Exhibit 10.27


 


EXECUTION
COPY


 


AGREEMENT
AND PLAN OF MERGER


 


by and
among


 


BEAUTY
SYSTEMS GROUP LLC,


 


the
Purchaser,


 


LADY LYNN
ENTERPRISES, INC.,

the Merger Sub,


 


SCHOENEMAN
BEAUTY SUPPLY, INC.,

the Corporation,


 


the
SHAREHOLDERS (as defined herein)


 


and


 


F. DALE
SCHOENEMAN,

as Shareholders’ Representative,


 


Dated:  September 30, 2009


 

















 


TABLE OF
CONTENTS


 


	
  Article 1 Definitions

  	
  1

  
	
  Article 2 The Merger; Conversion of
  Shares

  	
  13

  
	
   

  	
  2.1

  	
  The Merger

  	
  13

  
	
   

  	
  2.2

  	
  Effect of the Merger

  	
  13

  
	
   

  	
  2.3

  	
  Articles of Incorporation and Bylaws

  	
  13

  
	
   

  	
  2.4

  	
  Directors and Officers

  	
  13

  
	
   

  	
  2.5

  	
  Merger Consideration; Effect on Capital
  Stock

  	
  14

  
	
  Article 3 Closing and Closing Date;
  Effective Time

  	
  14

  
	
   

  	
  3.1

  	
  Closing Date; Effective Time

  	
  14

  
	
   

  	
  3.2

  	
  Purchaser’s Deliveries

  	
  15

  
	
   

  	
  3.3

  	
  Shareholders’ and the Corporation’s
  Deliveries

  	
  16

  
	
  Article 4 Closing Net Assets;
  Establishment of Escrow

  	
  17

  
	
   

  	
  4.1

  	
  Determination of Closing Net Assets

  	
  17

  
	
   

  	
  4.2

  	
  Excluded Assets; Cash

  	
  19

  
	
   

  	
  4.3

  	
  Regular Escrow and Special Escrow

  	
  19

  
	
  Article 5 Representations and
  Warranties of the Shareholders

  	
  20

  
	
   

  	
  5.1

  	
  Organization, Power and Authority

  	
  20

  
	
   

  	
  5.2

  	
  No Conflict and Binding Obligations

  	
  20

  
	
   

  	
  5.3

  	
  Compliance With Laws; Environmental, Health
  and Safety Matters

  	
  21

  
	
   

  	
  5.4

  	
  Financial Statements

  	
  22

  
	
   

  	
  5.5

  	
  Absence Of Certain Changes

  	
  23

  
	
   

  	
  5.6

  	
  Books Of Account

  	
  24

  
	
   

  	
  5.7

  	
  Tax Matters

  	
  24

  
	
   

  	
  5.8

  	
  No Material Adverse Effect

  	
  27

  
	
   

  	
  5.9

  	
  Title to Assets

  	
  27

  
	
   

  	
  5.10

  	
  Leases

  	
  27

  
	
   

  	
  5.11

  	
  Contracts

  	
  28

  
	
   

  	
  5.12

  	
  Purchase Orders

  	
  28

  
	
   

  	
  5.13

  	
  Customer Orders

  	
  29

  
	
   

  	
  5.14

  	
  Inventory

  	
  29

  
	
   

  	
  5.15

  	
  Permits

  	
  29

  
	
   

  	
  5.16

  	
  Tangible Assets

  	
  29

  
	
   

  	
  5.17

  	
  Legal Proceedings

  	
  29

  
	
   

  	
  5.18

  	
  Intellectual Property

  	
  30

  
	
   

  	
  5.19

  	
  Employees

  	
  30

  
	
   

  	
  5.20

  	
  Labor Contracts and Controversies

  	
  31

  
	
   

  	
  5.21

  	
  Retirement and Benefit Plans; ERISA

  	
  31

  
	
   

  	
  5.22

  	
  Transactions With Related Parties

  	
  32

  
	
   

  	
  5.23

  	
  Product Warranty

  	
  33

  
	
   

  	
  5.24

  	
  No Broker

  	
  33

  
	
   

  	
  5.25

  	
  Disclosure

  	
  33

  
	
   

  	
  5.26

  	
  Insurance

  	
  33

  
	
   

  	
  5.27

  	
  Indebtedness

  	
  33

  
	
   

  	
  5.28

  	
  Capitalization

  	
  34

  
	
   

  	
  5.29

  	
  Accounts Receivable

  	
  34

  



 


i

















 


	
   

  	
  5.30

  	
  Bank Accounts

  	
  34

  
	
   

  	
  5.31

  	
  Claims Against Officers and Directors

  	
  34

  
	
   

  	
  5.32

  	
  Recorded Sales Consistent With
  Manufacturers’ Directions

  	
  34

  
	
   

  	
  5.33

  	
  Intercompany Accounts; Transactions With
  Affiliates

  	
  35

  
	
  Article 6 Representations and
  Warranties of the Purchaser

  	
  35

  
	
   

  	
  6.1

  	
  Organization, Power and Authority

  	
  36

  
	
   

  	
  6.2

  	
  Authority and Binding Obligations

  	
  36

  
	
   

  	
  6.3

  	
  Investment Representation

  	
  36

  
	
   

  	
  6.4

  	
  Litigation

  	
  36

  
	
   

  	
  6.5

  	
  Consents and Governmental Approvals

  	
  36

  
	
   

  	
  6.6

  	
  No Broker

  	
  37

  
	
  Article 7 Covenants and Agreements

  	
  37

  
	
   

  	
  7.1

  	
  Landlord’s Consents for Store Leases

  	
  37

  
	
   

  	
  7.2

  	
  Supplier Contracts

  	
  39

  
	
   

  	
  7.3

  	
  Restrictive Covenant

  	
  39

  
	
   

  	
  7.4

  	
  Store Cash

  	
  42

  
	
   

  	
  7.5

  	
  Post-Closing Employee Matters

  	
  42

  
	
   

  	
  7.6

  	
  Post-Closing Treatment of Individual
  Shareholders

  	
  43

  
	
   

  	
  7.7

  	
  Tax Deposit

  	
  44

  
	
   

  	
  7.8

  	
  M&T Indebtedness

  	
  44

  
	
  Article 8 Indemnification

  	
  44

  
	
   

  	
  8.1

  	
  Indemnification by the Shareholder
  Indemnifying Parties

  	
  44

  
	
   

  	
  8.2

  	
  No Set-Off

  	
  45

  
	
   

  	
  8.3

  	
  Indemnification by the Purchaser

  	
  45

  
	
   

  	
  8.4

  	
  Survival

  	
  45

  
	
   

  	
  8.5

  	
  Limitation on Indemnification and Survival
  of Representations and Warranties

  	
  45

  
	
   

  	
  8.6

  	
  Method of Asserting Claims, etc.

  	
  46

  
	
   

  	
  8.7

  	
  Losses Net of Insurance, etc.

  	
  48

  
	
   

  	
  8.8

  	
  Workers’ Compensation Claim

  	
  48

  
	
   

  	
  8.9

  	
  Sole Remedy

  	
  48

  
	
   

  	
  8.10

  	
  Treatment of Indemnification Payments

  	
  48

  
	
   

  	
  8.11

  	
  Materiality Qualifications

  	
  48

  
	
  Article 9 Assignment

  	
  49

  
	
  Article 10 Notices

  	
  49

  
	
  Article 11 Integration, Interpretation
  and Miscellaneous Provisions

  	
  50

  
	
   

  	
  11.1

  	
  Entire Agreement

  	
  50

  
	
   

  	
  11.2

  	
  Waiver

  	
  50

  
	
   

  	
  11.3

  	
  Governing Law

  	
  50

  
	
   

  	
  11.4

  	
  Public Announcement

  	
  50

  
	
   

  	
  11.5

  	
  Expenses

  	
  50

  
	
   

  	
  11.6

  	
  Further Assurances

  	
  50

  
	
   

  	
  11.7

  	
  Counterparts

  	
  51

  
	
   

  	
  11.8

  	
  Facsimile Copies

  	
  51

  
	
   

  	
  11.9

  	
  Miscellaneous

  	
  51

  
	
   

  	
  11.10

  	
  Resolution of Certain
  Disputes

  	
  51

  
	
   

  	
  11.11

  	
  Notification

  	
  52

  



 


ii

















 


	
   

  	
  11.12

  	
  Schedules

  	
  52

  
	
   

  	
  11.13

  	
  Shareholders’
  Representative

  	
  52

  
	
  Article 12 Section 12.2
  Consideration; Additional Tax Matters

  	
  53

  
	
   

  	
  12.1

  	
  Allocation Schedule; Allocation Methodology

  	
  53

  
	
   

  	
  12.2

  	
  Section 12.2 Consideration

  	
  54

  
	
   

  	
  12.3

  	
  Responsibility for Preparing and Filing Tax
  Returns

  	
  55

  
	
   

  	
  12.4

  	
  Audits and Other Proceedings

  	
  55

  
	
   

  	
  12.5

  	
  Cooperation on Tax Matters

  	
  56

  
	
   

  	
  12.6

  	
  S Corporation Status

  	
  56

  
	
   

  	
  12.7

  	
  Transfer Taxes

  	
  57

  



 


Exhibits


 


	
  Exhibit A

  	
   

  	
  Consulting Agreement (F. Dale Schoeneman)

  
	
  Exhibit B

  	
   

  	
  Consulting Agreement (Kay L. Schoeneman)

  
	
  Exhibit C-1

  	
   

  	
  Escrow Agreement (Special Escrow)

  
	
  Exhibit C-2

  	
   

  	
  Escrow Agreement (Regular Escrow)

  
	
  Exhibit D

  	
   

  	
  Warehouse Lease (210 Industrial Park Road)

  
	
  Exhibit E

  	
   

  	
  Warehouse Lease (222 Industrial Park Road)

  
	
  Exhibit F

  	
   

  	
  Shareholders’ Release

  
	
  Exhibit G

  	
   

  	
  Articles of Incorporation

  
	
  Exhibit H

  	
   

  	
  Bylaws

  
	
  Exhibit I

  	
   

  	
  Territory

  
	
  Exhibit J

  	
   

  	
  Opinion of Shareholders’ Counsel

  
	
  Exhibit K

  	
   

  	
  Allocation Methodology

  
	
  Exhibit L

  	
   

  	
  Closing Payment and Ownership Percentages

  
	
  Exhibit M

  	
   

  	
  Consulting Agreement (Lori Schoeneman)

  
	
  Exhibit N

  	
   

  	
  Consulting Agreement (Tara Schoeneman)

  



 


	
  Schedules

  
	
   

  
	
  Schedule 4.2 — Excluded Assets

  
	
  Schedule 5.1 — Subsidiaries and Equity Positions in Other Companies

  
	
  Schedule 5.2 — No Conflict and Binding Obligations

  
	
  Schedule 5.4 — Financial Statements

  
	
  Schedule 5.4.2 — Liabilities

  
	
  Schedule 5.5 — Absence of Certain Changes

  
	
  Schedule 5.7 — Tax Matters

  
	
  Schedule 5.9 — Title to Assets - Exceptions

  
	
  Schedule 5.10.1(a) — Personal Property Leases

  
	
  Schedule 5.10.1(b) — Real Property Leases

  
	
  Schedule 5.11.1 — Contracts

  
	
  Schedule 5.12 — Corporation PO List

  
	
  Schedule 5.13 — Customer PO List

  
	
  Schedule 5.15 — Permits

  
	
  Schedule 5.16 — Tangible Assets

  



 


iii

















 


	
  Schedule 5.17 — Legal Proceedings

  
	
  Schedule 5.18.1 — Intellectual Property

  
	
  Schedule 5.18.2 — Agreements Relating to Intellectual Property

  
	
  Schedule 5.18.4 — Protection of Intellectual Property

  
	
  Schedule 5.19 — Employees

  
	
  Schedule 5.21.1 — Benefit Plans

  
	
  Schedule 5.21.7 — Increased or Accelerated Compensation upon Change
  of Control

  
	
  Schedule 5.22 — Related Party Transactions

  
	
  Schedule 5.26 — Insurance Policies

  
	
  Schedule 5.27 — Outstanding Indebtedness

  
	
  Schedule 5.28.2 — Capitalization

  
	
  Schedule 5.30 — Financial Institutions

  
	
  Schedule 5.33.1 — Intercompany Balances & Transactions

  
	
  Schedule 5.33.2 — Intercompany & Affiliate Agreements

  
	
  Schedule 7.5.6 — Employees with Special Severance

  



 


iv






 










 


AGREEMENT AND PLAN OF MERGER


 


THIS AGREEMENT AND PLAN OF
MERGER, made and entered into as of this 30th day of
September, 2009, is by and among Beauty Systems Group LLC, a Delaware limited
liability company (the “Purchaser”); Lady Lynn Enterprises, Inc., a
Delaware corporation (the “Merger Sub”); Schoeneman Beauty Supply, Inc.,
a Pennsylvania corporation (“Corporation”); and F. Dale Schoeneman, Kay
L. Schoeneman, Lori Schoeneman, Tara Schoeneman, the 2008 Grantor Retained
Annuity Trust of F. Dale Schoeneman dated December 26, 2008 and the 2008
Grantor Retained Annuity Trust of Kay L. Schoeneman dated December 26,
2008 (collectively, the “Shareholders” and individually, a “Shareholder”);
and F. Dale Schoeneman, in his capacity as Shareholders’ Representative pursuant
to, and in accordance with Section 11.13 hereof.


 


W I T N E S S E T H:


 


WHEREAS, the Merger Sub is a
wholly owned subsidiary of the Purchaser;


 


WHEREAS, the Boards of
Directors of the Purchaser, the Merger Sub and the Corporation have determined
that it would be advisable and in the best interests of the shareholders or
members (as appropriate) of their respective companies that the Corporation
merge with and into the Merger Sub (the “Merger”), with the Merger Sub
continuing as the surviving corporation in the Merger and remaining a wholly
owned subsidiary of the Purchaser, on the terms and subject to the conditions
set forth in this Agreement, and, in furtherance thereof, have approved the
Merger, this Agreement and the other transactions contemplated by this
Agreement;


 


WHEREAS, the Shareholders
own all of the issued and outstanding capital stock of the Corporation;


 


WHEREAS, pursuant to the
Merger, among other things, all of the issued and outstanding capital stock of
the Corporation shall be converted into the right to receive cash in the manner
set forth herein; and


 


WHEREAS, the Purchaser, the
Merger Sub, and the Shareholders desire to make certain representations,
warranties, covenants and other agreements in connection with the Merger as set
forth herein.


 


NOW, THEREFORE, in
consideration of the mutual covenants and agreements herein set forth, and
subject to the conditions herein set forth, the Parties, intending to be
legally bound hereby, agree as follows:


 


Article 1


Definitions


 


The following terms shall have the meanings set
forth below for the purpose of this Agreement:


 


“Accounting Firm”
shall have the meaning set forth in Section 11.10.


 

















 


“Affiliate” shall
mean, with respect to any Person, any other Person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by
or is under common control with, such person, firm, corporation, partnership or
other entity, with the term “control” meaning the power, directly or
indirectly, either to (i) vote 50% or more of the securities having
ordinary voting power for the election of directors (or persons performing
similar functions) of a Person or (ii) direct or cause the direction of
the management and policies of a Person, whether through the ability to
exercise voting power or otherwise. In addition, with respect to the
Corporation, the term “Affiliate” also includes any Person capable of being
controlled by any combination of Shareholders, members of one or more
Shareholder’s immediate family, the Corporation and their respective
Affiliates.


 


“Affiliate Transaction”
shall have the meaning set forth in Section 5.33.2.


 


“Aggregate Escrow Amount”
shall mean the sum of the Special Escrow Amount ($3,000,000) and the Regular
Escrow Amount ($15,000,000), or $18,000,000.


 


“Agreement” shall
mean this Agreement and Plan of Merger, including all Schedules and Exhibits.


 


“Allocation Methodology”
shall have the meaning set forth in Section 12.1.


 


“Allocation Schedule”
shall have the meaning set forth in Section 12.1.


 


“Articles of Merger”
shall have the meaning set forth in Section 3.1(b).


 


“Assets” shall mean,
as to a Person, all of the assets, properties, businesses and rights of such
Person of every kind, nature, character and description, whether real, personal
or mixed, tangible or intangible, accrued or contingent, or otherwise relating
to or utilized in such Person’s business, directly or indirectly, in whole or
in part, whether or not carried on the books and records of such Person, and
whether or not owned in the name of such Person or any Affiliate of such Person
and wherever located.


 


“Audit” shall have
the meaning set forth in Section 4.1.1.


 


“Audited Financial
Statements” shall mean the audited consolidated financial statements of the
Corporation at and for the periods ended September 30, 2006, 2007 and
2008; together with the report of the Corporation’s independent auditors
thereon.


 


“Auditor” shall have
the meaning set forth in Section 4.1.1.


 


“Base Purchase Price”
shall have the meaning set forth in Section 2.5(a).


 


“Beauty Supply Business”
shall mean the business of selling beauty supplies, including, but not limited
to, the warehousing and sale, through stores and salespeople, of beauty supply
products, small electrical appliances and equipment to beauty salons, barber
shops, licensed hairdressers, barbers and beauticians, but excluding the
Permitted Beauty Supply Business.


 


2

















 


“CERCLA” shall have
the meaning set forth in the definition of Environmental Laws.


 


“Certificate of Merger”
shall have the meaning set forth in Section 3.1(b).


 


“Claim Notice” shall
have the meaning set forth in Section 8.6.


 


“Claims” shall have
the meaning set forth in Section 8.1.


 


“Closing” shall mean
the act of completion of the closing of the transactions contemplated by this
Agreement on the Closing Date as set forth in Article 3.


 


“Closing Balance Sheet”
shall have the meaning set forth in Section 4.1.1.


 


“Closing Date” shall
mean the date on which the Closing takes place as set forth in Section 3.1.


 


“Closing Date Interest
Rate” shall mean the rate per annum equal to the prime commercial lending
rate quoted as of the Closing Date by The Wall Street Journal
(Eastern Edition).


 


“Closing Net Assets”
shall have the meaning set forth in Section 4.1.1.


 


“Closing Payment”
shall have the meaning set forth in Section 3.2.1.


 


“Code” shall mean the
Internal Revenue Code, as amended.


 


“Collateral Source”
shall have the meaning set forth in Section 8.7.


 


“Company Benefit Plans”
shall mean each written or oral employee benefit plan, scheme, program, policy,
arrangement or Contract (including, but not limited to, any “employee benefit
plan,” as defined in Section 3(3) of ERISA, whether or not subject to
ERISA, and any bonus, deferred compensation, stock bonus, stock purchase,
restricted stock, stock option or other equity-based arrangement, and any
employment, termination, retention, bonus, change in control or severance plan,
program, policy, arrangement or Contract) for the benefit of any current or former
officer, employee or director of the Corporation that is maintained or
contributed to by the Corporation or any Related Person which the amount
payable thereunder by the Corporation or any Related Person exceeds $2,000
individually or $30,000 in the aggregate, or has a duration of more than twelve
(12) months, or with respect to which any of them could incur material
Liability under the Code or ERISA or any similar non-U.S. law.


 


“Consulting Agreements”
shall mean the Consulting Agreement for: 
(i) F. Dale Schoeneman in the form of Exhibit A; (ii) Kay
L. Schoeneman in the form of Exhibit B; (iii) Lori Schoeneman
in the form of Exhibit M; and (iv) Tara Schoeneman in the form
of Exhibit N.


 


“Contract Date” shall
mean the date of this Agreement.


 


3

















 


“Contracts” shall
mean any contract, agreement, open purchase order, indenture, instrument,
lease, license, plan, promise, arrangement or undertaking (whether written or
oral and whether express or implied) to which any Person is a party or that is
legally binding on any Person or its equity interests, Assets or business.


 


“Corporation” shall
have the meaning set forth in the introductory paragraph hereof.


 


“Corporation PO List”
shall have the meaning set forth in Section 5.12.


 


“Corporation Securities”
shall mean: (i) shares of capital stock of, or other voting or equity
interests in, the Corporation; (ii) securities of the Corporation
convertible into or exercisable or exchangeable for shares of capital stock of,
or other voting or equity interests in, the Corporation; and (iii) options
or other rights or agreements, commitments or understandings of any kind to
acquire from, or to require the Corporation to issue, transfer or sell, any
capital stock of, or other voting or equity interests in, the Corporation or
securities convertible into or exercisable or exchangeable for capital stock
of, or other voting or equity interests in, the Corporation.


 


“Corporation’s Knowledge”
shall mean the actual knowledge of each of the Shareholders, William Wisser,
Chief Financial Officer of the Corporation, Karen Roberts, Controller of the
Corporation, and Scott Hunyara, Director of Information Technology of the
Corporation.


 


“Covered Employee”
shall have the meaning set forth in Section 7.5.1.


 


“Customer PO List”
shall have the meaning set forth in Section 5.13.


 


“Cutoff Date” shall
have the meaning set forth in Section 7.1.1.3.


 


“Deficiency Payment”
shall have the meaning set forth in Section 4.1.2.2.


 


“DGCL” shall have the
meaning set forth in Section 2.1.


 


“Diversion” shall
mean the knowing sale of merchandise to customers who will resell the
merchandise in a territory or the knowing sale of merchandise to a customer, in
each case, outside the channel of trade established by the manufacturer.


 


“Effective Time”
shall have the meaning set forth in Section 3.1(b).


 


“Employees” shall
have the meaning set forth in Section 5.19.


 


“Environmental Laws”
shall mean any and all Laws relating to: (i) environmental matters; (ii) the
control, use, management, treatment, storage, disposal or transportation of any
pollutant or other substance regulated for its potential impact on public
health or the environment, or protection of the air, water, or land (including,
without limitation, ambient air, indoor air, surface water, ground water, land
surface, or subsurface strata); (iii) solid, gaseous or liquid waste
generation, handling, treatment, storage, disposal or transportation; (iv) exposure
to 


 


4

















 


or
releases of hazardous, toxic or other harmful substances; (v) the
protection, remediation, and enhancement of human health, safety, or the
environment (including, without limitation, ambient air, indoor air, surface
water, ground water, land surface, or subsurface strata), in each case which is
in force as of the Contract Date or prior thereto.  Environmental Laws shall include, without
limitation, the Clean Air Act, 42 U.S.C. §7401 et seq., the Clean Water Act, 33
U.S.C. § 1251 et seq., the National Environmental Policy Act, 42 U.S.C. § 4321
et seq., the Endangered Species Act, 16 U.S.C. § 1531 et seq., the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act, 42
U.S.C. §6901 et seq. (“RCRA”), the Safe Drinking Water Act. 42 U.S.C.
§300f et seq., the Comprehensive Environmental Response, Compensation, and
Liability Act as amended by the Superfund Amendments and Reauthorization Act,
42 U.S.C. §9601 et seq. (“CERCLA”), the Federal Insecticide, Fungicide
and Rodenticide Act, 7 U.S.C. § 136 et seq., the Oil Pollution Act of 1990, 33
U.S.C. §2701 et seq., the Hazardous Materials Transportation Act, 49 U.S.C.
§1801 et seq., the Toxic Substances Control Act, 15 U.S.C. §2601 et seq., the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. §11001 et seq.,
the Occupational Safety and Health Act, 29 U.S.C. §651, et seq., any state or
local Laws similar or analogous to or implementing the foregoing requirements, and
any state or local Laws relating to Environmental Permits, in each case which
is in force as of the Contract Date.


 


“Environmental Matters”
shall mean any matter or circumstances related in any manner whatsoever to the
Corporation, the Schoeneman Beauty Supply Business, or any Assets (including
real property), Stores or Warehouses currently or formerly owned, leased,
operated, or used by the Corporation, the Schoeneman Beauty Supply Business, or
any predecessors in interest, which matter or circumstance exists on or prior
to the Closing Date, and to:  (i) the
Release or threatened Release of any Hazardous Substance by the Corporation,
the Schoeneman Beauty Supply Business or any predecessors in interest into the
environment on or prior to the Closing Date; (ii) the transportation,
treatment, storage, recycling, distribution, use or other handling of any
Hazardous Substance by the Corporation, the Schoeneman Beauty Supply Business
or any predecessors in interest on or prior to the Closing Date; (iii) the
placement of structures or materials into waters of the United States by the
Corporation, the Schoeneman Beauty Supply Business or any predecessors in
interest on or prior to the Closing Date; (iv) above-ground or underground
storage tanks, oil/water separators, and septic systems located at the Subject
Property on or prior to the Closing Date; (v) the presence of any
Hazardous Substance in any building or other improvement, equipment, structure
or workplace located at the Subject Property on or prior to the Closing Date;
or (vi) any violation of or noncompliance with an Environmental Law by the
Corporation, the Schoeneman Beauty Supply Business or any predecessors in
interest on or prior to the Closing Date.


 


“Environmental Permits”
shall mean all Permits issued pursuant to or with respect to applicable
Environmental Laws.


 


“ERISA” shall mean
means the Employee Retirement Income Security Act of 1974, as amended.


 


“Escrow Agent” shall
mean M&T Bank.


 


5

















 


“Escrow Condition Letter”
shall mean that certain letter between the Shareholders and the Purchaser dated
as of the date hereof regarding certain obligations of the Parties related to
the Regular Escrow Agreement.


 


“Excess Payment”
shall have the meaning set forth in Section 4.1.2.1.


 


“Excluded Assets”
shall have the meaning set forth in Section 4.2.


 


“Excluded Contracts”
shall have the meaning set forth in Section 5.11.1.


 


“Financial Statements”
shall mean the Audited Financial Statements and the Unaudited Financial
Statements, including in each case, a balance sheet and statements of income or
operations, and retained earnings or shareholders’ equity and, with respect to
the Audited Financial Statements only, a statement of cash flows.


 


“GAAP” shall mean
United States generally accepted accounting principles applied on a consistent
basis.


 


“Governmental Authority”
shall mean any court, tribunal, arbitrator, authority, agency, commission,
official, board or other instrumentality of the United States, any foreign
country or any domestic or foreign state, county, city or other political subdivision.


 


“Guaranteed Indebtedness”
shall mean Indebtedness of a third party that is:  (i) guaranteed by the Corporation; (ii) secured
by a Lien on any Asset of the Corporation; or (iii) the subject of any
other credit support arrangement provided by the Corporation.


 


“Hazardous Substances”  shall mean: 
(i) any oil, petroleum or petroleum products or byproducts and any
constituents thereof, flammable explosives, radioactive materials, mold, lead
in paint or drinking water, radon, pesticides and other agricultural chemicals,
asbestos in any form that is or could become friable, urea formaldehyde foam
insulation and transformers or other equipment that contain dielectric fluid
containing levels of polychlorinated biphenyls (PCBs); (ii) any chemicals
or other materials or substances which, as of the Contract Date or prior
thereto, are defined as or included in the definition of “hazardous substances,”
“hazardous wastes,” “hazardous materials,” “extremely hazardous wastes,” “dangerous
wastes,” “restricted hazardous wastes,” “toxic substances,” “toxic pollutants,”
“hazardous air pollutants” or words of similar import under any Environmental
Law; and (iii) any other chemical, substance, waste, material, pollutant
or contaminant defined as or deemed hazardous or toxic, or otherwise regulated
under any Environmental Law, including, without limitation, RCRA hazardous
wastes and CERCLA hazardous substances.


 


“Indebtedness” shall
mean: (i) all obligations for borrowed money or with respect to deposits
or advances of any kind; (ii) all obligations evidenced by bonds,
debentures, notes or similar instruments; (iii) all obligations upon which
interest charges are customarily paid (other than trade payables incurred in
the ordinary course of business consistent with past practices); (iv) all
obligations under conditional sale or other title retention agreements relating
to any property purchased; (v) all obligations incurred or assumed as the
deferred purchase price of property or services (excluding obligations to
creditors for raw materials, inventory, services and 


 


6

















 


supplies
incurred in the ordinary course of business consistent with past practices); (vi) all
lease obligations capitalized on the books and records of such Person; (vii) all
obligations of others secured by a Lien on property or assets owned or
acquired, whether or not the obligations secured thereby have been assumed; (viii) all
obligations under interest rate, currency or commodity derivatives or hedging transactions;
(ix) all letters of credit or performance bonds issued (excluding (A) letters
of credit issued for the benefit of suppliers to support accounts payable to
suppliers incurred in the ordinary course of business consistent with past
practices; (B) standby letters of credit relating to workers’ compensation
insurance; and (C) surety bonds and customs bonds); and (x) Guaranteed
Indebtedness.


 


“Indemnifying Party”
shall mean the party required to indemnify the other party pursuant to Article 8.


 


“Indemnified Party”
shall mean the party entitled to indemnification pursuant to pursuant to Article 8.


 


“Intellectual Property”
shall means trademarks, service marks, trade names, trade dress, including all
goodwill associated with the foregoing, domain names, copyrights, Software,
Internet Web sites, mask works and other semiconductor chip rights, patents and
patent applications, Trade Secrets and all similar intellectual property
rights, and registrations and applications to register or renew the registration
of any of the foregoing.


 


“Inventory” shall
mean all goods held by the Corporation and intended for resale in the ordinary
course of the Schoeneman Beauty Supply Business.


 


“Inventory Methodology”
shall have the meaning set forth in Section 4.1.1.


 


“IRS” shall mean the
Internal Revenue Service.


 


“Laws” shall mean any
and all federal, state, local and foreign laws, statutes, ordinances, rules,
regulations, judgments, rule of common law, injunctions, orders and
decrees and any and all arbitral findings and rulings.


 


“Legal Proceeding”
shall mean any lawsuit, arbitration, administrative proceeding (including,
without limitation, administrative worker’s compensation proceedings) or
similar formal or informal adversarial civil or criminal action or proceeding of
any kind or nature.


 


“Liabilities” means
any and all liabilities, obligations or commitments of any nature, whether
known or unknown, direct or indirect, absolute, accrued, contingent or
otherwise, whether due or to become due, and whether or not required to be
reflected or reserved against on a balance sheet under GAAP.


 


“Lien” shall mean,
with respect to any Asset, any mortgage, lien, pledge, charge, security
interest, lease, encumbrance or other adverse claim of any kind in respect of
such Asset.  For purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any Asset that it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such Asset.


 


7

















 


“Look Back Period”
shall have the meaning set forth in Section 7.3.2.


 


“Losses” shall have
the meaning set forth in Section 8.1.


 


“M&T Bank
Indebtedness” shall have the meaning set forth in Section 7.8.


 


“Material Adverse Effect”
shall mean any circumstance, occurrence of any event, or any change in or
effect on the Corporation or the Schoeneman Beauty Supply Business that,
individually or when taken together with all other circumstances, events,
changes in or effects on the Corporation or the Schoeneman Beauty Supply
Business, is or would reasonably be expected to be materially adverse to:  (i) the condition (financial or
otherwise), results of operations, business or Assets of the Corporation or the
Schoeneman Beauty Supply Business; or (ii) the ability of the Corporation
or any Shareholder to perform her, his or its obligations under this Agreement
or to consummate the transactions contemplated by this Agreement; provided,
that, “Material Adverse Effect” shall not be deemed to include the impact
of:  (a) any changes in Laws of
general applicability or interpretations thereof by courts or Governmental
Authorities; (b) any changes in GAAP; (c) any changes affecting the
general economic conditions in the United States, which changes do not
disproportionately affect the Corporation in any material respect; (d) any
failure by the Corporation to meet any internal or published projections,
forecasts, or revenue or earnings predictions for any period; (e) any
adverse effect arising from or relating to actions required to be taken under
the Store Leases or Supplier Contracts; or (f) any Permitted Lien.  References in this Agreement to dollar amount
thresholds shall not be deemed to be evidence of a Material Adverse Effect or
materiality.


 


“Maximum Amount”
shall have the meaning set forth in Section 8.5.1.


 


“Medical Insurance Cap”
shall have the meaning set forth in Section 7.6.


 


“Merger” shall have
the meaning set forth in the recitals hereof.


 


“Merger Consideration”
shall have the meaning set forth in Section 2.5(a).


 


“Merger Filings”
shall have the meaning set forth in Section 3.1(b).


 


“Merger Sub” shall
have the meaning set forth in the introductory paragraph hereof.


 


“Net Assets” shall
mean the book value of all assets of the Corporation (excluding the Excluded
Assets and the Tax Deposit), net of all liabilities of the Corporation,
determined in accordance with GAAP, net of elimination of all intercompany
transactions.


 


“Notice of Dispute”
shall have the meaning set forth in Section 4.1.1.


 


“Notice Period” shall
have the meaning set forth in Section 8.6.


 


“Operating Profits”
shall have the meaning set forth in Section 7.1.3.1.


 


“Operating Profits Per
Day” shall have the meaning set forth in Section 7.1.3.2.


 


8

















 


“Organizational Documents”
shall mean the articles of incorporation, certificate of incorporation,
charter, bylaws, articles of formation, certificate of formation, regulations,
operating agreement, certificate of limited partnership, partnership agreement,
and all other similar documents, instruments or certificates executed, adopted,
or filed in connection with the creation, formation, or organization of a
Person, including any amendments thereto. 
With respect to the Trusts, “Organizational Documents” includes any
trust agreement and similar documentation.


 


“Owned Intellectual
Property” shall have the meaning set forth in Section 5.18.1.


 


“PBCL” shall have the
meaning set forth in Section 2.1.


 


“Party” and “Parties”.  “Party” shall mean the Purchaser, the Merger
Sub, the Corporation, the Shareholders or the Shareholders’ Representative, as
the case may be, and “Parties” shall mean the Purchaser, the Merger Sub, the
Corporation, the Shareholders and the Shareholders’ Representative
collectively.


 


“Payoff Letters”
shall have the meaning set forth in Section 7.8.


 


“Per Share Merger
Consideration” shall mean the quotient of (x) the Merger Consideration
divided by (y) the total number of outstanding voting and non-voting
shares of common stock of the Corporation. 
The parties acknowledge that Per Share Merger Consideration associated
with the Base Purchase Price is approximately $711.51 per Share.


 


“Permits” shall mean
collectively all permits, orders, licenses, variances, certificates, approvals,
registrations, franchise rights and other authorizations and all applications
thereof, granted or issued by any Governmental Authority having jurisdiction
over the Schoeneman Beauty Supply Business.


 


“Permitted Beauty Supply
Business” shall mean the business of manufacturing beauty supplies and
importing beauty supplies, in each case where the sales of such beauty supplies
are limited to sales to distributors to licensed professionals and to the
general public and manufacturers of beauty supplies.


 


“Permitted Liens”
shall mean:  (i) Liens for Taxes not
yet due and payable or that are being contested in good faith and for which
adequate accruals or reserves have been established; (ii) Liens of
carriers, warehousemen, mechanics, materialmen and other like Liens arising in
the ordinary course of business but only to the extent the underlying payment
obligations are not past due; (iii) customary easements, rights of way,
zoning ordinances and other similar encumbrances affecting real property; and (iv) statutory
Liens in favor of lessors arising in connection with any property leased to the
Corporation, which Liens and other encumbrances described in clauses (i) —
(iv) do not, individually or in the aggregate, materially interfere with
the use by the Corporation of any of the Assets affected thereby.


 


“Person” means an
individual, corporation, partnership, limited liability company, association,
trust or other entity or organization, including a Government Authority.


 


9

















 


“Pre-Closing Tax Period”
shall mean any taxable year or period (or portion thereof) that ends on or
before the Closing Date.  For purposes of
this Agreement, in the case of any Taxes that are payable with respect to any
Tax period beginning before and ending after the Closing Date, such Taxes shall
be apportioned between the portion of such period ending on the Closing Date
and the portion beginning on the day after the Closing Date:  (i) in the case of real and personal
property Taxes, on a per diem basis; and (ii) in the case of all
other  Taxes, on the basis of the actual
activities of the Corporation as determined from the books and records of the
Corporation for such partial period.


 


“Proprietary Information”
shall have the meaning set forth in Section 7.3.5.


 


“Purchaser” shall
have the meaning set forth in the introductory paragraph hereof.


 


“Purchaser’s Knowledge”
shall mean the actual knowledge of John Golliher, Michael Dewey and Tommy
Dobrzykowski.


 


“RCRA” shall have the
meaning set forth in the definition of Environmental Laws.


 


“Regular Escrow”
shall have the meaning set forth in Section 4.3.1.


 


“Regular Escrow Agreement”
shall mean the Escrow Agreement in the form of Exhibit C-2.


 


“Regular Escrow Amount”
shall have the meaning set forth in Section 4.3.1.


 


“Related Person”
shall mean, with respect to any Person, any trade or business, whether or not
incorporated, which, together with such Person, is treated as a single employer
under Section 414 of the Code.


 


“Release” shall mean
any releasing, disposing, discharging, injecting, spilling, leaking, leaching,
pumping, dumping, pouring, emitting, escaping, emptying, seeping, dispersal,
migration, transporting, placing and the like, including, without limitation,
the moving of any materials, including, without limitation, Hazardous
Substances, through, into or upon, any land or subsurface strata, soil, surface
water, groundwater, wetlands, or air or otherwise entering into the indoor or
outdoor environment.


 


“Rent Differential”
shall have the meaning set forth in Section 7.1.1.3(d).


 


“Required Lease Consents”
shall have the meaning set forth in Section 7.1.1.


 


“Schoeneman Beauty Supply
Business” shall mean the entire businesses and operations of the Corporation
as conducted on the Contract Date, consistent with customary past practices,
including, without limitation, the warehousing and sale, through the
Corporation’s stores and salespeople, of beauty supply products, small
electrical appliances and equipment to beauty salons, barber shops, licensed
hairdressers, barbers and beauticians, conducted in part out of the Stores.


 


10






 










 


“Schoenemans” shall
have the meaning set forth in Section 7.3.1.


 


“Section 12.2
Consideration” shall have the meaning set forth in Section 12.2.


 


“Securities Act”
shall have the meaning set forth in Section 6.3.


 


“Shareholder” and “Shareholders”
shall have the meaning set forth in the introductory paragraph hereof.


 


“Shareholder Controlled
Proceeding” shall have the meaning set forth in Section 12.4.1.


 


“Shareholder Indemnifying
Parties” shall mean F. Dale Schoeneman, Kay L. Schoeneman, Lori Schoeneman
and Tara Schoeneman.


 


“Shareholders’ Release”
shall mean the Shareholder Release in the form of Exhibit F.


 


“Shareholders’
Representative” shall mean F. Dale Schoeneman.


 


“Shares” shall mean
the 98,800 shares of non-voting common stock, $1.00 par value per share, of the
Corporation, and 988 shares of voting common stock, $1.00 par value per share,
of the Corporation, which non-voting and voting shares of common stock
constitute all of the issued and outstanding Corporation Securities.


 


“Software” shall mean
all computer software, including, but not limited to, application software,
system software and firmware, including all source code and object code
versions thereof, in any and all forms and media, and all related
documentation.


 


“Special Escrow”
shall have the meaning set forth in Section 4.3.2.


 


“Special Escrow Agreement”
shall mean the Escrow Agreement in the form of Exhibit C-1.


 


“Special Escrow Amount”
shall have the meaning set forth in Section 4.3.2.


 


“Special Escrow Letter”
shall mean that certain letter between the Shareholders and the Purchaser dated
as of the date hereof regarding disposition of the Special Escrow Amount.


 


“Stock Certificates”
shall have the meaning set forth in Section 3.3.5.


 


“Store Leases” shall
mean collectively the forty-three (43) real property leases for the Stores.


 


“Stores” shall mean
the forty-three (43) sales locations operated by the Corporation in connection
with the operation of the Schoeneman Beauty Supply Business.


 


“Subject Property”
shall have the meaning set forth in Section 5.3.2.


 


11

















 


“Supplier Contracts”
shall mean all Contracts between the Corporation and Persons who supply beauty
supply products, small electrical appliances and equipment to the Corporation
for sale by the Corporation as part of the Schoeneman Beauty Supply Business.


 


“Surviving Corporation”
shall have the meaning set forth in Section 2.1.


 


“Target Net Asset Value”
shall have the meaning set forth in Section 4.1.1.


 


“Tax” (and with the
correlative meaning “taxable”) shall mean any: (i) federal, state, local
or foreign income, gross receipts, license, payroll, employment, excise,
severance, stamp, occupation, premium, windfall profits, environmental,
customs, duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, intangible, ad valorem, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax or other
governmental charge of any kind whatsoever, including any interest, penalty, or
addition thereto, and shall also include any fines arising under ERISA or
penalties, interest or additions thereto; and, (ii) Liability of the
Corporation for the payment of any amounts of the type described in clause (i) as
a result of any express or implied obligation to indemnify or otherwise assume
or succeed to the Liability of any person or entity or as a result of Treas.
Reg. 1.1502-6 (or any similar provision of state, local, or foreign law).


 


“Tax Deposit” shall
have the meaning set forth in Section 7.7.


 


“Tax Returns” shall
mean any return, report or statement required to be filed with or provided to
any taxing authority with respect to any Tax (including any attachments thereto
and any amendment thereof), including any information return, claim for refund,
amended return or declaration of estimated Tax.


 


“Terminated Lease”
shall have the meaning set forth in Section 7.1.1.3.


 


“Territory” shall
mean the geographical area described on Exhibit I.


 


“Threshold Amount”
shall have the meaning set forth in Section 8.5.1.


 


“Trade Secrets” shall
mean all inventions, processes, designs, formulae, trade secrets, know-how,
ideas, research and development, data, databases and confidential information.


 


“Transaction Documents”
shall mean this Agreement and the documents reflecting the transactions
contemplated herein.


 


“Transfer Taxes”
shall have the meaning set forth in Section 12.7.


 


“Trusts” shall mean
the:  (i) 2008 Grantor Retained
Annuity Trust of F. Dale Schoeneman dated December 26, 2008; and (ii) 2008
Grantor Retained Annuity Trust of Kay L. Schoeneman dated December 26,
2008.


 


12

















 


“Unaudited Financial
Statements” shall mean the unaudited interim consolidated financial
statements of the Corporation at and for the period ended August 31, 2009.


 


“Warehouses” shall
mean the warehouse locations at 210 Industrial Park Road (approximately 140,000
square feet) and 222 Industrial Park Road (approximately 20,000 square feet),
Pottsville, Pennsylvania.


 


“Warehouse Leases”
shall mean the leases for the warehouse locations located at:  (i) 210 Industrial Park Road,
Pottsville, Pennsylvania, in the form of Exhibit D; and (ii) 222
Industrial Park Road, Pottsville, Pennsylvania, in the form of Exhibit E.


 


Article 2


The
Merger; Conversion of Shares


 


2.1          The Merger.  At the
Effective Time, on the terms and subject to the conditions set forth in this
Agreement, and in accordance with the applicable provisions of the Pennsylvania
Business Corporation Law (the “PBCL”), and the Delaware General
Corporation Law (the “DGCL”), the Corporation shall merge with and into
the Merger Sub, the separate corporate existence of the Corporation shall cease
and the Merger Sub shall continue as the surviving corporation and shall remain
a wholly owned subsidiary of the Purchaser. 
The Merger Sub, as the surviving corporation after the Merger, is
hereinafter sometimes referred to as the “Surviving Corporation.”


 


2.2          Effect of the Merger. 
At the Effective Time, the effect of the Merger shall be as provided in
this Agreement and the applicable provisions of the PBCL and the DGCL.  Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of the Corporation and the Merger Sub
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of the Corporation and the Merger Sub shall become debts, liabilities and
duties of the Surviving Corporation.


 


2.3          Articles of Incorporation and Bylaws. 
Unless otherwise agreed by the parties before the Effective Time, at the
Effective Time:


 


(a)           the certificate of incorporation of
the Merger Sub, as in effect immediately prior to the Effective Time, shall be
the certificate of incorporation of the Surviving Corporation until amended in
accordance with applicable Law, except that Article 1 of the
articles of incorporation of the Surviving Corporation shall be amended and
restated in its entirety to read as follows: “The name of the corporation shall
be Schoeneman Beauty Supply, Inc.”; and


 


(b)           the by-laws of the Merger Sub, as in
effect immediately prior to the Effective Time, shall be the by-laws of the
Surviving Corporation until amended in accordance with applicable Law.


 


2.4          Directors and Officers.


 


(a)           At the Effective Time, the members of
the board of directors of the Merger Sub immediately prior to the Effective
Time shall become the members of the board of 


 


13

















 


directors of the Surviving
Corporation immediately after the Effective Time until their respective
successors are duly elected or appointed and qualified or until their earlier
death, resignation or removal.


 


(b)           At the Effective Time, the officers
of the Merger Sub immediately prior to the Effective Time shall be the officers
of the Surviving Corporation immediately after the Effective Time until their
respective successors are duly elected or appointed and qualified or until
their earlier death, resignation or removal.


 


2.5          Merger Consideration; Effect on Capital
Stock.


 


(a)           The aggregate merger consideration
payable hereunder is $71,000,000 (the “Base Purchase Price”) plus the Section 12.2
Consideration (the “Merger Consideration”).  The Merger Consideration (and the Per Share
Merger Consideration) is subject to adjustment as provided in Section 4.1.1
and as otherwise expressly provided herein, and shall be payable if and when to
the extent provided herein.


 


(b)           At the Effective Time by virtue of
the Merger and without any action on the part of the Corporation, the
Purchaser, the Merger Sub or the Shareholders, each Share of the Corporation
shall be converted into the right to receive the Per Share Merger
Consideration, shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each Shareholder shall cease
to have any rights with respect thereto, except the right to receive the Per
Share Merger Consideration payable with respect thereto in accordance with this
Agreement (which shall include the right to receive a pro rata share of amounts
to be released to the Shareholders pursuant to the Special Escrow Agreement and
the Regular Escrow Agreement), provided, that the foregoing shall not limit
any rights of the Shareholders to receive any other payments required to be
made to the Shareholders under this Agreement. 
Exhibit L sets
forth, with respect to each of the Shareholders:  (i) the portion of the Closing Payment
payable to such Shareholder; and (ii) such Shareholder’s percentage
interest in the Section 12.2 Consideration, any release of the Aggregate
Escrow Amount to the Shareholders and any other amounts paid to the
Shareholders pro rata in accordance with their relative Share ownership of the
Corporation immediately prior to the Merger. 
The Parties acknowledge that the portion of the Per Share Merger
Consideration associated with the Closing Payment shall be delivered and
received by the Shareholders at the Closing.


 


(c)           Each share of common stock of the
Merger Sub outstanding immediately prior to the Effective Time shall continue
to be outstanding and shall be a share of the common stock of the Surviving
Corporation.


 


Article 3


Closing and Closing Date; Effective Time


 


3.1          Closing Date; Effective Time.


 


(a)           The Closing hereunder shall take
place at the offices of Ballard Spahr LLP, 51st Floor, 1735 Market Street,
Philadelphia, Pennsylvania on September 30, 2009, at 2:00 


 


14

















 


p.m. (local time), or at
such other date, time and place as shall be mutually agreed upon in writing by
the Purchaser and the Shareholders.


 


(b)           Subject to the provisions of this
Agreement, on the Closing Date, the applicable Parties shall file, or cause to
be filed, with the:  (i) Secretary
of State of the State of Delaware a certificate of merger (the “Certificate
of Merger”) with respect to the Merger, duly executed and completed in
accordance with the applicable provisions of the DGCL, and shall make, or cause
to be made, all other filings or recordings required under the DGCL to effect
the Merger; and (ii) Pennsylvania Department of State the articles of
merger (the “Articles of Merger” and, together with the Certificate of
Merger, the “Merger Filings”) with respect to the Merger, duly executed
and completed in accordance with the applicable provisions of the PBCL, and
shall make, or cause to be made, all other filings, including the appropriate
docketing statement with respect to the Articles of Merger, required under the
PBCL to effect the Merger.  The Merger
shall become effective upon the filing of the Merger Filings with the Secretary
of State of the State of Delaware and the Pennsylvania Department of State, as
applicable (the “Effective Time”).


 


3.2          Purchaser’s Deliveries. 
At the Closing, the Purchaser shall execute and deliver to the
Shareholders, or cause to be executed and delivered to the Shareholders, the
following:


 


3.2.1       Payment to the Shareholders of cash in an
amount equal to the Base Purchase Price less the Aggregate Escrow Amount (such
resulting amount, the “Closing Payment”) payable to the Shareholders by
wire transfer of immediately available funds to one or more bank accounts
designated in writing by the Shareholders’ Representative; provided,
however, that a portion of the Closing Payment may be paid to M&T Bank
instead of the Shareholders as provided in Section 7.8.


 


3.2.2       A receipt for the Stock Certificates
delivered to the Purchaser pursuant to Section 3.3.5.


 


3.2.3       The Consulting Agreements executed by the
Surviving Corporation.


 


3.2.4       The Regular Escrow Amount and the Special
Escrow Amount, to be delivered to the Escrow Agent, as well the Special Escrow
Agreement and the Regular Escrow Agreement, each executed by the Purchaser.


 


3.2.5       The Warehouse Leases executed by the
Purchaser.


 


3.2.6       The Articles of Merger executed by the
Merger Sub.


 


3.2.7       The Certificate of Merger executed by the
Merger Sub.


 


3.2.8       A certificate from the Secretary of the
Purchaser in form reasonably satisfactory to the Shareholders’ Representative: (i) certifying
the resolutions of the sole member of the Purchaser approving this Agreement
and the other Transaction Documents; (ii) certifying a copy of the current
Organizational Documents of the Purchaser; and (iii) certifying the names
and signatures of the officers of the Purchaser authorized to sign this
Agreement and the other 


 


15

















 


Transaction Documents to
which it is a party.  The foregoing
certificate shall also certify that the attached resolutions and Organizational
Documents have not been rescinded, revoked, modified, or otherwise affected,
and remain in full force and effect.


 


3.2.9       A certificate from the Secretary of the
Merger Sub in form reasonably satisfactory to the Shareholders’ Representative:
(i) certifying the resolutions from each of the board of directors and the
shareholder of the Merger Sub approving this Agreement and the other
Transaction Documents; (ii) certifying a copy of the current
Organizational Documents of the Merger Sub; and (iii) certifying the names
and signatures of the officers of the Merger Sub authorized to sign this
Agreement and the other Transaction Documents to which it is a party.  The foregoing certificate shall also certify
that the attached resolutions and Organizational Documents have not been
rescinded, revoked, modified, or otherwise affected, and remain in full force
and effect.


 


3.2.10     Evidence that the Merger Sub has qualified
to do business in the Commonwealth of Pennsylvania.


 


3.2.11     The Special Escrow Letter executed by the
Purchaser.


 


3.2.12     The Escrow Condition Letter executed by the
Purchaser and the Merger Sub.


 


3.3          Shareholders’ and the Corporation’s
Deliveries.  At the Closing, the Shareholders and the
Corporation (as appropriate) shall execute and/or deliver to the Purchaser the
following:


 


3.3.1       A certified copy of the appropriate
corporate proceedings of the Corporation, its Board of Directors and the
Shareholders authorizing and approving the Transaction Documents.


 


3.3.2       Certificate of valid subsistence for the
Corporation from the Commonwealth of Pennsylvania certified by the Secretary of
State of the Commonwealth of Pennsylvania and certificates of good standing
from the states in which the Corporation is qualified to do business as a
foreign corporation.


 


3.3.3       The Special Escrow Agreement and the
Regular Escrow Agreement, each executed by the Shareholders’ Representative.


 


3.3.4       Possession of all of the assets owned by
the Corporation (except for the Excluded Assets) and possession and occupancy
of all of the Stores and the Warehouses.


 


3.3.5       Certificates evidencing all of the Shares
(the “Stock Certificates”), which Stock Certificates shall be duly
endorsed in blank or accompanied by duly executed stock powers executed in
blank.


 


3.3.6       The Warehouse Leases executed by the
applicable landlord party thereto.


 


16

















 


3.3.7       A resignation letter of each officer of
the Corporation designated by the Purchaser and each member of the Board of
Directors of the Corporation, effective in each case on the Closing Date; provided,
however, that such resignations shall not affect the status of those
persons providing such resignations as employees of the Corporation.


 


3.3.8       The Shareholders’ Release duly executed
and delivered by each Shareholder.


 


3.3.9       A certificate from the Secretary of the
Corporation in form reasonably satisfactory to the Purchaser: (i) certifying
the resolutions from each of the board of directors and the Shareholders
approving this Agreement and the other Transaction Documents, (ii) certifying
a copy of the current Organizational Documents of the Corporation and (iii) certifying
the names and signatures of the officers of the Corporation authorized to sign
this Agreement and the other Transaction Documents to which it is a party.  The foregoing certificate shall also certify
that the attached resolutions and Organizational Documents have not been
rescinded, revoked, modified, or otherwise affected, and remain in full force
and effect.


 


3.3.10     An opinion of Ballard Spahr LLP in the form
of Exhibit J.


 


3.3.11     The Payoff Letters pursuant to Section 7.8
to the extent applicable.


 


3.3.12     The Articles of Merger executed by the
Corporation.


 


3.3.13     The Special Escrow Letter executed by the
Shareholders and the Shareholders’ Representative.


 


3.3.14     The Escrow Condition Letter executed by the
Shareholders.


 


3.3.15     A certificate from each Shareholder, as
contemplated under and meeting the requirements of Section 1.1445-2(b)(2)(i) of
the Treasury Regulations, to the effect that such Shareholder is not a foreign
person within the meaning of the Code and applicable Treasury Regulations.


 


3.3.16     A receipt for the Closing Payment delivered
to the Shareholders pursuant to Section 3.2.1.


 


Article 4


Closing Net Assets; 


Establishment of Escrow


 


4.1          Determination
of Closing Net Assets.


 


4.1.1       It is the intention of the Parties that
the Merger Consideration is premised upon the Purchaser receiving an enterprise
with Net Assets of $9,113,000 (the “Target Net Asset Value”) as of 11:59 p.m.
(EST) on the Closing Date.  Immediately
following the Closing, the Shareholders shall cause Parente Randolph, LLC (the “Auditor”)
to perform a financial audit (the “Audit”) of the Corporation’s balance
sheet as of 11:59 p.m. (EST) on the Closing Date (the 


 


17

















 


“Closing Balance Sheet”),
which Audit shall include the taking of such physical inventory as the Auditor
deems necessary for purposes of the Audit. 
The cost of the Audit shall be evenly split between the Purchaser and
the Shareholders, with the Shareholders’ portion of such cost being paid
directly by the Shareholders (and not from either the Regular Escrow or the
Special Escrow, unless otherwise elected by the Purchaser in its sole
discretion) and shall not be subject to the Threshold Amount.  The Purchaser and the Shareholders shall
instruct the Auditor that the Closing Balance Sheet shall be prepared in
accordance with GAAP (except as set forth on Schedule 5.4, which such
exceptions shall be applicable to the Closing Balance Sheet) consistent in all
respects (including classification and presentation of line items) with the
accounting methods, practices and procedures used to prepare the balance sheet
included in the Unaudited Financial Statements (August 31, 2009).  For the avoidance of doubt, the value of the
Inventory as of 11:59 p.m. (EST) on the Closing Date shall be determined
in accordance with the methodology set forth on Schedule 4.1.1 (the “Inventory
Methodology”), which methodology is consistent with the Corporation’s past
practice.  To the extent that the
Inventory Methodology conflicts with GAAP, the Inventory Methodology shall
control.  The Purchaser and the
Shareholders shall cause the Auditors to deliver the Closing Balance Sheet,
together with a calculation of the Net Assets of the Corporation as of 11:59 p.m.
(EST) on the Closing Date based upon the Closing Balance Sheet (the “Closing
Net Assets”), to the Purchaser as soon as reasonably practical after the
Closing Date.  The Closing Balance Sheet
shall not include or reflect any of the Excluded Assets or the Tax
Deposit.  In the event the Purchaser
disputes the Closing Balance Sheet as delivered by the Auditor, the Purchaser
shall provide written notice (a “Notice of Dispute”) specifying in
reasonable detail all points of disagreement with the Closing Balance Sheet to
the Shareholders’ Representative within thirty (30) days after the Purchaser’s
receipt of the Closing Balance Sheet.  If
the Purchaser fails to deliver a Notice of Dispute within such 30-day period,
then the Closing Balance Sheet as delivered by the Auditor shall be used for
purposes of Section 4.1.2. 
If the Purchaser delivers a Notice of Dispute within such 30-day period,
the Purchaser and the Shareholders’ Representative shall endeavor in good faith
to resolve all specified points of disagreement within thirty (30) days after
the Shareholders’ Representative’s receipt of the Notice of Dispute.  If the dispute is not resolved within such
30-day period, which period may be extended by mutual agreement of the Parties,
the dispute shall be resolved in accordance with Section 11.10.


 


4.1.2       The Merger Consideration shall be subject
to adjustment as follows:


 


4.1.2.1   The Merger Consideration shall be subject to
an upward adjustment on a dollar for dollar basis in the event the Closing Net
Assets accompanying the Closing Balance Sheet as finally determined (by
agreement or otherwise) in accordance with this Agreement, including arbitration
set forth in Section 11.10, is greater than the amount equal to the
sum of the Target Net Asset Value plus $100,000.  The Purchaser shall pay to the Shareholders’
Representative the amount of any such Merger Consideration adjustment (an “Excess
Payment”) under this Section 4.1.2.1 within ten (10) days
after the amount of the Excess Payment has been finally determined pursuant to
this Agreement, including arbitration set forth in Section 11.10.  Any Excess Payment required under this Section 4.1.2.1
shall bear interest from the Closing Date to the date of payment at the Closing
Date Interest Rate, which interest shall be calculated on the basis of a
365-day year 


 


18

















 


and the actual number of days elapsed and such interest shall be paid
on the same date and in the same manner as the Excess Payment.


 


4.1.2.2   The Merger Consideration shall be subject to
a downward adjustment on a dollar for dollar basis in the event the Closing Net
Assets accompanying the Closing Balance Sheet as finally determined (by
agreement or otherwise) in accordance with this Agreement, including
arbitration set forth in Section 11.10, is less than an amount
equal to the Target Net Asset Value minus $100,000.  The Shareholders shall pay to the Purchaser
the amount of any such Merger Consideration adjustment (a “Deficiency
Payment”) under this Section 4.1.2.2 within ten (10) days
after the amount of the Deficiency Payment has been finally determined pursuant
to this Agreement, including arbitration set forth in Section 11.10.  Any Deficiency Payment required under this Section 4.1.2.2
shall bear interest from the Closing Date to the date of payment at the Closing
Date Interest Rate, which interest shall be calculated on the basis of a 365-day
year and the actual number of days elapsed and such interest shall be paid on
the same date and in the same manner as the Deficiency Payment.  Notwithstanding the foregoing, any Deficiency
Payment shall first be paid by the Shareholders and, to the extent the
Deficiency Payment, or any portion thereof, is not paid by the Shareholders in
accordance with this Section 4.1.2.2, then the Purchaser may, at
its option, receive the Deficiency Payment out of the Regular Escrow pursuant
to the terms of the Regular Escrow Agreement or may pursue remedies against the
Shareholders for the collection thereof.


 


4.2          Excluded Assets; Cash. 
Expressly excluded from the Closing Net Assets shall be those items
listed on Schedule 4.2 (collectively, the “Excluded Assets”).  The Parties acknowledge and agree that prior
to the Closing, the Shareholders shall cause the Corporation to assign and
transfer the Excluded Assets to the Shareholders or to one or more Affiliates
of the Shareholders by way of a dividend or otherwise.  The Parties further acknowledge and agree
that prior to the Closing the Shareholders may cause the Corporation to declare
and pay one or more cash dividends to the Shareholders prior to the Closing
Date.  Any cash that is not the subject
of such cash dividends shall be included in the Closing Balance Sheet and the
Closing Net Assets.


 


4.3          Regular Escrow and Special Escrow. 
In order to provide additional assurance to the Purchaser, the Purchaser
and the Shareholders’ Representative shall, at the Closing, execute each of the
Special Escrow Agreement and the Regular Escrow Agreement, which shall, in
addition to this Agreement, and with respect to the Special Escrow, the Special
Escrow Letter, govern the Regular Escrow and the Special Escrow.


 


4.3.1       Regular Escrow.  A primary escrow (the “Regular Escrow”)
initially shall be funded at Closing in the amount of $15,000,000 (the “Regular
Escrow Amount”) pending its disposition as set forth in the Regular Escrow
Agreement.


 


4.3.2       Special Escrow.  A special escrow (the “Special Escrow”)
shall be funded at Closing in the amount of $3,000,000 (the “Special Escrow
Amount”) pending its disposition as set forth in the Special Escrow Letter
and the Special Escrow Agreement.


 


19

















 


4.3.3       Neither the Regular Escrow Amount nor the
Special Escrow Amount shall in any way act as a limitation on the amount of any
Claims or any other rights or claims whatsoever which may be asserted (or
thereafter be assertable) by the Purchaser.


 


Article 5


Representations and Warranties of the Shareholders


 


In order to induce the
Purchaser to enter into this Agreement and to consummate the transactions
contemplated hereunder, the Shareholders represent and warrant the following
statements are true and correct as of the Contract Date:


 


5.1          Organization, Power and Authority. 
The Corporation is a corporation duly organized and validly subsisting
under the laws of the Commonwealth of Pennsylvania.  Each Trust is a trust validly existing under
the laws of the Commonwealth of Pennsylvania. The Corporation has full
corporate power and authority to own or lease its Assets and to carry on the
Schoeneman Beauty Supply Business as now conducted by it, and to enter into the
Transaction Documents and perform its obligations thereunder.  Each Trust has full power and authority to
own or lease its Assets (including its Shares), the trustees or trustee of each
Trust have the power to execute and deliver on behalf of the applicable Trust
each of the Transaction Documents to which such Trust is a party, and each such
Trust has the power to perform its obligations thereunder.  The Corporation is qualified to do business
as a foreign corporation in New Jersey, West Virginia and Delaware.  The Corporation is qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in which
it owns or leases property or conducts any business so as to require such
qualification, except where the failure to so qualify does not result in a
Material Adverse Effect.  Except as set
forth on Schedule 5.1, the Corporation does not have any subsidiaries,
direct or indirect, and does not have an equity position (or the option or
right to acquire an equity position) in any other entity, except for marketable
securities.  Exhibits G and H
attached hereto contain true and complete copies of the current Articles of
Incorporation and By-laws and all amendments thereto of the Corporation.


 


5.2          No Conflict and Binding Obligations. 
Except as set forth on Schedule 5.2, the execution and delivery
of this Agreement and the other Transaction Documents required to be executed
by any Shareholder and/or the Corporation, and the performance by each
Shareholder and the Corporation of his, her or its respective obligations
hereunder, do not: (i) violate or conflict with any provisions of the
Organizational Documents of the Corporation or any Trust, or any Law which is
applicable to, binding upon or enforceable against the Corporation, or its
Assets, or the Shareholder; (ii) constitute or result in a breach of any
of the terms, provisions, conditions of, or constitute a default under, or an
event which, with notice or lapse of time or both would constitute a default
under any material Contract to which the Corporation or any Shareholder is a party,
or by which any of them or the Corporation’s Assets may be bound;  (iii) result in the creation of any Lien
upon any of the Assets of the Corporation; (iv) cause the acceleration of
the maturity of any Indebtedness of the Corporation or cause any third party
rights under, or the performance required by the Corporation under, any
material Contract of the Corporation to accelerate; or (v) require the
consent or approval of any Governmental Authority or other Person, except for
the consents with respect to the Required Consent Leases and Supplier
Contracts.  The Transaction Documents and
the consummation of the transactions


 


20






 










 


contemplated herein have
been duly executed and delivered by each of the Shareholders and/or the
Corporation that are a party thereto and are legal, valid and binding
obligations of each of the Shareholders and the Corporation, enforceable in
accordance with their respective terms, subject to the effect of applicable
bankruptcy, insolvency, reorganization, moratorium or other similar federal or
state laws affecting the rights of creditors and the effect or availability of rules of
law governing specific performance, injunctive relief or other equitable
remedies (regardless of whether any such remedy is considered in a proceeding
at law or equity).  No “fair price,” “moratorium,”
“control share acquisition,” or similar anti-takeover statute or regulation enacted
under any applicable Law is applicable to the Merger or the transactions
contemplated by this Agreement.  No
Shareholder has any dissenter’s right of appraisal in connection with the
consummation of the transactions contemplated hereby, including under the PBCL,
the Organizational Documents of the Corporation, or other applicable Law.


 


5.3          Compliance With Laws;
Environmental, Health and Safety Matters.


 


5.3.1        The Corporation and the Schoeneman Beauty Supply Business
have been and are being conducted in all material respects in compliance with
all applicable Laws, including, without limitation: (i) employment and
wage/wage payment Laws; and (ii) all Laws relating to the protection of
human health and safety, such as (as an example only) the Occupational Safety
and Health Act of 1970.  Neither the
Corporation nor any Shareholder has received any written notice, request for
information, or other correspondence from any Governmental Authority or any
other Person concerning any violation (actual or alleged) of any Laws within
the five (5) years immediately prior to the date hereof.


 


5.3.2        None of the Assets (including real property), Stores or
Warehouses, through the time currently or formerly owned, leased, operated, or
used by the Corporation, the Schoeneman Beauty Supply Businesses, or any
predecessors in interest (collectively, the “Subject Property”) contains
Hazardous Substances, except for those Hazardous Substances used or present in
the ordinary course of business and consistent with past practice of the
Corporation and in accordance with all applicable Laws, including, without
limitation, Hazardous Substances contained in Inventory at the time of such
Inventory was manufactured.


 


5.3.3        The Corporation and the Schoeneman Beauty Supply Business
have been and are being conducted in all material respects in compliance with
all Environmental Laws.  Neither the
Corporation nor any Shareholder has caused or taken any action that would
reasonably be expected to result in any material Liability relating to: (i) the
environmental conditions at, on, above, under, or about any Subject Property;
or (ii) the past or present use, management, handling, transport,
treatment, generation, storage, disposal, Release or threatened Release of
Hazardous Substances.  There has been no
material burial or material  Release
of Hazardous Substances by the Corporation, or to the Corporation’s Knowledge,
by any other Person on, in, at, above, under, from or about any Subject
Property.


 


5.3.4        All waste containing any Hazardous Substance generated, used,
handled, stored, treated or disposed of by the Corporation, the Schoeneman
Beauty Supply Business, or any predecessor in interest, or sent by the
Corporation, the Schoeneman Beauty Supply Business, or any predecessor in
interest for disposal at an off-site location, has been Released in 


 


21

















 


compliance in all material
respects with applicable Environmental Laws and reporting requirements, and
there are not any environmental claims, requests for information from a
Governmental Authority or demands to take response, removal, corrective,
remedial or other responsive action or to pay for the costs of any such action
at any facility or site with respect to any such Release.


 


5.3.5        Neither the Corporation nor any Shareholder has received any
written notice, request for information, or other correspondence from any
Governmental Authority or any other Person within the five (5) years
immediately prior to the date hereof concerning any:  (i) alleged Liability under
Environmental Laws with respect to the Corporation, the Schoeneman Beauty
Supply Businesses, any Shareholder, or any Subject Property; (ii) any
Hazardous Substances that have been generated, treated, stored, handled or
removed from or disposed of on any Subject Property; or (iii) any
Hazardous Substances which have migrated on, in, under, above or to any Subject
Property from any adjacent property or which has migrated, emanated or
originated from any Subject Property onto any other property.


 


5.3.6        Neither the Corporation nor any Shareholder has received any
written notice that the Corporation or the lessor or lessee of any property
used at any time in conducting all or any portion of the Schoeneman Beauty
Supply Businesses or owned either presently or at any time previously by the
Corporation (or any predecessor thereof) is a potentially responsible party for
a federal, state, municipal or local cleanup site or corrective action under
any Environmental Law.


 


5.3.7        There is no pending or, to the Corporation’s Knowledge,
threatened or proposed, proceeding or governmental action to modify the zoning
classification of, or to condemn or take by the power of eminent domain (or to
purchase in lieu thereof), or to classify as a landmark, or to otherwise
restrict the use of any of the properties where any Store or Warehouse is
located.


 


5.3.8        Corporation has provided to the Purchaser access to true and complete copies of all
environmental site assessments, audits, test results, analytical data, boring
logs, and other environmental reports, investigations and studies in the
possession, custody or control of the Corporation relating to locations or
Assets currently or formerly owned, leased, operated or used by the
Corporation.


 


5.4          Financial Statements.


 


5.4.1        The Corporation has delivered to the Purchaser complete
copies of the Financial Statements, which are attached to Schedule 5.4.  Except as set forth on Schedule 5.4,
the Financial Statements have been prepared in accordance with GAAP and the
books and records of the Corporation, and present fairly in all material
respects the financial position, results of operations and cash flows of the
Corporation at and for the respective periods indicated (subject, in the case
of the Unaudited Financial Statements, to normal year-end adjustments, which
will not be material to the Corporation, individually or in the aggregate, the
absence of a statement of cash flows and the absence of footnote disclosure).


 


22

















 


5.4.2        The Corporation has no Liabilities except:  (i) as set forth on Schedule 5.4.2;
(ii) Liabilities disclosed or reserved against in the Financial Statements
or specifically disclosed in the notes thereto; (iii) Liabilities incurred
after the date of the Unaudited Financial Statements in the ordinary course of
business consistent with past practice; and (iv) future performance
obligations under Contracts.


 


5.5          Absence Of Certain Changes.  Since August 31, 2009, except as set
forth on Schedule 5.5, the Schoeneman Beauty Supply Business has been
conducted in the ordinary course consistent with past practice and there has
not been:


 


5.5.1        Any Material Adverse Effect;


 


5.5.2        Any declaration or payment of any dividend or other
distribution with respect to any Shares, except with respect to cash and the
Excluded Assets, or any redemption or other acquisition by the Corporation of
any Corporation Securities;


 


5.5.3        Any amendment or modification of the Organizational Documents
of the Corporation or of the terms of any Corporation Securities;


 


5.5.4        Any incurrence of any Indebtedness by the Corporation;


 


5.5.5        Any creation or other incurrence of any Lien on any material
Asset of the Corporation other than Permitted Liens;


 


5.5.6        Any loan or advance, except the extension by the Corporation
of trade credit to its customers in the ordinary course of business, or capital
contribution to or investment in any Person by the Corporation;


 


5.5.7        Any material damage, destruction or other casualty loss
(whether or not covered by insurance) affecting the Schoeneman Beauty Supply
Business or its Assets;


 


5.5.8        Any: (i) change in any method of accounting or
accounting principles or practices by the Corporation, except for any such
change required by reason of a concurrent change in GAAP; or (ii) revaluation
of any material Assets, except the write-down or write-off of accounts
receivable or inventory in the ordinary course of business;


 


5.5.9        Any: (i) grant of any severance or termination pay to
(or amendment to any existing arrangement with) any director, officer or
employee of the Corporation; (ii) increase in benefits payable under any
existing severance or termination pay policies or employment agreements; (iii) employment,
deferred compensation or other similar agreement (or any amendment to any such
existing agreement) entered into with any director, officer or employee of the
Corporation; (iv) establishment, adoption or amendment (except as required
by applicable Law) of any collective bargaining, bonus, profit-sharing, thrift,
pension, retirement, deferred compensation, compensation, stock option,
restricted stock or other benefit plan or arrangement covering any director,
officer or employee of the Corporation; or (v) increase in compensation,
bonus or other benefits payable to any director, officer or employee of the
Corporation;


 


23

















 


5.5.10      Any capital expenditures, or commitments
for capital expenditures, in an amount in excess of $50,000 in the aggregate,
by the Corporation;


 


5.5.11      Any material Tax election made or changed,
any annual Tax accounting period changed, any method of Tax accounting adopted
or changed, any amended Tax Returns or claims for  Tax refunds filed, any closing agreement entered
into, any  proposed Tax adjustments or
assessments, any  Tax claim, audit or
assessment settled, or any right to claim a Tax refund, offset or other
reduction in Tax Liability surrendered, in each case, by the Corporation;


 


5.5.12      Any material payments made to, discounting
in favor of or any other consideration extended to customers or suppliers by
the Corporation, other than in the ordinary course of business consistent with
past practice;


 


5.5.13      Any failure to pay or satisfy when due any
material Liability of the Corporation;


 


5.5.14      Any sale, transfer, lease or other
disposition of any Asset, except for Inventory sold in the ordinary course of
business consistent with past practice;


 


5.5.15      Any acquisition of a material amount of
the stock or assets of any other Person;


 


5.5.16      Any amendment, cancellation, compromise or
waiver of any material claim or right of the Corporation; or


 


5.5.17      Any agreement or commitment by the
Corporation to do any of the foregoing or any action or omission by the
Corporation that would reasonably be expected to result in any of the
foregoing.


 


5.6          Books Of Account.  The Corporation’s books of account and other
records fairly present and reflect in all material respects (subject to normal
month end and year end adjustments) all of the transactions entered into by the
Corporation and as to which the Corporation is a party or may be bound or
otherwise affected.


 


5.7          Tax Matters.  Except as set forth on Schedule 5.7:


 


5.7.1        The Corporation has timely filed all Tax Returns required to
have been filed, each such Tax Return has been prepared in compliance with all
applicable Laws, rules and regulations, and all such Tax Returns are true
and accurate in all respects.  The
Corporation has paid all Taxes due or owing (whether or not shown on any Tax
Return) to any taxing  authority. With
respect to any Taxes that are not yet due and owing, the Corporation has made
sufficient accruals on the Financial Statements.  The Corporation has complied with all
applicable Laws relating to the payment and withholding of Taxes and has duly
and timely withheld and paid over to the appropriate taxing authority all
amounts required to be so withheld and paid under all applicable Laws. There
are no outstanding requests for, and the Corporation has not been granted any,
extensions of time within which to file Tax Returns.


 


24

















 


5.7.2        None of the Tax Returns contain nor have required a
disclosure statement under Section 6662 of the Code (or any predecessor
statute relating to the penalties for substantial understatement of income tax)
or any similar provision of state, local or foreign Law.


 


5.7.3        Neither the IRS nor any other taxing authority has asserted,
proposed or assessed against the Corporation any deficiency or claim for Taxes
which has not been settled or otherwise resolved.  The Corporation has no request for any
rulings with regard to any Tax pending before the IRS, or any state, local or
foreign taxing authority.


 


5.7.4        All Tax deficiencies proposed, asserted or assessed against
the Corporation have been paid or finally settled and no amounts with respect
thereto remain unpaid.


 


5.7.5        Neither the IRS nor any state, foreign or local taxing
authority has audited, is presently auditing or has notified the Corporation in
writing of the commencement of an audit of any Tax Return of the
Corporation.  To the Corporation’s
Knowledge, there is no threatened action, audit, proceeding, or investigation
against or with respect to the Corporation with respect to: (i) the
assessment or collection of Taxes; or (ii) a claim for refund made by the
Corporation with respect to Taxes previously paid.


 


5.7.6        The Corporation has not waived or requested to waive any
statute of limitations with respect to the assessment of any Tax or agreed to
any extension of time with respect to the assessment of any Tax.


 


5.7.7        There are no Liens for Taxes (other than for Taxes not yet
due and payable) upon any of the Assets of the Corporation.


 


5.7.8        The Surviving Corporation will not be required: (i) to
include in income any adjustment pursuant to Section 481(a) of the
Code (or similar provisions of other Law) by reason of a change in accounting
method nor does the Corporation have any Knowledge that the IRS (or other
taxing authority) has proposed, or is considering, any change in accounting
method requiring any adjustment to the income of the Corporation for any past,
present, or future taxable period; or, (ii) to include any item of income
in, or exclude any item of deduction from, taxable income for any taxable
period (or portion thereof) ending after the Closing Date as a result of any “closing
agreement,” as described in Section 7121 of the Code (or any corresponding
provision of state, local or foreign income Tax law).


 


5.7.9        The Corporation has not made or become obligated to make, or
will make, as a result of any transactions contemplated hereby, any “parachute
payments” as defined in Section 280G of the Code (without regard to
subsection (b)(4) thereof).


 


5.7.10      The Corporation is not, and has not been,
a “U.S. real property holding corporation” within the meaning of Section 897
of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of
the Code.


 


5.7.11      There are no elections, consents or
agreements with Tax authorities other than those reflected on Tax forms filed
with Tax authorities, copies of which have been provided to the Purchaser prior
to the Closing Date.


 


25

















 


5.7.12      The Corporation is not a party to any tax
sharing, indemnity or similar agreement or arrangement, including any
terminated agreement as to which it has any continuing Liability, and has no
current or potential contractual obligation to indemnify any other Person with
respect to Taxes.


 


5.7.13      The Corporation is not and has never been
a member of any consolidated, combined, affiliated or unitary group of
corporations for any Tax purposes.


 


5.7.14      No claim has ever been made to the
Corporation in writing by any jurisdiction in which the Corporation does not
file Tax Returns to the effect that the Corporation is or may be subject to any
Tax imposed by that jurisdiction.


 


5.7.15      The Corporation has no Liability for the
Taxes of any other Person under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local or foreign law), as transferee or
successor, by contract or otherwise.


 


5.7.16      Except for dividends of Excluded Assets,
the Corporation has not paid any dividends in the past seven (7) years
other than cash dividends.


 


5.7.17      All transactions between the Corporation
and any Affiliates or any related person (as defined in Section 267 of the
Code) have been consummated on an arms length basis for fair value in
accordance with the guidelines established under Section 482 of the Code.


 


5.7.18      The Corporation has not participated in
any reportable transaction, as defined in Treasury Regulation Section 1.6011-4(b)(1),
or a transaction substantially similar to a reportable transaction.


 


5.7.19      The Corporation has not constituted either
a “distributing corporation” or a “controlled corporation” (within the meaning
of Section 355(a)(1)(A) of the Code) in a distribution of stock
qualifying for tax-free treatment under Section 355 of the Code: (i) in
the two (2) years prior to the date of this Agreement; or, (ii) in a
distribution which could otherwise constitute part of a “plan” or “series of
related transactions” (within the meaning of Section 355(e) of the
Code) in conjunction with the transactions contemplated by this Agreement.


 


5.7.20      The Corporation has properly and timely
elected under Code Sections 1362 of the Code and all applicable Treasury
regulations promulgated thereunder, and under each analogous or similar
provision of state or local Law in each jurisdiction where the Corporation is
required to file an income or franchise Tax Return and is permitted to so
elect, to be treated as an “S” corporation for all taxable periods since its
formation.  There has not been any
voluntary or involuntary termination or revocation of any such election before
the Closing Date and no taxing authority has challenged or is challenging
Corporation’s qualification as an S corporation.  The Corporation has complied with all Laws
necessary to maintain its election as an S corporation at all times since
formation and the Corporation will be validly an S corporation within the
meaning of Code Sections 1361 (and any comparable provision of state or local
Law) up to and including the Closing Date.


 


26

















 


5.7.21      Each of the Shareholders is, and has been
at all times during the period in which both: (i) the Corporation has been
an S corporation within the meaning of Section 1361(a) of the Code;
and (ii) such Shareholder has been a shareholder of the Corporation, an
eligible shareholder of an S corporation within the meaning of Section 1361(a) of
the Code (and any comparable provision of state and local Tax law in each
jurisdiction in which the Corporation is obligated to file income or franchise
Tax Returns).


 


5.7.22      Corporation does not have any potential
Liability for any Tax under Section 1374 of the Code (or any comparable
provision of state or local Law) in connection with the sale or deemed sale of
the Corporation’s Assets. The Corporation has not, in the past ten (10) years:
(A) acquired Assets from another corporation in a transaction in which the
Corporation’s Tax basis for the acquired Assets was determined, in whole or in
part, by reference to the Tax basis of the acquired Assets in the hands of the
transferor; or (B) acquired the stock of any corporation which is a
qualified subchapter S subsidiary.


 


5.8          No Material Adverse Effect.  Since August 31, 2009, there has not
been any Material Adverse Effect.


 


5.9          Title to Assets.  Except as disclosed on Schedule 5.9,
Corporation owns and has good title to, and is the lawful owner of, all Assets
used in connection with the Schoeneman Beauty Supply Business and all of the
Assets reflected in the respective Financial Statements (other than assets
leased under any lease listed on Schedules 5.10.1(a) or (b) and
assets disposed of in the ordinary course of business consistent with customary
past practices and not disposed of in violation of any provision hereof), free
and clear of all Liens, except Permitted Liens.


 


5.10        Leases.


 


5.10.1      Schedule 5.10.1(a) lists all
of the leases of personal property to which the Corporation is a party or is
otherwise bound (including all amendments and modifications thereto) and
reflects for each the names of the lessor and lessee and the address of the
Store, Warehouse or other location where the personal property is located.  Schedule 5.10.1(b) lists all of
the leases of real property to which the Corporation is a party or is otherwise
bound (including all amendments and modifications thereto) and reflects each of
the names of the lessor and lessee and the address or location of the Store,
Warehouse or other item of real property. 
The Corporation does not now, and has not ever, owned any interest in
any real property.


 


5.10.2      The Corporation has delivered to the
Purchaser true and complete copies of all real property leases and leases of
personal property to which the Corporation is a party or is otherwise bound
(including all amendments and modifications thereto).  Each such lease is valid and subsisting and
in full force and effect and enforceable against the Corporation in accordance
with its terms, subject to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of law
governing specific performance, injunctive relief or other equitable remedies
(regardless of whether any such remedy is considered in a proceeding at law or
equity.  Except for the absence of
consents with respect to the Required Consent Leases and the Supply Contracts, neither the
execution and delivery of this Agreement nor the consummation of the 


 


27

















 


transactions contemplated
hereby will result in any breach of, or constitute a default (or event which
with the giving of notice or lapse of time, or both, would become a default)
under any such lease or give to the lessor any rights of termination or
cancellation under any such lease. No such lease relates to a
Store or Warehouse that has been closed. 
No lease has been assigned or subleased in whole or in part by the
Corporation to another Person.  The
Corporation and, to the Corporation’s Knowledge, the lessor thereof, have
performed all of its respective obligations, and there is no default thereof,
or event, which with the giving of notice, the passage of time or both, would
result in a default on the part of, or acceleration of obligations of, either
the Corporation or, to the Corporation’s Knowledge, the lessor, under any such
lease.  The Corporation has not assigned,
hypothecated, pledged, mortgaged, or encumbered its interest, or any part
thereof, as lessee under any such lease.


 


5.10.3      All personal property leased by the
Corporation as lessee is in good working condition, ordinary wear and tear
excepted, has been maintained as required by and in accordance with the terms
of each such lease, and is suitable for the present use thereof.  The current use by the Corporation of the
Stores, Warehouses, other items of real property, and personal property leased
by it does not violate the terms of any lease or conflict with any contract to
which the Corporation is a party or is otherwise bound.


 


5.10.4      Except for the Excluded Assets, the Assets
of the Corporation as of the Contract Date are all of the Assets required for
the conduct of the Schoeneman Beauty Supply Business in all material respects
as the Schoeneman Beauty Supply Business is presently conducted.  The plants, buildings, structures and
material equipment and all other tangible Assets are in good working condition,
ordinary wear and tear excepted, and are suitable for the present use thereof.


 


5.11        Contracts.


 


5.11.1      Set forth on Schedule 5.11.1 is a
list of all Contracts of the Corporation as of the Contract Date.  The Parties are in agreement that all
Contracts requiring the payment of money in exchange for goods or services,
with the payment not exceeding $5,000 in the aggregate during the remaining
term of the Contract and having a remaining term of less than eighteen (18)
months can be excluded from Schedule 5.11.1 (the “Excluded Contracts”).  The Shareholders and the Corporation have
delivered true and correct copies of all Contracts to the Purchaser (including
all amendments and modifications thereto). 
The aggregate value of Excluded Contracts does not exceed $100,000.


 


5.11.2      The Corporation and, to the Corporation’s
Knowledge, the other parties thereto, have performed all of their respective
obligations and duties under each Contract and there is no default or event,
which with the giving of notice, the passage of time or both, would result in a
default on the part of, or accelerate any obligation of, the Corporation or, to
the Corporation’s Knowledge, any such other party under any such Contracts.


 


5.12        Purchase Orders.  Set forth on Schedule 5.12 is a list
of all unfilled purchase orders of the Corporation, as of a specified date
within (ten) 10 days prior to the Contract Date (the “Corporation PO List”).  The Corporation has delivered true and
correct copies of all open 


 


28

















 


purchase orders listed on
the Corporation PO List to the Purchaser (including all amendments and
modifications thereto).


 


5.13        Customer Orders.  Set forth on Schedule 5.13 is a list
of all unfilled customer orders of the Corporation, as of a specified date
within (10 days) prior to the Contract Date (the “Customer PO List”).  The Corporation has delivered true and
correct copies of all customer orders listed on the Customer PO List to the
Purchaser (including all amendments and modifications thereto).


 


5.14        Inventory.  Subject to the reserves therefor on the
Closing Balance Sheet, the Inventory is usable and saleable in the ordinary
course of business consistent with customary past practices by the Schoeneman
Beauty Supply Business and exists in quantities which do not materially exceed
levels which are reasonable in the present circumstances of the Schoeneman
Beauty Supply Business; and, subject to adjustment as described on Schedule
4.1.1, is in good, clean condition, in currently available packaging, not
damaged or obsolete and carried on the Unaudited Financial Statements in
accordance with Schedule 4.1.1.


 


5.15        Permits.  Set forth on Schedule 5.15 is a true
and correct list of all Permits possessed or used by the Corporation.  The Corporation has delivered to the
Purchaser true and complete copies of all Permits possessed or used by the
Corporation (including all amendments and modifications thereto).  The Permits, which are listed on Schedule
5.15, are all that are necessary to conduct the Schoeneman Beauty Supply
Business as presently conducted, and in each case where applicable, to own the
Assets owned by the Corporation and lease the Assets leased by the Corporation.  The Corporation is in compliance in all
material respects with all such Permits, and all such Permits are in full force
and effect.


 


5.16        Tangible Assets.  Set forth on Schedule 5.16 are all of
the tangible Assets (other than Inventory) owned by the Corporation as of the
Contract Date having an original acquisition cost of $1,000 or more.


 


5.17        Legal Proceedings.  Schedule 5.17 sets forth all Legal
Proceedings to which the Corporation has been a party during the last three (3) years,
to which the Corporation is currently a party or which, for equivalent periods,
involves any of the Assets used by the Schoeneman Beauty Supply Business.  Except as set forth on Schedule 5.17,
there are no Legal Proceedings pending or threatened in writing or, to the
Corporation’s Knowledge, threatened orally, against the Corporation.  The Corporation is not in default with
respect to any order, judgment, injunction, decree or consent decree by any
Governmental Authority.  No such order,
judgment, injunction decree or consent decree is now in effect which pertains
to the Corporation or any aspect of the Schoeneman Beauty Supply Business or
any of the Assets used therein.  The
Corporation has delivered to the Purchaser true and complete copies of all
documentation prepared or generated in connection with all of the Legal
Proceedings disclosable in this Section 5.17, including, without
limitation, complaints, orders, and briefs.


 


29

















 


5.18        Intellectual Property.


 


5.18.1      Schedule 5.18.1 lists all
Intellectual Property owned by the Corporation (the “Owned Intellectual
Property”) that is registered or subject to an application for registration
or that is otherwise used in the Schoeneman Beauty Supply Business, other than
Trade Secrets.  The Corporation is the
exclusive owner of the Owned Intellectual Property set forth on Schedule
5.18, free and clear of any Liens other than Permitted Liens.


 


5.18.2      Schedule 5.18.2 lists all
agreements to which the Corporation is a party or by which it is otherwise
bound that relate to Intellectual Property, including:  (i) licenses of Intellectual Property to
the Corporation by any other Person; (ii) licenses of Intellectual
Property to any other Person by the Corporation; (iii) agreements
otherwise granting or restricting the right to use Intellectual Property; and (iv) agreements
transferring, assigning, indemnifying with respect to or otherwise relating to
Intellectual Property used or held for use in the Schoeneman Beauty Supply
Business.


 


5.18.3      To the Corporation’s Knowledge, the
conduct of the Schoeneman Beauty Supply Business does not, in any material
respect, infringe or otherwise conflict with the rights of any Person in
respect of any Intellectual Property.  To
the Corporation’s Knowledge, none of the Owned Intellectual Property is being
infringed or otherwise used or being made available for use by any Person
without a license or permission from the Corporation.


 


5.18.4      Except as set forth on Schedule 5.18.4,
the Corporation has taken all actions reasonably necessary to ensure full
protection of the Owned Intellectual Property under any applicable Law
(including making and maintaining in full force and effect all necessary
filings, registrations and issuances). 
The Corporation has taken all actions reasonably necessary to maintain
the secrecy of all confidential Intellectual Property used in the Schoeneman
Beauty Supply Business.  The Corporation
is not using (or permitting the use of) any material  Owned Intellectual Property in a manner that would reasonably
be expected to result in the cancellation or unenforceability of such Owned
Intellectual Property.


 


5.18.5      Neither the Corporation nor any
Shareholder has received:  (i) any
written notice or claim of infringement; or (ii) any claim challenging or
questioning the validity or effectiveness of any of the Owned Intellectual
Property.


 


5.18.6      The transactions contemplated by this
Agreement will in no way alter or impair the Corporation’s right to any of the
Owned Intellectual Property or the free alienability thereof.


 


5.19        Employees.  Set forth on Schedule 5.19 is a list
of all hourly and salaried employees of the Corporation as of the Contract Date
(the “Employees”), setting forth as of the Contract Date, for each, his
or her title and/or current job description, compensation, a description
(individually or collectively) of all fringe benefits of any kind or nature,
including all bonus and expense arrangements. 
All compensation and fringe benefits of any kind or nature which
pre-date the Closing Date have been paid, or to the extent not paid, will be
fully accrued on the Closing Balance Sheet. 
Except as set forth on Schedule 5.19, the employment of each


 


30














 


Employee and the
relationship with each independent contractor of the Corporation is terminable
at will by the Corporation without any penalty, severance or other Liability
incurred by the Corporation.


 


5.20        Labor Contracts and Controversies.  The Corporation is not a party to any
collective bargaining agreement with any labor union or any local or
subdivision thereof.  To the Corporation’s
Knowledge, there is no current union organizing activity among any of the
employees of the Corporation nor any union representation petition pending or
threatened before the National Labor Relations Board or any similar agency in
any state.


 


5.21        Retirement and Benefit Plans; ERISA.


 


5.21.1      Schedule 5.21.1 lists all the
Company Benefit Plans (including a description of any oral Company Benefit
Plans).  With respect to each such
Company Benefit Plan, the Shareholders have provided or made available to the
Purchaser, to the extent applicable: (i) the plan document and all
amendments thereto; (ii) trust agreements, insurance contracts or other
funding arrangements; (iii) the most recent actuarial and trust reports
for financial statement purposes; (iv) the two most recent Forms 5500 with
attachments required to have been filed with the IRS or the Department of Labor
and all schedules thereto; (v) the most recent IRS determination, opinion
or advisory letter; (vi) all current summary plan descriptions; and (vi) all
correspondence, other than routine correspondence, received from or sent to the
IRS, the Pension Benefit Guaranty Corporation, the Department of Labor or any
other Governmental Authority (including a written description of any oral
communication).  The Corporation has not
communicated to any current or former employee any intention or commitment to
amend or modify any Company Benefit Plan or to establish or implement any other
employee or retiree benefit or compensation plan or arrangement.


 


5.21.2      Each Company Benefit Plan intended to be
qualified under Section 401(a) of the Code, and each corresponding
trust exempt under Section 501 of the Code, is so qualified and has
received or is the subject of a favorable determination, opinion or advisory
letter from the IRS.  All amendments and
actions required to bring each Company Benefit Plan into conformity with the
applicable provisions of ERISA, the Code, and other applicable Law have been
made or taken.  Each Company Benefit Plan
has been operated in all material respects in accordance with its terms and
applicable Laws.  Each Company Benefit
Plan that is a “nonqualified deferred compensation plan” (within the meaning of
Section 409A(d)(1) of the Code) subject to Section 409A of the
Code was, as of January 1, 2009, and has remained, in documentary and
operational compliance with Section 409A of the Code and the then applicable
guidance issued by the Internal Revenue Service thereunder.


 


5.21.3      Except as set forth on Schedule 5.21.3,
neither the Corporation nor any Related Person has at any time maintained,
sponsored, contributed to or been obligated to contribute  to a “employee pension plan”, as defined in Section 3(2) of
ERISA, subject to Title IV of ERISA, including a “multi-employer plan” (as
defined in ERISA Section 3(37) and 4001(a)(3)), or  a “multiple employer plan” (meaning a plan
sponsored by more than one employer within the meaning of ERISA Sections 4063
or 4064 or Code Section 413(c)).


 


31

















 


5.21.4      None of the Corporation nor any Related
Person has been involved in any transaction that could cause the Corporation
or, following the Closing Date, the Purchaser or any of their respective
Affiliates to be subject to Liability under Section 4069 or 4212 of
ERISA.  There has been no non-exempt “prohibited
transaction,” as such term is defined in Section 406 of ERISA and Section 4975
of the Code, with respect to any Company Benefit Plan that would reasonably be
expected to result in a material Liability to the Corporation.  All contributions and premiums required to
have been paid by the Corporation or any Related Person to any Company Benefit
Plan under the terms of any such plan or its related trust, insurance contract
or other funding arrangement or Contract, or pursuant to any applicable Law
(including ERISA and the Code) or collective bargaining agreement have been paid
within the time prescribed by any such plan, agreement or other Contract
applicable Law.


 


5.21.5      There are no pending or, to the
Corporation’s Knowledge, threatened, claims by or on behalf of any participant
in any of the Company Benefit Plans, or otherwise involving any such Company
Benefit Plan or the assets of any Company Benefit Plan that individually or in
the aggregate would reasonably be expected to result in a material Liability to
the Corporation, except for claims for benefits by participants in the ordinary
course.  The Company Benefit Plans are
not presently under audit or examination (nor has notice been received of a
potential audit or examination) by the IRS, the Department of Labor, or any
other Governmental Authority, and no matters are pending with respect to a
Company Benefit Plan under the IRS’s Employee Plans Compliance Resolution
System (EPCRS) or other similar programs.


 


5.21.6      The Corporation has no Liability in
respect of post-retirement health, medical or life insurance benefits for
retired, former or current employees of the Corporation or any Affiliate, other
than pursuant to the group health plan continuation coverage requirements of Section 4980B
of the Code and Sections 601 through 608 of ERISA or other similar applicable
Law.


 


5.21.7      Except as set forth on Schedule 5.21.7,
the execution, delivery, and performance of this Agreement by the Corporation
and the consummation by the Corporation of the transactions contemplated by
this Agreement will not (alone or in combination with any other event) result
in an increase in the amount of compensation or benefits or the acceleration of
the vesting or timing of payment of any compensation or benefits payable to or
in respect of any current or former employee, officer, director or independent
contractor of the Corporation or any increased or accelerated funding
obligation with respect to any Company Benefit Plan.  No payment or deemed payment by the
Corporation will arise or be made as a result (alone or in combination with any
other event) of the execution, delivery and performance of this Agreement by
the Corporation, or the consummation by the Corporation of the transactions
contemplated by this Agreement, that would not be deductible pursuant to Section 280G
of the Code.


 


5.22        Transactions With Related Parties.  Except as set forth on Schedule 5.22,
no Shareholder, nor any spouse, child, parent, sibling or any other Person
Affiliated with any Shareholder, as the case may be: (i) owns any equity
interest, directly or indirectly in, or is an officer or director of, any
Person which: (a) is a competitor of the Corporation; (b) is a
customer or supplier of the Corporation; or (c) has any contractual or
business relationship whatsoever 


 


32

















 


with the Corporation,
except for those relationships between the Corporation and the Shareholders
related to the ownership of the Corporation, the management of the Corporation
by the Shareholders and the employment by the Corporation of the Shareholders; provided
that the foregoing does not apply to the ownership (collectively) by them of
not more than two percent (2%) of the outstanding security (or any class
thereof) of any corporation or partnership listed on a national securities
exchange, the Nasdaq Stock Market or traded over-the-counter; or (ii) has
or claims to have any direct or indirect interest in any Asset (other than an
Excluded Asset) used or held for use by the Corporation.


 


5.23        Product Warranty.  The Corporation has not extended any express
warranties and there are no outstanding express warranties on any products sold
by the Corporation except for those from the manufacturers.


 


5.24        No Broker.  Except for Crowe Capital Markets LLC (“CCM”),
this Agreement and
the transactions contemplated herein have not and will not be brought about
through the action of any broker or finder retained or employed by any of the
Shareholders or the Corporation who would be entitled to a commission, finder’s
fee or similar compensation.  In the
event any compensation is payable to such a broker or finder, including,
without limitation, CCM, such compensation shall be paid by and be the sole
responsibility of, the Shareholders.


 


5.25        Disclosure.  No representation or warranty by any of the
Shareholders to the Purchaser contained in this Agreement or any other
Transaction Document contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein and therein not misleading in light of the
circumstances under which they were made.


 


5.26        Insurance.  Schedule 5.26 lists, and the
Shareholders have made available to the Purchaser complete copies of, all
insurance policies (including fidelity bonds and other similar instruments) relating
to the Corporation, the Assets, the Schoeneman Beauty Supply Business or the
employees, officers or directors of the Corporation.  There is no claim by or with respect to the
Corporation pending under any of such policies as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or in
respect of which such underwriters have reserved their rights.  All premiums payable under such policies have
been timely paid, and the Corporation has otherwise complied fully with the
terms and conditions of such policies. 
Such policies (or other policies providing substantially similar
insurance coverage) have been in effect continuously since at least January 1,
2004  and remain in full force and
effect.  To the Corporation’s Knowledge,
there is no threatened termination of, premium increase with respect to, or
alteration of coverage under, any of such policies.


 


5.27        Indebtedness.  All Indebtedness of the Corporation
outstanding as of August 31, 2009 is described in Schedule 5.27.  Schedule 5.27 sets out in respect of
each such liability or obligation, its origination date, the other party or
parties thereto, the outstanding principal amount, the amount of accrued
interest and the maturity date.  The
Shareholders have delivered to the Purchaser true and complete copies of all
instruments, notes, drafts, and any other document of any kind or description
evidencing all of the Indebtedness of the Corporation (including all amendments
and modifications thereto).


 


33

















 


5.28        Capitalization.


 


5.28.1      The authorized capital stock of the
Corporation consists of 1,000 shares of voting common stock, $1.00 par value
per share, and 100,000 shares of non-voting common stock, $1.00 par value per
share, of which only the Shares are issued and outstanding.  The Shares have been duly authorized and
validly issued and are fully paid and nonassessable.  The Shareholders own the Shares, beneficially
and of record, free and clear of any Lien. 
The capital structure of the Corporation (including the division of the
Corporation’s common stock into voting and non-voting common stock) was not
adopted by the Corporation or the Shareholders (in whole or in part) for
purposes related to potential obligations under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.


 


5.28.2      Except as set forth on Schedule 5.28.2
(and therein setting forth the ownership numbers and percentage ownership of
the Shares, and disclosing whether such Shares are voting or nonvoting), there
are no outstanding:  (i) Corporation
Securities; (ii) any options or other rights or agreements, commitments or
understandings of any kind to acquire from any Shareholder, any Shares; (iii) voting
trusts, proxies or other similar agreements or understandings to which the
Corporation is a party or by which the Corporation is bound with respect to the
voting of any shares of capital stock of or other voting or equity interests in
the Corporation; or (iv) contractual obligations or commitments of any
character restricting the transfer of, or requiring the registration for sale
of, any shares of capital stock of or other voting or equity interests in the
Corporation.  There are no outstanding
obligations of the Corporation to repurchase, redeem or otherwise acquire any
Corporation Securities.


 


5.29        Accounts Receivable.  All accounts, notes receivable and other
receivables (other than receivables collected since the date of the Unaudited
Financial Statement (August 31, 2009)) reflected on the Unaudited
Financial Statement (August 31, 2009) are, and all accounts and notes
receivable arising from or otherwise relating to the business of the
Corporation as of the Closing Date will be, valid, genuine and fully
collectible in the aggregate amount thereof, subject to normal and customary
trade discounts, less any reserves for doubtful accounts recorded on the
Financial Statements or the Closing Balance Sheet.


 


5.30        Bank Accounts.  Schedule 5.30 sets forth the names and
locations of each bank, brokerage firm or other financial institution at which
the Corporation has an account (giving account numbers) or safe deposit box and
the names of all persons authorized to draw thereon or have access thereto, and
the names of all persons, if any, holding powers of attorney or comparable
delegation of authority from the Corporation.


 


5.31        Claims Against Officers and Directors.  There are no pending or, to the Corporation’s
Knowledge, threatened, claims against any director, officer, employee or agent
of the Corporation which could give rise to any claim (whether through
indemnification, contribution or otherwise) against the Corporation.


 


5.32        Recorded Sales Consistent With
Manufacturers’ Directions.  All sales
data provided in the Financial Statements of the Corporation are based upon
sales which, to the Corporation’s Knowledge at the time such sales were made,
were made strictly in accordance 


 


34

















 


with manufacturers’ rules and
regulations for sales of merchandise established by the respective
manufacturers, and does not, to the Corporation’s Knowledge, contain any
recorded sales resulting from Diversion.


 


5.33        Intercompany Accounts; Transactions
With Affiliates.


 


5.33.1      Schedule 5.33.1 lists all balances
as of the August 31, 2009 between the Shareholders or any of their
Affiliates (other than the Corporation), on the one hand, and the Corporation,
on the other hand.  Since the August 31,
2009 there has not been any accrual of liability by the Corporation to any
Shareholder or any of their Affiliates (other than the Corporation) or other
transactions between the Corporation and the Shareholders or any of their
Affiliates (other than the Corporation), except in the ordinary course of
business of the Corporation consistent with past practice.


 


5.33.2      Schedule 5.33.2 lists all
agreements, arrangements and other commitments or transactions to or by which
the Corporation, on the one hand, and the Shareholder or any of their  Affiliates (other than the Corporation), on
the other hand, are or have been a party or otherwise bound or affected and
that: (i) were entered into since three (3) years ago; (ii) are
currently pending or in effect; or (iii) involve continuing Liabilities to
the Corporation (each, an “Affiliate Transaction”).  Each Affiliate Transaction was on terms and
conditions no more favorable to the Corporation than as would have been
obtainable by them at the time in a comparable arm’s-length transaction with a
Person other than the Shareholder or any of its Affiliates.  Except as disclosed on Schedule 5.33.2,
no stockholder, officer, director or employee of the Corporation, or any
immediate family member, relative or Affiliate of any such stockholder,
officer, director or employee: (i) owns, directly or indirectly, any interest
in (x) any asset or other property used in or held for use in the
Schoeneman Beauty Supply Business or (y) any Person that is a supplier,
customer or competitor of the Corporation; (ii) serves as an officer,
director or employee of any Person that is a supplier, customer or competitor
of the Corporation; or (iii) is a debtor or creditor of the
Corporation.  For purposes of this Section 5.33.2,
and without limitation, Affiliates of the Shareholders shall be deemed to
include: (i) any Person directly or indirectly beneficially owning or
controlling five percent (5%) or more of the outstanding voting securities of
the Shareholder or any of their Affiliates; (ii) any Person five percent
(5%) or more of whose outstanding voting securities are directly or indirectly
beneficially owned or controlled by a Shareholder or any of their Affiliates;
or, (iii) any current or former director or officer of the Shareholders or
any of their Affiliates or any “associates” or members of the “immediate family”
(as such terms are respectively defined in Rule 12b-2 and Rule 16a-1
of the Securities Exchange Act of 1934, as amended) of any such director or
officer.


 


Article 6


Representations and
Warranties of the Purchaser


 


In order to induce the
Shareholders to enter into this Agreement and to consummate the transactions
contemplated hereunder, the Purchaser represents and warrants to the
Shareholders that the following statements are true and correct as of the
Contract Date:


 


35

















 


6.1          Organization, Power and Authority.  The Purchaser is a limited liability company
duly organized, validly existing and in good standing under the laws of the
State of Delaware.  The Merger Sub is a
corporation duly organized and in good standing under the laws of the State of
Delaware.  Each of the Purchaser and the
Merger Sub has full power and authority to own or lease its Assets and to carry
on its business as now conducted by it, and to enter into the Transaction
Documents and perform its obligations thereunder.


 


6.2          Authority and Binding Obligations.  The execution and delivery of this Agreement
and the other Transaction Documents required to be executed by the Purchaser
and/or the Merger Sub, and the performance by the Purchaser and the Merger Sub
of its respective obligations hereunder, do not:  (i) violate or conflict with any
provisions of the Organizational Documents of the Purchaser or the Merger Sub,
or of any Law which is applicable to, binding upon or enforceable against the
Purchaser or its Assets or the Merger Sub or its Assets; or (ii) constitute
or result in any breach of any of the terms, provisions, conditions of, or
constitute a default under, or an event which, with notice or lapse of time or
both, would constitute a default under any material Contract to which the
Purchaser or the Merger Sub is a party, or by which it or its Assets may be
bound; or (iii) require the consent or approval of any Governmental
Authority or other Person.  The
Transaction Documents and the consummation of the transactions contemplated
herein have been duly executed and delivered by the Purchaser and the Merger
Sub, as applicable, and are legal, valid and binding obligations of the
Purchaser and the Merger Sub, as applicable, enforceable in accordance with their
respective terms, subject to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of law
governing specific performance, injunctive relief or other equitable remedies
(regardless of whether any such remedy is considered in a proceeding at law or
equity).


 


6.3          Investment Representation.  The Purchaser is acquiring the Shares solely
for the purpose of this investment and not with a view to, or for sale in
connection with, any distribution thereof in violation of the Securities Act of
1933, as amended (the “Securities Act”). 
The Purchaser acknowledges that the Shares are not registered under the
Securities Act or any applicable state securities law or other applicable laws,
and that the Shares may not be transferred or sold except pursuant to the
registration provisions of such Securities Act or pursuant to an applicable
exemption therefrom and pursuant to state securities laws and regulations as
applicable.  The Purchaser is an “accredited
investor” within the meaning of Rule 501(a) promulgated under the
Securities Act.


 


6.4          Litigation.  There is no Legal Proceeding pending or, to
the Purchaser’s Knowledge, threatened before any court, arbitration tribunal,
or judicial, governmental or administrative agency, against the Purchaser or
any of its Affiliates (including, without limitation, the Merger Sub) which
would materially restrict or limit the ability of the Purchaser or the Merger
Sub to perform its obligations hereunder or which seeks to prevent the
consummation of the transactions contemplated herein.


 


6.5          Consents and Governmental Approvals.  The execution, delivery and performance of
this Agreement by the Purchaser or the Merger Sub does not and will not require
any consent, 


 


36

















 


approval, authorization
or other action by, or filing with or notification to, any Governmental
Authority or any other Person.


 


6.6          No Broker.  This Agreement and the transactions
contemplated herein have not and will not be brought about through the action
of any broker or finder retained or employed by the Purchaser or the Merger Sub
who is entitled to a commission, finder’s fee or similar compensation.


 


Article 7


Covenants and Agreements


 


7.1          Landlord’s Consents for Store
Leases.


 


7.1.1        The Shareholders and the Purchaser are electing to proceed
with the Closing without first obtaining either a consent or a waiver for those
Store Leases which require the consent of the lessors in connection with a “change
of control” of the Corporation and/or the consent of the lessors in connection
with the assignment of the lease pursuant to the Merger (herein, those leases
which require such a consent and/or waiver of the lessor are called the “Required
Consent Leases”).  In order to induce
the Purchaser to proceed with the Closing without any consents or waivers from
the lessors of the Consent Required Leases, the Parties agree as follows:


 


7.1.1.1         Promptly after the Closing (but in no
event later than twenty-one (21) days after the Closing), the Shareholders’
Representative shall give notice to the lessors under all Store Leases and, in
the case of the Required Consent Leases, shall ask for consent to, or waiver of
the need for consent to, the “change of control” of the Corporation and/or the
assignment of the lease pursuant to the Merger. 
The notice will be prepared by counsel for the Shareholders and will be
subject to the Purchaser’s consent, which consent shall not be unreasonably
withheld or delayed.


 


7.1.1.2         The Shareholders’ Representative shall
be solely responsible for all dealings with all lessors of all Required Consent
Leases and the Shareholders’ Representative shall have full and complete
authority to negotiate with such lessors to obtain such consents or
waivers.  If the Shareholder
Representative believes that any such consent or waiver can be obtained by
offering a lessor of a Required Consent Lease a guaranty by one or more of the
Shareholders of the Required Consent Lease for the balance of the then current
lease term, the Purchaser agrees to provide any such Shareholders who execute
any such guaranties a full and complete indemnification of any obligations or
liabilities assumed by such Shareholder as a result of such guaranties.  To the extent the Shareholders’
Representative desires or is required to make payment of any monies in order to
effect a consent or waiver, other than pursuant to the guaranty referred to in
the immediately preceding sentence, such payment shall be the sole
responsibility of the Shareholders’ Representative. The Shareholders’
Representative shall keep the Purchaser advised concerning all communications
with the lessors of the Required Consent Leases.


 


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7.1.1.3         To the extent that a lessor of a
Required Consent Lease has not taken any action to declare a default under its
Required Consent Lease or terminate its Required Consent Lease by September 30,
2010 (the “Cutoff Date”), then provided the notice required under Section 7.1.1.1
has been given to such lessor, the Shareholders shall have no further
responsibility with respect to such lease. 
If, prior to the Cutoff Date, a lessor under a Required Consent Lease
has given written notice to the Corporation or its successor that the
Corporation or its successor is in default and thereafter, either before or
after the Cutoff Date, either the lessor declares such lease terminated or
evidences an intention to take legal action to terminate such lease (a “Terminated
Lease”), then the Corporation or its successor shall be entitled to close
the store subject to such Terminated Lease at anytime thereafter and the
Shareholder Indemnifying Parties jointly and severally shall indemnify, hold
harmless and defend the Purchaser, Corporation and its successor with respect
to such Required Consent Lease in the following amounts:


 


(a)           The reasonable costs of relocating the store subject to
the Terminated Lease to a new location with a radius of six (6) miles from
the location of the Required Consent Lease in question but not in excess of
$54,000;


 


(b)           Any amounts which the lessor of the Terminated Lease
collects from the Purchaser, the Corporation or any successor on account of the
occurrence of a “change of control” and/or assignment without the consent of
the lessor;


 


(c)           The loss of “Operating Profits” (as hereinafter defined)
applicable to the store that is subject to the Terminated Lease which shall
mean and be calculated by the following formula: (i) the number of days
(which in no event may be greater than one hundred and eighty (180)) between (A) the
date the Corporation or its successor closes the store subject to the
Terminated Lease and (B) the date upon which a new store is opened which replaces
the store subject to the Terminated Lease multiplied by (ii) the
dollar amount of the “Operating Profits Per Day” (as hereinafter defined) of
such store.


 


(d)           The Rent Differential times the number of square feet in
the Terminated Lease times a fraction, the numerator of which is the number of
days in the period from the date of termination of the Terminated Lease to the
end of the current lease term of the Terminated Lease, and the denominator of
which is 365.  For purposes hereof, the
term “Rent Differential” shall mean the excess, if any, of (A) the
effective annual rental per square feet for the new space (taking into
consideration any free rent periods for the new space) over (B) the rental
per square foot for the balance of the current term of the Terminated Lease.


 


Notwithstanding the foregoing, the Shareholders
shall not have liability to the Purchaser with respect to any Terminated Leases
in the following locations, since the Purchaser currently has an existing store
within the same geographic locations:  (i) Monroeville,
Pennsylvania, (ii) Greensburg, Pennsylvania, (iii) Johnstown,
Pennsylvania, (iv) Erie, Pennsylvania, (v) Scranton, Pennsylvania, (vi) Butler,
Pennsylvania, (vii) Pittsburgh, Pennsylvania (McKnight Road), (viii) West
Mifflin, Pennsylvania, (ix) Wheeling, West Virginia and (x) Barboursville,
West Virginia.


 


38

















 


7.1.2        Until the Cutoff Date or, in the case of Required Consent
Leases where the lessor as sought to declare the Surviving Corporation in
default because of the Closing under this Agreement, at any time, the Purchaser
shall have no right without the prior written consent of the Shareholders’
Representative to negotiate with any lessor of the Store Lease better lease
terms or change the activities of the store to a store that sells to the
general public as opposed to a store that only sells to licensed hairdressers,
barbers and beauticians.  Nothing
contained herein shall prevent the Purchaser from changing the name of the store
(and/or any or all signage and other advertising) provided the business
conducted at the store remains substantially equivalent to what was conducted
at that location prior to the Closing.


 


7.1.3        For purposes hereof, the following terms shall have the following
meaning:


 


7.1.3.1   “Operating Profits” means an amount
equal to sixteen percent (16%) of the total cash and credit sales at the store
in question during the one hundred and eighty (180) day period ending with the
Closing Date.


 


7.1.3.2   “Operating Profits Per Day” means an
amount equal to the Operating Profits of the store in question divided by one
hundred and eighty (180).


 


7.2          Supplier Contracts.  The Purchaser hereby acknowledges that the
Supplier Contracts may require consent or notice to the counterparties thereto
prior to the consummation of the transactions contemplated hereby.  The Parties acknowledge and agree that the
receipt of one or more consents applicable to the Supplier Contracts was not a
condition to the Closing and that the Shareholders have no obligation after the
Closing to obtain any consents applicable to Supplier Contracts.


 


7.3          Restrictive Covenant.  As a material inducement to the Purchaser to
enter into and perform its obligations under this Agreement, each of the
Shareholders covenant and agree as follows:


 


7.3.1        For a period of three (3) years after the Closing Date,
F. Dale Schoeneman, Kay L. Schoeneman, Lori Schoeneman and Tara Schoeneman (the
“Schoenemans”) shall not, directly or indirectly, alone or in
conjunction with any other corporation, firm, partnership, person, venture or
other entity, own (except as a holder of an aggregate of not more than two
percent (2%) of the outstanding stock of a corporation or partnership whose
stock or partnership interests are listed on a national securities exchange or
traded over the counter on NASDAQ), manage, operate, join, control, work for,
permit the use of his/her/its name by, or consult with any business enterprise
(person or entity) that is engaged in a Beauty Supply Business, or otherwise
engage in a Beauty Supply Business, anywhere within the Territory.


 


7.3.2        For a period of one (1) year after the termination from
employment from Corporation or their successors, each Schoeneman shall not, as
an employee, consultant, contractor, officer, owner, director, or otherwise,
participate in, provide, supervise, manage or control activities or services on
behalf of a Person engaged in a Beauty Supply Business within the 


 


39

















 


Territory that are the same
as or similar in function or purpose to the services that such individual
provided to the Corporation or the Schoeneman Beauty Supply Business in the two
(2) year period preceding the termination of that individual’s employment
(the “Look Back Period”).  This Section 7.3.2
is not intended to prohibit: (i) employment with an independently operated
subsidiary, division, or unit of a diversified corporation so long as the
independently operated business unit at issue is truly independent and does not
compete in any way with the Corporation (or its successor); or (ii) a
passive and non-controlling ownership of less than two percent (2%) of the
stock in a publicly traded company.  This
Section 7.3.2 supplements, and does not replace, shorten, or
diminish in any way the restrictions in Section 7.3.1.  To the extent that the Corporation or the
Purchaser deem it necessary for any Schoeneman to enter into a separate
employment agreement with the Corporation or the Purchaser that would also
cover and reinforce performance of the obligations of this Section 7.3.2
and the obligations of Section 7.3.6 that follow termination of
employment, then the Schoeneman shall enter into such separate agreement.


 


7.3.3        The covenants contained in Sections 7.3.1 and 7.3.2
shall be deemed to be a series of separate and severable covenants, one for
each county of each state located in the Territory.  Except for geographic coverage, each such
separate covenant shall be deemed identical in terms with the covenants
contained in Section 7.3.1. 
If, in any judicial proceeding, a court should refuse to enforce all of
the separate covenants deemed included in Section 7.3.1 because
taken together they cover too extensive a geographic area, then it is intended
that those of such covenants which, if eliminated, would permit the remaining
separate covenants to be enforced in such proceedings shall, for the purpose of
such proceeding, be deemed eliminated from the provisions hereof.


 


7.3.4        The covenants contained in Sections 7.3.1 and 7.3.2
shall be deemed to be a series of separate and severable covenants, one for
each successive month during the terms of said covenants.  If, in any judicial proceeding, a court
should refuse to enforce all of the separate covenants because taken together
they cover too long a period of time, then the last of such covenants in time
which, if eliminated, would permit the remaining separate covenants to be
enforced in such proceeding shall, for the purpose of such proceeding, be
deemed eliminated from the provisions hereof.


 


7.3.5        Any and all Proprietary Information which any Shareholder
heretofore obtained or may hereafter obtain with respect to the conduct and
details of any portion of the Schoeneman Beauty Supply Business or a Beauty
Supply Business as conducted by the Purchaser, any Affiliate, or their
successors, shall be held in confidence and shall not be revealed to any
competitor of the Surviving Corporation or any other Person.  No Shareholder shall make any use of
Proprietary Information, except for and on behalf of Purchaser or an Affiliate,
or their successors.  “Proprietary
Information” shall mean knowledge and information, relating to the
Corporation, or any portion of the Schoeneman Beauty Supply Business or a
Beauty Supply Business as conducted by the Purchaser, any Affiliate (including
the Surviving Corporation) or their successors, which: (i) is not
generally available to the public; (ii) gives or may give any competitive
advantage to the Surviving Corporation, the Purchaser, any Affiliate or their
successors with respect to the operation of any Beauty Supply Business; or (iii) if
disclosed, could give any advantage to a competitor of the Surviving
Corporation, the Purchaser, any Affiliate or their successors, or could
otherwise be deleterious to the Surviving Corporation’s or


 


40














 


the Purchaser’s ownership or
operation of a Beauty Supply Business. 
The foregoing obligation of confidentiality shall not apply to
information that:  (i) is required
to be released pursuant to a lawful order of a court of competent jurisdiction;
provided that the applicable Shareholder notifies the Purchaser promptly of
such order upon receipt and gives the Purchaser time to seek protection for
such Proprietary Information; (ii)  becomes generally available to the
public without breach of this Section 7.3.5 by a Shareholder;  (iii)  becomes available from Persons
who lawfully acquired such information without restriction; or (iv) the
Purchaser agrees in writing may be used or disclosed by the Shareholder.  In addition to the obligations set forth in
this Section 7.3.5, the Parties shall also have confidentiality
obligations set forth in the Escrow Condition Letter.


 


7.3.6        For a period of three (3) years following the Closing,
and also a period of one (1) year after the date of their respective
terminations from employment by the Surviving Corporation or its successor, the
Shareholders will not directly or indirectly, request, induce, influence or
solicit any employee, customer, or supplier of the Purchaser or the Surviving
Corporation or any other Affiliate of the Purchaser (including, without
limitation, any Employee who is hired as an employee by Purchaser) to terminate
his, her or its employment or business relationship with the Purchaser, the
Surviving Corporation or other Affiliate. 
Notwithstanding the foregoing, the Purchaser acknowledges and agrees
that this Agreement will not prohibit (x) solicitations through
advertising or other publications of general circulation; (y) the
solicitation for hire or hiring of any person whose employment has been terminated
by the Purchaser; or (z) hiring persons who respond to a bona fide
advertisement or general solicitation for a job opening or non-directed
executive search that was not specifically directed at the Purchaser or any of
its Affiliates or their employees or who make unsolicited contact for
employment.


 


7.3.7        The Parties recognize that the goodwill and going business
value of  the Corporation being purchased
and acquired by the Purchaser are very closely related to the special, unique
and extraordinary knowledge and skill by each Shareholder and that the
consummation by the Purchaser of this Agreement will be in reliance upon the
unconditional assurance of each Shareholder, as applicable, that they will
fully comply with the terms of this Agreement, particularly, but not limited
to, such terms as relate to their covenants and undertakings not to engage in
competition or to divulge information. 
Further, the period of protection of the Purchaser against the
competition of each Shareholder, as applicable, and the geographical area
within which such protection is essential has been agreed by the Parties to be
reasonable and necessary.  Therefore, if
any applicable Shareholder shall at any time breach or in any manner violate
any such covenant, then the Purchaser, in addition to, but not in substitution
for, any and all other relief to which the Purchaser may be entitled either at
law or in equity, shall be entitled to equitable relief against the Shareholder
by way of injunction to restrain the Shareholder from such breach and to compel
compliance by the Shareholder with its obligations hereunder.  Each Shareholder does hereby waive any proof:
(i) that such breach will cause irreparable injury to the Purchaser or (ii) that
there is no adequate remedy at law.


 


7.3.8        In the event of any breach of this Section 7.3 by
any Shareholder as herein set forth, that Shareholder shall pay to the
Purchaser the attorneys’ fees and costs incurred by the Purchaser in seeking
relief from such breach.


 


41

















 


7.3.9        In the event that a court of competent jurisdiction shall
refuse to enforce the provisions of the restrictive covenants set forth in Sections
7.3.1 and 7.3.2 of this Agreement because it deems the length of
time or the geographical area to be excessive or unreasonable, then the time
period or the geographical area, or both, shall be deemed to be amended to
conform to such time period and geographical area as such court shall determine
to be reasonable and not excessive.


 


7.4          Store Cash.             Any other provision of the
Transaction Documents notwithstanding, each Store shall be left with no less
that $200 in cash on hand upon Closing.


 


7.5          Post-Closing Employee Matters.


 


7.5.1        The Surviving Corporation shall either:  (i) continue the employment of those
employees who are employed by the Surviving Corporation on the day after the
Closing Date (including those employees on leave of absence, vacation or
otherwise absent from work on the day after the Closing Date) but excluding the
Schoenemans (the “Covered Employees”) for a period of not less than
three (3) months after the Closing Date; or in the alternative (ii) provide
an offer of a payment to the Covered Employees sufficient to be an equivalent
to base wages which otherwise would have been earned during the three (3) months
after the Closing Date, on such terms and conditions (including execution of a
release of claims) as the Surviving Corporation deems appropriate in its sole
discretion; provided, however, no such payment offer shall be due
to any Covered Employee under this paragraph unless the reason for the
termination by the Surviving Corporation prior to the end of three (3) months
after Closing Date is a consolidation of functions or reduction in force.


 


7.5.2        The Surviving Corporation agrees that for a period of not
less than three (3) months after the Closing Date, the employees of the
Surviving Corporation will be provided with group health medical benefits under
an employee benefit plan maintained by the Surviving Corporation and/or the
Purchaser that are reasonably comparable with that currently being provided by
the Corporation or substantially similar to that offered by the Purchaser to
its other similarly situated employees.


 


7.5.3        The Surviving Corporation will credit for purposes of
vacation and sick leave benefit accrual, the length of service of the employees
with the Corporation prior to the Closing Date, to the same extent that such
service would have been credited under any similar type of plan of the
Surviving Corporation; provided, however, that such credit shall
not result in a duplication for the same period of service.


 


7.5.4        The Surviving Corporation shall take all such actions as are
necessary or appropriate to ensure that each Employee, such employee’s spouse
and dependent children covered under a group health plan of the Corporation
immediately prior to the Closing Date shall be eligible to enroll for coverage
effective as of the date immediately after the Closing Date under a group
health plan maintained by the Surviving Corporation and/or the Purchaser.  The Surviving Corporation shall take all such
reasonable actions as are necessary or appropriate to cause each group health
plan maintained by the Surviving Corporation and/or the Purchaser in which an
Employee, any such employee’s spouse or dependent children will participate on
and 


 


42

















 


immediately after the
Closing Date to waive any waiting period, evidence of insurability requirement
or pre-existing condition limitation that did not also apply under the
applicable group health plan of the Surviving Corporation or the Purchaser, as
may be applicable.


 


7.5.5        To the extent that an employee has paid in whole or in part
any annual deductible or paid any out-of-pocket or co-payment expenses (as
evidenced by reasonable documentation to be provided to the Surviving
Corporation) under a group health plan of the Corporation for 2009, such
employees shall be credited therefor an equivalent amount under the corresponding
provisions of the corresponding group health plan of the Surviving Corporation
and/or the Purchaser in which such employee participates immediately after the
Closing Date.


 


7.5.6        If the Surviving Corporation terminates any of the employees
listed on Schedule 7.5.6 within six (6) months after the Closing
Date, as a result of a consolidation of functions or reduction in force, the
Surviving Corporation shall provide an offer of a payment to the employee
equivalent to a minimum of four (4) week’s base pay, on such terms and
conditions (including execution of a release of claims) as the Purchaser deems
appropriate in its sole discretion.


 


7.5.7        Nothing contained in this Section 7.5 shall
create any third party beneficiary rights in any Covered Employee or other
employee, any beneficiary or dependent thereof, with respect to the benefits
that may be provided to such Covered Employees or other employee by the
Surviving Corporation or the Purchaser or under any employee benefit plan, or
with respect to any entitlement of an employee to employment or continued
employment with the Surviving Corporation or the Purchaser for any specified
period after the Closing Date.


 


7.5.8        To the extent that any amounts that are required to be
contributed or paid pursuant to any Company Benefit Plan, including, without
limitation, the Corporation’s 401(k) Plan and the Corporation voluntary
profit sharing plan, or the special bonuses described on Schedule 5.19,
are accrued on the Closing Balance Sheet, the Surviving Corporation shall make
such contributions or payments after the Closing in accordance with the terms
of the applicable Company Benefit Plan.


 


7.6          Post-Closing Treatment of
Individual Shareholders.  The
individual Shareholders will continue as employees of the Corporation for at
least one (1) month after the Closing on the same terms and conditions and
with the same fringe benefits, including the same medical insurance coverage,
that they currently enjoy.  Beginning November 1,
2009, the Consulting Agreements for Dale and Kay Schoeneman shall become
effective. Irrespective of whether individual Shareholders continue as
employees and/or consultants of the Corporation, from and after November 1,
2009, the Purchaser shall pay to the individual Shareholders the cost of
continuing medical insurance benefits until October 31, 2010, which are
identical in amounts and coverage, and with identical deductibles and co-pays,
as each of the individual Shareholders currently enjoys under the existing Blue
Cross insurance policy (Policy No. 005041420000) that the Corporation has
in effect prior to the Closing, in an amount up to $70,000 in the aggregate for
all Shareholders (the “Medical Insurance Cap”).  Each of the individual Shareholders will be
entitled to obtain individual insurance policies to begin coverage effective November 1,
2009, and if they do so it will be the cost of such individual policies for
which the individual 


 


43

















 


Shareholders will be
entitled to reimbursement from the Purchaser, subject to the Medical Insurance
Cap.


 


7.7          Tax Deposit.  The Parties acknowledge and agree that as of
the Contract Date, the Corporation has on deposit with the IRS an amount equal
to $591,987 as a “required payment” within the meaning of Section 7519 of
the Code  (the “Tax Deposit”).  The Purchaser shall
promptly cause the Surviving Corporation to make a claim for refund of the Tax
Deposit as provided by, and in accordance with the rules regarding the
timing of such request for refund set forth in, Treasury Regulation Section 1.7519-2T(a)(6).  Upon receipt of the Tax Deposit (in whole or
in part) by the  Surviving Corporation, the
Purchaser shall cause the Surviving Corporation to promptly remit such funds to
the Shareholders’ Representative.


 


7.8          M&T Indebtedness.  In the event that, on the Closing Date,
Indebtedness owed by the Corporation to M&T Bank (the “M&T
Indebtedness”) has not been repaid by the Corporation and the Shareholders
have elected not to advance funds to the Corporation in order for the M&T
Indebtedness to be repaid in full, then the Purchaser shall allocate funds from
the Closing Payment to the repayment of the M&T Indebtedness in full
(allocated among the Shareholders on an equal “per share” basis).  In such case, for purposes of the Closing
Balance Sheet, the M&T Indebtedness shall be deemed paid in full.  In the event that M&T Indebtedness
remains outstanding on the Closing Date, the Shareholders shall cause the
Corporation to deliver to the Purchaser one or more payoff letters (collectively,
the “Payoff Letters”) executed by one or more authorized representatives
of M&T Bank setting forth, in the aggregate, all amounts necessary to be
paid in order to fully pay off all of the M&T Indebtedness on the Closing
Date and providing that, upon such payment, if it has not already been made,
the M&T Indebtedness will be extinguished and all Liens relating thereto
will be released.


 


Article 8


Indemnification


 


8.1          Indemnification by the Shareholder
Indemnifying Parties. 
Notwithstanding any investigation by or knowledge of the Purchaser, each
of the Shareholder Indemnifying Parties hereby, jointly and severally, agree to
defend, indemnify and hold the Purchaser and its Affiliates (including the
Surviving Corporation) harmless from and against any and all losses,
Liabilities, damages, obligations, judgments, damage, actions, demands, suits,
proceedings, claims, penalties, interest, costs and expenses (including
reasonable attorneys’ fees and other expenses relating thereto) (“Losses”),
arising out of or in connection with any of the following (hereafter
collectively, “Claims”):  (i) any
breach of any representation or warranty or any misrepresentation made by any
Shareholder in connection with this Agreement or in any other Transaction
Document; provided, however, that each Shareholder shall only be
severally responsible with respect to such Shareholder’s Consulting Agreement; (ii) any
breach of covenant, agreement or undertaking of any Shareholder in this
Agreement or in any other Transaction Document; provided, however,
that each Shareholder shall only be severally responsible with respect to such
Shareholder’s Consulting Agreement; (iii) any Legal Proceeding to the
extent that such Legal Proceeding relates to matters occurring prior to the
Closing and proves not to be fully reserved on the Closing Balance Sheet; (iv) any
and all Environmental Matters; provided, however, for the
avoidance of doubt, the Shareholder Indemnifying Parties 


 


44

















 


shall not have any
defense, indemnification obligation or hold harmless obligation under this Section 8.1
with respect to Hazardous Substances contained in Inventory owned and/or sold
by the Corporation in the ordinary course of business and consistent with past
practice of the Corporation at the time such Inventory was manufactured; (v) any
Losses of any kind or nature arising out of or in connection with the operation
of the Corporation or the Schoeneman Beauty Supply Business prior to Closing to
the extent not reserved on the Closing Balance Sheet (and therefore not
included in the calculation of Closing Net Assets); (vi) all Taxes (or the
non-payment thereof) of the Corporation for any Pre-Closing Tax Period, except
to the extent accrued on the Closing Balance Sheet; (vii) all Taxes of any
member of an affiliated, consolidated, combined or unitary group of which the
Corporation (or any predecessor of any of the foregoing) is or was a member on
or prior to the Closing Date, including pursuant to Treasury Regulation §1.1502-6
or any analogous or similar Law; and (viii) any and all Taxes of any
Person (other than the Corporation) imposed on the Corporation as a transferee
or successor, by contract or pursuant to any Law, which Taxes relate to an
event or transaction occurring before the Closing.  For the avoidance of doubt, the Shareholder
Indemnifying Parties shall not be responsible for any acts or omissions of the
Surviving Corporation after the Closing Date.


 


8.2          No Set-Off.  The Purchaser shall not have any right to set-off
any Losses against any payments to be made by it to any Shareholder pursuant to
any Transaction Document or otherwise.


 


8.3          Indemnification by the Purchaser.  The Purchaser hereby agrees to defend,
indemnify and hold harmless any Shareholder from and against any and all
Losses, arising out of or in connection with any (i) breach of
representation or warranty or any misrepresentation made by the Purchaser in
this Agreement or in any other Transaction Document; or (ii) breach of
covenant, agreement or undertaking of the Purchaser in this Agreement or in any
other Transaction Document.


 


8.4          Survival.  Subject to Section 8.5, all of
the respective representations, warranties, agreements and covenants contained
in this Agreement or in any other document or instrument delivered by or on
behalf of any Party hereunder or pursuant hereto shall survive the Closing
Date.


 


8.5          Limitation on Indemnification and
Survival of Representations and Warranties.


 


8.5.1        The Shareholder Indemnifying Parties shall be obligated to
defend, indemnify and hold harmless the Purchaser and its Affiliates with
respect to Sections 8.1(i), (iv) and/or (v) only
when the aggregate amount of all Losses suffered or incurred by the Purchaser
and its Affiliates as to which the rights of defense, indemnification and to be
held harmless provided under Sections 8.1(i), (iv) and/or (v) exceeds
$236,430 (the “Threshold Amount”), in the aggregate, subject to the
exceptions otherwise set forth in this Agreement.  After the aggregate amount of all such Losses
suffered or incurred by the Purchaser and its Affiliates exceeds the Threshold
Amount, the Shareholder Indemnifying Parties 
shall be obligated to defend, indemnify and hold harmless the Purchaser
and its Affiliates to the full extent of such Losses under Sections 8.1(i),
(iv) and/or (v) in excess of the Threshold Amount.  No individual claim for indemnification of
losses may be made under Section 8.1(i) unless such claim (or
series 


 


45

















 


of claims that arise out of
violations of the same Law, substantially the same or a similar set of facts,
the same occurrence or series of occurrences, or substantially the same policy,
practice and/or procedure) is in an amount of $2,500 or greater (the “Purchaser
Individual Claim Threshold”).  The
aggregate liability of the Shareholder Indemnifying Parties generally (subject
to the exceptions otherwise found in this Agreement) under Section 8.1(i),
(iv) and/or (v) shall not exceed $17,750,000 (the “Maximum
Amount”).


 


8.5.2        The aggregate liability of the Shareholders for Losses
arising out of a breach of representations and warranties found in Sections
5.3.2, 5.3.3, 5.3.4, 5.3.5, 5.3.6, 5.3.7,
5.3.8, 5.4, 5.7, 5.19, 5.20 and 5.21,
together with all Losses otherwise indemnifiable under Section 8.1
and Section 8.5, shall not exceed $35,500,000 (the “Higher
Representations Amount”).  Neither
the Threshold Amount, the Purchaser Individual Claim Threshold, the Maximum
Amount nor the Higher Representations Amount shall apply to, or otherwise limit
the aggregate liability of the Shareholder Indemnifying Parties for, Losses
arising out of a breach of any of the representations and warranties in Section 5.28.


 


8.5.3        The indemnification rights of the Parties for Claims
resulting from a breach of any representations and warranties contained in this
Agreement under Section 8.1 are subject to the condition that the
Shareholders’ Representative shall have received written notice of the Claims
for which indemnity is sought within thirty (30) months after the Closing Date;
provided, however, that, the indemnification rights of the
Purchaser for Claims resulting from a breach of any of the representations and
warranties made by the Shareholders in Sections 5.3.2, 5.3.3, 5.3.4,
5.3.5, 5.3.6, 5.3.7, 5.3.8, 5.4, 5.7,
5.19, 5.20 and 5.21 are subject to the condition that the
Shareholders shall have received written notice of the Claims for which
indemnity is sought within thirty (30) days after the expiration of the statute
of limitations related to the existence of such Claim under applicable Laws;
and provided further that Claims resulting from a breach of
any of the representations and warranties made in Section 5.28
shall survive indefinitely.


 


8.5.4        Notwithstanding any provision in this Agreement to the
contrary, the dollar and time limitations and thresholds described in Sections
8.5.1 through 8.5.3 shall only apply to Claims under Section 8.1
and shall not apply to Claims for actual fraud or intentional
misrepresentation.


 


8.6          Method of Asserting Claims, etc.  In
the event that any claim or demand for which an Indemnifying Party would be
liable to any Indemnified Party hereunder is asserted against or sought to be
collected from any Indemnified Party by a third party, such Indemnified Party
shall promptly, but in no event more than thirty (30) days following such
Indemnified Party’s receipt of such claim or demand, which, for purposes of
this Section 8.6, shall mean the actual receipt by any of the
Shareholders or, with respect to the Purchaser, the Persons listed in the
definition of “Purchaser’s Knowledge” or other Persons holding such positions
after the Closing and the General Counsel of the Purchaser (or its parent
company), notify the Indemnifying Party of such claim or demand and the amount
or the estimated amount thereof to the extent then feasible (which estimate
shall not be conclusive of the final amount of such claim or demand) (the “Claim
Notice”); provided, however, that the failure to notify the
Indemnifying Party shall not relieve the Indemnifying Party of its obligations
hereunder, except to the extent 


 


46

















 


such failure shall have
adversely prejudiced the Indemnifying Party. 
The Indemnifying Party shall have forty-five (45) days from the delivery
of the Claim Notice in accordance with Article 10 (the “Notice
Period”) to notify the Indemnified Party whether or not it desires to
defend the Indemnified Party against such claim or demand.  If the Indemnifying Party elects to assume the
defense of such claim or demand, it will be conclusively established for
purposes of this Agreement that such claim or demand is within the scope of and
subject to indemnification hereunder.  If
no response is received within the forty-five (45) day period, the Indemnified
Party shall be entitled to assume the defense of the third-party claim or
demand.  All costs and expenses incurred
by the Indemnifying Party in defending such claim or demand shall be a liability
of, and shall be paid by, the Indemnifying Party, subject to the limitations
set forth in this Article 8. 
In the event that the Indemnifying Party notifies the Indemnified Party
within the Notice Period that it desires to defend the Indemnified Party
against such claim or demand, except as hereinafter provided, the Indemnifying
Party shall have the right to defend the Indemnified Party by appropriate
proceedings (using counsel reasonably acceptable to the Indemnified Party); provided,
however, that, notwithstanding any election by the Indemnifying Party,
an Indemnified Party may elect to control any defense or settlement if the
claim or demand involves an issue or matter which could reasonably have a
material adverse effect on the business or assets of the Indemnified Party.  If any Indemnified Party desires to
participate in, but not control, any such defense or settlement by the
Indemnified Party, it may do so at its sole cost and expense.  The Indemnified Party shall not settle a
claim or demand without the consent of the Indemnifying Party, which shall not
be unreasonably withheld.  The
Indemnifying Party shall not settle a claim or demand without the consent of
the Indemnified Party (which shall not be unreasonably withheld), unless such
settlement is solely for monetary damages to be paid solely by the Indemnifying
Party.  If the Indemnifying Party elects
not to defend the Indemnified Party against a claim or demand for which the
Indemnifying Party has an indemnification obligation hereunder, whether by not
giving the Indemnified Party timely notice as provided above or otherwise, and
in the event the Indemnifying Party is ultimately determined to be obligated to
indemnify, defend or hold the Indemnified Party harmless with respect to the
applicable third-party claim, then the amount of any such claim or demand, or,
if the same be contested by the Indemnified Party, then that portion thereof as
to which such defense of the claim by the Indemnified Party is unsuccessful
(and the reasonable costs and expenses pertaining to such defense) shall be the
liability of the Indemnifying Party hereunder, subject to the limitations set
forth in this Article 8.  To
the extent the Indemnifying Party shall control or participate in the defense
or settlement of any third party claim or demand, the Indemnified Party will
give the Indemnifying Party and its counsel reasonable access to, during normal
business hours, the relevant business records and other documents, and shall
permit them to consult as reasonably necessary with the employees and counsel
of the Indemnified Party.  The Party
assuming the defense of a Claim hereunder shall competently prosecute and
defend all such claims.  Any notice of a
claim by reason of any of the representations, warranties, agreements or
covenants contained in this Agreement shall state as specifically as reasonably
practicable the representation, warranty, agreement or covenant with respect to
which the claim is made, a summary of the facts giving rise to an alleged basis
for the claim, and the estimated amount of the liability asserted against the
Indemnifying Party by reason of the claim (which estimate shall not be
conclusive of the final amount of such claim or demand).  Each Party reserves the right 


 


47

















 


either to bring an action
in the appropriate court of competent jurisdiction to dispute an indemnity
obligation under Section 8.1 or to enforce the indemnity
obligation, as appropriate.


 


8.7          Losses Net of Insurance, etc.  The amount of any Loss for which
indemnification is provided under Section 8.1 shall be net of:  (i) any amounts actually received by the
Indemnified Party pursuant to any indemnification by or indemnification
agreement with any third party; (ii) any amounts actually received under
any insurance or other sources of reimbursement as an offset against such Loss
(each source named in clauses (i) and (ii), a “Collateral Source”);
and (iii) accruals or reserves relevant to the claim or demand included on
the Closing Balance Sheet.  In addition,
the Indemnifying Party shall have no liability in respect of any such Losses to
the extent they arise or are incurred as a result of the passing of, or a
change in, any applicable Law.  The
Parties shall take and shall cause their Affiliates to take all reasonable
steps to mitigate any Loss upon becoming aware of any event that would
reasonably be expected to, or does, give rise thereto.  If, after the Indemnifying Party has paid the
Indemnified Party any amount pursuant to Article 8, it is
determined that all or portion of such payment should not have been made as a
result of the actual payment by one or more Collateral Sources and/or the
applicability of one or more of the limitations set forth in this Section 8.7,
then the Indemnified Party shall repay to the Indemnifying Party, promptly
after such determination, any amount that the Indemnifying Party would not have
had to pay pursuant to this Article 8 had such determination been
made at the time of such payment.


 


8.8          Workers’ Compensation Claim.  The Surviving Corporation shall keep the
Shareholders’ Representative reasonably advised concerning the status of any
workers’ compensation claims for which the Shareholders’ Indemnifying Parties
may have an indemnification obligation under Section 8.1.


 


8.9          Sole Remedy.  Except in the case of actual fraud or
intentional misrepresentation, the Parties acknowledge and agree that the
remedies provided for in this Agreement shall be the parties’ sole and
exclusive monetary remedy with respect to the subject matter of this
Agreement.  For the avoidance of doubt,
nothing in this Article 8 limits any Indemnified Party’s ability to
obtain injunctive or other equitable relief.


 


8.10        Treatment of Indemnification Payments.  Any payments pursuant to this Article 8
shall be treated as an adjustment to the Merger Consideration.


 


8.11        Materiality Qualifications.  For purposes of determining the right of an
Indemnified Party to be defended, indemnified or held harmless hereunder with
respect to a breach of any representation or warranty pursuant to Section 8.1(i) (including
for purposes of determining whether the Threshold Amount has been exceeded),
each such representation and warranty shall be read without regard and without
giving effect to any materiality qualification or Material Adverse Effect qualification
contained in such representation and warranty.


 


48

















 


Article 9


Assignment


 


Neither this Agreement nor
the rights or obligations contained herein shall be assignable by any Party
except with the written consent of all the Parties.  Notwithstanding the preceding sentence, the
Purchaser may assign its rights under this Agreement to any successor in
interest to its business, or to any Affiliate, but such assignment shall not
relieve the Purchaser of its obligations under this Agreement.  This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors, assigns,
heirs, executors and representatives, subject to the foregoing provisions of
this Article 9.


 


Article 10


Notices


 


All notices, requests,
demands and other communications hereunder shall be in writing, and shall be
deemed to have been given when delivered in person or by first class,
registered or certified mail, return receipt requested, postage and registration
or certification fees prepaid, or delivered by reliable overnight delivery
service, providing a receipt evidencing delivery, or delivered by facsimile
transmission, with a copy also delivered by any of the foregoing means:


 


If to Purchaser and/or the Merger Sub, to:


 


Beauty
Systems Group LLC


3001
Colorado Boulevard


Denton,
Texas 76210


Attention:  President


Facsimile:  (940) 297-4990


 


with
a copy to: Sally Beauty Holdings, Inc.


 


3001
Colorado Boulevard


Denton,
Texas  76210


Attention:  General Counsel


Facsimile:  (940) 297-4990


 


If
to Shareholders’ Representative, the Shareholders or any Shareholder:


 


Mr. F.
Dale Schoeneman


Shareholders’
Representative


390
Erlane Road


P.O. Box
378


Orwigsburg,
PA  17961


Facsimile:
(570) 366-5129


 


49

















 


with a copy to:


 


Richard J. Braemer


Ballard Spahr LLP


1735 Market Street, 51st
Floor


Philadelphia, PA  19103-7599


Facsimile:  (215) 864-9044


 


or at such other address as hereafter shall be
furnished by a notice sent in like manner by such addresses to the others.


 


Article 11


Integration, Interpretation
and Miscellaneous Provisions


 


11.1        Entire Agreement.  All prior negotiations and agreements among
the Parties are superseded by this Agreement and the other Transaction
Documents, and there are no representations, warranties, understandings or
agreements other than those expressly set forth herein or therein, in the
documents executed and delivered in connection herewith or therewith, except as
modified in writing concurrently herewith or subsequent hereto.


 


11.2        Waiver.  Failure or delay on the part of any of the
Parties to exercise any right, power or privilege hereunder, or under any
instrument executed pursuant hereto, shall not operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege preclude
any other or further exercise thereof or of any other right power or
privilege.  All waivers hereunder must be
in writing.


 


11.3        Governing Law.  This Agreement and the agreements attached as
Exhibits hereto shall be governed by and construed in accordance with the laws
of the Commonwealth of Pennsylvania, without regard to its conflict of law
provisions.


 


11.4        Public Announcement.  Except as may otherwise be required by Law or
the Rules of the New York Stock Exchange, no announcement of this
transaction shall be made to the general public until at or after the
Closing.  The Parties will consult and
cooperate with each other to the extent reasonably practicable as to the timing
and content of announcements of this transaction to the general public, if any,
and to employees, customers and suppliers of the Corporation.


 


11.5        Expenses.  Each of the Parties shall bear its own
expenses (including, without limitations, fees and expenses of its attorneys and
accountants) in connection with this Agreement or the consummation of the
transactions contemplated herein, whether or not the Closing takes place.  Expenses of the Corporation and/or the
Shareholders related to this transaction chargeable to Corporation shall be
reflected in the Closing Balance Sheet.


 


11.6        Further Assurances.  Following the Closing Date, upon the request
of the Purchaser and without further consideration, a Shareholder shall
execute, or cause to be


 


50














 


executed, and will
deliver to the Purchaser further documents of transfer, conveyance, assignment
and consent, and take such other action as may be reasonably necessary or
advisable to effectively carry out the other terms and provisions of this
Agreement.


 


11.7       Counterparts.  This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.


 


11.8       Facsimile Copies.  “Facsimile” transmissions of signed documents
shall be regarded and accepted as if they bore original signatures.  Promptly after such Facsimile transmission,
the original document bearing the original signatures shall be provided to the
other Party.


 


11.9       Miscellaneous.  Gender and number references shall be deemed
modified to fit the context.  The words “hereof,”
“herein,” and “hereunder” and words of similar import, when used in this
Agreement, shall, unless otherwise qualified, refer to this Agreement as a
whole and not to any particular provision of this Agreement.  Whenever the words “include,” “includes” or “including”
are used in this Agreement, they shall be deemed to be followed by the words “without
limitation,” whether or not they are in fact followed by those words or words
of like import.  References to specific
Articles and Sections are to the Articles and Sections of this Agreement,
unless specifically stated otherwise. 
All references herein to a particular “Schedule” shall mean such
schedule as it is included in the Disclosure Schedules attached hereto.  All references herein to a particular “Exhibit”
shall mean such exhibit attached hereto. 
The article and section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of the Agreement.  All of
the Parties have participated substantially in the negotiation and drafting of
this Agreement and agree that no ambiguity herein shall be construed against
any Party.  The Exhibits and Schedules to
this Agreement are hereby made a part hereof and shall be construed with and as
an integral part of this Agreement. 
Every provision of this Agreement is intended to be severable, and if
any term or provision is determined to be illegal or invalid for any reason
whatsoever, such legality or invalidity shall not affect the legality or
validity of the remainder of this Agreement. 
All references to currency or dollar amounts in this Agreement shall be
to lawful currency of the United States of America.


 


11.10    Resolution of Certain Disputes.  If the amount of the Closing Net Assets
pursuant to Section 4.1 cannot be resolved in accordance with Section 4.1
or if the Allocation Schedule pursuant to Section 12.1 cannot be
resolved in accordance with Section 12.1, the matter shall be
submitted to an independent “Big Four” accounting firm (the “Accounting Firm”)
for its review and resolution.  The
decision of the Accounting Firm shall be binding on the Parties and may be
specifically enforced by legal proceedings. 
The Accounting Firm shall be selected jointly by the Shareholders’
Representative and the Purchaser, or if such Parties are unable to agree, by
lot; provided, however, that under no circumstances shall an
accounting firm act as the Accounting Firm that has performed any services for
any of the Shareholders’ Representative, the Corporation, the Purchaser or
their respective Affiliates within two (2) years immediately preceding the
date of the proposed engagement of such accounting firm as the Accounting Firm.  The Accounting Firm shall act as an
arbitrator to determine, based solely on presentations by the 


 


51

















 


Purchaser and the
Shareholders’ Representative, and not by independent review, only those issues
still in dispute with respect to the Closing Net Assets or the Allocation
Schedule, as applicable.  The decision of
the Accounting Firm shall be final and binding. 
The fees and expenses of the Accounting Firm shall be borne equally by
the Shareholders and the Purchaser.  The
Purchaser and the Shareholders’ Representative and their respective agents and
representatives, shall have a reasonable opportunity to review the working
papers relating to the preparation of the Closing Balance Sheet and shall have
reasonable access to the Auditor.


 


11.11    Notification.  For all purposes of notification by the
Shareholders to the Purchaser, the Purchaser can conclusively rely on any
notification given by the Shareholders’ Representative in accordance with Article 10,
as representing all of the Shareholders or any one of them individually and
such notice shall be sufficient for purposes of this Agreement.  For all purposes of notification by the
Purchaser to the Shareholders, the Purchaser can conclusively rely that any
notice given by the Purchaser to the Shareholders’ Representative in accordance
with Article 10, is sufficient notice to all the Shareholders and
to each of the foregoing individually and such notice shall be sufficient for
purposes of this Agreement.


 


11.12    Schedules.  The
inclusion of any matter in any section or paragraph of the Schedules required
by Article 5 shall qualify only (a) the corresponding section
or paragraph in Article 5 and (b) other sections or paragraphs
in Article 5 only to the extent that it is reasonably apparent from
a reading of the disclosure and such other sections or paragraphs that such
disclosure also relates to such other section or paragraph.  The inclusion of any item on any Schedule shall
expressly not be deemed to constitute an admission by the Shareholders or the
Purchaser or otherwise imply that any such matter is material, has a Material
Adverse Effect or creates a measure for, or further defines the meaning of,
materiality or Material Adverse Effect and their correlative terms for the
purposes of this Agreement.  Any
capitalized and undefined term used in any section of the Schedules shall have
the same meaning assigned to such term herein.


 


11.13    Shareholders’ Representative.


 


11.13.1  Each
Shareholder hereby irrevocably appoints the Shareholders’ Representative as
his, her or its attorney-in-fact and agent to take any and all action and to
execute any and all documents on such Shareholder’s behalf with respect to this
Agreement and the other Transaction Documents and the transactions provided for
herein or therein, including the making and execution of any amendments to this
Agreement, the giving of any notices pursuant hereto, and the compromise or
settlement of any and all disputes which may hereafter arise pursuant to any
provision of this Agreement or any other Transaction Document or the
transactions provided for herein or therein. 
This appointment is irrevocable and coupled with an interest and shall
not be affected by the death, incapacity, illness, dissolution or other
inability to act of any of the Shareholders. 
The Shareholders’ Representative hereby accepts such appointment.


 


11.13.2  Each
Shareholder that is not a Trust hereby agrees joint and severally to indemnify
the Shareholders’ Representative and to hold the Shareholders’ Representative
harmless from any loss, liability or expense incurred without willful violation
of the Law or 


 


52

















 


gross negligence by the Shareholders’ Representative arising out of, or
in connection with, his duties as Shareholders’ Representative, including the
costs, fees and expenses incurred by the Shareholders’ Representative in
defending against any claim or liability in connection therewith.


 


11.13.3  The
Shareholders’ Representative shall and hereby agrees to serve without
compensation.


 


11.13.4  The
Shareholders’ Representative shall and hereby agrees to keep the Shareholders
informed of all notices received by the Shareholders’ Representative and of all
actions taken by the Shareholders’ Representative within a reasonable period of
time after such receipt or such action, as the case may be.


 


11.13.5  The Purchaser and the Escrow Agent shall be
able to rely conclusively on the instructions and decisions of the Shareholders’
Representative as to any actions required or permitted to be taken by the
Shareholders hereunder or the other Transaction Documents, and no Party shall
have any cause of action against the Purchaser or the Escrow Agent to the
extent that either Purchaser or the Escrow Agent, respectively, has relied upon
the instructions or decisions of the Shareholders’ Representative.


 


Article 12


Section 12.2
Consideration; Additional Tax Matters


 


12.1       Allocation Schedule; Allocation
Methodology.  Within one hundred
twenty (120) days after the Closing Date, the Purchaser shall prepare (or cause
to be prepared) and deliver to the Shareholders’ Representative a schedule
(together with any revisions thereto, the “Allocation Schedule”)
allocating the Seller’s Consideration (as defined in Treasury Regulation Section 1.1060-1(c)(1)),
for the assets of the Corporation among such assets.  The Allocation Schedule shall be prepared in
accordance with the method of allocation set forth on Exhibit K
(the “Allocation Methodology”), which is in accordance with Section 1060
of the Code and the Treasury Regulations promulgated thereunder.  It is expressly understood that no portion of
the Seller’s Consideration shall be allocated in the Allocation Schedule to the
covenants set forth in Section 7.3. 
The Allocation Schedule shall be deemed to be accepted by and shall be
conclusive and binding on the Shareholders except to the extent, if any, that
the Shareholders shall have delivered within thirty (30) days after the date on
which the Allocation Schedule is delivered to the Shareholders, a written
notice to the Purchaser stating each and every item to which the Shareholders
dispute (it being understood that any amounts not disputed shall be final and
binding).  If a change proposed by the
Shareholders is disputed by the Purchaser, then the Shareholders’
Representative and the Purchaser shall negotiate in good faith to resolve such
dispute.  If, after a period of twenty
(20) days following the date on which the Shareholders give the Purchaser
notice of any such proposed change, any such proposed change still remains
disputed, the dispute shall be resolved in accordance with Section 11.10.  The Allocation Schedule shall be promptly
revised by the Purchaser (and promptly delivered to the Shareholders) to take
into account any purchase price adjustments, including, but not limited to,
adjustments  arising from the resolution
of any disputes arising under Section 4.1 of this Agreement and
payments made from the Regular Escrow and Special Escrow described in Section 4.3,
indemnification payments made pursuant to Article 8 and the Section 12.2



 


53

















 


Consideration, which
adjustments shall be allocated among the assets of the Corporation in
accordance with the method of allocation prescribed by the aforesaid provisions
of the Code and Treasury Regulations; provided, however, that it
is expressly understood that no purchase price adjustment shall be made with
respect to the covenants described in Section 7.3 and that no revision
shall be made of the portion of the Allocation Schedule relating to such
covenants.  Any revisions of the
Allocation Schedule shall be subject to the dispute and arbitration provisions
set forth in this Section 12.1 and Section 11.10.  The Purchaser and each Shareholder shall file
(or cause to be filed) all federal, state and local Tax Returns (including,
without limitation, all such Tax Returns of the Corporation) in accordance with
the Allocation Schedule (and revisions thereto), and shall take no position
contrary thereto or inconsistent therewith (including, without limitation, in
any amended Tax Return or claim for refund, any examination or audit by any
taxing authority, or any other proceeding), except to the extent otherwise
required by Law.


 


12.2       Section 12.2 Consideration.
The Purchaser shall indemnify each Shareholder for (i) any increase in the
federal income Tax of such Shareholder for the taxable year in which the
Closing Date occurs over the federal income Tax that would have been payable by
such Shareholder for such taxable year if, instead of the structure of the
transaction as a forward triangular cash merger in accordance with the terms
and conditions of this Agreement, the Purchaser had purchased from the
Shareholders all of the outstanding stock of the Corporation and there was no
election made under Section 338(h)(10) of the Code with respect to
such purchase, and (ii) any increase in any state or local income Tax of
such Shareholder for the taxable year in which the Closing Date occurs
over  the state or local income Tax that
would have been payable by such Shareholder for such taxable year if, instead
of the structure of the transaction as a forward triangular cash merger in
accordance with the terms and conditions of this Agreement, the Purchaser had
purchased from the Shareholders all of the outstanding stock of the Corporation
and there was no election made under Section 338(h)(10) of the Code
with respect to such purchase.  Any
indemnification payment made pursuant to this Section 12.2 shall be
treated as an adjustment to the Seller’s Consideration; and the amount of any
indemnification payable to any Shareholder shall be grossed up to reflect the
income Tax ultimately payable by such Shareholder on account of such
indemnification payment.  All
determinations of amounts payable under this Section 12.2 shall be
performed by the Auditor, the cost of which shall be paid 50% by the Purchaser
and 50% by the Shareholders, as soon as practicable after the finalization of
the original and each revisions of the Allocation Schedule to the Shareholders
in accordance with Section 12.1. 
The determination by the Auditor shall be deemed to be accepted by and
shall be conclusive and binding on the Purchaser except to the extent, if any,
that the Purchaser shall have delivered within twenty (20) days after the date
on which the determination is delivered to the Purchaser, a written notice to
the Shareholders’ Representative stating each and every item to which the
Purchaser disputes (it being understood that any amounts not disputed shall be
final and binding).  If such
determination by the Auditor is disputed by the Purchaser, then the
Shareholders’ Representative and the Purchaser shall negotiate in good faith to
resolve such dispute.  If, after a period
of twenty (20) days following the date the Purchaser notifies the Shareholders’
Representative that the Purchaser disputes the Auditor’s determination, such
dispute remains unresolved, the dispute shall be resolved in accordance with Section 11.10.  The Purchaser shall pay amounts due
Shareholders under this Section 12.2 (the “Section 12.2
Consideration”) within ten (10) days of the finalization of the
determination of the Section 12.2 Consideration as agreed by the Purchaser
and the Shareholders’ Representative in 


 


54

















 


accordance with the terms
set forth in this Section 12.2 or pursuant to Section 11.10,
in each case, as applicable.  If,
pursuant to any revision to the Allocation Schedule, Shareholder has received
an aggregate amount of Section 12.2 Consideration in excess of the
required Section 12.2 Consideration, the Shareholders will pay on a per
share basis (though such obligation will be on the basis of joint and several
liability among the Shareholder Indemnifying Parties) such excess to the
Purchaser within ten (10) days of the finalization of such amount in a
manner consistent with the same terms governing the determination of the Section 12.2
Consideration.  Notwithstanding anything
herein to the contrary, the Section 12.2 Consideration paid to the
Shareholders shall not exceed $500,000 in the aggregate.


 


12.3       Responsibility for Preparing and
Filing Tax Returns.


 


12.3.1     The Parties intend that the Merger be
treated for all income Tax purposes as a purchase by Merger Sub of the assets
of the Corporation that is immediately followed by a liquidation of the
Corporation pursuant to Sections 331 and 336 of the Code and they shall prepare
all income Tax Returns of the Corporation, the Shareholders, the Purchaser and
the Merger Sub (including any successor entities thereto) in a manner
consistent with such intent.  The
Shareholders shall prepare (or cause to be prepared) the Transfer Tax Returns
(as described in Section 12.6) and all income and Pennsylvania
capital stock franchise Tax Returns of the Corporation for any taxable period
that ends on or prior to the Closing Date that are required to be filed after
the Closing Date in a manner consistent with previously filed Tax Returns of
the Corporation.  The Shareholders shall
permit the Purchaser to review and comment on each Tax Return of the
Corporation that has been prepared by the Shareholders in accordance with the
preceding sentence prior to its filing. 
In the event of any disagreement between the Purchaser and the
Shareholders regarding items set forth on the Tax Returns described in this Section 12.3.1,
the Purchaser and the Shareholders shall, in good faith, use their best efforts
to agree on such items.


 


12.3.2     The Purchaser shall prepare (or cause to be
prepared) all other Tax Returns of the Corporation that are required to be
filed after the Closing Date; and the Purchaser shall thereafter cause all such
Tax Returns that have been prepared (or caused to be prepared) by the
Shareholders or the Purchaser to be filed by the Corporation.


 


12.4       Audits and Other Proceedings.


 


12.4.1     Following the Closing Date, if an audit or
other administrative or Legal Proceeding is initiated by any taxing authority
with respect to Tax Returns of the Corporation for any taxable period that ends
on or prior to the Closing Date or with respect to Taxes of the Corporation for
which Shareholders would be liable pursuant to Section 8.1 (a “Shareholder
Controlled Proceeding”), the Purchaser, as the case may be, shall notify
the Shareholders in writing of such audit or proceeding.  Failure to give such notice shall not relieve
the Shareholders from any indemnification obligation which they would have with
respect to Section 8.1, except to the extent that the Shareholders
are actually and materially prejudiced thereby. 
The Shareholders will have the right, at their option, to control the
conduct of all stages of any Shareholder Controlled Proceeding of which it has
received such notice with representatives of its own choosing, provided,
however, the Shareholders shall allow the Corporation and its 


 


55

















 


counsel to participate in
any audit or other administrative or judicial proceeding to the extent that
such audit or proceeding relates to Taxes of the Corporation.  At such time as such request is received by
the Purchaser, the Purchaser shall furnish the Shareholders with powers of
attorney or any other documentation or authorization necessary or appropriate
to enable the Shareholders to control the conduct of such audit or other
proceeding.  The Purchaser shall control
the conduct of all stages of all other audits or other administrative or
judicial proceedings with respect to Taxes of the Corporation.  The Purchaser shall not, and shall not permit
any of their Affiliates (including the Corporation) to, accept any proposed
adjustment or enter into any settlement or agreement in compromise regarding
any Taxes of the Corporation for which the Shareholders would have an
indemnification obligation under Section 8.1 without the express
written consent of the Shareholders.


 


12.4.2     With respect to any audit or other
administrative or Legal Proceeding that the Shareholders control, the
Shareholders; (i) shall give prompt notice to Purchaser of any Tax
adjustment proposed in writing with respect to the assets or activities of the
Corporation; and (ii) shall not accept any proposed adjustment or enter
into any settlement or agreement in compromise which would bind the Purchaser
or the Corporation with respect to any Taxes of the Corporation without the
express written consent of the Purchaser, which consent shall not be
unreasonably withheld or delayed.


 


12.5       Cooperation on Tax Matters. The
Purchaser and the Shareholders shall cooperate fully, and the Purchaser shall
cause the Corporation to cooperate fully, as and to the extent reasonably
requested by the other Party, in connection with the filing of Tax Returns, and
any audit, litigation or other Legal Proceeding with respect to Taxes.  Such cooperation shall include the retention
and (upon the other Party’s request) the provision of records and information
which are reasonably relevant to any such audit, litigation or other Legal
Proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder.  The Purchaser and the
Shareholders agree: (i) to retain (or cause to be retained) all books and
records with respect to Tax matters pertinent to the Corporation relating to
any taxable period beginning before the Closing Date until the expiration of
the statute of limitations (and, to the extent notified by Purchaser or the
Shareholders, any extensions thereof) of the respective taxable periods, and to
abide by all record retention agreements entered into with any taxing
authority; and (ii) to give the other Parties reasonable written notice
prior to transferring, destroying or discarding any such books and records and,
if any Party receiving such notice so requests, the Purchaser or the
Shareholders, as the case may be, shall allow the requesting Party to take
possession of such books and records. 
The Purchaser, Corporation and Shareholders further agree, upon request,
to use their best efforts to obtain (or cause to be obtained) any certificate
or other document from any governmental authority or any other Person as may be
necessary to mitigate, reduce or eliminate any Tax that could be imposed on the
Corporation or the Shareholders (including, but not limited to, with respect to
the transactions contemplated hereby).


 


12.6       S Corporation Status.  The Shareholders shall not revoke, and the
Purchaser shall prohibit the Corporation from revoking, the Corporation’s
election to be taxed as an S corporation within the meaning of Sections 1361
and 1362 of the Code (or any comparable state or local laws) for any period
before the Closing Date.


 


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12.7       Transfer Taxes.  Notwithstanding and provision in this
Agreement to the contrary, all transfer, documentary, sales, use, stamp,
recording, registration and other such similar Taxes, charges and fees
(including any penalties and interest) incurred in connection with the
consummation of the transactions contemplated by this Agreement (the “Transfer
Taxes”) shall be paid 50% by the Shareholders and 50% by the Purchaser when
due and the Shareholders will file all necessary Transfer Tax Returns and other
documentation with respect to all Transfer Taxes, and, if required by applicable
law, Purchaser will, and will cause their Affiliates to, join in the execution
of any such Transfer Tax Returns and other documentation.  The Shareholders and the Purchaser shall
cooperate (and the Purchaser shall cause the Corporation to cooperate) with
each other in any mutually agreeable, reasonable and lawful arrangement
designed to minimize any applicable Transfer Taxes.


 


[Signatures on the Following Page]


 


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IN WITNESS WHEREOF, the Parties have executed this
Agreement on the day and year first above written.


 


	
  PURCHASER:

  	
   

  	
  CORPORATION:

  
	
  BEAUTY SYSTEMS GROUP LLC

  	
   

  	
  SCHOENEMAN BEAUTY SUPPLY,
  INC. 

  
	
   

  	
   

  	
   

  
	
  By:

  	
     /s/ John
  Golliher

  	
   

  	
  By: 

  	
     /s/ F.
  Dale Schoeneman

  
	
  Name:  John
  Golliher

  	
   

  	
  Name: F. Dale
  Schoeneman

  
	
  Title:    President

  	
   

  	
  Title: President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  LADY LYNN ENTERPRISES,
  INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
     /s/ John
  Golliher

  	
   

  	
   

  
	
  Name: John Golliher

  	
   

  	
   

  
	
  Title: President

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  SHAREHOLDERS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2008 GRANTOR RETAINED
  ANNUITY TRUST 

  OF F. DALE SCHOENEMAN DATED 

  DECEMBER 26, 2008 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ F. Dale Schoeneman 

  	
   

  	
  by

  	
  /s/ Lori Schoeneman

  
	
  F. Dale Schoeneman

  	
   

  	
   

  	
  Lori Schoeneman, Trustee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  by

  	
  /s/ Tara S. Schoeneman

  
	
  /s/ Kay L. Schoeneman

  	
   

  	
   

  	
  Tara Schoeneman, Trustee

  
	
  Kay L. Schoeneman

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2008 GRANTOR RETAINED
  ANNUITY TRUST 

  OF KAY L. SCHOENEMAN DATED 

  DECEMBER 26, 2008 

  
	
   

  	
   

  	
   

  
	
  /s/ Lori Schoeneman 

  	
   

  	
  by

  	
  /s/ F. Dale Schoeneman

  
	
  Lori Schoeneman

  	
   

  	
   

  	
  F. Dale Schoeneman,
  Trustee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Tara S. Schoeneman

  	
   

  	
   

  
	
  Tara Schoeneman

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ F. Dale Schoeneman

  	
   

  	
   

  
	
  F. Dale Schoeneman, in his
  capacity 

  as the Shareholders’ Representative 

  	
   

  	
   

  
						



 


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