EXHIBIT 2.1
AGREEMENT OF PURCHASE AND SALE
OF THE CAPITAL STOCK OF
GEORGETOWN COLLECTION, INC.,
A Delaware corporation
BY
THE L. L. XXXXXXXXXXXXX CO., INC.,
A California corporation,
as BUYER;
DATED: As of November 20, 1996
CONTENTS
RECITALS 1
1. SUBJECT MATTER OF AND CONSIDERATION FOR SALE 2
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1.1 Transfer of the Company Shares. 2
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1.2 Consideration for the Company Shares. 2
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1.2.1 Definitions 2
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1.2.2 Payments to Common Shareholder 3
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1.2.3 Payments to Preferred Shareholders 3
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1.2.4 Guaranty of Value 3
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2. CONTINGENT PAYMENT 4
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2.1 Contingent Payment 4
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2.2 Schedule of Contingent Payments 4
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3. CLOSING AND CLOSING DATE 4
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4. SELLERS REPRESENTATIONS AND WARRANTIES 4
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4.1 Several Representations and Warranties 4
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4.1.1 Validity of Agreement, etc. 5
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4.1.2 Ownership of the Company Shares. 6
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4.1.3 Capitalization of the Company 6
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5. SELLERS' COVENANTS AND AGREEMENTS. 6
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5.1 Pending the Closing 6
5.1.1 Amendments 6
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5.1.2 Capital Changes; Dividends; Redemptions. 7
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5.1.3 Subsidiaries 7
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5.1.4 Certain Changes 7
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5.1.5 No Default 9
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6. REPRESENTATIONS AND WARRANTIES OF BUYER 9
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6.1 Authority and Validity of Agreement and Instruments 9
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6.2 Organization and Good Standing 10
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6.3 Material Misstatements or Omissions 10
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6.4 No Violation 10
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6.5 Brokerage and Finder's Fees 10
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7. COVENANTS AND AGREEMENTS OF BUYER. 12
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7.1 Secured Lender Agreements 12
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7.2 Registration Agreement 13
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8. ABANDONMENT OF AGREEMENT. 13
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8.1 Failure to Close 13
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8.2 Mutual Agreement 13
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8.3 Material Breach 13
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8.4 Consequences of Abandonment 14
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9. CONDITIONS PRECEDENT TO CLOSING 14
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9.1 Conditions Precedent to Obligations of Buyer 14
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9.1.1 Correctness of Representations and Warranties 15
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9.1.2 Performance of Covenants and Agreements 15
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9.1.3 Resignation of Directors 15
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9.1.4 Repayment of Loans 15
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9.1.5 No Government Proceeding or Litigation 15
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9.1.6 No Injunction 16
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9.1.7 Material Change 16
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9.1.8 Consents Obtained 16
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9.1.9 Secured Creditor Agreements 16
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9.2 Conditions Precedent to the Obligations of Sellers 16
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9.2.1 Correctness of Representations and Warranties 16
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9.2.2 Purchase Price 17
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9.2.3 Performance of Covenants and Agreement 17
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9.2.4 No Governmental Proceeding or Litigation 17
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9.2.5 No Injunction 17
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9.2.6 Material Change 17
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9.2.7 Consents Obtained 17
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9.2.8 Opinion of Buyer's Counsel 18
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9.2.9 Repayment of Loans 18
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9.2.10 Secured Creditor Agreements 18
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9.2.11 Execution of Registration Agreement 18
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9.3 Regulatory Approvals. 18
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10. SELLER'S INDEMNITIES 18
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10.1 Indemnity Obligation 18
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10.2 Event of Indemnity 18
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10.3 Procedure for Making Claims for Indemnity 19
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10.4 Joint and Several Indemnity. 21
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10.5 Limitation on Indemnity 21
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11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES 21
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12. OTHER REMEDIES 22
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12.1 Remedies 22
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13. RELATED MATTERS 22
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13.1 Confidentiality 22
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13.2 Disclosure Schedule 22
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13.3 Non-Solicitation of Employees 23
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14. GENERAL PROVISIONS. 23
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14.1 Notices 23
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14.2 Arbitration 24
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14.3 Entire Agreement 25
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14.4 Section Headings 25
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14.5 Severability 25
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14.6 Counterparts 26
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14.7 Further Assurances 26
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14.8 Waiver of Compliance 26
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14.9 Expenses 26
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14.10 Assignment 27
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14.11 Publicity 27
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14.12 Governing Law 28
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14.13 Third Parties 28
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14.14 Construction 28
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14.14.1 No Strict Construction 28
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14.14.2 Independent Significance 28
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AGREEMENT OF PURCHASE AND SALE
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THIS AGREEMENT OF PURCHASE AND SALE ("Agreement") is made and entered into
as of the 20th day of November, 1996, by and among the parties listed on EXHIBIT
A (collectively "Sellers") and THE L. L. XXXXXXXXXXXXX CO., INC., a California
corporation ("Buyer") regarding the purchase and sale of certain securities in
GEORGETOWN COLLECTION, INC., a Delaware corporation (the "Company").
RECITALS
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A. Sellers collectively own of record 4,946,471 preferred shares of
the Company (the "Preferred Shares") and 89,050 common shares of the Company
(the "Common Shares") (collectively, the "Shares" or the "Company Shares"). The
Company Shares owned of record by each of the Sellers are set forth on EXHIBIT A
attached hereto.
X. Xxxxxxx collectively own 106,181.62 common stock purchase warrants
of the Company (the "GCI Warrants") The Company Shares owned of record by each
of the Sellers are set forth on EXHIBIT A-1 attached hereto.
C. Each of the Sellers desires to sell all of the Company Shares and
GCI Warrants now owned by each Seller to Buyer and Buyer desires to purchase all
of the Company Shares and GCI Warrants from Sellers. The purchase and sale of
the Company Shares and GCI Warrants shall be made upon the terms and subject to
all of the conditions contained in this Agreement.
NOW THEREFORE, in consideration of the foregoing recitals and the mutual
promises, agreements, representations and warranties herein contained, the
parties hereto agree as follows:
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1. SUBJECT MATTER OF AND CONSIDERATION FOR SALE
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1.1 Transfer of the Company Shares. Upon the terms and subject to all
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of the conditions contained herein and upon the performance by each of the
parties hereto of their obligations hereunder, Sellers hereby agree to sell,
assign, transfer and deliver to Buyer, as of the Closing Date, all of the
Company Shares and GCI Warrants including all rights and interest in connection
with such Shares (including any warrants, conversion rights or rights to accrued
dividends) by delivering to Buyer at the Closing the certificates representing
the Company Shares, duly endorsed for transfer or accompanied by stock powers
duly executed by Sellers.
1.2 Consideration for the Company Shares. As consideration for
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Buyer's purchase of the Company Shares and upon and subject to all of the terms
and conditions herein and upon the performance by each of the parties hereto of
their obligations hereunder, Buyer agrees to pay to Sellers, as described in
Sections 1.2.1, 1.2.2 and 1.2.3, the sum of $1,675,000, plus the Contingent
Payment for the Preferred Shares and GCI Warrants, and $4,011.18 for the Common
Shares, for an aggregate amount of $1,679,011.18 plus the Contingent Payment
(the "Purchase Price"). Set forth in EXHIBIT A is the allocation of the
Purchase Price payable to each of the Sellers.
The Purchase Price shall be paid as follows:
1.2.1 Definitions. For purposes of this Agreement, the following terms
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shall have the following respective meanings:
(a) "LLK Stock" means shares of the restricted common stock of Buyer, each
certificate bearing a legend in the form annexed hereto as EXHIBIT B-1, subject
to a registration agreement which grants the holder the right to exchange the
LLK Stock for the equivalent
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number of shares of Buyer's registered and freely tradeable Common Stock on or
after such date as is specified in the Registration Agreement.
(b) "Warrants" means warrants, in the form annexed hereto as EXHIBIT B-2,
which grant the holder the right to purchase shares of Buyer's common stock,
which Warrants will be exercisable for a period of five (5) years after the
respective date of grant. Any shares issued upon the exercise of such Warrants
will, upon delivery, be registered and freely tradeable and shall remain so
throughout the period that the Warrants are exercisable. In lieu of Warrants,
Buyer may pay cash or issue its registered and freely tradeable Common Stock of
an equivalent value to the Value of the Warrants.
(c) "Value", in connection with each share of common stock covered by a
Warrant, means the difference between (i) the average closing bid price of
Buyer's common shares for the five (5) trading days immediately preceding the
date of delivery of the Warrant, and (ii) the exercise (or strike) price of the
Warrant.
1.2.2 Payments to Common Shareholder. At the Closing, Buyer shall
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deliver to the Common Shareholder shares of LLK Stock with a Value equal to the
aggregate amount of $4,011.18.
1.2.3 Payments to Preferred Shareholders. At the Closing, Buyer shall
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deliver to the Preferred Shareholders shares of LLK Stock with a Value equal to
the aggregate amount of $1,675,000 allocated among the Preferred Shareholders as
set forth in EXHIBIT A.
1.2.4 Guaranty of Value. At the first anniversary of the Closing, if
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the average closing bid price of Buyer's common shares for the five (5) trading
days immediately
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preceding the first anniversary of the Closing multiplied times the number of
LLK Shares delivered at the Closing pursuant to Sections 1.2.2 and 1.2.3 hereof
equals a number less than the Value of the LLK Shares delivered at the Closing
pursuant to Sections 1.2.2 and 1.2.3, then Buyer shall deliver to the Sellers
cash, Warrants or LLK Shares with a Value equal to the amount by which such
number is less than the Value of the LLK Shares at the Closing date (the
"Guaranty Payment"). Such Guaranty Payment shall be allocated pro-rata among the
Sellers in EXHIBIT A.
2. CONTINGENT PAYMENT.
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2.1 Contingent Payment. In connection with the sale of the Company
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Shares by Preferred Shareholders to Buyer, Buyer shall deliver to the Preferred
Shareholders additional Warrants with a Value equal in amount to the percentages
of earnings before taxes for the Company ("EBT"), in accordance with EXHIBIT C
(the "Contingent Payment").
2.2 Schedule of Contingent Payments. Buyer shall make the Contingent
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Payments in accordance with EXHIBIT C within 30 days of the completion of the
audit of the Company's operations for the fiscal years ended December 31, 1997,
1998, 1999, 2000 and 2001.
3. CLOSING AND CLOSING DATE. The Closing ("Closing") of the
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transaction contemplated by this Agreement shall take place at the offices of
Xxxxxx, Xxxx & Xxxxxxx, Exchange Place, 00 Xxxxx Xxxxxx, Xxxxxx, XX, at 10:00
A.M., on November 15, 1996 or at such other date, time and place as may be
agreed upon by the parties, and shall for all purposes be deemed consummated as
of October 19, 1996 (the "Closing Date").
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4. SELLERS REPRESENTATIONS AND WARRANTIES.
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4.1 Several Representations and Warranties. Sellers, severally,
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represent and warrant the following, the truth and accuracy of each of which
shall constitute a condition precedent to the obligations of Buyer hereunder.
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4.1.1 Validity of Agreement, etc. This Agreement is, or will be at the
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Closing, valid and binding upon each of the respective Sellers and is, or will
be at the Closing, enforceable in accordance with its respective terms, except
as enforceability may be limited by bankruptcy, insolvency, reorganization or
other laws affecting generally the enforcement of creditors' rights and except
to the extent that courts may award money damages rather than specific
performance of contractual provisions. Except as set forth in a schedule to be
delivered by Sellers to Buyer as provided in Section 9.1.1 hereof ("DISCLOSURE
SCHEDULE"), each of the Sellers, respectively, have, or will have on the Closing
Date, valid marketable title to the Company Shares, free and clear of any
restrictions, claims, liens, pledges, hypothecation and encumbrances of or by
others, and full power and authority to transfer and deliver the Company Shares
to Buyer as contemplated in this Agreement, including all Company Shares held in
trust by any of the Sellers.
Except as set forth in the DISCLOSURE SCHEDULE, neither the execution and
delivery of this Agreement by Sellers nor the consummation of the transactions
contemplated hereby by any or all of them will violate any provision of the
Articles of Incorporation or By-Laws of the Company, nor to the knowledge of the
Sellers will such actions violate, or be in conflict with, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or cause the acceleration of the maturity of any
material debt or obligation pursuant to, or result in the creation or imposition
of any security interest, lien or other encumbrance upon any property or assets
of the Company under any material agreement or commitment to which the Company
is a party or by which the Company is bound, or to which the property of the
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Company is subject, or violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority.
4.1.2 Ownership of the Company Shares. Sellers are the sole owners of
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record of all of the Company Shares, each owning the number of shares set forth
on EXHIBIT A. The shares of the Company set forth on EXHIBIT A after each
Seller's name constitute all of the shares of the Company owned by such Seller
and the Company Shares include all of the issued and outstanding preferred stock
of the Company; and, except as set forth in the DISCLOSURE SCHEDULE, each Seller
has the full right, power and authority to sell and transfer the Company Shares
held by such Seller, free and clear of any lien, encumbrance, charge, equity or
restriction whatsoever. Except as set forth in the DISCLOSURE SCHEDULE, there
are no outstanding subscriptions, options, rights, warrants, convertible
securities, or other agreements, commitments or rights obligating the Sellers or
any of them to transfer any shares to any person or firm.
4.1.3 Capitalization of the Company. As of the date of this Agreement,
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the authorized capital stock of the Company consists of 5,030,218 shares of
preferred stock and 8,000,000 shares of common stock; of which 4,946,471 shares
of preferred stock and, to Sellers' knowledge without investigation, 578,000
shares of common stock are issued and outstanding.
5. SELLERS' COVENANTS AND AGREEMENTS. Sellers hereby afford Buyer
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the following affirmative and negative covenants, thereby agreeing to do or not
to do, or to cause the Company to do or not to do, as the case may be, the
following, the fulfillment of each of which (except for those covenants which
survive or are required to be performed subsequent to the Closing) shall
constitute a condition precedent to the obligations of Buyer hereunder:
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5.1 Pending the Closing, and except as disclosed in the DISCLOSURE
SCHEDULE or otherwise expressly consented to or approved by Buyer in writing,
Sellers hereby covenant and agree that Sellers will use Sellers' best efforts in
order that:
5.1.1 Amendments. No change or amendment shall be made in the Articles
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of
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Incorporation or By-Laws of the Company.
5.1.2 Capital Changes; Dividends; Redemptions. The Sellers will not
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cause or permit the Company to issue or sell any shares of its capital stock or
other securities, reclassify or split-up any such capital stock, declare or pay
any dividends thereon in cash, securities or other property or make any other
distribution with respect thereto, or grant or enter into any options, warrants,
calls or commitments of any kind with respect thereto.
5.1.3 Subsidiaries. The Sellers will not cause or permit the Company to
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organize any new subsidiary, acquire any capital stock or other equity
securities of any corporation or acquire any equity or ownership interest in any
business.
5.1.4 Certain Changes. The Sellers will not cause or take any Board of
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Directors action to authorize the Company to:
(a) Borrow or agree to borrow any funds or incur, or assume or become
subject to, whether directly or by way of guarantee or otherwise, any obligation
or liability (absolute or contingent), except obligations and liabilities
incurred in the ordinary course of business and consistent with past practice;
(b) Pay, discharge or satisfy any claim, liability or obligation (absolute,
accrued, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business and consistent with past
practice of liabilities or obligations reflected or reserved against in the
Balance Sheet or incurred in the ordinary course of business and consistent with
past practice since the date of the Balance Sheet;
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(c) Prepay any obligation having a fixed maturity of more than 90 days from
the date such obligation was issued or incurred;
(d) Permit or allow any of its property or assets (real, personal or mixed,
tangible or intangible) to be subjected to any mortgage, pledge, lien or
encumbrance;
(e) Write down the value of any inventory or write off as uncollectible any
notes or accounts receivable, except for write-downs and write-offs in the
ordinary course of business and consistent with past practice;
(f) Except as set forth in the DISCLOSURE SCHEDULE, cancel any debts or
waive any claims or rights of substantial value or sell, transfer, or otherwise
dispose of any of its properties or assets, except in the ordinary course of
business and consistent with past practice;
(g) Dispose of or permit to lapse any rights to the use of any patent,
trademark, trade name or copyright, or dispose of or disclose to any person any
trade secret, formula, process or know-how not theretofore a matter of public
knowledge;
(h) Except for increases in remuneration due to some salesmen selling more
and hence earning more commission than in the past, grant any increase in the
compensation of officers or employees (including any such increase pursuant to
any bonus, pension, profit sharing or other plan or commitment) or any increase
in the compensation payable or to become payable to any officer or employee
except for salary increases in the ordinary course of business and in accordance
with past practices, other than to officers of the Company;
(i) Make aggregate capital expenditures and commitments in excess of
$25,000 (on a consolidated basis) for additions to property, plant or equipment;
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(j) Pay, loan or advance any amount to, or sell transfer or lease any
properties or assets to, or enter into any agreement or arrangement with, any of
its officers or directors or any affiliate of any of its officers or directors;
(k) Change any of its banking or safe deposit arrangements described in
the DISCLOSURE SCHEDULE;
(l) Grant or extend any power of attorney; act as guarantor, surety, co-
signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation
of any person, corporation, partnership, joint venture, association,
organization or other entity; or
(m) Agree, whether in writing or otherwise, to do any of the foregoing.
5.1.5 No Default. The Sellers shall not cause the Company to do any
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act which will cause a breach of any material contract or commitment of the
Company or which would cause the breach of any material warranty made hereunder.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
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warrants the following, the truth and accuracy of each of which shall constitute
a condition precedent to the obligations of Sellers hereunder:
6.1 Authority and Validity of Agreement and Instruments. The
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execution and delivery to Sellers of this Agreement and the Warrants have been,
or will be at the Closing, duly authorized by the Board of Directors of Buyer
and will remain authorized during the period the Warrants are exercisable. All
of the aforementioned agreements and instruments are, or will be at the Closing,
valid and binding upon the Buyer and are, or will be at the Closing, enforceable
in accordance with their respective terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization or other laws
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affecting generally the enforcement of creditors' rights or the sale of Buyer's
securities and except to the extent that courts may award money damages rather
than specific performance of contractual provisions. The shares of the Buyer's
common stock underlying the Warrants have been, or will be at the date of
issuance, duly registered for public sale and will be freely tradeable on the
date of exercise and will remain freely tradeable thereafter. The provision of
this Section 6.1 shall survive the Closing.
6.2 Organization and Good Standing. Buyer is duly organized, validly
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existing and in good standing under the laws of the State of California. Buyer
has full corporate power and authority to carry on its business as it is now
conducted and is entitled to own, lease or operate the properties and assets it
now owns, leases or operates.
6.3 Material Misstatements or Omissions. No representations or
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warranties by Buyer contained in this Agreement or in any document, statement or
certificate furnished or to be furnished to Sellers or in connection with the
transactions contemplated hereby, contain, or on the Closing Date will contain,
any statement of a material fact known to be untrue, or omit, or on the Closing
Date will omit, to state any material known fact necessary to make the
statements of fact contained therein not misleading.
6.4 No Violation. Neither the execution and delivery of this
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Agreement nor the consummation of the transactions contemplated hereby will
violate any provisions of the Articles of Incorporation or By-laws of Buyer or
any agreement to which Buyer is a party.
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6.5 Brokerage and Finder's Fees. Buyer has not incurred any liability
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to any broker, finder or agent for any brokerage fees, finder's fees or
commissions with respect to the transactions contemplated by this Agreement.
6.6 Authority. Buyer has the full right, power and capacity to
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execute, deliver and perform its obligations under this Agreement, the Warrants
and all other agreements, instruments and documents in connection herewith. The
execution, delivery and performance of this Agreement, the Warrants and all
other agreements, instruments and documents to be executed and delivered by
Buyer in connection herewith (a) do not violate or conflict with Buyer's
Articles of Incorporation or By-Laws, (b) do not conflict with any note,
security agreement, lease, guaranty, license, permit, franchise or other
agreement or arrangement to which Buyer is a party or by which it or its assets
or properties may be bound, or any order, decree, injunction or judgment of any
court, governmental authority or regulatory agency or any local, state or
Federal laws, ordinances, regulations or orders applicable to Buyer, and (c) do
not require the consent, approval or authorization of, or declaration, filing or
registration with any governmental or regulatory authority or any third party.
6.7 No Litigation. There are no claims, actions, suits, proceedings
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or investigations pending or threatened in any court or before any governmental
agency or before any arbitrator, by or against or affecting or relating to Buyer
or any of Buyer's affiliates, at law or equity, which, if adversely determined
by Buyer, would have a material adverse effect upon Buyer, its financial
condition or its business operation or which may affect Buyer's right or ability
to consummate this transaction and fulfill its obligations hereunder.
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6.8 Financial Condition of Buyer. EXHIBIT E contains the annual
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report Form 10-K-SB, which contains a true, complete and correct copy of Buyer's
consolidated Statement of Financial Condition, including all subsidiaries, as of
December 31, 1995 and its consolidated statement of income and Statement of Cash
Flows, including all subsidiaries for the twelve months ended December 31, 1995
(the "Buyer Financial Statement"). The Buyer Financial Statement is: (a) a
statement prepared from the books and records of the Buyer and reviewed by its
independent certified public accountants, (b) prepared substantially in
accordance with the same accounting methods, practices and principles utilized
in connection with the preparation of the last three annual prior financial
statements issued by the Buyer, (c) sets forth fairly and completely the
consolidated financial position and the results of operations of Buyer as at the
relevant dates thereof and for the period covered thereby, (d) contains and
reflects all necessary adjustments for a fair and complete presentation of
Buyer's consolidated financial position and the results of its operations for
the period covered by the Buyer Financial Statement, (e) reflects all
liabilities, realized or unrealized, contingent or not contingent to which the
Company is liable, except for liabilities and obligations incurred in the
ordinary course of business and consistent with past practice since December 31,
1995 and (f) the reserves reflected in the Buyer Financial Statement are
adequate, appropriate and reasonable.
6.9 Offer of Warrants. The shares issuable upon exercise of the
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Warrants will be, when issued, duly and validly authorized and issued, and fully
paid and nonassessable. The offer (as defined in Section 2(3) of the Securities
Act of 1933, as amended (the "Securities Act")) and sale (as defined in Section
2(3) of the Securities Act) of the Warrants and the underlying shares issuable
upon the exercise of the Warrants, including any transactions which may be
deemed included as a part of any
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such offer and sale, have been and will be made in conformity with Section 4(2)
of the Securities Act.
6.10 Registration Statement. The Registration Statement pursuant to
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which the LLK Stock or shares issued upon exercise of the Warrants are to be
registered does not, and will not, contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
included therein, in light of the circumstances under which they were made, not
misleading.
7. COVENANTS AND AGREEMENTS OF BUYER. Buyer hereby affords Sellers
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the following affirmative and negative covenants, thereby agreeing to do or not
to do, or to cause the Company to do or not to do, as the case may be, the
following, the fulfillment of each of which (except for those covenants required
to be performed subsequent to the Closing) shall constitute a condition
precedent to the obligations of Sellers hereunder:
7.1 Secured Lender Agreements. At or prior and as a condition to the
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Closing, Buyer will enter into an agreement with certain secured creditors of
the Company which appear in EXHIBIT F, which agreement shall include the
following provisions:
(a) Buyer will execute and deliver a Settlement Agreement and Stock Pledge
with State Street Bank and Trust Company NA (the "Bank") in the form annexed
hereto as EXHIBIT G;
(b) Buyer will compromise and settle the outstanding debt to the Secured
Lenders appearing in the schedule contained in EXHIBIT F in the aggregate amount
of
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$1,500,000 pursuant to such form of agreements as shall be approved by counsel
for Buyer; and
(c) Bank and Secured Lenders are to provide releases of pledge of stock in
the Company and termination of guaranties consistent with the agreements between
Buyer and Bank.
7.2 Registration Agreement. Buyer will execute the Registration
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Agreement in the form annexed hereto as EXHIBIT H.
8. ABANDONMENT OF AGREEMENT.
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8.1 Failure to Close The transactions contemplated by this Agreement
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may be abandoned by any party at any time subsequent to the close of business on
December 2, 1996 upon delivery of written notice thereof to the other parties if
the Closing shall not have taken place by the close of business on November 29,
1996.
8.2 Mutual Agreement The transactions contemplated by this Agreement
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may be abandoned at any time prior to the Closing by mutual written agreement of
the parties.
8.3 Material Breach. The transactions contemplated by this Agreement
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may be abandoned by Buyer at any time prior to the Closing if there shall have
been a material breach of any covenant of Sellers or any of them contained in
this Agreement and required to be performed on or prior to the Closing or if any
investigation of the Company by Buyer, or the DISCLOSURE SCHEDULE or any
supplement thereto or any other document delivered to Buyer as contemplated by
this Agreement, shall have revealed any facts or circumstances which, in the
sole and exclusive good faith judgment of Buyer, reflect in a material adverse
way on the financial condition, assets,
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liabilities (absolute, accrued, contingent or otherwise), reserves, business,
operations or prospects of the Company.
8.4 Consequences of Abandonment. The abandonment of the transactions
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contemplated by this Agreement in accordance with this section shall be without
liability to any party, or its officers, directors or shareholders, including,
without limiting the generality of the foregoing, any liability for any loss of
the Company resulting from damage to its business relations with sales
representatives, distributors, licensees, customers, suppliers and others having
business relations with it. If the transactions contemplated by this Agreement
are terminated and/or abandoned as provided herein:
(a) Each party will redeliver all documents, work papers and other material
of any other party relating to the transactions contemplated hereby, whether
obtained before or after the execution hereof, to the party furnishing the same;
(b) Each party shall continue the confidentiality of all information it
obtained with respect to the other parties incident to the transactions
contemplated by this Agreement in accordance with the provisions of the
Confidentiality Agreement.
9. CONDITIONS PRECEDENT TO CLOSING.
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9.1 Conditions Precedent to Obligations of Buyer. The Closing shall
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not take place unless all of the following conditions not waived by Buyer have
been fulfilled before, or will be fulfilled at the Closing:
9.1.1 Correctness of Representations and Warranties. There shall be
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no representation or warranty of Sellers contained in this Agreement or in the
DISCLOSURE SCHEDULE or in any Exhibit attached hereto which is untrue or
inaccurate to any material extent or which would permit Buyer to abandon the
transactions contemplated
22
by this Agreement pursuant to the preceding section hereof. Sellers shall
deliver the DISCLOSURE SCHEDULE to Buyer on or prior to Closing. Sellers shall
have the right to update the DISCLOSURE SCHEDULE up to the time of the Closing.
9.1.2 Performance of Covenants and Agreements. There shall be no
---------------------------------------
covenant or agreement of Sellers contained in this Agreement and required to be
performed on or before the Closing which has been breached to any material
extent.
9.1.3 Resignation of Directors. Sellers shall have delivered to Buyer
-------------------------
written resignations of three of the directors of the Company and a release by
each director of any claim against the Company for his services as director
(except for claims to rights of indemnification).
9.1.4 Repayment of Loans. Prior to the Closing, all loans and advances
------------------
made by the Company to any individual comprising Seller or any member of their
families, or any trust or other entity controlled by them shall be repaid
together with any interest accrued thereon.
9.1.5 No Government Proceeding or Litigation. Except as set forth in
--------------------------------------
the DISCLOSURE SCHEDULE, no suit, action, investigation, inquiry or other
proceeding by any governmental body or other person or legal or administrative
proceeding shall have been instituted or threatened which (a) questions the
validity or legality of the transactions contemplated hereby, (b) in the sole
and exclusive judgment of Buyer materially impairs Buyer's ability to exercise
control over or manage the business and affairs of the Company after the
Closing, or (c) in the sole and exclusive judgment of Buyer might have a
material adverse effect on the business or financial condition of the Company.
23
9.1.6 No Injunction. On the Closing Date, there shall be no effective
-------------
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated hereby which
the Buyer deems unacceptable in its sole discretion.
9.1.7 Material Change. From the date of the Balance Sheet to the
---------------
Closing Date, the Company shall not have suffered any material adverse change
(whether or not such change is referred to or described in any supplement to the
DISCLOSURE SCHEDULE) in its business, financial condition, working capital,
assets, liabilities (absolute, accrued, contingent or otherwise), reserves or
operations.
9.1.8 Consents Obtained. All required consents referred to herein
-----------------
shall have been obtained.
9.1.9 Secured Creditor Agreements. The execution and delivery of each
---------------------------
of (a) the Settlement Agreement between Buyer and Bank, substantially in the
form annexed hereto as EXHIBIT J, (b) the execution and delivery of each
settlement agreement between Buyer and the Secured Lenders, and (c) all other
documents and agreements referred to therein.
9.2 Conditions Precedent to the Obligations of Sellers. The
----------------------------------------------------
Closing shall not take place unless all of the following conditions not waived
by Sellers are fulfilled before, or will be fulfilled at, the Closing:
9.2.1 Correctness of Representations and Warranties. There shall be no
---------------------------------------------
representation or warranty of Buyer contained in this Agreement which is untrue
or
24
inaccurate to any material extent or which would permit Sellers to abandon the
transactions contemplated by this Agreement pursuant to the preceding section
hereof.
9.2.2 Purchase Price. Sellers shall have received the Purchase Price
--------------
to be paid in accordance with Section 1.2 hereof.
9.2.3 Performance of Covenants and Agreement. There shall be no
--------------------------------------
covenant or agreement of Buyer contained in this Agreement and required to be
performed on or before the Closing which has been breached to any material
extent.
9.2.4 No Governmental Proceeding or Litigation. No suit, action,
----------------------------------------
investigation, inquiry or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which (a) questions the validity or legality of the transactions
contemplated hereby, (b in the sole and exclusive judgment of the Sellers
materially affects Buyer's ability to exercise control over or manage the
business or affairs of the Company after the Closing, or (c) in the sole and
exclusive judgment of the Sellers might have a material effect on the business
or financial condition of Buyer.
9.2.5 No Injunction. On the Closing Date, there shall be no effective
-------------
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions completed hereby which
the Seller deems unacceptable in its sole discretion.
9.2.6 Material Change. From the date of the Buyer Balance Sheet to the
---------------
Closing Date, the Buyer shall not have suffered any material adverse change in
its
25
business, financial condition, working capital, assets, liabilities (absolute,
accrued, contingent or otherwise), reserves or operations.
9.2.7 Consents Obtained. All required consents referred to herein
-----------------
shall have been obtained.
9.2.8 Opinion of Buyer's Counsel. Buyer shall have delivered to
--------------------------
Sellers an opinion of Xxxxxxx X. Xxxxx, Esq., counsel to Buyer, dated as of the
date of the Closing, in form and substance satisfactory to Sellers, covering the
matters set forth in EXHIBIT I hereto.
9.2.9 Repayment of Loans. Prior to the Closing, all loans and advances
------------------
made by the Company to Buyer shall be repaid together with any interest accrued
thereon.
9.2.10 Secured Creditor Agreements. The execution and delivery of each
---------------------------
of (a) the Settlement Agreement between Buyer and Bank, and the Secured Lenders
substantially in the form annexed hereto as EXHIBIT G, and (b) all other
documents and agreements referred to therein.
9.2.11 Execution of Registration Agreement. The Registration Agreement
-----------------------------------
shall have been duly executed and delivered by the parties thereto.
9.3 Regulatory Approvals. The Closing shall not take place until any
---------------------
required regulatory approvals have been obtained.
10. SELLER'S INDEMNITIES.
--------------------
10.1 Indemnity Obligation. Subject to the other express provisions of
--------------------
this Section 10, Sellers shall indemnify, defend and hold Buyer harmless against
and in respect of any and all third party claims, demands, losses, costs,
expenses, obligations,
26
liabilities, judgments, damages, recoveries, and deficiencies, including
interest, penalties and reasonable attorneys' fees, that Buyer shall incur or
suffer which arise, result from or relate to any Event of Indemnity (as
hereafter defined).
10.2 Event of Indemnity. The occurrence of any one or more of the
------------------
following events which expose Buyer to a third party claim ("Event of
Indemnity") shall give Buyer the right to indemnity as provided in Section 10.1
hereof:
(a) Any material untruth, omission or inaccuracy of the Sellers'
representations and warranties set forth in this Agreement, in the DISCLOSURE
SCHEDULE or in any Exhibit or Schedule attached hereto or in any certificate
required of Sellers to be delivered hereunder;
(b) Any material breach of Sellers' covenants and agreements set forth
herein shall be an Event of Indemnity; or
(c) Any and all claims, demands, suits, actions, causes of action,
proceedings, losses, liabilities, judgments (including, but not limited to,
reasonable costs and reasonable legal and other expenses), incident to any of
the matters indemnified and defended against in Section 10.2.
10.3 Procedure for Making Claims for Indemnity. In the event that
-----------------------------------------
Buyer shall have any claim or claims for indemnity under Section 10 of this
Agreement, Buyer (the "Indemnified Person" upon the giving of written notice)
shall give written notice to Sellers of the nature and basis of such claim or
claims and the amount (or estimated amount) thereof. The Indemnified Person
shall provide the Sellers with copies of any claims or other documents received
and make available to the Sellers all relevant information (in its possession)
which is material to the defense of any losses or claims
27
against the Indemnified Person which shall serve as the basis for a claim by the
Indemnified Person relating to such losses or claims pursuant to the terms
hereof. The Seller or Sellers responsible for the event which gave rise to the
claimed for indemnity agrees to defend, contest or otherwise protect the Buyer
against any such suit, action, investigation, claim or proceeding at such
Sellers' sole cost and expense. Buyer shall have the right, but not the
obligation, to participate at its own expense in the defense thereof by counsel
of the Buyer's choice. In the event that such Sellers fail timely to defend,
contest or otherwise protect against any such suit, action, investigation, claim
or proceeding, the Buyer shall have the right to do so, including, without
limitation, the right to make any compromise or settlement thereof, and Buyer
shall be entitled to recover the entire cost thereof from such Sellers to the
extent of the Buyer's rights to indemnification hereunder, including without
limitation, reasonable attorneys' fees, disbursements and amounts paid as the
result of such suit, action, investigation, claim or proceeding. At such time
and to the extent that Buyer has made payment with respect to a third party
claim for which it is entitled to indemnity hereunder and/or incurred expenses
in connection with defending such claim, Buyer will be entitled to an offset
against any balance due to such Sellers. In the event that there are no further
amounts due such Sellers, Buyer shall be entitled to recover from such Sellers
the amount not offset to the extent of Buyer's rights to indemnification
hereunder. If Sellers contend that the Buyer is not entitled to the
indemnification claimed, Sellers shall give written notice to the Buyer of
Sellers' objection to such claim within thirty (30) days after the date that the
notice of such claim is first received by Sellers. In the event that written
notice of objection is received by the Buyer within such thirty (30) day period,
such dispute shall be finally resolved by means of an arbitration proceeding.
The costs of the arbitration shall be born equally by the parties, except that
each party shall pay its own attorneys' fees. Any arbitration award, whether in
favor of the Buyer
28
or the Sellers shall include interest on the amount of the award at the rate of
5% simple per annum. In the event that written notice of objection is not
delivered to the Buyer by Sellers within such thirty (30) day period, or if
Sellers accept the claim for indemnity, or if the arbitration proceeding results
in any award in favor of the Buyer, the liability of Sellers under these
indemnity provisions shall be deemed conclusive.
If any claim or lawsuit involves a matter which falls within the scope of
the Company's insurance coverage, then and in such event the provisions of this
Section 10 shall apply only with respect to any claims incurred by the
Indemnified Person, that exceed the amounts payable to such Indemnified Person
by the insurance carrier on account of such claim. The parties agree to
promptly notify the insurance carrier of the Company of all claims that fall
within the scope of the relevant insurance coverage.
10.4 Joint and Several Indemnity. The indemnity obligations of
---------------------------
Sellers shall be joint and several. As to any joint obligation, in the first
instance, Buyer will seek to recover from such Sellers in proportion to the
portion of the Purchase Price received and receivable by each such Seller. A
dispute between or among the individual Sellers shall not affect or limit
Buyer's indemnity rights under Section 10.1.
10.5 Limitation on Indemnity. Notwithstanding anything to the
-----------------------
contrary in this Agreement, in no event shall the indemnity obligations of any
of the Sellers exceed:
(a) that portion of the Purchase Price paid at Closing in LLK Shares,
Warrants, cash or otherwise to such Seller and not paid in turn by such Seller
to the Bank or the Secured Lenders, or any of them, and
(b) Contingent Payments received or to be received by such Seller.
29
11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES Each of the
------------------------------------------
representations and warranties made by Sellers and made by Buyer shall survive
the Closing of the transactions contemplated in this Agreement, provided
however, that the right of Indemnity shall cease if action is not taken by the
Indemnified Person prior to the fifth annual anniversary of the Closing.
It is expressly understood and agreed that neither the Company, the
Sellers, nor the Buyer, nor their officers or agents has made any warranty or
agreement, express or implied, as to the tax consequences of the transactions
contemplated by this Agreement or the tax consequences of any action pursuant to
or growing out of this Agreement. The parties agree to treat all payments
required to be made under this Agreement or any exhibit thereto in a consistent
manner when reporting all of the transactions for tax purposes.
12. OTHER REMEDIES.
--------------
12.1 Remedies. The remedies provided for in Section 10 regarding
--------
Events of Indemnity are intended to be exclusive as to the events giving rise to
those Events of Indemnity. As to all other events, each party shall have all
other remedies now or hereafter existing at law or in equity or by statute or
otherwise, and the election of any one or more remedies shall not constitute a
waiver of the right to pursue other available remedies.
13. RELATED MATTERS.
---------------
13.1 Confidentiality. Each party hereto will hold and will cause its
---------------
consultants and advisors to hold in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law, all
30
documents and information concerning the other party furnished it by such other
party or its representatives in connection with the transactions contemplated by
this Agreement (except to the extent that such information can be shown to have
been (i) previously known by the party to which it was furnished, (ii) in the
public domain through no fault of the party to which it was furnished, or (iii)
later lawfully acquired from other sources other than by the party to which it
was furnished, and each party will not release or disclose such information to
any other person, except its auditors, attorneys, financial advisors, bankers
and other consultants and advisors in connection with this Agreement.
13.2 Disclosure Schedule. Sellers will deliver a complete DISCLOSURE
-------------------
SCHEDULE to Buyer on or prior to the Closing, except that such DISCLOSURE
SCHEDULE shall be subject to amendment or modification and shall be amended or
modified based on events occurring subsequent to the delivery of the DISCLOSURE
SCHEDULE and prior to the Closing.
13.3 Non-Solicitation of Employees. From the date hereof until the
-----------------------------
expiration of a period of one year following the date hereof, neither the
Sellers, nor any entity which they are then in control thereof, shall solicit
the employment or services as an employee, any person who is on the date hereof
is an officer of the Company.
14. GENERAL PROVISIONS.
------------------
14.1 Notices. All notices, requests, demands, claims and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) if personally delivered, (ii) if mailed, five business days after
having been sent by registered or certified mail, return receipt requested,
postage prepaid, addressed to the intended recipient as set forth below, (iii)
if given by telex or telecopier, once such
31
notice or other communication is transmitted to the telex or telecopier number
specified below and the appropriate answer back or telephonic confirmation is
received, provided that such notice or other communication is promptly
thereafter mailed in accordance with the provisions of clause (ii) above, or
(iv) if sent through an overnight delivery service in circumstances to which
such service guarantees next day delivery, the day following being so sent:
If to Buyer:
THE L. L. XXXXXXXXXXXXX CO., INC.
00000 Xxxxxxxx
Xxxxxx Xxxxx Xxxxxxxxx, XX. 00000
Facsimile (000) 000-0000
Copy to:
Xxxxxxx X. Xxxxx, Esq.
00 Xxxxxxxxxxx
Xxxx Xxxxxx, XX 00000
Facsimile (000) 000-0000
32
If to Sellers:
(See addresses set forth on EXHIBIT A)
Any party may give any notice, request, demand, claim or other
communication hereunder using any other means (including ordinary mail or
electronic mail), but no such notice, request, demand, claim or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any party may
change the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other parties notice
in the manner herein set forth.
14.2 Arbitration. The parties hereby agree to submit all
-----------
controversies, claims and matters of difference arising out of or relating to
this Agreement and the transactions contemplated hereby to arbitration before
three arbitrators according to the rules and practices of the American
Arbitration Association from time to time in force. Such arbitration shall be
conducted in Boston, Massachusetts. This submission and agreement to arbitrate
shall be specifically enforceable. Without limiting the generality of the
foregoing, the following shall be considered controversies for this purpose: (a)
all questions relating to the breach of any obligation, warranty or condition
hereunder; (b) failure of any party to deny or reject a claim or demand of any
other party; and (c) all questions as to whether the right to arbitrate any
question exists. Arbitration may proceed in the absence of any party if written
notice (pursuant to the American Arbitration Association's rules and
regulations) of the proceedings has been given to such party. The parties agree
to abide by all awards rendered in such proceedings.
33
Such awards shall be final and binding on all parties to the extent, and in the
manner, provided by Massachusetts statute. Such awards shall not be subject to
appeal. All such awards may be filed with the Clerk of the appropriate court as
a basis of judgment and of the issuance of execution for its collection and, at
the election of the party making such filing, with the clerk of one or more
other courts, state or federal, having jurisdiction over the party against whom
such an award is rendered or the property of said party.
14.3 Entire Agreement. This Agreement and the Exhibits, Schedules and
----------------
certificates specifically referred to herein or required to be delivered
pursuant to the terms hereof represent the entire agreement of the parties
hereto with respect to the subject matter hereof superseding all prior
agreements, understandings, discussions, negotiations, representations and
commitments of any kind. This Agreement may not be amended or supplemented, nor
may any rights hereunder be waived, except in a writing signed by each of the
parties affected thereby.
14.4 Section Headings. The section headings in this Agreement are
----------------
included for convenience only, are not a part of this Agreement and shall not be
used in construing it.
14.5 Severability. In the event that any provision or any part of any
------------
provision of this Agreement is held to be illegal, invalid or unenforceable in
any jurisdiction, as to such jurisdiction, such illegality, invalidity or
unenforceability shall not affect the validity or enforceability of any other
provision or part hereof. Any such illegality, invalidity or unenforceability
shall not invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by law, the parties hereby waive any
provision of law that renders any provision illegal, invalid or unenforceable in
any respect. In
34
addition, in the event of any such illegality, invalidity or unenforceability,
the parties agree that it is their intention and agreement that such provision
which is held or determined to be illegal, invalid or unenforceable as written,
in any jurisdiction shall nonetheless be in force and binding to the fullest
extent permitted by the law of the jurisdiction as though such provision had
been written in such a manner and to such an extent as to be enforceable under
the circumstances. Without limiting the foregoing, with respect to any
restrictive covenant contained in this Agreement or in its exhibits, if it is
determined that any such provision is excessive as to duration or scope, it is
intended that it nonetheless be enforced for such shorter duration or with such
narrower scope as will render it enforceable.
14.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
14.7 Further Assurances. Each party hereto shall execute and deliver
------------------
such instruments and take such other actions as the other party or parties, as
the case may be, may reasonably require in order to carry out the intent of this
Agreement.
14.8 Waiver of Compliance. Any failure of the Sellers, on the one
--------------------
hand, or Buyer, on the other, to comply with any obligation, agreement or
condition herein may be expressly waived in writing by the party having the
right to insist upon performance of such obligation, agreement or condition; but
such waiver or failure to insist upon strict compliance with such obligation,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
14.9 Expenses. All expenses incurred by or on behalf of Sellers in
--------
connection with the preparation, authorization, execution and performance of
this Agreement
35
(including but not limited to all fees and expenses of agents, representatives
and counsel shall be paid by the Company. Buyer shall pay all expenses incurred
by or on behalf of Buyer in connection with the preparation, authorization,
execution and performance of this Agreement, including but not limited to all
fees of its agents, representatives and counsel.
14.10 Assignment. This Agreement and all of the provisions hereof
----------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties (it
being understood that certain payments to be made hereunder may be assigned to
the Bank and/or the Secured Lenders), except by operation of law and except that
Buyer may assign its rights, but not its obligations, under this Agreement to
any wholly owned subsidiary of Buyer. If such assignment shall be made by
Buyer, such subsidiary shall be entitled to all of the rights and shall assume
all of the obligations of Buyer hereunder, provided, however, that Buyer shall
--------
guarantee the payment and performance of such subsidiary's obligations under
this Agreement, shall be and remain primarily liable therefor and shall deliver
evidence thereof reasonably satisfactory to the Sellers.
14.11 Publicity Neither the Company nor Buyer shall make or issue,
---------
or cause to be made or issued, any announcement or written statement concerning
this Agreement or the transactions contemplated hereby for dissemination to the
general public prior to the Closing Date without the prior consent of the other
party. This provision shall not apply, however, to any announcements made after
the Closing Date, or to any announcement or written statement required to be
made by law or the regulations of any federal or state governmental agency or
any stock exchange, except
36
that the party required to make such announcement shall, whenever practicable,
consult with the other party concerning the timing and content of such
37
announcement before such announcement is made. The parties acknowledge and
consent that Buyer shall issue a press release announcing that Buyer has
purchased a controlling interest in the Company following the execution of this
Agreement.
14.12 Governing Law. This Agreement and the legal relations among the
-------------
parties hereto shall be governed by and construed in accordance with the laws of
the Commonwealth of Massachusetts.
14.13 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or corporation other than the parties hereto
and their successors or assigns, any rights or remedies under or by reason of
this Agreement.
14.14 Construction:
-------------
14.14.1 No Strict Construction. The language used in this Agreement will
----------------------
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
other party. Whenever required by the context, any gender shall include any
other gender, the singular shall include the plural and the plural shall include
the singular. The words "herein", "hereof ", "hereunder" and words of similar
import shall refer to the Agreement as a whole and not to a particular section.
14.14.2 Independent Significance. The parties hereto intend that each
------------------------
representation, warranty and covenant contained herein shall have independent
significance. If any party has breached any representation, warranty or
covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative
38
levels of specificity) that the party has not breached, shall not detract from
or mitigate the fact that the party is in breach of the first representation,
warranty or covenant.
SIGNATURES APPEAR ON THE FOLLOWING PAGE
39
IN WITNESS WHEREOF, the parties have duly executed Agreement as of the date
first above mentioned.
THE L. L. XXXXXXXXXXXXX CO., INC.
By: /s/ XXXXX X. XXXXXXXXXXXXX
---------------------------
President & CEO
MERCHANT PARTNERS, LIMITED PARTNERSHIP
By: Merchant Advisors, Limited Partnership, General Partner
By: Merchant Development Corp., General Partner
By: /s/ XXXXXXX X. BANK
---------------------------
General Partner
40
NEW ENTERPRISE ASSOCIATES IV, LIMITED PARTNERSHIP
By: NEA Partners IV, Limited Partnership, General Partner
By: /s/ XXXXX XXXXXX
-----------------
General Partner
41
CONSUMER VENTURE PARTNERS I, L.P.
By: Consumer Venture Associates, L.P., General Partner
By: /s/ XXXXXXX X. XXXXXX III
--------------------------
General Partner
NORTH ATLANTIC VENTURE FUND, L.P.
By: North Atlantic Capital Partners, L.P., General Partner
By: /s/ XXXXXXX X. XXXXXX
--------------------------
General Partner
THE VERMONT VENTURE CAPITAL FUND, L.P.
By: Vermont Venture Capital Partners, L.P., General Partner
By: /s/ XXXXXXX X. XXXXXX
--------------------------
General Partner
42
EXHIBIT "A"
ALLOCATION OF PROCEEDS
Number of
% of Preferred LLK Shares
to be Rec'd.
Consumer Venture Partners I, L.P. 80.86% $ 1,353,400
Three Pickwick Plaza
Greenwich, CT 06830
Vermont Capital Venture Fund 4.33% $ 72.527.50
00 Xx. Xxxx Xx.
Xxxxxxxxxx, XX 00000
North Atlantic Venture Fund 9.81% $ 165,322.50
00 Xxxxxx Xx
Xxxxxxxx XX 00000
Merchant Partners 5.00% $ 83,750.00
0000 Xxxxxxx Xx Xxxxx 000
Xxxxxxxx, XX 00000
Total Preferred 100.00% $1,675,000.00
43
Common
Consumer Venture Partners I, L.P. 9.90% $4,011.18
(see above)
44
EXHIBIT "A-1"
Common Stock Purchase Warrants
Xxxxx Number Issue Date Expiration Date Exercise Price
NEA 53,396.13 07/13/91 01/01/99 1.55
cvp I 37,396.45 07/13/91 01/01/99 1.55
NAV 10,694.52 07/18/91 01/01/99 1.55
vcv 4,694.52 07/18/91 01/01/99 1.55
TOTAL 106,181.62
45
EXHIBIT "B-1"
46
EXHIBIT "B-2"
THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH
OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS
MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A
PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS
EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE CORPORATION,
SUCH OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT.
WARRANT
For the Purchase of Common Stock, No Par Value, of
THE L.L. XXXXXXXXXXXXX CO., INC.
(Incorporated Under the Laws of the State of California)
Void After 5 P.M. November ___, 0000
Xxxxxxx to Purchase
( ) Shares
---------------------------------------------
47
THIS IS TO CERTIFY, that, for value received,
______________________________ (the "Holder") or registered assigns, is
entitled, subject to the terms and conditions hereinafter set forth, on or after
January 1, 1998 and at any time prior to 5 P.M., California Time, on November
___, 2001 but not thereafter, to purchase such number of shares (the "Shares")
of Common Stock, no par value (the "Common Stock"), of THE L.L. XXXXXXXXXXXXX
CO., INC., a California corporation (the "Company"), from the Company as is set
forth above and upon payment to the Company of $____ per share (the "Purchase
Price") if and to the extent this Warrant is exercised, in whole or in part,
during the period this Warrant remains in force, subject in all cases to
adjustment as provided in Article II hereof, and to receive a certificate or
certificates representing the Shares so purchased, upon presentation and
surrender to the Company of this Warrant, with the form of subscription attached
hereto duly executed, and accompanied by payment of the Purchase Price of each
Share purchased.
1. TERMS OF THE WARRANT
2. Time of Exercise. Subject to the provisions of Sections 1.5 hereof,
----------------
this Warrant may be exercised at any time and from time to time after 9:00 A.M.,
California time, on January 1, 1998 (the "Exercise Commencement Date"), but no
later than 5:00 P.M., November ___, 2001 (the "Expiration Time") at which it
shall become void, and all rights hereunder shall thereupon cease.
3. Manner of Exercise.
------------------
4. The Holder may exercise this Warrant, in whole or in part, upon
surrender of this Warrant with the form of subscription attached hereto duly
executed, to the Company at its corporate office in Rancho Santa Margarita,
California together with the full Purchase Price for each Share to be purchased
in lawful money of the United States, or by certified check, bank draft or
postal or express money order payable in United States dollars to the order of
the Company, and upon compliance with and subject to the conditions set forth
herein.
5. Upon receipt of this Warrant with the form of subscription duly
executed and accompanied by payment of the aggregate Purchase Price for the
Shares for which this Warrant is then being exercised, the Company shall cause
to be issued certificates for the total number of whole Shares for which this
Warrant is being exercised in such denominations as
48
are required for delivery to the Holder, and the Company shall thereupon deliver
such certificates to the Holder or its nominee.
6. In case the Holder shall exercise this Warrant with respect to less
than all of the Shares that may be purchased under this Warrant, the Company
shall execute a new Warrant for the balance of the Shares that may be purchased
upon exercise of this Warrant and deliver such new Warrant to the Holder.
7. The Company covenants and agrees that it will pay when due and payable
any and all taxes which may be payable in respect of the issue of this Warrant,
or the issue of any Shares upon the exercise of this Warrant. The Company shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issuance or delivery of this Warrant or of the Shares
in a name other than that of the Holder at the time of surrender, and until the
payment of such tax the Company shall not be required to issue such Shares.
1.2.5 Right to Convert Warrant.
(a) The Company and the Holder Shall have the right (the
"Conversion Right") to convert this Warrant, in whole or in part, any time prior
to the Expiration Time into shares of Common Stock. Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any Purchase Price) that number of shares of Common Stock equal to
the quotient obtained by dividing (x) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the aggregate Purchase
Price for the Common Stock then issuable upon exercise of this Warrant (the
"Warrant Shares") in effect immediately prior to the exercise of the Conversion
Right from the aggregate Fair Market Value (equal to the average closing bid
price of the Company's common stock on NASDAQ for the five trading days
immediately prior to the exercise of the Conversion Right) for the Warrant
Shares immediately prior to the exercise of the Conversion Right) by (y) the
Fair Market Value of one share of Common Stock immediately prior to the exercise
of the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at
any time, or from time to time, after the Exercise Commencement Date and prior
to the Expiration Time, on any business day by delivering a written notice (the
"Conversion Notice") to the
49
Company exercising the Conversion Right and (i) specifying the total number of
shares of Common Stock the Holder will purchase pursuant to such conversion and
(ii) a place and date not less than one nor more than 20 business days from the
date of the Conversion Notice for the closing of such purchase.
(c) The Conversion Right may be exercised by the Company,
at any time, or from time to time, after the Exercise Commencement Date and
prior to the Expiration Time, on any business day by delivering a written notice
(the "Conversion Notice") to the Holder exercising the Conversion Right as to
the total number of shares of Common Stock the Holder will receive pursuant to
such conversion of the balance of the Shares that may be purchased upon exercise
of this Warrant, and (ii) a place and date not less than one nor more than 20
business days from the date of the Conversion Notice for the closing of such
purchase.
(d) At any closing under this subsection 1.2.5, (i) the
Holder will surrender the Warrant and (ii) the Company will deliver to the
Holder a certificate or certificates for the number of shares of Common Stock
issuable upon such conversion, together with cash in lieu of any fraction of a
share.
8. Exchange of Warrant. This Warrant may be split-up, combined or
-------------------
exchanged for another Warrant or Warrants of like tenor to purchase a like
aggregate number of Shares. If the Holder desires to split-up, combine or
exchange this Warrant, he shall make such request in writing delivered to the
Company at its corporate office and shall surrender this Warrant and any other
Warrants to be so split-up, combined or exchange, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split-up,
combination or exchange which will result in the issuance of a Warrant entitling
the Holder to purchase upon exercise a fraction of a Share. The Company may
require the Holder to pay a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any split-up, combination or
exchange of Warrants.
9. Holder as Owner. Prior to due presentment for registration of
---------------
transfer of this Warrant, the Company may deem and treat the Holder as the
absolute owner of this Warrant (notwithstanding any notation of ownership or
other writing hereon) for the purpose of any exercise hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
50
10. Transfer and Assignment. Until its expiration, this Warrant shall be
-----------------------
assignable and transferable in accordance with and subject to the provisions of
the Securities Act of 1933.
11. Method for Assignment. Any assignment permitted hereunder shall be
---------------------
made by surrender of this Warrant to the Company at its principal office with
the form of assignment attached hereto duly executed and funds sufficient to pay
any transfer tax. In such event, the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants which carry the same rights upon
presentation thereof at the corporate office of the Company together with a
written notice signed by the Holder, specifying the names and denominations in
which such new Warrants are to be issued.
12. Rights of Holder. Nothing contained in this Warrant shall be
----------------
construed as conferring upon the Holder the right to vote or to consent or to
receive notice as a stockholder in respect of any meetings of stockholders for
the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of this Warrant and prior to its exercise, any of the following
shall occur:
13. the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings; as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
14. the Company shall offer to the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
15. there shall be proposed any capital reorganization or reclassification
of the Common Stock, or a sale of all or substantially all of the assets of the
Company, or a consolidation or merger of the Company with another entity; or
51
16. there shall be proposed a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to be mailed to
the Holder, at the earliest practicable time (and, in any event, not less than
thirty (30) days before any record date or other date set for definitive
action), written notice of the date on which the books of the Company shall
close or a record shall be taken to determine the stockholders entitled to such
dividend, distribution, convertible or exchangeable securities or subscription
rights, or entitled to vote on such reorganization, reclassification, sale,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be. Such notice shall also set forth such facts as shall indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Purchase Price and the kind and amount of the Common Stock and other
securities and property deliverable upon exercise of this Warrant. Such notice
shall also specify the date as of which the holders of the Common Stock of
record shall participate in said distribution or subscription rights or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, consolidation,
merger, dissolution, liquidation or winding up, as the case may be (on which
date, in the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, the right to exercise this Warrant shall terminate).
Without limiting the obligation of the Company to provide notice to the holder
of actions hereunder, it is agreed that failure of the Company to give notice
shall not invalidate such action of the Company.
17. Lost Certificates. If this Warrant is lost, stolen, mutilated or
-----------------
destroyed, the Company shall, on such reasonable terms as to indemnity or
otherwise as it may impose (which shall, in the case of a mutilated Warrant,
include the surrender thereof, issue a new Warrant of like denomination and
tenor as, and in substitution for, this Warrant, which shall thereupon become
void.
18. Covenants of the Company. The Company covenants and agrees as
------------------------
follows:
19. at all times it shall reserve and keep available for the exercise of
this Warrant such number of authorized Shares as are sufficient to permit the
exercise in full of this Warrant; and
52
20. all Shares when issued upon the exercise of this Warrant will be
validly issued, fully paid, non-assessable and free of preemptive rights.
21. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES PURCHASABLE UPON
EXERCISE
22. Recapitalization. In case the Company shall, while this Warrant
----------------
remains unexercised, in whole or in part, and in force effect a recapitalization
of such character that the Shares purchasable hereunder shall be changed into or
become exchangeable for a larger or smaller number of shares, then, after the
date of record for effecting such recapitalization, the number of Shares of
Common Stock which the Holder hereof shall be entitled to purchase hereunder
shall be increased or decreased, as the case may be, in direct proportion to the
increase or decrease in the number of shares of Common Stock by reason such
recapitalization, and of the Purchase Price, per share, whether or not in effect
immediately prior to the time of such recapitalization, of such recapitalized
Common Stock shall in the case of an increase in the number of such Shares be
proportionately reduced, and in the case of a decrease in the number of such
Shares shall be proportionately increased. For the purposes of this Section
2.1, a stock dividend, stock split-up or reverse split shall be considered as a
recapitalization and as an exchange for a larger or smaller number of shares, as
the case may be.
23. Merger or Consolidation. In case of any consolidation of the Company
-----------------------
with, or merger of the Company into, any other corporation, or in case of any
sale or conveyance of all or substantially all of the assets of the Company
other than in connection with a plan of complete liquidation of the Company,
then, as a condition of such consolidation, merger or sale or conveyance,
adequate provision shall be made whereby the Holder shall thereafter have the
right to purchase and receive, upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of Shares of Common Stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock or securities as may be issued in
connection with such consolidation, merger or sale or conveyance, with respect
to or in exchange for the number of outstanding shares of Common Stock equal to
the number of shares of Common Stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
consolidation, merger or sale or conveyance, not taken place, and in any such
case appropriate provision shall be made with respect to the rights and
interests of the Holder of this Warrant to the end that the provisions hereof
shall be applicable as nearly as may be in relation to any shares of stock or
securities thereafter deliverable upon the exercise hereof.
24. Dilution.
--------
53
25. In case the Company shall, while this Warrant remains unexercised, in
whole or in part, and in force, issue (otherwise than by stock dividend or
split-up or reverse split) or sell shares of its Common Stock (hereinafter
referred to as "Additional Shares") for a consideration per share (before
deduction of expenses or commissions or underwriting discounts or allowances in
connection therewith) which shall be less than the Purchase Price, per share, in
effect immediately prior to the time of the issuance or sale of such Additional
Shares, then after the date of such issuance or sale, the Purchase Price per
share shall be reduced to a price determined by dividing (i) an amount equal to
the total amount of shares of Common Stock outstanding immediately prior to the
time of such issuance or sale multiplied by such Purchase Price per share as in
effect immediately prior to the issuance of such additional shares, and then
adding the consideration (before deduction of expenses or commission or
underwriting discounts or allowances in connection therewith), if any, received
by the Company upon such issuance or sale of such additional shares, by (ii) the
total number of shares of Common Stock outstanding after the date of the
issuance or sale of such Additional Shares, and the number of Shares of Common
Stock which the Holder shall be entitled to purchase hereunder at each such
adjusted Purchase Price per share, at the time such adjusted Purchase Price per
share, shall be in effect, shall be the number of whole shares of Common Stock
obtained by multiplying such Purchase Price Per Share, before such adjustment,
by the number of Shares of Common Stock purchasable upon exercise of the Warrant
immediately before such adjustment and dividing the product so obtained by such
adjusted Purchase Price per share.
26. In case the Company shall, while this Warrant remains unexercised, in
whole or in part, and in force, issue or grant any rights to subscribe for or to
purchase, or any option for the purchase of Common Stock or any shares of stock
convertible into or exchangeable for Common Stock (shares of stock convertible
or exchangeable for Common Stock being hereafter referred to as "Convertible
Securities"), or issue or sell Convertible Securities and the price per share
for which Common Stock is issuable upon the exercise of such rights or options
or upon conversion or exchange of such Convertible Securities at the time such
Convertible Securities first become convertible or exchangeable (determined by
dividing (i) in the case of any issuance or grant of any such rights or options,
the total amount, if any, received or receivable by the Company as consideration
for the issuance or grant of such rights or options, plus minimum aggregate
amount of additional consideration, if any, payable to the Company upon
conversion or exchange of such Convertible Securities at the time such
Convertible Securities first become convertible or exchangeable, or (ii) in the
case of an issuance or sale of Convertible Securities other than where the same
are issuable upon the exercise of any such rights or options, the total amount,
if any, received or receivable by the Company as consideration for the issuance
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 of such Convertible Securities at the time such Convertible Securities
first become convertible or exchangeable, by, in either case (iii) the total
maximum number of shares of
54
Common Stock issuable upon the exercise of such rights or options or upon the
conversion or exchange of such Convertible Securities at the time such
Convertible Securities first become convertible or exchangeable) shall be less
than either or both of the two Purchase Prices hereunder, per share, whether or
not in effect immediately prior to the time of the issuance or grant of such
rights or options or the issuance or sale of such Convertible Securities, then
the total maximum number of shares of Common Stock issuable upon the exercise of
such rights or options or upon conversion or exchange of the total maximum
amount of such Convertible Securities at the time such Convertible Securities
first become convertible or exchangeable, shall (as of the date of the issuance
or grant of such rights or options or, in the case of the issuance or sale of
Convertible Securities other than where the same are issuable upon the exercise
of rights or Options, as of the date of such issuance or sale) be deemed to be
outstanding and to have been issued for said price per share; provided, that (A)
no further adjustment of the Purchase Price per share shall be made upon the
actual issuance of such Common Stock upon the exercise of such rights or options
or upon the conversion or exchange of such Convertible Securities or upon the
actual issuance of Convertible Securities where the same are issuable upon the
exercise of such rights or options; and (B) rights or options issued or granted
pro rata to stockholders without consideration and Convertible Securities
issuable by way of dividend or other distribution to stockholders shall be
deemed to have been issued or granted at the close of business on the date fixed
for the determination of stockholders entitled to such rights, options or
Convertible Securities and shall be deemed to have been issued without
consideration; and (C) if, in any case, the total maximum number of shares of
Common Stock issuable upon exercise of such rights or options or upon conversion
or exchange of such rights or options or upon conversion or exchange of such
Convertible Securities is not, in fact, issued and the rights to exercise such
right or option or to convert or exchange such Convertible Securities shall have
expired or terminated, then, and in any such event, the Purchase Price, per
share, as adjusted, shall be appropriately readjusted at the time of such
expiration or termination. In such case, each Purchase Price per share which is
greater than the price per share for which Common Stock is issuable upon the
exercise of such rights or options or upon conversion or exchange of such
Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable, as determined in this subsection (b) shall
thereupon be reduced to a price determined by dividing (1) an amount equal to
(x) the total number of shares of Common Stock outstanding immediately prior to
the time of the issuance or grant of such rights or options or the issuance or
sale of such Convertible Securities multiplied by such Purchase Price per share
plus (y) the total amount, if any, received or receivable by the Company as
consideration for such issuance or grant or such issuance or sale, plus the
additional amounts referred to and more fully set forth in clauses (i) and (ii)
of the parenthetical material above in this subsection (b), whichever clause and
whichever additional amounts may be applicable, by (2) the total number of
shares of Common Stock outstanding after the date of such issuance or grant or
such issuance or sale, and the number of Shares of Common Stock which the Holder
shall be entitled to purchase hereunder at such adjusted Purchase Price per
share, at the time such adjusted Purchase Price per share shall be in effect,
shall be the number of whole shares of Common Stock obtained by multiplying such
Purchase Price per share, before such adjustment, by the number of Shares of
Common Stock purchasable upon the exercise of this Warrant immediately before
such adjustment and dividing the product so obtained by such adjusted Purchase
Price per share.
55
27. For the purpose of Sections 2.3.1 and 2.3.2 above, in case the Company
shall issue or sell Additional Shares, issue or grant any rights to subscribe
for or to purchase, or any options for the purchase of Common Stock or
Convertible Securities, or issue or sell Convertible Securities for a
consideration other than cash or a consideration part of which shall be other
than cash, the amount of the consideration received by the Company therefor
shall be deemed to be the cash proceeds, if any, received by the Company plus
the fair value of the consideration other than cash, as determined by the Board
of Directors of the Company in good faith, before deduction of commissions,
underwriting discounts or allowances or other expenses paid or incurred by the
Company for any underwriting of, or otherwise in connection with, such issuance,
grant or sale.
28. Notice of Dissolution or Liquidation. Except as otherwise provided in
------------------------------------
Section 2.2 above, in the case of any sale or conveyance of all or substantially
all of the assets of the Company in connection with a plan of complete
liquidation of the Company, in the case of the dissolution, liquidation or
winding-up of the Company, all rights under this Warrant shall terminate on a
date fixed by the Company, such date so fixed to be not earlier than the date of
the commencement of the proceedings for such dissolution, liquidation or
winding-up and not later than thirty (30) days after such commencement date.
Notice of such termination of purchase rights shall be given to the Holder at
least thirty (30) days prior to such termination date.
29. Statement of Adjustment. Any adjustment pursuant to the provisions of
-----------------------
this Section 2 shall be made on the basis of the number of Shares of Common
Stock which the Holder would have been entitled to acquire by exercise of this
Warrant immediately prior to the event giving rise to such adjustment and, as to
the Purchase Price per share in effect immediately prior to the rise to such
adjustment. Whenever any such adjustment is required to be made, the Company
shall forthwith determine the new number of Shares of Common Stock which the
Holder hereof shall be entitled to purchase hereunder and/or such new Purchase
Price per share and shall prepare, retain on file and transmit to the Holder
within 10 days after such preparation a statement describing in reasonable
detail the method used in calculating such adjustment.
30. No Fractional Shares. Anything contained herein to the contrary
--------------------
notwithstanding, the Company shall not be required to issue any fraction of a
Share in connection with the exercise of this Warrant, and in any case where the
Holder would, except for the provisions of this Section 2.6, be entitled under
the terms of this Warrant to receive a fraction of a Share upon such exercise,
the Company shall upon the exercise and receipt of the Purchase Price, issue the
largest number of whole Shares purchasable upon exercise of this Warrant. The
Company shall not be required to make any cash or other adjustment in respect of
such fraction of a Share to
56
which the Holder would otherwise be entitled. The Holder, by the acceptance of
this Warrant, expressly waives his right to receive a certificate for any
fraction of a Share upon exercise hereof.
31. No Change in Form Required. The form of Warrant need not be changed
--------------------------
because of any change pursuant to this Section in the Purchase Price or in the
number of Shares of Common Stock purchasable upon the exercise of a Warrant, and
Common Stock Purchase Warrants issued after such change may state the same
Purchase Price and the same number of shares of Common Stock as are stated in
the Warrants initially issued pursuant to the Agreement.
32. OTHER MATTERS
33. Payment of Taxes. The Company will from time to time promptly pay,
----------------
subject to the provisions of Section 1.2.4 hereof, all taxes and charges that
may be imposed upon the Company in respect of the issuance or delivery of this
Warrant or the Shares purchasable upon the exercise of this Warrant.
34. Binding Effect. All the covenants and provisions of this Warrant by
--------------
or for the benefit of the Company shall bind and inure to the benefit of its
successors and assigns hereunder.
35. Notices. Notices or demands pursuant to this Warrant to be given or
-------
made by the Holder to or on the Company shall be sufficiently given or made if
sent by certified or registered mail, return receipt requested, postage prepaid,
and addressed, until another address is designated in writing by the Company, as
follows:
The L.L. Xxxxxxxxxxxxx Co., Inc.
00000 Xxxxxxxxx
Xxxxxx Xxxxx Xxxxxxxxx, XX 00000
57
Notices to the Holder provided for in this Warrant shall be deemed given or made
by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.
36. Governing Law. The validity, interpretation and performance of this
-------------
Warrant shall be governed by the laws of the State of California.
37. Parties Bound and Benefitted. Nothing in this Warrant expressed and
----------------------------
nothing that may be implied from any of the provisions hereof is intended, or
shall be construed, to confer upon, or give to, any person or corporation other
than the Company and the Holder any right, remedy or claim under promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements contained in this Warrant shall be for the sole and exclusive benefit
of the Company and its successors and of the Holder, its successors and, if
permitted, its assignees.
38. Headings. The Article headings herein are for convenience only and
--------
are not part of this Warrant and shall not affect the interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ___ day of _____________ 19___.
THE L.L. XXXXXXXXXXXXX CO., INC.
By:_______________________________________
Xxxxx Xxxxxxxxxxxxx, President
58
[Corporate Seal]
Attest:
__________________________________
Xxxxx Xxxxxxx, Secretary
59
THE L.L. XXXXXXXXXXXXX CO., INC.
Assignment
FOR VALUE RECEIVED, _______________________________________________ hereby
sells, assigns and transfers unto __________________________
_____________________ the within Warrant and the rights represented thereby, and
does hereby irrevocably constitute and appoint
__________________________________________ Attorney, to transfer said Warrant on
the books of the Company, with full power of substitution.
Dated: _____________________
Signed:______________________________________
Signature guaranteed:
__________________________________
60
Subscription Form
THE L.L. XXXXXXXXXXXXX CO., INC.
00000 Xxxxxxxxx
Xxxxxx Xxxxx Xxxxxxxxx, XX 00000
The undersigned hereby irrevocably subscribes for the purchase of shares of
your Common Stock pursuant to and in accordance with the terms and conditions of
this Warrant, and herewith makes payment, covering such shares of Common Stock
which should be delivered to the undersigned at the address stated below, and,
if said number of shares shall not be all of the shares purchasable hereunder,
that a new Warrant of like tenor for the balance of the remaining shares
purchasable hereunder be delivered to the undersigned at the address stated
below.
The undersigned agrees that: (1) the undersigned will not offer, sell,
transfer or otherwise dispose of any such shares of Common Stock unless either
(a) a registration statement, or post-effective amendment thereto, covering such
shares of Common Stock has been filed with the Securities and Exchange
Commission pursuant to the Securities Act if 1933, as amended (the "Act"), and
such sale, transfer or other disposition is accompanied by a prospectus meeting
the requirements of Section 10 of the act forming a part of such registration
statement, or post-effective amendment thereto, which is in effect under the Act
covering the shares of Common Stock to be so sold, transferred or otherwise
disposed of, or (b) counsel to THE L.L. XXXXXXXXXXXXX CO., INC. has rendered an
opinion in writing and addressed to THE L.L. XXXXXXXXXXXXX CO., INC. that such
proposed offer, sale, transfer or other disposition of the shares of Common
Stock is exempt from the provisions of Section 5 of the Act in view of the
circumstances of such proposed offer, sale, transfer or other disposition; (2)
THE L.L. XXXXXXXXXXXXX CO., INC. may notify the transfer agent for its Common
Stock that the certificates for the Common Stock acquired by the undersigned are
not to be transferred unless the transfer agent receives advice from THE L.L.
XXXXXXXXXXXXX CO., INC. that one or both of the conditions referred to in (1)(a)
and (1)(b) above have been satisfied; and (3) THE L.L. XXXXXXXXXXXXX CO., INC.
may affix a restrictive legend to the certificates for shares of Common Stock
hereby subscribed for, if such legend is applicable.
61
Dated: ______________________ Signed: ______________________________________
Address: _____________________________________
_____________________________________
Signature Guaranteed:
_____________________________
62
EXHIBIT "C"
Schedule of Contingent Payments
Percent of EBT Fiscal Year
1997 1998-2001
New Enterprise Associates, N, EP. 7.120 2.138
Consumer Venture Partners, I, L.P. 4.995 1.499
North Atlantic Venture Fund 1.485 .444
Vermont Capital Venture Fund .55 .194
Merchant Partners, L.C. .75 .223
15.0 .045
63
EXHIBIT "D"
00
XXXXXXX "X"
XXXXXX XXXXXX
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
65
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
-----------------
OR
66
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-25488
THE L.L. XXXXXXXXXXXXX COMPANY, INC.
(Exact name of Small Business Issuer in its Charter)
CALIFORNIA 00-0000000
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
00000 XXXXXXXX
XXXXXX XXXXX XXXXXXXXX, XX 00000
-------------------------------------------------------------------------------
(Address of Principal Offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (000) 000-0000
67
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
------------------- WHICH REGISTERED
----------------
Common Stock, No Par Value NASDAQ NMS
Common Stock Purchase Warrants NASDAQ NMS
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
NONE
Check whether the issuer: (1) files all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 month (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
--- ---
Check if 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the most recent fiscal year were $13,140,346
The aggregate market value of the voting stock of the Registrant held by non-
affiliates of the Registrant, based upon the closing price of the Common Stock
on the NASDAQ National Market System on March 8, 1996 was $48,686,550. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, as of March
8, 1996 was 14,325,685.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
68
TABLE OF CONTENTS
ITEM PAGE
---- ----
69
39. BUSINESS....................................................... 1
A. HISTORY................................................... 1
B. GENERAL BUSINESS.......................................... 1
40. PROPERTY....................................................... 13
41. LITIGATION..................................................... 13
42. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.............. 14
43. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 14
44. SELECTED FINANCIAL DATA........................................ 15
45. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 15
70
46. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 19
47. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 19
48. DIRECTORS AND EXECUTIVE OFFICERS............................... 19
49. EXECUTIVE COMPENSATION......................................... 22
50. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 23
51. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 24
PART IV
-------
52. EXHIBITS LIST AND REPORTS ON FORM 8-K.......................... 26
53. SIGNATURES..................................................... 29
71
PART I
ITEM 1. BUSINESS
------ --------
HISTORY
The L. L. Xxxxxxxxxxxxx Company, Inc. (the "Company") was formed by Xxxxx X.
Xxxxxxxxxxxxx, Chairman, President, and Chief Executive Officer of the Company,
and Xxxxxx Xxxxxxxxxxxxx, the Vice President of the Company, under the name
International Beauty Supply, Ltd., a California corporation ("IBS").
Subsequently, in 1987 LaVie Cosmetics, a California corporation ("LaVie"), was
co-founded with Xxxxxxx Xxxx. In 1989 the Knickerbockers co-founded another
company, MLF Enterprises, a California corporation ("MLF") with Xx. Xxxx and
Xxxxxx Xxxxxxx, a director of the Company. MLF developed replicas of Xx.
Xxxxxxx'x jewelry collection, which were sold through the television home
shopping industry.
The Knickerbockers next formed Xxxxxxxxxxxxx Creations, Ltd., a California
corporation ("Creations") in 1990 and began developing the products and
celebrity endorsement programs which are now part of the Company.
In 1993 it was determined that the operations of Creations and IBS should be
consolidated under a single entity in order to facilitate the contemplated
public offering. However, in 1990, the directors and shareholders of the
Company were advised that Creations would be an unsuitable candidate for a
public offering. Therefore, on May 24, 1993, the directors and shareholders of
IBS approved an amendment of the articles of incorporation of the corporation
changing the name of the corporation from "International Beauty Supply, Ltd." to
the Company's current name, "The L. L. Xxxxxxxxxxxxx Company, Inc." The Company
then consummated an asset purchase agreement whereby the operating assets of
Creations, including but not limited to the marketing and distribution rights to
the products and programs of Creations, were acquired along with certain
liabilities. As of the date hereof, all current active contracts of Creations
have been assumed or amended to grant those rights and obligations to the
Company.
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The Company completed an initial public offering of common stock on January 25,
1995. The Company issued 471,500 units (including 61,500 overallotment units)
comprised of two shares of common stock and one common stock purchase warrant.
On August 30, 1995 the Board of Directors approved a five for one split of the
Company's stock and the increase of the number of authorized shares to
100,000,000.
GENERAL BUSINESS
The Company develops a diverse line of core products, contracts for the
manufacture of those products to the Company's specifications, and markets those
products to customers. The Company's strength and history has been its strategy
in marketing to the Home Shopping Industry by identifying the industry's key
product segments (i.e. collectibles, environmental systems, jewelry, health and
beauty) and building Brand recognition within those product segments. The
Company often provides a celebrity or expert spokesperson to enhance the appeal
of the product. The Company's celebrity programs have included products endorsed
by Xxxxx Xxxxxx, Xxxxxxx Xxxxxxxxx, Xxx Xxxxxx, Xxxxxx Xxxxxxx, Xxxxx Xxxxxxxxx,
Xxxxxxx Xxxxxxx, Xxxxxxx Xxxxxx, Xxxx Xxxxxxx and Xxx XxXxxxxxxx. The Company
plans to expand celebrity programs introducing new key product segments.
The Company currently sells these core products through direct response
marketing including; home shopping (ie; QVC Network "QVC", Home Shopping Network
"HSN"), print media advertising, infomercials and direct mail campaigns as well
as the newly developed retail stores and retail catalog accounts.
A breakdown of the Company's revenues during 1995 is as follows:
Core Business Products 63%
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Collectible 48%
Environmental 15%
Marketing Consulting Services 28%
Other 9%
-----
100%
The Company's current core collectible programs include; Xxxxx Xxxxxx
Fine Porcelain Collector Dolls, Xxxxxxx Xxxxxxxxx Collectible Bears, The
Xxxxxxxxxxxxx Collectible Toy Company and Xxx Xxxxxx Dolls sold through QVC,
direct response print advertisements, direct mail and major retail and catalog
outlets nationwide.
The Company also markets environmental products, such as the ECT
Ionizer, which has no celebrity endorsement. The Company has an agreement with
QVC which grants QVC certain rights regarding sales of the ECT Ionizer within
the United States based on a minimum commitment.
As a result of the Company's experience and knowledge in the area of
electronic retailing, the Company provides outside companies consulting services
in all facets of marketing products via direct response; such as designing
packaging, identifying and negotiating for celebrity endorsement, producing
Infomercials and advertising spots, and overseeing entire marketing campaigns.
To date, the customers for whom the Company has performed consulting services
are start-up companies.
The Company's general 5 year growth plan consists of focusing on the
following areas:
54. To review new products and prospect the development of new brands
utilizing the Company's expert marketing formulae and their introduction to
the current customer base and diversification of the Company's core product
lines.
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55. To expand the core business by introducing new product categories into
the existing programs and expand distribution of the core products
internationally.
56. To continue to provide outside companies with consulting services in
all facets of marketing products via direct response.
57. To develop the Xxxxxx/Xxxxxxxxxxxxx Media Marketing partnership which
has added a new dimension to the potential growth of the Company's business.
While the Company will continue the development of products for distribution via
direct response spots commercials or infomercials as part of the joint venture
agreement, it will explore acquisition and other opportunities synergistic with
the strategic growth plans of Xxxxxx/Xxxxxxxxxxxxx.
58. To implement the Pure Energy Corporation business plan as to the
development and marketing of the alternative fuel, and to establish an
investment banking relationship which confirms an initial public offering of
Pure Energy Corporation's securities.
MARKETING STRATEGIES
The Company's marketing strategy is to expand on its expertise in the
development of products and building of brands utilizing multiple channels of
distribution for the products and brands including; home shopping channels,
infomercials, print advertising, direct mail, catalogs, retail stores, as well
as, other forms of direct marketing. In implementing this strategy, the Company
plans to continue its focus on marketing brands by developing a product,
contracting for the manufacture of the product, and selling the product to the
appropriate level of distribution. Generally, new programs are tested utilizing
in-house telemarketing and once the program is deemed successful it is moved to
an telemarketing house and fulfillment center. All customer data bases are
compiled and managed at the Company for the purpose of back end marketing.
The Company will continue to focus on sales of the core product lines in direct
response marketing via; Home Shopping Channels (ie; "QVC "HSN"), print media
advertising, infomercials and direct mail campaigns as well as the newly
developed retail stores and retail catalog distribution channel. In addition,
the Company plans to expand its marketing and distribution channels of the
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core product lines by testing the international sales potential. The Company
will consider strategic acquisition of other companies that may provide new
product lines or additional means of product distribution.
THE DIRECT MARKETING INDUSTRY
Direct marketing has four major areas: Television Marketing, Print Media
Advertising, Catalogs and Direct Mail.
Television Marketing
---------------------
Although still in its infancy, a November 1994 report by Profiles indicates
Americans bought $3.85 billion worth of merchandise pitched on television in
1993 and estimates annual sales to reach $20 billion by 1999. Of the $3.85
billion, $2.2 billion that was done by the home shopping channels, $900 million
by infomercials and $750 million by direct response, 800-number spot
commercials. According to a Response TV news release dated July 7, 1995,
Consumer confidence in product purchased from television has risen over the last
three years with 74% of the surveyed buyers indicating they would purchase again
from television - a 6% increase from 1993.
Home Shopping
The Company's expertise in marketing to home shopping channels has been to
identify its key product segments, (i.e. collectibles, environmental systems,
jewelry, exercise equipment) and build brand recognition within those product
segments. Wherever practicable, the Company will concentrate on products which
lend themselves to continuity programs and the building of back end business
activities. The Company's management recognizes the need to remain visible in
this industry as the number of customers utilizing Home Shopping Channels
increases with the
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expansion of new subscribers. Today, more than half of American households
subscribe to cable TV services. As cable TV expands and adds new subscribers, it
is likely that the number of customers utilizing home shopping services will
increase as well. Home Shopping has earned the reputation as one of the best
ways to acquire a large number of new customers and qualified prospects There
are also new Home Shopping Channels that are becoming a force in the growing
industry such as Shop At Home, a Tennessee based retailer with approximately 10
million cable homes. The crossover continues between traditional retail outlets
and Home Shopping, according to the January 1995 Greensheet Report, Xxxxxxxxxx
Xxxx agreed to invest $8 million in Value Vision International, Inc. to enable
Value Vision to change its merchandise mix. The Company has sold Value Vision
$250,000 worth of jewelry inventory and is in the process of new product
development for this customer.
Generally, the format of the home shopping channels is to present 6 to 12 new
items per hour. Each hour can be comprised of a special program (i.e. all Xxxxx
Xxxxxx Dolls), or a mix of products (i.e. a gift hour with different kinds of
gift items). Special programs, such as celebrity programs, can be given as much
as three straight hours of prime time. These types of programs must be high-
dollar volume programs to warrant the allocation of this time. The home
shopping networks purchase products from vendors and handle all the fulfillment
of orders which they receive from customers. Typically, the vendors ship
products to a central home shopping network warehouse before the item is sold on
the air. When the customer order is taken by the home shopping network
operators, the order is filled from the home shopping network warehouse directly
to the customer.
The dominant companies of the cable home shopping industry are Home Shopping
Network ("HSN"), and QVC Network ("QVC"). Together, these two companies alone
generated over $2.6 billion in annual sales in 1995, however, there has been
an emergence of other companies moving into the home shopping format within the
past 2 years to take advantage of industry growth such as Value Vision and Shop
At Home.
Despite the magnitude of the annual sales of these companies in the home
shopping industry, there is actually a small percentage of consumers who receive
the television home shopping programming who have purchased products from a
television home shopping channel. With the growth in annual sales the industry
has enjoyed, and the growing awareness and popularity of this relatively new
sales medium due to its convenience and product accessibility, the prospects for
future growth of the industry are expected to be excellent. The Company plans
to continue to focus on developing products and brands for home shopping
channels, in the hope of capitalizing on the industry's growth.
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Infomercials and Direct Response Spot Commercials
To further the development of the Company's goals in developing products for the
infomercial market the Company entered into a partnership agreement with Xxxxxx
Communications, Inc. (AMEX: PXN) on December 5, 1995. Xxxxxx Communications
agreed to commit up to $10 million in cash and television air time toward the
joint development of brands to be tested and marketed through Xxxxxx'x
infomercial television network, "In TV". The Company's first project is
scheduled to be introduced in the first quarter of 1996. Xxxxxx Communications,
Inc. currently owns, operates or affiliates with 32 stations in 30 markets
reaching 44 million homes. Industry trends show that a successful infomercial
drives retail sales, producing additional retail sales equal to six to ten times
the infomercial sales. According to the 1994 Greensheet Annual Review, the
relationship between home shopping networks and Infomercials is closer than
ever. Not only have HSN and QVC developed their own infomercial-producing
divisions but more and more infomercial products are achieving record success on
the home shopping stations. Gross annual sales generated by infomercials
increased from $350 million in 1988 to an estimated $900 million in 1993. The
Company has produced and tested several infomercials. This format of
infomercials is different from the format of live home shopping shows like QVC,
HSN or Value Vision, in that the commercial is filmed, edited and produced
rather than being shown live.
Direct Response Print Advertisements
------------------------------------
Direct Response print advertisers focus on a narrow product line selection with
potentially high dollar volume. In May of 1995 the Company launched its first
direct response program featuring a Xxxxx Xxxxxx collectible doll. This
introduction took place in Doll Reader Magazine, followed by other collectible
trade publications such as DOLLS, Doll Crafter, Contemporary Dolls, Collectors
Mart and finally placed in mainstream publications such as Disney, Woman's Day,
McCalls, National Enquirer etc. In August of 1995 the Company launched its
second direct response campaign with Xxx Xxxxxx'x high end fashion porcelain
doll. The introduction took place in DOLLS Magazine followed by other
collectible trade publications such as Doll Reader, Doll Crafter, Contemporary
Dolls, Collectors Mart and finally placed in mainstream publications such as
National Enquirer, the Company found that this higher dollar, more collectible
doll performed better in the trade publications rather than the mainstream
publications. The final 1995 direct response introduction was an Xxxxxxx
Xxxxxxxxx collectible bear, the introduction
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took place in Teddy Bear and Friends Magazine followed by other collectible
trade publications such as Teddy Bear Review, Teddy Bear Times, Collector Mart
and finally placed in mainstream publications such as Disney, Woman's Day,
McCalls, National Enquirer etc.
With these positive tests the Company plans to continue the development and
placement of direct response print media advertising and to expand the customer
data base in 1996. The Company plans to also use the customer data base
resource to expand the direct mail portion of its business.
Catalog and Direct Mail Marketing
---------------------------------
Catalog shopping in the U.S. showed impressive growth last year according to a
new national survey to be published in the March 1996 issue of "Catalog Age"
magazine. The survey showed an increase in total catalog shoppers to 52% from
41% in 1993. Direct mail sales in general continue to grow, according to Direct
Marketing magazine, total U.S. mail order sales hit $233 billion in 1993, up 7%
over 1992. Today, there are over 10,000 mail order catalog companies and there
are over 150 Fortune 500 companies that are engaged in direct marketing.
CORE BUSINESS
Collectibles
------------
Collectibles were targeted by the company because the category represents a
significant portion of television home shopping sales.
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Xxxxx Xxxxxx Fine Porcelain Collector Dolls - The Company launched the Xxxxx
Xxxxxx Collectable Doll line nationally in conjunction with QVC and the Xxxx
Disney Company in 1991. The line currently consists of over 250 different styles
of dolls ranging in price from $20 to $600. The program has generated revenue
for the Company in excess of $18.3 million from its inception in 1990 through
December 31, 1995. Revenue from this program for the year ended December 31,
1995 are approximately $5.3 million, which represents approximately 40% of the
Company's total revenue for the year.
Xxxxxxx Xxxxxxxxx Collectible Bear Company - The Company launched its new line
of Xxxxxxx Xxxxxxxxx collectible teddy bears at Disneyland's First Annual Teddy
Bear Classic in June 1992. The line of collectable teddy bears currently
consists of over 150 different styles of bears ranging in price from $25 to
$300. The Xxxxxxx Xxxxxxxxx Collectable Bear line has generated over $2.6
million in sales for the Company since its introduction.
The Xxxxxxxxxxxxx Collectible Toy Company - The Xxxxxxxxxxxxx name is well
recognized in the toy and collectible teddy bear industries. The Company began
selling collectible Xxxxxxxxxxxxx products in October 1986, and was issued the
trademark "Xxxxxxxxxxxxx" for toys, dolls, stuffed animals plush animals and
marionettes in January, 1996. The Company launched its new line of Xxxxxxxxxxxxx
Collectible Toys at the Collector Communications, Doll and Teddy Bear Expo in
Virginia in August 1995. The Company expanded into the retail arena by
establishing a relationship with one of the industry's leading gift/collectibles
buying syndicates, Gift Creations Concepts ("GCC"). GCC is considered the
innovator among retail/catalog syndicates, their roster of retailers includes
375 of the finest stores in the gift industry. The GCC Member Retailers wrote
orders totaling 58 million wholesale dollars with participating vendors. The
line of collectable teddy bears currently consists of over 25 different styles
of bears ranging in price from $29 to $89.
Xxx Xxxxxx Legendary Beauties - The Company introduced the first edition of Xxx
Xxxxxx'x fashion dolls in August of 1995 in DOLLS Magazine in a direct response
print advertisement at a retail price of approximately $300. Xxx Xxxxxx is
recognized for his designs of limited edition Barbie(R) Dolls marketed by
Mattel. The Company's license agreement allows for the collection to be sold
through direct response advertising only.
Environmental
-------------
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Ionizers were targeted by the company as an established category that has been
sold through the home shopping channels for many years. Ionizers are one of the
few products which are sold on a daily basis. Environmental Control Technology
(ECT) Ionizer is a device for removing potentially harmful particles (such as
second hand cigarette smoke, bacteria, dust and pollens) from an indoor
environment. The ECT Ionizer was introduced on QVC in early March 1994 with
ionization expert Xxxxx Xxxx as the inventor and spokesperson. This product,
featuring patented technology, was developed by the Company in conjunction with
an environmental systems company and is covered by exclusive licensing and
manufacturing agreements. The Company has an agreement with QVC which does not
obligate QVC to purchase the ECT Ionizer, but which does grant QVC certain
rights regarding sales of the ECT Ionizer based upon the purchase by QVC of a
minimum of $6 million of the ECT Ionizer over a two year term. The ECT Ionizer
sells for an approximate retail price of $79. Since its introduction in 1994,
this product has generated revenue for the Company of approximately $5.4 million
through December 31, 1995.
Marketing Consulting Services
------------------------------
The Company's marketing department provides consulting and marketing expertise
in areas of direct marketing for a fee to outside companies. The scope of
services varies based on the individual client needs, following are a list of
some of the services available: Target Marketing, Corporate/Product Image,
Package Development, Direct Response Marketing Plan, Celebrity Endorsements,
Infomercial Production, Internet Placement, Media Buying, Management of Inbound
Telemarketers, Credit Card Processing and Fulfillment Centers. Revenue from
marketing services represented 28% of the Company's total revenue for the year
ended December 31, 1995. Due to the "start-up" nature of certain customers for
whom the Company performed services, the Company has established a reserve of
approximately $741,000 for uncollectible accounts receivable in 1995.
Other
-----
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Timphaven Productions, Xxxxxxx Xxxxx- The Company introduced a series of video
tapes and an interactive model's manual entitled, "Secrets of Modeling" by
Xxxxxxx Xxxxx, President of Elite Model Management, Los Angeles. Elite Model
Management is the worlds largest modeling agency, the series includes inside
tips on getting into the business by one of the industries biggest insiders,
Xxxxxxx Xxxxx. The series is being tested through several direct response
marketing avenues such as; Infomercial, Direct Response Print Advertising and
Direct Mail. The company is also exploring the possibility of marketing the
series at key video/book retailers.
SUMMARY OF REVENUE BY PRODUCT LINE
In 1995, revenue for the Company was $13,140,346. Home shopping channels
accounted for approximately 60% of the Company's revenue in 1995. The remaining
1995 sales were generated through wholesale customers and the Company's efforts
in alternative direct response channels of distribution. The breakdown per
product line for revenue in 1995 is as follows:
Year ended December 31, 1995
Category $000's Percent
----------------------------------------- ------- -------
Xxxxx Xxxxxx Collectibles $ 5,380 40.9%
Marketing Services 3,632 27.6%
ECT Ionizer 1,972 15.0%
Funicello & Xxxxxxxxxxxxx Collectibles 717 5.4%
Xxx Xxxxxx Collectibles 284 2.2%
Internet Marketing 430 3.4%
Elite 276 2.1%
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Other collectibles 449 3.4%
------- -----
Total $13,140 100.0%
------- -----
CORE PRODUCTS UNDER DEVELOPMENT
Collectibles
------------
The Company is currently expanding the Xxxxx Xxxxxx Fine Porcelain Doll
line, the Xxxxxxx Xxxxxxxxx Collectible Bear Company collection, The
Xxxxxxxxxxxxx Collectible Toy collection., the Xxxxxxx Xxxxxxx, "Such An Angel"
line of angel figurines under development with Xxxxxxx Xxxxxxx and Goodtimes
Entertainment and the Honeymooners collection of figurines depicting the
characters from the original Honeymooners television show.
Environmental
-------------
The Company plans to develop related products under the ECT name as
well as exploring international distribution of the original ECT Ionizer.
NEW PRODUCTS UNDER DEVELOPMENT
Alternative Fuel
----------------
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The Company entered into an agreement with Pure Energy Corporation to
purchase 40% of the outstanding capital stock of Pure Energy Corporation (see
Material Contracts) to develop a proprietary alternative fuel. The alternative
fuel being developed will have its greatest impact on corporate, industrial and
governmental agencies, as they cope with federal legislation that mandates use
of fuel powered by non-petroleum products. Legislation passed by the
Environmental Protection Agency's administration of the "1990 Amendments to the
Clean Air Act" and the Department of Energy's administration of the "Energy
Policy Act of 1992" require that federal motor pools use an alternative fuel in
their vehicles by the year 2000. The fuel is being developed by Pure Energy
Corporation under exclusive license from Princeton University.
Collectibles
------------
The Xxxxxxx Xxxxxxx Such an Angel Collection- The Company has an
exclusive license agreement to manufacture and distribute the line of angel
figurines under development with Xxxxxxx Xxxxxxx and Goodtimes Entertainment.
The line of collectible porcelain angel figurines, "Such An Angel", will be
based on a children's book and video written by Xxxxxxx Xxxxxxx and produced by
Goodtimes Entertainment. The collection is scheduled to debut in fourth quarter
of 1996.
The Honeymooners Collection- The Company has an exclusive license
agreement to manufacture and distribute porcelain dolls and figurines depicting
the characters from the original Honeymooners television show. The Company is
currently working with Xxxxxx Xxxxxxx'x daughter, Xxxx Xxxxxx, to develop a
program that is scheduled to be launched in mid 1996. The forty-fifth
anniversary of the Honeymooner's show is in 1996.
Health and Beauty
-----------------
Facial Steamer System- The Company has a contract for the worldwide
manufacturing, marketing and distribution of the patented Lifetime of the His or
Her - Facial Steamer System and Lifetime of Skincare from inventor Xxx Xxxx,
president of His or Her by Xxxx of Puerto Rico, Inc. This new product is
scheduled to debut in the second quarter of 1996. The Facial Steamer/Lifetime
of Skincare is a revolutionary, patented hand held device for facial
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treatments which emits a vitamin enriched moisturizing steam proven to reduce
fine wrinkles and rehydrate the skin. The spokesperson for this product will be
world famous dermatologist, Xx. Xxxxx Xxxx.
Fit and Firm - A joint venture between Xxxxxx Communications and The
L.L. Xxxxxxxxxxxxx Company with Xxxxxxxx Xxxxxxxx Xxxxxx ("Xxx Xx") as
spokesperson for the Fit and Firm licensed exercise equipment developed by
Brainstorm Product Development. Xxxxxxxx Xxxxxxxx Xxxxxx ("Xxx Xx") is currently
working with the Company on the development of the production proto type. The
device is scheduled for focus group tests in the second quarter of 1996 and the
infomercial is scheduled to debut early in the third quarter of 1996.
Jewelry
-------
Xxxxx Xxxx Jewelry - The Company is developing jewelry products with
Xxxxx Xxxx International, Ltd. ("GKI") for shipping to the home shopping
industry in the first quarter of 1996. The Company anticipates substantial
business within the home shopping and retail markets with GKI's gemstones and
jewelry designs.
Marketing Consulting Services
-----------------------------
Direct Response Marketing Services - The Company plans to continue
offering its direct marketing services to outside companies for a fee. The
scope of the services available includes: target marketing, corporate/product
image, package development, direct response marketing plan, celebrity
endorsements, infomercial production, Internet placement and management of
outside and fulfillment centers.
Internet Marketing - The Company recognizes the growth in the consumer
base utilizing the Internet and the potential of direct response sales through
this media. As technology advances and consumer awareness builds this media
should continue to be increasingly accepted as a means for marketing goods and
services. The Company plans to continue the marketing of
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its products through the Internet, as well as, developing direct marketing sites
for other companies.
Other
-----
Xx. Xxxxxx; Numerology; Xx. Xxxxxx is a master Numerologist who is
known for his accuracy. The Company created an infomercial as the first project
between Xxxxxx Communications and The L.L. Xxxxxxxxxxxxx joint venture
agreement. The Numerology infomercial was completed in February 1996 and the
Company is testing the 30 minute infomercial and plans a roll out in the second
quarter of 1996.
Although the Company currently believes that the above listed products
can be developed and produced as commercially viable product line additions,
there can be no assurance that the new products will be introduced or, if
introduced, that they will be successful.
PRODUCTION PROCEDURES
Purchasing
----------
The Company develops the product, locates an appropriate contract
manufacturing facility and prepares samples, which are presented to the customer
for approval. Upon approval of the samples by the customer, the customer
issues a purchase order to the Company for the desired quantity of the product.
In some cases the purchase order is secured by an irrevocable and transferable
letter of credit, and the order is placed with the Company's contract
manufacturer for production. Under certain circumstances the Company
manufactures product for sale without an irrevocable and transferable letter of
credit.
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Manufacturing
-------------
The Company utilizes contracted manufacturing facilities for its
production. The Company's products generally are drop-shipped from the contract
manufacturers directly to the Company's customers, only a small percentage is
shipped to the Company's warehouse for delivery to distributors, wholesalers and
retailers. Each line has a Product Manager who is responsible for costing and
designating the manufacturing source for each product and for monitoring the
quality control of the finished product. The quality standards are reviewed and
products are inspected by an independent inspection company with a Company
representative present on occasion. The Company has manufacturers in United
States, Hong Kong, China, Malaysia, Thailand and Taiwan.
MATERIAL CONTRACTS
Pure Energy Corporation
-----------------------
The Company entered into an agreement with Pure Energy Corporation on
February 7, 1996 to purchase 40% of the outstanding capital stock of Pure Energy
Corporation in exchange for options to purchase 200,000 shares of the Company's
capital stock for $8.50 per share and 200,000 shares of the Company's capital
stock for $12.00 per share, and a funding commitment of the Company to advance
up to $1.0 million for the development of a proprietary alternative fuel by Pure
Energy Corporation. In March 1996 Pure Energy Corporation entered into a letter
of intent with Biofine, Inc. to license patented technology to produce the
components of the proprietary low cost alternative fuel formula. Due diligence
is underway and will be completed before the execution of a definitive license
agreement.
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Xxxxxx Communications, Inc.
---------------------------
The Company entered into a joint venture with Xxxxxx Communications
Corporation on December 21, 1995 to form a corporation to be known as IN/LLK
Media Marketing. The Company will devote marketing management services to
IN/LLK Media Marketing. Initially, IN/LLK Media Marketing will develop six
individual products and services for marketing through the home shopping
industry. The joint venture is initially structured as a general partnership
between Xxxxxx Communications, Inc. and the Company named Xxxxxx/Xxxxxxxxxxxxx
Media Marketing. On January 22, 1996 the first joint venture agreement was
entered into with Agia Akal Singh Khalsa to develop and market the numerology
concept of Agia Akal Singh Khalsa through infomercials, radio, print media, the
home shopping industry and the worldwide web. The agreement provides for Agia
Akal Singh Khalsa to receive royalties on the worldwide sales of the numerology
services, and an advance royalty of $5,000 for each personal appearance.
Xxxxx Xxxx Enterprises
----------------------
The Company entered into an agreement on November 28, 1995 to become
the exclusive international distributer in the United States for all products
created by Xxxxx Xxxx International Co., Ltd. located in Bangkok, Thailand.
Xxxxx Xxxx International Co., Ltd. was formed in 1992 and specializes in the
design and development of jewelry for the mass merchandise market. The
agreement reached between the Company and Xxxxx Xxxx International Co., Ltd.
gives the Company the right to acquire 49% of Xxxxx Xxxx International Co., Ltd.
in exchange for warrants to purchase 300,000 shares of the Company's capital
stock at $5.50 per share. A second agreement entered into on November 27, 1995
with Xxxxx Xxxx Design Co., Ltd. provides for the Company to receive the sum of
$750,000 plus a management fee of 10% of the sales of jewelry products
manufactured by Xxxxx Xxxx Design Co., Ltd. and sold in the United States
through HSN, QVC, Value Vision and Shop at Home. The agreement obligates the
Company to purchase $200,000 of the inventory of Xxxxx Xxxx Design Co., Ltd.
over a twelve month period. The initial term of this agreement is five years
with an automatic renewal clause if sales are a minimum of $50 million.
Timphaven Productions, Xxxxxxx Xxxxx
------------------------------------
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The Company entered into a Licensing Agreement with Timphaven
Productions, Inc. and Xxxxxxx Xxxxx on July 24, 1995. The agreement provides
that the Company will market a series of video tapes and an interactive model's
manual entitled, "Secrets of Modeling". The series is being tested through
several direct response marketing avenues such as; Infomercial, Direct Response
Print Advertising and Direct Mail. The company is also exploring the possibility
of marketing the series at key video/book retailers. The Company is obligated
under the agreement to pay a royalty on sales of the products covered by the
agreement of 8% of annual sales under $5.0 million, 9% of annual sales between
$5 and $15 million, 9.5% of annual sales between $15 and $20 million, and 10% of
annual sales in excess of $20 million.
Xxxxxxx Xxxxxxx
---------------
On May 1, 1995, the Company entered into a License Agreement with SIM-
GT Licensing Corp. to license the name, likeness and trademarks of Xxxxxxx
Xxxxxxx. The Company has been granted the exclusive license to manufacture and
distribute the line of angel figurines under development with Xxxxxxx Xxxxxxx
and Goodtimes Entertainment. The line of collectible porcelain angel figurines,
"Such An Angel", is scheduled to debut in fourth quarter of 1996.
The Tracker Corporation of America
----------------------------------
On March 15, 1995 the Company entered into a marketing consulting
agreement with The Tracker Corporation of America, Inc. ("Tracker") which
provides that the Company will launch a television and marketing campaign to be
initially launched in the California marketplace to market Tracker's products,
and if successful, to launch national and international marketing campaigns for
Tracker's products.
As compensation for the services to be performed by the Company,
Tracker:
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(i) agreed to pay the Company a fee of $212,975 immediately and issue
800,000 restricted shares of Tracker common stock, valued at $2.50 per
share based on the trading price of the Tracker common stock on the
date of the agreement;
(ii) will pay the Company a fee equal to 7% of gross sales generated by the
Company, net of returns, during the test campaign in California, which
is to last 30 days; and
(iii) will pay the Company a fee of 15% of gross sales generated by the
Company, net of returns, on national sales, and 20% of gross sales
generated by the Company, net of returns, on international sales,
after the successful completion of the test campaign in California.
The Company received 400,000 of the 800,000 Tracker common shares immediately
and the balance is currently due to the Company as a result of the successful
completion of the California test campaign and the commencement of the national
and international campaigns. The Tracker common shares shall bear a restrictive
legend barring the Company from selling the shares for two (2) years from March
15, 1995, without the prior written consent of Tracker.
Following completion of the California test campaign, Tracker shall have 14 days
to notify the Company in writing that Tracker elects to cancel the Agreement.
In the event that Tracker so notifies the Company, the Agreement will be
canceled and Tracker will return the remaining 400,000 common shares to its
treasury and the Company will have no claim on such shares. If notice is not
given, the Agreement shall continue for a period of three (3) years (the
"Initial Term") with automatic one-year renewals unless one of the parties
provides notice of cancellation 30 days prior to the completion of the Initial
Term or any subsequent renewal term.
Tracker, through a wholly-owned subsidiary, The Tracker Corporation, is a
developmental stage entity engaged in the development, marketing and operation
of a unique system to aid in the recovery of lost or stolen items using advanced
bar code and laser scanning technologies. Tracker has been in a developmental
state since its inception.
90
The agreement with Tracker is different from other agreements that the Company
has in that Tracker is marketing its own products and the Company is providing a
service to Tracker by developing Tracker's marketing programs.
Xxx Xxxxxx (US), Inc.
---------------------
The Company entered into a License Agreement with Xxx Xxxxxx (US), Inc. on May
1, 1994 with respect to the use of the xxxx "Xxx Xxxxxx." The material terms of
the Agreement provide that Xxx Xxxxxx (US), Inc. will develop a group of designs
for sale to QVC Cable Television. All articles produced from the designs are
subject to the inspection and approval of Xxx Xxxxxx (US), Inc. The Agreement
will expire 18 months after the first QVC broadcast featuring the products,
which was scheduled for the fourth quarter 1995, and the Agreement may be
renewed by the Company with notice for an additional twelve months if Xxx Xxxxxx
(US), Inc. has received a minimum of $50,000 in royalties during the initial
term. Xxx Xxxxxx (US), Inc. retains all intellectual property rights to the
licensed xxxx, and the Company is solely responsible for the costs of
manufacturing, distribution, advertising and sales. Xxx Xxxxxx (US), Inc. is
required to use reasonable best efforts to provide the services of Xxx Xxxxxx as
the spokesperson for the products for a maximum of ten personal appearances on
QVC Cable Television per 18 or 12 month period. Xxx Xxxxxx (US), Inc. receives
royalties of eight percent of the net sales proceeds received by the Company
from all sales of the products covered by the Agreement. The Company is
required to keep product liability and spokespersons' liability insurance to
cover the products and the parties.
QVC Network, Inc.
-----------------
The Company entered into a License Agreement with QVC Network, Inc. on September
29, 1993 with respect to the marketing, promotion, distribution and sale of the
ECT Clean Room System Ionizers and related products. The material terms of the
Agreement provide that the Company grants to QVC Network, Inc. the exclusive
license, rights and privilege to promote the products worldwide. The initial
term of the Agreement is two years after the first QVC broadcast featuring the
products, which was March 4, 1994, and the Agreement automatically and
continuously renews for additional two year terms unless the Company gives
notice of its intent not to renew at least 30 days prior to the end of a term,
or net purchases by QVC Network, Inc.
91
are less than $6.3 million during the first term, and 110% of the preceding
minimum amount during each succeeding renewal term. The Company is required to
provide the services of Xxx Xxxx as the spokesperson for the products for a
maximum of twelve personal appearances on QVC Cable Television per year. QVC
Network, Inc. has the right, but is not obligated, to purchase the products from
the Company upon issuance of purchase orders, and, if the Company sells to
parties other than QVC Network, Inc., it is required to pay a commission to QVC
Network, Inc. of 5% of net sales of all the products sold by the Company to re-
sellers and 2.5% of net sales of all the products sold by the Company to end
users.
American Environmental Systems, Inc.
-----------------------------------
Xxxxxxxxxxxxx Creations, Ltd. entered into a Product Development and License
Agreement with American Environmental Systems, Inc. on August 4, 1992 with
respect to the development of the ECT Clean Room System Ionizers and related
products (the "Product Development and License Agreement"). A second agreement
was entered into between the parties on October 22, 1992 with respect to the
licensing of the trademark "ECT(R) (the "Trademark License Agreement"). The
agreements were assigned to the Company with the consent of American
Environmental Systems, Inc. effective September 28, 1993.
The material terms of Agreement provide that the Company pay a development fee
of $20,000 to American Environmental Systems, Inc. in exchange for the exclusive
license, rights and privilege to manufacture, sell and distribute the products.
The Company is solely responsible for the costs of manufacturing, distribution,
advertising and sales of the products, once they are developed. American
Environmental Systems, Inc. receives royalties of five percent of the proceeds
received by the Company from all sales of the products covered by the Agreement.
The exclusivity of the manufacturing and distribution licenses is contingent on
the payment to American Environmental Systems, Inc. of a minimum of $100,000 in
royalties each year. After the third year of the Agreement, the failure to pay
the minimum $100,000 royalties will result in the immediate termination of that
Agreement. To date the Company has met all contractual minimum payments. The
Company is entitled to the services of Xxxxx Xxxx as the spokesperson for the
products for a minimum of ten personal appearances on QVC Cable Television per
year. Other than the termination for failure to make minimum royalty payments
or breach of the terms of the Agreement, the Agreement will remain in force
indefinitely.
92
The material terms of the Trademark License Agreement provide that the Company
pay a royalty of two percent of the proceeds received by the Company from all
sales of the products using the trademark "ECT(R) and which are covered by the
Product Development and License Agreement. The term of the Trademark License
Agreement is the length of time that the Product Development and License
Agreement remains in force.
Cello, Inc.
-----------
The Company entered into License Agreement with Cello, Inc. on May 13, 1994 with
respect to the services of Xxxxxxx Xxxxxxxxx. The material terms of the
Agreement provide that the Company will design, develop and manufacture
collectable teddy bears and dolls, and such other products as the parties shall
agree on, with the approval of Cello. Cello retains all intellectual property
rights to the products, and the Company is solely responsible for the costs of
manufacturing, distribution, advertising and sales. Cello is bound to provide
the services of Xxxxxxx Xxxxxxxxx as the spokesperson for the products, subject
to Cello's approval of commentary and production, for a minimum of eight
personal appearances on QVC Cable Television per year for a total of four years.
Cello receives royalties of ten percent of the proceeds received by the Company
from all sales of the products covered by the Agreement, less credit for
returned items. Cello receives the sum of $15,000 for each appearance by
Xxxxxxx Xxxxxxxxx on QVC where a new product is introduced, and this sum is
credited against royalties due to Cello. The Company is required to keep
products liability and spokesperson liability insurance to cover the products
and the parties. The Agreement terminates in January 1998, except that Cello
has the right to terminate the Agreement if it does not receive a minimum of
$150,000 in royalties during any one year, and the Agreement automatically
renews for an additional three years if Cello has received a minimum of $850,000
in royalties during the initial four years. To date the Company has met all
contractual minimum payments.
Xxxxx, Inc.
-----------
The Company entered into a License Agreement with Xxxxx, Inc. On April 1, 1993
with respect to the services of Xxxxx Xxxxxx. The material terms of the
Agreement provide that the Company will design, develop and manufacture dolls,
and such other products as the parties shall agree on, with the approval of
Xxxxx, Inc. The Company retains all intellectual property rights to the
products
93
unless they contain Xxxxx Xxxxxx'x name, and the Company is solely responsible
for the costs of manufacturing, distribution, advertising and sales. Xxxxx, Inc.
is bound to provide the services of Xxxxx Xxxxxx as the spokesperson for the
products, subject to Xxxxx, Inc.'s approval of commentary and production, for a
minimum of eight personal appearances on QVC Cable Television per year for a
total of five years from April 1, 1993. Xxxxx, Inc. receives royalties of eight
percent, from April 1, 1993 through December 31, 1993, and ten percent
thereafter of the proceeds received by the Company from all sales of the
products covered by the Agreement, less credit for returned items. Xxxxx, Inc.
also receives travel expense reimbursement and a per diem for days on which an
appearance is made by Xxxxx Xxxxxx on QVC. The Company is required to keep
products liability and spokesperson liability insurance to cover the products
and the parties. The Agreement is for a five year term, and expires on April 1,
1998, except that Xxxxx, Inc. has the right to terminate the Agreement if it
does not receive a minimum of $500,000 in royalties during any one year, and the
Agreement may be renewed by the Company for an additional five years if Xxxxx,
Inc. has received a minimum of $600,000 in royalties during the last year of the
initial term. During the extended term, Xxxxx, Inc. has the right to terminate
the agreement if it has not received a minimum of $600,000 in any one year of
the extended term. To date the Company has met all contractual minimum payments.
94
TRADEMARKS AND LOGOS
The Company has the right to use the trademark names of the following
spokespersons and celebrities currently under contract: Xxxxx Xxxxxx, Xxxxxxx
Xxxxxxxxx, Xxx Xxxxxx, Xxxxxxx Xxxxxxx, Xxxxxxx Xxxxx, Xxx Xxxx, Xxxxxxx and the
Honeymooners. The Company has also been issued trademarks under the following
names: Xxxxxxxxxxxxx Bears, Xxxxxxxxxxxxx Dolls, Xxxxxxxxxxxxx Toys,
Xxxxxxxxxxxxx Collectibles and Xxxxxxxxxxxxx and XXXXXXXXXXXXX DIRECT. Trademark
applications have been filed for; Cyberbroadcasting. The Company also has a
marketing and licensing agreement with QVC to manufacture and sell the
Environmental Control Technology ECT Ionizer. QVC has filed an application for
registration of the name.
COMPETITION
The direct marketing business is highly competitive and many of the Company's
competitors have substantially greater financial and personnel resources than
the Company. The Company believes that its primary competitors in direct
marketing are difficult to distinguish because the Company is involved in five
types of direct marketing: Home Shopping, Infomercials, Print Media Advertising,
Catalogs and Direct Mail. The Company feels, however, that its main competitors
are National Media, Georgetown Collections, Amcor and the Vermont Teddy Bear
Company. The Company also competes with large infomercial companies such as
Xxxxx-Xxxxxx, and large direct mail companies such as the Franklin Mint, as well
as a variety of retailers and other direct marketers. In addition, according to
the Company's management, obtaining product acceptance by QVC is very
competitive because of the increased exposure and recent success of the home
shopping industry.
95
EMPLOYEES
As of March 15, 1996, the Company has 25 full time and 6 part time employees who
were employed at the Company's main office in Rancho Santa Margarita,
California. The 25 full time employees are comprised of four executives, six
product development, two sales, five administrative, four customer service and
four warehouse employees. The six part time employees are comprised of two
product rework area, one warehouse and one customer service, two clerical
employees.
ITEM 2. PROPERTY
------ --------
The Company leases office and warehouse space at 00000 Xxxxxxxx, Xxxxxx Xxxxx
Xxxxxxxxx, Xxxxxxxxxx 00000. The building space allocation is 1,500 square feet
of office space and 8,500 square feet of warehouse space. On February 15, 1995,
the Company signed a new 3 year lease agreement for the premises at a rate of
$7,755 per month, which includes taxes, maintenance, and property insurance. The
previous lease had expired on January 31, 1995. The Company also owns various
computer and office equipment located in its main facility.
ITEM 3. LITIGATION
------ ----------
On February 27, 1996 a lawsuit was filed in Orange County Superior Court, Case
No. 759883, naming Xxxxx X. Xxxxxxxxxxxxx, Xxxxxx Xxxxxxxxxxxxx and the Company
as defendants. The plaintiff, Xxxxxxx Xxxx, is a minority stockholder in MLF, a
company in which Xx. Xxxxx Xxxxxxxxxxxxx and Ms. Xxxxxx Xxxxxxx owned an
interest. Xx. Xxxx'x lawsuit seeks damages for sums allegedly owed to him by Xx.
Xxxxxxxxxxxxx from the operations of that company. Counsel for the Company
believes that the demand is unfounded and that the lawsuit is without merit. The
Company plans to defend the lawsuit and will tender a claim for costs of the
defense to its Directors' and Officers' Insurance carrier.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------ ---------------------------------------------------
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal 1995.
96
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
STOCK MARKET AND OTHER INFORMATION
The Company's common stock is listed on the NASDAQ National Market System under
the symbol "KNIC" and has been so listed since January 25, 1995. Previous to
such date, there was no public trading market for the Company's equity
securities. In addition, warrants to purchase up to 2,357,500 shares of the
Company's Common Stock are listed on the NASDAQ National Market System under the
symbol "KNICW." The terms of the warrants provide that one warrant plus $1.30
are required to purchase one additional share of the Company's common stock. The
warrants are redeemable at the Company's option commencing March 15, 1995 upon
30 days notice to the warrant holders at $0.01 per share if the closing bid of
the Common Stock averages in excess of 110% of the then current exercise price
of the warrants for a period of 20 consecutive trading days ending within 15
days of the notice of redemption.
On March 18, 1996, the Common Stock closed at $9.125 per share. The closing
price of the Company's stock on December 29, 1995 was $8.25. The total volume of
shares traded during the year ended December 31, 1995 was 25,351,657 shares. As
of March 27, 1996, there were 78 holders of record of the Company's Common
Stock.
The following table presents information on the high and low prices per share
for the Company's Common Stock for each fiscal quarter in 1995.
97
1995: HIGH $ LOW $
---------------------------------------------------
First Quarter 1.175 0.750
Second Quarter 1.100 0.725
Third Quarter 10.400 1.050
Fourth Quarter 9.500 4.500
DIVIDENDS
The Company has never paid any dividends on the Common Stock. The
Company intends to retain earnings and capital for use in its business and does
not expect to pay any dividends within the foreseeable future. Any payment of
cash dividends in the future on the Common Stock will be dependent on the
Company's financial condition, results of operations, current and anticipated
cash requirements, plans for expansion, restrictions, if any, under debt
obligations, as well as other factors that the Board of Directors deems
relevant.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer, Inc. of Colorado has been appointed and
serves as transfer agent and registrar of the
98
Company's Common Stock and Warrants.
ITEM 6. SELECTED FINANCIAL DATA
------ -----------------------
SCHEDULE I - FINANCIAL DATA
1993 1994 1995
----------- --------- ----------
Net Revenues $5,155,626 7,779,955 13,140,346
Net Income (loss) $ (102,516) 725,244 1,268,520
Net Income (loss) per common Share (.01)(1) .10(1) .10
Total Assets $1,438,673 2,201,591 11,213,614
---------- --------- ----------
------------------
(1) Adjusted to reflect the five-for-one stock split effected August 1995
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
99
Additions
Balance at charged to Balance at
beginning of costs and end of
period expenses Deduction period
------------ ---------- --------- ----------
Allowance for Doubtful
Accounts Classifications
for Year ended December 31
1993 $0 0 0 0
1994 $0 0 0 0
1995 $0 741,294 0 741,294
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------ -----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
100
The L. L. Xxxxxxxxxxxxx Company, Inc. (the "Company") was formed by
Xxxxx X. Xxxxxxxxxxxxx, Chairman, President, and Chief Executive Officer of the
Company, and Xxxxxx Xxxxxxxxxxxxx, his wife and the Vice President of the
Company, under the name International Beauty Supply, Ltd., a California
corporation ("IBS"). IBS developed a line of cosmetics called "Orchid Premium"
that was initially marketed to professional beauty supply houses and
subsequently expanded to retail stores.
The Company's principal business has been to develop, manufacture, and
sell products to the home shopping industry. The Company's strategy has been to
bring celebrity or spokesperson involvement to the design, endorsement and
marketing of its products. Using this strategy, the Company was the first to
bring celebrities to the home shopping industry and has documented product
marketing successes. The Company continues to focus on maximizing revenues
through the home shopping industry and believes that such medium is a strong
marketplace for its products. While continuing to maximize opportunities to
market its products though the home shopping industry, the Company has focused
on expanding its distribution channels to include various types direct response
advertising, including print advertisements, infomercials and the Internet.
Additionally, the Company generates revenue from the production of infomercials
and marketing programs for other companies desiring to market their products
over the home shopping industry and the Internet. In the most recent year ended
December 31, 1995, the Company's net revenues increased $5,360,391 or 69% to
$13,140,346 as compared to net revenues for the year ended December 31, 1994 of
$7,779,955. The Company's profitability continues to increase. For the year
ended December 31, 1995, the Company's net income was $1,268,520, an increase of
$543,276 or 75% when compared to net income of $725,244 in 1994.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenues represented by items included in the Company's Statements
of Operations.
Year Ended December 31
1994 1995
----------- ----------
Revenue 100.0% 100.0%
Cost of revenue 54.1 48.2
Gross Profit 45.9 51.8
Operating Expenses 30.6 36.3
101
Operating income 15.3 15.5
Interest (expense) (0.2) 0.8
Net income 9.3 9.7
During the three months ended December 31, 1995, the Company recorded an
additional provision for doubtful accounts of approximately $463,000.
Revenues
Net revenues increased $5,360,391 or 69% to $13,140,346 as compared to net
revenues for the year ended December 31, 1994 of $7,779,955. The increase in
revenues was due primarily to an increase in revenues from a variety of the
Company's products including the Xxxxx Xxxxxx collectible doll line, the Xxxxxxx
Xxxxxxxxx bear line, the ECT Ionizer and Media Production Division. The Company
has continued to identify, develop and market collectible products which are
suited for marketing via direct marketing. For example, net revenues from the
Xxxxx Xxxxxx collectible doll line increased from $4,037,000 in 1994 to
$5,368,000 in 1995. The increase in Xxxxx Xxxxxx doll revenues is partially
attributed to two doll series; "Xxxxx and Rags" and "Xxxxx Xxx". These dolls are
each unique and highly collectible and are examples of the Company's ability to
create demand in its collectible products. In addition to marketing its products
via the home shopping industry, the Company has begun to expand its distribution
system to include direct response print advertising. Direct response advertising
primarily consists of print advertisements and infomercials. The impact of the
revenue from direct response advertising is significant in that the Company
typically realizes greater profit margins on such sales.
The Company also reported revenues of approximately $3,632,000 in 1995
from media production services; a service which the Company did not offer in
1994. The Company believes that media production will contribute to the
Company's future success. Revenues from the ECT Ionizer decreased from
$2,460,000 in 1994 to $1,972,000 in 1995. The Company's revenue and operating
results are subject to significant fluctuations as a result of new product
introductions, strategic alliances, seasonality of customer buying trends and
general economic conditions.
Gross profit
Gross profit increased $3,244,821 or 91% to $6,813,024 as compared to
gross profit for the year ended December 31, 1994 of $3,568,203 due to the
increase in revenues in 1995 over 1994. In addition, the Company continues to
focus on products which realize high profit margins. The Company has
successfully attained improved pricing on porcelain dolls to the point where
gross profit margins can exceed 60% on certain dolls. Additionally, the relative
low cost of revenues associated with the Company's Media Production services
contributes to a higher overall gross profit margin in 1995. However, the
Company set up a reserve for uncollectible accounts of approximately $741,000 in
1995 due to the start up nature of several of the Media Production services
customers. The costs of sales associated with the Media Production services
consist of salaries of employees, travel and studio time. Further, through
direct response advertising, the Company realizes increased profit margins on
its products because the products are
102
sold at retail prices, as opposed to sales to the home shopping industry which
are at wholesale prices. As a result of the foregoing, the overall gross profit
percentage of the Company increased from 45.9% in 1994 to 51.8% in 1995.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $2,383,170 or
100.0% to $4,767,170 as compared to selling, general and administrative expenses
for the year ended December 31, 1994 of $2,384,000. The primary reason for the
increase in such expenses is greater commission expense due to higher sales. The
Company's overall commission expense averages approximately 9% of net revenues
on product sales. Overall operating expenses increased due to the growth of the
infrastructure of the Company necessary to handle the rapid growth in sales. For
example, the Company had 16 employees in 1994 and 31 in 1995. Advertising and
promotion increased in 1995 due to the need for an investor relations firm and
costs of issuing annual and quarterly reports. Travel expense increased in 1995
over 1994 due to the increase in frequency of shows over home shopping channels
which require the Company to transport employees and celebrities to and from the
studio and provide lodging and incidentals. Insurance expense increased in 1995
over 1994 due to the Company's addition of Directors and Officers insurance.
Additionally, the Company's bad debt expense increased in 1995 due to creating a
provision for doubtful accounts totaling $741,294 associated with receivables
from the Company's media production services. Remaining expenses in this
category were in proportion to the corresponding revenues between 1994 and 1995.
Other income (expense)
Other income (expense) increased $70,838 in 1995 to $105,879 in 1995 over
$35,041 in 1994 primarily due to the increase in interest income on funds raised
from the initial public offering in January of 1995.
Net Income
As a result of the foregoing factors, net income increased $543,276 or 75%
to $1,268,520 in 1995 over $725,244 for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations from cash flow from operations and
proceeds from the initial public offering of stock in January of 1995.
103
Cash flow from operations has decreased primarily due to the growth in
sales which causes higher accounts receivable balances in 1995 over 1994.
Additionally, the Company has extended payment terms to certain customers with
whom the Company expects to transact considerable future business. In January of
1995, the Company completed its initial public offering of stock which raised
approximately $4,332,000. The Company has also received approximately $2,300,000
in proceeds from the exercise of warrants to purchase shares of common stock
which were sold as part of the unit offering in the initial public offering
(discussed below). Cash flow from operations decreased due to the increase in
receivables associated with sales volume in both the Xxxxx Xxxxxx doll program
and the Xxxxxxx Xxxxxxxxx teddy bear line. The Company has also incurred certain
prepaid advertising costs, infomercial production costs and advanced royalties
associated with forthcoming projects which are reflected as prepaid expenses on
the balance sheet at December 31, 1995. The combination of the above factors
resulted in an overall increase in working capital from $289,197 at December 31,
1994 to $7,847,207 at December 31, 1995. The current ratio for the Company
increased from 1.18 at December 31, 1994 to 4.1 at December 31, 1995. The
Company's liquidity increased due to the initial public offering of stock in
January of 1995 (discussed below) and due to the increase in profits experienced
during the first nine months of 1995.
The Company completed an initial public offering of 943,000 pre-split
shares of common stock in January of 1995. The Company raised $4,007,907, after
paying underwriters fees and costs associated with the offering, to be used
primarily for product distribution and development. The Company has also
received approximately $2,500,000 from the exercise by warrant holders of common
stock purchase warrants sold to the public as part of the initial public
offering in January of 1995. The Company had 471,500 warrants outstanding which
were issued as part of the unit offered in the initial public offering that were
exercisable at the warrant holders option at $6.50 per share. The Company had
the right to redeem the warrants at $.05 per warrant if the closing bid price on
the common stock averages in excess of 110% of $6.50 per share for over 20
consecutive days. Upon the complete exercise of these warrants, the Company had
the ability to receive approximately $3,000,000 in cash. The Company did not
exercise its right to redeem the warrants, but the warrants were exercised
voluntarily by the warrant holders. The Company currently has approximately
91,000 warrants outstanding of the 471,500 originally issued. The infusion of
cash from the initial public offering and the subsequent exercise of the common
stock warrants has improved the liquidity of the Company considerably. The
foregoing discussion on warrants is on a pre-split basis.
In January 1996, the Company established a line of credit with a financial
institution in the amount of $1,200,000. The line of credit bears interest at
two percentage points above the prime rate and requires the Company to comply
with certain financial covenants.
The Company, pursuant to an agreement with Xxxxx Xxxx International, Ltd.,
has committed to purchase $200,000 of jewelry inventory over a period ending
December 31, 1996.
The Company, pursuant to an agreement with Pure Energy Corporation, has
committed a maximum of $1,000,000 in certain installments to fund costs
associated with the development of alternative fuel.
The Company believes that existing cash and cash equivalents and
borrowings available with its credit agreement will be sufficient to meet the
Company's working capital requirements through December 31, 1996.
104
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this report, including "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain various forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events. The Company cautions that these statements are
further qualified by important factors that could cause actual results to differ
materially from those tn the forward looking statements, including without
limitation, those associated with the ability of the Company to continue to
develop and market existing products and products under development, retain
suppliers and accomplish its expansion strategies. In addition, these statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including
without limitation, decline in demand for the merchandise offered by the
Company, the ability of the Company to obtain adequate merchandise supply and
hire and train employees, management's ability to manage the Company's planned
expansion, and the effect of economic conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------ -------------------------------------------
The Financial Statements of the Company identified in the Index to
Financial Statements appearing under ITEM 14, EXHIBITS AND REPORTS OF FORM 8-K
of this report are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
In January 1996, the company changed its auditing firm from Singer, Lewak,
Xxxxxxxxx & Xxxxxxxxx to Deloitte & Touche. A report on Form 8-K was filed
concerning the change of accountants.
PART III
105
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- --------------------------------------------------
The directors and executive officers of the Company are as follows:
Name Age Position
--------------------------- --- ----------------------------
Xxxxx X. Xxxxxxxxxxxxx 53 Chief Executive Officer,
President and Chairman of
the Board
Xxxxx Xxxxxxx 34 Executive Vice President and
Secretary
Xxxxxx Xxxxxxxxxxxxx 32 Vice President
Xxxxxxx X. Xxxxxx 32 Chief Financial Officer and
Director
Xxxxxx Xxxxxxx 49 Director
Xxxxxx X. Xxxxxxxx 66 Director
Xxxxxxx X. Xxxxx 43 Director
All directors hold office until the next meeting of the shareholders of the
Company and until their successors are qualified and elected. Executive officers
of the Company are appointed by the Board of Directors and serve at the
discretion of the Board. All executive officers devote full time to the Company,
except Xxxxxxx Xxxxxx, who devotes approximately 75% of his time to the Company
as of the date of this filing.
Xx. Xxxxx X. Xxxxxxxxxxxxx, Chief Executive Officer, President, and
Chairman
Xx. Xxxxxxxxxxxxx, 53, is the founder and President of the Company. He
received an AA degree in 1964 from Santa Xxxxxx College with a major in medicine
and a minor in economics.
From 1965 through 1974 Xx. Xxxxxxxxxxxxx worked as a salesman and sales
supervisor at X. Xxxxxx & Son, purchased and sold several liquor stores, and
acquired and sold a total of seven restaurants, four of which comprised a chain
of Mexican restaurants. Between 1974 and 1985, he acted as a private investor
and businessman, investing in real estate and purchasing and selling small
businesses.
106
Xx. Xxxxxxxxxxxxx and his wife, Xxxxxx, Vice President of the Company,
formed the Company as International Beauty Supply in 1985, co-founded LaVie
Cosmetics with Xxxxxxx Xxxx and comedienne, Xxxxxxx Xxxxxx in 1987, co-founded
another company, MLF Enterprises, in 1989 with Xxxxxxx Xxxx and Xxxxxx Xxxxxxx
and, in 1990, the Knickerbockers formed Xxxxxxxxxxxxx Creations, Ltd. and began
developing the celebrity driven products which are now part of the L. L.
Xxxxxxxxxxxxx Co., Inc.
Xx. Xxxxx Xxxxxxx, Executive Vice President
Xx. Xxxxxxx, 34, joined the Company in December of 1993. She assumed the
position of Executive Vice President in May 1995. Xx. Xxxxxxx graduated in 1981
from Xxxxxx College in California with an Associate of Arts degree in
Merchandising. In addition, she has a 12 year background in international trade,
product development, marketing, and sales. From 1983 through 1987 Xx. Xxxxxxx
served as Operation Manager for Xxxxx Xxxxxxx Images, a licensee of Xxxxx
Xxxxxxx Sportswear. From 1987 through 1993 she worked on the senior
merchandising team and ultimately served as Vice President of Merchandising for
Pacific Outlook Sportswear, the largest licensee of Xxxxx Xxxxxxx Sportswear.
Xx. Xxxxxxx was instrumental in launching the Company's direct response
print campaigns and infomercial projects in 1995. She continues to develop
departmental strategy and staffing requirements to manage the Company's growth.
Xx. Xxxxxx Xxxxxxxxxxxxx, Vice President
Xxx. Xxxxxxxxxxxxx, 32, has been with the Company as Vice President since
its inception. She has over 8 years experience in the field of marketing. In
1985 Xxx. Xxxxxxxxxxxxx helped to form the Company as International Beauty
Supply, and thereafter LaVie Cosmetics, MLF Enterprises and Xxxxxxxxxxxxx
Creations, Ltd. Since 1985, she has worked to develop and market products and
programs for the home shopping industry. Her focus has mainly been the creation
and development of the products, and she has emphasized collectibles.
Xxx. Xxxxxxxxxxxxx is currently managing all aspects of the Xxxxx Xxxxxx
Doll Collection program, including product and program development, production,
marketing and sales. In addition, she also oversees the other collectible
programs, including the collectable bears. She has had primary responsibility
for the profitability and diversity of the collectible lines and is currently
coordinating expansion in these programs. Xxx. Xxxxxxxxxxxxx'x area of
responsibility currently accounts for over $4 million in sales for the Company.
Xx. Xxxxxxx X. Xxxxxx, C.P.A., Chief Financial Officer, Director
107
Xx. Xxxxxxx X. Xxxxxx, 32, was hired as a consultant on April 1, 1993 and
became Chief Financial Officer of the Company on June 30, 1993. He is a
certified public accountant with over 10 years experience in public accounting,
specializing in emerging companies. Xx. Xxxxxx holds a masters degree in
taxation from the University of Southern California.
Xx. Xxxxxx has provided services relating to auditing, compilation and
review of companies in the manufacturing, high technology, real estate, retail,
health care, financial and entertainment industries. In addition to financial
statement preparation, Xx. Xxxxxx has provided services relating to income tax
planning and preparation, business valuation, financial and operational
planning, budgeting and personal financial planning.
Xx. Xxxxxx has also provided consulting services relating to economic
analysis and feasibility studies on real estate projects, debt and equity
restructuring, software installation and implementation, office automation and
temporary or part time controllership services.
From 1993 to the present, Xx. Xxxxxx has maintained a private accountancy
and financial consulting practice. Prior to his private practice, he worked as
Business Manager with Breslauer, Jacobson, Xxxxxx & Xxxxxxx from 1992 to 1993
and with Xxxxx, Xxxxxx & Schurawel as a Senior Accountant from 1991 to 1992. Xx.
Xxxxxx worked with Deloitte & Touche as a Senior Consultant from 1986 to 1991.
Currently, Xx. Xxxxxx serves as Chief Financial Officer of the Company
approximately 90 hours per month, overseeing the financial records preparation
and reporting, and performing the general functions of CFO.
Ms. Xxxxxx Xxxxxxx, Director
Xx. Xxxxxxx, 49, was appointed to the Board of Directors in June 1994. She
is a well known celebrity actress and has been the president and a director of
Xxxxxxx Productions, Inc., an acting services firm since 1978. Xx. Xxxxxxx has
participated in the development and marketing of products with MLF Enterprises
(a company she co-owns with Xxxxx X. Xxxxxxxxxxxxx and Xxxxxxx Xxxx) in 1989,
and with Xxxxxxxxxxxxx Creations, Ltd. in 1991 to 1993.
Xx. Xxxxxx X. Xxxxxxxx, Director
Xx. Xxxxxxxx, 66, was appointed to the Board of Directors and elected
Secretary of the Company in June 1994. He graduated from U.C.L.A. Law School in
1954 and has been a licensed attorney in private practice and a member of the
California State Bar since 1955. Xx. Xxxxxxxx was a City Council member of the
Xxxxxx City Counsel from 1962 to 1966. Xx. Xxxxxxxx has advised the Company on
general corporate matters since its inception in 1985.
108
Xx. Xxxxxxx X. Xxxxx, Director
Mr. Black, 43, was appointed to the Board of Directors in November 1995. He
received a BSBA in Marketing from the University of Denver in 1978, an MBA from
the University of Denver in 1981 and a Juris Doctor from Western State
University College of Law in 1987. Mr. Black is a licensed attorney and a member
of the California State Bar, the Federal District Courts for the Central and
Northern Districts of California and the Ninth Circuit Court of Appeals.
Mr. Black worked as an Area Manager for Deere & Company from 1979 through
1984, Director of Analysis for Management Resource Services Company from 1984
through 1985, and Senior Vice President of Geneva Corporation from 1985 through
1990. He maintains a private law practice and is currently General Counsel of
Sunclipse, Inc. in Montebello, California, General Counsel and Director of
Pyraponic Industries, Inc. in San Diego, California, Special Counsel for North
America for Amcor, Ltd. in Melbourne Australia, General Counsel, Secretary and
Director of Anle Paper Co., Inc. in Chicago, Illinois, General Counsel,
Secretary and Director of Xxxx-Xxxxx Container Corporation in Elmhurst,
Illinois, Director of Raymark Container, Inc. in Atlanta, Georgia, Director
General of Amcor de Mexico, S.A. de C.V. in Guadalajara, Jalisco Mexico, and
Director General of Xxxx X. Xxxxxxxxx Co. de Mexico, S.A. de C.V in Tijuana,
Baja California Mexico.
ITEM 11. EXECUTIVE COMPENSATION
------- ----------------------
The following table sets forth certain information concerning annual, long
term and other compensation received during the last three fiscal years and to
be received by (i) the Chief Executive Officer of the Company, and (ii) the
Company's four most highly compensated executive officers whose annual salary
and bonus compensation exceeded $100,000:
Name and Principal Fiscal Long Term All Other
Position Year Salary Bonus Compensation Compensation
------------------ --------- --------- --------- ------------ ------------
Xxxxx X. Xxxxxxxxxxxxx 1995 $175,000 $175,000 N/A N/A
1994 $175,000 N/A N/A N/A
1993 $123,000 N/A N/A
DIRECTORS FEES
Directors receive a fee of $500 per meeting attended and reasonable travel
expenses.
109
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Xxxxx X. Xxxxxxxxxxxxx,
its President, on September 27, 1994 and with Xx. Xxxxxx Xxxxxxxxxxxxx, its Vice
President, on September 27, 1994. The respective terms of the employment
agreements are five years each. The agreements are subject to early termination
by the Company under certain conditions, including breach of the agreement,
fraud by the employee, and/or breach of fiduciary duty owed to the Company by
the employee. The Company has the right to extend the terms of the employment
agreements for an additional five years each upon written notice to the
employees. Under terms of the agreements, each of the employees agrees to devote
his or her full time and effort to the business affairs of the Company and to
use his or her best efforts to promote the best interests of the Company.
During the first year, the employment agreements called for Xxxxx X.
Xxxxxxxxxxxxx to receive an annual base salary of $175,000 and for Xxxxxx
Xxxxxxxxxxxxx to receive an annual base salary of $75,000. In addition, these
two officers and Xxxxx Xxxxxxx, Executive Vice President, are eligible to
receive an annual bonus in an amount to be determined by a compensation
committee and ratified by the Board of Directors out of a Management Bonus Fund
up to a maximum of 10% of the pretax profits of the Company and are entitled to
receive certain stock options from the Stock Option Plan previously adopted by
the Company. See "Stock Option Plan."
STOCK OPTION PLAN
The shareholders approved and the Company adopted a Stock Option Plan on
September 27, 1994 which was amended and restated on June 15, 1995 as the L. L.
Xxxxxxxxxxxxx 1995 Amended and Restated Stock Option Plan (the "Plan"). The Plan
is administered by a committee appointed by the Board of Directors and provides
that options may be granted at exercise prices determined by the Board of
Directors in its sole discretion. The Plan is designed as an incentive for
employees, non-employee directors and persons providing services of special
importance to the Company. Unless otherwise specified, the options expire ten
years from the date of grant. The Plan covered an aggregate of 400,000 shares
when granted, which has been increased by the five-for-one stock split to a
total of 2,000,000 shares. As of the date of this report, 400,000 pre-split
options have been granted pursuant to the Plan, which has been increased by the
five-for-one stock split to a total of 2,000,000 options granted.
Options Granted
The following table discloses the individual grants of options to purchase
securities of the Company to each of the Named Executive Officers, for the most
recent fiscal year.
Options/SAR Grants During the Fiscal Year Ended December 31, 1995
110
Number of % of Total Market Value
Securities Options/SARs of Securities
Underlying Granted to Underlying
Options/SARs Employees Exercise or Options/SARs
Granted in Fiscal Base Price on Grant Date Expiration
Name (#)(1) Year (1) ($/Share) ($/Share) Date
---------------------- ------------ ------------ ------------- ------------- ----------
Xxxxx X. Xxxxxxxxxxxxx 500,000 25.0% $.75 (2) $.75(3) 2005
Xxxxx Xxxxxxx 151,250 7.6% $.75 (2) $.75(3) 2005
Xxxx Xxxxxx 50,000 2.5% $.75 (2) $.75(3) 2005
------- ---- ------- ---- ----
(1) Options granted on June 15, 1995 were subject to a five-for-one stock
split effected in August 1995.
(2) At the grant date, options vested with an exercise price of $3.75 per
share. Following the five-for-one stock split, the exercise price was
reduced by a factor of five to $.75 per share.
(3) Market value based on the average trading price of the Company's
common stock on the grant date; June 15, 1995, reduced by a factor of
five to reflect the five for one stock split effective August 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------- --------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 15, 1995 by (i) each
director of the Company, (ii) the CEO of the Company and the four most highly
compensated executive officers of the Company whose annual salary and bonus
compensation exceeded $100,000, (iii) all directors and executive officers as a
group, and (iii) each person known to the Company to own beneficially more than
5% of the outstanding shares of Common Stock:
111
Name and Address of Amount and Nature of Percent
Beneficial Owner (1) Ownership of Class
----------------------------------- -------------------- --------
Xxxxx X. Xxxxxxxxxxxxx and Xxxxxx
Xxxxxxxxxxxxx, Husband and Wife as
Community Property 7,489,285 52.3%(2)
Directors and Executive Officers
as a Group 935,000(3) 6.5%(3)
_____________________________
(1) The address for all persons listed is 30055 Comercio, Xxxxxx Xxxxx
Xxxxxxxxx, Xxxxxxxxxx 00000
(2) Percentage is based on the 7,139,285 shares currently held of record
plus options issued by the Company to Xx. Xxxxxxxxxxxxx that enables
Xx. Xxxxxxxxxxxxx to currently acquire 350,000 shares of the Company's
common stock.
(3) Beneficial ownership of the Directors and Executive Officers as a
group is based on 175,000 shares currently held of record plus options
issued by the Company to Directors and Executive Officers to currently
acquire 760,000 shares of the Company's common stock, but does not
include shares held of record or options granted to Xx. Xxxxx X.
Xxxxxxxxxxxxx.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------- ----------------------------------------------
112
RELATED PARTY TRANSACTION
The Company leases office and warehouse space at 00000 Xxxxxxxx, Xxxxxx Xxxxx
Xxxxxxxxx, Xxxxxxxxxx 00000. The building space allocation is 1,500 square feet
of office space and 8,500 square feet of warehouse space. Up until September 30,
1994 the facilities were subleased from K and E Marketing, Ltd., a corporation
co-owned by Xxxxx X. Xxxxxxxxxxxxx, a principal of the Company, and Xxxxxxx
Xxxx, a spokesperson for the Company, at a rate of $8,065 per month (since
January 1, 1994) plus its proportionate share of taxes, maintenance and property
insurance. Several related companies occupied the facilities and the rental
payment was based on the Company's pro-rated share of the space. On October 1,
1994, the lease was amended to assign the leasehold to the Company. On February
15, 1995, the Company signed a new 3 year lease agreement for the premises at a
rate of $7,755 per month, which includes taxes, maintenance, and property
insurance. The previous lease had expired on January 31, 1995. The related
companies no longer occupy the facilities or pay rent to the Company.
LOAN TO SHAREHOLDER
In December 1995, the Company made a loan to its president, Xxxxx X.
Xxxxxxxxxxxxx, in the principal amount of $260,000. Such loan was evidenced by a
promissory note from Xx. Xxxxxxxxxxxxx to the Company providing for payment of
the entire principal amount plus interest at prime plus 2 1/2% per annum due and
payable on June 1, 1996.
Pursuant to a resolution of the Board of Directors of the Company, passed on
September 27, 1994, any ongoing and future transactions between the Company and
its officers, directors, employees, and affiliates, that are outside the scope
of the Company's employment relationship with such persons will be on terms no
less favorable to the Company than can be obtained from unaffiliated parties.
Any such transactions are subject to the approval of a majority of the
disinterested members of the Board of Directors.
AFFILIATED AND PREDECESSOR COMPANIES
The L. L. Xxxxxxxxxxxxx Company, Inc. (the "Company") was formed by Xxxxx X.
Xxxxxxxxxxxxx, Chairman, President, and Chief Executive Officer of the Company,
and Xxxxxx Xxxxxxxxxxxxx, his wife and the Vice President of the Company, under
the name International Beauty Supply, Ltd., a California corporation ("IBS").
IBS developed a line of cosmetics called "Orchid Premium" that was initially
marketed to professional beauty supply houses and subsequently expanded to
retail stores.
The Knickerbockers next venture was LaVie Cosmetics, a California corporation
("LaVie"), that the Knickerbockers co-founded with Xxxxxxx Xxxx, a spokesperson
for the Company, and comedienne, Xxxxxxx Xxxxxx, in 1987. LaVie introduced a
product named Creme de LaVie in both the X. Xxxxxx and Nordstrom department
stores. In October 1988 Creme de LaVie was introduced on The Home Shopping
Network in Tampa, Florida with Xx. Xxxx and Xx. Xxxxxx live on the air.
113
In 1989 the Knickerbockers co-founded another company, MLF Enterprises, a
California corporation ("MLF") with Xx. Xxxx and Xxxxxx Xxxxxxx, a director of
the Company. MLF developed replicas of Xx. Xxxxxxx'x jewelry collection, which
were sold through the television home shopping industry.
The Knickerbockers next formed Xxxxxxxxxxxxx Creations, Ltd., a California
corporation ("Creations") in 1990 and began developing the products and
celebrity endorsement programs which are now part of the Company.
In 1993 the directors and shareholders of Creations and IBS determined to effect
an initial public offering in order to finance the continued growth of the
different companies. It was determined that the operations of Creations and IBS
should be consolidated under a single entity in order to facilitate the
contemplated public offering. However, because Creations had been switched from
a "C" corporation to a subchapter "S" corporation in 1990, the directors and
shareholders of the Company were advised that Creations would be an unsuitable
candidate for a public offering.
On May 24, 1993, the directors and shareholders of IBS approved an amendment of
the articles of incorporation of the corporation changing the name of the
corporation from "International Beauty Supply, Ltd." to the Company's current
name, "The L. L. Xxxxxxxxxxxxx Company, Inc." The Company's name was chosen to
maximize the retention of the goodwill in the home shopping industry associated
with the name "Xxxxxxxxxxxxx" by virtue of Creations' business. The Company then
consummated an asset purchase agreement whereby the operating assets of
Creations, including but not limited to the marketing and distribution rights to
the products and programs of Creations, were acquired along with certain
liabilities. As of the date hereof, all current active contracts of Creations
have been assumed or amended to grant those rights and obligations to the
Company.
In connection with the initial public offering of the Company's common stock
completed January 25, 1995, the Directors and shareholders of the Company
approved as of June 15, 1994 a 1990.5 for 1 stock split of its outstanding
common stock, and as of September 27, 1994 a .714 for 1 reverse stock split of
its outstanding common stock.
CONFLICTS OF INTEREST
Xx. Xxxxxxxxxxxxx has a current interest in LaVie Cosmetics ("LaVie"), MLF
Enterprises ("MLF"), and Xxxxxxxxxxxxx Creations, Ltd. ("Creations"). Each of
these companies has previously developed and marketed products which are in
direct competition with the Company's products. The Company has acquired the
trademark rights and the license to market the products of LaVie, and has
acquired certain operating assets and the operations of Creations. Both LaVie
and Creations are currently inactive, but have not been dissolved.
Xx. Xxxxxxxxxxxxx and Ms. Xxxxxx Xxxxxxx, a director of the Company, both have a
current interest in MLF, which previously developed and marketed a line of
jewelry products directly competitive to certain products that the Company may
be marketing now or in the future. The operations of MLF have been discontinued
and it is inactive, however MLF has not been dissolved.
Because Xx. Xxxxxxxxxxxxx is an officer and director of the Company, and because
Xx. Xxxxxxx is a director of the Company, their respective continuing interests
in LaVie, Creations, and MLF pose potential conflicts of interest, should such
corporations become active again in the future, and should they sell or market
products which are competitive with the Company's products, or should the
Company negotiate or enter into any significant transaction or agreements with
those companies, then a conflict of interest will exist. The
114
Company has received assurances that none of the corporations or individuals
named herein have any intention to compete with the Company or enter into any
transactions or agreements which would present a conflict of interest. There can
be no assurance, however, that such a conflict will not develop.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-------- ----------------------------------------------------------------
(A) FINANCIAL STATEMENTS AND SCHEDULES Page
-------------------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-1
Balance Sheet at December 31, 1995 F-2
Statements of Operations for the Years Ended December 31, 1995 and 1994 F-3
Statements of Shareholder's Equity for the Years Ended December 31, 1995 and 1994 F-4
Statements of Cash Flows for the Years Ended December 31, 1995 and 1994 F-5
Notes to Financial Statements F-6
(B) REPORTS ON FORM 8-K
-------------------
A report on Form 8-K was filed in the first quarter of the fiscal year
ended December 31, 1996 in connection with the Company's change of
accountants.
(C) EXHIBITS
--------
Exhibit
Number Description
------------------------------------------------
115
3.1 Articles of Incorporation of International Beauty Supply, Ltd. ("IBS")
dated July 11, 1985.(1)
3.2 Amendment to Articles of Incorporation of IBS dated May 24, 1993.(1)
3.3 Certificate of Amendment to Articles of Incorporation of The L. L.
Xxxxxxxxxxxxx Company Inc. (the "Company") dated June 20, 1994.(1)
3.4 Certificate of Amendment to Articles of Incorporation of the Company
dated September 27, 1994.(1)
3.5 Bylaws of the Company.(2)
4.1 Qualified Stock Option Plan adopted by the Company on September 27,
1994 along with form of Stock Option Agreement.(3)
4.2 Form of Warrant Agreement.(3)
4.3 Form of Representative's Warrant issued to X.X. XxXxx Securities, Inc.
upon consummation of the Company's offering on January 25, 1995.(3)
10.1 Employment Agreement, dated September 27, 1994, between the Company
and Xxxxx X. Xxxxxxxxxxxxx.(3)
10.2 Employment Agreement, dated September 27, 1994, between the Company
and Xxxxxx Xxxxxxxxxxxxx.(3)
10.3 Product Development and License Agreement between American
Environmental Systems, Inc. ("AES") and Xxxxxxxxxxxxx Creations, Ltd.
("Creations") dated August 4, 1992 re development of a portable room
--
ionizer.(3)
10.4 Trademark License Agreement between AES and Creations dated October
22, 1992 re the licensing of the trademark EpE to Xxxxxxxxxxxxx.(3)
--
116
10.5 Assignment of AES Product Development and License Agreement and AES
Trademark License Agreement from Creations to the Company dated
January 15, 1993, with Acceptance of Assignment by the Company and
Consent to Assignment by AES.(3)
10.6 Agreement between QVC Network, Inc. ("QVC") and the Company dated
September 29, 1993 re sales of EpE Clean Room ionizers.(3)
--
10.7 Agreement between Xxxxx, Inc. and the Company dated April 1, 1993 re
--
the services of Xxx Xxxxxx in the design, production, and sale of
products and licensing to the Company of the use of Xxx Xxxxxx'x name
in conjunction with the Company's products.(3)
10.8 Agreement between Xxx Xxxxxx (US), Inc. and the Company dated May 1,
1994 re the services of Xxx Xxxxxx in the design, production and sale
--
of products and licensing to the Company of the use of Xxx Xxxxxx'x
name in conjunction with the Company's products.(3)
10.9 Agreement between Cello, Inc. and the Company dated May 13, 1994 re
--
services of Xxxxxxx Xxxxxxxxx in the design, development, manufacture
and the sale of products, with Acceptance by Xxxxxxx Xxxxxxxxx and
Cancellation of Prior Agreement dated October 30, 1991 between Cello,
Inc. and Creations.(3)
10.10 Agreement between the Company and The Tracker Corporation of America
dated March 15, 1995 re the development of marketing campaigns for
--
the Tracker products.(4)
10.11 Lease Agreement between the Company and Xxxx Management for 00000
Xxxxxxxx, Xxxxx Xxxxxxxxx, XX dated February 15, 1995.(2)
10.12 Letter of Agreement between the Company, Xx. Xxxxxxx Xxxx, and Xxx
Xxxx dated June 22, 1993 re the sale of EpE Clean Room System
--
Ionizers.(2)
10.13 Letter of Agreement between the Company, Xx. Xxxxxxx Xxxx, and Xxxxx
Xxxxxxxxx dated June 23, 1993 re the sale of EpE Clean Room System
--
Ionizers.(2)
10.14 Joint Venture Agreement between the Company and Xxxxxx
Communications Corporation, dated December 21, 1995 re the formation
--
of the joint venture corporation to be known as IN/LLK Media
Marketing.(5)
10.15 Agreement between the joint venture partnership of the Company and
Xxxxxx Communications Corporation, and Agia Akal Singh Khalsa, dated
January 22, 1996 re the development and marketing of numerology
--
services through infomercials, print media, radio, the home shopping
industry and the worldwide web. (5)
117
10.16 Agreement between the Company and Xxxxx Xxxx International Co.,
Ltd., dated November 28, 1995 re the acquisition of 49% of the
--
issued and outstanding stock of Xxxxx Xxxx International Co., Ltd.
(5)
10.17 Agreement between the Company and Xxxxx Xxxx Design Co., Ltd., dated
November 27, 1995 re the distribution of the jewelry products of
--
Xxxxx Xxxx Design Co., Ltd. (5)
10.18 Agreement of Purchase and Sale of the Capital Stock of Pure Energy
Corporation between the Company and Pure Energy Corporation, dated
February 7, 1996 re the acquisition of 40% of the issued and
--
outstanding capital stock of Pure Energy Corporation. (5)
10.19 Letter of intent between Pure Energy Corporation and Biofine, Inc.,
dated March 3, 1996 re the licensing of the patents of Biofine, Inc.
--
(5)
10.20 License Agreement between the Company and SIM-GT Licensing Corp.,
dated May 1, 1995 re the licensing of the name, likeness and
--
trademarks of Xxxxxxx Xxxxxxx. (5)
10.21 Agreement between the Company and Timphaven Productions, Inc.,
dated July 24, 1995 re the distribution of videos, cassettes and
--
instructional materials. (5)
23.0 Consent of Singer, Lewak, Xxxxxxxxx and Xxxxxxxxx, CPA's pertaining
to the 1994 audited financial statements. (5)
__________________________________
(1) Filed as part of Exhibit 3.1 to The L. L. Xxxxxxxxxxxxx Company, Inc.
Form SB-2 Registration Statement No. 33-85230-LA as filed with the Securities
& Exchange Commission on or about October 13, 1994.
(2) Filed as an exhibit to the L. L. Xxxxxxxxxxxxx Company, Inc. Annual
Report on Form 10-KSB filed on or about March 29, 1995.
(3) Filed as an Exhibit to The L. L. Xxxxxxxxxxxxx Company, Inc. Form SB-2
Registration Statement No. 33-85230-LA as filed with the Securities &
Exchange Commission on or about October 13, 1994.
(4) Filed as Exhibit to The L. L. Xxxxxxxxxxxxx Company, Inc. report on Form
8-K dated March 21, 1995.
(5) Filed Herewith.
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
The L. L. Xxxxxxxxxxxxx Company, Inc.
-------------------------------------
(Registrant)
Date: March 29, 1996 By: /s/ Xxxxx X. Xxxxxxxxxxxxx
---------------------------------
Xxxxx X. Xxxxxxxxxxxxx
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
-----------------------------------------------------------------------
/s/ Xxxxx X. Xxxxxxxxxxxxx Chief Executive Officer, 3/29/96
--------------------------- -------
Xxxxx X. Xxxxxxxxxxxxx President and Chairman
/s/ Xxxxxxx X. Xxxxxx Chief Financial Officer 3/29/96
--------------------------- -------
Xxxxxxx X. Xxxxxx and Director
119
/s/ Xxxxx Xxxxxxx Executive Vice President 3/29/96
--------------------------- -------
Xxxxx Xxxxxxx and Secretary
Director
---------------------------
Xxxxxx Xxxxxxx
/s/ Xxxxxx X. Xxxxxxxx Director 3/29/96
--------------------------- -------
Xxxxxx X. Xxxxxxxx
/s/ Xxxxxxx X. Xxxxx Director 3/29/96
--------------------------- -------
Xxxxxxx X. Xxxxx
120
EXHIBIT "F"
The Finance Authority of Maine
00 Xxxxxxx Xxxxxx
Xxxxxxx, Xxxxx 00000
Costal Enterprises, Inc.
c/o Tompkins, Clough, Xxxxxxx & Xxxxxx, P.A.
Three Xxxxx Xxxxx
Xxxxxxxx, Xxxxx 00000
Southern Maine Economic Development District
c/o Curtis, Thaxter, Stevens, Broder & Micoleau, LLC
Xxx Xxxxx Xxxxx
Xxxxxxxx, Xxxxx 00000
121
EXHIBIT "G-1"
122
EXHIBIT "G-2"
123
EXHIBIT "H"
124
EXHIBIT "I"
125
EXHIBIT "J"
126
EXHIBIT "K"
127
EXHIBIT "L"
128
EXHIBIT "M"
129
EXHIBIT "N"
130
