HSR Act, including providing copies of relevant information regarding the
Company and, if required under the HSR Act, preparing and filing with the
Federal Trade Commission and the Department of Justice a Notification and Report
Form pursuant to the HSR Act.
Section . Adjustments.
-----------
() Adjustments of Number of Warrant Shares. The number of Warrant
---------------------------------------
Shares issuable upon the exercise of each Warrant shall be subject to adjustment
from time to time as hereinafter provided. Upon each adjustment pursuant to any
of paragraphs (b), (c), (d) or (e) of this Section 7, each Warrant shall
thereafter entitle the holder thereof to purchase at the Exercise Price the
number of Warrant Shares resulting from such adjustment (the "Adjusted Warrant
----------------
Share Amount").
- ------------
() Adjustment upon Issuance of Common Stock. If at any time after the
----------------------------------------
date hereof, the Company shall issue or sell any shares of Common Stock for a
consideration per share less than the Market Price (as hereinafter defined)
immediately prior to the time of such issue or sale, then, forthwith upon such
issue or sale, the Adjusted Warrant Share Amount shall be equal to the product
of the Adjusted Warrant Share Amount in effect immediately prior to the time of
such issue or sale multiplied by a fraction, the numerator of which shall be the
product of (x) the total number of shares of Common Stock outstanding
immediately after such issue or sale multiplied by (y) the Market Price
immediately prior to such issue or sale, and the denominator of which shall be
the sum of (A) the number of shares of Common Stock outstanding immediately
prior to such
4
<PAGE>
issue or sale multiplied by the Market Price immediately prior to such issue or
sale plus (B) the aggregate consideration received by the Company upon such
issue or sale.
() Other Adjustment Events and Provisions. For the purposes of this
--------------------------------------
Section 7, the following clauses shall also be applicable.
() Issuance of Rights, Warrants or Options. Except as provided
---------------------------------------
in clauses (iii) and (xii) of this Section 7(c) hereof, in case at any time
the Company shall grant, issue or sell (whether directly or by assumption
in a merger or otherwise) any rights or warrants (other than the Warrants)
to subscribe for or to purchase, or any options for the purchase of, Common
Stock or any stock or securities convertible into or exchangeable for
Common Stock (such convertible or exchangeable stock or securities being
herein called "Convertible Securities") whether or not such rights or
----------------------
warrants or options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such rights or
warrants or options or upon conversion or exchange of such Convertible
Securities (determined as provided below) shall be less than the Market
Price determined as of the date of granting such rights or warrants or
options, as the case may be, then the total maximum number of shares of
Common Stock issuable upon the exercise of such rights (other than rights
issued pursuant to a stockholders' rights plan adopted by the Company
pursuant to which the acquisition by any third party of a specified
percentage of shares of Common Stock triggers the exercisability of such
rights to purchase Common Stock for so long as no event has occurred
triggering such right to exercise) or warrants or options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such rights or warrants or options
shall (as of the date of granting of such rights or warrants or options) be
deemed to be outstanding and to have been issued for such price per share.
Except as provided in clause (v) of this Section 7(c), no further
adjustment of the Adjusted Warrant Share Amount shall be made upon the
actual issue of such Common Stock or such Convertible Securities upon
exercise of such rights or warrants or options or upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible
Securities. For the purposes of this clause (i), the price per share for
which Common Stock is issuable upon the exercise of any such rights or
warrants or options or upon conversion or exchange of any such Convertible
Securities shall be determined by dividing (A) the total amount, if any,
received or receivable by the Company as consideration for the granting of
such rights of warrants or options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all
such rights or warrants or options, plus, in the case of such rights or
warrants or options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion or
exchange thereof, by (B) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights or warrants or options or upon
the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such rights or warrants or options.
() Issuance of Convertible Securities. In case the Company
----------------------------------
shall issue (whether directly or by assumption in a merger or otherwise) or
sell any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon the conversion or exchange of such
Convertible Securities (determined as provided below) shall be less than
the Market Price determined as of the date of such issue or sale of such
Convertible Securities, then the total maximum number of shares of Common
Stock
5
<PAGE>
issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible Securities)
be deemed to be outstanding and to have been issued for such price per
share, provided that (A) except as provided in clause (v) of this Section
7(c), no further adjustments of the Adjusted Warrant Share Amount shall be
made upon the actual issue of such Common Stock upon conversion or exchange
of such Convertible Securities and (B) if any such issue or sale of such
Convertible Securities is made upon exercise of any rights or warrants to
subscribe for or to purchase or any option to purchase any such Convertible
Securities for which adjustments of the Adjusted Warrant Share Amount have
been or are to be made pursuant to clause (i) of this Section 7(c), no
further adjustment of the Adjusted Warrant Share Amount shall be made by
reason of such issue or sale. For the purposes of this clause (ii), the
price per share for which Common Stock is issuable upon conversion or
exchange of Convertible Securities shall be determined by dividing (1) the
total amount received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (2) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities.
() Issuance of Additional Settlement Warrants. If the number of
------------------------------------------
shares of Common Stock issuable upon the exercise of the Settlement
Warrants (as defined in Section 7(c)(xii)(A)) shall be increased from
1,750,000 shares, then upon the occurrence of such increase, the Adjusted
Warrant Share Amount shall be equal to the product of the Adjusted Warrant
Share Amount immediately prior to such increase multiplied by a fraction
the numerator of which is (i) the total number of shares of Common Stock
outstanding immediately thereafter (assuming the issuance of all shares
subject to the Settlement Warrant) and the denominator of which is the
total number of shares of Common Stock outstanding immediately prior to
such increase.
() Misstatement of Outstanding Common Stock. If the number of
----------------------------------------
shares of Common Stock issued and outstanding as of the date on which the
Company has given its representation pursuant to Section 3.2(a) of the Note
Purchase Agreement or if the number of shares of Common Stock issuable
pursuant to outstanding warrants, options, or rights including conversion
or preemptive rights) or agreements for the purchase or acquisition from
the Company of any of its shares of capital stock on which the Company has
given its representation pursuant to Section 3.2(d) of the Note Purchase
Agreement is greater than the respective number set forth in such
representations, the Adjusted Warrant Share Amount shall be equal to the
product of the Adjusted Warrant Share Amount immediately prior to any
adjustment hereunder, multiplied by a fraction the numerator of which is
the total number of shares of Common Stock actually outstanding or issuable
as of the date of such representation and the denominator of which is the
total number of shares of Common Stock that the Company represented were
outstanding or issuable.
() Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any rights or warrants or options referred to in
clause (i) above, or the additional consideration, if any, payable upon the
conversion or exchange of Convertible Securities referred to in clause (i)
or (ii) above, or the date at which any Convertible Securities referred to
in clause (i) or (ii) above are convertible into or exchangeable for Common
Stock, shall change (other than under or by reason of an event resulting in
a change pursuant to provisions set forth in the documents governing such
rights, warrants, options or Convertible Securities designed to protect
against dilution, to the extent such event also results in an adjustment
pursuant to this Section 7), then the Adjusted Warrant Share Amount in
effect at the time of such event shall forthwith be readjusted to the
Adjusted Warrant Share Amount which would have been in effect at such time
had such
6
<PAGE>
rights, warrants, options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially granted, issued
or sold. On the expiration of any such option or warrant or right or the
termination of any such right to convert or exchange such Convertible
Securities, the Adjusted Warrant Share Amount then in effect hereunder
shall forthwith be decreased to the Adjusted Warrant Share Amount which
would have been in effect at the time of such expiration or termination had
such right, warrant, option or Convertible Security, to the extent
outstanding immediately prior to such expiration or termination, never been
issued, and the Common Stock issuable thereunder shall no longer be deemed
to be outstanding. If the purchase price provided for in any such right or
warrant or option referred to in clause (ii) above or the rate at which any
Convertible Securities referred to in clause (i) or (ii) above are
convertible into or exchangeable for Common Stock, shall change at any time
under or by reason of provisions set forth in the documents governing such
rights, warrants, options or Convertible Securities designed to protect
against dilution, then in case of the delivery of Common Stock upon the
exercise of any right or warrant or option or upon conversion or exchange
of any such Convertible Security, the Adjusted Warrant Share Amount then in
effect hereunder shall forthwith be adjusted to such respective amount as
would have obtained had such right, warrant, option or Convertible Security
never been issued as to such Common Stock and had adjustments been made
upon the issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Adjusted Warrant Share Amount
then in effect hereunder is thereby increased.
() Stock Dividends. In case the Company shall declare a dividend
---------------
or make any other distribution upon any stock of the Company payable in
Common Stock or Convertible Securities, any Common Stock or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
() Consideration for Stock. In case any shares of Common Stock
-----------------------
or Convertible Securities or any right or warrants or options to purchase
any such Common Stock or Convertible Securities shall be issued or sold:
() for cash, the consideration received therefor shall be
deemed to be the amount received by the Company therefor, without
deduction therefrom of any expenses incurred or any underwriting
commission or concessions paid or allowed by the Company in connection
therewith.
() for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed
to be the fair value of such consideration as determined by the Board
of Directors of the Company, in good faith and in the exercise of
reasonable business judgment, without deduction of any expenses
incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith, which determination
shall be conclusive and which determination of valuation shall be sent
in writing by the Boards of Directors to the registered holders of
Warrants; provided, however, that if the fair value of the non-cash
-------- -------
consideration the value of which is being determined exceeds
$1,000,000, the Board of Directors of the Company shall provide
written notice of its valuation to the Warrantholders, and in the
event that the holders of at least thirty-three percent (33%) of the
then-outstanding Warrants disagree with such valuation, such
Warrantholders may
7
<PAGE>
provide written notice of such disagreement (which notice shall
include such Warrantholder's valuation and the basis therefor) to the
Company within 15 days following such notice from the Board of
Directors. For a period of 15 days following the delivery of the last
timely delivered notice of disagreement, the Company and such
Warrantholders shall in good faith seek to agree upon a valuation. If
at the end of such 15 day period the Company and such Warrantholders
have not agreed upon a valuation, then the value of the non-cash
consideration the value of which is being determined shall be
determined in an arbitration conducted in the same manner as an
arbitration conducted to determine Market Price as provided in Section
7(c)(x)(B).
() in connection with any merger or consolidation in which
the Company is the surviving corporation (other than any consolidation
or merger in which the previously outstanding shares of Common Stock
of the Company shall be changed into or exchanged for the stock or
other securities of another corporation), the amount of consideration
therefor shall be deemed to be the fair value as determined reasonably
and in good faith by the board of directors of the Company of such
portion of the assets and business of the non-surviving corporation as
such board any determine to be attributable to such shares of Common
Stock, Convertible Securities, rights or warrants or options, as the
case may be.
In the event of any consolidation or merger of the Company in which the Company
is not the surviving corporation or in which the previously outstanding shares
of Common Stock of the Company shall be changed into or exchanged for the stock
or other securities of another corporation or in the event of any sale of all or
substantially all of the assets of the Company for stock or other securities of
any corporation, the Company shall be deemed to have issued a number of shares
of its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation, and if any such calculation results in
adjustment of the Adjusted Warrant Share amount, the determination of the number
of shares of Common Stock issuable upon exercise of the Warrants immediately
prior to the merger, consolidation or sale, for purposes of paragraph (f) of
this Section 7, shall be made after giving effect to such adjustment of the
Adjusted Warrant Share Amount.
() Record Date. In case the Company shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Stock or in
Convertible Securities, or (B) to subscribe for or purchase Common Stock or
Convertible Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
() Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or
for the account of the Company, but the disposition of any such shares
shall be considered an issue or sale of Common Stock for the purposes of
this Section 7(c).
() Definition of Market Price. "Market Price" shall mean the
-------------------------- ------------
greater of:
() $0.075, and
8
<PAGE>
() () if shares of the Common Stock are listed or
admitted to trading on any exchange or quoted through NASDAQ or any
similar organization, the average of the daily closing prices per
share of the Common Stock for the 20 consecutive trading days
immediately preceding the date of public announcement of the event
giving rise to adjustment under this Section 7 or, if no such public
announcement is made with respect to such event, the average of the
daily closing prices per share of the Common Stock for the 20
consecutive trading days immediately preceding the day as of which
"Market Price" is being determined. The closing price of each day
shall be the last sale price regular way or, in case no such sale
takes place on such day, the average of the closing bid and asked
prices regular way, in either case on the New York Stock Exchange, or,
if shares of the Common Stock are not listed or admitted to trading on
the New York Stock Exchange, on the principal national securities
exchange on which the shares are listed or admitted to trading, or if
the shares are not so listed or admitted to trading, the average of
the highest reported bid and lowest reported asked prices as furnished
by the National Association of Securities Dealers, Inc. through NASDAQ
or through a similar organization if NASDAQ is no longer reporting
such information.
() if such shares of Common Stock are not listed or
admitted to trading on any exchange or quoted through NASDAQ or any
similar organization, such value shall be determined by the Board of
Directors of the Company, in good faith and in the exercise of
reasonable business judgment, without taking into consideration any
premium for shares representing control of the Company, any discount
for any minority interest therein or any restrictions on transfer
under Federal and applicable state securities laws or otherwise, which
determination shall be conclusive, and which determination of
valuation shall be sent in writing by the Board of Directors to the
registered holders of Warrants, provided, however, that if the Market
-------- -------
Price of the shares of Common Stock the value of which is being
determined exceeds $1,000,000, the Board of Directors of the Company
shall provide written notice of its determination of Market Price, and
in the event that the holders of at least thirty-three percent (33%)
of the then-outstanding Warrants disagree with such valuation, such
Warrantholders may provide written notice of such disagreement (which
notice shall include such Warrantholder's valuation and the basis
therefor) to the Company within 15 days following such notice from the
Board of Directors. For a period of 15 days following the delivery of
the last timely delivered notice of disagreement, the Company and such
Warrantholders shall in good faith seek to agree upon a valuation. If
at the end of such 15 day period the Company and such Warrantholders
have not agreed upon a valuation, then, to the fullest extent
permitted by law, the value of the shares of Common Stock shall be
determined, at the request of any party, by arbitration conducted in
the English language in Los Angeles, California in accordance with and
to the extent permitted by the Delaware Arbitration Act and, to the
extent not inconsistent therewith, the Rules for Large, Complex Cases
of the America Arbitration Association. The parties to the arbitration
shall attempt to select an arbitrator from such members. If the
parties to the arbitration do not agree on the selection of an
arbitrator within twenty (20) days after the date demand for the
arbitration is filed, an arbitrator having such experience shall be
selected in accordance with such Rules of the America Arbitration
Association. The arbitrator shall set forth his or her determination
in writing (which shall be sent to each party to such arbitration) and
shall enumerate in
9
<PAGE>
reasonable detail the basis of his or her determination. No party to
the arbitration may seek, and the arbitrator shall not award, punitive
or exemplary damages. To the fullest extent permitted by applicable
law, any judgment or award rendered by the arbitrator shall be final,
conclusive and binding. Judgment may be entered on any final,
unappealable arbitration award by any state or federal court having
jurisdiction thereof. To the fullest extent permitted by applicable
law, any controversy concerning whether a dispute is an arbitrable
dispute or as to the interpretation or enforceability of this Section
7(c)(x)(B)(II) skull be determined by the arbitrator. The arbitration
proceedings as well as the fact such proceedings occur, stall be kept
confidential by the parties hereto and may only be disclosed to their
personal representatives and advisors or as required by law and
insofar as is necessary to confirm, correct, vacate or enforce the
award. In the event of a breach of this provision, the arbitrator is
expressly authorized to assess damages and each of the parties hereto
consents to the expansion of the scope of arbitration for such
purpose. The pendency of any arbitration under this Section
7(c)(x)(B)(II) shall not relieve any party hereto of its obligations
under this Agreement. To the fullest extent permitted by applicable
law, if the Company or any Warrantholder shall resort to legal
proceedings for injunctive or other similar relief pending the outcome
of any such arbitration proceeding or prior to the initiation thereof,
such party shall not be deemed to have waived its rights to cause such
matter or any other mater to be referred to arbitration pursuant to
this Section 7(c)(x)(B)(II). The parties intend that this agreement to
arbitrate be valid, enforceable and irrevocable. The Warrant
designation of situs or a governing law for this Certificate or the
arbitration shall not be deemed an election to preclude application of
the Federal Arbitration Act if it would be applicable. The arbitrator
shall have authority in his or her discretion to grant injunctive
relief, award specific performance and impose sanctions upon any party
to any such arbitration. The fees, expenses and charges of any
arbitration pursuant to this Section 7(c)(x)(B)(II) shall be borne (I)
by the Company, if the arbitrator renders a valuation of the shares of
Common Stock that is higher than the valuation rendered by the Board
of Directors, or (II) by the Warrantholders who have notified the
Company in writing of their objection to the valuation of the Board of
Directors, pro rata in proportion to the number of shares of Common
Stock issuable upon exercise of their respective Warrants, if the
arbitrator renders a valuation of the shares of Common Stock that is
equal to or less than the valuation rendered by the Board of
Directors.
() Determination of Market Price under Certain Circumstances.
---------------------------------------------------------
Anything herein to the contrary notwithstanding, in case the Company shall
issue any shares of Common Stock or Convertible Securities in connection
with the acquisition by the Company of the stock or assets of any other
corporation or the merger of any other corporation into the Company, the
Market Price shall be determined as of the date the number of shares of
Common Stock or Convertible Securities (or in the case of Convertible
Securities other than stock, the aggregate principal amount of Convertible
Securities) was determined (as set forth in a written agreement between the
Company and the other party to the transaction) rather than on the date of
issuance of such shares of Common Stock or Convertible Securities.
() Certain Issues Excepted. Anything herein to the contrary
-----------------------
notwithstanding, the Company shall not be required to make any adjustment
of the Adjusted Warrant Share Amount whatsoever upon the issuance of
() (i) up to 593,741 shares of Common Stock, net of
repurchases, issuable to employees, directors, consultants or advisors
under
10
<PAGE>
options presently outstanding which were issued prior to the date of
the Warrants pursuant to stock option and restricted stock purchase
agreements approved by the stockholders and directors of this
corporation (excluding the options for 150,000 shares to be
surrendered by Guy de Vreese and canceled in connection with
settlement of pending litigation), (ii) up to 1,750,000 shares of
Common Stock issued or issuable to present or former shareholders of
the corporation pursuant to warrants anticipated to be issued in
connection with settlement of pending litigation (the "Settlement
----------
Warrants") to the extent the per share exercise price with respect
--------
thereto equals or exceeds the per share exercise price hereunder,
(iii) up to 80,000 shares of Common Stock issued or issuable pursuant
to that certain warrant granted to Ann Ehringer (the "Independent
-----------
Committee Warrant") in consideration for her services on the
-----------------
Independent Committee established to review the transactions
contemplated by the Note Purchase Agreement to the extent the per
share exercise price with respect thereto equals or exceeds the per
share exercise price hereunder, (iv) up to 7,749,449 shares of Common
Stock issued or issuable to Dana Arnold pursuant to the Arnold Warrant
to the extent the per share exercise price with respect thereto equals
or exceeds the per share exercise price hereunder, (v) 250,000 shares
of Common Stock issued or issuable to Eugene Shutler pursuant to
warrants issued under a Consulting Agreement, dated as of April 19,
1996, entered into between the corporation and Eugene Shutler to the
extent the per share exercise price with respect thereto equals or
exceeds the per share exercise price hereunder (the "Shutler Warrant")
---------------
and (vi) such additional number of shares of Common Stock as may be
fixed by the Board of Directors of this corporation issuable or issued
to employees, directors, consultants or advisors of this corporation
pursuant to stock option or restricted stock purchase plans approved
by the stockholders and directors of this corporation provided that
the aggregate number of shares of Common Stock issuable upon the
exercise of options or other rights issued pursuant to such plans.
exclusive of any options or other rights that have been exercised,
plus the aggregate number of share of Common Stock issued upon
exercise of such options or rights or otherwise issued pursuant to
such plans, shall not exceed 400,000 (as such number may be
proportionally adjusted upon any stock split or combination or upon a
merger or other corporate reorganization).
() Common Stock issued or issuable upon conversion of the
Company's Series A Preferred Stock and Series B Preferred Stock, or
() Common Stock issued or issuable upon exercise of the
Company's Series A Warrants and Series B Warrants or any other
warrants outstanding on the date hereof.
The Company shall not be required to make any such adjustment upon the
issuance of shares or the granting of any options or Warrants or rights
referred to in Section 7(c)(xii)(A), (B) and (C) if and to the extent that
the issuance of the shares covered thereby is expected by this clause.
() Certain Special Dividends. In case the Company shall declare a
-------------------------
dividend or make any other distribution (other than a distribution referred to
in paragraph (c) of this Section 7) upon the Common Stock (other than regular
periodic cash dividends), then in each case the Adjusted Warrant Share Amount in
effect immediately prior to the declaration of such dividend or making of such
distribution shall be adjusted so that such Adjusted Warrant Share Amount shall
equal the number of Warrant Shares determined by multiplying the Adjusted
Warrant Share
11
<PAGE>
Amount in effect immediately prior to the close of business on the
date fixed for the determination of stockholders entitled to receive such
dividend or distribution by a fraction, the numerator of which shall be the
Market Price on the date fixed for such determination and the denominator of
which shall be the Market Price on the date fixed for such determination less,
in the case of a dividend or distribution in cash, the amount per share of
Common Stock so declared or, in the case of any other dividend or distribution,
the then fair market value (as determined reasonably and in good faith by the
Board of Directors of the Company) of the portion of the property so distributed
applicable to one share of Common Stock, such adjustment to become effective
immediately prior to the opening of business on the day following the date fixed
for the determination of stockholders entitled to receive such distribution,
provided, however, that for this purpose, Market Price shall be determined as
- -------- -------
provided in Section 7(c)(x) without regard to Section 7(c)(x)(A).
() Subdivision or Combination of Stock. In case the Company shall at
-----------------------------------
any time subdivide the outstanding shares of Common Stock into a greater number
of shares, the Adjusted Warrant Share Amount in effect immediately prior to such
subdivision shall be proportionately increased, and conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Adjusted Warrant Share Amount in effect immediately prior to such
combination shall be proportionately reduced.
() Adjustment for Consolidation, Merger, Sale of Assets,
-----------------------------------------------------
Reorganization, etc. In case the Company (i) consolidates with or merges into
- --------------------
any other corporation and is not the continuing or surviving corporation of such
consolidation or merger, or (ii) permits any other corporation to consolidate
with or merge into the Company and the Company is the continuing or surviving
corporation but, in connection with such consolidation or merger, the Common
Stock is changed into or exchanged for stock or other securities of any other
corporation or cash or any other assets, or (iii) transfers all or substantially
all of its properties and assets to any other corporation, or (iv) effects a
capital reorganization or reclassification of the capital stock of the Company
in such a way that holders of Common Stock shall be entitled to receive stock,
securities, cash or assets with respect to or in exchange for Common Stock,
then, and in each such case, proper provision shall be made so that, upon the
basis and upon the terms and in the manner provided in this Section 7(f), the
holder of this Warrant Certificate, upon the exercise of each Warrant at any
time after the consummation of such consolidation, merger, transfer.
reorganization or reclassification, shall be entitled to receive (at the
aggregate Exercise Price in effect for all shares of Common Stock issuable upon
such exercise immediately prior to such consummation as adjusted to the time of
such transaction), in lieu of the Adjusted Warrant Share Amount prior to such
consummation, the stock and other securities, cash and assets to which a holder
of a number of shares of Common Stock equal to the Warrant Share Amount would
have been entitled upon such consummation (subject to adjustments subsequent to
such corporate action as nearly equivalent as possible to the adjustments
provided for in this Section 7).
() Notice of Adjustment. Whenever the Adjusted Warrant Share Amount
--------------------
is adjusted, then and in each such case the Company shall promptly, but in no
event later than 20 days after the date of occurrence of the event causing such
adjustment, deliver a certificate of an officer of the Company (the "Officer's
---------
Certificate") to the registered holder of the Warrants, which Officer's
- -----------
Certificate shall state the Adjusted Warrant Share Amount resulting from such
adjustment and or the increase or decrease, if any, in the number of shares of
Common Stock or other stock or property issuable upon the exercise of each
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based, including, if applicable, the Market
Price as determined in accordance with paragraph (c)(x) of this Section 7. The
Company shall keep at its office copies of all certificates and cause the same
to be available for inspection at said office during normal business hours by
any holder of a Warrant or any prospective purchaser of a Warrant designated by
a holder thereof.
12
<PAGE>
() Other Notices. In case at any time:
-------------
() the Company shall declare or pay any cash dividend on the
Common Stock (other than a regular periodic cash dividend);
() the Company shall declare or pay any dividend payable in
stock upon the Common Stock or make any distribution (other than a regular
periodic cash dividend) to the holders of the Common Stock;
() the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or
other rights;
() the Company shall authorize the distribution to all holders
of the Common Stock of evidence of its indebtedness or assets (other than a
regular periodic cash dividend);
() there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation or
merger of the Company with another corporation (other than a subsidiary of
the Company in which the Company is the surviving or continuing corporation
and no change occurs in the Common Stock of the Company), or sale of all or
substantially all of the Company's assets to, another corporation;
() there shall be a voluntary or involuntary dissolution,
liquidation, bankruptcy, assignment for the benefit of creditors or winding
up of the Company, or
() the Company proposes to take any other action or an event
occurs which would require an adjustment pursuant to paragraph (i) of this
Section 7, then, in any one or more of such cases, the Company shall give
written notice, addressed to the holder of this Warrant Certificate at the
address of such holder as shown on the books of the Company, of (A) the
date on which the books of the Company shall close or a record shall be
taken for any such dividend, distribution or subscription rights, as the
case may be, or (B) the date (or, if not then known, a reasonable
approximation thereof by the Company) on which any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
bankruptcy, assignment for the benefit of creditors, winding up or other
action, as the case may be, shall take place. Such notice shall also
specify (or, if not then known, reasonably approximate) the date as of
which the holders of Common Stock of record shall participate in any such
dividend, distribution or subscription rights, as the case may be, or shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, bankruptcy, assignment for the
benefit of creditors, winding up, or other action, as the case may be. Such
written notice shall also state that the action in question or the record
date is subject to the effectiveness of a registration statement under the
Securities Act or to a favorable vote of security holders, if either is
required. Such written notice shall be given (1) at least 15 days prior to
any event specified in any of clauses (i), (ii) or (iv) of this Section
7(h) and, with respect to any event specified in clause (i) of this Section
7(h), at least five days prior to the date on which the books of the
Company shall close or a record shall be taken for such event, (2) at least
20 days prior to any event specified in clauses (iii), (v) and (vii) of
this Section 7(h) and (3) with respect to events specified in clause (vi)
of this Section 7(h), (x) at least 30 days prior to a voluntary dissolution
or liquidation of the Company (y) at least three days prior to a voluntary
13
<PAGE>
bankruptcy, assignment for the benefit of creditors or winding up of the
Company, or (z) promptly after an involuntary bankruptcy, assignment for
the benefit of creditors or winding up of the Company. The failure to give
such written notice required by this Section 7(h) or any defect therein
shall not affect any vote upon, or the taking of, any such action.
() Certain Events. If any event occurs as to which in the reasonable
--------------
opinion of the Company or the holder of this Warrant Certificate, in good faith,
the other provisions of this Section 7 are not strictly applicable but the lack
of any adjustment would not in the opinion of the Company or such holder fairly
protect the purchase rights of the holder of this Warrant Certificate in
accordance with the basic intent and principles of such provisions, or if
strictly applicable would not fairly protect the purchase rights of the holder
of this Warrant Certificate in accordance with the basic intent and principles
of such provisions, then the Company shall appoint a firm of independent
certified public accountants (which may be the regular auditors of the Company)
of recognized national standing, which shall give the opinion upon the
adjustment, if any, on a basis consistent with the basic intent and principles
established in the other provisions of this Section 7, necessary to preserve,
without dilution, the exercise rights of the registered holder of this Warrant
Certificate. Upon receipt of such opinion, the Company shall forthwith make the
adjustments described therein.
() Prohibition of Certain Action. The Company shall not, by
-----------------------------
amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed under this
Warrant Certificate by the Company, but shall at all times in good faith assist
in the carrying out of all the provisions of this Section 7. Without limiting
the generality of the foregoing, the Company (a) shall not increase the par
value of any shares of Common Stock receivable upon the exercise of the Warrants
to an amount that is greater than the Exercise Price then in effect, (b) shall
take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully-paid and nonassessable shares of
Common Stock upon the exercise of all Warrants from time to time outstanding and
(c) shall not take any action which results in any adjustment of the Adjusted
Warrant Share Amount if such Adjusted Warrant Share Amount issuable after the
action would exceed the total number of shares of Common Stock then authorized
by the Company's certificate of incorporation and available for the purpose of
issue upon such exercise.
Section . Exercise Price. The Exercise Price of each Warrant shall be
--------------
$0.075.
Section . No Stock Rights. Except as may be provided in the
---------------
Stockholders Agreement, the holder of this Warrant Certificate, as such, shall
be entitled to vote or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof, nor shall anything contained herein be construed to confer upon the
holder of this Warrant Certificate, as such, the rights of a stockholder of the
Company or the right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action, to exercise any preemptive right, to receive notice of
meetings or other actions affecting stockholders (except as provided herein), or
to receive dividends or subscription rights or otherwise, until the Date of
Election to Purchase Warrants shall have occurred.
Section . Fractional Warrant Shares. No fractional Warrant Shares
-------------------------
shall be issued upon exercise of the Warrants, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share. Whether
or not fractional shares are issuable upon such exercise shall be determined on
the basis of the total number of shares of the Warrant the
14
<PAGE>
holder is at that time exercising and the number of shares of Common Stock
issuable upon such aggregate exercise.
Section . Absence of Registration. Neither the Warrants nor the
-----------------------
Warrant Shares have been registered under the Securities Act. The holder of this
Warrant Certificate, by acceptance hereof, represents that such holder is
acquiring the warrants to be issued to such holder for such holder's own account
and not with a view to the distribution thereof, and agrees not to sell,
transfer, pledge or hypothecate any Warrants or any Warrant Shares except as
contemplated in the Management Participation Agreements (as defined in the Note
Purchase Agreement) which may be entered into (which Management Participation
Agreements shall contain restrictions on transfer consistent with the legend on
page one of this Warrant Certificate), or in accordance with applicable law and
in accordance with the legend on the first page of this Warrant Certificate to
the extent such legend complies with applicable law.
Section . Notices. All notices, requests, demands and other
-------
communications relating to this Warrant Certificate shall be in writing,
including by telecopier, addressed, if to the registered owner hereof, to it at
the address furnished by the registered owner to the Company, and if to the
Company, at its office at 667 Rancho Conejo, Newbury Park, California 91320.
Attention President, Telecopier (805) 376-9184, or to such other address as any
party shall notify the other party in writing, and shall be effective, upon
receipt and, in the case of written notice by mail, three days after placement
into the mails (first class, postage prepaid), and in the case of notice by
telecopies on the same day as sent if the transmission is confirmed at or before
5:00 p.m. local time in the place of receipt, otherwise on the next business
day.
Section . Binding Effect. This Warrant Certificate shall be binding
--------------
upon and inure to the sole and exclusive benefit of the Company, its successors
and assigns, and the registered holder or holders from time to time of the
Warrants and the Warrant Shares.
Section . Survival of Rights and Duties. This Warrant Certificate
-----------------------------
shall terminate and be of no further force and effect on the earlier of 5:00
p.m., Los Angeles time, on the Expiration Date or the date on which all of the
Warrants have been exercised, except that the provisions of Sections 6(b) and 11
of this Warrant Certificate shall continue in full force and effect after such
termination date.
Section . Governing Law. This Warrant Certificate shall be construed
-------------
in accordance with and governed by the laws of the State of California without
regard to principles of conflicts of laws.
Section . Modification and Waiver. This Warrant Certificate and any
-----------------------
term hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought.
15
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be executed under its corporate seal by its officers thereunto duly authorized
as of the date hereof.
STYLES ON VIDEO, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
16
<PAGE>
ANNEX A
-------
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, __________________ hereby sells, assigns and
transfers to each assignee set forth below all of the rights of the undersigned
in and to the number of Warrants (as defined in and evidenced by the foregoing
Warrant Certificate) set opposite the name of such assignee below and in and to
the foregoing Warrant Certificate with respect to such Warrants and the Warrant
Shares (as defined in the Warrant Certificate) issuable upon exercisable of such
Warrants.
Name of Assignee Address Number of Warrants
- ---------------- ------- ------------------
If the aggregate number of such Warrants shall not constitute all the
Warrants evidenced by the foregoing Warrant Certificate, the undersigned
requests that a new Warrant Certificate evidencing the Warrants not so assigned
be issued in the name of and delivered to the undersigned.
Name of
Warrantholder (Print)
-----------------------
Dated (By)
--------------------------- ----------------------------------------
[SIGNATURE GUARANTEE] ATTEST
(Not Required for Initial
Registered Warrantholder)
-------------------------------------------
Secretary
17
<PAGE>
ANNEX B
-------
FORM OF ELECTION TO PURCHASE
(To Be Executed by the Warrantholder if the Warrantholder Desires to Exercise
_______ Warrants Evidenced by the foregoing Warrant Certificate)
To Styles on Video, Inc.:
The undersigned hereby irrevocably elects to exercise Warrants (as
defined in and evidenced by the foregoing Warrant Certificate) for, and to
purchase thereunder, Warrant Shares issuable upon exercise of such Warrants and
payment by the Warrantholder of the Exercise Price.
The Warrantholder hereby elects to pay the Exercise Price by complying
with clause below.
A. the delivery of $___________ in cash and any applicable taxes,
subject to Section 4 of the Warrant Certificate, payable by the undersigned
pursuant to such Warrant Certificate, or
B. instructing Styles on Video, Inc. to retain a number of Warrant
Shares (the "Payment Shares") equal to the quotient of the aggregate Exercise
--------------
Price of the Warrants hereby exercised divided by the Market Price of such
shares as of the date of exercise, and to deduct the number of Payment Shares
from the Warrant Shares to be delivered.
The undersigned requests that certificates for such shares be issued
in the name of the following:
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
------------------------------------
- ---------------------------------
(Please print name and address)
--------------------------------
- -------------------------------------------------------------------------------
If such number of Warrants shall not constitute all the Warrants
evidenced by the foregoing Warrant Certificate, the undersigned requests that a
new Warrant Certificate evidencing the Warrants not so exercised be issued in
the name of and delivered to the following:
- -------------------------------------------------------------------------------
B-18
<PAGE>
(Please print name and address)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Capitalized terms used herein but not otherwise defined shall have the
meanings ascribed to them in the Warrant Certificate.
Dated Name of
------------------------- Warrantholder (Print)
--------------------
[SIGNATURE GUARANTEE] (By)
(Not Required for Initial -------------------------------------
Registered Warrantholder)
(Title)
B-19
<PAGE>
EXHIBIT 10.37
CONFIDENTIAL
TERMINATION AND SETTLEMENT AGREEMENT
TERMINATION AND SETTLEMENT AGREEMENT (this "Agreement"), dated as of
December 19, 1996, between (i) FOREVER YOURS, INC. ("FYI"), a California
corporation and STYLES ON VIDEO, INC. ("SOV"), a Delaware corporation
(collectively, the "Companies"), and (ii) DANA I. ARNOLD ("Arnold"), an
individual.
W I T N E S S E T H:
-------------------
WHEREAS, SOV is the owner of 100% of the capital stock of FYI; and
WHEREAS, Arnold is a member of the Board of Directors of SOV, and
serves as Chairman of the Board of Directors, Chief Executive Officer, President
and Secretary of FYI pursuant to that certain Amended and Restated Employment
Agreement (the "Employment Agreement"), dated as of May 15, 1996, between Arnold
and FYI; and
WHEREAS, Arnold is the owner of a certificate for 7,747,449 Series C
Warrants (the "Warrants") to purchase shares of common stock, $.001 par value,
of SOV; and
WHEREAS, Arnold wishes to resign from the positions he holds with each
of the Companies, and the Companies and Arnold accordingly wish to terminate the
Employment Agreement and to fully and completely settle and resolve, pursuant to
this Agreement, their respective obligations to each other; and
NOW, THEREFORE, in consideration of the promises and the mutual
agreements contained herein, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, Arnold and the Companies hereby agree
as follows:
PURPOSE OF THE AGREEMENT
------------------------
This Agreement is made solely to accomplish an expeditious resolution of
the disputes that have arisen between the parties. Nothing herein is, or may be
construed as, an admission of liability or fault of any kind or nature on the
part of any party to this Agreement.
ARTICLE 1. RESIGNATION
-----------
Arnold hereby resigns in good standing (i) from the Board of Directors of
each of the Companies, (ii) as Chairman, Chief Executive Officer, President and
Secretary of FYI, and (iii) from
1
<PAGE>
any and all other offices and positions with either of the Companies and any of
their Affiliates. Without limitation to the foregoing sentence, Arnold's
employment by FYI pursuant to the Employment Agreement or otherwise is
terminated, as of December 18, 1996. However, Arnold shall remain available to
consult on a reasonable basis.
ARTICLE 2. DEFINITIONS
-----------
References to "Section" herein shall refer to Sections of this
Agreement. References to "Articles" shall refer to the Articles hereof. When
used in this Agreement, the terms set forth in this Article 2 shall have the
meanings set forth herein:
"Affiliate" of a Person shall mean any entity directly or indirectly
controlled by, controlling, or under common control with, that Person.
"Person" shall mean an individual, corporation, partnership, limited
liability company or any other entity, or any government or agency or political
subdivision of a government.
"Exercise Price" means the price for exercise of the Warrants referred
to hereinabove, as defined in the Warrant Certificate dated as of May 15, 1996
issued by SOV to Arnold.
"Transaction" shall mean the proposed transaction between SOV and
Hasco International, Inc. ("Hasco").
ARTICLE 3. BENEFITS
--------
Section 3.1. Arnold shall continue to be eligible to participate in the
Company Officer Benefit Plans defined in Section 4.2.2 of the Employment
Agreement until the earlier of March 31, 1997 or the closing of the Transaction.
Section 3.2. Arnold shall receive his current salary until the earlier of
March 31, 1997 or the closing of the Transaction. On the closing of the
Transaction, Arnold shall receive all unpaid salary due him under the Employment
Agreement at the rate of $100,000 per year.
Section 3.3. Arnold agrees that the payments contemplated by Section 3.2
above shall constitute the entire amount of monetary consideration to which he
is entitled under this Agreement, and that he will not seek any further
compensation or amount in connection with the matters which are the subject of
this Agreement, including, without limitation, with respect to any claims,
debts, liabilities, demands, obligations, promises,
2
<PAGE>
acts, agreements, costs, expenses (including, but not limited to attorneys'
fees), damages, causes of action, and claims for relief, of whatever kind or
nature, whether known or unknown, arising from or relating or incident to
Arnold's employment by either of the Companies pursuant to the Employment
Agreement or otherwise or activities in connection therewith, or relating to
Arnold's age, race, sex, religion, national origin, color, marital status, or
any other category protected from discrimination under federal, state or local
law.
Section 3.4. Arnold acknowledges that the Companies and their Affiliates
have made no representations to him regarding the tax consequences of any
amounts received by him pursuant to this Agreement. Arnold agrees to pay
federal and state taxes, if any, which are required by law to be paid by him
with respect to this Agreement.
Section 3.5. The Companies and Arnold acknowledge that this Agreement is
consensual and entered into without duress of any kind.
ARTICLE 4. MUTUAL RELEASES AND WAIVERS
---------------------------
Section 4.1. Except for the obligations arising under this Agreement, each
of the Companies hereby irrevocably relieves, releases and forever discharges
Arnold, his heirs, agents, representatives, employees, attorneys, and their
respective successors and assigns, and each of them, of and from any and all
claims, debts, liabilities, demands, obligations, promises, acts, agreements,
costs, expenses (including, but not limited to attorneys fees), damages, causes
of action, and claims for relief, of whatever kind or nature, whether known or
unknown, including, without limitation, those arising from or relating or
incident to Arnold's employment by either of the Companies pursuant to the
Employment Agreement or otherwise or activities in connection therewith.
Section 4.2. Except for the obligations arising under this Agreement,
Arnold hereby irrevocably relieves, releases and forever discharges each of the
Companies and their Affiliates, Pacific Capital Group, International Digital
Investors, L.P., their directors, shareholders, partners, agents,
representatives, employees, attorneys, and their respective successors and
assigns, including but not limited to K. Eugene Shutler, Marshall Geller, Barry
Porter, Ann Graham Ehringer, John A. Edling, and each of them, of and from any
and all claims, debts, liabilities, demands, obligations, promises, acts,
agreements, costs, expenses (including, but not limited to attorneys' fees),
damages, causes of action, and claims for relief, of whatever kind or nature,
whether known or unknown, including, without limitation, those arising from or
relating or incident to Arnold's employment by
3
<PAGE>
either of the Companies pursuant to the Employment Agreement or otherwise or
activities in connection therewith, or his ownership of the Warrants, or
relating to Arnold's age, race, sex, religion, national origin, color, marital
status, or any other category protected from discrimination under federal, state
or local law.
Section 4.3. Each of the parties hereto expressly waives any and all
rights under Section 1542 of the Civil Code of the State of California ("Section
1542") and any similar provision in any other jurisdiction. Section 1542
provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EVALUATING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR.
Section 4.4. Each of the Companies hereby expressly and completely waives
and releases any right or benefit which it or they have or may have under
Section 1542 pertaining to the matters set forth herein. In connection with
such waiver and relinquishment, each of the Companies acknowledges that it is
aware that it has or may hereafter discover claims presently unknown or
unsuspected, or facts in addition to or different from those which it now knows
or believes to be true, with respect to the matters set forth herein.
Nevertheless, it is the intention of each of the Companies, through this
Agreement, and with the advice of counsel, fully, finally and forever to settle
and release all such matters set forth herein. In furtherance of such
intention, each of the Companies' releases herein given shall be and remain in
effect as full and complete releases of the matters set forth herein,
notwithstanding the discovery or existence of any such additional or different
claims or facts relative hereto.
Section 4.5. Arnold hereby expressly and completely waives and releases
any right or benefit which he has or may have under Section 1542 pertaining to
the matters set forth herein. In connection with such waiver and
relinquishment, Arnold acknowledges that he is aware that he has or may
hereafter discover claims presently unknown or unsuspected, or facts in addition
to or different from those which he now knows or believes to be true, with
respect to the matters st forth herein. Nevertheless, it is the intention of
Arnold, through this Agreement, and with the advice of counsel, fully, finally
and forever to settle and release all such matters set forth herein. In
furtherance of such intention, each of Arnold's releases herein given shall be
and remain in effect as full and complete releases of the matters set forth
herein, notwithstanding the discovery or existence of any such additional or
different claims or facts relative hereto.
4
<PAGE>
Section 4.6. Arnold hereby expressly and completely waives and releases
any right or benefit which he has or may have under the Age Discrimination in
Employment Act of 1967 (29 U.S.C. (S) 621 et seq.); provided, however, that the
-- ---
parties here acknowledge that any right or claim under such Act that may arise
after the date of this Agreement is executed are not waived.
ARTICLE 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF ARNOLD
---------------------------------------------------
The Companies and Arnold hereby represent, warrant and covenant that:
Section 5.1. Arnold has seven (7) days following the execution of this
Agreement to revoke this Agreement and has been and hereby is advised that this
Agreement shall not become effective or enforceable until the revocation period
has expired. Provided that Arnold does not exercise his right of revocation as
set forth above, this Agreement shall become effective on the eighth day after
its execution by Arnold (the "Effective Date"). Any revocation hereof must be
in writing and provided pursuant to the provisions of Section 8.7.
Section 5.2. (a) Upon the closing of the Transaction, all of the
Warrants represented by the certificate owned by Arnold shall become fully
vested.
(b) The Exercise Price with respect to the Warrants shall
remain at 7.5 cents per share of common stock of SOV; provided that, in case the
Exercise Price is reduced below 7.5 cents per share of common stock of SOV for
another holder of Warrants, the Exercise Price with respect to Arnold's Warrants
will be reduced in a like amount.
(c) In case SOV shall at any time subdivide the outstanding
shares of common stock of SOV into a greater number of shares, the Adjusted
Warrant Share Amount (as defined by section 7, subsection "a" of that certain
Warrant Certificate for Series C Warrants to Purchase Common Stock, dated as of
May 15, 1996, No. R-4 for 7,747,449 Warrants) in effect immediately prior to
such subdivision shall be proportionately increased, and conversely, in case the
outstanding shares of common stock of SOV shall be combined into a smaller
number of shares, the Adjusted Warrant Share Amount in effect immediately prior
to such combination shall be proportionately reduced.
(d) Whenever the number of shares of common stock of SOV
purchasable upon the exercise of a Warrant is adjusted, the applicable Exercise
Price payable upon exercise of the Warrant shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by the fraction, of which
the numerator shall be the number of shares of common stock of SOV purchasable
upon the exercise of such Warrant immediately prior to such adjustment, and of
which the denominator shall be
5
<PAGE>
the number of shares of common stock of SOV so purchasable immediately
thereafter.
(e) Arnold hereby acknowledges that, pursuant to a contemplated
recapitalization of SOV, the percentage ownership of common stock of SOV which
he can purchase by exercising the Warrants will be unaffected, but he will be
entitled to purchase fewer shares of common stock of SOV and the price per share
will be proportionately greater than prior to the recapitalization.
(f) SOV will keep Arnold informed with respect to any transactions or
decisions that might affect the number of shares of common stock of SOV that may
be purchased upon the exercise of the Warrants.
Section 5.3. For the period from the Effective Date to May 15, 2001,
except as may be required by applicable law or legal process, including without
limitation the requirements of the securities laws of the United States, Arnold
shall not, and shall exercise best efforts to not permit his representatives,
employees, independent contractors, consultants, counsel or agents to, disclose
to any Person (i) any of the details of the arrangements set forth in this
Agreement, or (ii) reveal to any Person, or use for his own purposes, any Trade
Secret (as defined in the Employment Agreement) or other trade secret or
proprietary or other information concerning or relating to any matters affecting
either of the Companies or their Affiliates, or any of their respective
businesses, whether or not Arnold obtained such trade secret or proprietary or
other information as a result of his employment thereby (the "Confidential
Information"), except as permitted in writing by such other party, and except as
required or permitted hereunder; provided, however, anything to the contrary
appearing above notwithstanding, Confidential Information shall not include
information which is generally available to the public prior to Arnold's receipt
thereof, or has become, or becomes in the future, part of the public domain
after such receipt, other than as a result of or in connection with a violation
of any duty, liability or obligation set forth herein or in the Employment
Agreement, (ii) was available to Arnold on a nonconfidential basis from any
source other than the Companies or their Affiliates prior to disclosure by or on
behalf of Arnold, or (iii) becomes available to Arnold on a nonconfidential
basis from any source other than the Companies or their Affiliates which has the
right to make such disclosure and which information is not subject to a
confidentiality agreement or otherwise prohibited from transmission.
Section 5.4. If Arnold, or anyone to whom Arnold has transmitted or
caused to be transmitted Confidential Information, becomes legally compelled to
disclose any of such Confidential Information, Arnold will promptly notify each
of the Companies in writing so that the Companies may take such action as each
of them, in its discretion, may deem necessary or desirable to
6
<PAGE>
obtain a protective order or other appropriate remedy and/or waive compliance
with the provisions of this Agreement.
Section 5.5. Arnold shall immediately turn over to the Companies and
their Affiliates all correspondence, property, writings or documents, including
computer software and computer files, in his possession or custody which belong
or relate to the Trade Secrets or Confidential Information.
Section 5.6. Arnold has carefully read and fully understands all of the
provisions of this Agreement.
Section 5.7. Arnold is, through this Agreement, releasing the Companies
and their Affiliates from any and all claims he may have against any of them,
other than any claim arising under this Agreement.
Section 5.8. Arnold knowingly and voluntarily intends to be legally bound
by this Agreement.
Section 5.9. Arnold was advised and hereby is advised to consider the
terms of this Agreement and consult with any attorney of his choice prior to
executing this Agreement, and he has so consulted with such attorneys.
Section 5.10. For the period from the Effective Date to May 15, 1998,
Arnold shall not, and shall not permit his representatives, employees,
independent contractors, consultants, counsel or agents to (i) engage directly
or indirectly in any business which FYI or any successor to the business of FYI
conducts as of the Effective Date; provided, however, that ownership of less
than 1% of the outstanding stock of any publicly traded corporation shall not be
deemed to constitute a breach of this Section 5.10 solely by reason thereof, or
(ii) directly or indirectly solicit any employee of either of the Companies or
their Affiliates to work for any business or other Person then in direct or
indirect competition with the business of FYI as presently constituted; or (iii)
contact directly or indirectly, for business purposes, any hospital that is
under contract or served by with FYI; or (iv) purchase any securities (other
than by exercise of Arnold's Warrants) issued by SOV, by Dycam, by Hasco, or by
any successor of the foregoing. If the final judgment of a arbitrator or court
of competent jurisdiction declares that any term or provision of this Section
5.10 is invalid or unenforceable, the parties agree that the arbitrator or court
making the determination of invalidity or unenforceability shall have the power
to reduce the scope, duration, or area of the term or provision, to delete
specific words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this
7
<PAGE>
Agreement shall be enforceable as so modified after the expiration of the time
within which the judgment may be appealed. The parties hereto acknowledge that
this Agreement is being entered into substantially concurrently, and in
connection, with the sale of the assets of FYI.
Section 5.11. Arnold hereby agrees that he shall not, either personally
or through any of his representatives, employees, independent contractors,
consultants, counsel or agents, make any personally or professionally
disparaging remarks, either orally or in writing, to any third party about SOV,
FYI or Hasco, nor shall he in any manner interfere with the business or
operations of SOV, FYI or Hasco. Such prohibition shall extend to all third
parties whatsoever, including, without limitation, the press or other media; the
public; former and future business clients or customers; officers, directors or
employees of SOV, FYI or Hasco and all individuals. Notwithstanding anything to
the contrary contained in this Agreement, SOV, FYI and/or Hasco shall have to
right to make reasonable statements, remarks and disclosures in response to any
article or published report referring to either of them which is based upon or
refers to statements by Arnold or any of his representatives, employees,
independent contractors, consultants, counsel or agents.
ARTICLE 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANIES
----------------------------------------------------------
Each of the Companies hereby represents, warrants and covenants that:
Section 6.1. For so long as Arnold complies with the terms of this
Agreement, but not longer than a period of three years from the Effective Date,
the Companies shall not, and shall not permit their Affiliates to, directly or
through attorneys or other intermediaries, make any statements or take any
actions with the purpose or reasonably anticipated effect of casting Arnold in
an unfavorable light, except as may be required by applicable law or legal
process, including without limitation the requirements of the securities laws of
the United States; provided, however, that nothing appearing herein shall cause
either of the Companies or their Affiliates to be liable for any statement made
or action taken by non-managerial personnel if such statement or action was made
or taken without the knowledge or approval of such Company or Affiliate or any
of their respective authorized managerial personnel.
Section 6.2. To the extent provided for in the respective Bylaws of the
Companies, the Companies will continue to indemnify Arnold for any claims or
damages arising from Arnold's good faith performance of his duties in his
positions with the Companies.
8
<PAGE>
ARTICLE 7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF EACH PARTY
-------------------------------------------------------
Each party hereto hereby covenants, represents and warrants, severally and
not jointly as follows:
Section 7.1. Such party has received its own independent legal advice
from attorneys of his or its own choice, with respect to the advisability of
executing this Agreement.
Section 7.2. There are no other agreements or undertakings between any of
the parties relating in any way to the claims settled herein, except as stated
in this Agreement.
Section 7.3. Such party, together with his or its attorneys, has made
such investigation of facts pertaining to this Agreement and of all the matters
pertaining thereto, as he or it deems necessary or advisable.
Section 7.4. This Agreement is the result of negotiation among the
parties, each of whom has participated in the drafting hereof, through his or
its representative attorneys. This Agreement shall be interpreted in accordance
with the plain meaning of its terms and shall not be strictly construed for or
against any of the parties hereto.
Section 7.5. This Agreement has been carefully read by, the contents
hereof are known and understood by, and it is signed freely by, such party.
Section 7.6. This Agreement is intended by such party to be, and such
party hereby covenants that this Agreement is, final and binding between and
among the parties hereto, including their successors and assigns, and is further
intended to be effective as a full and final accord and satisfaction between and
among the parties hereto. Such party relies on the finality of this Agreement
as a material factor inducing such party's execution of this Agreement.
Section 7.7. Such party will not take any action which would interfere
with the performance of this Agreement by the other parties hereto or which
would adversely affect any of the rights provided for herein.
Section 7.8. This Agreement may be executed in counterparts, which,
collectively, shall constitute one and the same instrument.
Section 7.9. The representations and warranties contained in this
Agreement shall survive the date of execution hereof and the consummation of
each of the transactions contemplated hereby.
9
<PAGE>
Section 7.10. Such party is the sole and lawful owner of all right, title
and interest in and to every claim and other matter which he or it releases or
confers herein, and he or it has not heretofore assigned or transferred, or
purported to assign or transfer, to any Person or entity, any claims or other
matter herein released or conferred. The parties hereto shall indemnify, defend,
and hold each other harmless from and against any claims based upon or arising
in connection with any such prior assignment or transfer, or any such purported
assignment or transfer, of any claims or other matter herein released, or
conferred.
Section 7.11. This Agreement has been approved and authorized by the
respective Boards of Directors of the Companies.
ARTICLE 8. MISCELLANEOUS
-------------
Section 8.1. Assignment. This Agreement may not be assigned, in whole or
----------
in part, by any party hereto without the prior written consent of the other
parties.
Section 8.2. Amendments. No amendment or modification hereof shall be
----------
valid or binding upon the parties hereto unless made in writing and signed by
all of the parties.
Section 8.3. No Partnership. Nothing contained in this Agreement shall
--------------
be construed to constitute either party the partner or agent of the other party,
nor shall either party have any authority to bind the other party in any
respect, except as otherwise expressly set forth herein.
Section 8.4. Entire Agreement. This Agreement constitutes the entire
----------------
agreement among the parties hereto respecting the subject matter hereof and
supersedes all prior agreements among or between any of the parties hereto
respecting such subject matter.
Section 8.5. Non-Admission. This Agreement and compliance herewith shall
-------------
not be construed as an admission by any party hereto of any liability whatsoever
(other than pursuant to this Agreement), or as an admission by any such party of
any violation of the rights of any other party or Person, violation of any
order, law, stature, duty, or contract whatsoever against such other party or
Person. Each party specifically disclaims any liability to the other parties or
any other Person for any alleged violation of the rights of such other party or
Person, or for any alleged violation of any order, law, statute, duty, or
contract.
10
<PAGE>
Section 8.6. Severability. If any provision of this Agreement is held to
------------
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not be affected or impaired thereby, and such
remaining provisions shall be construed so as to give effect to the parties'
intent.
Section 8.7. Notices. Except as otherwise specifically required in this
-------
Agreement, all notices and other communications given hereunder shall be in
writing and shall be deemed to have been duly given when delivered by facsimile,
messenger or recognized national courier or express mail service to the address
or facsimile number set forth below, or to such other address or facsimile
number as may be furnished by such party by notice in the manner provided
herein:
FYI: Forever Yours, Inc.
667 Rancho Conejo Drive
Newbury Park, California 91320
Attention: Board of Directors
Facsimile: (805)376-8364
SOV: Styles on Video, Inc.
K. Eugene Shutler
Chief Executive Officer
667 Rancho Conejo Boulevard
Newbury Park, California 91320
Facsimile: (805)376-9184
Arnold: _________________________________
_________________________________
_________________________________
Facsimile:
Section 8.8 Headings. Section headings have been inserted for
--------
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
Section 8.9 Waiver. The waiver of a breach or default under any
------
provision of this Agreement shall not be deemed a waiver of any subsequent
breach or default of any kind or nature.
11
<PAGE>
Section 8.10 Governing Law. This Agreement shall be governed by
-------------
and construed in accordance with the laws of the State of California applicable
to agreements made and fully to be performed therein by residents thereof.
Section 8.11 Disputes. All claims, disputes, demands, causes of
--------
action, and claims for relief, of whatever kind or nature, whether known or
unknown, arising from or relating or incident to this Agreement shall be
litigated in the federal or state courts which encompass the County of Los
Angeles, California.
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
FOREVER YOURS, INC.,
a California corporation
By:
----------------------------------
Name:
Title:
STYLES ON VIDEO, INC.,
a Delaware corporation
By:
-----------------------------------
DANA I. ARNOLD
By:
-----------------------------------
Dana I. Arnold
13
<PAGE>
EXHIBIT 10.38
[EXECUTION COPY]
ASSET PURCHASE AGREEMENT
Dated as of January 31, 1997
Among
STYLES ON VIDEO, INC.
FOREVER YOURS, INC.
HASCO INTERNATIONAL, INC.
and
HASCO HOLDINGS CORP.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1. DEFINITIONS 1
ARTICLE 2. PURCHASE AND SALE OF ASSETS 6
2.1 Transferred Assets 6
2.2 Excluded Assets 7
ARTICLE 3. ASSUMPTION OF LIABILITIES 7
3.1 Assumed Liabilities 7
3.2 Excluded Liabilities 8
3.3 Payment of Excluded Liabilities 9
3.4 Closing Date Agreements 9
ARTICLE 4. CONSIDERATION 10
4.1 Purchase Price 10
4.2 Purchase Price Adjustment - Hospital Contracts 11
4.3 Allocation of Purchase Price 12
4.4 Purchase Price Adjustment -- Operations 12
ARTICLE 5. THE CLOSING 14
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE
PARENT 14
6.1 Organization 14
6.2 Power and Authority 14
6.3 Valid and Binding Agreement 14
6.4 Subsidiaries 15
6.5 Consents and Approvals 15
6.6 No Violations 15
6.7 Financial Statements 15
6.8 No Undisclosed Liabilities 15
6.9 Title to Properties 16
6.10 Condition of Transferred Assets 16
6.11 Real Property 16
6.12 Proprietary Rights 16
6.13 Contracts 17
6.14 Litigation 18
6.15 Compliance with Laws 18
6.16 No Material Adverse Change 18
6.17 Interim Changes 18
6.18 Taxes 19
6.19 Labor Matters 20
6.20 Environmental and Safety Matters 20
6.21 Arnold Agreements 21
6.22 Inventory 21
6.23 Transactions with Affiliates 21
6.24 Employee Benefit Plans 21
6.25 Insurance 22
6.26 Brokers 22
6.27 Accuracy of Information 22
6.28 Representations and Warranties on Closing Date 22
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF THE BUYER 23
7.1 Organization 23
7.2 Power and Authority 23
7.3 Valid and Binding Agreement 23
7.4 Consents and Approvals 23
7.5 No Violations 23
7.6 Brokers 23
7.7 Financial Statements 24
7.8 No Material Adverse Change 24
7.9 Representations and Warranties on Closing Date 24
ARTICLE 8. COVENANTS OF THE SELLER AND PARENT 24
8.1 Conduct of Business 24
8.2 Access to Information 25
8.3 Efforts to Consummate Transaction 25
8.4 No Solicitation 26
8.5 Hospital Contracts 26
8.6 Financial Information. 26
8.7 Employees. 27
8.8 Pre-Closing Activities 27
8.9 Consultation 27
8.10 Limitation of Liability 27
ARTICLE 9. COVENANTS OF THE BUYER 27
9.1 Actions and Consents 27
9.2 Continued Assistance 28
9.3 Buyer Financial Statements 28
ARTICLE 10. OTHER AGREEMENTS AMONG THE PARTIES 28
10.1 Expenses 28
10.2 Certain Tax Matters 28
10.3 Receivables; Mail 29
ARTICLE 11. CONDITIONS OF CLOSING 30
11.1 Conditions to Obligation of the Buyer to Close 30
11.2 Conditions to Obligation of the Seller to Close 31
ARTICLE 12. INDEMNIFICATION 32
12.1 Indemnification 32
12.2 Minimum Amounts of Indemnity 33
12.3 Survival; Time Limit On Indemnity 33
12.4 Procedure for Claims By Third Parties 33
12.5 Right of Set-off 34
ARTICLE 13. MISCELLANEOUS 35
13.1 Termination 35
13.2 Publicity 35
13.3 Entire Agreement 35
13.4 Power of Attorney 36
13.5 Non-Assignable Assets 36
13.6 Further Assurances 37
13.7 Notices 37
13.8 Waivers and Amendments 38
13.9 Counterparts 38
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
13.10 Governing Law 38
13.11 Severability 38
13.12 No Strict Construction 38
13.13 Assignment 38
13.14 Specific Performance 39
13.15 Headings 39
13.16 No Third Party Beneficiaries 39
13.17 Guarantee By the Parent 39
13.18 Guarantee By Holdings 40
</TABLE>
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (this "Agreement"), dated January 31, 1997,
---------
among STYLES ON VIDEO, INC., a Delaware corporation ("Parent"), FOREVER YOURS,
------
INC., a California corporation (the "Seller"), HASCO INTERNATIONAL, INC., a
------
Missouri corporation (the "Buyer"), and HASCO HOLDINGS CORP., a Delaware
-----
corporation ("Holdings").
--------
WHEREAS, the Parent owns all of the outstanding stock of the Seller;
WHEREAS, Holdings owns all of the outstanding stock of the Buyer;
WHEREAS, the Seller is engaged in the newborn portrait, photography
and imaging service (the "Business");
--------
WHEREAS, the Seller desires to sell, assign and transfer, and the
Buyer desires to purchase and acquire, substantially all of the assets,
properties and rights used by the Seller in the operation of the Business,
subject to the assumption by the Buyer of certain specified liabilities and
obligations of the Seller relating to the Business, on the terms and conditions
set forth herein;
WHEREAS, on the date hereof the Buyer has agreed to make available to
the Seller certain loans to be used in connection with the Business as provided
in the Loan Agreement, dated as of the date hereof (the "Loan Agreement");
WHEREAS, the Business has been, and is expected to continue to,
operate at a loss; and
WHEREAS, the Buyer desires that Seller take certain actions to reduce
its losses between the date hereof and the Closing Date and the Seller has
agreed to take actions as provided in Sections 8.8 and 8.9 with this objective.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1. DEFINITIONS
"Affiliate" means, as to any Person, any other Person which directly
---------
or indirectly controls, or is under common control with, or is controlled by,
such Person and, if such Person is an individual, any member of the immediate
family (including parents, spouse and children) of such individual, any trust
whose principal beneficiary is such individual or one or more members of such
individual's immediate family and any Person who is controlled by any such
member or trust.
"Adjustments" has the meaning set forth in Section 4.4(a).
-----------
"Arnold Agreements" means those certain termination and Settlement
-----------------
Agreements, dated as of December 18, 1996, among the Seller, Parent and Randee
Arnold and, dated as of December 19, 1996, among the Seller, Parent and Dana
Arnold.
"Assumed Liabilities" has the meaning set forth in Section 3.1.
-------------------
"Agreement" has the meaning set forth in the preamble hereof.
---------
"Business" has the meaning set forth in the preamble hereof.
--------
1
<PAGE>
"Buyer" has the meaning set forth in the preamble hereof.
-----
"CERCLA" means the Comprehensive Environmental Response, Compensation,
------
and Liability Act of 1980, as amended.
"Change of Control" shall mean the acquisition by any Person or a
-----------------
group (as defined in section 13(d) of the Exchange Act of 1934) of Persons
(other than any current stockholder of Holdings, their Affiliates or group of
such current stockholders or their Affiliates and, in the case of Buyer,
Holdings) of control (directly or indirectly) of Holdings or the Buyer; provided
--------
that the change of directors or officers of the Buyer or Holdings shall not be
deemed an acquisition of control.
"Closing" has the meaning set forth in Article 5.
-------
"Closing Date" has the meaning set forth in Article 5.
------------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Control" (including, with its correlative meanings, "controlled by"
-------
and "under common control with") shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of management or
policies of the subject Person (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise).
"Credit Amount" shall initially be zero and shall be increased or
-------------
decreased in accordance with Section 4.2.
"Dycam" means Dycam Inc., a Delaware corporation.
-----
"Dycam Master Agreement" has the meaning given to such term in Section
----------------------
3.4.
"Dycam Option" has the meaning set forth in Section 3.4.
------------
"Environmental and Safety Requirements" means all federal, state,
-------------------------------------
local and foreign statutes, regulations, ordinances and other provisions having
the force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law concerning public
health and safety, worker health and safety, and pollution or protection of the
environment, including without limitation all those relating to the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, Release,
threatened Release, control, or cleanup of any hazardous materials, substances
or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"Excluded Assets" has the meaning set forth in Section 2.2.
---------------
"Excluded Liabilities" has the meaning set forth in Section 3.2.
--------------------
"GAAP" means, with respect to any date of determination, generally
----
accepted accounting principles as used by the Financial Accounting Standards
Board and/or the American
2
<PAGE>
Institute of Certified Public Accountants consistently applied and maintained in
accordance with past practice throughout the periods indicated.
"Governmental Agency" means any federal, state, local, foreign or
-------------------
other governmental agency, instrumentality, commission, authority, board or
body.
"Hasco Hospital" means any hospital in which Hasco is Installed on
--------------
December 13, 1996, or was Installed during the 12 months preceding December 13,
1996.
"Hasco Loans" means the loans by the Buyer under the Loan Agreement.
-----------
"Hazardous Materials" means "hazardous substances" as defined in
-------------------
CERCLA, petroleum products, asbestos, pollutants, contaminants and wastes, and
shall include, but not be limited to, all substances regulated under
Environmental and Safety Requirements.
"Hospital Contracts" means each written or oral contract or
------------------
arrangement of Seller existing on the date hereof or entered into in accordance
with Section 8.5 after the date hereof with any hospital for the provision of
infant photography services in hospitals.
"Hospital Guarantee" has the meaning given to such term in Section
------------------
3.2(e).
"Indemnified Party" has the meaning set forth in Section 12.4(a).
-----------------
"Indemnifying Party" has the meaning set forth in Section 12.4(a).
------------------
"Installed" by the Seller or the Buyer means that the Seller or the
---------
Buyer has one of its cameras in the hospital in question that is operational and
taking pictures and where the Seller or Buyer, as the case may be, is providing
sales materials to mothers of the newborn infants.
"Interim Financials" has the meaning set forth in Section 8.6.
------------------
"Internal Revenue Service" or "IRS" means the United States Internal
------------------------ ---
Revenue Service.
"IP License" has the meaning set forth in Section 3.4.
----------
"Latest Balance Sheet" means the Seller's balance sheet as of December
--------------------
31, 1996.
"Leased Property" has the meaning set forth in Section 6.11(b).
---------------
"Leases" has the meaning set forth in Section 6.11(b).
------
"Letter of Intent" means the Letter Agreement among the Parent,
----------------
Seller, Buyer and Dycam, dated as of December 13, 1996, relating to the sale of
the Business and certain other matters.
"Liability" means any liability or obligation (whether known or
---------
unknown, absolute or contingent, liquidated or unliquidated or due or to become
due), including any liability for Taxes.
"Liens" means any mortgage, pledge, security interest, encumbrance,
-----
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof), any sale of receivables
with recourse against the Seller or any of its affiliates, any filing or
agreement to file a financing statement as debtor under the Uniform Commercial
Code or any similar statute other than to reflect ownership by a third party of
property leased to the Seller under
3
<PAGE>
a lease which is not in the nature of a conditional sale or title retention
agreement, or any subordination arrangement in favor of another Person (other
than any subordination arising in the Ordinary Course of Business).
"Loan Agreement" has the meaning set forth in the preamble hereof.
--------------
"Losses" means any and all damages, costs, liabilities, losses,
------
judgments, claims, penalties, fines, expenses or other costs (including
attorney's fees).
"Material Adverse Effect" means a material adverse effect upon (a) the
-----------------------
Transferred Assets, (b) the business, operations, condition (financial or
otherwise), assets, prospects or employee, customer or supplier relations of the
Seller, (c) the ability of the Seller, Parent or Dycam to consummate the
transactions contemplated hereby, (d) the enforceability of this Agreement or
the other agreements contemplated hereby against the Seller, Parent or Dycam, as
applicable, or (e) the ability of the Buyer following the Closing Date to
operate the Business as operated by the Seller prior to the Closing Date;
provided that income before tax of the Seller (excluding legal and accounting
expenses relating to the Arnold Agreements or the transactions contemplated
hereunder), calculated consistently, of not less than an average of negative
$250,000 per month following September 30, 1996 shall not, in and of itself,
constitute a Material Adverse Effect.
"Monthly Financials" means the balance sheet and statement of
------------------
operations of the Seller for the each month commending with January, 1996 and
ending with December, 1996.
"Monthly Interim Financials" means the balance sheet and statement or
--------------------------
operations of the Seller, to the extent provided to the Buyer pursuant to
Section 8.6, for each month after December 1996.
"Noncompetition Agreement" means the noncompetition agreement dated as
------------------------
of the Closing Date to be entered into between the Buyer, the Seller and the
Parent in the form of Exhibit A hereto.
---------
"Ordinary Course of Business" means the ordinary course of business
---------------------------
consistent with past practice.
"Person" means any individual, partnership, joint venture,
------
corporation, trust, unincorporated organization or other entity.
"Post-Closing Tax Period" means, with respect to a taxable period
-----------------------
which includes (but does not end on) the Closing Date, the period beginning on
the day after the Closing Date and ending on the last day of such taxable
period.
"Pre-Closing Tax Period" means, with respect to a taxable period which
----------------------
includes (but does not end on) the Closing Date, the period beginning on the
first day of such taxable period and ending on (and including) the Closing Date.
"Proprietary Rights" means, collectively, all patents, patent
------------------
applications and patent disclosures; inventions (whether or not patentable and
whether or not reduced to practice as well as any reissues, continuations,
continuations-in-part, divisions, extensions or reexaminations thereof); all
trade and corporate names, service marks, trademarks, trade dress, together with
all goodwill associated therewith; all mask works; all registered and
unregistered statutory and common law copyrights and copyrightable works; all
registrations, applications and renewals for any of the foregoing; all trade
secrets, confidential information, ideas, formulae, compositions, know-how,
manufacturing and production processes and techniques, research information,
drawings, specifications, designs, plans, improvements, proposals, technical and
computer data, documentation and software, financial, business and marketing
plans, customer and supplier lists
4
<PAGE>
and related information, marketing and promotional materials and all other
information, know-how and proprietary rights and all copies and tangible
embodiments of the foregoing (in whatever form or medium).
"Quarterly Financials" means the balance sheet and statement of
--------------------
operations of the Seller for the each of the first four fiscal quarters of 1996.
"Quarterly Interim Financials" means the balance sheet and statement
----------------------------
of operations of the Seller, to the extent provided to the Buyer pursuant to
Section 8.6, for each fiscal quarter of 1997.
"Real Property" has the meaning set forth in Section 6.11(b).
-------------
"Release" shall have the meaning set forth in CERCLA.
-------
"Retained Employees" shall have the meaning set forth in Section 8.7.
------------------
"Seller" has the meaning set forth in the preamble hereof.
------
"Seller Financials" has the meaning set forth in Section 6.7.
-----------------
"Tax" means any (a) federal, state, local or foreign income, gross
---
receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use,
transfer, registration, value added, excise, natural resources, severance,
stamp, occupation, premium, windfall profit, environmental, customs, duties,
real property, personal property, capital stock, social security, unemployment,
disability, payroll, license, employee or other withholding, or other tax, of
any kind whatsoever, including any interest, penalties or additions to tax or
additional amounts in respect of the foregoing; (b) Liability of any corporation
for the payment of any amounts of the type described in clause (a) arising as a
result of being (or ceasing to be) a member of any affiliated group (or being
included in any Tax Return relating thereto); and (c) Liability for the payment
of any amounts of the type described in clause (a) or (b) as a result of any
express or implied obligation to indemnify or otherwise assume or succeed to the
Liability of any other Person.
"Tax Liabilities" has the meaning set forth in Section 3.2(d).
---------------
"Tax Returns" means returns, declarations, reports, claims for refund,
-----------
information returns or other documents (including any related or supporting
schedules, statements or information) filed or required to be filed in
connection with the determination, assessment or collection of Taxes of any
party or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
"Third Party Claim" has the meaning set forth in Section 12.4(a).
-----------------
"Trademark Assignment" has the meaning set forth in Section 3.4.
--------------------
"Transferred Assets" has the meaning set forth in Section 2.1.
------------------
"Transferred Employees" has the meaning set forth in Section 8.7.
---------------------
"Underpayment" has the meaning given to such term in Section 3.2(e).
------------
"Year-End 1996 Financials" means the balance sheet and statement of
------------------------
operations of Parent for the fiscal year ended December 31, 1996.
5
<PAGE>
As used herein, the term "includes" or "including" shall be deemed to
be followed by "without limitations."
ARTICLE 2. PURCHASE AND SALE OF ASSETS
2.1 TRANSFERRED ASSETS. On the terms and subject to the conditions
set forth in this Agreement, the Seller shall sell, transfer, convey, assign and
deliver to the Buyer, and the Buyer shall purchase, acquire and accept from the
Seller, on the Closing Date, all of the right, title and interest of the Seller
in and to all of the properties, assets and rights used or useful in connection
with the Business, other than the Excluded Assets (as defined below), as the
same shall exist on the Closing Date (collectively, the "Transferred Assets"),
------------------
free and clear of all liens, including, without limitation, the following:
(a) all Hospital Contracts, including those listed on Schedule 2.1(a)
---------------
(such listed Hospital Contracts are referred to as the "Current Contracts");
-----------------
(b) all machinery, equipment (including cameras and camera units
computer equipment and office equipment), inventories, raw materials, supplies,
spare parts and other items of personal property of the Seller utilized in
connection with the Business;
(c) all motor vehicles owned or leased by the Seller utilized in
the Business;
(d) all cash and cash equivalents of Seller;
(e) all accounts receivable of the Seller or relating to products sold
or services rendered in connection with the Business, whether or not invoices
relating thereto have been issued;
(f) all right, title and interest in and to all leases, contracts,
licenses, purchase orders, sales orders, commitments and other similar
agreements of the Seller relating to the Business to the extent that they are
listed on Schedule 3.1;
------------
(g) all prepaid expenses (excluding amounts due from Parent), advances
and deposits of the Seller relating to the Business;
(h) all causes of action, demands, judgments, claims (including
insurance claims), indemnity rights or other rights of the Seller relating to
the Transferred Assets or the Business or arising under express or implied
warranties from suppliers with respect to the Transferred Assets;
(i) all Proprietary Rights of the Seller utilized in connection with
the Business, including, but not limited to, the Proprietary Rights set forth on
Schedule 6.12 but excluding those set forth on Schedule 2.2(b); all income,
- ------------- ---------------
royalties, damages and payments due at Closing or thereafter and all other
rights with respect thereto (including rights to damages and payments for past,
present or future infringements or misappropriations thereof) in all countries,
in each case with respect to any of the Proprietary Rights transferred pursuant
to this Section 2.1(i);
(j) all rights under confidentiality and non-compete agreements, and
all similar rights arising under common law or by statute, to the extent
assignable as contemplated in Section 13.5;
6
<PAGE>
(k) all franchises, consents, licenses, marketing rights, permits,
authorizations, approvals and other operating authorities issued by any
Governmental Agency to the Seller relating to the Business;
(l) all right, title and interest of the Seller relating to the
Business as a going concern, including its goodwill (if any) and all other
intangible assets associated therewith;
(m) the originals or copies of all books and records of the Seller
relating to the Business, including correspondence, employment records,
production records, accounting records, property records, mailing lists,
customer and vendor lists, Proprietary Rights prosecution files, and regulatory
files (including master files); and
(n) all other assets and properties of the Seller relating to the
Business which exist on the Closing Date, whether tangible or intangible, real
or personal.
2.2 EXCLUDED ASSETS. The Seller is not selling, and the Buyer is not
purchasing, any of the following assets relating to the Business, all of which
shall be retained by the Seller and shall not be reflected on the Closing Date
Balance Sheet (collectively, the "Excluded Assets"):
---------------
(a) the Seller's rights under this Agreement;
(b) the Proprietary Rights described on Schedule 2.2(b); and
---------------
(c) interests in land and buildings owned or leased by the
Seller.
ARTICLE 3. ASSUMPTION OF LIABILITIES
3.1 ASSUMED LIABILITIES. On the Closing Date, simultaneously with
the transfer by the Seller to the Buyer of the Transferred Assets, the Buyer
shall assume and shall thereafter pay or cause to be paid or otherwise
discharged, as the same become due, the following liabilities and obligations of
the Seller relating to the Business (collectively, the "Assumed Liabilities"):
-------------------
(a) all (i) trade payables and commissions, (ii) accrued employee
compensation for the current pay periods on the Closing Date and (iii)
reimbursement of employee business expenses, in each case that arose in the
Ordinary Course of Business and exist on the Closing Date (collectively, the
"Payables"), but only to the extent so reflected or reserved in the Final
- ---------
Adjustment Amount; provided that Buyer shall not assume any such liability or
obligation to the extent it (x) is a liability for or obligation in respect of
breach of contract, breach of warranty, violation of law, infringement or
misappropriation of any Proprietary Right or any claim or lawsuit, (y) relates
to a Hospital Guarantee, except to the extent set forth in Section 3.3 or (z) is
an Underpayment;
(b) all obligations under (i) unfilled customer orders for goods and
services which have been accepted in the Ordinary Course of Business and (ii
contracts, agreements, purchase orders and other commitments set forth on
Schedules 2.1(a) and 3.1 hereto and all other Hospital Contracts, provided that
- ---------------- ---
Buyer shall not assume any such liability or obligation to the extent it (x) is
a liability for or obligation in respect of breach of contract, breach of
warranty, violation of law, infringement or misappropriation of any Proprietary
Right or any claim or lawsuit, (y) relates to a Hospital Guarantee, except to
the extent set forth in Section 3.3 or (z) is an Underpayment; and
(c) the Hasco Loans, including all accrued interest thereon.
7
<PAGE>
3.2 EXCLUDED LIABILITIES. Except as expressly provided in Section
3.1, the Buyer does not assume and shall not be obligated to pay, perform or
discharge any liabilities or obligations of the Seller or otherwise relating to
the Business other than the Assumed Liabilities (all of which are sometimes
referred to collectively herein as "Excluded Liabilities"). Excluded
--------------------
Liabilities include:
(a) liabilities or obligations of the Seller which may arise by
reason of or with respect to this Agreement or any of the transactions
contemplated hereunder (including legal, accounting, brokerage, investment
banking, finder's fees or liabilities to directors, officers, stockholders or
creditors of the Seller or Parent);
(b) liabilities for money borrowed including bank lines of
credit, the current portions of any long-term debt, capitalized lease
obligations (except capital leases set forth on Schedule 3.1 and as provided in
------------
Section 3.1(b)) and written but unpaid checks;
(c) all long-term liabilities including any and all shareholder
loans payable, industrial revenue bonds, land loans payable and subordinated
indebtedness owed to related parties;
(d) liabilities or obligations for Taxes (i) for which the Seller
is liable or that relate to the operations of the Business on or prior to the
Closing Date or (ii that are incurred by the Seller or Parent as a result of the
transactions contemplated hereby (collectively, "Tax Liabilities");
---------------
(e) except to the extent set forth in Section 3.3, liabilities
for commissions or other similar payments owed to (i) hospitals in connection
with guarantees or other assurances of specified commission or income levels
("Hospital Guarantees"), (ii) hospitals or other Persons resulting from
-------------------
underpayment of amounts owed ("Underpayments") or (iii) Jack West or any other
-------------
seller of a business or hospital contracts;
(f) liabilities and obligations resulting from damage or injury
(actual or alleged) to persons or property occurring prior to the Closing Date;
(g) liabilities and obligations arising under or imposed pursuant
to Environmental and Safety Requirements, including those associated with the
alleged or actual release of any toxic or hazardous waste, constituent or other
substance into the environment during any period prior to the Closing Date,
whether or not attributable to actions or failures to act by Seller, with
respect to the operation of or properties utilized in connection with the
Business at any time prior to the Closing Date;
(h) any liability with respect to any past or present employee
(including officers) or independent contractor including any liability owing to
any employee of the Seller for accrued bonuses or profit sharing or any
liability or obligation under or with respect to any employee benefit plan,
program, contract or arrangement covering past or present employees of the
Business and their dependents and beneficiaries, except for (i) accrued employee
compensation for the current pay period on the Closing Date and reimbursement of
employee business expenses, in each case, that arose in the Ordinary Course of
Business and exists on the Closing Date and (ii) liabilities to Transferred
Employees that arise after the Closing Date out of such employment;
(i) liabilities for infringement or misappropriation arising from
the use of the Proprietary Rights prior to the Closing Date;
8
<PAGE>
(j) liabilities or obligations of the Seller the existence of which
would violate or constitute a breach of any representation, warranty, covenant
or agreement of the Seller contained herein or made in connection herewith;
(k) liabilities or obligations to any stockholder or director of the
Seller or Parent, or Affiliates of the Parent or Seller; and
(l) liabilities or obligations of any nature relating to the
Excluded Assets.
3.3 PAYMENT OF EXCLUDED LIABILITIES.
(a) On the Closing Date, the Seller shall pay or make arrangements or
otherwise satisfy the Buyer that the Seller will be able to satisfy its
indebtedness for borrowed money and other Excluded Liabilities. In the event
that the Buyer or the Seller receives a claim for payment under a Hospital
Guarantee or for an Underpayment, each party shall notify the other. The Seller
shall pay any such claim within 20 business days following receipt thereof,
unless within such period it determines in good faith that such claim is not
valid; provided that if the Seller determines that any such claim is not valid,
it shall first give Buyer a notice of such determination and the basis therefor
and give the Buyer an opportunity to discuss with the Seller such determination;
provided further that if the Seller does not pay such claim within such 20
business day period, the Buyer may pay such claim and, subject to and in
accordance with Section 12.5, offset the amount paid.
(b) All Hospital Guarantees are described on Schedule 3.3 hereto.
------------
The Buyer agrees that all obligations arising under such listed Hospital
Guarantees for periods beginning and ending after the Closing Date are included
in the Assumed Liabilities and are the responsibility of the Buyer. The Seller
agrees that all obligations arising under Hospital Guarantees not listed on such
schedule or for periods beginning and ending before the Closing Date are
included in the Excluded Liabilities and remain the responsibility of the
Seller. The Buyer and Seller agree that with respect to those Hospital
Guarantees listed on such schedule that relate to periods beginning prior to the
Closing Date and ending after the Closing Date, (i) the Buyer shall be liable
for such Hospital Guarantee if the sales at such subject hospital are materially
less during the applicable period after the Closing Date than during the
applicable period before the Closing Date due to the servicing (or lack of
servicing) by the Buyer and (ii) the Buyer and Seller shall be liable for such
Hospital Guarantee for such period based upon the number of days in such
guarantee period prior to and after the Closing Date with respect to any such
Hospital Guarantees not subject to clause (i).
(c) In the event that the Cedars Sinai Los Angeles hospital makes any
claim for commissions for pictures taken during the three year period following
the Closing Date for security purposes (i.e., other than for pictures sold), the
Seller shall indemnify the Buyer for any such amounts; provided that such
amounts do not exceed $50,000; and provided further that the provisions of
Section 12.4 shall apply as if such claim were a Third Party Claim.
3.4 CLOSING DATE AGREEMENTS. On the Closing Date,
(a) Dycam and the Buyer shall execute and deliver the Dycam Master
Agreement in the form attached hereto as Exhibit B, with such changes as are
reasonably acceptable to the Buyer and Dycam (the "Dycam Master Agreement");
----------------------
(b) Parent shall execute and deliver to the Buyer the Option Agreement
in the form attached hereto as Exhibit C (the "Dycam Option");
--------- ------------
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(c) the Seller and the Buyer shall execute an agreement whereby the
Buyer will sublease from the Seller the premises at 667 Rancho Conejo Boulevard,
Newbury Park that is subject to that certain Standard Industrial/Commercial
Single-Tenant Lease-Net for a period ending December 31, 1998 with rental
payments equal to Seller's lease cost for such period, which agreement shall be
in form and substance reasonably satisfactory to the Buyer and Seller (the
"Sublease Agreement");
------------------
(d) the Seller, Parent and Buyer shall execute the Noncompetition
Agreement;
(e) the Seller and the Buyer shall execute a license agreement in
the form attached as Exhibit D (the "IP License"); and
--------- ----------
(f) the Seller and Parent shall execute the trademark assignment in
the form of Exhibit E (the "Trademark Assignment").
--------- --------------------
ARTICLE 4. CONSIDERATION
4.1 PURCHASE PRICE.
(a) In consideration for the transfer, conveyance and assignment of
the Transferred Assets, the Buyer shall:
(i) on the Closing Date, pay to the Seller an amount equal to
$3,468,060 (subject to adjustment as provided herein); and
(ii) on each three month anniversary of the Closing Date, pay to
the Seller an amount equal to $88,750 until (and including) the third
anniversary of the Closing Date, for total payments (subject to
adjustment as provided herein) of $1,065,000.
The amounts set forth in Sections 4.1(a)(i) and (a)(ii) shall be paid by wire
transfer of immediately available funds to such account of the Seller as
designated in writing from time to time. In the event any payment is due on a
date which is not a business day in the State of Missouri, such payment shall be
made on the next business day. Except as specifically set forth herein, no
interest shall accrue or be payable on the payments contemplated under Section
4.1(a)(ii). The amount set forth in Section 4.1(a)(ii) shall become immediately
due and payable upon notice from the Seller following (i) the default in the
payment when due of any amount contemplated by such Section 4.1(a)(ii), if such
default continues for a period of three business days following notice of such
default by the Seller, (ii) the default in the payment when due of any Assumed
Liability, if such default continues for a period of ten business days following
notice by the Seller of such default (provided that if Buyer does not have
sufficient information to determine the nature and amount of such Payable,
Seller shall also provide such information) and (iii) a Change of Control;
provided that (w) in the event of a default under clause (i), the Seller shall
be entitled interest, at a rate per annum equal to 10%, on any unpaid amount
from the date it was due until the date it is paid, (x) the withholding of any
amount in accordance with Section 12.5 shall not be deemed a default even if
such amount is later determined to be due and owing to the Seller, (y) no
default shall exist under clause (ii) if the Buyer is contesting any Assumed
Liability in good faith or if the Seller contests a purchase price reduction or
offset for the amount of such Assumed Liability and (z) in the event such
amounts become payable pursuant to clause (iii), the amount payable shall be
equal to the remaining payments owed pursuant to Section 4.1(a)(ii), discounted
at the then current blended interest rate for the Buyer's and Holdings'
indebtedness for borrowed money.
10
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(b) In addition, as part of the purchase consideration, the Buyer
shall pay to the Seller on the Closing Date the amount, if any, equal to the
Seller's estimated ordinary compensation costs (which shall be limited to normal
salary or hourly rate and allocated cost of health benefits, life insurance
premiums workers compensation and payroll taxes) for any Retained Employees for
the period from the Closing Date up until April 15, 1997; provided that if the
Closing Date occurs on or after April 15, 1997, no consideration shall be
payable under this section 4.1(b); provided further that the calculation of such
estimate shall be reasonably satisfactory to the Buyer; provided further that
this obligation is a purchase price adjustment solely for the benefit of the
Seller and shall not impose any liability or obligation on the Buyer with
respect to such Retained Employees.
4.2 PURCHASE PRICE ADJUSTMENT - HOSPITAL CONTRACTS.
(a) [INTENTIONALLY LEFT BLANK]
(b) If, prior to the Closing Date, the Seller receives a notice of
termination of any Current Contract for any reason (a "Terminated Contract"),
-------------------
(i) first, the Credit Amount shall be reduced (but not below zero) by the amount
set forth opposite such Terminated Contract on Schedule 2.1(a) and (ii) then,
---------------
the consideration payable under Section 4.1(a)(i) and (a)(ii) shall be reduced
pro rata (based upon the aggregate amounts payable under such subsections) by an
amount equal to the excess, if any, of (x) the amount set forth opposite such
Terminated Contract on Schedule 2.1(a) and (y) the reduction to the Credit
---------------
Amount pursuant to clause (i).
(c) If, after the Closing Date, the Seller receives a notice of
termination of any Current Contract (also a "Terminated Contract"), (i) first,
-------------------
the Credit Amount shall be reduced (but not below zero) by the Reduction Amount
(defined below) and (ii) then, the consideration payable under Section
4.1(a)(ii) shall be reduced by the excess, if any, of the Reduction Amount over
the reduction to the Credit Amount pursuant to clause (i). The "Reduction
---------
Amount" means the product of (x) the amount set forth opposite such Current
- ------
Contract on Schedule 2.1(a) times (y) the Applicable Percentage. The
---------------
"Applicable Percentage" equals 100% for any Terminated Contract where notice of
- ----------------------
termination is received on or prior to the 3rd month anniversary of the Closing
Date, 75% for any Terminated Contract where notice of termination is received
after the 3rd and on or prior to the 6th month anniversary of the Closing Date,
50% for any Terminated Contract where notice of termination is received after
the 6th and on or prior to the 9th month anniversary of the Closing Date and 25%
for any Terminated Contract where notice of termination is received after the
9th and on or prior to the 12th month anniversary of the Closing Date.
(d) In the event that (i) the Seller executed or executes a
Hospital Contract in accordance with Section 8.5 after December 13, 1996 and
prior to February 28, 1997 and (ii) such contract is Installed (either by Seller
or Buyer) prior to June 30, 1997, the Credit Amount shall be increased in an
amount equal to $20 times the number of annualized hospital births (calculated
as provided in Section 4.2(h)) for the hospital subject to such Hospital
Contract; provided that this Section 4.1(d) shall not apply to any Hasco
Hospital. Following the Closing Date, the Buyer shall use its commercially
reasonable efforts (which shall be consistent with those used for other similar
contracts of Buyer) to Install any such contract prior to June 30, 1997.
(e) If (x) any Terminated Contract continues for a period of at
least 12 months following the notice of termination or (y) the Terminated
Contract is reinstated within 12 months following the date of notice of
termination (such 12 month anniversary, in the case of clause (x), or the date
of reinstatement, in the case of clause (y), is referred to as the "Date of
-------
Reinstatement"), Buyer shall pay to the Seller the amount of any purchase price
- -------------
reduction relating to such Terminated Contract. A Terminated Contract shall be
deemed to be "reinstated" if the
11
<PAGE>
subject hospital enters into a new written contract with the Buyer
notwithstanding there being no intermediate provider of such services. To the
extent any purchase price reduction with respect to such Terminated Contract
related to payments already made by Buyer (such as those made on the Closing
Date or those made pursuant to 4.1(a)(ii)), such payment shall be made in cash
within 10 Business Days following the Date of Reinstatement, and any other
amounts shall increase the future payments under 4.1(a)(ii).
(f) Any reduction to or increase of payments under Section 4.1(a)(ii)
will be made pro rata across all remaining payments.
(g) The Seller shall not be entitled to payment for any Credit
Amount.
(h) The number of hospital births at any hospital shall be agreed upon
between the Buyer and Seller in good faith based upon the American Hospital
Association published statistics and other sources agreed to by the Buyer and
the Seller and determined consistent with the calculations used to arrive at
hospital births for the Current Contracts as set forth on Schedule 2.1(a).
---------------
4.3 ALLOCATION OF PURCHASE PRICE. Within 60 days after determination
of the Final Closing Balance Sheet (defined below), Buyer shall make, or cause
to be made, an appraisal of the Transferred Assets (the "Appraisal"). Each of
Buyer and Seller shall allocate the purchase price among the Transferred Assets
pursuant to Section 1060 of the Code in accordance with the fair market values
of the assets as set forth in the Appraisal. Each of Buyer and Seller shall
file Internal Revenue Service Form 8594 in a timely manner.
4.4 PURCHASE PRICE ADJUSTMENT -- OPERATIONS.
(a) At least 3 days prior to the Closing Date, the Buyer and Seller
shall agree on good faith estimates of the Adjustments (defined below) as of the
Closing Date based on the Seller's most recently available (unaudited) monthly
balance sheets and Seller's good faith estimates of the changes thereto, which
estimate shall be reasonably acceptable to Buyer (the "Estimated Adjustment
--------------------
Amount"). The cash payable pursuant to Section 4.1(a)(i) shall be reduced by
- ------
the amount of the Estimated Adjustment Amount. "Adjustments" means the sum of
-----------
(i) the amount of Payables on the Closing Date, (ii) the amount by which the
principal amount of the Hasco Loans exceed the lesser of (x) $540,000 and (y)
$540,000 times the quotient of the number of days elapsed since January 15, 1997
divided by 90, (iii) the amount, if any, by which the liabilities of the Seller
(whether Assumed Liabilities or Excluded Liabilities, but excluding the Hasco
Loans) on the Closing Date (as reflected on the Final Closing Balance Sheet) are
less than the liabilities of the Seller (whether Assumed Liabilities or Excluded
Liabilities but excluding the Hasco Loans) on the date hereof (as reflected on
the Final Signing Balance Sheet), (iv) the amount of any non-ordinary course
expenses (including any legal fees or expenses and interest to Affiliates (other
than Dycam)) paid by the Seller between the date hereof and the Closing Date and
(v) the amount, if any, by which "accounts receivables," "pre-paid expenses,"
"inventory" and "deposits" (as such terms are used on the Financial Statements)
of the Seller on the Closing Date (as reflected on the Final Closing Balance
Sheet) are less than $115,000, $40,000, $20,000 and $30,000, respectively.
(b) Prior to the Closing Date, the Seller shall prepare and provide to
the Buyer a balance sheet of the Seller as of the date of this Agreement (the
"Preliminary Signing Balance Sheet"). Within 90 days following the Closing
---------------------------------
Date, the Buyer shall prepare and deliver to the Seller a balance sheet of the
Seller as of the Closing Date (immediately prior to giving effect to the
Closing) (the "Preliminary Closing Balance Sheet"), and the Buyer's calculation
---------------------------------
of the actual Adjustments based upon such Preliminary Closing Balance Sheet (the
"Preliminary Adjustment Amount"). The Preliminary Signing Date Balance Sheet
-----------------------------
and Preliminary Closing Date Balance
12
<PAGE>
Sheet shall be prepared in accordance with GAAP, consistently applied, except
for the absence of footnotes and absence of statements of cash flow and
stockholders' equity and except that all proper accruals and other items shall
be set forth thereon.
(c) Following the delivery of the Preliminary Signing Balance Sheet
and Preliminary Closing Balance Sheet, the Buyer and Seller shall make itself
and its employees and independent accountants available to meet and discuss such
statements with the other party. Within thirty (30) calendar days following the
delivery of the Preliminary Closing Balance Sheet, (i) the Buyer may deliver to
the Seller its objections to the Preliminary Signing Balance Sheet and (ii) the
Seller may deliver to the Buyer its objections to the Preliminary Closing
Balance Sheet and/or determination of the Preliminary Adjustment Amount. If the
Buyer does not deliver written notice of an objection to the Preliminary Signing
Balance Sheet within such thirty (30) day period, the Buyer shall be deemed to
have accepted the Preliminary Signing Balance Sheet and such Preliminary Signing
Balance Sheet shall be deemed to be the "Final Signing Balance Sheet." If the
---------------------------
Seller does not deliver written notice of an objection to the Preliminary
Closing Balance Sheet within such thirty (30) day period, the Seller shall be
deemed to have accepted the Preliminary Closing Balance Sheet and Preliminary
Adjustment Amount and such Preliminary Closing Balance Sheet and Preliminary
Adjustment Amount shall be deemed to be the "Final Closing Balance Sheet" and
---------------------------
"Final Adjustment Amount," respectively.
- ------------------------
(d) If the Buyer or Seller (as applicable) delivers written notice of
an objections to the Preliminary Signing Balance Sheet, Preliminary Closing
Balance Sheet or Preliminary Adjustment Amount (the "Objections") within the
----------
thirty (30) day period contemplated above, the Buyer and the Seller shall,
during the fifteen (15) days following delivery of the Objections (or, if
Objections are delivered by both Buyer and Seller, 15 days following the latest
delivery of such Objections), meet and discuss in good faith the Objections. If
the Objections cannot be satisfied by negotiation between the parties within
such fifteen (15) day period, the Objections will be referred for arbitration to
an independent auditor selected pursuant to the terms of this Section. The
Buyer shall select two independent accounting firms; provided, that such
independent accounting firms shall not include Coopers & Lybrand or any current
auditor, or auditor during the prior 12 months, of the Buyer, the Seller,
Holdings or Parent. Of such two independent accounting firms selected by the
Buyer, the Seller shall choose the Los Angeles office of one of the firms to
serve as the accounting arbitrator (the "Accounting Arbitrator") with respect to
---------------------
the Objections. The Accounting Arbitrator will be instructed to select, at its
discretion, the individuals who will have primary responsibility for this matter
and will be instructed to reach a determination within forty-five (45) days from
the date of referral. The Accounting Arbitrator will be limited to determining
matters of accounting as they relate to the Objections. The decision of the
Accounting Arbitrator will be final and binding upon the parties. The fees and
expenses of the Accounting Arbitrator engaged pursuant to this Section 4.4 shall
be paid by the party whose last calculation of the Final Adjustment Amount prior
to the submission of the matter to the Accounting Arbitrator is furthest from
the Final Adjustment Amount established by the Accounting Arbitrator. The
Preliminary Signing Balance Sheet, Preliminary Closing Balance Sheet and/or
Preliminary Adjustment Amount, as adjusted by agreement of the Seller and the
Buyer or by the Accounting Arbitrator in accordance with this Section 4.4, shall
be the "Final Signing Balance Sheet," "Final Closing Balance Sheet" and "Final
--------------------------- --------------------------- -----
Adjustment Amount," respectively.
- -----------------
(e) (i) If the difference of (A) Estimated Adjustment Amount minus
(B) the Final Adjustment Amount is negative, then the amounts payable by the
Buyer to the Seller under Section 4.1(a)(ii) will be reduced (in the order of
maturity) by the absolute amount of such difference.
(ii) If the difference of (A) Estimated Adjustment Amount minus
(B) the Final Adjustment Amount is positive, then as soon as practicable (but in
no event later than three business days) after the final determination of the
Final Closing Balance Sheet pursuant to this
13
<PAGE>
Section 4.3, the absolute value of such difference shall be paid to the Seller
by the Buyer by wire transfer in immediately available funds to an account
specified by the Seller.
(f) Notwithstanding anything to the contrary contained in this
Agreement, but subject to the provisions of Section 12.5, if any Payable arises
after the determination of the Final Closing Balance Sheet and was not included
therein, the Buyer may pay such Payable and reduce the amounts payable by the
Buyer to the Seller under Section 4.1(a)(ii) by the amount of such Payable (such
reduction to be in the order of maturity). The Buyer shall provide the Seller
with periodic statements of any such Payables and such other information in
Buyer's possession in connection therewith as the Seller reasonably requests;
provided that notice of all such Payables must be given on or before the first
- --------
anniversary of the Closing Date.
ARTICLE 5. THE CLOSING
The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Sanders, Barnet, Goldman, Simons &
-------
Mosk at 1:00 p.m. on the date of the stockholders meeting contemplated by
Section 8.3, or at such other time or date as the Buyer and the Seller shall
agree. The time and date of the Closing is referred to herein as the "Closing
-------
Date."
- ----
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE
PARENT
The Seller and Parent, jointly and severally, represent and warrant to
the Buyer as follows:
6.1 ORGANIZATION. The Seller is a corporation duly organized and
existing in good standing under the laws of the State of California, and has the
corporate power to own its property and to carry on its business as now
conducted and to carry out the transactions contemplated by this Agreement. The
Seller is qualified to do business as a foreign corporation in all jurisdictions
where failure to so qualify would have a Material Adverse Effect. Parent is a
corporation duly organized and existing in good standing under the laws of the
State of Delaware, and has the corporate power to own its property and to carry
on its business as now conducted and to carry out the transactions contemplated
by this Agreement. Parent is qualified to do business as a foreign corporation
in all jurisdictions where failure to so qualify would have a Material Adverse
Effect.
6.2 POWER AND AUTHORITY. Subject to the approval of Parent's
stockholders holding a majority of each class of Parent's outstanding capital
stock, the Seller and Parent each have all requisite power and authority,
corporate or otherwise, to enter into this Agreement and the other agreements
contemplated hereby and to carry out the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the other agreements
contemplated hereby and, subject to the approval of Parent's stockholders
holding a majority of each class of Parent's outstanding capital stock, the
performance by the Seller and Parent of their obligations hereunder and
thereunder have been duly and validly authorized by all necessary corporate
action. Except for approval by Parent's shareholders holding a majority of each
class of Parent's outstanding capital stock, no further corporate action or
other proceedings on the part of the Seller or Parent is necessary to authorize
this Agreement, the other agreements contemplated hereby or the transactions
contemplated hereby or thereby.
6.3 VALID AND BINDING AGREEMENT. When executed and delivered, this
Agreement and each of the other agreements, documents and instruments to be
executed and delivered by the Seller or Parent pursuant hereto shall constitute
valid and binding agreements of the Seller and/or Parent (as applicable),
enforceable against the Seller and/or Parent (as applicable)
14
<PAGE>
in accordance with their terms, subject, as to enforcement, (a) to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights and (b) to
general principles of equity, whether such enforceability is considered in a
proceeding in equity or at law.
6.4 SUBSIDIARIES. The Seller does not have any subsidiaries or own
any investments in any other Person.
6.5 CONSENTS AND APPROVALS. Except as set forth on Schedule 6.5, no
------------
registration or filings with, notices to, or consent, approval, permit,
authorization or action of, any third party (including any Governmental Agency
or other Person) is required in connection with the execution and delivery by
the Seller or Parent of this Agreement or the other agreements, documents and
instruments to be executed and delivered by the Seller and/or Parent pursuant
hereto or in connection with the consummation of the transactions contemplated
hereby or thereby.
6.6 NO VIOLATIONS. The execution and delivery of this Agreement and
the other agreements, documents and instruments to be executed and delivered
pursuant hereto by the Seller and/or Parent and the consummation by the Seller
and Parent of the transactions contemplated hereby and thereby (a) do not and
will not conflict with or violate any provision of the certificate of
incorporation or by-laws (or similar organizational documents) of the Seller or
Parent and (b) do not and will not (i) conflict with or result in a breach of
the terms, conditions or provisions of, (ii) constitute a default under, (iii)
result in the creation of any Lien upon the Transferred Assets pursuant to, (iv)
give any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) except as set forth on Schedule
--------
6.5, require any authorization, consent, approval, exemption or other action by
or notice to any court, Governmental Agency or other third party pursuant to,
any law, statute, rule or regulation to which the Seller or Parent is subject,
or any agreement, instrument, order, judgment or decree to which the Seller or
Parent is subject or by which any of the Transferred Assets are bound.
6.7 FINANCIAL STATEMENTS. The Seller has previously delivered to the
Buyer copies of the Parent's financial statements as of and for the accounting
periods ended December 31, 1994 and 1995 (the "Year End Statements") and
Quarterly Financials and Monthly Financials for accounting periods ending prior
to the date hereof. The Year End Statements and Quarterly Statements
(collectively, the "Seller Financials") are, and in the case of the Quarterly
Interim Financials or Year-End 1996 Financials will be, consistent with the
books and records of Parent and the Seller, as the case may be, which, in turn,
are, and in the case of the Quarterly Interim Financials or Year-End 1996
Financials will be, accurate and complete in all material respects, have been
prepared in accordance with GAAP consistently applied (except, in the case of
the Quarterly Financials and Quarterly Interim Financials for absence of
footnotes and normal year-end adjustments, which adjustments will not be
material and the absence of statements of cash flow and stockholders' equity)
and fairly present the assets, Liabilities and financial condition of the Parent
or Seller at the dates specified and the results of their operations for the
periods then ended. As of the date of the most recent balance sheet of the
Seller included in the Seller Financials, the Seller had no liabilities or
obligations of any kind or nature, fixed or contingent, matured or unmatured,
which are not reflected or fully reserved against on such balance sheet to the
extent required by GAAP. The Monthly Financials are and in the case of the
Monthly Interim Financials will be, prepared in good faith by the Seller based
upon the books and records of the Seller.
6.8 NO UNDISCLOSED LIABILITIES. To its knowledge, the Seller does
not have any Liabilities arising out of transactions entered into prior to the
Closing, or any action or inaction prior to the Closing, or any state of facts
existing at or prior to the Closing other than (a) Liabilities set forth or
reserved against on its Latest Balance Sheet, (b) Liabilities which have arisen
after the date of its Latest Balance Sheet in the Ordinary Course of Business
(none of which is a Liability resulting from breach of contract, breach of
warranty, tort, infringement, claim or law suit
15
<PAGE>
which would have a Material Adverse Effect), (c) Liabilities under the Arnold
Agreements and (d) other Liabilities expressly disclosed in other Schedules to
this Agreement.
6.9 TITLE TO PROPERTIES. The Seller has good and marketable title to
all of the Transferred Assets free and clear of all Liens, subject to the rights
of landlords, lessors and licensors in the case of leased or licensed assets.
The Transferred Assets include all of the assets, properties, whether tangible
or intangible, and other rights owned by the Seller and used in the conduct of
the Business as conducted on the Latest Balance Sheet Date and as currently
conducted by the Seller, other than as set forth on Schedule 6.9, the Excluded
------------
Assets and those disposed of in the ordinary course of business.
6.10 CONDITION OF TRANSFERRED ASSETS. Except as set forth on Schedule
--------
6.10, the machinery, equipment and other tangible assets (other than inventory)
- ----
included among the Transferred Assets are in normal operating condition,
reasonable wear and tear excepted, and have been maintained and repaired on a
regular basis so as to preserve their utility and value.
6.11 REAL PROPERTY.
(a) The Seller does not own, in whole or in part, any real
property.
(b) Attached as Schedule 6.11 is a list of all leases, subleases
-------------
and other similar agreements, including all amendments, extensions and other
modifications (the "Leases") for real property (the "Leased Property" or the
---------------
"Real Property") utilized in connection with the Business to which the Seller is
-------------
a party. The Seller has a good and valid leasehold interest in and to all of the
Leased Property, subject to no Liens except as described in such Schedule. Each
Lease is in full force and effect and is enforceable in accordance with its
terms. The Seller has previously delivered to the Buyer true and complete copies
of all the Leases. Except as described on Schedule 6.11 hereto, no consent,
-------------
waiver, approval or authorization is required from the landlord under any Lease
as a result of the execution of this Agreement or the consummation of the
transactions contemplated hereby.
(c) Other than the Seller or Parent, there are no parties in
possession or parties having any rights to occupy any of the Real Property. The
Real Property is in good condition and repair and is sufficient and appropriate
for the conduct of the Business. All permits, licenses and other approvals
necessary to the current occupancy and use of the Real Property have been
obtained, are in full force and effect and have not been violated. There is no
pending or, to the knowledge of the Seller, any threatened condemnation
proceeding affecting any portion of the Real Property.
6.12 PROPRIETARY RIGHTS. Schedule 6.12 attached hereto sets forth a
-------------
complete and correct list and brief description of all patented and registered
Proprietary Rights owned by the Seller and used in connection with the Business
and all pending patent applications and applications for the registration of
other Proprietary Rights owned by the Seller. Schedule 6.12 also sets forth a
-------------
complete and correct list and brief description of (a) all unregistered
trademarks, trade names and corporate names used by the Seller, (b) all computer
software owned and/or used by the Seller (other than mass-marketed software with
a license fee of less than $1,000), and (c) all licenses and other rights
granted by the Seller to any third party with respect to Proprietary Rights and
all licenses and other rights granted by any third party to the Seller, in each
case together with a description of the subject matter licensed. The Seller has
delivered to the Buyer correct and complete copies of all documents embodying
such licenses. Except as set forth on Schedule 6.12, (a) the Seller owns and
-------------
possesses all right, title and interest in and to, or has a written, enforceable
and effective license to use, all of the Proprietary Rights necessary for the
operation of the Business as presently conducted and as presently proposed to be
conducted, free and clear of all Liens; (b) no claim by any third party
contesting the validity, enforceability, use or ownership of
16
<PAGE>
any Proprietary Rights owned or used by the Seller has been made, is currently
outstanding or, to Seller's knowledge, is threatened, and there are no grounds
for any such claim; (c) the Seller has not received any notices of, nor is it
aware of any facts which indicate a likelihood of, any infringement or
misappropriation by, or other conflict with, any third party with respect to,
any Proprietary Rights owned or used by the Seller, nor has the Seller received
any claims alleging infringement or misappropriation of, or conflict with, any
Proprietary Rights of any third party or any offers by a third party to license
its intellectual property; (d) the Seller has not infringed, misappropriated or
otherwise acted in conflict with any Proprietary Rights of any third party, nor
is the Seller aware of any infringement, misappropriation or conflict which
shall occur as a result of the continued operation of the Business as currently
conducted or as proposed to be conducted; (e) all Proprietary Rights owned or
used in connection with the Business prior to the date hereof shall be owned by
or available for use by the Buyer on identical terms and conditions immediately
subsequent to Closing; (f) the Seller has made all necessary filings and
recordations and has paid all required fees and Taxes to record and maintain its
ownership of its patented and registered Proprietary Rights in the United States
Patent and Trademark Office, the United States Copyright Office, and all similar
foreign agencies; (g) the Seller has never agreed to indemnify any person with
respect to any Proprietary Rights; and (h) the Seller is not aware of any
Proprietary Rights that any competitors or other Person has developed which
reasonably could be expected to supersede or make obsolete any product or
process of the Seller or to limit the Business.
6.13 CONTRACTS.
(a) Schedule 6.13 hereto sets forth a complete and correct list (with
-------------
descriptions) of all Hospital Contracts existing on the date hereof and all
agreements, including commitments, instruments, leases (other than real property
leases) or other consensual obligations, to which the Seller is a party or to
which it is subject (excluding customary inventory purchase orders in the
Ordinary Course of Business) (i) which shall be binding upon the Buyer
subsequent to the Closing and which involves consideration with a value of
$20,000 or more, (ii) which shall require the Buyer to provide goods or services
more than ninety (90) days from the date hereof, (iii) which evidence or provide
for any indebtedness of the Seller or any Liens on any of the Transferred
Assets, (iv) which guarantee the performance, Liabilities or obligations of any
other entity, (v) which restrict the ability of the Seller to conduct any
business activities, (vi) which involve any related party, including the Parent
and any present or former employee of the Seller, (vii) which involve any
Governmental Agency, (viii) which are not in the Ordinary Course of Business,
(ix) which are terminable by any third party as a result of the transactions
contemplated by this Agreement, (x) which relate to the distribution or
marketing of the products of the Business, (xi) which relate to Proprietary
Rights used in connection with the Business, (xii) which are sales, distribution
or franchise agreements, or (xiii) which are otherwise material to the Business.
(b) All of the agreements included in the Transferred Assets are
valid, binding and enforceable in accordance with their respective terms. The
Seller is not in breach of any of the agreements included in the Transferred
Assets, nor to the best of the Seller's knowledge is any third party in breach
of such agreements or has repudiated any provision of such agreement and no
event has occurred which with notice, lapse of time or both would constitute a
breach or default or permit termination, modification or acceleration. True and
complete copies of all agreements set forth on Schedule 6.13 (including
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amendments, waivers or other changes thereto) have previously been delivered to
the Buyer. Except as set forth on Schedule 6.13, all agreements included in the
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Transferred Assets are assignable by the Seller to the Buyer without the consent
of any other entity.
(c) As of January 31, 1997, the Seller has not been notified that any
hospital may terminate any Hospital Contract, or that any hospital will propose
any change to the terms of any Hospital Contract. Except as set forth on
Schedule 3.3, there are no guarantees to
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17
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any hospital or other person regarding the minimum level of payments to be made
in connection with any Hospital Contract.
6.14 LITIGATION. Except as set forth on Schedule 6.14, there are no
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claims, actions, suits, inquiries, proceedings or investigations pending or, to
the best of the Seller's knowledge, threatened against or affecting the Seller
or any of the Transferred Assets before or by any court or Governmental Agency.
The Seller is not presently subject to any judgment, injunction, order or other
decree of any court of competent jurisdiction.
6.15 COMPLIANCE WITH LAWS. The Business has been conducted in
compliance in all material respects with all applicable laws and regulations of
foreign, federal, state and local Governmental Agencies. The Seller possesses,
and is in compliance in all material respects with, all licenses, permits,
franchises, certificates, approvals and other governmental authorizations
necessary to the conduct of the Business, and such licenses, permits, approvals
and authorizations are transferrable to the Buyer and will be in full force and
effect on and following the Closing Date.
6.16 NO MATERIAL ADVERSE CHANGE. Except as set forth on Schedule
--------
6.16, since the date of the Latest Balance Sheet, no event, occurrence, fact,
condition, change or development has occurred that, individually or in the
aggregate, has constituted or resulted in, or could constitute or result in, a
Material Adverse Effect.
6.17 INTERIM CHANGES. Except as set forth on Schedule 6.17 hereto,
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since the date of the Latest Balance Sheet there have not been:
(a) any changes in the financial condition, assets, liabilities,
personnel or operations of the Seller or in its relationships with suppliers,
customers, distributors, lessors, licensors or others, other than changes in the
ordinary course of business which would not individually or in the aggregate
result in a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not covered by
insurance, adversely affecting the Transferred Assets;
(c) any indebtedness for borrowed money or any forgiveness or
cancellation of indebtedness owing to the Seller or waiver of any claims or
rights by the Seller;
(d) any increase in the compensation or benefits paid or to
become payable by the Seller to any of its officers or employees, except for
increases in the Ordinary Course of Business to hourly-paid employees that in
the aggregate are not material;
(e) any dividends or distributions or any transfer, lease,
license or other disposition of assets of the Seller, other than sales of
inventory in the Ordinary Course of Business;
(f) any Liens placed on any of the Transferred Assets;
(g) any amendment or termination of any lease, contract, license
or other agreement to which the Seller is a party;
(h) any change in the collection, payment or credit experience
or practices of the Seller or in the accounting practices, procedures or methods
of the Seller;
(i) any agreement, arrangement or transaction between the Seller
and any affiliate of the Seller or any officer or employee of the Seller;
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(j) a delay or postponement (beyond the Seller's normal practice) of
the payment of the Seller's accounts payable or other Liabilities;
(k) the mortgage, pledge or creation of a Lien against any of the
Transferred Assets, except Liens for current property taxes not yet due and
payable;
(l) the sale, assignment or transfer of any of the Transferred Assets,
except in the Ordinary Course of Business, or the cancellation without fair
consideration of any debts or claims owing to or held by the Seller;
(m) the sale, assignment or transfer of any Proprietary Rights, or the
disclosure of any proprietary confidential information to any Person or the
granting of any license or sublicense of any rights under or with respect to any
Proprietary Rights;
(n) any extraordinary losses or waiver of any rights of value by the
Seller, whether or not in the Ordinary Course of Business other than those not
having a Material Adverse Effect;
(o) any capital expenditures or commitments therefor that aggregate in
excess of $50,000.
(p) any other transaction not in the Ordinary Course of Business and
consistent with past practices or any material change in the business policies
or practices of the Seller; or
(q) any commitment by the Seller to do any of the foregoing.
6.18 TAXES. (a) Except as described on Schedule 6.18, the Seller has
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timely filed all Tax Returns required to be filed by it, each such Tax Return
has been prepared in compliance with all applicable law and regulations, and all
such Tax Returns are true and accurate in all material respects. All Taxes due
and payable by the Seller have been paid.
(b) The Seller has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor or other third party.
(c) Except as set forth in Schedule 6.18 attached hereto:
-------------
(i) no deficiency or proposed adjustment which has not been
settled or otherwise resolved for any amount of Tax has been proposed,
asserted or assessed by any taxing authority against the Seller, and to the
Seller's knowledge, no such deficiency or proposed adjustment has been
threatened;
(ii) no claim has ever been made by a taxing authority in a
jurisdiction where the Seller does not file Tax Returns that the Seller is
or may be subject to Taxes assessed by such jurisdiction; and
(iii) none of the Assumed Liabilities includes any obligation to
make any payments that will be nondeductible under Section 280G of the Code
(or any corresponding provision of state, local or foreign income Tax law).
(d) Schedule 6.18 contains a list of states, territories and
-------------
jurisdictions (whether foreign or domestic) in which the Seller or Parent is
required to file Tax Returns.
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(e) The Buyer will not be required to deduct and withhold any amount
pursuant to Section 1445(a) of the Code upon the transfer of the Transferred
Assets to the Buyer.
6.19 LABOR MATTERS. The Seller is not a party to any collective
bargaining agreement or any employment, consulting or similar agreement relating
to the Business or any agreement or arrangement providing for severance payments
to any employee of the Seller upon termination of employment or which provide
benefits upon a change in control of the Seller. To the best knowledge of the
Seller, there is no basis for any unfair labor practice charge or complaint
against the Seller arising out of the Seller's activities (including, without
limitation, provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes), nor
is there any labor strike, work stoppage, grievance or other labor dispute
pending or, to the Seller's best knowledge, threatened against the Seller.
There is no existing representation question respecting any employees of the
Seller, nor to the Seller's best knowledge are there any organizational efforts
with respect to any employees of the Seller.
6.20 ENVIRONMENTAL AND SAFETY MATTERS. Except as set forth on
Schedule 6.20 hereto:
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(a) The Seller has complied and is in compliance with all
Environmental and Safety Requirements.
(b) Without limiting the generality of the foregoing, the Seller has
obtained and complied with, and is in compliance with, all permits, licenses and
other authorizations that may be required pursuant to Environmental and Safety
Requirements for the occupation of their facilities and the operation of the
Business. A list of all such permits, licenses and other authorizations is set
forth on Schedule 6.20.
-------------
(c) The Seller has not received any written or oral notice, report or
other information regarding any Liabilities or potential Liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise), including any
investigatory, remedial or corrective obligations, relating to the Seller or its
facilities and arising under Environmental and Safety Requirements.
(d) None of the following exists at any property or facility owned or
operated by the Seller:
(i) Asbestos-containing material in any form or condition;
(ii) Materials or equipment containing polychlorinated biphenyls;
(iii) Underground storage tanks or surface impoundments; or
(iv) Landfills or other permanent waste disposal areas.
(e) The Seller has not treated, stored, disposed of, arranged for or
permitted the disposal of, transported, handled, or Released any substance,
including without limitation any Hazardous Materials, or owned or operated any
facility or property, so as to give rise to Liabilities of the Seller pursuant
to Environmental and Safety Requirements, including without limitation any
Liabilities for corrective action, response costs, natural resource damage or
attorneys fees.
(f) Neither this Agreement, the agreements to be entered into
herewith, nor the consummation of the transactions contemplated hereby or
thereby will result in any obligations for site investigation or cleanup, or
notification to or consent of Government Agencies or third parties, pursuant to
any "transaction-triggered" or "responsible property transfer" Environmental and
Safety Requirements.
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<PAGE>
(g) The Seller has not either expressly or by operation of law assumed
or undertaken any Liability, including without limitation any obligation for
corrective or remedial action, of any other Person relating to Environmental and
Safety Requirements.
(h) Without limiting the foregoing, no facts, events or conditions
relating to the past or present facilities, properties or operations of the
Seller will prevent, hinder or limit continued compliance with Environmental and
Safety Requirements, give rise to any investigatory, remedial or corrective
obligations pursuant to Environmental and Safety Requirements, or give rise to
any other Liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise) pursuant to Environmental and Safety Requirements, including without
limitation any relating to onsite or offsite Releases or threatened Releases of
Hazardous Materials, personal injury, property damage or natural resource
damage.
6.21 ARNOLD AGREEMENTS. True and complete copies of the Arnold
Agreements have been delivered to the Buyer. The Arnold Agreements have been
duly executed by each of the parties thereto and to the Seller's and Parent's
knowledge and belief, represent the binding and enforceable agreement of each of
the parties thereto, and are in full force and effect (subject to limitations
and restrictions imposed by applicable law with respect to covenants not to
compete). Neither the Seller nor Parent has any knowledge of any breach of the
terms thereof. The Arnold Agreements were negotiated and entered into with the
intent of, among other things, (a) protecting the Seller and Parent from damage
prior to and following the Closing Date and (b) following the Closing Date,
protecting, for the benefit of Buyer, the goodwill of the Business (including
hospital relationships and confidential information) that is being conveyed to
Buyer hereunder.
6.22 INVENTORY. The inventory of the Seller is, when taken as a
whole, of a level and quality consistent with that reflected on the Latest
Balance Sheet.
6.23 TRANSACTIONS WITH AFFILIATES. Except as set forth on Schedule
--------
6.23 since December 31, 1995, none of the Seller, Parent or their respective
- ----
Affiliates has been involved in any business arrangement or relationship and
none of the Parent or its Affiliates (other than Seller) owns any property or
right, tangible and intangible, which is used in the Business. Except as set
forth on Schedule 6.23, since the date of the Latest Balance Sheet, none of the
--------------
Parent or its Affiliates has loaned any money to or borrowed any money from the
Seller, which in either case remain outstanding as of the date hereof. Except
as set forth on Schedule 6.23, since the date of the Latest Balance Sheet, none
-------------
of the Parent or its Affiliates has transferred any Liability property or right,
tangible or intangible, to the Seller and the Seller has not transferred any
property or right, tangible or intangible, to any of the Parent or its
Affiliates.
6.24 EMPLOYEE BENEFIT PLANS.
(a) Schedule 6.24 contains an accurate and complete list of each
-------------
"employee benefit plan" (as such term is defined in Section 3(3) of ERISA) and
each other employee benefit plan, policy, understanding or arrangement, in each
case contributed to, maintained or sponsored by the Seller, or with respect to
which the Seller has any liability or potential liability. Each such item
listed on Schedule 6.24 is referred to herein as a "Benefit Plan." Schedule
------------- --------
6.24 also contains an accurate and complete list of each collective bargaining
- ----
agreement, employment agreement and each other agreement, arrangement,
commitment, understanding, or policy of any kind with or for the benefit of any
current or former employee, officer, director or consultant of the Seller.
(b) Each Benefit Plan that is intended to be qualified within the
meaning of Section 401(a) of the Code has received a determination from the IRS
that such Benefit Plan is qualified under Section 401(a) of the Code, and
nothing has occurred since the date of such determination that could adversely
affect the qualification of such Benefit Plan.
21
<PAGE>
(c) The Seller does not contribute to, maintain, sponsor or have any
liability or potential liability with respect to any "employee pension benefit
plan" (as such term is defined in Section 3(2) of ERISA) that is subject to
Section 302 of ERISA or Section 412 of the Code or with respect to any
"multiemployer plan" (as such term is defined in Section 3(37) of ERISA).
(d) Except as set forth on Schedule 6.24, (i) each Benefit Plan and
-------------
any related trust, insurance contract or fund has been maintained, funded and
administered in compliance with its respective terms and the terms of any
applicable collective bargaining agreements and in compliance with all
applicable laws and regulations, including, but not limited to, ERISA and the
Code; (ii) no asset of the Seller that is to be acquired by the Buyer, directly
or indirectly, pursuant to this Agreement is subject to any lien under ERISA or
the Code; (iii) the Seller has not incurred any liability under Title IV of
ERISA or to the Pension Benefit Guaranty Corporation; and (iv) there are no
pending or threatened actions, suits, investigations or claims with respect to
any Benefit Plan (other than routine claims for benefits) and Seller does not
have any knowledge of any facts which could give rise to (or be expected to give
rise to) any such actions, suits, investigations or claims.
(e) Except as set forth on Schedule 6.24, (i) the Seller has complied
-------------
with the health care continuation requirements of Part 6 of Subtitle B of Title
I of ERISA; and (ii) the Seller does not have any obligation under any Benefit
Plan or otherwise to provide health or life insurance benefits to former
employees of the Seller or any other person, except as specifically required by
Part 6 of Subtitle B of Title I of ERISA.
(f) The Seller does not have any liability with respect to any
"employee benefit plan" (as defined in Section 3(3) of ERISA) solely by reason
of being treated as a single employer under Section 414 of the Code with any
trade, business or entity other than the Seller.
(g) With respect to each Benefit Plan, the Seller has provided the
Buyer with true, complete and correct copies of (to the extent applicable) (i)
all documents pursuant to which the Benefit Plan is maintained, funded and
administered, (ii) the most recent annual report (Form 5500 series) filed with
the IRS (with applicable attachments), (iii) the most recent financial
statement, (iv) the most recent actuarial valuation of benefit obligations, (v)
the most recent determination letter received from the IRS, and (vi) the most
recent summary plan description provided to participants.
6.25 INSURANCE. Seller has maintained, and has currently in effect,
insurance coverage that is usual and customary for a business of a type operated
by the Seller.
6.26 BROKERS. No broker's, finder's or any similar fee shall be
incurred by or on behalf of the Seller or the Parent in connection with the
origin, negotiation, execution or performance of this Agreement or the
transactions contemplated hereby for which the Buyer shall have any Liability.
6.27 ACCURACY OF INFORMATION. None of the Seller's or the Parent'
representations, warranties or statements contained in this Agreement or in the
Schedules hereto or any other information provided to the Buyer or its agents by
the Seller, the Parent or their respective agents contains any untrue statement
of a material fact or omits to state any material fact necessary in order to
make any of such representations, warranties or statements true.
6.28 REPRESENTATIONS AND WARRANTIES ON CLOSING DATE. The
representations and warranties contained in this Article 6 shall be true,
correct and complete on and as of the Closing Date with the same force and
effect as though such representations and warranties
22
<PAGE>
had been made on and as of the Closing Date (or, in the case of any such
representations or warranties made only as of a particular date, as of such
particular date).
ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer and Holdings, jointly and severally, represent and warrant
to Seller and the Parent as follows:
7.1 ORGANIZATION. The Buyer and Holdings are corporations duly
organized and existing in good standing under the laws of their states of
incorporation and have the corporate authority to own their properties and to
carry on their business as now conducted and to carry out the transactions
contemplated by this Agreement.
7.2 POWER AND AUTHORITY. Each of the Buyer and Holdings has all
requisite power and authority, corporate or otherwise, to enter into this
Agreement and the other agreements contemplated hereby to which they are a party
and to carry out the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the other agreements contemplated
hereby and the performance by each of the Buyer and Holdings of its obligations
hereunder and thereunder have been duly and validly authorized by all necessary
corporate action. No corporate action or other proceedings on the part of the
Buyer or Holdings is necessary to authorize this Agreement, the other agreements
contemplated hereby or the transactions contemplated hereby or thereby.
7.3 VALID AND BINDING AGREEMENT. When executed and delivered, this
Agreement and each of the other agreements, documents and instruments to be
executed and delivered by the Buyer and/or Holdings pursuant hereto shall
constitute valid and binding agreements of the Buyer and/or Holdings (as
applicable), enforceable against the Buyer or Holdings (as applicable) in
accordance with their terms, subject, as to enforcement, (a) to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights and (b) to
general principles of equity, whether such enforceability is considered in a
proceeding in equity or at law.
7.4 CONSENTS AND APPROVALS. Except as set forth on Schedule 7.4, no
------------
registration or filings with, notices to, or consent, approval, permit,
authorization or action of, any third party (including any Governmental Agency
or other Person) is required in connection with the execution and delivery by
the Buyer or Holdings of this Agreement or the other agreements, documents and
instruments to be executed and delivered by the Buyer or Holdings pursuant
hereto or in connection with the consummation of the transactions contemplated
hereby or thereby.
7.5 NO VIOLATIONS. Except as set forth on Schedule 7.5, the
------------
execution and delivery of this Agreement and the other agreements, documents and
instruments to be executed and delivered pursuant hereto by the Buyer and/or
Holdings and the consummation by the Buyer and Holdings of the transactions
contemplated hereby and thereby (a) do not and will not conflict with or violate
any provision of the certificate of incorporation or by-laws (or similar
organizational documents) of the Buyer or Holdings and (b) do not and will not
(i) conflict with or result in a breach of the terms, conditions or provisions
of, (ii) constitute a default under, (iii) give any third party the right to
modify, terminate or accelerate any obligation under, (iv) result in a violation
of, or (v) except as set forth on Schedule 7.5, require any authorization,
------------
consent, approval, exemption or other action by or notice to any court,
Governmental Agency or other third party pursuant to, any law, statute, rule or
regulation to which the Buyer or Holdings is subject, or any agreement,
instrument, order, judgment or decree to which the Buyer or Holdings is subject.
7.6 BROKERS. No broker's, finder's or any similar fee shall be
incurred by or on behalf of the Buyer in connection with the origin,
negotiation, execution or performance of this
23
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Agreement or the transactions contemplated hereby for which the Seller or the
Parent shall have any liability.
7.7 FINANCIAL STATEMENTS. Holdings has previously delivered to the
Seller copies of Holdings' financial statements as of and for Holdings' fiscal
years ended September 30, 1994, 1995 and 1996 and fiscal quarter ended December
31, 1996 (collectively, the "Holdings Financials"). The Holdings Financials are
-------------------
consistent with the books and records of the Holdings which, in turn, are
accurate and complete in all material respects, have been prepared in accordance
with GAAP consistently applied (except, in the case of interim financials for
absence of footnotes and normal year-end adjustments, which adjustments will not
be material) and fairly present the assets, Liabilities and financial condition
of Holdings at the dates specified and the results of its operations for the
periods then ended. As of the date of the most recent balance sheet included in
Holdings Financials, Holdings had no liabilities or obligations of any kind or
nature, fixed or contingent, matured or unmatured, which are not reflected or
fully reserved against on such balance sheet to the extent required by GAAP.
7.8 NO MATERIAL ADVERSE CHANGE. Since December 31, 1996, no event,
occurrence, fact, condition, change or development has occurred (or is likely to
occur) that, individually or in the aggregate, has constituted or resulted in,
or could constitute or result in a material adverse change in the Buyer's
business, operations, condition (financial or otherwise), assets, prospects or
employee, customer or supplier relations that Seller reasonably determines
(after written disclosure of all material facts and circumstances) could be
expected to have a material adverse effect on the Buyer's ability to fulfill its
obligations under this Agreement.
7.9 REPRESENTATIONS AND WARRANTIES ON CLOSING DATE. The
representations and warranties contained in this Article 7 shall be true and
complete on and as of the Closing Date with the same force and effect as though
such representations and warranties had been made on and as of the Closing Date.
ARTICLE 8. COVENANTS OF THE SELLER AND PARENT
8.1 CONDUCT OF BUSINESS. Except (x) as set forth on Schedule 8.1 and
------------
(y) for leases of cameras from Dycam that are installed in hospitals subject to
Hospital Contracts which leases are on terms consistent (and no less favorable
to the Seller) than those entered prior to the date hereof, from the date hereof
to the Closing Date, except as expressly contemplated by this Agreement or
otherwise consented to by the Buyer in writing, the Seller shall:
(a) carry on the Business, including the cash management practices of
the Business, only in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and use its best efforts to preserve
intact its present business organizations, keep available the services of its
present officers and employees (except Dana and Randee Arnold), and preserve its
relationships with customers, suppliers and others having business dealings with
it;
(b) maintain in all material respects all of the structures, equipment
and other tangible personal property of the Seller in good repair, order and
condition except for ordinary wear and tear and damage by unavoidable casualty;
(c) preserve, maintain, protect and continue to develop all
Proprietary Rights used in the Business;
(d) keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by the Seller;
24
<PAGE>
(e) perform in all material respects all obligations of the Seller
under leases, agreements, contracts and instruments relating to or affecting the
Business;
(f) maintain the books of account and records of the Seller in
the usual, regular and ordinary manner;
(g) comply in all material respects with all statutes, laws,
ordinances, rules and regulations applicable to the Seller and the conduct of
the Business;
(h) not hire or terminate employees, enter any employment agreement or
commitment to employees or effect any increase in the compensation or benefits
payable or to become payable to any officer, director or management employee or
effect any increase in the compensation of any other employee, except for (i)
increases for hourly employees in the Ordinary Course of Business that in the
aggregate are not material and (ii) hiring of employees on a temporary basis
pending the Closing and (iii) termination of employees for cause;
(i) not (i) create or incur any indebtedness for borrowed money,
capital lease or similar obligation, (ii enter into or terminate any lease of
real estate or personal property, (ii create any Lien on the Transferred Assets,
or (iv cancel without payment in full any notes, loans or other obligations
receivable from any person or entity, except loans from, and Liens in favor of,
the Buyer;
(j) not sell, lease, license or otherwise dispose of any material
asset of the Seller (other than dispositions of the Excluded Assets and sales of
inventory in the Ordinary Course of Business), acquire any substantial assets,
make any investment (including capital expenditures) or enter into any contract
or make any material commitment relating to the Business, except as contemplated
by Section 8.5;
(k) not (i) loan or advance funds to the Parent or any affiliate of
the Seller or (ii engage in any transaction with the Parent or any Affiliate of
the Seller or Parent, or create or discharge any intercompany account, other
than in the Ordinary Course of Business;
(l) not take any action which would require disclosure under
Section 6.17; and
(m) not commit itself to do any of the actions described in
clauses (h) through (l) above.
8.2 ACCESS TO INFORMATION. Between the date of this Agreement and the
Closing Date, the Seller will (a) give the Buyer and its authorized
representatives (including lenders and accountants) reasonable access to all
employees, plants, offices, warehouses and other facilities and property of the
Seller and to its books and records (including such access as may be necessary
to enable the Buyer and its independent accountants to perform a physical
inventory prior to Closing in connection with the preparation of the Closing
Date Balance Sheet), (b) permit the Buyer and its authorized representatives to
make such inspections thereof as the Buyer may reasonably request, and (c)
furnish the Buyer and its representatives and advisers with such financial, tax
and operating data and other information with respect to the business and
properties of the Seller as the Buyer may from time to time reasonably request;
provided, however, that any such investigation shall be conducted in such a
manner as not to interfere unreasonably with the operation of the Seller. Any
information provided pursuant to this Section 8.2 shall be subject to the
Confidentiality Agreements described in Section 13.3.
8.3 EFFORTS TO CONSUMMATE TRANSACTION. The Seller and the Parent
shall use their reasonable commercial efforts to take or cause to be taken all
actions under their control
25
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and required to consummate the transactions contemplated hereby including,
without limitation, such actions as may be necessary to obtain, prior to the
Closing, all necessary governmental or other third-party approvals and consents
required in connection with the consummation of the transactions contemplated by
this Agreement. Without limiting the foregoing, Parent will file with the
Securities and Exchange Commission ("SEC") its preliminary proxy materials on
---
or before February 21, 1997 and will use its commercially reasonable efforts to
expedite receipt of comments on such materials from the SEC and will respond
promptly to any such comments. The Board of Directors of Parent will recommend
that Parent's stockholders vote in favor of the transactions contemplated
hereby. The Seller or Parent shall provide the Buyer with copies of all proxy
materials to be filed with the SEC or sent to Parent's stockholders (except for
those materials that do not vary in any material respect to those previously
provided to the Buyer). None of such proxy materials shall refer to the Buyer,
Holdings or their Affiliates unless the Buyer has consented to such reference
(which consent shall not be unreasonably withheld or delayed).
8.4 NO SOLICITATION. Unless and until this Agreement shall have been
terminated pursuant to Section 13.1, the Seller and the Parent shall not
directly or indirectly (a) solicit, elicit, encourage or initiate any
discussions or negotiations with or provide any information to any person (other
than the Buyer or its representatives) concerning or in connection with any sale
of substantial assets of, or an equity interest in, the Seller or any merger or
other business combination relating to the Seller, or (b) disclose any
information not customarily disclosed to any person concerning the business and
assets of the Seller, or afford to any other person access to the properties,
books and records of the Seller, or otherwise assist any person in connection
with any of the foregoing. The Seller or the Parent, as the case may be, shall
promptly notify the Buyer of any proposal, inquiry or offer relating to any of
the foregoing matters and shall advise the Buyer of the material terms thereof.
8.5 HOSPITAL CONTRACTS.
(a) The Seller will only enter into Hospital Contracts in its Ordinary
Course of Business (including, without limitation, with respect to commissions
payable thereunder); provided that such Hospital Contracts shall be evidenced in
writing; provided further that the Seller will not, without the consent of the
Buyer (i) provide guarantees of minimum commissions or income or (ii) enter into
a Hospital Contract with any hospital with less than 500 annualized births
(calculated as provided in Section 4.2(h)); and provided further that,
notwithstanding the foregoing, the Seller will not enter into any Hospital
Contracts (or Install any Hospital Contract entered into prior to the date
hereof) if the Buyer notifies the Seller within 5 days after the Buyer's receipt
of written notice of the material terms of such Hospital Contract (or proposed
Installation) that the Buyer has in good faith determined that it does not
expect such contract to provide a reasonable return. The Seller will notify the
Buyer of the material terms of any Hospital Contract prior to entering into such
Hospital Contract. The Hospital Contracts entered into after December 13, 1996
and prior to the date hereof are listed on Schedule 8.5.
------------
(b) The Seller will promptly notify the Buyer if the Seller receives
notice that any hospital may terminate a Hospital Contract, or that any hospital
intends to propose any change to a Hospital Contract.
8.6 FINANCIAL INFORMATION. Prior to the Closing, the Seller shall
provide to the Buyer, as soon as such information becomes available, audited
financials statements of Parent or for the year ended December 31, 1996 and
monthly and quarterly financial statements of Seller for months and quarters
ending after December 31, 1996 (the "Interim Financials") for the Seller
------------------
(prepared consistent with the applicable Financial Statements) together with
such other financial information as the Buyer may reasonably request; provided
that financial statements for each month (including January 1997) shall be
delivered within 21 days following such month end and financial
26
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statements for the fiscal year ended December 31, 1996 shall be delivered prior
to the Closing Date.
8.7 EMPLOYEES. As of the Closing Date, the Buyer shall offer to
employ those employees of the Seller as Buyer determines in its sole discretion,
it being agreed that the Buyer shall have no obligation to hire any or all of
such employees. The wages or salaries offered to any such employee shall be
substantially similar to such employee's then current wage or salary and the
employee benefits offered to such employees shall be substantially similar to
those afforded to other similarly-situated employees of the Buyer. The employees
who accept the Buyer's offers of employment as of the Closing Date shall be
referred to herein as "Transferred Employees." All employees who do not accept
---------------------
such offers of employment and each other employee of the Seller who does not
become a Transferred Employee (including, without limitation, any employee of
the Seller who on the Closing Date is on an approved medical leave of absence,
short-term or long-term disability leave of absence, or workers' compensation
leave of absence) shall be referred to herein as "Retained Employees." The
------------------
Seller shall be solely responsible for all liabilities, obligations and
commitments relating to compensation of the Retained Employees and as may arise
as a result of the transactions contemplated by this Agreement, including, but
not limited to, any severance payments. Nothing in this Agreement shall limit
the Buyer's ability to terminate the employment of any Transferred Employee at
any time and for any reason, including without cause.
8.8 PRE-CLOSING ACTIVITIES. The Seller agrees that prior to the
Closing Date, the Seller shall direct its management and other personnel to
focus their material efforts and business activities on servicing existing
hospitals to increase hospital sales and hospital satisfaction with the Seller's
services. In addition, the Seller shall, in coordination with Hasco, provide
hospitals subject to Hospital Contracts with information regarding Hasco and the
transactions contemplated hereby.
8.9 CONSULTATION. The Seller will, from time to time, consult with
the Buyer regarding the daily operations of the Seller's business. In
connection therewith, the Seller will, at the Buyer's request, set up meetings
with key personnel of the Seller and the Buyer to discuss such operations. Such
meeting will be held as frequently as reasonably requested by the Buyer. The
Seller will make office space available from time to time prior to the Closing
Date for up to one employee of the Buyer in connection with such consultation
and meetings with key personnel.
8.10 LIMITATION OF LIABILITY. The Seller and Parent agree that
neither the Buyer, Holdings or any of their Affiliates shall have any liability
to the Seller, Parent or any Affiliate, stockholder, officer, employee, agent or
other Person for any failure of the Buyer or Holdings to grant a consent under
this Agreement or the Loan Agreement or for any suggestion or request made to
Seller or Parent relating to their business, except to the extent of the Buyer's
gross negligence or wilful misconduct. Notwithstanding anything contained in
the Agreement to the contrary, no claim may be made against the Buyer or
Holdings or any of their Affiliates for any lost profits or any special,
indirect or consequential damages in respect of any breach or wrongful conduct
(other than willful misconduct constituting actual fraud) in connection with,
arising out of or in any way related to the transactions contemplated hereunder,
or any act, omission or event occurring in connection herewith or therewith; and
the Seller and Parent hereby waive, release and agree not to sue upon any such
claim for any such damages.
ARTICLE 9. COVENANTS OF THE BUYER
9.1 ACTIONS AND CONSENTS. The Buyer and Holdings shall use their
reasonable commercial efforts to take or cause to be taken all actions under
their control and required to consummate the transactions contemplated hereby
including, without limitation, such
27
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actions as may be necessary to obtain, prior to the Closing, all necessary
governmental or other third party approvals and consents required in connection
with the consummation of the transactions contemplated by this Agreement.
9.2 CONTINUED ASSISTANCE. At all times from and after the Closing
Date, the Buyer shall cooperate with the Seller and provide such assistance as
the Seller may reasonably request, at the Seller's expense, in connection with
the defense or prosecution of any claims, actions, suits or investigations
arising out of the conduct of the Business prior to the Closing Date (except if
the Buyer and Seller are adverse on such matter).
9.3 BUYER FINANCIAL STATEMENTS. At least five business days prior to
the Closing Date, the Buyer shall deliver to the Seller a copy of its most
recently available monthly or quarterly financial statements.
ARTICLE 10. OTHER AGREEMENTS AMONG THE PARTIES
10.1 EXPENSES. Except as otherwise specifically provided in this
Agreement, each party hereto shall pay its own expenses incident to this
Agreement and the transactions contemplated hereby, including legal and
accounting fees and disbursements. Any filing, recording or other fees or
sales, transfer or other Taxes applicable to the conveyance and transfer of the
Transferred Assets from the Seller to the Buyer pursuant to the provisions of
this Agreement or the effectuation of any of the other transaction contemplated
hereby shall be borne and paid by the Seller. The provisions of this Section
10.1 shall survive any termination of this Agreement.
10.2 CERTAIN TAX MATTERS.
(a) Access and Record Retention. The Buyer and Seller shall each
---------------------------
permit authorized representatives of the other, at all reasonable times after
the Closing, access to their offices, records and accounts which relate to the
Seller prior to the Closing for the purpose of obtaining any information
necessary for the preparation and filing of any Tax Returns or other reports to
any Governmental Agency for any period and for other proper purposes. The Buyer
and the Seller shall each (i) retain such records as the other may reasonably
request, including those which shall be necessary to permit preparation and
filing of federal and state Tax Returns, for reasonable periods (not less than
seven years) consistent with their record retention policies, and (ii) give the
other party reasonable written notice prior to transferring, destroying or
discarding such records and, if the other party so requests, the Buyer or
Seller, as the case may be, shall allow the other party to take possession of
such records. This Section 10.2(a) shall not apply in connection with
litigation or other action between or among the parties hereto or their
Affiliates.
(b) Prorations. All real property Taxes, personal property Taxes, ad
----------
valorem obligations and similar Taxes imposed on a periodic basis, in each case
levied with respect to the Transferred Assets, other than conveyance taxes
provided for in Section 10.2(c) below, for a taxable period which includes (but
does not end on) the Closing Date shall be apportioned between the Seller and
the Buyer as of the Closing Date based on the number of days of such taxable
period included in the Pre-Closing Tax Period and the number of days of such
taxable period included in the Post-Closing Tax Period. The Seller shall be
liable for the proportionate amount of such Taxes that is attributable to the
Pre-Closing Tax Period. Within 90 days after the Closing, the Seller and the
Buyer shall present a reimbursement to which each is entitled under this Section
10.2(b) together with such supporting evidence as is reasonably necessary to
calculate the proration amount. The proration amount shall be paid by the party
owing it to the other within 10 days after delivery of such statement.
Thereafter, the Seller shall notify the Buyer upon receipt of any bill for real
or personal property Taxes relating to the Transferred Assets, part or all of
which are attributable to the Post-Closing Tax Period, and shall promptly
deliver such bill to the Buyer who
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<PAGE>
shall pay the same to the appropriate taxing authority, provided that if such
bill covers the Pre-Closing Tax Period, the Seller shall also remit prior to the
due date of assessment to the Buyer payment for the proportionate amount of such
bill that is attributable to the Pre-Closing Tax Period. In the event that
either the Seller or the Buyer shall thereafter make a payment for which it is
entitled to reimbursement under this Section 10.2(b), the other party shall make
such reimbursement promptly but in no event later than 30 days after the
presentation of a statement setting forth the amount of reimbursement to which
the presenting party is entitled along with such supporting evidence as is
reasonably necessary to calculate the amount of reimbursement. Any payment
required under this Section and not made within 20 business days of delivery of
the statement shall bear interest at the rate per annum determined, from time to
time, under the provisions of Section 6621(a)(2) of the Code for each day until
paid.
(c) Certain Taxes. All transfer, documentary, sales, use, stamp,
-------------
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement shall be paid by the Seller
when due, and the Seller will, at its own expense, file all necessary Tax
Returns and other documentation with respect to all such transfer, documentary,
sales, use, stamp, registration and other Taxes and fees, and, if required by
applicable law, the Buyer will, and will cause its affiliates to, join in the
execution of any such Tax Returns and other documentation.
10.3 RECEIVABLES; MAIL.
(a) In the event that any payment of the accounts receivable or other
asset included in the Transferred Assets is received by the Seller after the
Closing Date, the Seller will hold such amounts received or paid as trustee for
the Buyer and remit such payments to the Buyer as soon as practicable following
receipt thereof (but in any event within 2 business days).
(b) Notwithstanding any other provision of this Agreement, the Seller
shall on the sixth month anniversary of the Closing Date pay to the Buyer the
amount by which the aggregate of all sums received by the Buyer in respect of
accounts receivable included in the Transferred Assets (after subtracting from
any amount paid any reasonable collection costs incurred by the Purchaser) is
less than the amount thereof reflected on the Final Closing Balance Sheet (net
of reserves); provided that this provision shall apply only to the extent that
Buyer fulfills its obligations under this Section 10.3 to collect the Receivable
and that a purchase price adjustment pursuant (or further adjustment) would have
occurred pursuant to Section 4.4 had the amount of such uncollected
receivable(s) (net of reserves) been valued at zero on the Closing Date. Upon
receipt of such payment as contemplated by the preceding sentence, the Buyer
shall assign any such receivables back to the Seller and shall thereafter pay to
the Seller any amounts subsequently collected by the Buyer in respect of such
assigned receivables. For the purposes of this Section 10.3, an account
receivable shall not be regarded as realizing its full face value to the extent
that it is paid, received or otherwise recovered in circumstances in which such
payment, receipt or recovery is or may be void, voidable or otherwise liable to
be reclaimed or set aside. With respect to any delinquent receivable included
in the Transferred Assets, the Buyer shall take such actions to collect such
receivable as are consistent with its normal collection policies for its other
receivables. Any collections received shall be applied to the oldest
outstanding receivable of such payee unless such payee specifies another
receivable in writing. Any amounts due Buyer under this Section 10.3(b) shall
be satisfied pursuant to an offset of payments due the Seller under Article 4
(such offset to be in the order of maturity).
(c) The Seller authorizes and empowers the Buyer from and after the
Closing Date (i) to receive and open mail addressed to the Seller and (ii) to
deal with the contents thereof in any manner the Buyer sees fit; provided, in
the case of clause (ii), such mail and the contents thereof relate to the
Transferred Assets or otherwise to the Business or to any of the Assumed
Liabilities. The Seller agrees to deliver to the Buyer promptly upon receipt
any mail,
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<PAGE>
checks or other documents received by it pertaining to the Transferred
Assets or otherwise to the Business or any of the Assumed Liabilities. The
Buyer agrees to deliver to the Seller any mail, checks or documents which it
receives to which it is not entitled by reason of this Agreement or otherwise
and to which the Seller is entitled.
ARTICLE 11. CONDITIONS OF CLOSING
11.1 CONDITIONS TO OBLIGATION OF THE BUYER TO CLOSE. The obligation
of the Buyer to close the transactions contemplated hereby shall be subject to
the fulfillment and satisfaction, prior to or at the Closing, of the following
conditions, or the written waiver thereof by the Buyer:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Seller and the Parent contained in this Agreement shall be
true and correct in all material respects on and as of the Closing Date with the
same force and effect as though made on and as of the Closing Date (or, in the
case of any such representation or warranty made only as of a particular date,
as of such particular date). The Seller and the Parent shall have performed and
complied in all material respects with all covenants and agreements required by
this Agreement to be performed or complied with by the Seller or the Parent, as
the case may be, on or prior to the Closing Date.
(b) No Proceedings. No action, suit or proceeding will be pending or
--------------
threatened before any judicial authority or Government Entity the result of
which could prevent or prohibit the consummation of any transaction pursuant to
the this Agreement, cause any such transaction to be rescinded following
consummation, or adversely affect the Buyer's right to conduct the Business or
to own the Transferred Assets or the Seller's performance of its obligations
pursuant to this Agreement or the other agreements contemplated hereby, and no
judgment, order, decree, stipulation, injunction or charge having any such
effect will exist.
(c) Approvals. All governmental and third party approvals, consents,
---------
permits or waivers necessary for consummation of the transactions contemplated
by this Agreement shall have been obtained. Stockholders of Parent holding the
required number of shares shall have approved the transactions contemplated
hereunder.
(d) Financing. The Buyer shall have received the proceeds of the
---------
financing required to pay the cash portion of the Purchase Price and related
fees and expenses and the consent of Heller Financial, Inc. and the other
lenders providing such financing to the other transactions contemplated hereby,
in each case on terms satisfactory to the Buyer.
(e) Deliveries. The Seller and/or the Parent shall have delivered, or
----------
caused to be delivered, to the Buyer the following documents and certificates
(which shall be in form and substance satisfactory to the Buyer):
(i) Officer's Certificate - a certificate dated the Closing Date
---------------------
and signed by an executive officer of the Seller and Parent expressly certifying
that the conditions set forth in Section 11.1(a), 11.1(b), 11.1(c) and 11.1(f)
have been satisfied;
(ii) Bill of Sale - a bill of sale in form and substance
------------
reasonably acceptable to the Buyer and other good and sufficient instruments of
transfer and conveyance as shall be effective to vest in the Buyer good and
marketable title to the Transferred Assets;
(iii) Instruments of Assignment - assignment, duly executed
-------------------------
by the Seller and in form and substance reasonably acceptable to the Buyer of
all contracts, agreements, licenses, purchase orders and leases (including
leases for motor vehicles) relating to
30
<PAGE>
the Business; and separate assignments in form and substance to the Buyer of all
Proprietary Rights, including those set forth on Schedule 6.12;
-------------
(iv) Miscellaneous - such other documents of transfer,
-------------
conveyance and assignment valid to transfer all of the Transferred Assets to the
Buyer;
(v) Opinion of The Seller's Counsel - an opinion of the
-------------------------------
Seller's counsel as to the due authorization and enforceability of this
Agreement and that the proper stockholder approval and other corporate actions
of the Parent and the Seller have taken place to authorize the performance of
the transactions contemplated hereby, which opinion shall be in form and
substance reasonably acceptable to the Buyer and dated the Closing Date;
(vi) Noncompetition Agreement - the Noncompetition Agreement,
------------------------
duly executed by the Seller and Parent;
(vii) Sublease Agreement -- the Sublease Agreement duly executed
by Seller;
(viii) Dycam Option -- the Dycam Option, duly executed by Parent;
------------
(ix) Dycam Master Agreement -- the Dycam Master Agreement, duly
----------------------
executed by Dycam; and
(x) IP License -- the IP License, duly executed by the Seller.
----------
(f) No Material Adverse Effect. No event, occurrence, fact,
--------------------------
condition, change or development shall occur (or be likely to occur) that,
individually or in the aggregate, has constituted or resulted in, or could
constitute or result in, a Material Adverse Effect.
(g) Key Employee. Marty Joel shall have accepted the Buyer's offer of
------------
employment and shall not have given any indication of his intention to terminate
such employment.
(h) Other Documents and Instruments. The Buyer shall have received
-------------------------------
such other documents and instruments as reasonably requested by the Buyer in
connection with the transactions contemplated hereunder.
11.2 CONDITIONS TO OBLIGATION OF THE SELLER TO CLOSE. The obligation
of the Seller to close the transactions contemplated hereby shall be subject to
the fulfillment and satisfaction, prior to or at the Closing, of the following
conditions, or the written waiver thereof by the Seller:
(a) Representations, Warranties and Covenants; Officer's Certificate.
----------------------------------------------------------------
The representations and warranties of the Buyer and Holdings contained in this
Agreement shall be true and correct on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date. The Buyer and
Holdings shall have performed and complied with all covenants and agreements
required by this Agreement to be performed or complied with by the Buyer and
Holdings on or prior to the Closing Date.
(b) Approvals. All governmental and third party approvals, consents,
---------
permits or waivers necessary for consummation of the transactions contemplated
by this Agreement shall have been obtained. Stockholders of Parent holding the
required number of shares shall have approved the transactions contemplated
hereunder.
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(c) Proceedings. No action, suit or proceeding will be pending or
-----------
threatened before any judicial authority or Government Entity the result of
which could prevent or prohibit the consummation of any transaction pursuant to
the this Agreement, cause any such transaction to be rescinded following
consummation, or adversely affect the Buyer's performance of its obligations
pursuant to this Agreement or the other agreements contemplated hereby, and no
judgment, order, decree, stipulation, injunction or charge having any such
effect will exist.
(d) Deliveries. The Buyer shall have delivered, or caused to be
----------
delivered, to the Seller and the Parent:
(i) Officer's Certificate - a certificate dated the Closing Date
---------------------
and signed by an executive officer of the Buyer and Holdings expressly
certifying that the conditions set forth in Sections 11.2(a), 11.2(b), (1.2(c)
and 11.2(e) have been satisfied;
(ii) Sublease Agreement -- the Sublease Agreement, duly
------------------
executed by Buyer;
(iii) Opinion of the Buyer's Counsel - an opinion of the
------------------------------
Buyer's New York counsel as to the due authorization and enforceability of this
Agreement (assuming New York law applies), which opinion shall be in form and
substance reasonably acceptable to the Seller and dated the Closing Date;
(iv) Dycam Master Agreement -- the Dycam Master Agreement
----------------------
duly executed by Buyer;
(v) Assumption Agreement -- an assumption agreement, in form and
--------------------
substance reasonably acceptable to the Seller, pursuant to which the Buyer
assumes all the Assumed Liabilities; and
(vi) IP License -- the IP License, duly executed by the
----------
Seller.
(e) No Material Adverse Effect. No event, occurrence, fact, condition,
--------------------------
change or development has occurred (or is likely to occur) that, individually or
in the aggregate, has constituted or resulted in, or could constitute or result
in a material adverse change in the Buyer's business, operations, condition
(financial or otherwise), assets, prospects or employee, customer or supplier
relations that Seller reasonably determines (after written disclosure of all
material facts and circumstances) could be expected to have a material adverse
effect on the Buyer's ability to fulfill its obligations under this Agreement.
ARTICLE 12. INDEMNIFICATION
12.1 INDEMNIFICATION. (a) The Seller and the Parent hereby agree,
jointly and severally, to indemnify and hold harmless the Buyer and its
directors, officers, employees, agents, Stockholders and affiliates against and
in respect of any and all damages, costs, liabilities, losses, judgments,
penalties, fines, expenses or other costs (including attorney's fees)
(collectively, "Losses") arising from or relating to: (i) any breach of any of
------
the representations or warranties made by the Seller or the Parent in this
Agreement, any Schedule hereto or any other agreement, document or instrument
delivered by the Seller or the Parent in connection with the Closing; (ii) any
breach of the covenants and agreements made by the Seller or the Parent in this
Agreement or any other agreement, document or instrument delivered by the Seller
or the Parent in connection with the Closing; (iii) any litigation or other
proceeding brought by any Stockholder, officer, director, employee or creditor
of Seller, Parent or Dycam in connection with the transactions contemplated
hereby; and (iv) the Excluded Liabilities, including liabilities associated with
broker's and finder's fees and similar compensation based on arrangements to
which the Buyer is not a party.
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(b) The Buyer shall indemnify and hold harmless the Seller and the
Parent, against and in respect of any Losses arising from or relating to (i) any
breach of any of the representations or warranties made by the Buyer or Holdings
in this Agreement, any Schedule hereto or any other agreement, document or
instrument delivered by the Buyer or Holdings in connection with the Closing,
(i) any breach of the covenants and agreements made by the Buyer or Holdings in
this Agreement or any other agreement, document or instrument delivered by the
Buyer or Holdings in connection with the Closing, and (ii following the Closing
Date, the Assumed Liabilities.
12.2 MINIMUM AMOUNTS OF INDEMNITY. (a) No amounts shall be payable
by the Seller or the Parent pursuant to Section 12.1(a)(i) unless and until the
aggregate amount otherwise payable pursuant to such Section 12.1(a)(i) in the
absence of this Section 12.2 exceeds $50,000, in which event such amount in
excess of $50,000 (but only such amount in excess) shall be due.
12.3 SURVIVAL; TIME LIMIT ON INDEMNITY. Notwithstanding any
examination made by or on behalf of any party hereto, the knowledge of any party
or the acceptance by any party of any certificate or opinion, each
representation, warranty and covenant contained herein, and in any writing
delivered pursuant hereto, shall survive the Closing. Notwithstanding the
foregoing, no claim for indemnification under Section 12.1(a)(i) shall be made
after 5:00 p.m. (St. Louis time) on the 30th month anniversary of the Closing
Date.
12.4 PROCEDURE FOR CLAIMS BY THIRD PARTIES. (a) Any party asserting a
right of indemnification provided for under this Agreement (the "Indemnified
-----------
Party") in respect of, arising out of or involving a claim or demand made by any
- -----
person, firm, Governmental Agency or corporation against the Indemnified Party
(a "Third Party Claim") shall notify the indemnifying party (the "Indemnifying
----------------- ------------
Party") in writing of the Third Party Claim within 20 business days after
- -----
receipt by such Indemnified Party of written notice of the Third Party Claim.
As part of such notice, the Indemnified Party shall furnish the Indemnifying
Party with copies of any pleadings, correspondence or other documents relating
thereto that are in the Indemnified Party's possession. The Indemnified Party's
failure to notify the Indemnifying Party of any such matter within the time
frame specified above shall not release the Indemnifying Party, in whole or in
part, from its obligations under this Section 12, except to the extent that the
Indemnified Party's ability to defend against such claim is actually prejudiced
thereby. If, within 15 days following notification of a Third Party Claim that
seeks solely monetary damages, the Indemnifying Party unconditionally
acknowledges its liability under this Section 12 with respect to such Third
Party Claim and provides to the Indemnified Party assurances of its ability to
pay any such Third Party Claim (reasonably acceptable to the Indemnified Party),
the Indemnifying Party shall have the right to defend against any such Third
Party Claim at the expense of such Indemnifying Party. Any such defense shall
be conducted actively and diligently by reputable attorneys employed by the
Indemnifying Party reasonably acceptable to the Indemnified Party; provided that
the Indemnified Party shall be entitled at any time to participate in such
proceedings and to be represented by attorneys of its own choosing; and provided
further that the fees and expenses of such counsel shall be at the sole expenses
of the Indemnified Party unless (i) the Indemnifying Party shall not have
notified the Indemnified Party that it will assume the defense of such Third
Party Claim and have designated counsel reasonably acceptable to the Indemnified
Party as provided above or (ii) the named parties to any proceeding with respect
to such Third Party Claim (including any actual or potential impleaded parties)
include both the Indemnified Party and the Indemnifying Party and representation
of both parties by the same counsel would, as reasonably determined by the
Indemnified Party's counsel, be inappropriate due to actual or potential
differing interests between them. The cost of separate counsel for the
Indemnified Party in the case of clauses (i) or (ii) of the preceding sentence
shall be paid by the Indemnifying Party. If any Indemnifying Party shall
undertake to defend any Third Party Claim, the Indemnified Party agrees to
cooperate fully with
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the Indemnifying Party and its counsel in the defense against any such Third
Party Claim. All costs and expenses incurred in connection with such cooperation
shall be borne by the Indemnifying Party. The Indemnifying Party shall not
settle any Third Party Claim for other than cash (and with a full release of the
Indemnified Party) unless the Indemnified Party shall consent.
(b) If any party becomes obligated to indemnify another party with
respect to any Third Party Claim and the amount of liability with respect
thereto shall have been finally determined, the Indemnifying Party shall pay
such amount to the Indemnified Party in immediately available funds within ten
days following written demand by the Indemnified Party. All amounts paid
hereunder shall be paid as an adjustment to the purchase price.
12.5 RIGHT OF SET-OFF. (a) The Buyer shall have the right to set-off
against any payments to the Seller or Parent (and any transferee thereof)
required under this Agreement all or any part of its Losses (in lieu of seeking
cash indemnification therefor to which it is entitled under this Article 12) or
other amount owed by the Seller or Parent (or any transferee) hereunder or under
agreements entered into pursuant to this Agreement that have been fixed by
agreement of the Buyer and the Seller or fixed pursuant to this Section 12.5
hereof by notifying the Seller that the Buyer is exercising its right of set-
off; provided that if a portion, but not all, of the claim has been fixed (by
agreement or otherwise), the amount that has been fixed may be offset. In the
event that the Buyer has a good faith claim for Losses or other offset and the
amount thereof or basis therefore has not been fixed by agreement of the Buyer
and the Seller or pursuant to the procedure set forth in this Section 12.5
hereof, then the Buyer may withhold from any payment to the Seller or Parent (or
any transferee thereof) the amount equal to the disputed amount of such claim
for Losses or other offset; provided that if the aggregate amounts withheld at
any one time exceed $100,000 the Seller may request, and promptly upon such
request, the Buyer shall establish and deposit such withheld amounts in an
escrow account at a trust department of a nationally recognized bank. Such
escrow account shall provide that such monies may not be released without either
(i) joint agreement by the Buyer and the Seller or (ii) a written decision
issued pursuant to Section 12.5(b). Any costs of such escrow account shall be
paid by the party (the Buyer or Seller) that receives the least amount of the
aggregate funds deposited in the escrow account. Upon the resolution of such
claim for Losses or other offset, then the amount deposited in the escrow as set
forth above shall be paid to the appropriate party; provided that any such
payment shall be accompanied by the proportional share of the interest earned by
the escrow on such amounts. Any such set-off shall be in addition to any other
rights the Buyer has to indemnification or payment of Losses or other amounts.
(b) If the parties are unable to resolve any dispute regarding an
offset under this Section 12.5 within 30 days after the date of such offset,
such unresolved dispute shall be submitted to a third party mutually agreeable
to the parties, which third party shall not have had a material relationship
with any of the parties or their respective Affiliates within the two years
preceding appointment (an "independent third party"), for resolution. If the
parties are unable to agree on the selection of an independent third party to
act as Arbitrator, the Seller shall select one independent third party to act as
an arbitrator, the Buyer shall select one independent third party to act as an
arbitrator and the two appointed arbitrators shall select a third arbitrator,
who shall also serve as chair of the tribunal; provided that each of the persons
selected pursuant to this sentence shall be persons listed as potential
arbitrators by the Los Angeles chapter of the American Arbitration Association.
The Buyer and Seller shall make their selections within 15 days following notice
by either party to the other that agreement on a single arbitrator will not be
reached. The two arbitrators shall select the third arbitrator within 15 days
following the selection of the second arbitrator. If any arbitrator has not
been appointed within the time limits specified herein, such appointment shall
be made by the American Arbitration Association upon the written request of any
party within 15 days of the request in accordance with the rules of such
organization. The single arbitrator chosen or the three chosen are referred to
as the "Arbitration Panel." If there are three arbitrators, the decision of two
of such arbitrators shall control. The Arbitration Panel shall
34
<PAGE>
determine those items in dispute, based solely on presentations by the parties
and not by independent review, and shall render a written report as to the
resolution of each dispute. In resolving any disputed item, the Arbitration
Panel may not assign a value to an item greater than the greatest value for such
item claimed by any party or less than the smallest value for such item claimed
by any party. The Arbitration Panel shall have exclusive jurisdiction over, and
resort to the Arbitration Panel as provided in this Section shall be the sole
recourse and remedy of the parties against one another with respect to any
disputes arising under this Section 12, and the Arbitration Panel's
determination shall be conclusive and binding on the parties and shall be
enforceable in a court of law.
(c) Any offset contemplated by this Section 12.5 shall be deemed an
adjustment to the purchase price payable hereunder.
ARTICLE 13. MISCELLANEOUS
13.1 TERMINATION. (a) Anything herein to the contrary notwithstanding,
this Agreement may be terminated at any time prior to the Closing Date: (i) by
mutual written consent of the Buyer and the Seller; (ii) by either the Buyer or
the Seller if for any reason the Closing shall not have occurred on or before
May 30, 1997; or (iii) by either the Buyer or the Seller in the event that a
condition to the terminating party's obligations to close the transactions
contemplated by this Agreement shall become incapable of satisfaction; provided,
however, that no party shall be entitled to terminate this Agreement pursuant to
clause (ii) or (iii) in the event that the failure of the Closing to occur or
any condition to Closing to be satisfied shall be attributable to such party's
breach of this Agreement.
(b) If any party terminates this Agreement pursuant to this Section
13.1, this Agreement shall become void and of no force or effect, without any
Liability or further obligation on the part of any party hereto, except for (x)
Liabilities arising from a breach of this Agreement prior to its termination in
accordance with Section 13.1(a) above and (y) Sections 13.1(c), 13.2 and 13.3.
(c) In consideration of the benefits provided by the Buyer to the
Seller and Parent and in recognition of the substantial time and money that the
Buyer has spent and will spend in connection with the transactions contemplated
hereby and as an inducement to the Buyer to enter into this Agreement, the
Seller and Parent, jointly and severally, agree to pay to the Buyer a cash fee
of $400,000 if, within 12 months of any termination of this Agreement pursuant
to this Section 13.1, a Third Party Transaction is consummated. Such fee is due
and payable on the date such Third Party Transaction is consummated. A "Third
Party Transaction" means any acquisition of all or any significant part of the
business and properties, capital stock or capital stock equivalents of Parent
and/or the Seller, whether by merger, purchase of stock, purchase of assets,
tender offer or otherwise, including any such transaction with a current
stockholder or employee but excluding a transaction among the Seller, Parent,
Dycam and/or IDI provided that such transaction does not result, directly or
indirectly, in any of the stockholders of Seller, Parent or Dycam receiving any
cash proceeds or any Person or group of Persons (other than now current
stockholders of Parent or Dycam) obtaining beneficial ownership of more than 5%
of any of the combined entities' common stock.
13.2 PUBLICITY. No press release or other public announcement concerning
this Agreement or the transactions contemplated hereby shall be made without
advance approval thereof by the Seller and the Buyer (not to be unreasonably
withheld), except as required by law.
13.3 ENTIRE AGREEMENT. This Agreement and the other documents delivered in
connection herewith constitutes the entire agreement of the parties with respect
to the subject matter hereof. The representations, warranties, covenants and
agreements set forth in this Agreement and
35
<PAGE>
in any financial statements, schedules or exhibits delivered pursuant hereto
constitute all the representations, warranties, covenants and agreements of the
parties hereto and upon which the parties have relied, and except as
specifically provided herein, no change, modification, amendment, addition or
termination of this Agreement or any part thereof shall be valid unless in
writing and signed by or on behalf of the party to be charged therewith.
Notwithstanding the foregoing, the Confidentiality Agreements dated as of
September 25, 1996 (the "Buyer's Confidentiality Agreement") (whereby the Buyer
---------------------------------
agrees to keep information confidential) and October 8, 1996 (the "Seller's
--------
Confidentiality Agreement") (whereby the Seller agrees to keep information
- -------------------------
confidential) shall survive the execution of this Agreement; provided that the
Buyer's Confidentiality Agreement shall terminate on the Closing Date.
13.4 POWER OF ATTORNEY. Effective upon the Closing Date, the Seller
hereby irrevocably constitutes and appoints the Buyer and its successors,
assigns and designees as its true and lawful attorney-in-fact, with full power
of substitution, in the name of the Buyer or the Seller, on behalf of and for
the benefit of the Buyer, to collect all accounts receivable and other items
being transferred, conveyed and assigned to the Buyer as provided herein; to
endorse, without recourse, checks, notes and other instruments relating to the
Transferred Assets in the name of the Seller; to institute and prosecute, in the
name of the Seller, all proceedings which the Buyer may deem proper in order to
collect, assert or enforce any claim, right or title of any kind in or to the
Transferred Assets; to defend and compromise any and all actions, suits or
proceedings in respect of any of the Transferred Assets; and to do all such acts
and things in relation to the Transferred Assets as the Buyer may deem
advisable. The Seller agrees that the foregoing powers are coupled with an
interest and shall be irrevocable by the Seller. The Seller further agrees that
the Buyer shall retain for its own account any amounts collected pursuant to the
foregoing powers and the Seller shall promptly transfer and deliver to the Buyer
any cash or other property received by the Seller, directly or indirectly, at
any time after the Closing Date in respect of any accounts receivable or
otherwise relating to the assets, properties, rights or businesses transferred,
conveyed and assigned to the Buyer as provided herein.
13.5 NON-ASSIGNABLE ASSETS. (a) Notwithstanding anything contained
in this Agreement to the contrary, this Agreement shall not constitute an
agreement or an attempted agreement to transfer, sublease or assign any
contract, license, lease, commitment, sales, purchase order, franchise, consent,
license, right, permit, authorization, approval or any other agreement or any
claim, right or benefit arising thereunder or resulting therefrom if any such
attempted transfer, sublease or assignment without the consent of any other
party thereto would constitute a breach thereof or would in any way adversely
affect the rights of the Buyer thereunder. The Seller shall, between the date
hereof and the Closing Date (and, if requested by the Buyer, after the Closing
Date), use its best efforts to obtain the consent of any party or parties to any
such contracts, licenses, leases, commitments, sales orders, purchase orders or
other agreements to the transfer, sublease or assignment thereof by the Seller
to the Buyer or its designees hereunder in all cases in which such consent is
required. If any such consent is not obtained, or if an attempted assignment
would be ineffective or would affect the rights of the Seller thereunder such
that the Buyer would not in fact receive all such rights, the Seller shall
perform such agreement for the account of the Buyer or otherwise cooperate with
the Buyer in any arrangement necessary or desirable to provide for the Buyer or
its designees the benefits of any such agreement, including without limitation
enforcement for the benefit of the Buyer of any and all rights of the Seller
against the other party thereto arising out of the breach, termination or
cancellation of such agreement by such other party or otherwise; provided that
if the Buyer is required to pay any fee or cost in connection with such
transfer, such fee shall be paid by the Seller or, if paid by the Buyer, the
Seller shall reimburse the Buyer. Notwithstanding any of the provisions of this
Section 13.6, nothing herein shall be deemed to waive or excuse any obligation
on the part of the Seller, or any condition for the benefit of the Buyer, to
obtain any necessary consents of any person or entity to the assignment to the
Buyer of any of the Transferred Assets or any contract, license, lease,
commitment, order or other agreement required to be assigned hereunder.
36
<PAGE>
(b) Without limiting Section 13.5(a), (i) prior to the Closing Date,
the Seller and Parent shall take all actions within their control to enforce the
provisions of the Arnold Agreements, including in particular Article 5 of each
Arnold Agreement, and (ii) after the Closing Date, the Seller and Parent shall
take all actions reasonably requested by the Buyer to enforce the provisions of
the Arnold Agreements, including hiring such counsel as reasonably requested by
the Buyer and filing such legal actions as recommended by such counsel or the
Buyer, and otherwise cooperate with the Buyer in connection with such
enforcement. Any out-of-pocket costs incurred, and any recovery obtained, by
the Seller or Parent as a result of actions undertaken pursuant to clause (ii)
shall be at the cost, and for the benefit, of the Buyer; provided that the Buyer
shall, except as set forth in the next proviso, be liable for any legal fees or
other expenses due under the Arnold Agreements as a result of such action;
provided that the Buyer shall not be liable for any breach (or liability arising
therefrom) by the Seller, Parent or any of their Affiliates under the Arnold
Agreements or any other liability arising out of actions of the Seller, Parent
or their Affiliates. The Seller and Parent acknowledge and agree that they
retain significant interest in the Arnold Agreements' enforceability and that a
breach of the Arnold Agreements would cause significant damage to the Seller and
Parent.
13.6 FURTHER ASSURANCES. From time to time after the Closing, each
party hereto will execute and deliver, or cause its affiliates to execute and
deliver, to any other party hereto such instruments of sale, transfer,
conveyance, assignment and delivery, and such consents, assurances, powers of
attorney and other instruments as may be reasonably requested by the requesting
party or its counsel in order to vest in the Buyer all right, title and interest
of the Seller in and to the Transferred Assets and otherwise in order to carry
out the purpose and intent of this Agreement.
13.7 NOTICES. Any and all notices or other communications or
deliveries required or permitted to be given or made pursuant to any of the
provisions of this Agreement shall be deemed to have been duly given or made for
all purposes if (a) sent by certified or registered mail, return receipt
requested and postage prepaid, (b) hand delivered, (c) sent by a nationally
recognized overnight courier or (d) sent by telephone facsimile transmission
(the receipt of which is confirmed) as follows:
If to the Buyer:
Hasco International, Inc.
3613 Mueller Road
St. Charles, MO 63301
Attention: David Van Vliet
Telecopy No.: (314) 770-0275
With a copy to:
Kirkland & Ellis
153 East 53rd Street
39th Floor
New York, NY 10022
Attention: Charles B. Fromm
Telecopy No.: (212) 446-4900
If to the Seller:
Forever Yours, Inc.
667 Rancho Conejo Boulevard
Newbury Park, CA 91320
37
<PAGE>
Attention: James O'Brien
Telecopy No.: (805) 376-9184
If to Parent:
Styles On Video, Inc.
667 Rancho Conejo Boulevard
Newbury Park, CA 91320
Attention: K. Eugene Shutler
Telecopy No.: (805) 376-9184
With a copy (in each case) to:
Sanders, Barnet, Goldman, Simons & Mosk
1901 Avenue of the Stars, Suite 850
Los Angeles, California 90067
Attention: Michael Sanders
Telecopy No.: (310) 553-2435
or at such other address as any party may specify by notice given to the other
party in accordance with this paragraph. The date of giving of any such notice
shall be the date three days following the posting of the mail, the date of hand
delivery, the day after delivery to the overnight courier service or the date
sent by telephone facsimile.
13.8 WAIVERS AND AMENDMENTS. This Agreement may be amended,
superseded, canceled, renewed or extended and the terms hereof may be waived
only by a written instrument signed by the parties or, in the case of a waiver,
by the party waiving compliance.
13.9 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
13.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE
(WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE
THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF
CALIFORNIA.
13.11 SEVERABILITY. Should any clause, section or part of this
Agreement be held or declared to be void or illegal for any reason, all other
clauses, sections or parts of this Agreement shall nevertheless continue in full
force and effect.
13.12 NO STRICT CONSTRUCTION. The language used in this Agreement
shall be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
Person.
13.13 ASSIGNMENT. This Agreement shall be binding upon, and inure to
the benefit of, the parties and their respective successors and permitted
assigns. This Agreement or any rights or obligations hereunder shall not be
assignable by either party, except that (a) the Buyer may (i) assign any or all
of its rights and interests hereunder (x) to one or more of its Affiliates, (y)
in connection with the transfer of all or substantially all of the assets of the
Buyer and/or (z) to any party(ies) providing financing to the Buyer or (ii)
designate one of more of its Affiliates to perform
38
<PAGE>
its obligations hereunder (in any or all of which cases the Buyer shall
nonetheless remain liable and responsible for the performance of all of its
obligations hereunder) and (b) the Seller may, after the Closing Date, assign
its rights to receive money hereunder to (i) its Affiliates and, after the first
anniversary of the Closing Date, to any other Person that the Buyer consents to
(which consent will not be unreasonably withheld); provided that the Buyer's
rights of offset and the adjustments set forth herein to the purchase price
shall continue to apply notwithstanding any assignment by the Seller; and
provided further that the provisions of Section 4.1 relating to a Change of
Control or default by Buyer shall continue to apply notwithstanding any
assignment by the Buyer.
13.14 SPECIFIC PERFORMANCE. Each of the Buyer and the Seller
acknowledges and agrees that the other would be damaged irreparably in the event
any of the provisions of this Agreement are not performed in accordance with
their specific terms or otherwise are breached and to enforce specifically this
Agreement and the terms and provisions thereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Buyer and the Seller and the matter, in addition to any other remedy to which
they may be entitled, at law or in equity.
13.15 HEADINGS. The Section and other headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement or of any term or provision hereof.
13.16 NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer
any rights or remedies upon any person other than the parties hereto and their
respective successors and permitted assigns.
13.17 GUARANTEE BY THE PARENT. The Parent, as principal obligor and
not as surety, covenants with the Buyer:
(a) to cause the Seller to effect prompt and complete performance of
all the terms, covenants, conditions and provisions of this Agreement and the
agreements contemplated hereby that are to be kept, observed and performed by
the Seller.
(b) that, if for any reason whatsoever, including the insolvency or
bankruptcy of the Seller, the Seller shall at any time or from time to time fail
to keep, perform or observe any term, covenant, condition or provision of this
Agreement or any of the agreements contemplated hereby that is to be kept,
observed or performed by the Seller, then the Parent shall forthwith on demand
of the Buyer, perform or observe, as the case may be, such term, covenant,
condition or provision in accordance with the relevant provisions of this
Agreement and the agreements contemplated hereby;
(c) that the Parent is jointly and severally bound with the Seller to
perform the terms, covenants, conditions and provisions of this Agreement and
the agreements contemplated hereby that are to be kept, observed and performed
by the Seller and, in the enforcement of its rights pursuant to this Section
13.17 the Buyer may proceed against the Parent as if the Parent were a principal
party under this Agreement with respect to such terms, covenants, conditions and
provisions applicable to the Seller.
In the event of a default by the Seller under this Agreement or the
agreements contemplated hereby, the Parent waive any right to require the Buyer
to:
(i) proceed against the Seller or pursue any rights or remedies
with respect to this Agreement or the agreements contemplated hereby
against the Seller, or
39
<PAGE>
(ii) pursue any other remedy whatsoever in the power of the Buyer
prior to the Buyer pursuing any rights it may have under this Agreement or
the agreements contemplated hereby against the Parent.
Without limiting the generality of the foregoing, the liability of the
Parent shall not be deemed to have been waived, released, discharged, impaired
or affected by reason of the release or discharge of the Seller in any
receivership, bankruptcy, winding-up or other creditors' proceedings or the
rejection, disaffirmance or disclaimer of this Agreement or any of the
agreements contemplated hereby in any proceeding, and shall continue with
respect to the periods prior thereto and thereafter, for and with respect to
this Agreement and the agreements contemplated hereby.
13.18 GUARANTEE BY HOLDINGS. Holdings, as principal obligor and not as
surety, covenants with the Seller:
(a) to cause the Buyer to effect prompt and complete performance of
all the terms, covenants, conditions and provisions of this Agreement and the
agreements contemplated hereby that are to be kept, observed and performed by
the Buyer.
(b) that, if for any reason whatsoever, including the insolvency or
bankruptcy of the Buyer, the Buyer shall at any time or from time to time fail
to keep, perform or observe any term, covenant, condition or provision of this
Agreement or any of the agreements contemplated hereby that is to be kept,
observed or performed by the Buyer, then Holdings shall forthwith on demand of
the Seller, perform or observe, as the case may be, such term, covenant,
condition or provision in accordance with the relevant provisions of this
Agreement and the agreements contemplated hereby;
(c) that Holdings is jointly and severally bound with the Buyer to
perform the terms, covenants, conditions and provisions of this Agreement and
the agreements contemplated hereby that are to be kept, observed and performed
by the Buyer and, in the enforcement of its rights pursuant to this Section
13.17 the Seller may proceed against Holdings as if Holdings were a principal
party under this Agreement with respect to such terms, covenants, conditions and
provisions applicable to the Buyer.
In the event of a default by the Buyer under this Agreement or the
agreements contemplated hereby, Holdings waive any right to require the Seller
to:
(i) proceed against the Buyer or pursue any rights or remedies
with respect to this Agreement or the agreements contemplated hereby
against the Buyer, or
(ii) pursue any other remedy whatsoever in the power of the
Seller prior to the Seller pursuing any rights it may have under this
Agreement or the agreements contemplated hereby against Holdings.
Without limiting the generality of the foregoing, the liability of
Holdings shall not be deemed to have been waived, released, discharged, impaired
or affected by reason of the release or discharge of the Buyer in any
receivership, bankruptcy, winding-up or other creditors' proceedings or the
rejection, disaffirmance or disclaimer of this Agreement or any of the
agreements contemplated hereby in any proceeding, and shall continue with
respect to the periods prior thereto and thereafter, for and with respect to
this Agreement and the agreements contemplated hereby.
* * * * *
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed on the date and year first above written.
HASCO INTERNATIONAL, INC.
By:
Name:
Title:
HASCO HOLDINGS CORP.
By:
-------------------------------
Name:
Title:
FOREVER YOURS, INC.
By:
Name:
Title:
STYLES ON VIDEO, INC.
By:
Name:
Title:
41
<PAGE>
EXHIBIT 10.39
RELEASE
-------
[FYI]
FOR AND IN CONSIDERATION of the exchange of promises and the mutual
releases set forth herein among Hasco International, Inc., a Missouri
corporation ("Hasco International"), Hasco Holdings Corp., a Delaware
corporation ("Holdings"), and Forever Yours, Inc., a California corporation plus
such other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the undersigned and their successors and assigns (the
"Releasors") hereby release each other and all of the other entities' employees,
administrators, officers, directors, stockholders, attorneys, affiliates and
subsidiaries, solely in their capacity as such, and their successors and assigns
(collectively, the "Releasees") from all manner of action and causes of action,
suits, choses in action, contracts, covenants, claims, bonds, bills, debts,
dues, sums of money, rents (including rentals dues and rents subsequently to
become due), commissions, compensations, damages, taxes, demands and rights
whatsoever, in law or in equity ("Claims"), now existing or which may hereafter
accrue in favor of each Releasor by reason of any facts and circumstances which
existed prior to or as of the date of this release relating in any way to the
baby portrait, photography or imaging business including, but not limited to,
claims arising in or in connection with the lawsuit that Forever Yours brought
against Hasco International in the United States District Court for the Central
District of California (Case No. 96-1696) (the "Litigation"). Each Releasor
hereby covenants that it will (i) dismiss, with prejudice, the Litigation and
(ii) refrain from commencing any action or suit, or prosecuting any pending
action or suit, in law or in equity, against the Releasees on account of any
action or cause of action covered by this release.
In the event that any party breaches this Release by bringing legal
action, the breaching party shall be liable to pay all attorney's fees and costs
incurred by the non-breaching party in defense of such action.
<PAGE>
Notwithstanding anything to the contrary contained herein, this
release shall not release any (i) Claims arising out of any breach of the Asset
Purchase Agreement, dated as of January 31, 1997, or the Loan Agreement, dated
as of January 31, 1997 or (ii) Claims that exist against Randee or Dana Arnold.
THE RELEASES CONTAINED HEREIN CONSTITUTE A WAIVER BY ALL PARTIES
HERETO OF ANY AND ALL RIGHTS UNDER (S) 1542 OF THE CIVIL CODE OF CALIFORNIA (OR
ANY SIMILAR LAW OR STATUTE OF ANY JURISDICTION THAT MIGHT APPLY), WHICH PROVIDES
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Each of the parties hereto understands and agrees that the releases
contained herein are not intended to be and shall not be deemed, construed or
treated in any respect as an admission of liability by any person or entity for
any purpose.
This release may be executed in counterparts. A fax signature shall
be deemed an original for all purposes hereof. Each party delivering this
release by fax agrees to deliver an original, or re-execute an original,
promptly upon the request of any other party hereto.
This release shall be effective only upon (i) execution and delivery
of this release by each of the signatories hereto and (ii) execution and
delivery of a release in form substantially similar to this release by each of
(x) Hasco International, Holdings and Styles on Video, Inc., a Delaware
corporation, and (y) Hasco International, Holdings and Dycam Inc., a Delaware
corporation.
WITNESS our hands this 4th day of February, 1997.
<TABLE>
<S> <C>
WITNESSES: HASCO INTERNATIONAL, INC.
By:
- --------------------- --------------------------------------
Its: and duly
Authorized Agent
</TABLE>
<PAGE>
<TABLE>
<S> <C>
FOREVER YOURS, INC.
By:
- --------------------- --------------------------------------
Its: and duly
Authorized Agent
HASCO HOLDINGS CORP.
By:
- --------------------- --------------------------------------
Its: and duly
Authorized Agent
</TABLE>
<PAGE>
EXHIBIT 10.40
RELEASE
-------
[SOV]
FOR AND IN CONSIDERATION of the exchange of promises and the mutual
releases set forth herein among Hasco International, Inc., a Missouri
corporation ("Hasco International"), Hasco Holdings Corp., a Delaware
corporation ("Holdings"), and Styles on Video, Inc., a Delaware corporation plus
such other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the undersigned and their successors and assigns (the
"Releasors") hereby release each other and all of the other entities' employees,
administrators, officers, directors, stockholders, attorneys, affiliates and
subsidiaries, solely in their capacity as such, their successors and assigns
(collectively, the "Releasees") from all manner of action and causes of action,
suits, choses in action, contracts, covenants, claims, bonds, bills, debts,
dues, sums of money, rents (including rentals dues and rents subsequently to
become due), commissions, compensations, damages, taxes, demands and rights
whatsoever, in law or in equity ("Claims"), now existing or which may hereafter
accrue in favor of each Releasor by reason of any facts and circumstances which
existed prior to or as of the date of this release relating in any way to the
baby portrait, photography or imaging business including, but not limited to,
claims arising in or in connection with the lawsuit that Forever Yours brought
against Hasco International in the United States District Court for the Central
District of California (Case No. 96-1696) (the "Litigation"). Each Releasor
hereby covenants that it will (i) dismiss, with prejudice, the Litigation and
(ii) refrain from commencing any action or suit, or prosecuting any pending
action or suit, in law or in equity, against the Releasees on account of any
action or cause of action covered by this release.
In the event that any party breaches this Release by bringing legal
action, the breaching party shall be liable to pay all attorney's fees and costs
incurred by the non-breaching party in defense of such action.
<PAGE>
Notwithstanding anything to the contrary contained herein, this
release shall not release any (i) Claims arising out of any breach of the Asset
Purchase Agreement, dated as of January 31, 1997, or the Loan Agreement, dated
as of January 31, 1997 or (ii) Claims that exist against Randee or Dana Arnold.
THE RELEASES CONTAINED HEREIN CONSTITUTE A WAIVER BY ALL PARTIES
HERETO OF ANY AND ALL RIGHTS UNDER (S) 1542 OF THE CIVIL CODE OF CALIFORNIA (OR
ANY SIMILAR LAW OR STATUTE OF ANY JURISDICTION THAT MIGHT APPLY), WHICH PROVIDES
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Each of the parties hereto understands and agrees that the releases
contained herein are not intended to be and shall not be deemed, construed or
treated in any respect as an admission of liability by any person or entity for
any purpose.
This release may be executed in counterparts. A fax signature shall
be deemed an original for all purposes hereof. Each party delivering this
release by fax agrees to deliver an original, or re-execute an original,
promptly upon the request of any other party hereto.
This release shall be effective only upon (i) execution and delivery
of this release by each of the signatories hereto and (ii) execution and
delivery of a release in form substantially similar to this release by each of
(x) Hasco International, Holdings and Forever Yours, Inc., a California
corporation, and (y) Hasco International, Holdings and Dycam Inc., a Delaware
corporation.
WITNESS our hands this 4th day of February, 1997.
<TABLE>
<S> <C>
WITNESSES: HASCO INTERNATIONAL , INC.
By:
- --------------------------- -------------------------------------
Its: and duly
Authorized Agent
</TABLE>
<PAGE>
<TABLE>
<S> <C>
STYLES ON VIDEO, INC.
By:
- --------------------------- -------------------------------------
Its: and duly
Authorized Agent
HASCO HOLDINGS CORP.
By:
- --------------------------- -------------------------------------
Its: and duly
Authorized Agent
</TABLE>
<PAGE>
EXHIBIT 10.41
RELEASE
-------
[DYCAM]
FOR AND IN CONSIDERATION of the exchange of promises and the mutual
releases set forth herein among Hasco International, Inc., a Missouri
corporation ("Hasco International"), Hasco Holdings Corp., a Delaware
corporation ("Holdings"), and Dycam Inc., a Delaware corporation plus such other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the undersigned and their successors and assigns (the "Releasors")
hereby release each other and all of the other entities' employees, officers,
administrators, directors, affiliates and subsidiaries, solely in their capacity
as such, and their successors (collectively, the "Releasees") from all manner of
action and causes of action, suits, choses in action, contracts, covenants,
claims, bonds, bills, debts, dues, sums of money, rents (including rentals dues
and rents subsequently to become due), commissions, compensations, damages,
taxes, demands and rights whatsoever, in law or in equity ("Claims"), now
existing or which may hereafter accrue in favor of each Releasor by reason of
any facts and circumstances which existed prior to or as of the date of this
release relating in any way to the baby portrait, photography or imaging
business including, but not limited to, claims arising in or in connection with
the lawsuit that Forever Yours brought against Hasco International in the United
States District Court for the Central District of California (Case No. 96-1696)
(the "Litigation"). Each Releasor hereby covenants that it will (i) dismiss,
with prejudice, the Litigation and (ii) refrain from commencing any action or
suit, or prosecuting any pending action or suit, in law or in equity, against
the Releasees on account of any action or cause of action covered by this
release.
In the event that any party breaches this Release by bringing legal
action, the breaching party shall be liable to pay all attorney's fees and costs
incurred by the non-breaching party in defense of such action.
Notwithstanding anything to the contrary contained herein, this
release shall not release any (i) Claims arising out of any breach of the Asset
Purchase Agreement, dated as of
<PAGE>
January 31, 1997, or the Loan Agreement, dated as of January 31, 1997 or (ii)
Claims that exist against Randee or Dana Arnold.
THE RELEASES CONTAINED HEREIN CONSTITUTE A WAIVER BY ALL PARTIES
HERETO OF ANY AND ALL RIGHTS UNDER (S) 1542 OF THE CIVIL CODE OF CALIFORNIA (OR
ANY SIMILAR LAW OR STATUTE OF ANY JURISDICTION THAT MIGHT APPLY), WHICH PROVIDES
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Each of the parties hereto understands and agrees that the releases
contained herein are not intended to be and shall not be deemed, construed or
treated in any respect as an admission of liability by any person or entity for
any purpose.
This release may be executed in counterparts. A fax signature shall
be deemed an original for all purposes hereof. Each party delivering this
release by fax agrees to deliver an original, or re-execute an original,
promptly upon the request of any other party hereto.
This release shall be effective only upon (i) execution and delivery
of this release by each of the signatories hereto and (ii) execution and
delivery of a release in form substantially similar to this release by each of
(x) Hasco International, Holdings and Styles on Video, Inc., a Delaware
corporation, and (y) Hasco International, Holdings and Forever Yours, Inc., a
California corporation.
WITNESS our hands this 4th day of February, 1997.
<TABLE>
<S> <C>
WITNESSES: HASCO INTERNATIONAL , INC.
- ---------------------------- By:
-----------------------------------
Its: and duly
Authorized Agent
</TABLE>
DYCAM INC.
<PAGE>
<TABLE>
<S> <C>
By:
- ---------------------------- -----------------------------------
Its: and duly
Authorized Agent
HASCO HOLDINGS CORP.
By:
- ---------------------------- -----------------------------------
Its: and duly
Authorized Agent
</TABLE>
<PAGE>
EXHIBIT 10.42
LOAN AGREEMENT
LOAN AGREEMENT, dated as of January 31, 1997, among Forever Yours,
Inc., a California corporation (the "Borrower"), Styles On Video, Inc., a
Delaware corporation ("Parent"), and Hasco International, Inc., a Missouri
corporation (the "Lender").
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following definitions:
"AFFILIATE" shall mean, as to any Person, any other Person which directly
or indirectly controls, or is under common control with, or is controlled by,
such Person and, if such Person is an individual, any member of the immediate
family (including parents, spouse and children) of such individual, any trust
whose principal beneficiary is such individual or one or more members of such
individual's immediate family and any Person who is controlled by any such
member or trust.
"ASSET PURCHASE AGREEMENT" means the Asset Purchase Agreement, dated as of
January 31, 1997, among the Borrower, Parent, the Lender and Hasco Holdings
Corp.
"BANKRUPTCY CODE" means The United States Bankruptcy Code of 1978, as
amended from time to time, or any successor federal statute.
"BORROWING PERIOD" means each of the following periods: (a) the date of
this Agreement through and including February 14, 1997; (b) February 15, 1997
through and including March 14, 1997; and (c) March 15, 1997 through and
including April 15, 1997.
"BUSINESS DAY" shall mean any day on which commercial banks are not
authorized or required to close in the State of Missouri.
"CONTROL" (including, with its correlative meanings, "controlled by" and
"under common control with") shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of management or policies of the
subject Person (whether through ownership of securities or Borrower or other
ownership interests, by contract or otherwise).
"DEFAULT" shall mean any event which upon the giving of notice, passage of
time or both would result in an Event of Default.
"EVENT OF DEFAULT" shall mean one or more of the events specified in
Section 6.
"EXPIRATION DATE" shall mean the earlier of (a) the termination of the
Asset Purchase Agreement or (b) April 22, 1997; provided that such date shall be
extended by successive periods of 15 days if, at the time of any such extension,
(x) the Asset Purchase Agreement shall not have been terminated,(y) no Default
or Event of Default exists and (z) Borrower and Parent are proceeding diligently
and in good faith to satisfy the conditions set forth in the Asset Purchase
Agreement; provided that in no event shall the Expiration Date extend past May
22, 1997.
"GUARANTEE" shall mean a guarantee, an endorsement, a contingent agreement
to purchase or to furnish funds for the payment or maintenance of, or otherwise
to be or become contingently liable under or with respect to, any Indebtedness
or other obligations, performance, net worth, working capital or earnings of any
Person, or a guarantee of the payment of dividends or other
<PAGE>
distributions upon the stock or equity interests of any Person, or an agreement
to purchase, sell or lease (as lessee or lessor) property, products, materials,
supplies or services primarily for the purpose of enabling a debtor to make
payment of its obligations or an agreement to assure a creditor against loss,
and including causing a bank to issue a letter of credit for the benefit of
another Person, but excluding endorsements for collection or deposit in the
ordinary course of business.
"INDEBTEDNESS" shall mean, without duplication, as to any Person (a)
indebtedness created, issued or incurred by such Person for borrowed money
(whether by loan or the issuance or sale of debt securities) whether or not
recourse is limited to specific assets of such Person; (b) obligations of such
Person to pay the deferred purchase or acquisition price of property or
services, other than trade accounts payable arising in the ordinary course of
business; (c) Indebtedness of others secured by a Lien on the property of such
Person, whether or not the Indebtedness so secured has been assumed by such
Person; (d) reimbursement obligations of such Person in respect of letters of
credit or similar instruments issued or accepted by banks and other financial
institutions for the account of such Person; (e) capital lease obligations of
such Person; and (f) Indebtedness of others Guaranteed by such Person.
"INSTALLED" has the meaning given to such term in the Asset Purchase
Agreement.
"INVESTMENT" shall mean (without duplication), for any Person: (a) the
acquisition (whether for cash, property, services or securities or otherwise) of
capital stock, bonds, notes, debentures, Borrower or other ownership interests
or other securities of any other Person or any agreement to make any such
acquisition (including, without limitation, any "short sale" or any sale of any
securities at a time when such securities are not owned by the Person entering
into such sale); (b) the making of any deposit with, or advance, loan or other
extension of credit to, any other Person (including the purchase of property
from another Person subject to an understanding or agreement, contingent or
otherwise, to resell such property to such Person, but excluding any such
advance, loan or extension of credit having a term not exceeding 90 days
representing the purchase price of inventory or supplies sold in the ordinary
course of business); (c) the entering into of any Guarantee of, or other
contingent obligation with respect to, Indebtedness or other liability of any
other person and (without duplication) any amount committed to be advanced, lent
or extended to such Person or (d) any capital expenditure (including capital
leases) or any operating lease.
"LIEN" shall mean any mortgage, deed of trust, pledge, hypothecation,
assignment for security, security interest, encumbrance, levy, lien or similar
charge of any kind.
"LOAN" shall mean the loans made to the Borrower pursuant to this
Agreement.
"MATERIAL ADVERSE EFFECT" has the meaning given to such term in the Asset
Purchase Agreement.
"MATURITY DATE" shall mean the earlier of (a) the closing of the purchase
of assets under the Asset Purchase Agreement and (b) the 90th day following the
Expiration Date.
"OBLIGATIONS" shall mean (a) all the principal of and interest (including
interest accruing on or after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding relating to
the Borrower, whether or not a claim of post-petition interest is allowed in
such proceeding) under this Agreement and the Note, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise and (b) all other monetary and non-monetary obligations of the
Borrower to the Lender under this Agreement and any other Loan Document.
<PAGE>
"PRIOR LOAN" shall mean the $60,000 loan made on January 22, 1996 by the
Lender to the Borrower.
"RESTRICTED PAYMENTS" shall mean (a) dividends or distributions by or on
behalf of any Obligor (in cash, property or obligations, but excluding dividends
payable solely in shares of non-redeemable capital stock) on, or other payments
or distributions on account of or with respect to, or the setting apart of money
for a sinking or other analogous fund for, or the purchase, redemption,
retirement or other acquisition of, any shares of any class of capital stock or
partnership interest of any Obligor or any options, warrants or similar rights
to acquire any such capital stock or partnership interest and (b) any prepayment
by any Obligor of principal, optional redemption, purchase, retirement,
defeasance, or similar optional prepayment with respect to any Indebtedness for
borrowed money, other than the Loan, except in each case the exchange of debt or
securities of any Obligor for non-redeemable capital stock of such Obligor.
The terms set forth below are defined in the Sections set forth below:
<TABLE>
<CAPTION>
Recitals
BORROWER
<S> <C>
IDI (S)2.3
LENDER Recitals
LOAN DOCUMENTS (S)4.1
OBLIGOR (S)4
NOTE (S)3
PARENT Recitals
SECURITY AGREEMENT (S)3
</TABLE>
All accounting terms used herein shall have the meanings given to them
under generally accepted accounting principals, consistently applied.
2. LOAN AND TERMS OF PAYMENT.
2.1 THE LOAN. The Lender agrees, on the terms and subject to the
conditions contained herein, to make loans to the Borrower during the period
from and including the date of this Agreement to but not including the
Expiration Date in an aggregate principal amount of up to $180,000 for each
Borrowing Period, but in no event more than an aggregate of $540,000; provided
that if the aggregate Loans in any Borrowing Period are less than $180,000, such
unborrowed amount may be borrowed in a subsequent Borrowing Period; provided
further that the Lender may in its sole discretion loan money in excess of such
limits and during periods other than the Borrowing Period and, if the lender
makes such loans, such loans shall be Loans made under this Agreement and
subject to the terms hereof. Notwithstanding the foregoing, on the execution
date of this Agreement a borrowing under the foregoing facility shall be deemed
to have been made in the principal amount of the Prior Loan, which amount shall
deemed to repay the Prior Loan, with such amount then constituting a Loan
hereunder.
2.2 INTEREST. The Loans shall bear interest at a rate per annum
equal to 10%. Accrued and unpaid interest outstanding under the Loans at the
Maturity Date shall be due and payable by the Borrower without demand upon such
date. Interest on the Loans shall be computed on the basis of a year of 365/366
days and actual days elapsed (including the first day but excluding the last
day) occurring in the period for which such amounts are payable. Interest on
the principal advanced to repay the Prior Loan shall accrue from January 22,
1997. If an Event of Default shall have occurred and be continuing, the
Borrower agrees to pay to the Lender interest on the unpaid principal amount of
the Loans (and, to the extent permitted by law, on the unpaid amount of all
interest, fees and other amounts payable hereunder that is not paid when due) at
a rate
<PAGE>
per annum equal at all times to 2 percentage points per annum above the 10% rate
per annum otherwise required to be paid on such Loans pursuant to this Section
2.2.
2.3 PRINCIPAL REPAYMENT. The outstanding principal of the Loans
shall be due and payable by the Borrower without demand upon the Maturity Date.
The Loan may be repaid in whole or in part by the Borrower without penalty or
premium at any time and from time to time. International Digital Investors,
L.P. ("IDI") shall have the right to pay in cash to the Lender any and all of
---
the Obligations (including, without limitation, the payment of the principal
amount of the Loans and any accrued or unpaid interest thereon); provided,
however, that nothing contained in this Agreement shall obligate IDI to fulfill
any Obligations.
2.4 PAYMENT WITH HOSPITAL CONTRACTS. At the Maturity Date, the
Borrower may repay the Obligations either in cash or, subject to the conditions
set forth herein, by the assignment of Hospital Contracts; provided that the
--------
Lender must consent to each Hospital Contract proposed to be assigned in payment
of the Obligations, which consent will not be unreasonably withheld (it being
understood that the Lender may consider the stability, sale rate and terms of
the Hospital Contract). Each assigned Hospital Contract shall be deemed to have
a value equal to that assigned to such contract on Schedule 2.1(a) to the Asset
---------------
Purchase Agreement or, if such Hospital Contract is not set forth on such
Schedule 2.1(a), a value equal to $20 per annualized hospital births at the
- ---------------
covered hospital (with the number of annualized hospital births calculated as
contemplated by in Section 4.2(h) of the Asset Purchase Agreement). No Hasco
Hospital (as defined in the Asset Purchase Agreement) may be included in the
assignment. The assignment documents will be in form and substance reasonably
satisfactory to the Lender and the Borrower, and will contain a binding
undertaking of Parent and the Borrower not to directly or indirectly solicit
such assigned hospital for three years following the assignment and not to
disclose confidential information regarding such hospital or Hospital Contract.
2.5 USE OF PROCEEDS. The Borrower shall use the proceeds of the Loan
solely to pay trade payables, salaries, commissions and other ordinary course
operating expenses; provided in no event shall any proceeds be used to repay any
obligations to, or expenses or amounts advanced by, any Affiliate of the
Borrower or Parent (other than to individuals in the ordinary course of business
and to Dycam under agreements in existence prior to the date hereof or arising
in the ordinary course of business after the date hereof) or for any expenses or
other amounts incurred in connection with the transactions contemplated by this
Agreement or the Asset Purchase Agreement.
2.6 CONDITIONS. Loans may be requested by the Borrower on or before
12 noon (St. Louis time) on any Business Day by written request that shall
represent and warrant that all of the conditions to such Loan are satisfied.
Loan requests may be submitted for minimum amounts of $50,000 (or such lesser
amount as is then available for borrowing under the terms of this Agreement).
Subject to the terms and conditions of this Agreement, the Lender shall fund any
proper loan request no later than 4:00 pm (St. Louis time) on the Business Day
following receipt of such request. The obligations of the Lender to make any
Loan are subject to the following conditions:
(a) no Default or Event of Default shall have occurred and be
continuing; and
(b) the representations and warranties made by the Borrower and
the Parent in this Agreement, any other Loan Document and the Asset
Purchase Agreement shall be true, complete and correct in all material
respects on and as of the date of the making of such Loan with the
same force and effect as if made on and as of such date (or, in the
case of any such representation and warranty made only as of a
particular date, as of such particular date).
<PAGE>
3. SECURITY; NOTE.
The Obligations shall be secured by the Security Agreement, dated as
of the date hereof (the "Security Agreement"). The Obligations shall be
evidenced by a promissory note in the form attached hereto as Exhibit A (the
"Note"). In the event that the Lender extends Loans to the Borrower in excess
of $540,000 hereunder, the Borrower shall execute and deliver to the Lender an
additional promissory note for such additional Loans; provided, that the failure
to deliver such additional promissory note shall not affect the Borrower's
obligations with respect to such additional Loans.
4. REPRESENTATIONS AND WARRANTIES.
The Borrower and Parent (collectively the "Obligors" and individually,
an "Obligor") represent and warrant as follows:
4.1 EXISTENCE. Each Obligor is a corporation duly existing and in
good standing under the laws of its state of incorporation. Each Obligor (a)
has all requisite corporate power, and has all governmental licenses,
authorizations, consents and approvals necessary to own its assets and carry on
its business as now being or as proposed to be conducted and to consummate the
transactions contemplated by this Agreement, the Security Agreement and the Note
(collectively the "Loan Documents") and (b) is qualified to do business in all
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure to so qualify would have a Material
Adverse Effect.
4.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents to which each Obligor is a party is within
each Obligor's powers, has been duly authorized, and is not in conflict with nor
constitutes a breach of any provision contained in any governing documents, or
any other document, instrument or agreement to which the Obligor is a party or
by which the Obligor, or its property or assets is or may be bound, nor will it
constitute an event of default under any material agreement to which the Obligor
is a party or by which the Obligor is bound.
4.3 VALID AND BINDING AGREEMENT. The Loan Documents and all of the
other documents, instruments and agreements executed in connection herewith or
contemplated hereby constitute the valid and binding agreements of each Obligor
executing such Loan Documents and other documents instruments and agreements,
enforceable in accordance with their terms against such Obligor.
4.4 FEDERAL RESERVE REGULATIONS. No Obligor is engaged in the
business of extending credit for the purpose, whether immediate, incidental or
ultimate, of buying or carrying Margin Stock. No part of the proceeds of any
extension of credit hereunder, whether directly or indirectly, and whether
immediately, incidentally or ultimately, will be used (a) to purchase or carry
Margin Stock or to extend credit to others for the purpose of purchasing or
carrying Margin Stock or to refund indebtedness originally incurred for such
purpose, or (b) for any purpose which entails a violation of, or which is
inconsistent with, the provisions of the Regulations of the Board of Governors
of the Federal Reserve System, including Regulations G, T, U or X.
4.5 NO OTHER SECURITY INTERESTS. The Collateral (as defined in
the Security Agreement) are subject to no Liens other than Liens in favor of
IDI, which Liens are subordinate to those created under the Security Agreement,
and Liens described in Sections 5.6(a), (b), (c) and (d).
<PAGE>
5. COVENANTS.
The Borrower covenants and agrees that, until payment in full of the
Obligations, the Borrower shall do all of the following:
5.1 GOOD STANDING. Each of the Borrower and Parent shall maintain
its corporate existence and its good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a Material Adverse
Effect.
5.2 GOVERNMENT COMPLIANCE. Each of the Borrower and Parent shall
comply with all statutes, laws, ordinances and government rules and regulations
to which it is subject, except noncompliance with which could not reasonably be
expected to have a Material Adverse Effect.
5.3 INSURANCE. The Borrower shall maintain insurance coverage that
is usual and customary for a business of a type operated by the Borrower.
5.4 PAYMENT OF TAXES. Each of the Borrower and Parent shall promptly
pay all state and federal taxes when due; provided, however, that if either the
Borrower or Parent contests any such tax, it shall do so in good faith by
appropriate proceedings and shall establish such reserves on its books as are
appropriate under generally accepted accounting principles.
5.5 FINANCIAL STATEMENTS. The Borrower shall furnish to the Lender:
(a) on or prior to the Tuesday of each week, a statement of cash flows of the
Borrower for the preceding week, (b) on or prior to the 21st day of each month,
a balance sheet and statement of operations for the Borrower for the preceding
month and (c) such other financial or other information reasonably requested by
the Lender.
5.6 LIMITATION ON LIENS. The Borrower will not create, incur, assume
or suffer to exist any Lien upon any of its property, whether now owned or
hereafter acquired, except:
(a) Liens created pursuant to the Loan Documents;
(b) Liens imposed by any governmental authority for taxes,
assessments or charges not yet due or which are being contested in good faith
and by appropriate proceedings if adequate reserves with respect thereto are
maintained on the books of the Borrower in accordance with generally accepted
accounting principles;
(c) Carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are not
overdue for a period of more than 30 days or which are being contested in good
faith by appropriate proceedings;
(d) Pledges or deposits under worker's compensation, unemployment
insurance and other social security legislation;
(e) Liens relating to Dycam cameras purchased or leased after the
date hereof consistent with prior terms and in the ordinary course of business
for Installation in hospitals subject to Hospital Contracts; and
(f) Liens existing on the date hereof.
<PAGE>
5.7 INDEBTEDNESS. The Borrower will not create, incur or suffer to
exit any Indebtedness except:
(a) Indebtedness to Hasco under the Loan Documents;
(b) Indebtedness for Dycam cameras purchased or leased after the date
hereof in the ordinary course of business for Installation in hospitals subject
to Hospital Contracts;
(c) Indebtedness to Affiliates created after the date hereof to
finance operations of the Borrower; and
(d) Indebtedness outstanding on the date hereof.
5.8 INVESTMENTS. The Borrower will not make or permit to remain
outstanding any Investments except:
(a) Operating deposit accounts with banks;
(b) Investments for Dycam cameras purchased or leased after the date
hereof consistent with prior terms and in the ordinary course of business for
Installation in hospitals subject to Hospital contracts; and
(c) Investments made prior to, and outstanding on, the date hereof.
5.9 RESTRICTED PAYMENTS. The Borrower will not make any
Restricted Payments.
5.10 LINES OF BUSINESS. Neither the Borrower nor the Parent
shall engage to any substantial extent in any business activity other than the
business engaged in by the Borrower and Parent, respectively, on the date
hereof.
5.11 TRANSACTIONS WITH AFFILIATES. The Borrower will not,
directly or indirectly: (a) make any Investment in an Affiliate of an Obligor;
(b) transfer, sell, lease, assign or otherwise dispose of any property to an
Affiliate of an Obligor; (c) merge into or consolidate with or purchase or
acquire property from an Affiliate of an Obligor; (d) enter into any other
transaction directly or indirectly with or for the benefit of an Affiliate of an
Obligor (including, without limitation, guarantees and assumptions of
obligations of an Affiliate of an Obligor) or (e) make any loans, advances or
any other payments by any Obligor to any Affiliate of an Obligor, except (w) for
leases or purchases of Dycam cameras and other related transactions consistent
with prior terms and in the ordinary course of business, (x) exchanges of the
Borrower's debt or securities for non-redeemable capital stock of the Borrower,
(y) transactions that occurred prior to the date hereof and (z) loans or
advances to the Borrower by its Affiliates to finance operations of the
Borrower.
6. EVENTS OF DEFAULT.
Any one or more of the following events which remains uncured during
the applicable cure period provided below shall constitute an Event of Default
by the Borrower under this Agreement:
6.1 PAYMENT DEFAULT. The Borrower fails to pay when due and payable,
or when declared due and payable in accordance with this Agreement, any portion
of the Obligations.
<PAGE>
6.2 COVENANT DEFAULT; REPRESENTATIONS. The Borrower violates any of
the covenants contained in this Agreement, any other Loan Document or the Asset
Purchase Agreement, and such covenant violation is not cured within five (5)
business days following receipt by the Borrower of notice of such violation; or
any of the representations or warranties in this Agreement, any other Loan
Document or the Asset Purchase Agreement are not true in any material respect
when made or deemed made.
6.3 INSOLVENCY. (a) Any Obligor shall admit in writing its
inability to, or be generally unable to, pay its debts as such debts become due.
(b) Any Obligor shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case under the Bankruptcy Code, or (vi) take any corporate action
for the purpose of effecting any of the foregoing.
(c) A proceeding or case shall be commenced against any Obligor,
without its application or consent, in any court of competent jurisdiction,
seeking (i) its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of all or any substantial part of
its assets, or (iii) similar relief under any law relating to bankruptcy,
insolvency, reorganization, winding-up, or composition or adjustment of debts,
and such proceeding or case shall continue undismissed, or an order, judgment or
decree approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect, for a period of 60 or more days; or an order for relief
against any Obligor shall be entered in an involuntary case under the Bankruptcy
Code.
6.4 JUDGMENTS. A money judgment, writ or warrant of attachment or
similar process is entered or filed against any Obligor or any Obligor's
subsidiaries which is not fully covered by insurance or remains unvacated,
unbonded, unstayed or unpaid or undischarged for more than thirty (30) days
(whether or not consecutive) or in any event later than five (5) business days
prior to the date of any proposed sale thereunder, which, together with all such
other unvacated, unbonded, unstayed, unpaid and undischarged judgments or
attachments against the Obligors exceeds in the aggregate $25,000.
6.5 OTHER INDEBTEDNESS. Any Obligor is in default under any other
agreement under which it has incurred Indebtedness in excess of $25,000, which
default results in the acceleration of such Indebtedness.
6.6 CHANGE OF CONTROL. The acquisition by any Person or a group
(as defined in section 13(d) of the Exchange Act of 1934) of Persons (other than
IDI, Pacific Capital Group or Dycam and, in the case of the Seller, Parent) of
control directly or indirectly) of control of any Obligors; provided that the
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change of directors or officers of Parent or the Borrower shall not be deemed an
acquisition of control.
7. LENDER'S RIGHTS AND REMEDIES.
7.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event of Default,
the Lender may, at its election (a) declare all Obligations immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 6.3 all Obligations shall become immediately due and payable without any
action by the Lender) and (b) exercise any and all rights and remedies under the
Loan Documents and applicable law.
<PAGE>
7.2 REMEDIES CUMULATIVE. The Lender's rights and remedies under the
Loan Documents shall be cumulative. The Lender shall have all other rights and
remedies not inconsistent herewith as provided by law or in equity. No exercise
by the Lender of one right or remedy shall be deemed an election which precludes
other remedies, and no waiver by the Lender of any Event of Default on the
Borrower's part shall be deemed made unless done in a writing signed by the
Lender. No delay by the Lender shall constitute a waiver, election, or
acquiescence by it.
7.3 EXPENSES. The Borrower shall pay, or reimburse the Lender for
all reasonable out-of-pocket costs and expenses (including, without limitation,
attorneys fees and expenses) paid or incurred by the Lender before and after
judgment in enforcing, protecting or preserving its rights under the Loan
Documents and any other document, instrument or agreement relating hereto or
contemplated hereby, and including without limitation, the enforcement of the
Lender's rights against, or realization on, any collateral or security therefor.
8. NOTICES.
Any and all notices or other communications or deliveries required or
permitted to be given or made pursuant to any of the provisions of this
Agreement shall be deemed to have been duly given or made for all purposes if
(i) sent by certified or registered mail, return receipt requested and postage
prepaid, (ii) hand delivered, (iii) sent by a nationally recognized overnight
courier or (iv) sent by telephone facsimile transmission (the receipt of which
is confirmed) as follows:
If to the Lender:
Hasco International, Inc.
3613 Mueller Road
St. Charles, MO 63301
Attention: David Van Vliet
Telecopy No.: (314) 770-0275
With a copy to:
Kirkland & Ellis
153 East 53rd Street
39th Floor
New York, NY 10022
Attention: Charles B. Fromm
Telecopy No.: (212) 446-4900
If to the Borrower:
Forever Yours, Inc.
667 Rancho Conejo Boulevard
Newbury Park, CA 91320
Attention: James O'Brien
Telecopy No.: (805) 376-9184
If to Parent:
Styles on Video, Inc.
667 Rancho Conejo Boulevard
<PAGE>
Newbury Park, CA 91320
Attention: K. Eugene Shutler
Telecopy No.: (805) 376-9184
With a copy (in each case) to:
Sanders, Barnet, Goldman, Simons & Mosk
1901 Avenue of the Stars, Suite 850
Los Angeles, California 90067
Attention: Michael Sanders
Telecopy No.: (310) 553-2435
9. CHOICE OF LAW.
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS,
IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING PURSUANT TO THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED
IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF
LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
10. GENERAL PROVISIONS.
10.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and assigns of each of the parties;
provided, however, that neither this Agreement nor any rights hereunder may be
assigned by the Borrower without the Lender's written consent, which consent may
be granted or withheld in the Lender's sole discretion.
10.2 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
changed or terminated orally. Any amendment of, supplement to or other
modification of this Agreement must be in a written instrument executed by the
Borrower and the Lender. All prior agreements, understandings, representations,
warranties, and negotiations between the parties hereto with respect to the
subject matter of this Agreement, if any, are merged into this Agreement.
10.3 SURVIVAL. All covenants, agreements, representations and
warranties made herein shall survive the execution and delivery hereof and the
making of the Loan.
10.4 NO WAIVER. No failure or delay on the part of the Lender in
the exercise of any power, right or privilege under this Agreement shall impair
such power, right or privilege or be construed to be a waiver of any default or
acquiescence therein, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise thereof or of any
other right, power or privilege. Any waiver or consent with respect to any
provision of the Loan Documents shall be effective only in the specific instance
and for the specific purpose for which it was given.
10.5 HEADINGS. Section and subsection headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
<PAGE>
10.6 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be valid, legal and
enforceable under the applicable law of any jurisdiction. Without limiting the
generality of the foregoing sentence, in case any provision of this Agreement
shall be invalid, illegal or unenforceable under the applicable law of any
jurisdiction, the validity, legality and enforceability of the remaining
provisions, or of such provision in any other jurisdiction, shall not in any way
be affected or impaired thereby.
10.7 LIMITATIONS ON INTEREST RATES. Notwithstanding any provision
in this Agreement, the total liability for payments in the nature of interest
shall not exceed the applicable limits imposed by any applicable federal or
state interest rate laws. If any payments in the nature of interest, additional
interest and other charges made hereunder are held to be in excess of the
applicable limits imposed by any applicable federal or state law the amount held
to be in excess shall be considered payment of principal under the Loan and the
indebtedness evidenced hereby shall be reduced by such amount so that the total
liability for payments in the nature of interest, additional interest and other
charges shall not exceed the applicable limits imposed by any applicable federal
or state interest-rate laws.
10.8 INTERPRETATION. As used in this Agreement, the words 'herein,"
"hereof" and "hereunder" and other words of similar meaning refer to this
Agreement as a whole, including the Exhibits and Schedules hereto, all of which
are by this reference incorporated into this Agreement, as the same may from
time to time be amended, modified or supplemented, and not to any particular
section, subsection or clause contained in this Agreement, unless otherwise
specifically indicated. The term "including" shall not be limiting or
exclusive, unless specifically indicated to the contrary. The term "or" is
disjunctive; the term "and" is conjunctive. The term "shall" is mandatory; the
term "may" is permissive. Wherever from the context it appears appropriate,
each term stated in either the singular or plural shall include the singular and
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and the neuter. Any reference to a "Section,"
"Subsection," "Exhibit" or "Schedule" shall refer to the relevant Section or
Subsection of or Exhibit or Schedule to this Agreement, unless otherwise
specifically indicated.
10.9 INDEMNIFICATION; LIMITATION ON DAMAGES. The Borrower agrees to
indemnify the Lender for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind and nature whatsoever which may be imposed on, incurred by or asserted
against the Lender in any way relating to or arising out of this Agreement or
any other Loan Document or the transactions contemplated hereby, except to the
extent such losses arise from the gross negligence or wilful misconduct of the
Lender. Notwithstanding anything contained in the Agreement to the contrary, no
claim may be made by the Borrower or Parent against the Lender for any lost
profits or any special, indirect or consequential damages in respect of any
breach or wrongful conduct (other than willful misconduct constituting actual
fraud) in connection with, arising out of or in any way related to the
transactions contemplated hereunder or under the other Loan Documents, or any
act, omission or event occurring in connection herewith or therewith; and the
Borrower and Parent hereby waive, release and agree not to sue upon any such
claim for any such damages.
10.10 GUARANTEE BY THE PARENT. The Parent, as principal obligor and
not as surety, covenants with the Lender:
(a) to cause the Borrower to effect prompt and complete performance
of all the terms, covenants, conditions and provisions of this Agreement and the
agreements contemplated hereby that are to be kept, observed and performed by
the Borrower.
(b) that, if for any reason whatsoever, including the insolvency or
bankruptcy of the Borrower, the Borrower shall at any time or from time to time
fail to keep, perform or
<PAGE>
observe any term, covenant, condition or provision of this Agreement or any of
the agreements contemplated hereby that is to be kept, observed or performed by
the Borrower, then Parent shall forthwith on demand of the Lender, perform or
observe, as the case may be, such term, covenant, condition or provision in
accordance with the relevant provisions of this Agreement and the agreements
contemplated hereby;
(c) that Parent is jointly and severally bound with the Borrower to
perform the terms, covenants, conditions and provisions of this Agreement and
the agreements contemplated hereby that are to be kept, observed and performed
by the Borrower and, in the enforcement of its rights pursuant to this Section
10.10 the Lender may proceed against Parent as if Parent were a principal party
under this Agreement with respect to such terms, covenants, conditions and
provisions applicable to the Borrower.
In the event of a default by the Borrower under this Agreement or the
agreements contemplated hereby, Parent waives any right to require the Lender
to:
(i) proceed against the Borrower or pursue any rights or
remedies with respect to this Agreement or the agreements contemplated
hereby against the Borrower, or
(ii) pursue any other remedy whatsoever in the power of the
Lender prior to the Lender pursuing any rights it may have under this
Agreement or the agreements contemplated hereby against Parent.
Without limiting the generality of the foregoing, the liability of
Parent shall not be deemed to have been waived, released, discharged, impaired
or affected by reason of the release or discharge of the Borrower in any
receivership, bankruptcy, winding-up or other creditors' proceedings or the
rejection, disaffirmance or disclaimer of this Agreement or any of the
agreements contemplated hereby in any proceeding, and shall continue with
respect to the periods prior thereto and thereafter, for and with respect to
this Agreement and the agreements contemplated hereby.
* * * * * *
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as
of the date first written above.
HASCO INTERNATIONAL, INC.
By:________________________________
Name:
Title:
FOREVER YOURS, INC.
By:________________________________
Name:
Title:
STYLES ON VIDEO, INC.
By:________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.43
REVOLVING NOTE $540,000.00
January 31, 1997
FOR VALUE RECEIVED, the undersigned, Forever Yours, Inc., a California
corporation (the "Maker"), hereby promises to pay to the order of Hasco
International, Inc., a Missouri corporation (the "Lender"), the principal sum of
Five Hundred and Forty Thousand Dollars and No Cents ($540,000.00), or, if less,
the aggregate unpaid principal amount of all advances made to the Maker by the
Lender pursuant to Section 2.1 of the Loan Agreement, dated as of January 31,
1997, as the same may be amended, modified, restated or supplemented from time
to time (the "Loan Agreement"), among the Maker, the Lender and Styles On Video,
Inc., in lawful money of the United States of America in immediately available
funds, at such times as specified in the Loan Agreement. The Maker also agrees
to pay interest on the principal amount hereof from time to time outstanding, in
lawful money of the United States of America in immediately available funds, at
a rate or rates per annum and payable on such dates and for such periods as
determined pursuant to the terms of the Loan Agreement.
The Maker promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from their due
dates at a rate or rates determined as set forth in the Loan Agreement.
The Maker hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever, other than as expressly required by the Loan
Agreement. The nonexercise by the holder of any of its rights hereunder in any
particular instance shall not constitute a waiver thereof in that or any
subsequent instance.
The date, amount and all payments and prepayments of the principal
hereof and interest hereon and the respective dates thereof shall be recorded by
such holder in its internal records and, prior to any transfer of this Note,
endorsed by the holder on the schedule attached hereto or any continuation
thereof; provided, however, that the failure of the holder hereof to make such a
notation or any error in such a notation shall not in any manner affect the
obligation of the Maker to make payments of principal and interest in accordance
with the terms of this Note and the Loan Agreement.
This Note is secured by and entitled to the benefits of the Security
Agreement (as defined in the Loan Agreement).
FOREVER YOURS, INC.
By: /s/ K. Eugene Shutler
---------------------------
Name: K. Eugene Shutler
Title: Chairman & C.E.O
1
<PAGE>
Loans and Payments
------------------
<TABLE>
<CAPTION>
Unpaid
Payments of Principal Name of
Amount and Principal or Balance of Person Making
Date Date of Loan Interest Note Notation
- ------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
</TABLE>
2
<PAGE>
EXHIBIT 10.44
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of January 31, 1997, made by Forever
Yours, Inc., a California corporation, (the "Pledgor"), in favor of Hasco
-------
International, Inc., a Missouri corporation (together with any of its successors
and assigns, the "Lender"). Capitalized terms used but not defined herein shall
------
have the meanings given to them in that certain Loan Agreement, dated as of the
date hereof (the "Loan Agreement"), among the Pledgor, the Lender and Styles On
--------------
Video, Inc.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is acknowledged, and to induce the Lender to make the loans
to the Pledgor described in the Loan Agreement, the Pledgor hereby agrees with
the Lender as follows:
1. Defined Terms. The following terms shall have the following
-------------
meanings:
"Bankruptcy Code" means The United States Bankruptcy Code of 1978, as
---------------
amended from time to time, or any successor federal statute.
"Collateral" has the meaning assigned to it in Section 2 of this
----------
Security Agreement.
"Contracts" means all contracts, instruments, undertakings, documents
---------
and other agreements or arrangements (whether written or oral) of hospitals or
other health care providers that relate in any way to in-hospital newborn
photography services in which the Pledgor may now or hereafter have any right,
title or interest, as any of the same may from time to time be amended, modified
or supplemented, and all rights, title or interest of the Pledgor thereunder.
"IDI" means International Digital Investors, L.P., a Delaware limited
---
partnership.
"Lien" shall mean any mortgage, deed of trust, pledge, hypothecation,
----
assignment for security, security interest, encumbrance, levy, lien or similar
charge of any kind.
"Obligations" shall mean (a) all the principal of and interest
-----------
(including interest accruing on or after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding relating to FYI, whether or not a claim of post-petition interest is
allowed in such proceeding) under the Loan Agreement or Note, when and as due,
whether at maturity, by acceleration, upon one or more dates set for prepayment
or otherwise and (b) all other monetary and non-monetary obligations of FYI to
the Lender under the Loan Agreement, Note or this Agreement.
"Proceeds" means (a) any and all proceeds of any insurance, indemnity,
--------
warranty or guaranty payable to the Pledgor from time to time with respect to
any of the Collateral, (b) any and all payments (in any form whatsoever) made or
due and payable to the Pledgor from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any governmental body, authority, bureau or agency (or
any person acting under color of governmental authority), (c) any and all other
amounts from time to time paid or payable under or in connection with any of the
Collateral and (d) any "proceeds" as such term is defined in Section 9306(1) of
the UCC, including, without limitation, all "accounts" (as defined in the UCC)
arising from the Contracts.
"Security Agreement" means this Security Agreement, as amended,
------------------
restated, supplemented or otherwise modified from time to time.
-1-
<PAGE>
"Subordination Agreement" means the Subordination and Intercreditor
-----------------------
Agreement dated as of the date hereof by and among the Pledgor, the Lender and
IDI.
"UCC" means the Uniform Commercial Code from time to time in effect in
---
the State of California; provided, however, that if by reason of mandatory
provisions of law, the perfection or the effect of perfection or non-perfection
of the security interest in any Collateral is governed by the Uniform Commercial
Code as in effect in a jurisdiction other than California, "UCC" means the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions hereof relating to such perfection or effect of perfection or
non-perfection.
2. Grant of Security Interest. As collateral security for the
--------------------------
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or otherwise) of the Obligations, the Pledgor hereby
grants to the Lender a priority lien upon and security interest in (the
"Security Interest") all of the following property, now owned or at any time
hereafter acquired by the Pledgor or in which the Pledgor now has or at any time
in the future may acquire any right, title or interest (collectively, the
"Collateral"):
(i) all Contracts; and
(ii) to the extent not otherwise included, all Proceeds and
products of any and all of the foregoing.
3. Representations and Warranties. The Pledgor hereby represents
------------------------------
and warrants to the Lender, which representations and warranties shall survive
the execution of this Security Agreement, that:
(a) First Priority Security Interest. This Security Agreement, when
--------------------------------
executed and delivered to the Lender, will create and grant to the Lender a
valid Security Interest and charge in favor of and for the benefit of the Lender
in the Collateral and, to the extent required, upon giving effect to the
Subordination Agreement and the filing of the UCC financing statements, the
Lender shall have, at the time of attachment, a perfected first lien on the
Collateral described therein, prior to all other Liens and other encumbrances,
and is enforceable as such as against creditors of and purchasers from the
Pledgor. All action necessary or desirable to protect and perfect such Security
Interest in each item of the Collateral has been duly taken by the Pledgor.
(b) Chief Executive Office. The "chief executive office" (as defined
----------------------
in the UCC) of the Pledgor is located at 667 Rancho Conejo Boulevard, Newbury
Park, CA 91320.
(c) Corporate Representations. The Pledgor is a corporation duly
-------------------------
organized and existing in good standing under the laws of the State of
California and has the requisite corporate power and authority to enter into,
execute, deliver and perform its obligations under this Agreement, the Loan
Agreement, the Note and the Subordination Agreement. When executed and
delivered, this Agreement, the Loan Agreement, the Note and the Subordination
Agreement shall each constitute valid and binding agreements of the Pledgor,
enforceable against the Pledgor in accordance with their terms, subject, as to
enforcement, (a) to bankruptcy, insolvency, reorganization, arrangement,
moratorium and other similar laws of general applicability relating to or
affecting creditors' rights and (b) to general principles of equity, whether
such enforceability is considered in a proceeding in equity or at law.
4. Covenants.
---------
The Pledgor covenants and agrees, so long as this Agreement is in
effect, that:
-2-
<PAGE>
(a) Asset Sales. The Pledgor shall not sell, transfer, lease or
-----------
otherwise dispose of any of the Collateral or attempt, offer or contract to do
so; provided, however, upon prior notice to the Lender, the Pledgor may
terminate any contract that is a part of the Collateral in the normal course of
business, consistent with past practice.
(b) Further Assurances. The Pledgor will execute and deliver to the
------------------
Lender such consents, assurances, powers of attorney and other instruments as
may be reasonably requested by the Lender or its counsel in order to carry out
the purpose and intent of this Security Agreement.
5. Remedies.
--------
(a) General. If any Event of Default shall occur and be continuing,
-------
the Lender may exercise, in addition to all other rights and remedies granted to
it in this Security Agreement, the Loan Agreement, the Note and in any other
instrument or agreement securing, evidencing or relating to the Obligations, all
rights and remedies of a secured party under the UCC against the Pledgor.
(b) Sale. If any Event of Default shall occur and be continuing, the
----
Lender without demand of performance or other demand, presentment, protest,
advertisement or notice of any kind (except any notice required by law referred
to below) to or upon the Pledgor or any other person (all and each of which
demands, defenses, advertisements and notices are hereby waived to the extent
permitted by applicable law), may in such circumstances forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof,
and/or may forthwith sell, lease, assign, give an option or options to purchase,
or otherwise dispose of and deliver the Collateral or any part thereof (or
contract to do any of the foregoing), in one or more parcels at public or
private sale or sales, at the office of the Lender or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Pledgor will execute and deliver such documents and take such other
action as the Lender deems necessary or advisable in order that such sale may be
made in compliance with law. The Lender shall have the right upon any such
public sale or sales, and, to the extent permitted by law, upon any such private
sale or sales, to purchase the whole or any part of the Collateral so sold.
Upon any such sale the Lender shall have the right to deliver, assign and
transfer the Collateral so sold to the purchaser thereof. Each purchaser at any
such sale shall hold the Collateral so sold to it absolutely and free from any
Lien or other claim or right of whatever kind, including any equity or right of
redemption of the Pledgor, to the extent permitted by applicable law, hereby
specifically waives all rights of redemption, stay or appraisal which it has or
may have at any time in the future under any law now existing or hereafter
enacted or adopted (as well as any rights to exoneration, subrogation or
reimbursement arising at law, in equity or otherwise).
(c) Notice. If any notice of a proposed sale or other disposition of
------
collateral shall be required by law, such notice shall be deemed reasonable and
proper if given at least 10 days before such sale or other disposition. All
waivers by the Pledgor of rights (including rights to notice), and all rights
and remedies afforded the Lender herein, and all other provisions of this
Security Agreement, are expressly made subject to any applicable mandatory
provisions of law limiting, or imposing conditions (including conditions as to
reasonableness) upon, such waivers or the effectiveness thereof or any such
rights and remedies. Any sale or other disposition of the Collateral and the
possession thereof by the Lender shall be in compliance with all provisions of
applicable law (including applicable securities laws and applicable provisions
of the UCC). To the extent permitted by the UCC, the Pledgor shall remain
liable for any deficiency if the proceeds of any sale or other disposition of
the Collateral are insufficient to pay the Obligations and the
-3-
<PAGE>
reasonable fees and disbursements of any attorneys or other agency employed by
the Lender to collect such deficiency.
6. Lender's Appointment as Attorney-in-Fact.
----------------------------------------
(a) Powers. The Pledgor hereby irrevocably constitutes and appoints
------
the Lender and any officer thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of the Pledgor and in the name of the Pledgor or in its own
name, from time to time in the Lender's discretion, for the purpose of carrying
out the terms of this Security Agreement which are required to be observed or
performed by the Pledgor, to take any and all appropriate action and to execute
any and all documents and instruments which may be necessary or desirable to
accomplish the purposes of this Security Agreement, and without limiting the
generality of the foregoing, the Pledgor hereby gives the Lender the power and
right, on behalf of the Pledgor without notice to or assent by the Pledgor, to
do the following:
(i) at any time when any Event of Default shall occur and be
continuing and upon five (5) days' notice of such Event of Default to IDI,
in the name of the Pledgor or its own name, or otherwise, to take
possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under, or
with respect to, any Collateral and to file any claim or to take any other
action or proceeding in any court of law or equity or otherwise deemed
appropriate by the Lender for the purpose, of collecting any and all such
moneys due with respect to such Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) upon the occurrence and during the continuance of any
Event of Default and upon five (5) days' notice of such Event of Default to
IDI,
(A) to direct any party liable for any payment under any
of the Collateral to make payment of any and all moneys due or to
become due thereunder directly to the Lender or as the Lender shall
direct;
(B) to ask or demand for, collect, receive payment of and
give receipt for, any and all moneys, claims and other amounts due or
to become due at any time in respect of or arising out of any
Collateral;
(C) to sign and endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against
debtors, Assignments, verifications, notices and other documents in
connection with any of the Collateral;
(D) to defend any suit, action or proceeding brought
against the Pledgor or any Subsidiary thereof with respect to any
Collateral;
(E) to settle, compromise or adjust any suit, action or
proceeding described in the preceding clauses and, in connection
therewith, to give such discharges or releases as the Lender may deem
appropriate;
(F) to open such Pledgor's mail or notify postal
authority to direct Pledgor's mail;
-4-
<PAGE>
(G) to notify, or to direct such Pledgor to notify,
account debtors whose accounts are included in the Collateral that
such accounts have been assigned to the Lender and that payments in
respect thereof shall be made directly to the Lender and, in its own
name, or in the name of others, to communicate with account debtors on
such accounts to verify with them to its satisfaction the existence,
amount and terms of any Accounts; and
(H) generally, to sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any of the Collateral
as fully and completely as though the Lender were the absolute owner
thereof for all purposes, and to do, at the Lender's option and the
Pledgor's expense, at any time, or from time to time, all acts and
things which the Lender reasonably deems necessary to protect,
preserve or realize upon the Collateral and the Liens of the Lender
thereon and to effect the intent of this Security Agreement, all as
fully and effectively as the Pledgor or any Subsidiary thereof might
do, in each case in accordance with the law.
The Pledgor hereby ratifies all that said attorneys shall lawfully do
or cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.
(b) Other Powers. The Pledgor also authorizes the Lender, at any
------------
time and from time to time, to execute, in connection with the sale provided for
in Section 5 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral.
(c) No Duty on the Part of Lender. The powers conferred on the
-----------------------------
Lender hereunder are solely to protect the interests of the Lender in the
Collateral and shall not impose any duty upon the Lender to exercise any such
powers. The Lender shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers, and neither the Lender nor
any of its officers, directors or employees shall be responsible to the Pledgor
for any act or failure to act hereunder, except for their own gross negligence
or willful misconduct. To the extent permitted by applicable law, the Pledgor
waives all claims, damages and demands it may acquire against the Lender arising
out of the exercise by them of any rights under this Security Agreement, except
for the gross negligence, bad faith or willful misconduct on the part of the
Lender.
7. Performance by Lender of Pledgor's Obligations. If the Pledgor
----------------------------------------------
fails to perform or comply with any of its agreements contained herein, in the
Loan Agreement, the Note or any other agreement or instrument related to the
foregoing and the Lender shall itself perform or comply, or otherwise cause
performance or compliance, with such agreement, the reasonable expenses of the
Lender incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum then in effect under the Loan Agreement
shall be payable by the Pledgor to the Lender on demand and shall constitute
Obligations secured hereby.
8. Duration of Agreement; Release of Security. This Security
------------------------------------------
Agreement and the Security Interest granted hereby shall terminate when all the
Obligations have been paid in full. Upon termination of Lender's Security
Interest, the Collateral shall be released from the liens created by this
Security Agreement and its ancillary documents, all without delivery of any
instrument or performance of any act by any party, and all rights in the
Collateral shall revert back to the Pledgor. Upon such termination, the Lender
shall cause to be assigned, transferred and delivered as soon as possible,
against receipt but without any recourse, warranty or representation whatsoever,
any remaining Collateral in its possession and money received in respect
thereof. The Lender shall also execute and deliver as soon as possible to the
Pledgor all UCC termination
-5-
<PAGE>
statements and similar documents as shall be reasonably requested by or on
behalf of the Pledgor to evidence the termination and release of the liens on
the Collateral.
9. Pledgor Remains Liable Under Contracts and Agreements. Anything
-----------------------------------------------------
contained in this Security Agreement to the contrary notwithstanding, (a) the
Pledgor shall remain solely liable to perform its duties and obligations under
the contracts and agreements included in the Collateral to the extent set forth
therein to the same extent as if this Agreement had not been executed, (b) the
exercise by the Lender of any of its rights and remedies hereunder shall not
release the Pledgor from any of its duties or obligations under the contracts
and agreements included in the Collateral except to the extent the exercise of
such rights renders the performance of such duties or obligations by the Pledgor
impracticable under any such agreement or contract and (c) the Lender shall not
have any obligation or liability under any contract or agreement included in the
Collateral by reason of this Agreement, and Lender shall not be obligated in any
manner to perform any of the obligations or duties the Pledgor thereunder or to
take any action to collect or enforce any claim for payment assigned hereunder.
10. Limitation on Duty of Lender Regarding the Collateral. Beyond
------------------------------------------ ----------
the exercise of reasonable care in the custody of any Collateral in its
possession, the Lender shall have no duty as to any Collateral in its possession
or control or in the possession or control of any agent or bailee, or any income
thereon, or as to the preservation of rights against prior parties or any other
rights pertaining thereto. The Lender shall be deemed to have exercised
reasonable care in the custody of the Collateral in the Lender's possession if
the Collateral is accorded treatment substantially equal to that which the
Lender accords its own property. The Lender shall not be liable or responsible
for any loss or damage to any of the Collateral, or for any diminution in the
value thereof, by reason of the act or omission of any warehouseman, carrier,
forwarding agency, consignee or other agent or bailee selected by the Lender in
good faith.
11. Limitation on Duties Regarding Preservation of Collateral. The
---------------------------------------------------------
Lender's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9207 of the UCC
or otherwise, shall be to deal with it in the same manner as the Lender would
deal with similar property for its own account. The Lender or any of its
directors, officers or employees shall not be liable for failure to demand,
collect or realize upon all or any part of the Collateral or for any delay in
doing so or shall be under any obligation to sell or otherwise dispose of any
Collateral upon the request of the Pledgor or otherwise.
12. Security Interest Absolute. Except as prohibited by law, all
--------------------------
rights of the Lender hereunder, the grant of the Security Interest in the
Collateral and all obligations of the Pledgor hereunder shall be absolute and
unconditional irrespective of (a) any lack of validity or enforceability of the
Obligations, the Loan Agreement, the Note or any other agreement or instrument
relating to any of the foregoing, (b) any change in the time, manner or place of
payment of, or in any other term of, all or any of the Obligations, or any other
amendment or waiver of or any consent to any departure from the Loan Agreement,
the Note or any other agreement or instrument relating to any of the foregoing,
(c) failure by the Lender to take steps to perfect or maintain perfected its
security interest in, or to preserve its rights to, any of the Collateral, (d)
any exchange, release or non-perfection of any other collateral, or any release
or amendment or waiver of or consent to or departure from any guaranty, for all
or any of the Obligations, (e) the disallowance under Section 502 of the
Bankruptcy Code of all or any portion of the claims of the Lender for repayment
of the Obligations or (f) any other circumstance which might otherwise
constitute a legal or equitable defense available to, or a legal or equitable
discharge of, the Pledgor with respect to the Obligations or with respect to
this Agreement other than the indefeasible payment in full of all of the
Obligations.
13. Powers Coupled with an Interest. All authorizations and agencies
-------------------------------
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest.
-6-
<PAGE>
14. Severability. Any provision of this Security Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. Section Headings. The section headings used in this Security
----------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
16. No Waiver: Cumulative Remedies. To the extent permitted by
------------------------------
applicable law, the Lender shall not by any act (except by a written instrument
pursuant to Section 18), delay, indulgence, omission or otherwise be deemed to
have waived any right or remedy hereunder or to have acquiesced in any Default
or Event of Default or in any breach of any of the terms and conditions hereof.
To the extent permitted by applicable law, no failure to exercise, or any delay
in exercising, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or future exercise thereof or the exercise of
any other right, power or privilege. A waiver by the Lender of any right or
remedy hereunder on any occasion shall not be construed as a bar to any right or
remedy which the Lender would otherwise have on any future occasion. The rights
and remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.
17. Waivers and Amendments: Successors and Assigns. None of the
----------------------------------------------
terms or provisions of this Security Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgor and the Lender. This Security Agreement shall be binding upon the
successors and assigns of the Pledgor and shall inure to the benefit of the
Lender. Without limiting anything to the contrary herein, this Agreement and
the benefits hereunder may be assigned to any permitted assignee of the Note.
18. Notices. Any and all notices or other communications or
-------
deliveries required or permitted to be given or made pursuant to any of the
provisions of this Agreement shall be deemed to have been duly given or made for
all purposes if (i) sent by certified or registered mail, return receipt
requested and postage prepaid, (ii) hand delivered, (iii) sent by a nationally
recognized overnight courier or (iv) sent by telephone facsimile transmission
the receipt of which is confirmed as follows:
If to the Lender:
Hasco International, Inc.
3613 Mueller Road
St. Charles, MO 63301
Attention: David Van Vliet
Telecopy No.: 312-770-0275
With a copy to:
Kirkland & Ellis
153 East 53rd Street
39th Floor
New York, NY 10022
Attention: Charles B. Fromm
Telecopy No.: 212-446-4900
-7-
<PAGE>
If to the Pledgor:
Forever Yours, Inc.
667 Rancho Conejo Boulevard
Newbury Park, CA 91320
Attention: James O'Brien
Telecopy No.: 805-376-9184
With a copy to:
Sanders, Barnet, Goldman, Simons & Mosk
1901 Avenue of the Stars, Suite 850
Los Angeles, California 90067
Attention: Michael Sanders
Telecopy No.: 310-553-2435
or at such other address as any party may specify by notice given to the other
party in accordance with this section. The date of giving of any such notice
shall be the date three days following the posting of the mail, the date of hand
delivery, the day after delivery to the overnight courier service or the date
sent by telephone facsimile.
19. GOVERNING LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO INSTRUMENTS MADE TO BE PERFORMED ENTIRELY WITHIN SUCH
STATE, EXCEPT AS OTHERWISE REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO
THE EXTENT THAT REMEDIES PROVIDED BY THE LAWS OF ANY JURISDICTION OTHER THAN
CALIFORNIA ARE GOVERNED BY THE LAWS OF SUCH JURISDICTION.
20. WAIVER OF JURY TRIAL. THE LENDER AND THE PLEDGOR HEREBY
--------------------
IRREVOCABLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED UPON, OR ARISING OUT OF, THIS SECURITY AGREEMENT, OR ANY COURSE
OF CONDUCT, COURSE OF DEALING, STATEMENTS OR ACTIONS OF THE LENDER OR THE
PLEDGOR RELATING THERETO.
21. Counterparts. This Security Agreement may be executed in any
------------
number of identical counterparts, each of which shall constitute an original but
all of which when taken together shall constitute but one contract.
* * * * * *
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed and delivered as of the date first above
written.
HASCO INTERNATIONAL, INC.
By_________________________________
Name:
Title:
FOREVER YOURS, INC.
By: _______________________________
Name:
Title:
-9-
<PAGE>
EXHIBIT 10.59
Styles On Video, Inc.
667 Rancho Conejo Boulevard
Newbury Park, California 91320
May 24, 1995
Interactive Video Systems, Inc.
162-1020 Maitland Street
Vancouver, B.C. Canada V6B2T4
Gentlemen:
Reference is made to that certain Agreement dated as of October 4, 1994
(the "Agreement") between Styles on Video, Inc. ("SOV") and Interactive Video
Systems, Inc. ("IVS"). It is the intention of the parties to the Agreement that,
upon the terms and subject to the conditions set forth herein, effective as of
May 24, 1995, the Agreement will be terminated and of no further force and
effect; provided, that the covenant of SOV set forth in Section 15 of the
--------
Agreement shall remain in full force and effect. All capitalized terms not
defined herein shall have the meanings ascribed thereto in the Agreement.
1. SOV shall pay to the IVS the sum of $25,000 in five equal monthly
installments on the 15th day of each calendar month; provided however that the
first installment shall be due on May 18, 1995. In the event that SOV fails to
make any payment as and when it is due, the entire unpaid balance will be
immediately due and payable, and will bear interest at the rate of 12% per annum
until paid.
2. IVS shall keep for its own account the 10,000 shares of SOV stock
delivered to IVS pursuant to the Agreement.
3. From and after the date hereof, SOV shall no longer own or have any
rights in or to the distribution of the Starmaker product in the U.S., nor any
rights in or to the IVS technology, software or trademarks.
4. If SOV at any time proposes to register on a firmly underwritten public
offering basis any of its Common Stock to be offered for cash for its own
account it shall give written notice to IVS of its intention to do so at least
15 days prior to the filing of a registration statement with respect to such
registration. If IVS desires to dispose of all or part of its stock, it may
request registration thereof in connection with the SOV's registration by
delivering to SOV, within ten days after receipt of notice of the proposed
registration, written notice of
<PAGE>
Interactive Video Systems, Inc.
May 24, 1995
Page 2
such request stating the number of shares of SOV Common Stock to be disposed.
SOV shall use its best efforts to cause all shares specified in IVS' notice to
be registered under the Securities Act so as to permit the sale or other
disposition by IVS of the shares so registered. SOV will pay all of the expenses
of any such offering. IVS will provide SOV with such information as SOV may
require regarding IVS to include in the registration statement and prospectus.
SOV will indemnify and hold harmless IVS and its officers, directors and
affiliates for any liabilities it may incur as a result of or in connection with
such registration.
5. The Agreement, and all of the rights, obligations and liabilities of
the parties thereto under the Agreement other than SOV's obligations under
Section 15 of the Agreement, which shall continue for the period therein
specified, shall be and hereby are terminated effective as of May 15, 1995.
Neither SOV nor IVS shall have any rights, obligations or liabilities of any
kind or nature, whether known or unknown, suspected or unsuspected, under the
Agreement from and after May 15, 1995.
6. Subject to the payment in full of the amounts specified in Paragraph 1
hereof, IVS, by its execution and delivery of this Agreement on behalf of itself
and its officers, directors, executors, administrators, representatives,
successors and assigns and all others claiming any interest in any of the
matters covered or contemplated hereby through or by reason of their
relationship to IVS, hereby fully and unconditionally releases and discharges
SOV and its partners, affiliates, subsidiaries, officers, directors, agents,
employees, attorneys, advisors, representatives, successors and assigns
(collectively the "SOV Releasees") from, and relinquishes and waives any and all
rights, claims and actions of any nature whatsoever that IVS and/or its
successors now have or may, after the execution of this letter agreement, have
or claim to have against the SOV Releasees directly or indirectly arising out of
or in connection with the Agreement or the transactions contemplated thereby.
IVS acknowledges and agrees that this release applies to all claims for
injuries, damages or losses that IVS may have against the SOV Releasees relating
to the Agreement, and IVS hereby acknowledges that it is aware of and is waiving
the benefits of the following provision of California Civil Code Section 1542:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor."
<PAGE>
Interactive Video Systems, Inc.
May 24, 1995
Page 3
IVS waives application of and any and all rights it has or may have under
California Civil Code Section 1542 and/or any successor section to it. In
connection with this waiver, IVS acknowledges that it is aware that it may
hereafter discover claims presently unknown or unsuspected or facts in addition
to or different from those which it now knows or believes to be true with
respect to the matters covered hereby. Nevertheless, IVS intends by this
Agreement to release fully, finally and forever all matters covered and
contemplated hereby. In furtherance of such intention, the releases set forth in
this letter agreement shall be and remain in effect as fully and complete
releases of all matters notwithstanding the discovery or existence of any
additional or different claims or facts relevant hereto.
7. Subject to the payment in full of the amounts specified in Paragraph
1 hereof, Ian Grant ("Grant"), in his individual capacity, by his execution and
delivery of this Agreement, hereby fully and unconditionally releases and
discharges SOV and its partners, affiliates, subsidiaries, officers, directors,
agents, employees, attorneys, advisors, representatives, successors and assigns
(collectively the "SOV Releasees") from, and relinquishes and waives any and all
rights, claims and actions of any nature whatsoever that he and/or his
successors now have or may, after the execution of this letter agreement, have
or claim to have against the SOV Releasees directly or indirectly arising out of
or in connection with the Agreement or the transactions contemplated thereby.
Grant acknowledges and agrees that this release applies to all claims for
injuries, damages or losses that Grant may have against the SOV Releasees
relating to the Agreement, and Grant hereby acknowledges that he is aware of and
is waiving the benefits of the following provision of California Civil Code
Section 1542:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
Grant waives application of and any and all rights he has or may have under
California Civil Code Section 1542 and/or any successor section to it. In
connection with this waiver, Grant acknowledges that he is aware that he may
hereafter discover claims presently unknown or unsuspected or facts in addition
to or different from those which he now knows or believes to be true with
respect to the matters covered hereby. Nevertheless, Grant intends by this
Agreement to release fully, finally and forever all matters covered and
contemplated hereby. In furtherance of such intention,
<PAGE>
Interactive Video Systems, Inc.
May 24, 1995
Page 4
the releases set forth in this letter agreement shall be and remain in effect as
fully and complete releases of all matters notwithstanding the discovery or
existence of any additional or different claims or facts relevant hereto.
8. SOV, by its execution and delivery of this Agreement, on behalf of
itself and its officers, directors, executors, administrators, representatives,
successors and assigns and all others claiming any interest in any of the
matters covered or contemplated hereby through or by reason of their
relationship to SOV, hereby fully and unconditionally releases and discharges
IVS and its partners, affiliates, subsidiaries, officers, directors, agents,
employees, attorneys, advisors, representatives, successors and assigns
(collectively the "IVS Releasees") from, and relinquishes and waives any and all
rights, claims and actions of any nature whatsoever that SOV and/or its
successors now have or may, after the execution of this letter agreement, have
or claim to have against the IVS Releasees directly or indirectly arising out of
or in connection with the Agreement or the transactions contemplated thereby.
SOV acknowledges and agrees that this release applies to all claims for
injuries, damages or losses that SOV may have against the IVS Releasees, and SOV
hereby acknowledges that it is aware of and is waiving the benefits of the
following provision of California Civil Code Section 1542:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor."
SOV waives application of and any and all rights it has or may have under
California Civil Code Section 1542 and/or any successor section to it. In
connection with this waiver, SOV acknowledges that it is aware that it may
hereafter discover claims presently unknown or unsuspected or facts in addition
to or different from those which it now knows or believes to be true with
respect to the matters covered hereby. Nevertheless, SOV intends by this
Agreement to release fully, finally and forever all matters covered and
contemplated hereby. In furtherance of such intention, the
<PAGE>
Interactive Video Systems, Inc.
May 24, 1995
Page 5
releases set forth in this letter agreement shall be and remain in effect as
fully and complete releases of all matters notwithstanding the discovery or
existence of any additional or different claims or facts relevant hereto.
9. No amendment of any term or provision of this letter agreement shall
be effective unless made in writing. The parties intend that this letter
agreement will be governed by the laws of the State of California. In the
event that any action, suit, arbitration or other proceeding is instituted
concerning or arising out of this letter agreement, the prevailing party shall
recover all such party's costs, including reasonable attorneys' fees, incurred
in each and every action, suit, arbitration or proceeding, including any and all
petitions or appeals therefrom.
If the foregoing correctly reflects our understanding, please sign the
attached copy of this letter in the space indicated and return it to the
undersigned.
STYLES ON VIDEO, INC.
/s/ James E. O'Brien
-----------------------------------
By: James O'Brien, Chief Operating
Officer
AGREED TO AND ACCEPTED BY:
INTERACTIVE VIDEO SYSTEMS, INC.
/s/ Ian Grant
- ------------------------------
By: Ian Grant, President
- ------------------------------
Ian Grant
<PAGE>
EXHIBIT 10.60
DYCAM, INC.
9414 Eton Avenue
Chatsworth, CA 91311
(818) 998-8008 . fax (818) 998-7951
December 20, 1996
Mr. Ronald N. Iversen
1485 Calle Yucca
Thousand Oaks, CA 91360
RE: Offer of Employment
Dear Ron:
The purpose of this letter is to confirm in writing the terms pursuant to
which Dycam, Inc. is prepared to employ you as Vice President - Sales &
Marketing.
1. Signing Bonus - Upon acceptance of this letter by you, Dycam will pay to you
a one time "signing bonus" of $3,000.
2. Salary - Your salary will be $120,000 per year, payable in accordance with
Dycam's normal payroll practices.
3. Commencement of Employment - Your employment will commence on January 1,
1997.
4. Stock Options/Warrants - You will be entitled to participate in Dycam's stock
option and/or warrant plan and will be entitled to up to 150,000
options/warrants ("Options") with terms consistent with Options held by other
senior executives of Dycam and with vesting provisions and exercise prices as
described below. Such Options shall consist of two kinds, up to 90,000
Options that will vest so long as you continue to be employed by Dycam (the
"Employment Options") and up to 60,000 Options that will vest if certain
conditions described below are satisfied (the "Bonus Options").
a. 1997
----
7,500 Employment Options shall vest on the last day of each calendar
quarter (i.e., the first vesting is on March 31, 1997, with subsequent
vesting on June 30, 1997, September 30, 1997 and December 31, 1997). In
addition, if at any time during calendar 1997 the Board of Directors of
Dycam approves a written business plan in substantially the form submitted
by you, an additional 5,000 Bonus Options shall become vested for each
quarter of the calendar year. (Accordingly, if you continue to be employed
by Dycam during all of 1997 you will be entitled to 30,000
<PAGE>
-2- December 20, 1996
Employment Options and, if the business plan is approved, an additional
20,000 Bonus Options, bringing the total option award to you to 50,000
Options.) The exercise price in respect of all Employment Options and
Bonus Options shall be $1.25 per share, provided, however, if the average
closing price of Dycam stock as reported by the American Stock Exchange
(the "Closing Price") for the first three trading days of 1997 exceeds
$1.00 per share the exercise price shall be such three day average plus
$.25.
b. 1998
----
7,500 Employment Options and 5,000 Bonus Options (collectively, the "1998
Options") shall vest on each of March 31, 1998, June 30, 1998, September
30, 1998 and December 31, 1998. The exercise price for all of the 1998
Options shall be the average Closing Price for the first three trading
days of 1998. All of the 1998 Bonus Options shall become permanently
vested if Dycam's revenue for 1998 equals or exceeds (i) 125% of Dycam's
revenue for 1997 and (ii) Dycam's revenue for 1997 plus $1,500,000.
c. 1999
----
7,500 Employment Options and 5,000 Bonus Options (collectively the "1999
Options") shall vest on each of March 31, 1999, June 30, 1999, September
30, 1999 and December 31, 1999. The exercise price for all of the 1999
Options shall be the average Closing Price for the first three trading
days of 1999. All of the 1999 Bonus Options shall become permanently
vested if Dycam's revenue for 1999 equals or exceeds (i) 125% of Dycam's
revenue for 1998 and (ii) Dycam's revenue for 1998 plus $2,000,000.
All Bonus Options shall vest quarterly, as described above, however, such
Bonus Options for each particular year shall never be exercisable and will
thus be extinguished if the vesting condition for such year is not
satisfied.
5. Term - The term of your employment shall extend through December 31, 1999
unless previously terminated by you or by Dycam pursuant to section 6 of this
letter agreement.
6. Termination
a. Termination Without Cause - If Dycam chooses to terminate your employment
without cause for any reason prior to June 30, 1997, Dycam shall pay to
you effective upon such termination the greater of (i) the salary that
would otherwise
<PAGE>
-3- December 20, 1996
be paid to you through and including June 30, 1997 or (ii) three months
salary. In addition, if Dycam chooses to terminate your employment without
cause prior to June 30, 1997, you will become immediately vested in the
Employment Options which would otherwise vest on March 31, 1997 and June
30, 1997 and, if the business plan prepared by you is adopted by the Board
of Directors prior to June 30, 1997, the Bonus Options which would
otherwise vest on March 31, 1997 and June 30, 1997. If Dycam chooses to
terminate your employment without cause after June 30, 1997, Dycam shall
pay to you six months salary and you will be entitled to vest in any
Employment Options and Bonus Options (if the applicable condition is
subsequently satisfied) that would otherwise have been earned by you
during the six months immediately succeeding the date of your termination.
b. Termination With Cause or Termination by You - In the event Dycam
terminates you for cause or you choose to resign you will receive no
additional compensation, Employment Options or Bonus Options subsequent to
the date of your termination for cause or resignation; however, you shall
retain any Employment Options and Bonus Options previously earned by you.
7. Medical Allowance - You shall receive an allowance of $400 per month towards
medical insurance until such time as Dycam has in place an employee medical
plan.
8. 401K - You shall be entitled to participate in Dycam's 401K plan, on the
same terms as other management employees.
9. Co-Investment - If at any time during 1997 Dycam undertakes a private
placement of equity securities, Dycam will endeavor to provide you the
opportunity to co-invest provided that (i) you pay any incremental legal
fees and expenses associated with your co-investment (including legal fees
that may result from so-called "non-accredited investor" issues pursuant to
Securities and Exchange Commission regulations and similar California
guidelines), and (ii) your co-investment is permitted by the lead equity
investor.
10. Board Presentations - It is expected that you will be interacting directly
with members of Dycam's Board of Directors, both formally and informally,
and that as part of your responsibilities, you will make presentations
concerning Dycam's marketing plan and sales efforts directly to Dycam's
Board of Directors.
11. Representations and Warranties - Dycam is extending this offer of employment
to you based upon your representations that (i) the annual salary being paid
to you by your current employer, as reported, is equal to or in excess of
$120,000, (ii) you are not now, nor have you within the past seven years,
been involved in any litigation of a
<PAGE>
-4- December 20, 1996
material nature and (iii) you have not, within the past seven years, declared
personal bankruptcy nor have you been the owner of more than 10% of the
equity of any company that has filed for bankruptcy protection.
We believe the terms outlined above are consistent with our conversations
of the past few days. If you agree, please indicate your agreement and
acceptance by signing below.
Ron, we are very excited to welcome you to the Dycam team. We know that
you can make a valuable contribution and that together we can greatly enhance
the value of Dycam for you and all other shareholders.
Sincerely,
/s/ John Edling
John Edling
Agreed and accepted
this 20th day of December, 1996
----
/s/ Ronald N. Iverson
- ----------------------------
Ronald N. Iverson
JE:sr
<PAGE>
EXHIBIT 16.1
[COOPERS & LYBRAND LETTERHEAD]
March 29, 1996
Ms. Nancy H. Galgas
Chief Financial Officer
Styles on Video, Inc.
667 Rancho Conejo Blvd.
Newbury Park, CA 91320
Dear Ms. Galgas:
This is to inform you that we hereby resign as the independent accountants of
Styles on Video, Inc. Please send us a draft of your Form 8-K for the auditor
change so that we can provide you with our required letter which must be filed
as an exhibit to the Form 8-K.
Sincerely yours,
/s/ Coopers & Lybrand L.L.P.
c.c.: Mr. Jeffrey A. Safchik, CEO
<PAGE>
EXHIBIT 21.1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF STYLES ON VIDEO, INC.
Dycam Inc.
Forever Yours, Inc.
Styles Servicing, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Styles on Video, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (33-77942) and the Registration Statements on Form S-8
(33-79138, 33-60830, 33-60832, 33-60834 and 33-60836) of our report dated August
2, 1996, except as to Note 18, which is as of January 31, 1997, on the
consolidated financial statements of Styles on Video, Inc. and subsidiaries as
of and for the year ended December 31, 1995 appearing in the Annual Report on
Form 10-KSB of Styles on Video, Inc. for the year ended December 31, 1995.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
March 18, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Styles on Video, Inc. on Form S-3 (File No. 33-77942) and Form S-8 (File No.
33-79138, 33-60830, 33-60832, 33-60834 and 33-60836) of our report, which
includes an explanatory paragraph concerning substantial doubt about the ability
of Styles on Video, Inc. to continue as a going concern, dated August 28, 1995,
except for Notes 2 and 17 which are dated March 12, 1996, on our audit of the
financial statements of Styles on Video, Inc. as of December 31, 1994 and for
the year then ended, which report is included in this Annual Report on Form
10-KSB.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,778,000
<SECURITIES> 0
<RECEIVABLES> 467,000
<ALLOWANCES> 267,000
<INVENTORY> 806,000
<CURRENT-ASSETS> 4,336,000
<PP&E> 1,294,000
<DEPRECIATION> 303,000
<TOTAL-ASSETS> 10,741,000
<CURRENT-LIABILITIES> 2,770,000
<BONDS> 3,206,000
0
0
<COMMON> 4,000
<OTHER-SE> 3,660,000
<TOTAL-LIABILITY-AND-EQUITY> 10,741,000
<SALES> 4,967,000
<TOTAL-REVENUES> 4,967,000
<CGS> 2,749,000
<TOTAL-COSTS> 2,749,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,000
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</TABLE>
