<PAGE>
Pursuant to Rule 424(B)(1) Prospectus
Registration No. 333-02722
2,600,000 SHARES
[LOGO]
ELECTRONIC HAIR STYLING, INC.
COMMON STOCK
All of the 2,600,000 shares of Common Stock offered hereby are being offered
by Electronic Hair Styling, Inc. (the "Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial offering price. After the offering, the Company's
current directors, executive officers and principal stockholders will own
approximately 55.3% of the outstanding shares of voting stock of, and will
continue to control, the Company. The Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "EHST."
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING
ON PAGE 6 AND "DILUTION" COMMENCING ON PAGE 14.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
Per Share......................... $8.00 $0.56 $7.44
Total (3)......................... $20,800,000 $1,456,000 $19,344,000
</TABLE>
(1) Excludes five-year warrants to purchase a number of shares of Common Stock
equal to 7% of the number of shares of Common Stock purchased and sold by
the Underwriters (excluding over-allotments, if any), at an exercise price
equal to 120% of the initial public offering price. The Company has also
agreed to indemnify the Underwriters against certain liabilities, including
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting" for a description of the foregoing and certain other
arrangements between the Company and the Underwriters.
(2) Before deducting offering expenses estimated to be approximately $905,000,
payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 390,000 additional shares of Common Stock solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $23,920,000, $1,674,400 and $22,245,600, respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Rodman & Renshaw, Inc., New York, New
York, on or about May 29, 1996.
------------------------
RODMAN & RENSHAW, INC. SANDS BROTHERS & CO., LTD.
<PAGE>
The date of this Prospectus is May 22, 1996.
<PAGE>
<PAGE>
[OUTSIDE RIGHT SIDE OF GATEFOLD WITH FIRST FULL PAGE OF ARTWORK]
THIS IS A RENDERING OF AN ELECTRONIC HAIR STYLING DEVICE THAT WOULD UTILIZE
THE COMPANY'S LICENSED TECHNOLOGY. THE RENDERING IS A CONCEPTUAL MODEL THAT
REFLECTS MANAGEMENT'S CURRENT DEVELOPMENT AND ENGINEERING DESIGN OBJECTIVES. THE
COMPANY IS ENGAGED IN EARLY STAGE RESEARCH AND DEVELOPMENT ACTIVITIES RELATING
TO THE REACTION OF HAIR SAMPLES TO ITS TECHNOLOGY AND DOES NOT EXPECT TO
INTRODUCE ITS FIRST PROTOTYPE BEFORE THE SECOND HALF OF 1998 AT THE EARLIEST.
ACTUAL PRODUCTS, IF SUCCESSFULLY DEVELOPED, COULD DIFFER SUBSTANTIALLY FROM
THOSE CURRENTLY ENVISIONED BY THE COMPANY AND NO ASSURANCE CAN BE GIVEN THAT
APPLICATION OF THE TECHNOLOGY WILL RESULT IN ANY COMMERCIALLY VIABLE PRODUCTS.
RISKS ASSOCIATED WITH THE DEVELOPMENT OF THE TECHNOLOGY AND PRODUCTS BASED ON IT
ARE DISCUSSED UNDER THE CAPTION "RISK FACTORS -- RISKS ASSOCIATED WITH
ELECTRONIC CHEMISTRY-TM- PRODUCT DEVELOPMENT."
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited summary financial information for each of
the first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
PERMASOFT-REGISTERED TRADEMARK-, SALON STYLE-REGISTERED TRADEMARK-,
STYLE-REGISTERED TRADEMARK-, PATIVA-TM-, NUCLEIC A-REGISTERED TRADEMARK-, APPLE
PECTIN-REGISTERED TRADEMARK- AND VITA/E-REGISTERED TRADEMARK- ARE REGISTERED
TRADEMARKS OF THE COMPANY.
<PAGE>
[INSIDE LEFT SIDE OF GATEFOLD (REVERSE SIDE OF
PRIOR PAGE) WITH 2ND PAGE OF ARTWORK; FOUR PICTURES OF MODELS WITH SHAMPOO
BOTTLES]
The Company's brands, well known for quality, are used and sold by salons, and
are purchased by consumers from over 60,000 retail outlets in North America.
<PAGE>
[INSIDE RIGHT SIDE OF GATEFOLD (REVERSE SIDE OF PROSPECTUS COVER PAGE AND
OPPOSITE PROSPECTUS SUMMARY PAGE) WITH 3RD PAGE OF ARTWORK; FOUR PICTURES OF
MODELS WITH SHAMPOO BOTTLES]
<PAGE>
[INSIDE LEFT OF BACK GATEFOLD
(REVERSE SIDE OF PROSPECTUS BACK PAGE) WITH ARTWORK]
<PAGE>
[INSIDE RIGHT OF BACK GATEFOLD WITH ARTWORK]
<PAGE>
[OUTSIDE LEFT OF BACK GATEFOLD WITH ARTWORK]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO
THE MERGER, EFFECTIVE ON MARCH 18, 1996, OF ELECTRONIC HAIR STYLING, INC., A
WASHINGTON CORPORATION ("OLD EHS"), WITH AND INTO ITS WHOLLY-OWNED SUBSIDIARY,
ELECTRONIC HAIR STYLING, INC., A DELAWARE CORPORATION (THE "COMPANY"), AND THE
ISSUANCE OF .660 SHARES OF COMMON STOCK OF THE COMPANY IN EXCHANGE FOR EACH
ISSUED AND OUTSTANDING SHARE OF COMMON STOCK OF OLD EHS. THE TERM "COMPANY" AS
USED IN THIS PROSPECTUS INCLUDES THE COMPANY, ITS PREDECESSORS AND ITS LAMAUR
AND EHS LABORATORIES DIVISIONS ("LAMAUR" AND "EHS LABORATORIES," RESPECTIVELY).
UNLESS OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION SET
FORTH HEREIN ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
The Company develops, formulates, manufactures and markets personal hair
care products, consisting of shampoos, conditioners, hair sprays, permanent wave
products and other styling aids, for both the consumer and professional markets.
These products are distributed through its recently-acquired Lamaur division to
consumer retail outlets, professional salons and specialty shops. The Company's
brand names include PERMASOFT-REGISTERED TRADEMARK-, SALON
STYLE-REGISTERED TRADEMARK-, STYLE-REGISTERED TRADEMARK-, PATIVA-TM-, NUCLEIC
A-REGISTERED TRADEMARK-, APPLE PECTIN-REGISTERED TRADEMARK- and
VITA/E-REGISTERED TRADEMARK-. The Company also contract manufactures a variety
of household cleaning and hair care aerosol sprays and liquid products. The
Company believes its Lamaur division was among the ten largest manufacturers in
the United States in 1995 (based on domestic revenues) in three categories of
hair care products -- shampoos, conditioners and styling aids. The Company's EHS
Laboratories division is engaged in the early stages of research and development
with respect to a new hair styling concept. Based on patented technology
licensed by the Company from an affiliate, the product is intended to combine
electronics and chemicals to style, color and condition hair quickly, without
the damaging side effects often experienced with most chemical-based hair
styling products. The Company had pro forma total net sales, substantially all
in the United States, from its Lamaur division of approximately $117.8 million
in the year ended December 31, 1995.
The Company's objective is to become a leading worldwide developer and
marketer of advanced hair care products through a strategy that combines the
stability provided by Lamaur's established hair care products business, which
the Company intends to return to profitability, and the growth opportunities
available through acquisitions, strategic relationships and the development of
EHS Laboratories' technology. To implement this strategy, the Company has
installed a new senior management team with significant experience in the
personal care products industry. Key features of the Company's turnaround
strategy include emphasizing marketing and sales efforts while maintaining the
Company's strong production base and research capabilities, in addition to
refining the cost-cutting program introduced by prior management. The Company
plans to increase its market share by expanding its national marketing program,
broadening its base of exclusive distributors for its PATIVA-TM- line of
products and increasing sales to Mexico, Canada and other international markets.
Since January 1, 1996, the Company has obtained significant contract
manufacturing orders from new customers, with deliveries commencing in the
second quarter, and intends to continue to increase the level of its contract
manufacturing activities by obtaining additional orders from both existing and
new customers. In addition, the Company intends to explore opportunities for
acquisitions or strategic relationships that may enable it to expand its hair
care products line or diversify its business into other segments of the personal
care market. The Company believes that these initiatives, all of which will
require significant financial resources, will enable the Company to respond
effectively to the competitive factors it faces, which presently include
primarily the need to introduce and promote (i) high-end products in the
professional market, (ii) higher-quality, professional-type products and more
natural products in the retail market, and (iii) line extensions of styling
aids.
In November 1995, the Company acquired Lamaur (previously PCD, the Personal
Care Division of DowBrands L.P.) for an aggregate acquisition cost of
approximately $30.2 million. The assets and operations of Lamaur were purchased
from DowBrands Inc. ("Dow"), an affiliate of The Dow Chemical Company, and
include a modern, automated 438,000 square foot administrative, manufacturing,
warehousing and laboratory facility located on 25 acres in the Minneapolis
metropolitan area. As part of the acquisition purchase price, Dow received an
equity interest in the Company (17.3% after giving effect to this Offering).
Lamaur has been a leading domestic producer and marketer of a broad range of
hair care products for over 60 years and was an independent publicly-traded
company, listed on the New York Stock Exchange, until its acquisition by Dow in
1987.
3
<PAGE>
Worldwide retail sales of hair care products (excluding hair care
appliances) in 1994 were approximately $25.0 billion, of which approximately
$4.5 billion represented sales in North America. It is estimated that by 2000,
worldwide retail sales of hair care products will reach approximately $32.8
billion, with approximately $5.6 billion attributable to sales in North America.
The Company believes that the absence of any fundamental change in the
technology underlying hair care products for several decades, combined with the
substantial global market for hair care products, presents an opportunity for
new technologically oriented products.
The Company is engaged in early stage research and development activities
related to hair styling applications of its licensed proprietary technology,
ELECTRONIC CHEMISTRY-TM-. The technology is based on the belief that structural
and cosmetic changes in hair can be achieved by applying an electromagnetic
signal, accompanied by the application of chemicals and/or mechanical stress.
The Company's objective is to develop products that will apply the technology to
electronically style, color and condition hair quickly and without the damaging
side effects often experienced with the harsh chemicals and heat treatments
associated with most traditional hair care products. Substantial additional
steps will need to be taken before the Company can commercially introduce any
ELECTRONIC CHEMISTRY-TM- products. It does not expect to introduce any prototype
product before the second half of 1998 at the earliest. See "Business--Research
and Development--EHS Laboratories' Technology."
The Company's principal executive offices are located at One Lovell Avenue,
Mill Valley, California 94941. The telephone number at that location is (415)
380-8200, and the fax number at that location
is (415) 380-8170. The Company is a Delaware corporation and the successor by
merger to Old EHS.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................ 2,600,000 shares
Common Stock to be Outstanding after the
Offering........................................... 5,560,495 shares (1)
Use of Proceeds.................................... To initially repay approximately $8.0
million principal amount of revolving
credit indebtedness incurred in
connection with the November 1995
acquisition of Lamaur and for working
capital and general corporate pur-
poses.
Risk Factors and Dilution.......................... Prospective investors should carefully
consider the matters set forth under
the captions "Risk Factors" and
"Dilution." An investment in the shares
of Common Stock offered hereby involves
a high degree of risk and immediate and
substantial dilution.
Nasdaq National Market Symbol...................... "EHST"
</TABLE>
- ------------------------
(1) Excludes 2,899,085 shares, consisting of (i) 660,000 shares of Common Stock
reserved for issuance upon conversion of the Company's Series A Convertible
Preferred Stock held by Dow, which must be converted into Common Stock if
the market price of the Common Stock equals or exceeds $21.21 for a period
of 30 consecutive business days, (ii) 503,910 shares of Common Stock
reserved for issuance upon conversion of the Company's Series B Preferred
Stock that will be issued upon the conversion of the Dow Convertible Note in
connection with the consummation of this Offering, (iii) 1,400,925 shares of
Common Stock reserved for future issuance under the Company's stock
incentive plans, (iv) 152,250 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants, and (v) 182,000 shares of Common
Stock reserved for issuance upon exercise of warrants issued to the
Representatives of the Underwriters. See "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are (i) selected financial data with respect to the
statements of operations of the Company for the period from April 1, 1993
(Inception) to December 31, 1993, for the twelve months ended December 31, 1994,
and 1995, and for the three months ended March 31, 1995 and 1996, and the
balance sheets of the Company at December 31, 1995, and March 31, 1996, (ii)
selected financial data with respect to the unaudited pro forma statement of
operations for the Company for the twelve months ended December 31, 1995,
presenting the combined results of operations of the Company as if the
acquisition of Lamaur was effective as of January 1, 1995, and (iii) selected
financial data with respect to the statements of operations for Lamaur
(previously PCD, the Personal Care Division of DowBrands L.P., an affiliate of
Dow) for each of the four years ended December 31, 1994, and for the period from
January 1, 1995 to November 30, 1995 (the effective date of the acquisition for
financial reporting purposes), and the balance sheets of Lamaur at December 31,
1991, 1992, 1993 and 1994.
FINANCIAL DATA OF THE COMPANY
<TABLE>
<CAPTION>
HISTORICAL THREE
------------------------------------------- MONTHS
YEAR ENDED DECEMBER ENDED
APRIL 1, 1993 31, PRO FORMA MARCH 31,
(INCEPTION) TO ---------------------- YEAR ENDED ---------
DECEMBER 31, 1993 1994 1995 (1) DECEMBER 31, 1995 (2) 1995
------------------- --------- ----------- ---------------------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales............................ $ -- $ -- $ 8,070 $ 117,766 $ --
Gross margin............................... -- -- 2,414 46,371 --
Operating loss............................. (1,565) (557) (1,082) (9,759)(3) (93)
Interest expense........................... (40) (59) (300) (1,554) (18)
Net loss................................... $ (1,605) $ (616) $ (1,382) $ (11,212)(3) $ (111)
------- --------- ----------- ---------- ---------
------- --------- ----------- ---------- ---------
Net loss per share......................... $ (.44) $ (.15) $ (.34) $ (2.74) $ (.03)
------- --------- ----------- ---------- ---------
------- --------- ----------- ---------- ---------
Weighted average shares outstanding........ 3,658 4,086 4,086 4,086 4,086
SUPPLEMENTAL PRO FORMA DATA (4):
Net loss................................... $ (10,432)
----------
----------
Net loss per share......................... $ (2.02)
----------
----------
Weighted average shares outstanding........ 5,161
<CAPTION>
1996
---------
<S> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales............................ $ 28,480
Gross margin............................... 10,526
Operating loss............................. (317)
Interest expense........................... (414)
Net loss................................... $ (723)
---------
---------
Net loss per share......................... $ (.18)
---------
---------
Weighted average shares outstanding........ 4,086
SUPPLEMENTAL PRO FORMA DATA (4):
Net loss...................................
Net loss per share.........................
Weighted average shares outstanding........
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
AT DECEMBER 31, 1995 --------------------------
ACTUAL ACTUAL AS ADJUSTED (5)
--------------------- --------- ---------------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital............................................................ $ 10,346 $ 9,817 $ 20,256
Total assets............................................................... 42,967 42,806 53,245
Long-term debt, less current portion....................................... 20,350 20,271 7,271
Stockholders' equity....................................................... 6,594 6,048 29,487
</TABLE>
FINANCIAL DATA OF LAMAUR
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1995
------------------------------------------ THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995 (6)
--------- --------- --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales.......................................... $ 136,946 $ 124,288 $ 112,031 $ 121,277 $ 109,696
Gross margin............................................. 58,075 46,675 40,970 49,542 42,608
Operating expenses....................................... 53,912 56,014 53,851 57,830 42,344
Write-down of assets..................................... -- -- -- 120,100 11,000
Operating income (loss).................................. 4,163 (9,339) (12,881) (128,388) (10,736)
Net loss................................................. $ (3,094) $ (15,722) $ (19,207) $(133,488) $ (12,238)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1991 1992 1993 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital.......................................... $ 17,079 $ 16,517 $ 11,457 $ 16,787
Total assets............................................. 197,380 190,605 180,376 58,021
Net invested capital..................................... 184,265 179,654 169,058 47,493
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1995
------------------------------------------ THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995 (6)
--------- --------- --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Earnings (loss) before interest and non-cash charges
(7).................................................... $ 11,583 $ (2,184) $ (5,174) $ (59) $ 2,375
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
- ----------------------------------
(1) Includes the results of operations of Lamaur for the month of December 1995
following its acquisition by the Company.
(2) Pro forma data gives effect to the acquisition of Lamaur as if it had
occurred on January 1, 1995 and is based on available information and
contains certain assumptions and adjustments. See Notes To Unaudited Pro
Forma Combined Statement of Operations on page 15.
(3) Includes an $11.0 million write-down of assets required to adjust the
carrying value of Lamaur to its net realizable value in connection with
Dow's decision to sell Lamaur. Future significant charges are not expected
as all assets and liabilities were recorded at their estimated fair values
at the date of the Company's acquisition of Lamaur.
(4) Reflects the conversion of the Dow Convertible Note into Series B
Convertible Preferred Stock (which will automatically occur upon the
Offering), the issuance of 1,075,000 shares of Common Stock to fund the
repayment of $8.0 million of debt (as described under "Use of Proceeds"),
and the related inclusion of dividends and reduction of interest expense.
(5) Adjusted to reflect the receipt and application by the Company of estimated
net proceeds from the issuance of 2,600,000 shares and the conversion of the
Dow Convertible Note into 763,500 shares of Series B Convertible Preferred
Stock. See "Use of Proceeds" and "Capitalization."
(6) Results of operations of Lamaur following its acquisition by the Company in
November 1995 are included in the Company's results of operations for the
year ended December 31, 1995.
(7) Consists of net loss before interest expense, depreciation and amortization
and write-down of assets. It is presented to assist in understanding the
Company's operating results and in determining the Company's ability to meet
one of its loan covenants (debt service coverage ratio), calculated by
dividing net income plus depreciation, amortization and current interest, by
current interest plus scheduled repayments of principal of all indebtedness.
In addition, the exclusion of the asset write-downs results in data that
assists in understanding ongoing operating results because the write-downs
were non-recurring charges. However, this data is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles. See the Company's Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk and immediate and substantial dilution and should only be made by
persons who can afford a loss of their entire investment. In evaluating an
investment in the Common Stock being offered hereby, investors should consider
carefully, among other matters, the following risk factors, as well as the other
information contained in this Prospectus.
LIMITED OPERATING HISTORY; PRIOR LOSSES
The Company has a limited operating history, having commenced its product
research and development activities in 1993 through its EHS Laboratories
division, and having had no revenues until it completed the recent acquisition
of its Lamaur division in November 1995. The Company incurred a loss of $0.7
million for the three months ended March 31, 1996, compared with a loss of $0.1
million for the three months ended March 31, 1995 and a loss of $1.4 million in
the year ended December 31, 1995, compared with a loss of $0.6 million in the
year ended December 31, 1994, and a loss of $1.6 million in the period from
April 1, 1993 (Inception) to December 31, 1993. As a result of these losses, at
December 31, 1995, the Company had an accumulated deficit of $3.6 million, and
had deferred tax assets of $1.3 million, consisting primarily of net operating
loss carryforwards. Because the Company's Lamaur division experienced cumulative
losses over the last nine years, management believes that it is more likely than
not that sufficient taxable income will not be generated in future periods to
utilize the deferred tax assets. Therefore, at December 31, 1995, a valuation
allowance of $1.3 million was established. Giving effect to the Lamaur
acquisition on a pro forma basis, the Company would have had a net loss in the
year ended December 31, 1995, of approximately $11.2 million, or $2.74 per share
($0.2 million, or $0.05 per share, after excluding the $11.0 million write-down
of assets recorded prior to the acquisition to adjust the carrying value of
Lamaur to its net realizable value). The Company's immediate goal is to return
Lamaur to profitability by the end of 1996. In order to achieve this objective,
the Company believes it will need to increase its share of the retail segment of
the market, in part through an increase in advertising and promotions, and also
increase the number of exclusive distributors for its professional products,
while maintaining its existing distribution network. The costs of expanding the
Company's retail market share are expected to be substantial, both during the
remainder of 1996 and thereafter. There can be no assurance that the Company
will ever achieve profitability in the future or maintain profitability, once
achieved, on a consistent basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LEVERAGE, SUBSTANTIAL DEBT SERVICE, PREFERRED STOCK DIVIDEND REQUIREMENTS, AND
RELATED FINANCIAL AND OPERATING RESTRICTIONS
Following the Offering, the Company will remain leveraged and will continue
to have substantial debt service requirements as well as substantial preferred
stock dividend requirements. At April 30, 1996, the Company had outstanding
approximately $26.0 million of long-term and short-term debt and other
obligations, of which approximately $17.4 million was outstanding under the
Company's credit agreement (the "Norwest Credit Agreement"), with Norwest
Business Credit, Inc., an affiliate of Norwest Bank Minnesota N.A. ("Norwest"),
$5.0 million was outstanding under a convertible subordinated note (the "Dow
Convertible Note") issued to Dow as part of the purchase price of the Lamaur
acquisition, and $2.6 million represented credits toward future product
purchases by Dow. Effective upon the Offering, the Dow Convertible Note will be
converted into 763,500 shares of the Company's Series B Convertible Preferred
Stock, par value $0.01 per share (the "Series B Convertible Preferred Stock"),
which provides for cumulative dividends at the rate of 8.0% per annum, payable
quarterly ($400,000 annually). At March 31, 1996, after giving effect to the
Offering and the application of the proceeds of the Offering, the Company would
have had total indebtedness of approximately $10.0 million, stockholders' equity
of approximately $29.5 million and a ratio of total indebtedness to total equity
of approximately 0.34 to 1. A substantial portion of the Company's cash flow
will be devoted to debt service and preferred stock dividend payments. The
ability of the Company to make required payments of principal, interest and
preferred stock dividends will be largely dependent upon its future performance.
The Company believes, however, that cash flow from operations, together with
other available sources of liquidity, will be adequate to make all required
payments, permit anticipated capital expenditures and fund working capital and
other cash requirements for the next 24 months.
6
<PAGE>
The Norwest Credit Agreement, together with the terms of the Series B
Convertible Preferred Stock, impose operating and financial restrictions on the
Company and require the Company to comply with certain financial covenants
regarding profitability, minimum net worth, leverage and cash flow. Those
restrictions prohibit dividends on common stock and redemption of common or
preferred stock and also affect, among other things, the Company's ability to
incur additional indebtedness, issue stock of subsidiaries, repay indebtedness
prior to its stated maturity, create liens, sell assets or engage in mergers or
acquisitions, make certain capital expenditures, change its management, modify
its compensation plans, and make investments in subsidiaries. These restrictions
may limit the ability of the Company to effect future financing or may otherwise
restrict corporate activities. As of March 31, 1996, the Company was in
compliance with all financial covenants under the Norwest Credit Agreement,
including limitations on losses incurred (the Company having incurred an actual
net loss of $0.7 million, compared with a covenant limiting permitted net losses
to no more than $1.5 million), minimum net worth (actual, inclusive of
subordinated debt, of $11.0 million, compared with a covenant minimum of $8.3
million), and leverage (actual ratio of 3.03 to 1.0, compared with a covenant
maximum of 4.39 to 1.0). The Norwest Credit Agreement also provides for a debt
service coverage ratio of at least 1.2 to 1.0 for the year ended December 31,
1996. Giving effect to the Lamaur acquisition on a pro forma basis as if it had
occurred on January 1, 1995, but excluding the $11.0 million write-down of
assets recorded prior to the acquisition, and after giving effect to the
Offering and the application of the proceeds therefrom as if the Offering had
occurred on May 31, 1995, the Company would have had a debt service coverage
ratio of approximately 1.5 to 1.0 for the year ended December 31, 1995. The
Company incurred a net loss of approximately $0.7 million in the three months
ended March 31, 1996, a level consistent with the Company's operating plan.
However, if the Company is unable to achieve management's plans and improve
operating results at Lamaur during the remainder of 1996, or obtain additional
financing, the Company could be in default at the end of 1996 under the Norwest
Credit Agreement. In addition, the Company has pledged substantially all of its
assets to the Company's lenders. In the event of a default under the Norwest
Credit Agreement, the Company's lenders could foreclose on those assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital Stock
- -- Convertible Preferred Stock."
RECENT MAJOR ACQUISITION AND POSSIBLE ADVERSE EFFECTS ON FUTURE RESULTS OF
OPERATIONS
In November 1995 the Company acquired the operations and assets of Lamaur
from Dow for approximately $30.2 million. The purchase price was allocated to
the acquired assets and liabilities based on their estimated fair values.
Principally as a result of charges taken by Dow of $120.1 million in 1994 and
$11.0 million in 1995 in connection with Dow's decision in early 1994 to sell
Lamaur, the operations of Lamaur incurred a net loss of $133.5 million for the
year ended December 31, 1994 and a net loss of $12.2 million for the period from
January 1, 1995 to November 30, 1995. Dow acquired Lamaur, which was a public
company, in 1987 and recorded substantial goodwill which represented the excess
of the purchase price over the estimated fair value of the net assets acquired.
Due to a decline in the market share of Lamaur's products, the value of Lamaur
decreased significantly subsequent to the acquisition by Dow. As a result, the
charges recorded by Dow in 1994 and 1995 were required to adjust the carrying
value of Lamaur to its net realizable value. Future significant charges are not
expected as all assets and liabilities of Lamaur were recorded at their
estimated fair values at the date of the Company's acquisition of Lamaur (which,
for property, plant and equipment, was based on independent appraisals). See
Note 1 of the Financial Statements of Lamaur included elsewhere in this
Prospectus for a description of the acquisition of Lamaur by the Company and the
allocation of the purchase price. On a pro forma basis, as if the Lamaur
acquisition had been effected on January 1, 1995, and including all adjustments
which the Company considers necessary for a fair presentation in accordance with
generally accepted accounting principles, the Company would have had a net loss
for the year ended December 31, 1995 of approximately $11.2 million ($2.74 per
share) ($0.2 million ($0.05 per share) after excluding the $11.0 million
write-down of assets described above), as compared with its actual net loss of
approximately $1.4 million ($0.34 per share) for the period. Such pro forma
financial information is based, in significant part, upon unaudited information
with respect to the results of operations of Lamaur that was provided to the
Company by Dow and has not been verified by the Company. See "Unaudited Pro
Forma Financial Information."
Future actions by the Company may result in changes to Lamaur's operations.
Actual revenues during 1996 may be less than the pro forma revenues for the year
ended December 31, 1995, in part as a result of the cost-cutting program
initiated earlier in 1995 that Lamaur's new management intends to continue and
refine. The effects of any future changes in Lamaur's product manufacturing
operations or marketing cannot be determined at this time and are not reflected
in the pro forma financial statements included elsewhere in this Prospectus.
Although the Company has identified areas in which future reductions in
operating expenses may
7
<PAGE>
be feasible and anticipates reducing operating expenses in the near future,
there can be no assurance that any such reductions can or will be effected.
There can be no assurance that the present and future efforts of the Company's
new management team to reduce operating expenses of Lamaur will be successful in
the near term, or that the Company will be able to reduce those costs and
expenses without materially and adversely affecting product sales or impairing
its ability to maintain or expand its share of the market. If the Company is
unsuccessful in its effort to achieve and maintain profitable operations at
Lamaur, the Company's business and results of operations would be materially and
adversely affected. Continued losses at Lamaur would have a material adverse
effect on the Company's financial condition and on its ability to compete
effectively in the markets for its products and on its EHS Laboratories
division's ability to continue its planned research and development activities.
See "Unaudited Pro Forma Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON MANAGEMENT
The Company's future success and profitability is substantially dependent
upon the performance of its senior executives. Only one of the Company's senior
executives has an employment agreement with the Company, although all of the
Company's senior executives have been granted options to purchase shares of
Common Stock, of which a significant proportion are not vested. The loss of one
or more of its senior executives could have a material adverse effect on the
Company. Moreover, the Company does not maintain key-man life insurance on any
of its executives. In addition, Mr. Don G. Hoff, the Company's founder, chairman
and chief executive officer, served as Chairman of the Board and Chief Executive
Officer of AT&E Corporation ("AT&E"), a company engaged in telecommunications
research and development, from 1974 to 1991. Mr. Hoff resigned from all his
managerial positions with AT&E in April 1991. Subsequently, in July 1991, AT&E
filed for reorganization under Chapter 11 of the Bankruptcy Code. Another
officer of the Company served as an officer of AT&E from December 1984 to April
1991. See "Management."
NEED FOR FUTURE CAPITAL
Through late 1995, the Company financed all of its working and other capital
requirements from equity infusions and borrowings from certain of its
stockholders. Future growth will be dependent, in part, upon the capital
resources available to the Company from time to time. In connection with the
Lamaur acquisition, the Company obtained from Norwest a $20.0 million credit
facility. The facility consists of a $6.0 million 36-month term loan and a $14.0
million working line of credit (the "Norwest Credit Line"). The full amount of
the term loan and approximately $8.6 million of the revolving credit facility
had been drawn upon as of March 31, 1996. Approximately $8.0 million of the
amount drawn under the Norwest Credit Line will be repaid with the proceeds of
the Offering. The Company's ability to draw upon the Norwest Credit Line will be
dependent in part on the quality and size of the Company's trade receivables and
inventory. The Company believes that internally generated funds, amounts made
available to it under the Norwest Credit Line and cash on hand, together with
the net proceeds of this Offering, should satisfy its anticipated capital needs
for the next 24 months. However, there can be no assurance that those funds will
be sufficient to support the Company's business strategy or that, if additional
financing is required, it will be available in amounts and on terms satisfactory
to the Company, if at all. Furthermore, the Norwest Credit Agreement bears
interest at variable rates and, accordingly, increases in applicable base rates
will adversely affect the Company's cost of capital. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The personal hair care products business is highly competitive. The Company
competes in its market against several larger multi-national companies, all of
which have substantially greater financial and other resources than those of the
Company. Principal competitors of the Retail Division include The Procter &
Gamble Company, Unilever N.V. (Helene Curtis), Bristol-Myers Squibb Company
(Clairol), L'Oreal S.A. (Cosmair) and Alberto-Culver Company, and those of the
Salon Division include Bristol-Myers Squibb Company (Clairol and Matrix),
Nexxus, and Wella AG (Redken). Competitive conditions in the industry have
adversely affected profit margins. In addition, there has been a growing
consumer demand for greater convenience and performance. In part as a result of
these factors, the industry has been experiencing a consolidation (the Company
believes that currently, five companies account for approximately 60% of
worldwide sales in the hair care products industry) and a globalization in the
activities of its members.
8
<PAGE>
Competitive market conditions could materially and adversely affect the
Company's results of operations if it were required to reduce product prices to
remain competitive or experienced decreased sales volume. The Company plans to
increase retail sales in Mexico and Canada during the remainder of 1996 and in
1997, and is considering expansion into other international markets. Expanding
the Company's share of the Mexican, Canadian and other international markets
will require the Company to address competitive factors similar to those it
faces in the United States as well as comply with any local regulatory
requirements. See "Business -- Competition."
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Certain customers are material to the business and operations of the
Company. DowBrands Home Care Division ("DowBrands") and Wal-Mart Stores, Inc.
("Wal-Mart") each accounted for approximately 18% of the Company's pro forma
total net sales for 1995. The Company currently maintains more than 1,800 active
customer accounts and no customer other than DowBrands and Wal-Mart accounted
for more than 10% of Lamaur's sales in any of the last three years. Nonetheless,
the loss of sales to DowBrands, Wal-Mart or other significant customers could
have a material adverse effect on the business and operations of the Company.
The Company has no contractual obligations from any customers (including
DowBrands) to make continuing purchases from Lamaur, although DowBrands has
agreed to purchase all of its future requirements for certain products from the
Company for a two-year period ending in November 1997. As part of this agreement
and in connection with the acquisition, Dow agreed to accept $3.0 million of
credits to be applied towards purchases of finished products in eight equal
quarterly installments of $375,000 commencing February 1996. See "Business --
Marketing and Distribution" and "-- Manufacturing and Supply."
RELIANCE ON MANUFACTURING FACILITIES
The Company manufactures substantially all of its products at its facility
in Fridley, Minnesota. The Company's manufacturing operations use certain custom
designed equipment which, if damaged or otherwise rendered inoperable or
unavailable, could result in the disruption of the Company's manufacturing
operations. The Company seeks to protect against this risk by maintaining
substantial spare parts and an internal maintenance shop capable of servicing
and rebuilding all in-house manufacturing equipment. The Company also believes
that there are several readily available external sources to repair or replace
any of this equipment should that be necessary. The Company also maintains
multiple compounding areas, filling lines and packaging facilities. Any extended
interruption of operations at the Company's manufacturing facility would,
however, have a material adverse effect on the business of the Company. See
"Business -- Manufacturing and Supply."
DEPENDENCE ON TRADEMARKS FOR CURRENT AND FUTURE MARKETS
The market for the Company's products is significantly dependent upon the
goodwill engendered by its trademarks and trade names. Trademark protection is
therefore material to the Company's business. Although a number of the Company's
trademarks and trade names are registered in the United States, there can be no
assurance that the Company will be successful in asserting trademark or trade
name protection for its significant marks and names in the United States or
other markets, and the costs to the Company of such efforts may be substantial.
See "Business -- Patents and Trademarks."
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The Company's ability to anticipate changes in technologies, markets and
industry trends and to successfully develop and introduce new and enhanced
products on a timely basis will be a critical factor in its ability to grow and
remain competitive. There can be no assurance that new products will be
completed or that such products can be marketed successfully. In addition, the
anticipated development schedules for new or improved products are inherently
difficult to predict and are subject to change as a result of shifting
priorities in response to customers' requirements and competitors' new product
introductions. Moreover, the Company expects that its EHS Laboratories division
will devote substantial resources to research and development efforts, including
expenditures aggregating approximately $2.0 million over approximately the next
three years. The costs of such efforts are likely to be expensed as they are
incurred, notwithstanding that the benefits, if any, from such efforts (in the
form of increased revenues or decreased product costs) may not be reflected
until subsequent periods. See "Business -- Marketing and Distribution" and "--
Research and Development."
9
<PAGE>
RISKS ASSOCIATED WITH ELECTRONIC CHEMISTRY-TM- PRODUCT DEVELOPMENT
EMERGING TECHNOLOGY AND MARKET; SUBSTANTIAL RISK OF UNCERTAIN MARKET
ACCEPTANCE. The Company is engaged in early research and development of hair
styling applications of an electronics-based technology. As with any new
technology, there is the substantial risk that products based on the technology
will not be successfully developed or that if developed, that the marketplace
may not accept the potential benefits of the technology. The Company expects to
incur substantial expenses as it continues its research activities and, if they
are successful, to develop new products and penetrate new markets. The Company
does not expect to introduce any prototype product before the second half of
1998 at the earliest, and any Company electronics-based product introduced to
the market will not obtain name recognition until some time after the Company's
initial marketing efforts, if at all. Market acceptance of the Company's
products will depend, in large part, upon the pricing of the products and the
ability of the Company to demonstrate the advantages of its products over
competing methodologies and products. There can be no assurance that the Company
will be able to market its technology successfully or that any of the Company's
future electronics-based products will be accepted in the marketplace.
NEED FOR THIRD-PARTY ASSISTANCE. Substantial additional steps will need to
be taken before the Company can commercially introduce its ELECTRONIC
CHEMISTRY-TM- products. The Company anticipates that some of these steps will be
undertaken by the Company and some, including continuing hair morphology and
other research, will be undertaken pursuant to agreements or arrangments with
third parties. In 1994, the Company entered into a technical assistance
agreement with Samsung Electronics Co., Ltd. ("Samsung") pursuant to which
Samsung will have the opportunity (but not the obligation) to participate with
the Company in developing the electronic components and overall design of the
Company's hair styling products; however, Samsung has not participated in such
development to date or provided any revenues or financing to the Company. There
can be no assurance that Samsung will pursue or be successful in any such
development efforts, nor can there be any assurance that Samsung will extend the
term of its agreement with the Company beyond 1996. Moreover, a similar
arrangement may be required by the Company with one or more companies engaged in
the chemical products industry to develop certain chemical components of the
Company's planned hair styling product, and there can be no assurance that any
such arrangement will be entered into or, if entered into, will be successful.
The Company's inability, for technological, financial or other reasons, to
develop and sell products that are technologically competitive, responsive to
customer needs and competitively priced could have a material adverse effect on
its business.
REGULATORY RISKS. The development and initial marketing of the Company's
ELECTRONIC CHEMISTRY-TM- products will require adherence to Federal
Communications Commission ("FCC") standards regarding electromagnetic signals,
and is likely also to require Food and Drug Administration ("FDA") and other FCC
review and approval. The process of obtaining and maintaining such regulatory
approvals is not expected to commence until after a suitable prototype product
is available, may be lengthy, expensive and uncertain, and is likely to require
animal trials (as is customary in the personal hair care products business) and,
possibly, human trials. Moreover, the Company is unable to predict the nature
of, or time that will be required to obtain, regulatory approvals, and there can
be no assurance that new standards relating to the sale of electromagnetic
signal-emitting devices for use in close proximity to the human body will not be
adopted prior to or after the Company introduces its new products, and any such
standards might require redesign or even abandonment of the product. A delay in
obtaining regulatory approvals, or the unavailability of such approvals, could
have an adverse effect on the Company's strategic plans.
PRODUCT LIABILITY RISKS. Even if regulatory approvals are obtained and
product marketing and sales commence, there can be no assurance that the Company
will not encounter private party lawsuits alleging defects or harmful effects
from the Company's hair styling appliance products. The cost of defending or
settling such claims may be high, and insurance against such claims may not be
available, or may be prohibitive in cost.
DEPENDENCE ON LICENSED PATENT. The Company has obtained an exclusive
license to use for cosmetic hair care applications one United States patent that
it believes provides significant protection for its proprietary technology.
However, there can be no assurance that such patent or any other patents that
may be granted will be enforceable or provide the Company with meaningful
protection from competitors. Moreover, if a competitor were to infringe the
Company's licensor's patent, the costs of enforcing the
10
<PAGE>
Company's licensed patent rights may be substantial or even prohibitive. There
can also be no assurance that the Company's future products will not infringe
the patent rights of others or that it will not be forced to expend substantial
funds to defend against infringement claims of, or to obtain licenses from,
third parties. See "Business -- Patents and Trademarks."
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may vary significantly from quarter to
quarter, in part because of the costs associated with changes in the Company's
mix of product sales and promotions, changes in consumer buying patterns,
aggressive competition, and the timing of, and costs related to, any future
acquisitions. The Company's operating results for any particular quarter are not
necessarily indicative of any future results. The uncertainties associated with
new product introduction and market trends may limit management's ability to
accurately forecast short-term results of operations. In addition, the Company
generally has a relatively low backlog of orders at any one time, and most of
any backlog that exists is generally delivered within five to 10 days of receipt
of an order. Fluctuations caused by variations in quarterly operating results or
the Company's failure to meet analysts' projections or public expectations as to
results may adversely affect the market price of the Common Stock.
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS
After the Offering, the Company's present stockholders, consisting primarily
of senior management, members of its chairman's family, and Dow, will own
approximately 61% of the outstanding shares of voting stock (approximately 58%
if the Underwriters' over-allotment option is exercised in full). Consequently,
the present stockholders will have the ability to elect all of the Company's
directors and to control the outcome of all other issues submitted to the
Company's stockholders. Certain provisions of Delaware law applicable to the
Company may also discourage third-party attempts to acquire control. See
"Principal Stockholders" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will incur an
immediate dilution in net tangible book value per share of Common Stock of $5.39
per share ($3.61 per share assuming conversion of the Company's preferred
stock). See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by existing stockholders pursuant to
Rule 144 ("Rule 144") promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), or otherwise, could have an adverse effect on the price
of the shares of Common Stock. Upon consummation of this Offering, the Company
will have outstanding 5,560,495 shares of Common Stock, plus the 1,163,910
shares of Common Stock which may be issued upon conversion of preferred stock.
The 2,600,000 shares of Common Stock offered hereby (2,990,000 if the
Underwriters' over-allotment option is exercised in full) will be freely
transferable without restriction or further registration under the Securities
Act. The remaining 2,960,495 outstanding shares of Common Stock, and the
1,163,910 shares of Common Stock which may be issued upon conversion of the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
(collectively, the "Convertible Preferred Stock"), will be "restricted
securities," as that term is defined in Rule 144, and may only be sold pursuant
to a registration statement under the Securities Act or an applicable exemption
from registration thereunder, including exemptions provided by Rule 144. In
addition, the Company has contractually granted its existing stockholders
certain registration rights. No prediction can be made as to the effect that
future sales of Common Stock, or the availability of shares of Common Stock for
future sales, will have on the market price of the Common Stock prevailing from
time to time. Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. The Company has agreed not to register, issue, sell or
otherwise dispose of any of its securities, subject to certain exceptions, for a
period of 180 days from the date of this Prospectus without the prior written
consent of the Representatives. The Company's officers, directors and principal
stockholders have agreed (i) not to, directly or indirectly, issue, agree or
offer publicly to sell, grant an option for the purchase or sale of, assign,
transfer, pledge, hypothecate, distribute or otherwise encumber or dispose of,
any shares of Common Stock or other equity securities of the Company or other
securities convertible into or exercisable for such shares of Common Stock or
other equity securities for 180 days from the date of this Prospectus without
the prior written consent of the Representatives, and (ii) not to register any
shares held by them for a period of 180 days from the date of this Prospectus.
See "Shares Eligible for Future Sale."
11
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market for the Common Stock
will develop or continue after the Offering. The initial public offering price
per share of Common Stock has been determined by negotiation between the Company
and the Representatives of the Underwriters and does not necessarily bear any
relationship to the Company's assets, book value, revenues or other established
criteria of value, and should not be considered indicative of the price at which
the Common Stock will trade after completion of the Offering. There can be no
assurance that the market price of the Common Stock will not decline below the
initial public offering price. See "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
Trading volume and prices for the Common Stock could be subject to wide
fluctuations in response to quarterly variations in operations, results,
announcements with respect to sales and earnings, as well as technological
innovations, and new product developments and other events or factors, which
cannot be foreseen or predicted by the Company, including the sale or attempted
sale of a large amount of securities in the public market, the registration for
resale (which is expected to occur approximately six months after the date of
this Prospectus) of the shares issuable upon conversion of the Convertible
Preferred Stock, and the effect on the Company's earnings of existing or future
equity-based compensation awards to management. See "Management -- Executive
Compensation."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered hereby are estimated to be $18.4 million ($21.3 million if
the Underwriters' over-allotment option is exercised in full), after deducting
the underwriting discount and expenses of the Offering payable by the Company.
The Company intends to use approximately $8.0 million of the net proceeds
initially to reduce the indebtedness outstanding under its revolving line of
credit incurred in connection with the acquisition of Lamaur on November 16,
1995. The indebtedness expected to be repaid currently bears interest at the
annual rate of 9.75%, which is 1.25% over Norwest's current base rate. The
Company may from time to time increase its borrowings under its revolving line
of credit, as needed for its working capital and general corporate requirements.
The remaining net proceeds from this Offering (including any proceeds received
from the exercise of the over-allotment option) are expected to be utilized for
general corporate purposes, including principally expanding Lamaur's marketing
efforts by introducing new products (approximately $4.5 million), supporting EHS
Laboratories' ongoing research and development activities directed towards the
completion of its first protoype advanced hair styling products (approximately
$2.0 million), and the restaging of certain existing products (approximately
$1.0 million). The balance will be used for working capital.
The amounts and timing of actual expenditures will depend upon numerous
factors, including, primarily, the progress of the Company's research and
development programs, product marketing strategies and the competitive
environment. Additionally, it is the Company's policy regularly to review
potential opportunities to acquire, or enter into joint venture or licensing
relationships with respect to, products and businesses compatible with its
existing business. The Company may, therefore, use a portion of the net proceeds
to make such acquisitions or to fund such joint ventures, although the Company
does not have any arrangements with respect thereto other than its agreement
with Samsung. See "Business -- Research and Development -- EHS Laboratories'
Technology."
The Company believes that the net proceeds of this Offering together with
cash flow from operations and existing credit facilities will be sufficient to
finance its working and other capital requirements for a period of approximately
24 months from the date of this Prospectus. Pending the aforementioned uses, the
net proceeds from this Offering will be invested in interest bearing government
securities or short-term, investment grade securities.
12
<PAGE>
DIVIDEND POLICY
Pursuant to the terms of the Series B Convertible Preferred Stock, the
holders of Series B Convertible Preferred Stock, in preference to the holders of
the Company's Common Stock, are entitled to receive cumulative cash dividends at
the rate of 8.0% per annum, payable quarterly ($400,000 annually). Dividends are
payable with respect to the Series A Convertible Preferred Stock only to the
extent (on an as-converted basis) that dividends are declared payable on the
Common Stock.
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The payment of future dividends will depend on the
evaluation by the Company's Board of Directors of such factors as it deems
relevant at the time. Currently, the Board of Directors believes that all of the
Company's earnings, if any, should be retained for the development of the
Company's business. In addition, payment of dividends on the Common Stock is
prohibited by the terms of the Norwest Credit Agreement and is restricted by the
terms of its Convertible Preferred Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and as adjusted to give effect to the sale of 2,600,000 shares of
Common Stock offered hereby, the application of the estimated net proceeds from
this Offering in the manner set forth under the caption "Use of Proceeds," and
the conversion of the Dow Convertible Note into 763,500 shares of Series B
Convertible Preferred Stock.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings and credits, including current portion of long-term debt............ $ 2,700 $ 2,700
--------- -----------
--------- -----------
Long-term debt, including related party debt and credits.................................. $ 20,271 $ 7,271
Stockholders' equity:
Common stock, $.01 par value, 12,000,000 shares authorized; 2,960,495 shares issued and
outstanding, actual, 5,560,495 shares issued and outstanding, as adjusted (1).......... 30 56
Convertible Preferred Stock, $.01 par value, 4,000,000 shares authorized; 1,000,000
shares of Series A issued and outstanding, actual and as adjusted...................... 8,500 8,500
763,500 shares of Series B issued and outstanding, as adjusted (2)..................... -- 5,000
Additional paid-in capital.............................................................. 1,894 20,307
Stock subscriptions receivable.......................................................... (50) (50)
Accumulated deficit..................................................................... (4,326) (4,326)
--------- -----------
Total stockholders' equity................................................................ 6,048 29,487
--------- -----------
Total capitalization.................................................................. $ 26,319 $ 36,758
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 2,899,085 shares, consisting of (i) 660,000 shares of Common Stock
reserved for issuance upon conversion of the Company's Series A Convertible
Preferred Stock held by Dow, which must be converted into Common Stock if
the market price of the Common Stock equals or exceeds $21.21 for a period
of 30 consecutive business days, (ii) 503,910 shares of Common Stock
reserved for issuance upon conversion of the Company's Series B Preferred
Stock that will be issued upon the conversion of the Dow Convertible Note in
connection with the consummation of this Offering, (iii) 1,400,925 shares of
Common Stock reserved for future issuance under the Company's stock
incentive plans, (iv) 152,250 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants, and (v) 182,000 shares of Common
Stock reserved for issuance upon exercise of warrants issued to the
Representatives of the Underwriters. See "Underwriting."
(2) See "Description of Capital Stock -- Convertible Preferred Stock."
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<PAGE>
DILUTION
The net tangible book value (deficiency) of the Company's Common Stock at
March 31, 1996, was ($4.0 million), or ($1.33) per share of Common Stock ($6.0
million, or $1.67 per share of Common Stock, if the Series A Convertible
Preferred Stock is assumed to have been converted into shares of Common Stock).
"Net tangible book value (deficiency)" per share is equal to the total tangible
assets of the Company reduced by the Company's total liabilities and by the
liquidation preference on outstanding Convertible Preferred Stock, divided by
the number of shares of Common Stock outstanding. After giving effect to the
sale of the 2,600,000 shares of Common Stock offered hereby (after deducting
underwriting discounts and commissions and estimated offering expenses), the net
tangible book value of the Company at March 31, 1996, would have been $14.5
million, or $2.61 per share ($29.5 million, or $4.39 per share of Common Stock,
if the Convertible Preferred Stock is assumed to have been converted into shares
of Common Stock) representing an immediate increase in net tangible book value
of $3.94 per share to existing stockholders ($2.72 assuming conversion of the
Convertible Preferred Stock) and an immediate dilution in net tangible book
value of $5.39 per share, or 67.4% ($3.61 per share, or 45.2%, assuming
conversion of the Convertible Preferred Stock) to investors purchasing shares at
the initial public offering price ("New Investors"). The following table
illustrates the per share dilution to New Investors (assuming no conversion of
the Convertible Preferred Stock):
<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $ 8.00
Net tangible deficiency per share before this Offering....................... $ (1.33)
Increase in net tangible book value per share attributable to New
Investors................................................................... 3.94
---------
As adjusted, net tangible book value per share as of March 31, 1996, after
this Offering............................................................... 2.61
---------
Dilution in net tangible book value to New Investors......................... $ 5.39
---------
---------
</TABLE>
If the Underwriters' over-allotment option is exercised in full, the net
tangible book value per share of Common Stock after this Offering would be $2.92
per share ($4.55 per share assuming conversion of the Convertible Preferred
Stock), which would result in dilution to new investors in this Offering of
$5.08 (or 63.5%) ($3.45, or 43.1%, assuming conversion of the Convertible
Preferred Stock) per share of Common Stock.
The following table summarizes at March 31, 1996, the total consideration
paid and the average price paid per share of Common Stock by the existing
stockholders (assuming no conversion of the Series A Convertible Preferred
Stock) and the New Investors who purchase pursuant to this Offering (before
deducting the underwriting discount and the other offering expenses payable by
the Company):
<TABLE>
<CAPTION>
COMMON STOCK ACQUIRED
TOTAL CONSIDERATION AVERAGE
------------------------ ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................................... 2,960 53.2% $ 1,046 4.8% $ .35(1)
New Investors.................................................. 2,600 46.8 20,800 95.2 8.00
----- ----- --------- -----
Total........................................................ 5,560 100.0% $ 21,846 100.0%
----- ----- --------- -----
----- ----- --------- -----
</TABLE>
- ------------------------
(1) Assuming conversion of the Series A Convertible Preferred Stock, average
price per share would be $2.64.
14
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma financial information (the "Unaudited Pro
Forma Financial Information") is based on the historical financial statements of
the Company included elsewhere in this Prospectus and has been prepared to
illustrate the effect of the acquisition of Lamaur (previously PCD, the Personal
Care Division of Dow Brands L.P., an affiliate of Dow). The Unaudited Pro Forma
Financial Information and accompanying notes are based upon and should be read
in conjunction with the financial statements and the notes thereto of the
Company and Lamaur included elsewhere in this Prospectus.
The pro forma combined statement of operations for the year ended December
31, 1995 gives effect to the acquisition of Lamaur as if it had occurred on
January 1, 1995. The Unaudited Pro Forma Financial Information is not
necessarily indicative of either future results of operations or the results
that might have occurred if the foregoing transaction had been consummated on
the indicated date.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
LAMAUR HISTORICAL ADJUSTMENTS
COMPANY (THROUGH INCREASE PRO FORMA
HISTORICAL NOVEMBER 30, 1995) (DECREASE) COMBINED
---------- ------------------ -------------- -----------
<S> <C> <C> <C> <C>
Total net sales......................... $ 8,070 $109,696 $ -- $117,766
Cost of goods sold...................... 5,656 67,088 (1,349)(1) 71,395
---------- -------- -------------- -----------
Gross margin............................ 2,414 42,608 1,349 46,371
Operating expenses...................... 3,496 42,344 (710)(2) 45,130
Write-down of assets.................... -- 11,000 -- 11,000
---------- -------- -------------- -----------
Operating loss.......................... (1,082) (10,736) 2,059 (9,759)
Other
Interest expense from Dow............. -- (1,603) 1,603(3) --
Interest expense...................... (300) -- (1,254)(4) (1,554)
Other income.......................... -- 101 -- 101
---------- -------- -------------- -----------
Net loss................................ $(1,382) $(12,238) $ 2,408 $(11,212)(5)
---------- -------- -------------- -----------
---------- -------- -------------- -----------
Net loss per share...................... $ (.34) $ (2.74)
---------- -----------
---------- -----------
Weighted average shares outstanding
(6).................................... 4,086 4,086
Supplemental pro forma data (7):
Net loss.............................. $(10,432)
-----------
-----------
Net loss per share.................... $ (2.02)
-----------
-----------
Weighted average shares outstanding
(6).................................. 5,161
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(1) Includes a reduction in depreciation of $315,000 to reflect the Company's
basis in property, plant and equipment, a reduction in employee benefits
expenses as a result of the elimination of postretirement benefits and
401(k) matching contributions of $874,000, and a reduction in the Company's
vacation benefits of $160,000.
(2) Includes a reduction in depreciation of $35,000 to reflect the Company's
basis in property, plant and equipment, a reduction in employee benefits
expenses as a result of the elimination of postretirement benefits and
401(k) matching contributions of $570,000, and the reduction in the
Company's vacation benefits of $105,000. Lamaur historical depreciation
expense reflects the impact of the write-down of assets.
(3) Interest expense from Dow has been eliminated as this represented a charge
on Dow's net investment in Lamaur.
(4) Represents interest expense on debt incurred in conjunction with the
Company's acquisition of Lamaur and estimated average borrowings during the
year. Interest expense was computed at rates ranging from 9.75% to 10.0%
(based on a prime rate of 8.5%).
(5) Includes an $11.0 million write-down of assets required to adjust the
carrying value of Lamaur to its net realizable value in connection with
Dow's decision to sell Lamaur. Future significant charges are not expected
as all assets and liabilities were recorded at their estimated fair values
at the date of the Company's acquisition of Lamaur.
(6) In accordance with the rules of the Securities and Exchange Commission, all
common stock equivalents of the Company issued within one year of this
initial public offering have been considered as outstanding since the
inception of the Company using the treasury stock method (assuming a market
price of $8.00) even though they are anti-dilutive in loss periods. Common
stock equivalents issued prior to one year of this initial public offering
are excluded in loss periods as they are anti-dilutive.
(7) Reflects the conversion of the Dow Convertible Note into Series B
Convertible Preferred Stock (which will automatically occur upon the
Offering), the issuance of 1,075,000 shares of Common Stock to fund the
repayment of $8.0 million of debt (as described under "Use of Proceeds"),
and the related inclusion of dividends and reduction of interest expense.
15
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is selected financial data with respect to the statements of
operations of the Company for the period from April 1, 1993 (Inception) to
December 31, 1993, and for the twelve months ended December 31, 1994, and 1995,
and the balance sheets of the Company at December 31, 1993, 1994 and 1995. Such
data was derived from the Company's audited financial statements, certain of
which are included elsewhere in this Prospectus. Also set forth below is
selected financial data for the three months ended March 31, 1995 and 1996 and
as of March 31, 1996, which is derived from the unaudited financial statements
of the Company and includes, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position and results of operations of the Company for such
periods. The results of operations for the three months ended March 31, 1995 and
1996 are not necessarily indicative of results for a full fiscal year. In
addition, set forth below is selected financial data with respect to the pro
forma statement of operations for the Company for the twelve months ended
December 31, 1995. Such data presents the combined results of operations of the
Company as if the acquisition of Lamaur was effective as of January 1, 1995.
Such data was derived from the unaudited pro forma combined financial statements
included on page 15 in this Prospectus and are qualified by reference to such
pro forma financial statements. The pro forma combined financial data includes
all adjustments which the Company considers necessary for a fair presentation,
in accordance with generally accepted accounting principles, of its results of
operations for that period. The pro forma combined financial data does not
purport to represent what the Company's results of operations would actually
have been had the acquisition in fact occurred on the indicated date or to
project the Company's results of operations for any future date or period.
In addition, included below is selected financial data with respect to the
statements of operations for Lamaur for each of the four years ended December
31, 1994, and for the period from January 1, 1995 to November 30, 1995 (the
effective date of the acquisition for financial reporting purposes), and the
balance sheets of Lamaur at December 31, 1991, 1992, 1993 and 1994. Such data
were derived from the Lamaur financial statements (previously, PCD, the Personal
Care Division of DowBrands L.P., an affiliate of Dow), certain of which are
included herein.
FINANCIAL DATA OF THE COMPANY
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------
YEAR ENDED DECEMBER THREE MONTHS ENDED
APRIL 1, 1993 31, PRO FORMA YEAR MARCH 31,
(INCEPTION) TO -------------------- ENDED DECEMBER --------------------
DECEMBER 31, 1993 1994 1995 (1) 31, 1995 1995 1996
----------------- --------- --------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS
DATA:
Total net sales................... $ -- $ -- $ 8,070 $ 117,766 $ -- $ 28,480
Cost of goods sold................ -- -- 5,656 71,395 -- 17,954
------- --------- --------- -------- --------- ---------
Gross margin...................... -- -- 2,414 46,371 -- 10,526
Operating expenses................ 1,565 557 3,496 45,130 93 10,843
Write-down of assets.............. -- -- -- 11,000 -- --
------- --------- --------- -------- --------- ---------
Operating loss.................... (1,565) (557) (1,082) (9,759) (93) (317)
Interest expense.................. (40) (59) (300) (1,554) (18) (414)
Other income...................... -- -- -- 101 -- 8
------- --------- --------- -------- --------- ---------
Net loss.......................... $ (1,605) $ (616) $ (1,382) $ (11,212)(2) $ (111) $ (723)
------- --------- --------- -------- --------- ---------
------- --------- --------- -------- --------- ---------
Net loss per share................ $ (.44) $ (.15) $ (.34) $ (2.74) $ (.03) $ (.18)
------- --------- --------- -------- --------- ---------
------- --------- --------- -------- --------- ---------
Weighted average shares
outstanding (3).................. 3,658 4,086 4,086 4,086 4,086 4,086
SUPPLEMENTAL PRO FORMA DATA (4):
Net loss.......................... $ (10,432)
--------
--------
Net loss per share................ $ (2.02)
--------
--------
Weighted average shares
outstanding (3).................. 5,161
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- --------- AT MARCH 31,
1996
-------------
<S> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital (deficit).......................................... $ (27) $ (466) $ 10,346 $ 9,817
Total assets....................................................... 134 6 42,967 42,806
Long-term debt, less current portion............................... 1,000 1,000 20,350 20,271
Stockholders' equity (deficit)..................................... (1,057) (1,462) 6,594 6,048
</TABLE>
16
<PAGE>
FINANCIAL DATA OF LAMAUR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM JANUARY
------------------------------------------- 1, 1995 THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995(5)
--------- --------- --------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Total net sales........................... $ 136,946 $ 124,288 $ 112,031 $ 121,277 $ 109,696
Cost of goods sold........................ 78,871 77,613 71,061 71,735 67,088
--------- --------- --------- ---------- --------
Gross margin.............................. 58,075 46,675 40,970 49,542 42,608
Operating expenses........................ 53,912 56,014 53,851 57,830 42,344
Write-down of assets...................... -- -- -- 120,100 11,000
--------- --------- --------- ---------- --------
Operating income (loss)................... 4,163 (9,339) (12,881) (128,388) (10,736)
Interest expense from Dow................. (7,550) (6,055) (6,643) (5,805) (1,603)
Other income (expense), net............... 293 (328) 317 705 101
--------- --------- --------- ---------- --------
Net loss.................................. $ (3,094) $ (15,722) $ (19,207) $ (133,488) $ (12,238)
--------- --------- --------- ---------- --------
--------- --------- --------- ---------- --------
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1991 1992 1993 1994
--------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital........................... $ 17,079 $ 16,517 $ 11,457 $ 16,787
Total assets.............................. 197,380 190,605 180,376 58,021
Net invested capital...................... 184,265 179,654 169,058 47,493
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM JANUARY
------------------------------------------- 1, 1995 THROUGH
1991 1992 1993 1994 NOVEMBER 30, 1995(5)
--------- --------- --------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Earnings (loss) before interest and non-
cash charges (6)......................... $ 11,583 $ (2,184) $ (5,174) $ (59) $ 2,375
--------- --------- --------- ---------- --------
--------- --------- --------- ---------- --------
</TABLE>
- --------------------------
(1) Includes the results of operations of Lamaur for the month of December 1995
following its acquisition by the Company.
(2) Includes an $11.0 million write-down of assets required to adjust the
carrying value of Lamaur to its net realizable value in connection with
Dow's decision to sell Lamaur. Future significant charges are not expected
as assets and liabilities were recorded at their estimated fair values at
the date of the Company's acquisition of Lamaur.
(3) In accordance with the rules of the Securities and Exchange Commission, all
common stock equivalents of the Company issued within one year of this
initial public offering have been considered as outstanding since the
inception of the Company using the treasury stock method (assuming a market
price of $8.00) even though they are anti-dilutive in loss periods. Common
stock equivalents issued prior to one year of this initial public offering
are excluded in loss periods as they are anti-dilutive.
(4) Reflects the conversion of the Dow Convertible Note into Series B
Convertible Preferred Stock (which will automatically occur upon
consummation of the Offering), the issuance of 1,075,000 shares of Common
Stock to fund the repayment of $8.0 million of debt (as described under "Use
of Proceeds"), and the related inclusion of dividends and reduction of
interest expense.
(5) Results of operations of Lamaur following its acquisition by the Company in
November 1995 are included in the results of operations of the Company for
the year ended December 31, 1995.
(6) Consists of net loss before interest expense, depreciation and amortization
and write-down of assets. It is presented to assist in understanding the
Company's operating results and in determining the Company's ability to meet
one of its loan covenants (debt service coverage ratio), calculated by
dividing net income plus depreciation, amortization and current interest, by
current interest plus scheduled repayments of principal of all indebtedness.
In addition, the exclusion of the asset write-downs results in data that
assists in understanding ongoing operating results because the write-downs
were non-recurring charges. However, this data is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles. See the Company's Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Financial Data, the Unaudited Pro Forma Financial Information and the
financial statements and related notes thereto appearing elsewhere in this
Prospectus.
PRO FORMA AND HISTORICAL RESULTS OF OPERATIONS
The following table sets forth pro forma statements of operations
information in dollars and as a percentage of total net sales for each of the
two years ended December 31, 1995, and the three months ended March 31, 1995,
and historical statement of operations information in dollars and as a
percentage of total net sales for the three months ended March 31, 1996. The pro
forma information gives effect to the acquisition of Lamaur as if it had
occurred at the beginning of each period presented. The pro forma information is
not necessarily indicative of either future results of operations or results
that might have occurred if the acquisition had been consummated at the
beginning of each of the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------ -----------------------------------
PRO FORMA PRO FORMA PRO FORMA HISTORICAL
1994 1995 1995 1996
----------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total net sales.......... $ 121,277 100.0% $117,766 100.0% $ 31,653 100.0% $ 28,480 100.0%
Cost of goods sold....... 69,764 57.5 71,395 60.6 19,554 61.8 17,954 63.0
--------- ------ -------- ----- -------- ----- -------- -----
Gross margin............. 51,513 42.5 46,371 39.4 12,099 38.2 10,526 37.0
Operating expenses....... 54,600 45.0 45,130 38.3 10,742 33.9 10,843 38.1
Write-down of assets..... 120,100 99.0 11,000 9.4 11,000 34.7 -- --
--------- ------ -------- ----- -------- ----- -------- -----
Operating loss........... (123,187) (101.5) (9,759) (8.3) (9,643) (30.4) (317) (1.1)
Other income (expense):
Interest expense..... (2,374) (2.0) (1,554) (1.3) (410) (1.3) (414) (1.4)
Other income......... 705 0.6 101 -- 39 0.1 8 --
--------- ------ -------- ----- -------- ----- -------- -----
Net loss................. $(124,856) (102.9)% $(11,212) (9.6)% $(10,014) (31.6)% $ (723) (2.5)%
--------- ------ -------- ----- -------- ----- -------- -----
--------- ------ -------- ----- -------- ----- -------- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 (HISTORICAL) COMPARED TO THREE MONTHS ENDED
MARCH 31, 1995 (PRO FORMA)
Total net sales for the quarter ended March 31, 1996, were $28.5 million,
compared with pro forma sales of $31.7 million for the same period in the prior
year, a decline of 10.1%. Although the STYLE-Registered Trademark- line
experienced an increase in sales during the first quarter of 1996, this increase
was more than offset by decreases in PERMASOFT-Registered Trademark- sales and
contract manufacturing revenues. The new Lamaur management team believes that
the decline in PERMASOFT-REGISTERED TRADEMARK- sales is the result of an
unsuccessful 1994 marketing effort in which the PERMASOFT-REGISTERED TRADEMARK-
product line was reformulated and repackaged, causing confusion among customers.
This confusion, together with the substantial reduction in advertising support
for PERMASOFT-REGISTERED TRADEMARK- after the first quarter of 1995 and a change
in consumer preferences that resulted in a reduction in perm incidence, was
responsible for the decline in PERMASOFT-REGISTERED TRADEMARK- sales in 1995,
which has continued into 1996. Lamaur's new management has developed a strategy
intended to reverse the decline in PERMASOFT-REGISTERED TRADEMARK- sales that
includes increased advertising and an expanded focus on customers with
color-treated hair, a growing market segment. The higher contract manufacturing
revenues in the 1995 period compared to the 1996 period reflected significant
revenues from a one-time manufacturing project the Company performed for
DowBrands in 1995 while a new DowBrands plant was coming on-line. In addition,
1995 first quarter results reflected a significant order for a new product
launch by a contract customer.
Gross margin for the quarter ended March 31, 1996, decreased by $1.6
million, or 13.0%, as compared with pro forma gross margin for the same period
in 1995. Gross margin as a percentage of net sales was 37.0% for the first
quarter of 1996, as compared with pro forma gross margin of 38.2% during the
same period in 1995. The decrease in gross margin percentage in 1996 was due to
a change in product sales mix to lower margin products as a result of an
increase in sales of the lower margin STYLE-Registered Trademark- line and a
decrease in
18
<PAGE>
consumer retail purchases of the higher margin PERMASOFT-Registered Trademark-
product line. The Company believes its gross margin percentage in 1996 will be
comparable to the 1995 full year pro forma gross margin percentage as a result
of its emphasis on higher margin products such as SALON
STYLE-Registered Trademark-, the development of the Company's strategy to
reverse the decline in sales of PERMASOFT-Registered Trademark-, the Company's
highest margin product, and the Company's efforts to reduce raw material and
packaging costs.
Operating expenses of $10.8 million for the quarter ended March 31, 1996,
were relatively unchanged from the pro forma operating expenses of $10.7 million
for the same period in 1995. Operating expenses for the quarter ended March 31,
1996 reflect $0.5 million in marketing expenses for the aforementioned
PERMASOFT-REGISTERED TRADEMARK- advertising campaign as well as an increase of
approximately $0.2 million in allowances for doubtful accounts as a result of a
bankruptcy filing by a contract manufacturing customer. The Company expects that
increased marketing activities will result in substantial additional marketing
support expenses in the next two years, while the results of those activities,
if they are successful, may not result in proportional revenue increases in
those same period.
The $11.0 million write-down of assets by Dow in the first quarter of 1995
reflected a further adjustment in the carrying value of Lamaur to its net
realizable value in connection with Dow's decision to sell Lamaur. Future
significant changes are not expected as all assets and liabilities were recorded
at their estimated fair values at the date of the Company's acquisition of
Lamaur.
As a result of the foregoing factors, the operating loss for the quarter
ended March 31, 1996 was $0.3 million, compared with a pro forma operating loss
of $9.6 million in the same period in 1995. Excluding the asset write-down, pro
forma operating profit for the quarter ended March 31, 1995 would have been $1.4
million.
Interest expense was $0.4 million for each of the quarters ended March 31,
1996 and 1995.
As a result of the foregoing factors, the net loss for the three months
ended March 31, 1996 was $0.7 million, compared to a pro forma net loss for the
three months ended March 31, 1995 of $10.0 million.
YEAR ENDED DECEMBER 31, 1995 (PRO FORMA) COMPARED TO YEAR ENDED DECEMBER 31,
1994 (PRO FORMA)
Total net sales on a pro forma basis of $117.8 million for 1995 declined
2.9% compared to $121.3 million in 1994. Although the SALON
STYLE-Registered Trademark- product line and contract manufacturing experienced
sales growth, these increases were more than offset by decreases in the
PERMASOFT-Registered Trademark- and STYLE-Registered Trademark- product lines.
The decrease in PERMASOFT-REGISTERED TRADEMARK- sales in 1995 followed moderate
sales increases in 1994 after a heavily funded marketing campaign. As part of
that 1994 marketing effort, the PERMASOFT-REGISTERED TRADEMARK- product line was
reformulated and repackaged. However, in the view of the new Lamaur management
team, the reformulation and repackaging caused confusion among customers, which,
together with the substantial reduction in advertising support for
PERMASOFT-REGISTERED TRADEMARK- after the first quarter of 1995 and a change in
consumer preferences that resulted in a reduction in perm incidence, was
responsible for the decline in PERMASOFT-REGISTERED TRADEMARK- sales in 1995. As
a result, Lamaur's new management has developed a strategy intended to reverse
the decline in PERMASOFT-REGISTERED TRADEMARK- sales that includes increased
advertising and expanding its focus to customers with color-treated hair, a
growing market segment. Included in contract manufacturing were sales to
DowBrands, which increased by $2.2 million, or 11.3%. Sales to DowBrands
represented 18.2% of pro forma total net sales for 1995 compared to 15.9% in
1994.
Pro forma gross margin for 1995 decreased by $5.1 million as compared with
1994, or 10.0%. Gross margin as a percentage of pro forma total net sales was
39.4% in 1995, as compared with 42.5% in 1994. The decrease in gross margin
percentage was due to a change in product sales mix to lower-margin products, as
a result of a decrease in consumer retail purchases of the higher margin
PERMASOFT-Registered Trademark- product line, and increases in lower margin
contract manufacturing, as well as a greater emphasis on promotional activities,
which resulted in higher product costs. The decrease in gross margins was
partially offset by the higher margins provided by SALON
STYLE-Registered Trademark-, as well as a reduction of direct labor employee
benefit expenses in 1995 as a result of pro forma adjustments in the amount of
$874,000, related to the elimination of postretirement benefits and 401(k)
matching contributions, and $160,000, related to the reduction in the Company's
vacation benefits. The pro forma adjustments were made to reflect the Company's
decision to eliminate or reduce
19
<PAGE>
those benefits. Comparable adjustments are not included in the 1994 pro forma
gross margin. See note (1) in Notes To Unaudited Pro Forma Combined Statement of
Operations on page 15. The Company expects its gross margin percentage in 1996
to be comparable to the 1995 pro forma gross margin percentage as a result of
its emphasis on higher margin products such as SALON
STYLE-Registered Trademark-, the development of the Company's strategy to
reverse the decline in sales of PERMASOFT-Registered Trademark-, the Company's
highest margin product, and the Company's efforts to reduce raw material and
packaging costs.
Operating expenses on a pro forma basis for 1995 decreased to $45.1 million,
or 38.3% of pro forma total net sales, as compared to $54.6 million or 45.0% of
pro forma total net sales in 1994. The decrease was principally due to a
reduction in marketing expenses in 1995 from 1994 levels, which had been
increased in 1994 for the PERMASOFT-Registered Trademark- marketing campaign and
the introduction of a new product line, SALON STYLE-Registered Trademark-.
Operating expenses on a pro forma basis also decreased because of the reduction
in 1995 employee benefit expenses as a result of pro forma adjustments made by
the Company in the amount of $570,000 related to the elimination of
postretirement benefits and 401(k) matching contributions, and $105,000 related
to the reduction in the Company's vacation benefits. The pro forma adjustments
were made to reflect the Company's decision to eliminate or reduce those
benefits. Comparable adjustments are not included in the 1994 pro forma
operating expenses. See note (2) in Notes To Unaudited Pro Forma Combined
Statement of Operations on page 15.
The $120.1 million write-down of assets by Dow in 1994 was required to
adjust the carrying value of Lamaur to its net realizable value in connection
with Dow's decision to sell Lamaur. An additional write-down of $11.0 million
was recorded in 1995. Future significant charges are not expected as all assets
and liabilities were recorded at their estimated fair values at the date of the
Company's acquisition of Lamaur.
As a result of the foregoing factors, the pro forma operating loss for 1995
was $9.8 million, compared with the 1994 pro forma operating loss of $123.2
million. Excluding the asset write-down, pro forma operating income would have
been $1.2 million in 1995 and pro forma operating loss would have been $3.1
million in 1994.
Pro forma interest expense, which was $1.6 million for 1995, compared with
$2.4 million in 1994, represents interest on the indebtedness incurred in
connection with the Company's acquisition of Lamaur and expected average
borrowings during the periods.
As a result of the foregoing factors, the pro forma net loss for 1995 was
$11.2 million, compared with the 1994 pro forma net loss of $124.9 million.
HISTORICAL RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THREE MONTHS ENDED MARCH 31,
1996 AND 1995 FOR THE COMPANY
The Company was in a development stage and had no revenues until it
completed the acquisition of Lamaur in November 1995. Operating expenses of
$10.8 million were incurred in the three months ended March 31, 1996, compared
with $0.1 million in the three months ended March 31, 1995, and operating
expenses of $3.5 million were incurred in the year ended December 31, 1995,
compared with $0.6 million in the year ended December 31, 1994, and $1.6 million
in the period from April 1, 1993 (Inception) to December 31, 1993. The higher
operating expenses for 1995 and the first quarter of 1996 primarily reflect the
inclusion of Lamaur's operating expenses after its acquisition in late 1995.
Prior to the Lamaur acquisition, the Company's operating expenses were comprised
of marketing, administrative and other operating expenses incurred to support
the Company's technology development and research activities. The higher level
of expense in 1993 reflected a $1.0 million fee to Intertec Ltd., a limited
partnership controlled by the Company's Chairman of the Board, Chief Executive
Officer and principal stockholder, in consideration of the grant of an exclusive
license to use certain patented technology for cosmetic hair care applications.
See "Business -- Research and Development -- EHS Laboratories Technology." As a
result of the foregoing factors, the Company incurred a loss of $0.7 million in
the first quarter of 1996, compared with a
20
<PAGE>
loss of $0.1 million in the first quarter of 1995, and a loss of $1.4 million in
the year ended December 31, 1995, compared with a loss of $0.6 million in the
year ended December 31, 1994, and a loss of $1.6 million in the period from
April 1, 1993 (Inception) to December 31, 1993.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 FOR
LAMAUR
Total net sales for 1994 increased to $121.3 million from $112.0 million for
1993, an increase of $9.3 million, or 8.3%. This was attributable to the
increase in unit sales of PERMASOFT-Registered Trademark-, the introduction of a
new product line, SALON STYLE-Registered Trademark- and the increase in sales
volume of contract manufacturing as a result of increased orders from both
DowBrands and other customers. These increases were partially offset by
decreases in the net sales of Lamaur's Salon Division and the
STYLE-Registered Trademark- product line. The STYLE-Registered Trademark- line
experienced a sales decline in 1994 as a result of its competitors introducing
new products and increasing promotional activities in the price-value segment of
the market. Included in contract manufacturing sales were sales to DowBrands,
which increased by $2.7 million, or 16.0%. Sales to DowBrands represented 15.9%
of total net sales for 1994, compared to 14.8% in 1993.
Gross margins for 1994 increased by $8.6 million over 1993, or 20.9%, as a
result of increased sales volume. Gross margin as a percentage of total net
sales was 40.9% in 1994, as compared with 36.6% in 1993. This improvement
reflected an improved product mix toward higher margin products, resulting from
the introduction of SALON STYLE-Registered Trademark- and the positive effect of
an advertising campaign for PERMASOFT-Registered Trademark-. In addition, Lamaur
realized a full year of benefit from its cost reduction program implemented in
the latter part of 1993.
Operating expenses increased to $57.8 million or 47.7% of total net sales in
1994, compared to $53.9 million, or 48.1% in 1993. This was attributable to
increased marketing dollars for the advertising campaign to support the
PERMASOFT-REGISTERED TRADEMARK- reformulation and repackaging and the
introduction of SALON STYLE-Registered Trademark-. These increases were
partially offset by the benefits realized from the cost reduction program
described above.
The $120.1 million write-down of assets by Dow in 1994 was required to
adjust the carrying value of Lamaur to its net realizable value in connection
with Dow's decision to sell Lamaur. Dow acquired Lamaur, which was a public
company, in 1987 and recorded substantial goodwill, which represented the excess
of the purchase price over the fair value of the net assets acquired. Due to a
decline in market share of Lamaur's products, the value of Lamaur decreased
significantly subsequent to the acquisition by Dow, resulting in the charge
described above.
As a result of the foregoing factors, the operating loss for 1994 was $128.4
million compared with the 1993 operating loss of $12.9 million. Excluding the
asset write-down, the 1994 operating loss would have been $8.3 million.
Interest expense was $5.8 million for 1994, compared with $6.6 million in
1993. Lamaur's capital requirements were funded by Dow and Lamaur was charged
interest based upon its working capital. In addition, Lamaur was charged
interest by Dow for an amount related to the financing of Dow's purchase of
Lamaur.
As a result of the foregoing factors, the net loss for 1994 was $133.5
million, compared with the 1993 net loss of $19.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Through late 1995, the Company financed all of its working and other capital
requirements from equity infusions and borrowings from certain of its
stockholders.
As a result of the Lamaur acquisition, the Company is leveraged and has
substantial debt service requirements and, following the Offering, will have
substantial preferred stock dividend requirements. At March 31, 1996, the
Company had approximately $23.0 million outstanding in long-term and short-term
debt, including approximately $14.3 million outstanding under the Norwest Credit
Agreement, $5.0 million outstanding under the Dow Convertible Note as part of
the purchase price of Lamaur, and $2.6 million
21
<PAGE>
representing credits accepted by Dow in connection with the acquisition to be
credited in quarterly installments toward future product purchases by Dow over a
two-year period. A substantial portion of the Company's cash flow will be
required for debt service and preferred stock dividend requirements. The
Company's principal sources of funds are borrowings under the Norwest Credit
Agreement.
The Norwest Credit Agreement is for three years, commencing November 1995,
and provides for a working capital line up to $14.0 million and a term loan of
$6.0 million which is amortized over five years with estimated annual principal
installments of $1.2 million. The working capital balances and term loan are
payable in full in November 1998. The interest rates on these loans are variable
and are tied to Norwest Bank's base rate. The working capital line and term loan
with Norwest are secured by all of the assets of the Company and impose certain
operating and financial restrictions such as minimum income requirements,
minimum net worth and debt service and leverage ratios (as defined in the
Norwest Credit Agreement). Such restrictions will affect the Company's ability
to incur additional indebtedness and will limit the amount of capital
expenditures. See "Risk Factors -- Leverage, Substantial Debt Service, Preferred
Stock Dividend Requirements and Related Financial and Operating Restrictions."
Upon the Offering, the Dow Convertible Note will be converted into 763,500
shares of Series B Convertible Preferred Stock, the holders of which are
entitled to dividends ($400,000 annually) which will accrue whether or not
declared and will be cumulative to the extent not paid.
The Company has had no significant capital expenditures since its date of
inception. Capital expenditures for Lamaur were approximately $1.1 million, $0.9
million and $2.5 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company's capital expenditures for 1996 are anticipated to be
approximately $1.5 million.
Accounts receivable at March 31, 1996 increased $3.4 million from December
31, 1995, principally due to higher sales in March 1996 compared to December
1995.
At December 31, 1995, the Company had deferred tax assets of $1.3 million,
consisting primarily of net operating loss carryforwards. Because the Company's
Lamaur division experienced cumulative losses over the last nine years,
management believes that it is more likely than not that sufficient taxable
income will not be generated in future periods to utilize the deferred tax
assets. Therefore, at December 31, 1995 a valuation allowance of $1.3 million
was established.
The Company intends to use $8.0 million of the net proceeds of this Offering
to reduce the indebtedness outstanding under the Norwest Credit Agreement. The
indebtedness expected to be repaid currently bears interest at the annual rate
of 9.75%, which is 1.25% over Norwest's current base rate. The Company may from
time to time increase its borrowings under its revolving line of credit, as
needed for its working capital and general corporate requirements. The remaining
net proceeds from this Offering (including any proceeds received from the
exercise of the over-allotment option) are expected to be utilized for general
corporate purposes, including principally expanding Lamaur's marketing efforts
by introducing new products (approximately $4.5 million), supporting EHS
Laboratories' ongoing research and development activities directed towards the
completion of its first prototype advanced hair styling products (approximately
$2.0 million), and the restaging of certain existing products (approximately
$1.0 million). The balance will be used for working capital.
Management believes that the Company's cash on hand, anticipated cash flow
from operations and the amounts available to the Company under the Norwest
Credit Agreement will be sufficient for its working capital, capital
expenditures and debt service and preferred stock requirements for at least the
next 24 months. See "Use of Proceeds."
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<PAGE>
BUSINESS
OVERVIEW
The Company develops, formulates, manufactures and markets personal hair
care products, consisting of shampoos, conditioners, hair sprays, permanent wave
products and other styling aids, for both the consumer and professional hair
care markets. These products are distributed through its recently-acquired
Lamaur division to consumer retail outlets, professional salons and specialty
shops. The Company also contract manufactures a variety of aerosol sprays and
other products. The Company believes its Lamaur division was among the ten
largest manufacturers in the United States in 1995 (based on domestic revenues)
in three categories of hair care products -- shampoos, conditioners and styling
aids. The Company's EHS Laboratories division is engaged in the early stages of
research and development with respect to a new hair styling concept. Based on
patented technology licensed by the Company from an affiliate, the product is
intended to combine electronics and chemicals to style, color and condition hair
quickly, without the damaging side effects often experienced with most
chemical-based hair styling products.
In November 1995, the Company acquired Lamaur for an aggregate acquisition
cost of approximately $30.2 million, of which approximately $13.7 million was
paid in cash, $8.5 million in Series A Convertible Preferred Stock, $5.0 million
in the form of the Dow Convertible Note, and $3.0 million in credits toward
future product purchases by Dow. The assets and operations of Lamaur had
previously constituted the Personal Care Division of Dow. Through the issuance
of the Convertible Preferred Stock, Dow received an equity interest in the
Company (17.3% after giving effect to this Offering). Lamaur has been a leading
domestic producer and marketer of a broad range of hair care products for over
60 years and was an independent publicly-traded company, listed on the New York
Stock Exchange, until its acquisition by Dow in 1987 for approximately $183.0
million. The purchase price paid by Dow in 1987 reflected Lamaur's market
valuation at the time and the existence of a competing bid. The Company's
management believes that the subsequent decline in Lamaur's value was caused by
Dow's decision to shift Lamaur from its traditional marketing-driven operations
to one based on Dow's chemical research and development capabilities.
Lamaur is a leading domestic producer and marketer of a broad range of hair
care products. Its product lines are sold through consumer retail outlets by its
retail division (the "Retail Division") under the premium-priced
PERMASOFT-Registered Trademark-, mid-priced SALON STYLE-Registered Trademark-
and value-priced STYLE-Registered Trademark- brand names. Each line contains a
wide assortment of shampoos, conditioners and styling products positioned
towards distinct consumer segments. In addition, a full line of high quality,
premium-priced products including shampoos, conditioners, hair sprays, perms and
a variety of styling aids are sold to the professional salon and specialty shops
market by its salon division (the "Salon Division") under the NUCLEIC
A-Registered Trademark-, APPLE PECTIN-Registered Trademark- and
VITA/E-Registered Trademark- brand names and the recently introduced PATIVA-TM-
brand name. Sales by the Retail Division, which historically have accounted for
between 62% and 70% of Lamaur's total revenues, are made to mass merchandisers,
food stores, drug stores and others by a combination of the Company's direct
sales force and a network of independent brokers. Sales by the Salon Division to
the professional market, including sales to distributors who then sell to
professional salons and specialty outlets, are made directly by the in-house
sales force, and historically have accounted for between 14% and 17% of Lamaur's
total sales. Lamaur also manufactures certain products, principally aerosol
sprays, on a contract basis for third parties. Those activities generally have
accounted for approximately 16% to 23% of Lamaur's sales and generate lower
margins than its other sales.
The Company is engaged through its EHS Laboratories division in technology
development and research activities related to hair styling applications of the
Company's licensed proprietary technology. The Company's objective is to develop
products that will apply the Company's technology to electronically style, color
and condition hair quickly, and without the often damaging side effects
experienced with the harsh chemicals and heat treatments associated with most
traditional hair care products. The Company has internally conducted preliminary
laboratory tests involving the reaction of human hair to electromagnetic signals
and has assisted its affiliated licensor in obtaining a United States patent
that the Company believes provides broad coverage, and hence significant
protection, for its licensed proprietary technology. The Company does not expect
to introduce any prototype product before the second half of 1998 at the
earliest.
23
<PAGE>
To date, the Company's activities have included market research, such as
obtaining and reviewing material and data describing market size and
demographics of hair care products markets throughout the world and current and
future competitive trends, as well as communicating with various companies
engaged in the hair care products industry. The Company's business strategy in
part reflects the results of this market research. The Company also introduced
its licensed proprietary technology and development strategy to selected
companies in the hair care industry to form a foundation for possible future
cooperative efforts. Substantial additional steps will need to be taken before
the Company can commercially introduce any ELECTRONIC CHEMISTRY-TM- products.
The Company anticipates that some of these steps will be taken internally and
some will be undertaken pursuant to relationships with third parties.
INDUSTRY OVERVIEW
Worldwide retail sales of hair care products (excluding hair care
appliances) in 1994 were approximately $25.0 billion, of which approximately
$4.5 billion represented sales in North America. It is estimated that by 2000,
worldwide retail sales of hair care products will reach approximately $32.8
billion, with approximately $5.6 billion attributable to sales in North America.
There have been changes in consumers' buying patterns toward higher priced
shampoos and conditioners and specialty niche products. In addition, the cost of
goods sold in the hair care products market has been rising steadily for several
years; however, intense competition has prevented manufacturers and distributors
from passing those increases on to customers. The result has been an erosion in
profit margins among the industry's competitors generally, although this effect
has been less pronounced in certain market niches that are characterized by
premium pricing and fewer competitors. Consequently, the hair care industry,
despite its size and growth, has been experiencing both a consolidation in the
number of competitors and a globalization in the marketing efforts of the
remaining competitors. The Company believes that, currently, five companies
(Unilever N.V., The Procter & Gamble Company, Alberto-Culver Company, The
Gillette Company and Johnson & Johnson) account for approximately 60% of
worldwide sales in the hair care products industry.
STRATEGY
The Company believes the most significant trends currently affecting the
hair care industry that will continue to influence its competitive planning for
both the retail and professional segments of the market are an increase in the
marketing impact of certain types of consumer retail outlets, particularly mass
merchandisers and changes in consumers' buying patterns towards higher priced
shampoos and conditioners and specialty niche products. Competition in the
professional segment of the market is also influenced by a company's ability to
maintain a clear separation of brands between those directed at the professional
market and those directed at the consumer retail market, and substantial contact
with and service to the professional customer. Among the competitive factors the
Company faces are the need to introduce and promote (i) high-end products in the
professional market, (ii) both higher-quality, professional-type products and
more natural products in the retail market, and (iii) line extensions of styling
aids.
The Company's objective is to become a leading worldwide developer and
marketer of advanced hair care products through a strategy that combines the
stability provided by Lamaur's established hair care products business, which
the Company intends to return to profitability, and the growth opportunities
available through acquisitions, strategic relationships and the development of
EHS Laboratories' technology. To implement this strategy, the Company has
installed a new senior management team with significant experience in the
personal care products industry. Key features of the Company's strategy include
emphasizing marketing and sales efforts while maintaining the Company's strong
production base and research capabilities, in addition to refining the
cost-cutting program introduced by prior management. The Company plans to
increase its market share by expanding its national marketing program,
broadening its base of exclusive professional market distributors for its
PATIVA-TM- line of products, and increasing sales to Mexico, Canada and other
international markets. Since January 1, 1996, the Company has obtained
significant contract manufacturing orders from new customers, with deliveries
commencing in the second quarter, and intends to continue to increase the level
of its contract manufacturing activities by obtaining additional orders from
both existing and new customers. In
24
<PAGE>
addition, the Company intends to explore opportunities for acquisitions or
strategic relationships that may enable it to expand its hair care products line
or diversify its business into other segments of the personal care market.
Lamaur experienced 30 consecutive years of profitable operations immediately
prior to its acquisition by Dow in 1987. Although Lamaur experienced net losses
in each year since becoming a division of Dow in 1987, it experienced operating
earnings (before reflecting interest to Dow, goodwill charges and taxes) in
fiscal years 1989, 1990 and 1991. The Company's immediate goal is to return
Lamaur to profitability by the end of 1996. In order to achieve this objective,
the Company will return the principal focus of Lamaur's operations to sales and
marketing. In that regard, the Company believes it will need to increase its
share of the retail segment of the market, in part through an increase in
advertising and promotions, and also increase the number of exclusive
distributors for its professional products, while maintaining its existing
network of distributors. The costs of expanding the Company's retail market
share are expected to be substantial, both during the remainder of 1996 and
thereafter.
PRODUCTS
The Company formulates and manufactures a broad range of hair care product
lines, consisting of approximately 90 products, marketed under several distinct
brand names. Product lines sold through consumer retail outlets include
PERMASOFT-Registered Trademark-, SALON STYLE-Registered Trademark-, and
STYLE-Registered Trademark- brand names that are widely recognized by retailers
and consumers. Each line contains a broad assortment of shampoos, conditioners
and styling products and is positioned towards a distinct consumer segment.
Product lines used by stylists and sold by salons and beauty supply stores
throughout the United States and in Canada include shampoos, conditioners, hair
sprays, perms and a variety of styling aids sold under the PATIVA-TM-, NUCLEIC
A-Registered Trademark-, APPLE PECTIN-Registered Trademark- and
VITA/E-Registered Trademark- brand names. In addition, Lamaur also manufactures
products, principally aerosol sprays, under contract for third parties.
The following table sets forth the Company's principal brands and products
sold within each brand:
RETAIL BRANDS
<TABLE>
<CAPTION>
BRAND SHAMPOOS AND CONDITIONERS STYLING AIDS AND PERMS
- -------------------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
PERMASOFT-Registered Trademark-....... Revitalizing Shampoo, Moisturizing Hair Sprays (aerosol and nonaerosol),
Shampoo, Extra Body Shampoo, Shampoo Mousse, Gel, Frizz Control Cream, Shine
Plus Conditioner, Revitalizing Treatment, Conditioning Foam,
Conditioner, Moisturizing Conditioner, Revitalizing Spray
Extra Body Conditioner, Deep
Reconditioning Treatment, Moisturizing
Mist Conditioner
SALON STYLE-Registered Trademark-..... Moisture Potion-Registered Trademark- Hair Sprays (aerosol and nonaerosol),
Shampoo, Therapy Shampoo, Strengthening Spray Gel, Vitafixx-TM- Spritz, Body
Shampoo, NutriShine Shampoo, Hydration Boost-Registered Trademark- Mousse,
Conditioning Shampoo, Botanical Defrizz 'N Shine-Registered Trademark-
Reconstructing Conditioner, Moisture Hydrating Cream
Potion-Registered Trademark-
Conditioner, Detangling Conditioner, Pro
Mist Leave-On Conditioner, Hydro
Balanced Hair Masque
STYLE-Registered Trademark-........... Moisturizing Shampoo, Extra Body Hair Sprays (aerosol and non-aerosol),
Shampoo, Regular Shampoo, Strawberry Gel, Mousse, Dry
Shampoo, Nourishing Shampoo, Coconut & Style-Registered Trademark- Hair Spray
Papaya Shampoo, Moisturizing for Men (aerosol)
Conditioner, Extra Body Conditioner,
Regular Conditioner, Strawberry
Conditioner, Deep Conditioning
Conditioner, Coconut & Papaya
Conditioner
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SALON BRANDS
BRAND SHAMPOOS AND CONDITIONERS STYLING AIDS AND PERMS
- -------------------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
PATIVA-TM-............................ Curl Cleanse-Moisturizing Shampoo, Mousse, Spritz, Design Creme,
Revitalizing Volumizing Conditioner Alternative Wave (Normal), Alternative
Wave (Tinted), Sprae Concentrate Hair
Spray
NUCLEIC A-Registered Trademark-....... Body Plus-Registered Trademark- Shampoo, Botanical-TM- Hair Spray, Gel
Proteplex-Registered Trademark- Shampoos
and Conditioner
APPLE PECTIN-Registered Trademark-.... Shampoo and Conditioner, Moisturizing Moisturizing Hair Spray, Acid Perm,
Shampoo, ScentSates-TM- Shampoos and Apple Pectin Plus-Registered Trademark-
Conditioners, Apple Pectin Perm, Ten-Minute Wave, Ultra Hold
Plus-Registered Trademark- Shampoo and Mousse, Styling Creme
Conditioner in One
VITA/E-Registered Trademark-.......... Shampoo, Conditioners Perm, Hair Spray, Ultrahold Hair Spray,
Unscented Hair Spray, Maximum Hold Hair
Spray, Ultra-hold Concentrate Hair Spray
Other Salon Products.................. Natural Man-TM- Conditioning Shampoo, Natural Man-TM- Styling Creme, Natural
Bone Marrow-Registered Trademark- Man-TM- Hair Spray, Natural
Conditioners Woman-Registered Trademark- Hair Spray,
CO-A-Registered Trademark- Perm, CO-A
Kinetics-Registered Trademark- Perm,
Lamaur Inception-Registered Trademark-
Thio-Free Perm,
Strata-Registered Trademark- Perm, Gamma
pHactor-Registered Trademark- Wave Set
and Concentrate,
Beauti-Lac-Registered Trademark- Hair
Spray, Stylac-Registered Trademark- Hair
Spray, Sprayage-Registered Trademark-
Hair Spray, Body Plus Mousse,
Axiom-Registered Trademark- Perm, Body
for Sure-Registered Trademark- Perm
</TABLE>
PERMASOFT-Registered Trademark-, which is the Company's "high-end" retail
product line, was developed to meet the needs of a large segment of consumers
who use permanent wave products. As a result of a lower incidence of perm usage
(a decline in usage among women from approximately 54% in 1990 to approximately
34% in 1994) and competition from others developing products for this market
segment, PERMASOFT-Registered Trademark- sales have declined 46% from 1991 to
1995. The Company has developed a strategy intended to reverse the decline in
PERMASOFT-Registered Trademark- sales which includes increased advertising and
expanding the product line's focus to customers with color-treated hair, a
growing market segment.
SALON STYLE-Registered Trademark- was launched in 1994 as a line of
"mid-priced" shampoos and conditioners positioned as "Salon Quality at a
Fraction of the Price." The line was successfully extended in late 1994 with the
addition of styling products.
STYLE-Registered Trademark- is the Company's "value priced" brand, intended
for use by the entire family. The brand has shown a significant turnaround the
last six months of 1995, with unit sales increasing by 47% compared with the
comparable period in 1994, after four years of declining sales.
PATIVA-TM- is a line of professional salon products anchored by an
innovative wave technology that eliminates the neutralizer step. Launched in
March 1995, this line provides the Salon Division with a "higher-end" brand.
26
<PAGE>
The following table sets forth certain information concerning the Company's
net sales by division in each of the last five fiscal years:
<TABLE>
<CAPTION>
NET SALES BY DIVISION FOR YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
-------------------- -------------------- -------------------- -------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retail.................. $ 95,734 69.7% $ 85,076 68.4% $ 74,215 66.2% $ 80,669 66.5% $ 73,256
Salon................... 20,183 14.7 18,231 14.7 18,465 16.5 16,928 14.0 16,947
Contract
Manufacturing (1)...... 21,377 15.6 20,981 16.9 19,351 17.3 23,680 19.5 27,563
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... $ 137,294 100.0% $ 124,288 100.0% $ 112,031 100.0% $ 121,277 100.0% $ 117,766
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
Retail.................. 62.2%
Salon................... 14.4
Contract
Manufacturing (1)...... 23.4
---------
Total............... 100.0%
---------
---------
</TABLE>
- ------------------------------
(1) Contract manufacturing sales included sales to DowBrands of $15.3 million,
$18.1 million, $16.6 million, $19.3 million, and $21.4 million in each of
the years ended December 31, 1991, 1992, 1993, 1994 and 1995, respectively.
MARKETING AND DISTRIBUTION
The Company's consumer retail sales are made to mass merchandisers, food
stores, drug stores and other retail outlets, as well as to wholesalers who
service retail outlets, resulting in the Company's products being sold in more
than 60,000 retail outlets in North America. Sales for the Retail Division are
carried out through a combination of the Company's own sales force and
independent brokers. Salon Division products are distributed to professional
salons and specialty shops through a network of independent distributors served
by the Company's sales force.
The Company currently maintains more than 1,800 active customer accounts and
no customer other than DowBrands and Wal-Mart accounted for more than 10% of
Lamaur's total net sales in any of the last three years. DowBrands accounted for
15%, 16% and 18% of Lamaur's total net sales in each of 1993, 1994 and 1995,
respectively, and Wal-Mart accounted for 19%, 18% and 18% of Lamaur's total net
sales in each of 1993, 1994 and 1995, respectively. The loss of sales to
DowBrands, Wal-Mart or other significant customers could have a material adverse
effect on the business and operations of the Company. There are no contractual
obligations from any customers (including DowBrands) to make continuing
purchases from the Company, although DowBrands has agreed to purchase all of its
future requirements for certain products from the Company for a two-year period.
The Company believes that growth in its business is achieved in part by
gaining market share at the expense of competitors. Accordingly, the Company
promotes sales of its products utilizing substantial advertising, consumer
promotions and merchandising support programs. During the years ended December
31, 1993, 1994 and 1995, Lamaur's marketing support expense was approximately
$23.8 million, $31.4 million and $23.8 million, respectively. The Company's
strategy contemplates a more aggressive marketing program under the direction of
its new management. The Company's marketing activities include direct and
cooperative advertising, consumer and trade promotions and, with respect to the
Salon Division, training programs, distribution and promotional sales and
promotional seminars. Management believes it can broaden its base of exclusive
distributors for its PATIVA-TM- line of products, and thereby increase Salon
Division revenues and the Company's profitability, without adversely affecting
its existing network of distributors.The Company also invests in research and
development for new products, in product line extensions of its established
brand names and in periodic restaging of established products.
The Company believes there is substantial customer recognition for its major
brand names and that consumer loyalty positively affects sales. Consequently, it
seeks to maintain its brand name recognition through (i) national and local
television, print and radio advertising, (ii) promotions and coupons, and (iii)
continually reviewing and improving its products and packaging. The Company
believes the expenditures associated with those activities, which are expensed
in the period in which they are incurred, provide long term benefits to the
Company to the extent they sustain or extend consumer awareness of its products.
Furthermore, the Company believes that increased advertising for one brand name
or product often enhances consumer recognition of its other products.
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<PAGE>
In view of the intensely competitive nature of the personal hair care
products industry, new product introductions require proportionally higher costs
relative to sales than expenditures for well-established products during the
introductory period. While those expenditures materially impact results of
operations in the particular period in which they are incurred, they assist in
the Company's growth beyond that period if the new product is ultimately
successful.
The Company anticipates incurring increased expenditures in connection with
its marketing activities in the next two years, and expects to utilize a
substantial portion of the net proceeds of this Offering to fund those
activities. See "Use of Proceeds." These activities include (i) expanding its
product mix by introducing new products, (ii) restaging certain other existing
products, and (iii) enhancing the Company's marketing efforts, particularly in
connection with its commencement of activities outside the United States. The
Company plans to increase retail sales in Mexico and Canada during the remainder
of 1996 and in 1997, and is considering expansion into other international
markets. Expanding the Company's international market share in Mexico, Canada
and elsewhere will require the Company to address competitive factors similar to
those it faces in the United States, as well as to comply with any local
regulatory requirements. See "Business -- Competition."
RESEARCH AND DEVELOPMENT
The Company continuously engages in the development of new products and
improvements to its existing formulations and maintains extensive laboratory
facilities for those purposes. Lamaur relies principally on the experience of
its staff in connection with formulating new products. In accordance with new
management's strategy, the Company's research and technical staff of
approximately 28 persons works closely with the Company's sales and marketing
groups to discern changes in consumer tastes and new product developments in the
industry. The Company believes its research and development efforts are enhanced
materially by the availability of its on-site salon, which is fully equipped to
permit the testing of new products and improvements in conditions that simulate
those actually encountered by consumers. The Company maintains extensive
laboratory, quality assurance and quality control facilities. Examples of
products recently developed by Lamaur include (i) the SALON
STYLE-Registered Trademark- product line, a complete consumer-oriented line of
hair care products introduced in 1994 for consumers desiring salon quality at a
fraction of the price, and (ii) PATIVA-TM- for the professional salon and
specialty market, introduced in 1995.
EHS LABORATORIES' TECHNOLOGY
The Company believes that the absence of any fundamental change in the
technology underlying hair care products for several decades, combined with the
substantial global market for hair care products, presents an opportunity for
new technologically oriented products. In the Company's view, electronically
controlled and managed hair styling products that use chemicals and provide
quick and convenient application can gain widespread consumer acceptance if they
are successfully developed and properly marketed. The Company's strategy is to
develop a line of advanced hair styling products and, if it is successful in
doing so, eventually to compete significantly on that basis. There can be no
assurance, however, that the Company will be able to develop such advanced hair
styling products or, if it does, that they will be commercially successful. See
"Risk Factors -- Risks Associated with ELECTRONIC CHEMISTRY-TM- Product
Development."
The Company's current objective is to develop electronic appliances based on
EHS Laboratories' licensed proprietary technology that will permit users to
style, color and condition their hair, on a "temporary" or "permanent" basis,
without the often damaging side effects experienced with the harsh chemicals and
heat treatments associated with most traditional hair care products. The harsh
chemicals currently used in such products are in a family of compounds known as
mercaptans, which are often damaging to human hair and skin. The Company's
proposed ELECTRONIC CHEMISTRY-TM- appliances are expected to use low
concentrations of a family of alcohol-based compounds that are generally known
not to adversely affect human hair and skin. Although the Company intends to
develop applications of its technology that will perform the same basic
processes as have been applied for many years to the treatment of hair by
traditional methods, the Company believes products utilizing its technology, if
successfully developed, will perform these processes more quickly and safely
than traditional products. EHS Laboratories' proprietary technology is based
upon the fact that (i) the chemical and physical properties of protein chains
and certain molecular bonds are
28
<PAGE>
instantly altered in the presence of an electromagnetic signal delivered at
specific resonance frequencies (the frequencies being determined by the
particular type of molecular bond being treated and the substances in which
those molecules are located), and (ii) the alterations stop instantly when the
electronic signal stops. The applying of an electromagnetic signal is expected
to be accompanied by the application of chemicals and/or mechanical stress to
effect the desired structural or cosmetic changes in the hair. The Company
refers to its technology as "Resonance Frequency Transfer" ("RFT") technology.
The Company anticipates that, if it is successful in achieving its current
development and engineering design objectives, its principal product will be an
electronic appliance that will include three basic components. The first
component will be a control module that will contain the power source,
microprocessor and control software responsible for inducing and managing the
electronic signal and chemical delivery systems. The second component will be a
delivery system that will contain both a liquid cartridge holder and a liquid
dispersion system. The third component is expected to consist of disposable and
replaceable cartridges, each of which would contain consumable chemical styling,
coloring and conditioning agents. No determination as to the manufacturing
source for the appliance has been made, nor is one expected to be selected for
some time.
EHS Laboratories' activities have been primarily directed towards conducting
early-stage research with respect to the reaction of hair samples to
electromagnetic signals. Substantial additional research and development will be
required before any prototype product containing its licensed technology could
be delivered, and the Company believes that the earliest any prototype product
might be introduced would be the second half of 1998, at the earliest. These
steps will include research, development and design of the electronic and
chemical components, developing a functional prototype, product engineering,
obtaining any required regulatory approvals, field trials, and, if all of the
foregoing are successfully completed, manufacturing and distribution.
The timing of introduction of its first commercial product will depend on
the time required to obtain any required regulatory approvals. See "Business --
Government Regulation." The wide range of research, development and design
activities that remain to be undertaken include continuing basic research
regarding hair morphology (form and structure) and its reaction to
electromagnetic signals at various frequencies, research concerning the
application of chemicals to hair treated by RFT technology, the development of
the control module, the delivery system, the cartridges and their related
electronic and mechanical controls, circuitry, software and interfaces, and the
overall design of the appliance. The Company expects to conduct certain of those
activities directly. Other activities will be conducted by firms with whom the
Company will seek joint venture or other strategic alliances or licensing
arrangements. The Company has entered into a technical assistance program with
Samsung pursuant to which Samsung may elect (but is not obligated) to
participate with the Company in joint development of specialized components and
production prototypes of the control modules and delivery systems, as well as
the initial design of the appliance.
The agreement with Samsung provides for the Company to share the results of
its research and development program with Samsung, for Samsung to evaluate the
Company's technical development program on the basis of determining the ability
to manufacture components and end user products, and for Samsung to participate
in periodic technical reviews. Upon completion and delivery of a functional
prototype by the Company which is approved by Samsung's engineers, Samsung may
elect to produce five samples for field testing by the Company. During the term
of the Agreement, Samsung has the exclusive right to enter into a license
agreement for the manufacture of the Company's products. If Samsung requests
that a manufacturing license arrangement be developed, the Company and Samsung
have agreed to negotiate the terms of the license in good faith. Unless Samsung
is then fabricating five samples or the parties are then negotiating the terms
of the license arrangement, the agreement and Samsung's exclusive right to enter
into a license agreement may be terminated by either party on 30-days' notice,
and will terminate in September 1996. The Company anticipates extending the
agreement beyond September 1996 on the same terms as presently in effect.
The Company believes that its agreement with Samsung has and will continue
to provide a framework for discussing and guiding the initial design,
development and testing of the appliance and its components,
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and is consistent, at this early stage of development, with its strategy of
licensing to third parties certain aspects of product design and development. As
the Company is not obligated to continue with Samsung should it not exercise its
right of first refusal, the Company believes its current arrangement with
Samsung will not discourage other potential parties from dealing with the
Company, although there can be no assurance in that regard. The Company believes
that it will also seek strategic relationships with up to three established
chemical products concerns for the purpose of developing suitable chemical hair
treatment liquids that can be utilized in the application of its RFT technology.
EHS Laboratories has conducted most of its research and development
activities to date through internal laboratory testing and independent
consultants, principally SRI International. The Company expects that hair
morphology research will continue to be conducted by the Company in conjunction
with TRI/ Princeton, an industry-funded and sponsored laboratory facility
engaged in research projects relating to certain materials and their
characteristics. The Company intends to perform additional research and
development work in connection with the RFT technology at its Fridley, Minnesota
laboratories, although it expects it will continue to utilize outside consulting
and laboratory services to conduct research and development activities. The
Company anticipates expending an additional $2.0 million on EHS Laboratories
research and development activities over approximately the next three years.
MANUFACTURING AND SUPPLY
LAMAUR OPERATIONS. All the Company's manufacturing, packaging and
warehousing operations are located in a 438,000 square foot facility in Fridley,
Minnesota. See "Business -- Properties."
The production area comprises 135,000 square feet and includes formula
compounding areas, quality control laboratories, multiple fully-automated, high
speed aerosol and liquid filling lines and state-of-the-art packaging
facilities. The compounding or mixing department utilizes a combination of
manual and fully-automated batch processing systems. A portion of the aerosol
batching is controlled by an automated computer-driven blending system which has
significantly improved efficiencies and product integrity. The high speed
fully-automated packaging equipment used for both liquid filling and aerosol
lines runs at speeds of up to 300 containers per minute. The Company believes it
is an industry leader in fully automating its production facilities. The Company
has substantial excess production capacity, which it currently intends to
utilize in connection with any expansion of its contract manufacturing
activities.
The Company maintains a strict internal control system to monitor the
quality of its products. The quality control laboratory is well equipped and
capable of conducting both micro and analytical testing. The Company also
maintains product liability insurance at levels it believes to be adequate.
Raw materials used by the Company are principally alcohol, surfactants,
fragrances, propellants and a wide variety of packaging materials and compounds
including containers such as aerosol cans, cardboard boxes and plastic
containers, container caps, tops, valves and labels, all of which are purchased
from outside sources. The Company's principal raw materials and packaging
components are available from several domestic suppliers and it is not dependent
on the availability of supplies from any single source. While at times the hair
care industry has experienced a shortage of raw materials of the types essential
to the Company's business, because the Company has long-established supplier
relationships and has developed alternative raw material substitutes, it does
not anticipate any difficulty in obtaining adequate supplies of raw materials to
meet its needs. Similarly, while the industry has from time to time experienced
raw material cost increases, the Company believes it has been and remains able
to purchase its requirements at competitive prices from sources that are readily
available in the vicinity of the Fridley, Minnesota, facility.
The Company uses tank railcars to transport certain high volume raw
materials. Trucks are used to transfer smaller volume raw material requirements
as well as packaging components such as aerosol cans, plastic bottles and caps,
and cardboard shipping containers. A separate tank farm for above-ground bulk
storage of chemicals and aerosol propellants is located adjacent to the plant.
The Company maintains inventory of raw materials and packaging materials as
well as certain finished goods in its on-site warehouse that comprises 265,000
square feet. Finished inventory generally is warehoused for distribution
throughout the United States at the Company's plant, but products produced for
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third parties are immediately released to third party warehouses and do not
remain on the Fridley site as inventory. As many as twelve over-the-road truck
trailers can be loaded and unloaded in the plant's warehousing and shipping area
at one time.
CONTRACT MANUFACTURING. Contract manufacturing of household cleaning and
hair care aerosol sprays and liquid products for others, particularly with
respect to the production of aerosol spray products utilizing the Company's
automated high speed production lines, has contributed 17% or more to Lamaur's
sales in each of the last three years. Since the beginning of 1996, the Company
has obtained significant new contract manufacturing orders from new customers,
with deliveries commencing in the second quarter of 1996. From January 1, 1996,
through May 1, 1996, the Company had received contract manufacturing orders
aggregating approximately $14.68 million, of which approximately $500,000
represented orders from two new customers, compared with contract manufacturing
orders received aggregating approximately $13.80 million, of which none
represented new customer orders, in the comparable period in 1995. The Company
recognizes revenues from such orders only upon shipment, and there can be no
assurance when or if all of the orders received in early 1996 will result in
revenue. In connection with the Lamaur acquisition in November 1995, the Company
and DowBrands entered into a two-year agreement (with two additional one-year
extensions at Dow's election) pursuant to which the Company will continue to
serve as DowBrands' sole supplier of certain household cleaning products,
subject to the Company maintaining competitive pricing and delivery schedules.
The Company believes the terms of that agreement are no less favorable to the
Company than those that could be obtained from unaffiliated third parties.
GOVERNMENT REGULATION
The Company's manufacturing and packaging operations are subject to a wide
range of federal, state and local regulations. These regulations include the
applicable cosmetic purity and labeling requirements prescribed by the federal
Food, Drug and Cosmetic Act, the applicable labeling provisions of the Fair
Packaging and Labeling Act, the discharge, handling and disposal of hazardous
wastes regulations contained in applicable environmental laws, and the plant and
laboratory safety requirements of various applicable occupational safety and
health laws. Existing and future aerosol-based products are also expected to be
subject to state and, possibly, federal standards relating to permissible levels
of volatile organic compounds. The Company does not expect that compliance with
those standards will adversely affect its revenues or costs. The Company is also
subject to federal regulations concerning the content of Lamaur's advertising,
trade practices and certain other matters.
A Phase I environmental assessment of the Fridley facility was performed in
late 1995. No environmental pollution was identified. The Company is not aware
of any environmental pollution or liabilities arising out of any past or present
activities of either Lamaur or the Company. Additionally, DowBrands Inc. has
agreed, for a period of eight years (but only until May 15, 1996, with respect
to asbestos related matters, if any) to indemnify the Company against
environmental liabilities in excess of $150,000 arising at the Fridley facility
from events that occurred prior to the Company's acquisition of Lamaur.
The development and initial marketing of the Company's ELECTRONIC
CHEMISTRY-TM- products will require careful adherence to Federal Communications
Commission ("FCC") standards regarding electromagnetic signals, and is likely
also to require Food and Drug Administration ("FDA") and other FCC review and
approval. The process of obtaining FDA and FCC approvals is not expected to
commence until after a suitable prototype product is available, and the process
of obtaining and maintaining such regulatory approvals may be lengthy, expensive
and uncertain, and is likely to require at least animal trials. Moreover, the
Company is unable to predict the nature of, or time that will be required to
obtain, regulatory approvals, and there can be no assurance that new standards
relating to the sale of electromagnetic signal-emitting devices for use in close
proximity to the human body will not be adopted prior to or after the Company
introduces its new products, and any such standards might require redesign or
even abandonment of the product. A delay in obtaining regulatory approvals, or
the unavailability of such approvals, could have an adverse effect on the
Company's strategic plans.
The Company believes it has complied in all material respects with regard to
governmental regulations applicable to it. To date, those regulations have not
materially restricted or impeded the Company's operations.
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PATENTS AND TRADEMARKS
LAMAUR. The Company markets its Lamaur products under a number of
trademarks and trade names that are registered in the United States and several
foreign countries. The Company will seek to register significant marks and names
in other foreign countries when it enters them. Principal trademarks of the
Retail Division include PERMASOFT-REGISTERED TRADEMARK-, SALON
STYLE-REGISTERED TRADEMARK- and STYLE-REGISTERED TRADEMARK-. The Salon Division
trademarks include PATIVA-TM-, NUCLEIC A-Registered Trademark-, APPLE
PECTIN-Registered Trademark- and VITA/E-Registered Trademark-. The Company
believes its position in the marketplace is significantly dependent upon the
goodwill engendered by its trademarks and trade names, and therefore considers
trademark protection to be material to its business. Although Lamaur owns
certain patents, its business is not materially dependent upon any patent,
license, franchise or concession, whether owned by or licensed to the Company.
EHS LABORATORIES. The Company believes that protection of its proprietary
technology (which includes certain technology licensed from an affiliate) and
know-how is critical to the development of EHS Laboratories' business. It seeks
to protect its interests through a combination of patent protection and
confidentiality agreements with all EHS Laboratories employees, as well as by
limiting the availability of certain critical information to a small number of
key employees. The Company intends to pursue a vigorous patent application
program in the United States. To date, it has obtained the rights, pursuant to
an exclusive license, to cosmetic hair care applications of the RFT technology
reflected in a United States patent (No. 5,395,490, issued to Messrs. Don Hoff
and Joseph Stiley in March 1995, and expiring in March 2012), that it believes
is important to the protection of the core technology underlying EHS
Laboratories' activities. See "Certain Transactions." The Company believes that
the patent, which contains claims relating to the method of applying electronic
signals at frequencies determined by the natural characteristics of a material
in order to alter certain molecular bonds in that material, provides broad
coverage, and hence significant protection, for its proprietary technology;
however, there can be no assurance that this will be the case. Moreover, the
Company currently has no patent protection for its technology outside the United
States, and may be unable to obtain even limited protection for its proprietary
technology in foreign countries. See "Risk Factors -- Risks Associated with
ELECTRONIC CHEMISTRY-TM- Product Development."
The Company will pay a royalty to its affiliated licensor equal to (i) 1.0%
of the Company's proceeds from any direct sales made by the Company of products,
instruments or components using, or derived from, the technology, and (ii) 1.0%
of the "revenue base" of the Company's sub-licensees. The "revenue base" is the
proceeds received by the sub-licensees for their sales of products using the RFT
technology. This royalty declines in steps as the revenue base increases,
ultimately declining to 0.4% when cumulative sales from all products using the
RFT technology reach $10.0 billion. The Company has no sub-licenses as of the
date of this Prospectus, and there can be no assurance it will enter into any
sub-license on terms favorable to the Company.
The license may be terminated by the licensor upon certain events of default
caused by the Company, including, among others, the Company's (i) failure to
make timely payment of the required royalty payment, (ii) invalid sub-licensing
of the license, and (iii) failure to continue as a going concern or filing a
bankruptcy petition. Upon termination of the license, all licenses and rights
granted to the Company cease to exist. Any valid sub-licensees, however, will
continue to have their rights recognized after termination of the license. The
license agreement summarized above has been filed with the Securities and
Exchange Commission as an exhibit to the Registration Statement of which this
Prospectus is a part, and reference should be made thereto for more complete
information with respect thereto.
The Company believes that its current and anticipated business does not and
will not infringe on any patent owned by others.
COMPETITION
The markets for Lamaur's products are intensely competitive and sensitive to
changing consumer needs and preferences. They are characterized by frequent
introductions of competitive products, often accompanied by major advertising
and promotional activities, which can significantly affect sales and earnings of
the sponsor of the product and its competitors. Among the competitive factors
the Company faces are the need to introduce and promote (i) high-end products in
the professional market, (ii) both higher-quality, professional-type products
and more natural products in the retail market, and (iii) line extensions of
styling aids.
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The Company competes primarily on the basis of product quality, price,
marketing and brand name recognition. As a result of competitive conditions in
the industry, which have adversely affected profit margins, and growing consumer
demand for greater product convenience and performance, the industry has been
experiencing a consolidation (the Company believes that currently, five
companies account for approximately 60% of worldwide sales in the hair care
products industry) and a globalization in the activities of its members. The
hair care products market is dominated by large, multi-national corporations,
all of which compete with the Company and have greater financial and other
resources than those of the Company. The Company believes its Lamaur division
was among the ten largest manufacturers in the United States in 1995 (on the
basis of domestic revenues) of three categories of hair care products --
shampoos, conditioners and styling aids. Principal competitors of the Retail
Division include The Procter & Gamble Company, Unilever N.V. (Helene Curtis),
Bristol-Myers Squibb Company (Clairol), L'Oreal S.A. (Cosmair) and
Alberto-Culver Company, and those of the Salon Division include Bristol-Myers
Squibb Company (Clairol and Matrix), Nexxus, and Wella AG (Redken).
PERSONNEL
The Company employed approximately 336 persons at Lamaur as of March 31,
1996, consisting of approximately 33 administrative employees; 28 persons
engaged in laboratory and other testing and scientific activities; 140
production employees; 47 sales and marketing employees, including 22 persons
located in various regional centers and other locations outside Fridley,
Minnesota; 35 warehousing and receiving personnel; and 53 maintenance and
clerical workers. The Company also employed six persons as of March 31, 1996 at
its Mill Valley, California headquarters consisting of four Company executive
officers and two persons engaged in both EHS Laboratories' activities and
general Company business. None of the Company's employees is a member of a labor
union. The Company considers its relationship with its employees to be good.
PROPERTIES
The Company owns its facility in Fridley, Minnesota, near Minneapolis. This
facility contains administrative, laboratory, production and warehousing areas.
The 438,000 square foot, primarily single story, air conditioned plant is
located on a 25 acre site, and includes an approximately 38,000 square foot, two
story office center that houses the administrative staff, research laboratories,
computer services and the test salon. The Company believes the facility, which
was constructed in 1969 and improved during the 1980s at a total cost in excess
of $60 million, is well maintained and adequate for its contemplated needs. The
Company has substantial excess production capacity, which it currently intends
to utilize in connection with any expansion of its contract manufacturing
activities.
The Company leases its 4,000 square foot office facility in Mill Valley,
California, near San Francisco, from an affiliate. See "Certain Transactions."
RECENT ACQUISITION OF LAMAUR
Lamaur was acquired by the Company from Dow effective as of November 16,
1995, for an aggregate acquisition cost of approximately $30.2 million, pursuant
to an agreement that provided for the payment of aggregate consideration to Dow
of $28.8 million, of which $12.3 million was payable in cash, $3.0 million
represented credits accepted by Dow in connection with the acquisition to be
credited toward future product purchases by Dow over a two-year period, and the
balance by the issuance to Dow of 1,000,000 shares of the Company's Series A
Convertible Preferred Stock, and the $5.0 million Dow Convertible Note, which
note will be converted into 763,500 shares of Series B Convertible Preferred
Stock upon the Offering. The Convertible Preferred Stock is convertible into an
aggregate of 1,163,910 shares of Common Stock of the Company. As of November 16,
1995, the Company entered into a credit agreement with Norwest pursuant to which
the Company borrowed the cash portion of the purchase price payable to Dow. A
portion of that borrowing is being repaid with part of the net proceeds of this
Offering. See "Use of Proceeds."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the Company's directors
and officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Don G. Hoff.................... 60 Chairman of the Board of Directors and Chief Executive Officer of the
Company
Dominic J. LaRosa.............. 53 President and Chief Executive Officer of the Lamaur Division and a
Director of the Company
John D. Hellmann............... 46 Vice President -- Finance and Chief Financial Officer of the Company
Donald E. Porter............... 56 Vice President -- Corporate Development and Investor Relations of the
Company
Richard T. Loda................ 47 Vice President -- Science and Technology, EHS Laboratories
William M. Boswell............. 53 Vice President -- Sales, Retail Division of Lamaur
Michele L. Redmon.............. 40 Vice President -- Marketing, Retail Division of Lamaur
Ronald Williams................ 52 Vice President -- Operations of Lamaur
John G. Hewson................. 45 Vice President -- Business Development, Planning and Administration of
Lamaur
Patrick T. Parenty............. 37 Vice President -- Sales, Salon Division of Lamaur
Harold M. Copperman............ 64 Director
Paul E. Dean................... 58 Director
Gerald A. Eppner............... 57 Director
Perry D. Hoff.................. 36 Director
Joseph F. Stiley, III.......... 56 Director
</TABLE>
The business experience, principal occupations and employment, as well as
the periods of service, of each of the directors and executive officers of the
Company during at least the last five years are set forth below.
DON G. HOFF is the founder of the Company and has served as its Chairman of
the Board and Chief Executive Officer since its formation in 1993. Mr. Hoff has
also served as Chairman and Chief Executive Officer of Intertec Ltd., a private
investment company specializing in technology, since 1975. From 1974 to 1991 he
served as Chairman of the Board and Chief Executive Officer of AT&E Corporation
("AT&E"), a company engaged in telecommunications research and development. See
"Risk Factors -- Dependence on Management." Mr. Hoff serves as a Director for a
number of mutual funds with major financial institutions. He is currently
Chairman of Baring's Asia Pacific Fund and has been a Director of the fund since
1991. He also serves as a Director of Prudential Global Fund (since 1984);
Trustee of Prudential U.S. Government Fund (since 1986); Director of Prudential
Short-Term Global Income Fund (since 1990); Director of Prudential Pacific
Growth Fund (since 1992); and Director of Barings Greater China Fund (since
1992). Mr. Hoff spends the majority of his time on the business of the Company.
DOMINIC J. LAROSA joined the Company as a director in September 1995, has
been President and Chief Executive Officer of the Lamaur Division since November
1995, and is a member of the Audit Committee. From 1993 to 1995, Mr. LaRosa was
the founding President and Chief Executive Officer of J.B. Williams Company,
Inc., a personal care products company. From 1982 to 1992, he held senior
management positions at Colgate Palmolive/The Mennen Company, including
President and CEO of the Aromatic Industries Division (1989-1992), General
Manager of the Personal Care Division (1987-1989) and Vice President --
Marketing (1982-1987). Mr. LaRosa served as Marketing Director of Bristol-Myers
Company, Drackett Products Division from 1979-1982, and held marketing director
and product manager positions at Sterling Drug Company, Lehn & Fink Division
from 1971 to 1979. Mr. LaRosa serves on the Board of Directors of Marietta
Corporation.
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<PAGE>
JOHN D. HELLMANN joined the Company as Vice President -- Finance and Chief
Financial Officer in September 1995. Prior to that, for more than nine years, he
served in various capacities, including as General Manager with Liberty
Electronics, a manufacturer of computer equipment. From 1976 to September 1985,
Mr. Hellmann served as Chief Financial Officer of Inmar Corporation (d/b/a ACA
Joe, Topps and Trowsers). Mr. Hellmann is a certified public accountant.
DONALD E. PORTER joined the Company as Vice President in April 1993. Prior
to that, he had been a Vice President of Intertec Ltd. since April 1991. From
December 1984 to April 1991, Mr. Porter served at AT&E in various executive
capacities, including strategic planning and global licensing for AT&E, and as
General Manager and Vice President, Sales and Marketing of AT&E Systems, a
division of AT&E. See "Risk Factors--Dependence on Management." Prior to
December 1984, Mr. Porter was a Founder and Vice President of Sales and
Marketing for Genesis Electronics Corporation, a pioneering firm in the voice
mail industry. Mr. Porter has also held senior executive positions with Harris
Corporation and ITT Corporation.
RICHARD T. LODA rejoined the Company in March 1996 as Vice President --
Science and Technology, having held the position from February 1994 to July
1994. From 1990 until joining the Company, Dr. Loda was a scientific Program
Manager for the Advanced Research Projects Agency, managing research and
development programs related to electrochemical power sources, environmental
sciences and materials chemistry. He was a Research Staff Scientist at the
Institute for Defense Analyses from 1987 to 1990 and an Associate Scientist at
Applied Research Corporation from 1985 to 1987. Dr. Loda holds a Ph.D in
Physical Chemistry from Wesleyan University and was a National Institutes of
Health Postdoctoral Fellow at the University of Oregon.
WILLIAM M. BOSWELL joined the Company as Vice President -- Sales, Retail
Division of Lamaur in November 1995. From 1994 until the time he joined the
Company, Mr. Boswell was Senior Vice President -- Sales of Revlon, Inc., where
he managed a 150-person sales force, including brokers, for its Beauty Care
Division. From 1983 to 1993, he held various senior management sales positions
at Colgate Palmolive/The Mennen Company, including Vice President -- Sales
(Colgate Palmolive Canada), managing sales of $280 million, and Vice President
- -- Sales (Mennen), responsible for all sales functions within Mennen USA. From
1967 to 1982, Mr. Boswell performed various sales functions at Bristol-Myers
Company, Drackett Products Division, including Vice President -- Sales, Broker
Division (1979-1982) and Vice President -- Sales, Non-Food Division (1982).
MICHELE L. REDMON joined the Company as Vice President -- Marketing, Retail
Division of Lamaur in November 1995. Prior to joining the Company, she served as
Group Product Manager at Alberto-Culver Company, and was responsible for several
hair care and other product lines which generated over $100 million in revenue.
She successfully launched Alberto VO5 Naturals and provided the strategic plans
to profitably build sales through new product and restaging activities. Prior to
that, Ms. Redmon held various marketing manager positions at Colgate
Palmolive/The Mennen Company, where she improved total revenue and margins in
several personal care product lines. Ms. Redmon worked at the Regina Company
from 1987 to 1988 as Product Manager, where she managed the launch of a new
vacuum cleaner appliance. From 1978 to 1986, Ms. Redmon held various sales and
product manager positions at the Safety Razor Division of The Gillette Company.
RONALD WILLIAMS joined the Company as Vice President -- Operations of Lamaur
in November 1995. From 1994 until the time he joined the Company, Mr. Williams
was Executive Vice President of Snowblade Corporation, a recreational equipment
manufacturer. From 1993 to 1994 he served as Vice President -- USA Operations of
the J.B. Williams Company, Inc. during its start-up phase. From 1972 to 1992, he
held various operations and manufacturing management positions at Colgate
Palmolive/The Mennen Company, including: Vice President International Operations
(1989-1992) overseeing operations of Mennen's subsidiaries in Canada, Mexico,
and certain other countries, and of its licensees worldwide; Director of
International Operations (1986-1989); and Director of Engineering, International
(1982-1986).
JOHN G. HEWSON joined the Company as Vice President -- Business Development,
Planning and Administration of Lamaur in November 1995. From 1991 to 1995, he
was Director of Materials Management for DowBrands Personal Care Division. He
was named Vice President -- Manufacturing Services,
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<PAGE>
DowBrands Personal Care Division in April of 1995. Prior to that, he was
Director of Purchasing and Packaging Engineering at DowBrands from 1987 to 1991.
Before joining DowBrands, Mr. Hewson held various positions, including Corporate
Director of Purchasing, Carter Hawley, Hale Inc. (1987), Assistant Director of
Materials Management (1983-1986) and International Purchasing Manager
(1982-1983) for Richardson-Vicks, Inc., Purchasing Manager for Alberto-Culver
Company (1980-1982) and Buyer for The Procter & Gamble Company (1975-1980).
PATRICK T. PARENTY joined the Company as Vice President -- Sales, Salon
Division of Lamaur in November 1995. Prior to joining the Company, Mr. Parenty
was, since 1993, Vice President, Salon Division of Lamaur Inc. Mr. Parenty
joined Lamaur Inc. in April 1983 as a territory manager for the Nucleic A
Division. He has held a variety of other positions with Lamaur/DowBrands
Personal Care Division, including Vice President -- Sales, Salon Division
(1990), National Sales Director for Nucleic A Division (1988) and Regional
Manager for Lamaur Division (1985).
HAROLD M. COPPERMAN has been a Director of the Company since September 1995
and is Chairman of the Compensation Committee. Mr. Copperman is Vice Chairman of
Impulse Telecommunications Corporation, a position he has held since 1990. Prior
to 1990, he held chief executive and senior management positions in strategic
relations, business development, marketing and operations with multinational
organizations as well as start-up entrepreneurial ventures. These include
Electronic Data System Corporation (1987 - 1990) and Advanced Business
Communications, Inc. (1983 - 1987). Mr. Copperman's experience in high
technology global business environments also includes senior executive positions
with Northern Telecom Ltd., Stromberg Carlson Corporation and ITT Corporation.
PAUL E. DEAN has been a Director of the Company since September 1995 and is
a member of the Audit Committee. Prior to his retirement in August 1993, Mr.
Dean was associated with The Dow Chemical Company for over 30 years. Immediately
prior to retiring and since 1991, Mr. Dean was the Director of Corporate New
Ventures at Dow, responsible for managing new technology and related business
development programs. From 1987 to 1991, he was Michigan Director of Research
and Development, and prior to that, he held various management positions in
technical service and development and in research and manufacturing, with a
focus on commercialization of new products.
GERALD A. EPPNER has been a Director of the Company since April 1993 and is
Chairman of the Audit Committee and a member of the Compensation Committee. He
has been a partner in the New York law firm of Battle Fowler LLP, legal counsel
to the Company since February 1993, specializing in domestic and international
corporate and securities law matters. Prior to February 1993, Mr. Eppner was a
partner in the New York law firm of Reid & Priest.
PERRY D. HOFF has been a Director of the Company since April 1993. He has
been a Director and Vice President of Operations of Innovative Capital
Management, Inc., a private investment company, affiliated with Intertec
Holdings, L.P., since 1980, and has also been the President and a Director of
Intertec Holdings, Inc. since 1990. From 1978 to 1981 he was the Director of
Research for Aquanautics, Inc. Perry D. Hoff is the son of Don G. Hoff.
JOSEPH F. STILEY, III joined the Board in March of 1994 and is a member of
the Compensation Committee. Prior to that date and from April of 1993, Mr.
Stiley was Vice President of the Company, responsible for research and
development. From December 1987 to 1993, Mr. Stiley was a consultant to high
technology companies, including Intertec Ltd. From 1984 to 1987, Mr. Stiley
served as Executive Vice President of AT&E. From 1977 to 1983, he held key
executive positions with several publicly owned companies, including a strategic
business unit of General Telephone and Electronics and Digital Broadcasting
Corporation. Mr. Stiley has consulted to the governments of Canada and France,
other European and domestic corporations, and has participated in the
development of international standards for communications.
All Directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors.
36
<PAGE>
ADVISORY BOARD
The Chairman of the Board, with the Board's approval, has established an
advisory board to provide expertise and advice to the Company in several areas.
Currently, this advisory board consists of:
NICHOLAS J. CAPUTO is an independent financial services consultant. From
1993 to 1994, he was Senior Vice President of Global Strategies Group, Inc., an
institutional financial services and securities trading company. From 1984 to
1993, Mr. Caputo was President of NVS, a company which specialized in advising
on securities trading clearance. Prior to 1984, Mr. Caputo was an executive with
Bank of America, most recently as President of the BankAmerica Trust Company of
New York.
WALLACE R. JOHNSON, recently retired, had been a senior executive of the
Personal Care Division of DowBrands since 1988, serving since 1993 as Vice
President and General Manager. Mr. Johnson originally joined Lamaur in 1964 when
it was independently owned as Lamaur, Inc. From 1979 to 1987 he was a member of
the Board of Directors of Lamaur and held various management positions,
including Senior Vice President of Finance.
DAVID A. ROSEN is an independent management consultant, specializing in
financial, administrative and operational management. Mr. Rosen provided
financial consulting services to the Company in connection with its acquisition
of Lamaur. From 1992 to 1994, Mr. Rosen was Chief Financial Officer of RESNA
Industries, Inc., an environmental services company with $30 million in annual
sales. Prior thereto he held financial and administrative management positions
in a number of companies, including Johnson Controls, Inc. (1990-1992), Cannon
Constructors, Inc. (1988-1990), and the Beckett Group (1981-1988).
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee, established in April 1993, currently consists of
Messrs. Eppner (Chairman), Dean and LaRosa. The functions of the Audit Committee
are to recommend annually to the Board of Directors the appointment of the
independent public accountants of the Company, review the scope of their annual
audit and other services they are asked to perform, review the report on the
Company's financial statements following the audit, review the accounting and
financial policies of the Company and review management's procedures and
policies with respect to the Company's internal accounting controls.
The Compensation Committee, also established in April 1993, currently
consists of Messrs. Copperman (Chairman), Eppner and Stiley. The functions of
the Compensation Committee are to review and approve salaries, benefits and
bonuses for all executive officers of the Company, and to review and recommend
to the Board of Directors matters relating to employee compensation and employee
benefit plans. The Compensation Committee also administers the Company's stock
option plans. See "Management -- Equity Compensation Plans."
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<PAGE>
EXECUTIVE COMPENSATION
The table below summarizes the compensation received by the Company's Chief
Executive Officer and the four most highly compensated executive officers
(collectively, the "named executive officers") for each of the Company's last
three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION NUMBER OF
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION OPTIONS COMPENSATION (2)
- ----------------------------------- ---- ----------- ------- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Don G. Hoff ....................... 1995 $31,730 $ -- $ -- 234,300(3) $110,000
Chairman and Chief Executive 1994 -- -- -- -- 140,000
Officer 1993 -- -- -- -- 105,000
Dominic J. LaRosa ................. 1995 15,384 -- 4,371 132,000(4) 52,750
President and CEO, Lamaur 1994 -- -- -- -- --
1993 -- -- -- -- --
William M. Boswell ................ 1995 11,538 -- 4,371 39,600(4) 19,750
Vice President--Sales, Retail 1994 -- -- -- -- --
Division of Lamaur 1993 -- -- -- -- --
Michele L. Redmon ................. 1995 9,230 -- 7,840 19,800(4) 13,875
Vice President--Marketing, Retail 1994 -- -- -- -- --
Division of Lamaur 1993 -- -- -- -- --
Donald E. Porter .................. 1995 57,692 10,000 15,000 -- 22,500
Vice President--Corporate 1994 48,000 -- -- 13,200(3) 24,000
Development and Investor Relations 1993 36,000 -- -- 23,100(3) 24,000
</TABLE>
- ------------------------
(1) Commencing November 16, 1995, Messrs. Hoff, LaRosa, Boswell and Porter and
Ms. Redmon will receive annual compensation of $250,000, $200,000, $150,000,
$100,000 and $120,000, respectively.
(2) Amounts listed represent non-cash credits granted in lieu of annual salary.
These amounts can be used toward 80% of the exercise price of vested
options. In addition, Messrs. LaRosa, Boswell, Porter and Ms. Redmon will
accrue during the next 12 months non-cash credits of $50,000, $30,000,
$20,000 and $15,000, respectively, that also can be used toward 80% of the
exercise price of vested options.
(3) All fully vested.
(4) 25% are vested; the remainder vest ratably over three years.
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<PAGE>
The following table sets forth the individual grants of stock options made
during the fiscal year ended December 31, 1995 to each of the named executive
officers.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM (3)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME OPTIONS FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------------- ------------ ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Don G. Hoff.......................... 217,932(1) 38.6% $ 1.52 12/31/02 $ 134,855 $ 314,269
16,368(1) 2.9 3.03 12/31/02 20,190 47,052
Dominic J. LaRosa.................... 132,000(2) 23.4 3.03 12/31/02 162,824 379,449
William M. Boswell................... 39,600(2) 7.0 6.06 12/31/02 97,694 227,669
Michele L. Redmon.................... 19,800(2) 3.5 6.06 12/31/02 48,847 113,835
Donald E. Porter..................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) All fully vested.
(2) 25% vested; the remainder vest ratably over three years.
(3) The potential realizable value through the expiration date of the options
has been determined on the basis of the fair market value of the shares at
the time the options were granted, compounded annually over the seven year
term of the option, net of exercise price. These values have been determined
based upon assumed rates of appreciation and are not intended to forecast
the possible future appreciation, if any, of the price or value of the
Company's Common Stock.
The following table sets forth the number of exercisable or vested and
unexercisable or unvested options during the fiscal year ended December 31, 1995
held by each of the named executive officers and the year-end value of such
unexercised options.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
YEAR-END YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ($)
- ------------------------------------------- ------------------------------------ -------------------------------
<S> <C> <C>
Don G. Hoff................................ 234,300/0 1,039,000/0
Dominic J. LaRosa.......................... 33,000/99,000 99,990/300,024
William M. Boswell......................... 9,900/29,700 0/0
Michele L. Redmon.......................... 4,950/14,850 0/0
Donald E. Porter........................... 36,300/0 164,802/0
</TABLE>
- ------------------------
(1) No options were exercised during the fiscal year ended December 31, 1995.
From the inception of the Company through November 16, 1995, Don G. Hoff,
the Company's Chairman and Chief Executive Officer, did not receive any cash
compensation. In recognition of Mr. Hoff's agreement to forego receiving any
salary since the Company's inception, the Company's Board of Directors in
November 1995 approved the grant to Mr. Hoff of $355,000 in non-cash credits,
representing his accrued salary from the Company's inception through October
1995, that can be used toward 80% of the exercise price of granted options.
39
<PAGE>
EMPLOYMENT AGREEMENT WITH DON G. HOFF
In November 1995 the disinterested members of the Board of Directors
approved an Employment Agreement with Don G. Hoff, Chairman and Chief Executive
Officer, originally entered into as of June 1, 1994, and modified as of November
6, 1995, and which took effect immediately following the closing of the Lamaur
acquisition on November 16, 1995. The Employment Agreement provides for Mr.
Hoff's continued employment as Chief Executive Officer of the Company for a term
ending on December 31, 1998 (the "term of employment"), reporting to the
Company's Board of Directors, and devoting so much of his business time to the
affairs of the Company as the Board requires. The Employment Agreement provides
that Mr. Hoff's salary as Chief Executive Officer (which is $250,000 annually,
commencing on November 16, 1995) may not be decreased without his consent. In
the event Mr. Hoff is unable to perform his duties as Chief Executive Officer
because of a disability, he shall be entitled to his full base salary for a
period of twelve months from the date of disability and 50% of such base salary
for twelve additional months. In addition, the Employment Agreement provides
that Mr. Hoff will continue to be nominated for election as a director of the
Company at each annual meeting of stockholders and be appointed as Chairman of
the Board for so long as he serves as the Company's Chief Executive Officer.
Under the Employment Agreement, Mr. Hoff shall be required during the term
of employment and for one year thereafter not to engage in any activity
competitive with the Company or any of its subsidiaries or affiliates (except
that he may own up to 5% of the voting stock of any publicly held corporation).
Mr. Hoff is also required to assign to the Company all inventions, discoveries,
know-how or other proprietary technology relating to hair care which he
hereafter conceives, reduces to practice or otherwise creates during the term of
employment.
If, prior to the expiration of the term of employment, Mr. Hoff is
discharged by the Company without Cause (which is defined to mean a discharge of
Mr. Hoff for any reason other than conviction of Mr. Hoff of a felony or a
disability or a discharge as the result of a material breach of any other
provision of the Employment Agreement by the Company which Mr. Hoff elects to
treat as a discharge without Cause, including but not limited to certain events
which would constitute a "change in control" of the Company, as defined in the
Employment Agreement, without Mr. Hoff's written consent), Mr. Hoff will be
entitled to all benefits under the Employment Agreement as if he had continued
to be employed during the full term of employment. In addition, if there is a
discharge without Cause (i) in lieu of further salary payments under the
Employment Agreement, Mr. Hoff will be entitled to receive within three days
after the date of discharge, an amount equal to the sum of the discounted
present value of the base salary to which he would have been entitled under the
Employment Agreement from the date of discharge through December 31, 1998
(assuming a 5% yearly increase in his base salary for each remaining calendar
year during the term of employment), and (ii) all options previously granted to
Mr. Hoff, to the extent not then vested or exercisable, shall become immediately
vested and exercisable in full.
40
<PAGE>
THE 1996 STOCK INCENTIVE PLAN
The 1996 Stock Incentive Plan was adopted by the Board of Directors on March
14, 1996, and approved by stockholders on May 15, 1996. The 1996 Stock Incentive
Plan provides for the granting of options, stock appreciation rights and
restricted stock (collectively, "Awards") to employees and directors of the
Company and its subsidiaries and to consultants and advisors who are compensated
by the Company or its subsidiaries (collectively, "Participants"). Directors who
are not employees and members of Advisory Boards established by the Company are
not permitted to participate in the 1996 Stock Incentive Plan. The class of
Participants currently is approximately 350 persons.
The principal provisions of the 1996 Stock Incentive Plan are summarized
below. The following summary of the material provisions of the 1996 Stock
Incentive Plan does not purport to be complete and is qualified in its entirety
by the terms of the 1996 Stock Incentive Plan, a complete copy of which is
attached as an exhibit to the Registration Statement of which this Prospectus is
a part.
The 1996 Stock Incentive Plan will be administered by a "Committee"
(currently the Compensation Committee) which is composed of at least two
directors of the Company, each of whom is a "disinterested person" within the
meaning of Rule 16b-3 promulgated under Section 16(b) ("Rule 16b-3") of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and an "outside
director" within the meaning of regulations promulgated under Section 162(m) of
the Internal Revenue Code of 1986, as amended ("Code"). Pursuant to the 1996
Stock Incentive Plan, the Committee will select Participants to whom Awards will
be granted and determine the type, size, terms and conditions of Awards,
including the per share purchase price and vesting provisions of options and the
restrictions relating to Restricted Stock. The Committee will also administer,
construe and interpret the 1996 Stock Incentive Plan.
An aggregate of 1,250,000 shares of Common Stock of the Company may be
issued or transferred pursuant to the 1996 Stock Incentive Plan; however, not
more than 50% of the allotted number of shares of Common Stock in the aggregate
may be made the subject of restricted stock Awards and no Participant may
receive more than 500,000 shares during the term of the Plan in respect of
Awards.
The Committee may grant to Participants options to purchase shares. Subject
to the provisions of the Code, options may either be incentive stock options
(within the meaning of Section 422 of the Code) or nonqualified stock options.
The per share purchase price (i.e., the "exercise price") under each option
shall be established by the Committee at the time the option is granted. The per
share exercise price of an option shall not be less than 100% in the case of
incentive stock options and 85% in the case of nonqualified stock options, of
the fair market value of a share on the date the option is granted (110% in the
case of an incentive stock option granted to a ten-percent stockholder). Options
will be exercisable at such times and in such installments as determined by the
Committee; provided, however, options generally shall not be exercisable more
than 90 days following termination of employment (12 months in the event of a
termination due a death or disability). The Committee may accelerate the
exercisability of any option at any time. Each option granted pursuant to the
1996 Stock Incentive Plan shall be for such term as determined by the Committee,
provided, however, that no option shall be exercisable after the expiration of
ten years from its grant date (five years in the case of an incentive stock
option granted to a ten-percent stockholder). The agreement evidencing the
option grant shall set forth the terms and conditions applicable to such option
upon a termination or change in the employment status of the Participant as
determined by the Committee.
OPTIONS. Options are not transferable by the Participant other than by will
or the laws of descent and distribution and may be exercised during the
Participant's lifetime only by the Participant or the Participant's guardian or
legal representative. The purchase price for shares acquired pursuant to the
exercise of an option must be paid (i) in cash, (ii) in the discretion of the
Board of Directors, by promissory note, (iii) by utilizing non-cash credits (for
up to 80% of the purchase price), (iv) by transferring shares to the Company, or
(v) a combination of the foregoing, upon such terms and conditions as determined
by the Committee. Notwithstanding the foregoing, the Committee may establish
cashless exercise procedures which provide for the simultaneous exercise of an
option and sale of the underlying share of Common Stock. Upon a change in
control of the Company (as defined in the 1996 Stock Incentive Plan), all
options outstanding under the 1996 Stock Incentive Plan will become immediately
and fully exercisable and the Participant may, to the extent set
41
<PAGE>
forth in the option agreement, during the sixty-day period following the change
in control surrender for cancellation any option (or portion thereof) for a cash
payment or an amount of stock of the Company (or its successor) in respect of
each share covered by the option, or portion thereof surrendered, with a value
equal to the excess, if any, of (i) the fair market value, on the date preceding
the date of surrender, of the shares subject to the option (or any portion
thereof) surrendered over (ii) the aggregate purchase price for such shares
under the option or portion thereof surrendered. In the case of an option
granted within six months prior to a change in control to any Participant who
may be subject to liability under Section 16(b) of the Exchange Act, such
Participant shall be entitled to surrender for cancellation his or her option
during the sixty-day period commencing upon the expiration of six months after
the date of grant of such option.
STOCK APPRECIATION RIGHTS. The 1996 Stock Incentive Plan permits the
granting of stock appreciation rights to Participants in connection with an
option or as a freestanding right. A stock appreciation right permits the
Participant to receive, upon exercise, cash and/or shares, at the discretion of
the Committee, equal in value to an amount determined by multiplying (i) the
excess, if any, of (x) for those granted in connection with an option, the per
share fair market value on the date preceding the exercise date over the per
share purchase price under the related option, or (y) for those not granted in
connection with an option, the per share fair market value on the date preceding
the exercise date over the per share fair market value on the grant date of the
stock appreciation right by (ii) the number of shares as to which such stock
appreciation right is being exercised.
Stock appreciation rights granted in connection with an option cover the
same shares as those covered by such option and are generally subject to the
same terms. Freestanding stock appreciation rights shall be granted on such
terms and conditions as shall be determined by the Committee, but shall not have
a term of greater than ten years. No stock appreciation right is exercisable
prior to the date six months after it is granted. Upon a change in control, all
stock appreciation rights become immediately and fully exercisable.
RESTRICTED STOCK. The terms of a restricted stock Award, including the
restrictions placed on such shares and the time or times at which such
restrictions will lapse, shall be determined by the Committee at the time the
Award is made. The Committee may determine at the time an Award of restricted
stock is granted that dividends paid on such restricted stock may be paid to the
Participant or deferred and, if deferred, whether such dividends will be
reinvested in shares of Common Stock. Deferred dividends (together with any
interest accrued thereon) will be paid upon the lapsing of restrictions on
shares of restricted stock or forfeited upon the forfeiture of shares of
restricted stock. The agreements evidencing Awards of restricted stock shall set
forth the terms and conditions of such Awards upon a Participant's termination
of employment. The extent, if any, to which the restrictions on shares of
restricted stock shall lapse upon a change in control will be determined by the
Committee at the time of the grant of the Award of restricted stock and set
forth in the Agreement evidencing the Award.
OTHER TERMS OF THE PLAN. The 1996 Stock Incentive Plan provides (subject to
certain restrictions in the case of Participants who may be subject to liability
under Section 16(b) of the Exchange Act) that in satisfaction of the federal,
state and local income taxes and other amounts as may be required by law to be
withheld (the "Withholding Taxes") with respect to an option or Award, the
Participant may make a written election, which may be accepted or rejected in
the discretion of the Committee, to have withheld a portion of the shares
issuable to him or her having an aggregate fair market value equal to the
Withholding Taxes.
The Committee shall have the authority at the time a grant of options or an
Award is made to award designated Participants tax bonuses that shall be paid on
the exercise of such options or payment of such Awards. The Committee shall have
full authority to determine the amount of any such tax bonus and the terms and
conditions affecting the vesting and payment thereof.
The 1996 Stock Incentive Plan will terminate on the day preceding the tenth
anniversary of its effective date. The Board may terminate or amend the 1996
Stock Incentive Plan at any time, except that (i) no such amendment or
termination may adversely affect outstanding Awards, and (ii) to the extent
necessary to maintain the 1996 Stock Incentive Plan's status under Rule 16b-3,
no amendment will be effective unless approved by stockholders.
42
<PAGE>
PRIOR STOCK PLANS. The Company's predecessor, Old EHS, had maintained the
1993 Long-Term Incentive Plan, the Senior Management Incentive Plan and the 1995
Incentive Plan (collectively, the "Prior Stock Plans") which provided for one or
more of the following awards: options, incentive stock rights, stock
appreciation rights, limited stock appreciation rights and restricted stock
purchases. As of February 29, 1996, options to purchase a total of 788,700
shares had been issued under the Prior Stock Plans ("Prior Plan Options"). No
other awards were granted under the Prior Stock Plans.
In connection with the merger of Old EHS with and into the Company, the
Prior Plan Options were assumed by the Company and issued under the 1996 Stock
Incentive Plan, and the Prior Stock Plans were terminated. The Prior Plan
Options, as issued under the 1996 Stock Incentive Plan (with no change in
vesting, expiration date or other principal terms and conditions of the
outstanding option agreements, other than price per share and the number of
shares, which changed as a result of the exchange ratio associated with the
merger of Old EHS and the Company), are subject to and governed by the terms and
conditions of the 1996 Stock Incentive Plan.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTION
In general, a Participant will not recognize taxable income upon grant or
exercise of an incentive stock option and the Company will not be entitled to
any business expense deduction with respect to the grant or exercise of an
incentive stock option. (However, upon the exercise of an incentive stock
option, the excess of the fair market value on the date of the exercise of the
shares received over the exercise price of shares will be treated as an
adjustment to alternative minimum taxable income). In order for the exercise of
an incentive stock option to qualify for the foregoing tax treatment, the
Participant generally must be an employee of the Company or a subsidiary from
the date the incentive stock option is granted through the date three months
before the date of exercise, except in the case of death or disability, where
special rules apply.
If the Participant has held the shares acquired upon exercise of an
incentive stock option for at least two years after the date of grant and for at
least one year after the date of exercise, upon disposition of the shares by the
Participant, the difference, if any, between the sale price of the shares and
the exercise price of the option will be treated as long-term capital gain or
loss. If the Participant does not satisfy these holding period requirements, the
Participant will recognize ordinary income at the time of the disposition of the
shares, generally in an amount equal to the excess of the fair market value of
the shares at the time the option was exercised over the exercise price of the
option. The balance of gain realized, if any, will be long-term or short-term
capital gain, depending on whether or not the shares were sold more than one
year after the option was exercised. If the Participant sells the shares prior
to the satisfaction of the holding period requirements but at a price below the
fair market value of the shares at the time the option was exercised, the amount
of ordinary income will be limited to the excess of the amount realized on the
sale over the exercise price of the option. Subject to the discussion below with
respect to Section 162(m) of the Code, the Company will be allowed a business
expense deduction to the extent the Participant recognizes ordinary income.
In general, a Participant to whom a nonqualified stock option is granted
will recognize no income at the time of the grant of the option. Upon exercise
of a nonqualified stock option, a Participant will recognize ordinary income in
an amount equal to the amount by which the fair market value of the shares on
the date of exercise exceeds the exercise price of the option (special rules may
apply in the case of a Participant who is subject to Section 16(b) of the
Exchange Act). Subject to the discussion below with respect to Section 162(m) of
the Code, the Company will be entitled to a business expense deduction in the
same amount and at the same time as the Participant recognizes ordinary income.
Section 162(m) of the Code and the regulations proposed thereunder generally
would disallow the Company a federal income tax deduction for compensation paid
to the chief executive officer and the four other most highly compensated
executive officers to the extent such compensation paid to any of such
individuals exceeds one million dollars in any year. Section 162(m) generally
does not disallow a deduction for payments of qualified "performance-based
compensation" the material terms of which have been approved by stockholders. In
addition, Section 162(m) does not apply for a specified period to certain plans
maintained by a corporation before the initial public offering of its securities
if the material terms of the
43
<PAGE>
plans are disclosed in the prospectus. The Company intends that compensation
attributable to options and stock appreciation rights granted under the 1996
Stock Incentive Plan will be qualified "performance-based compensation" or
exempt from Section 162(m).
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AND ADVISORY BOARD MEMBERS
The Stock Option Plan for Non-Employee Directors and Advisory Board Members
(the "Director Plan") was adopted by the Board of Directors and approved by the
shareholders on April 29, 1993, and amended on May 4, 1994. In connection with
the merger of Old EHS with and into the Company, the Director Plan and the
options outstanding under the Director Plan were assumed by the Company. The
Director Plan was further amended on March 14, 1996 and, as so amended, was
approved by the Company's stockholders on May 15, 1996.
The principal provisions of the Director Plan are summarized below. The
following summary of the material provisions of the Director Plan does not
purport to be complete and is qualified in its entirety by the terms of the
Director Plan, a complete copy of which is attached as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Director Plan, as amended, provides for the grant of options for the
purchase of up to 150,000 shares of Common Stock of the Company to non-employee
directors of the Company and members of Advisory Boards established by the
Company. Currently, approximately 10 persons are eligible for grants of options
under the Director Plan. No director may be granted options with respect to more
than 75,000 shares during the term of this Plan. The Director Plan will be
administered by a "Committee" (currently the Compensation Committee) which is
composed of at least two directors of the Company, each of whom is a
"disinterested person" within the meaning of Rule 16b-3.
Under the terms of the Plan, each non-employee director, on commencement of
office will receive an option to purchase 6,600 shares of Common Stock upon the
date of election. In addition, on the date of the Company's annual meeting of
shareholders, each non-employee director continuing in office will receive an
option to purchase 3,300 shares of Common Stock. The exercise price per share
for all options granted under the Director Plan will be equal to the market
price of the Common Stock as of the date of grant and may be paid (i) in cash,
(ii) by transferring shares to the Company, or (iii) a combination of the
foregoing. Options may not be assigned or transferred except by will or by the
laws of descent and distribution. Options become exercisable in full beginning
one year after their date of grant and are exercisable only while the director
is serving as a director of the Company or within 180 days after the Participant
ceases to serve as a director of the Company (except that if a director dies or
becomes disabled while he or she is serving as a director of the Company, the
option is exercisable for a period of 12 months from the date of death or
disability). However, upon a change in control of the Company, options become
immediately and fully exercisable. Options expire, to the extent not exercised,
10 years from the date of grant.
The Director Plan also authorizes the issuance of options to individuals
serving on Advisory Boards established by the Company. The provisions of the
plan for Advisory Board members are substantially the same as those applicable
to directors.
No options will be granted under the Director Plan after the tenth
anniversary of its effective date. The Board may terminate or amend the Director
Plan at any time, except that (i) no such amendment or termination may adversely
affect outstanding options, and (ii) to the extent necessary to maintain the
Director Plan's status under Rule 16b-3, no amendment will be effective unless
approved by stockholders.
As of March 31, 1996, a total of 85,800 stock options were outstanding under
the Director Plan.
44
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS. In general, a director
to whom an option is granted under the Director Plan will recognize no income at
the time of the grant of the option. Upon exercise of the option, a director
will recognize ordinary income in an amount equal to the amount by which the
fair market value of the shares on the date of exercise exceeds the exercise
price of the option (special rules may apply in the case of an option exercised
at a time when the sale of the acquired shares could subject the director to
suit under Section 16(b) of the Exchange Act). The Company will be entitled to a
business expense deduction in the same amount and at the same time as the
director recognizes ordinary income.
EMPLOYEE STOCK PLAN
The Company's employee stock plan (the "Employee Stock Plan") was adopted by
the Board of Directors on November 30, 1995 for the purpose of issuing to each
former Dow employee who became and remained a Company employee, 50 shares of
Common Stock at no cost to that employee. An aggregate of 16,500 shares of
Common Stock of the Company may be issued pursuant to the Employee Stock Plan.
COMPENSATION OF DIRECTORS
Members of the Board of Directors presently receive no additional
remuneration for acting in that capacity. The Company anticipates that its
non-employee Directors will be paid $500 (plus reasonable out-of-pocket
expenses) for each Board meeting or Committee meeting they attend. In addition,
non-employee Directors are entitled to receive options to purchase shares of
Common Stock under the Company's Outside Director and Advisory Board Plan.
Battle Fowler LLP, in which Gerald A. Eppner, Esq., a Director of the
Company is a partner, has represented the Company as general legal counsel since
1993. Since then the Company has accrued fees to Battle Fowler LLP aggregating
$400,000, of which $150,000 was paid in 1995, $50,000 has been paid to date in
1996 and $200,000 has been accrued for payment in 1996. The Company also expects
to pay Battle Fowler LLP an additional amount of approximately $250,000 for
services in connection with this Offering.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 31, 1996, certain information
regarding beneficial ownership of the Common Stock by (i) each stockholder known
to the Company to be the beneficial owner of more than 5% of the Common Stock,
(ii) each director and named executive officer of the Company, and (iii) all
executive officers and directors as a group, before and after the Offering.
Unless otherwise indicated, each of the stockholders has sole voting investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
AMOUNT AND NATURE OF ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------ -------------------- ----------------- ---------------
<S> <C> <C> <C>
Don G. Hoff(1)(2)........................................... 1,910,617 59.8% 33.0%
Perry D. Hoff(3)(4)......................................... 1,699,417 57.2% 30.5%
Intertec Holdings, L.P.(3)(5)............................... 1,676,317 56.6% 30.1%
DowBrands Inc.(6)(7)........................................ 1,163,910 28.2% 17.3%
Futurtec, L.P.(8)(9)........................................ 419,843 14.2% 7.6%
Claude Ganz(10)(11)......................................... 214,500 7.2% 3.9%
Dominic J. LaRosa(12)(13)................................... 99,000 3.3% 1.8%
Donald E. Porter(1)(14)..................................... 95,700 3.2% 1.7%
Gerald A. Eppner(15)(16).................................... 82,500 2.8% 1.5%
Joseph F. Stiley, III(17)(18)............................... 72,600 2.4% 1.3%
William M. Boswell(12)(19).................................. 9,900 * *
Michele L. Redmon(12)(20)................................... 4,950 * *
Harold M. Copperman(1)...................................... 0 * *
Paul E. Dean(1)............................................. 0 * *
All officers and directors of the Company as a group (15
persons)(21)............................................... 2,384,415 69.6% 39.6%
</TABLE>
- ------------------------
* Represents less than one percent.
(1) The address of Messrs. Don G. Hoff, Porter, Copperman and Dean is c/o
Electronic Hair Styling, Inc., One Lovell Avenue, Mill Valley, CA 94941.
(2) Includes (i) 1,676,317 shares held by Intertec Holdings, L.P., an
investment partnership (whose general partner is Intertec Holdings, Inc., a
corporation of which Mr. Don Hoff is a director and his son is president
and a director) and whose sole limited partner is Intertec Ltd., a limited
partnership in which Mr. Don Hoff holds a 12% limited partner interest, and
whose general partner is a corporation of which Mr. Don Hoff is a director
and his son is an officer and director), and (ii) 234,300 shares which may
be acquired by Mr. Hoff upon the exercise of options currently exercisable
or exercisable within the next 60 days. Excludes 93,060 shares held
directly by other members of Mr. Hoff's family and 146,115 shares which
Intertec Holdings, L.P. is required to purchase pursuant to a stock
purchase agreement with the Company. See "Certain Transactions." Mr. Don
Hoff disclaims beneficial ownership of all but 433,447 shares.
(3) The address of Mr. Perry D. Hoff and Intertec Holdings, L.P. is East 5058
Grapeview Loop, Allyn, WA 98524.
(4) Includes (i) 1,676,317 shares held by Intertec Holdings, L.P., an
investment partnership (whose general partner is Intertec Holdings, Inc., a
corporation of which Mr. Perry Hoff is president and a director)
46
<PAGE>
and whose sole limited partner is Intertec Ltd., a limited partnership in
which Mr. Perry Hoff holds a 25% limited partner interest, and whose
general partner is a corporation of which Mr. Perry Hoff is an officer and
director), (ii) 13,200 shares held directly by Mr. Perry Hoff, and (iii)
9,900 shares which may be acquired by Mr. Perry Hoff upon the exercise of
options currently exercisable or exercisable within the next 60 days. Does
not include 79,860 shares held directly by other members of Mr. Perry
Hoff's family and 146,115 shares which Intertec Holdings, L.P. is required
to purchase pursuant to a stock purchase agreement with the Company. See
"Certain Transactions." Mr. Perry Hoff disclaims beneficial ownership of
all but 437,989 shares.
(5) The sole limited partner of Intertec Holdings, L.P. is Intertec Ltd., a
limited partnership in which Mr. Don Hoff and members of his immediate
family hold 100% of the limited partner interest, and whose general partner
is a corporation, all of whose officers and directors are members of Mr.
Hoff's family. Does not include 128,589 shares which Intertec Holdings,
L.P. is required to purchase pursuant to a stock purchase agreement with
the Company. See "Certain Transactions."
(6) The address of DowBrands Inc. is 9550 Zionsville Road, P.O. Box 68511,
Indianapolis, IN 46268.
(7) Includes 1,163,910 shares which may be acquired upon the conversion of
Series A and Series B Convertible Preferred Stock.
(8) The address of Futurtec, L.P. is 111 Great Neck Road, Suite 301, Great
Neck, NY 11021.
(9) Futurtec Capital Corp., the general partner of Futurtec, L.P., exercises
sole voting and investment power over the shares held by Futurtec, L.P. Mr.
Ido Klear is the sole stockholder of Futurtec Capital Corp.
(10) The address of Mr. Ganz is P.O. Box 1074, Glen Ellen, CA 95442.
(11) Includes 9,900 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(12) The address of Messrs. LaRosa and Boswell and Ms. Redmon is 5601 East River
Road, Fridley, MN 55432.
(13) Includes 33,000 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days. Does not
include warrants to purchase 16,500 shares of Common Stock, exercisable
commencing May 1996.
(14) Includes 36,300 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(15) The address of Mr. Eppner is 75 East 55th Street, New York, NY 10022.
(16) Consists of 9,900 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(17) The address of Mr. Stiley is West 528 Center Street, Spokane, WA 99203.
(18) Includes 29,700 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
(19) Includes 9,900 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days. Does not
include warrants to purchase 16,500 shares of Common Stock, exercisable
commencing May 1996.
(20) Consists of 4,950 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days. Does not
include warrants to purchase 8,250 shares of Common Stock exercisable
commencing May 1996.
(21) Includes 466,950 shares which may be acquired upon the exercise of options
currently exercisable or exercisable within the next 60 days.
47
<PAGE>
CERTAIN TRANSACTIONS
LICENSE AGREEMENT. In May 1993, the Company acquired from Intertec Ltd., a
Delaware limited partnership ("Intertec Ltd."), for a 30-year period, the
exclusive worldwide rights to use all RFT technology owned by Intertec Ltd.
relating to cosmetic hair care applications. The 30-year exclusive license
agreement (the "License") gives the Company the right to develop, manufacture
and sell products for cosmetic hair care applications based on RFT technology.
Intertec Ltd., which is entirely owned by Mr. Don G. Hoff and members of his
immediate family, is the sole limited partner in Intertec Holdings, L.P., the
Company's principal shareholder. The License is non-assignable, but the Company
may sublicense the rights granted to it provided the sublicense includes certain
protective provisions. The Company issued, as consideration for the grant of the
license, a promissory note in the principal amount of $1.0 million, and agreed
to pay a royalty as described below. The Company's promissory note, as amended
effective as of May 1993 (the "Intertec Note"), is payable to Intertec Holdings,
L.P., as agent for Intertec Ltd., in four equal annual installments of $250,000,
commencing on the first to occur of (i) the first anniversary of the closing of
this Offering, or (ii) May 31, 1998. The Intertec Note accrues interest in
arrears at 5.5% per annum, payable with each installment of principal. The
Company has also agreed to pay certain legal expenses, which have been incurred
by Intertec Ltd. in connection with preparing and prosecuting the patent
application for the patent covering the RFT technology. Such expenses were
approximately $60,000 as of February 29, 1996.
The Company will pay a royalty to Intertec Ltd. equal to (i) 1.0% of the
Company's proceeds from any direct sales made by the Company of products,
instruments or components using, or derived from, the technology, and (ii) 1.0%
of the "revenue base" of the Company's sub-licensees. The "revenue base" is the
proceeds received by the sub-licensees for their sales of products using the RFT
technology. This royalty declines in steps as the revenue base increases,
ultimately declining to 0.4% when cumulative sales from all products using the
RFT technology reach $10.0 billion. The Company has no sub-licenses as of the
date of this Prospectus, and there can be no assurance it will enter into any
sub-license on terms favorable to the Company. Upon expiration in 2012 of the
patent held by Intertec Ltd., the Company will be unable to deny competitors
access to RFT technology.
Neither the $1.0 million license fee, the terms of the Intertec Note nor the
terms of the royalty were established by arm's length negotiations or
independent appraisal.
COMMON STOCK PURCHASE AGREEMENT. In March 1996, the Company and Intertec
Holdings, L.P. entered into a stock purchase agreement pursuant to which
Intertec Holdings, L.P. agreed to purchase from the Company, and the Company
agreed to sell to Intertec Holdings, L.P., shares of Common Stock at the initial
public offering price per share. The aggregate number of shares of Common Stock
which Intertec Holdings, L.P. is required to purchase is equal to (x) the
outstanding principal of, and all accrued and unpaid interest on the Intertec
Note as of the closing of the Company's initial public offering, divided by (y)
the initial public offering price per share. Intertec Holdings, L.P. is
obligated, subject to there being no event of default under the Company's loan
agreements and certain other customary conditions, to purchase and pay for the
shares in four equal installments commencing on the first anniversary of the
closing of the Offering. The deferred purchase price under the stock purchase
agreement accrues interest from and after the closing of the Company's initial
public offering at 5.5% per annum, payable with each installment. Intertec
Holdings, L.P. may elect to accelerate one or more purchases under the stock
purchase agreement on 30 days prior notice to the Company. The Company may, at
any time or from time to time, terminate Intertec Holdings, L.P.'s purchase
rights with respect to one or more of the installments, on 10 days prior notice
to Intertec Holdings, L.P. The terms of the stock purchase agreement were not
established by arm's length negotiations or independent appraisal.
FACILITIES AND EQUIPMENT. Pursuant to a lease dated June 30, 1993, the
Company leases from Innovative Capital Management, Inc. ("ICM"), an affiliate of
Mr. Don G. Hoff and Mr. Perry D. Hoff, Directors of the Company, for a 36-month
term expiring in June, 1996, office space in Mill Valley, CA, together with all
of the furniture and office equipment at that location, for a total of $7,513
per month. The space consists of approximately 4,000 square feet used for
corporate offices with furniture and equipment, including computers, telephones,
office machines, desks, conference tables and related items. The terms of the
lease were
48
<PAGE>
not established by arms' length negotiations or independent appraisal. The
Company's Board of Directors will review the terms of a proposed lease renewal
prior to the scheduled expiration of the lease and, if the terms are comparable
to those which might be obtained in an arm's-length transaction, is expected to
approve the renewal.
RELEASE OF PLEDGED ASSETS. On November 22, 1995, the Company repaid in full
its indebtedness to WestAmerica Bank in the amount of $300,000, from the
proceeds of the Norwest Credit Line, thereby releasing WestAmerica Bank's
security interest in certain assets of ICM, pledged as security for such
indebtedness. In connection with the release of its pledged assets, ICM released
its security interest in all the assets of the Company which had been granted to
ICM as security for its pledge.
MANUFACTURING AGREEMENT WITH DOWBRANDS. See "Business -- Manufacturing --
Contract Manufacturing" for information concerning the Company's agreement with
DowBrands, pursuant to which DowBrands agreed to accept $3.0 million of credits
to be applied towards purchases of finished products in eight equal quarterly
installments of $375,000 commencing February 1996.
LEGAL FEES. Battle Fowler LLP, in which Gerald A. Eppner, Esq., a Director
of the Company is a partner, has represented the Company as general legal
counsel since 1993. Since then the Company has accrued fees to Battle Fowler LLP
aggregating $400,000, of which $150,000 was paid in 1995, $50,000 has been paid
to date in 1996 and $200,000 has been accrued for payment in 1996. The Company
expects to pay Battle Fowler LLP an additional amount of approximately $250,000
for services in connection with this Offering.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares of
Common Stock, $0.01 par value, and 4,000,000 shares of preferred stock. As of
March 31, 1996 there were 2,960,495 shares of Common Stock outstanding held by
354 stockholders, and 1,000,000 shares of preferred stock held by one
stockholder.
COMMON STOCK
The shares of Common Stock currently outstanding are, and the shares of
Common Stock that will be outstanding upon the consummation of this Offering
will be, validly issued, fully paid and non-assessable. Each holder of Common
Stock is entitled to one vote for each share owned of record on all matters
voted upon by the stockholders, and a majority vote is required for action to be
taken by the stockholders. In the event of liquidation, dissolution or
winding-up of the Company, the holders of Common Stock are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the
payment of all debts and liabilities of the Company and the liquidation
preference of any outstanding preferred stock. The holders of the Common Stock
have no preemptive rights or cumulative voting rights and there are no
redemption, sinking fund or conversion provisions applicable to the Common
Stock.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors, out of funds legally available for such
purpose, subject to the dividend and liquidation rights of any preferred stock
that may be issued. Payment of dividends are restricted by the terms of the
Company's existing loan agreement and the terms of the Company's Series A and
Series B Convertible Preferred Stock.
PREFERRED STOCK
The Company's Certificate of Incorporation provides that the Company may, by
vote of its Board of Directors, issue the preferred stock in one or more series
having the rights, preferences, privileges and restrictions thereon, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or designation of such series, without further vote or
action by the stockholders. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others.
49
<PAGE>
CONVERTIBLE PREFERRED STOCK
Upon the consummation of this Offering, the 1,000,000 shares of Series A
Convertible Preferred Stock issued to Dow as part of the purchase price of the
Lamaur acquisition will remain outstanding, and the Dow Convertible Note issued
as part of the purchase price of the Lamaur acquisition will automatically be
converted into 763,500 shares of the Company's Series B Convertible Preferred
Stock. The Series A Convertible Preferred Stock provides for a liquidation
preference of $10.00 per share, or $10.0 million in the aggregate, plus any
declared and unpaid dividends. Dividends are payable with respect to the Series
A Convertible Preferred Stock only to the extent (on an as-converted basis) that
dividends are declared payable on the Common Stock. The Series B Convertible
Preferred Stock provides for (i) cumulative cash dividends at the rate of 8.0%
per annum, payable quarterly, and (ii) a liquidation preference of $6.55 per
share, or $5.0 million in the aggregate plus all accrued and unpaid dividends.
The Series A Preferred is not redeemable. The Series B Convertible Preferred
Stock may be redeemed by the Company at any time or from time to time, on 30
days' prior written notice, at a redemption price per share equal to $6.55, plus
all accrued and unpaid dividends. Each Series of Convertible Preferred Stock is
entitled to vote on a share-for-share basis with the Common Stock, and has
certain rights to vote as a class. The Convertible Preferred Stock is
convertible at any time at the option of the holder into shares of Common Stock,
initially at the rate of 0.660 shares of Common Stock for each share of
Convertible Preferred Stock, subject to adjustments for stock dividends, stock
splits, reclassifications or subdivisions, and may be converted into Common
Stock at the option of the Company if the last reported sales price of the
Common Stock exceeds $21.21 for a 30-day trading period, and the Common Stock is
then registered pursuant to Section 12(b) or 12(g) of the Exchange Act and
listed on a securities exchange or quoted on the Nasdaq National Market.
LIMITATIONS UPON TRANSACTIONS WITH "INTERESTED STOCKHOLDERS"
Section 203 of the Delaware General Corporation Law prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own), 15% or more of the corporation's voting stock. The
restrictions of Section 203 do not apply, among other things, if a corporation,
by action of its stockholders, adopts an amendment to its certificate of
incorporation or by-laws expressly electing not to be governed by Section 203,
provided that, in addition to any other vote required by law, such amendment to
the certificate of incorporation or by-laws must be approved by the affirmative
vote of a majority of the shares entitled to vote. Moreover, an amendment so
adopted is not effective until twelve months after its adoption and does not
apply to any business combination between the corporation and any person who
became an interested stockholder of such corporation on or prior to such
adoption. The Company's Certificate of Incorporation and By-laws do not
currently contain any provisions electing not to be governed by Section 203 of
the Delaware General Corporation Law. The provisions of Section 203 of the
Delaware General Corporation Law may have a depressive effect on the market
price of the Common Stock because they could impede any merger, consolidating
takeover or other business combination involving the Company or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares by current stockholders could adversely affect the
price of the Company's Common Stock. Upon completion of this Offering, the
Company will have 5,560,495 shares of Common Stock outstanding, of which
2,960,495 shares of Common Stock (53.2% of the shares to be outstanding) were
issued by the Company in private transactions. Some of these shares are treated
as "restricted securities" pursuant to Rules 144 and 701 under the Securities
Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be "affiliates" of the
Company (as that term is defined under the Act), who has beneficially owned his
or her shares for at least two years is entitled to sell within any three-month
period that number of restricted securities that does not exceed the greater of
one percent of the then outstanding shares of Common Stock (55,605 shares based
on the number of shares to be outstanding after the Offering), or the average
weekly trading volume of the Common Stock during the four calendar weeks
immediately preceding such sale, notice and the availability of current public
information about the Company. After three years have elapsed from the later of
the issuance of restricted securities by the Company or their acquisition from
an affiliate, such shares may be sold without limitations by persons who have
not been affiliates of the Company for at least three months.
The Company has agreed not to register, issue, sell or otherwise dispose of
any of its securities, subject to certain exceptions, for a period of 180 days
from the date of this Prospectus without the prior written consent of the
Representatives. The Company's officers, directors and principal stockholders
have agreed (i) not to, directly or indirectly, issue, agree or offer publicly
to sell, grant an option for the purchase or sale of, assign, transfer, pledge,
hypothecate, distribute or otherwise encumber or dispose of, any shares of
Common Stock or other equity securities of the Company or other securities
convertible into or exercisable for such shares of Common Stock or other equity
securities for 180 days from the date of this Prospectus without the prior
written consent of the Representatives, and (ii) not to register any shares held
by them for a period of 180 days from the date of this Prospectus.
REGISTRATION RIGHTS. Certain of the Company's existing holders of Common
Stock, including Intertec Holdings, L.P., the Company's principal stockholder,
and the Company are parties to agreements providing each such holder with
certain registration rights, including one demand registration right exercisable
at any time after six months from the date of this Prospectus for registration
of "restricted securities" having an aggregate market value of at least
$500,000. The registration rights of Intertec Holdings, L.P. extend to the
shares of Common Stock purchasable under its stock purchase agreement, dated as
of March 19, 1996, with the Company.
The Company and Dow are parties to an agreement providing for certain
registration rights with respect to the shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock, including one demand registration
exercisable at any time after the date of this Prospectus. The Company has also
agreed to register for resale on Securities Act Form S-3 all of the shares of
Common Stock issuable upon conversion of the Convertible Preferred Stock as soon
as it is eligible for the use of such form (anticipated to be one year from the
date of this Prospectus). Dow has also been granted "piggyback" registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock until such time as they cease to be "restricted
securities."
Each of the Company's existing holders of Common Stock was granted
"piggyback" registration rights for a two-year period following their respective
purchases of Common Stock.
The Company has agreed to pay all registration expenses (other than
underwriting or sales commissions) incurred in complying with the registration
rights described above.
Notwithstanding the foregoing, all existing stockholders of the Company with
registration rights have agreed (i) to waive their registration rights with
respect to the Offering, and (ii) without the prior written consent of the
Company and the representative of the Underwriters, not to register any shares
held by them for a period of six months from the date of this Prospectus.
51
<PAGE>
Prior to this Offering there has been no public market for the Common Stock.
The Company cannot predict the number of shares which may be sold in the future
pursuant to Rule 144 since such sales will depend upon the market price and
trading volume of Common Stock, the circumstances of individual holders thereof
and other factors. In addition, the Company can make no predictions as to the
effect, if any, that sales of shares of Common Stock or the availability of
shares for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Common Stock in the public
market could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities.
The Company intends to file a registration statement under the Securities
Act to register the shares of Common Stock issued and reserved for issuance in
compensatory arrangements and under its employee and director stock plans.
Registration would permit the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act. The number of shares
reserved for issuance under the Company's equity compensation plans and the
number of shares with respect to which awards are outstanding are as follows:
1,250,000 shares under the 1996 Stock Incentive Plan (of which 813,700 were
outstanding as of March 31, 1996), 150,000 shares under the Director Plan (of
which 85,800 were outstanding as of March 31, 1996), and 16,500 under the
Employee Stock Plan (of which 15,575 were outstanding as of March 31, 1996).
UNDERWRITING
The Underwriters below, for whom Rodman & Renshaw, Inc. ("Rodman") and Sands
Brothers & Co., Ltd. ("Sands") are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Rodman & Renshaw, Inc................................................................ 1,300,000
Sands Brothers & Co., Ltd............................................................ 1,300,000
-----------------
Total............................................................................ 2,600,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that the Underwriters are committed to purchase and pay for
all of the above shares of Common Stock if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus, that the Underwriters may allow
to selected dealers a concession of $0.31 per share, and that such dealers may
reallow a concession of $0.10 per share to certain other dealers. After the
public offering, the offering price and other selling terms may be changed by
the Underwriters. Application has been made for the Common Stock to be included
for quotation on the Nasdaq National Market. The Representatives have advised
the Company that they do not anticipate sales to discretionary accounts by the
Underwriters to exceed 5% of the total number of shares of Common Stock offered
hereby.
The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to an aggregate of 390,000 additional shares of Common Stock,
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it, as shown in the above table, bears to the 2,600,000
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
52
<PAGE>
In addition to the underwriting discounts and commissions shown on the cover
page of this Prospectus, the Company has agreed to pay to Sands additional
compensation in the amount of $100,000 for investment banking services performed
in connection with the acquisition of Lamaur from Dow, and to reimburse the
Representatives for certain out-of-pocket expenses, in the amount of $75,000 (of
which $25,000 has been advanced).
In connection with this Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, warrants to purchase a number of
shares of Common Stock equal to 7% of the shares of Common Stock sold in the
Offering, exclusive of any shares of Common Stock sold pursuant to the
Underwriters' over-allotment option (the "Representatives' Warrants"). The
Representatives' Warrants are initially exercisable at a price of $9.60 per
share of Common Stock (120% of the initial public offering price) for a period
of four years, commencing one year from the effective date of the Offering and
are restricted from sale, transfer, assignment or hypothecation for a period of
12 months from the effective date of the Offering, except to officers, partners
or successors of the Representatives. The exercise price of the Representatives'
Warrants and the number of shares of Common Stock issuable upon exercise thereof
are subject to adjustment under certain circumstances. The Representatives'
Warrants grant to the holders thereof certain rights of registration for the
securities issuable upon exercise of the Representatives' Warrants. The
Representatives' Warrants are redeemable by the Company, on prior notice, if the
price of the Common Stock two years after the closing of the Offering, exceeds
$20.00 (250% of the initial public offering price) for a 60-day period.
In addition, Rodman has a one-time right of first refusal to perform
services for the Company with respect to certain future transactions for a
period of three years after the effective date of the Offering.
The officers, directors and principal stockholders of the Company have
agreed that they will not publicly sell or dispose of any shares of Common Stock
for a period of 180 days after the date on which the Registration Statement is
declared effective by the Commission, without the prior written consent of the
Representatives. See "Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
Rodman was retained by the Company in March 1996 for a 10-month period to
provide certain financial advisory services related to general strategic
financial advice, valuation and potential mergers and acquisitions. The Company
has agreed to pay Rodman (i) $265,000, of which $15,000 has been paid to date
and the balance will be payable in equal monthly installments commencing the
month following the closing of the Offering and ending in December 1996, and
(ii) a transaction fee with respect to consummated mergers or acquisitions in
such amount as may be mutually agreed upon in connection with each separate
transaction. As further consideration for such services, the Company has agreed
to sell to Rodman, for nominal consideration, warrants to purchase a number of
shares of Common Stock equal to 1.5% of the number of shares of Common Stock
sold in the Offering, exclusive of any shares of Common Stock sold pursuant to
the Underwriters' over-allotment option (the "Financial Advisor's Warrants").
The Financial Advisor's Warrants are initially exercisable at a price of $9.60
per share of Common Stock (120% of the initial public offering price) for a
period of four years, commencing one year from the effective date of the
Offering and are restricted from sale, transfer, assignment or hypothecation for
a period of 12 months from the effective date of the Offering, except to
officers, partners or successors of Rodman. The exercise price of the Financial
Advisor's Warrants and the number of shares of Common Stock issuable upon
exercise thereof are subject to adjustment under certain circumstances. The
Financial Advisor's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise of the Financial
Advisor's Warrants. The Financial Advisor's Warrants are redeemable by the
Company, on prior notice, if the price of the Common Stock two years after the
closing of the Offering exceeds $20.00 (250% of the initial public offering
price) for a 60-day period.
53
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined through
negotiations between the Company and the Representatives and is not necessarily
related to the Company's asset value, net worth or other established criteria of
value. Among the factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, the Company's capital structure and
certain other factors as were deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Battle Fowler LLP, New York,
New York. Gerald A. Eppner, Esq., a member of Battle Fowler LLP, legal counsel
to the Company, is a director of the Company and owns 72,600 shares of the
Company's Common Stock. Certain legal matters in connection with the sale of the
Common Stock offered hereby will be passed upon for the Underwriters by
Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York.
EXPERTS
The financial statements of Electronic Hair Styling, Inc. as of December 31,
1994 and 1995, for the period from April 1, 1993 (Inception) to December 31,
1993, and for the years ended December 31, 1994 and 1995, included in this
Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of PCD, The Personal Care Division of DowBrands
L.P., for the years ended December 31, 1993 and 1994, and for the period from
January 1, 1995 through November 30, 1995, included in this Prospectus, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein (which report expresses an unqualified opinion on such
financial statements and includes an explanatory paragraph referring to PCD's
basis of presentation) and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form S-1 with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information pertaining to the Company and the
shares of Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits, financial statements and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or any other document are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates.
54
<PAGE>
ELECTRONIC HAIR STYLING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ELECTRONIC HAIR STYLING, INC.
Independent Auditors' Report.......................................................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and as of March 31, 1996 (Unaudited).................. F-3
Statements of Operations for the Period from April 1, 1993 (Inception) to December 31, 1993, for the
Years Ended December 31, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996
(Unaudited).......................................................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the Period from April 1, 1993 (Inception)
to December 31, 1993, for the Years Ended December 31, 1994 and 1995 and for the Three Months Ended
March 31, 1996 (Unaudited)........................................................................... F-5
Statements of Cash Flows for the Period from April 1, 1993 (Inception) to December 31, 1993, for the
Years Ended December 31, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996
(Unaudited).......................................................................................... F-6
Notes to Financial Statements for the Period from April 1, 1993 (Inception) to December 31, 1993, for
the Years Ended December 31, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996
(Unaudited).......................................................................................... F-7
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
Independent Auditors' Report.......................................................................... F-15
Statements of Operations for the Years Ended December 31, 1993 and 1994 and for the Period from
January 1, 1995 to November 30, 1995................................................................. F-16
Statements of Net Invested Capital for the Years Ended December 31, 1993 and 1994 and for the Period
from January 1, 1995 to November 30, 1995............................................................ F-17
Statements of Cash Flows for the Years Ended December 31, 1993 and 1994 and for the Period from
January 1, 1995 to November 30, 1995................................................................. F-18
Notes to Financial Statements for the Years Ended December 31, 1993 and 1994 and for the Period from
January 1, 1995 to November 30, 1995................................................................. F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Electronic Hair Styling, Inc.:
We have audited the accompanying balance sheets of Electronic Hair Styling,
Inc. (the "Company"), as of December 31, 1994, and 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
period from April 1, 1993 (Inception) to December 31, 1993 and for each of the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
1995, and the results of its operations and its cash flows for the period from
April 1, 1993 (Inception) to December 31, 1993 and for the years ended December
31, 1994 and 1995, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
March 21, 1996
F-2
<PAGE>
ELECTRONIC HAIR STYLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash......................................................................... $ 2 $ 2,338 $ 456
Receivables from Dow......................................................... -- 2,374 2,073
Accounts receivable, net..................................................... -- 10,307 13,298
Inventories (Note 3)......................................................... -- 11,140 10,268
Prepaid expenses and other current assets.................................... -- 210 209
--------- --------- -----------
Total current assets....................................................... 2 26,369 26,304
Property, Plant and Equipment, Net (Note 4).................................... 4 16,283 16,034
Other Assets................................................................... -- 315 468
--------- --------- -----------
Total...................................................................... $ 6 $ 42,967 $ 42,806
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................. $ 144 $ 6,469 $ 6,990
Accrued expenses............................................................. 91 4,024 4,856
Accrued salaries, wages and employee related expenses........................ -- 2,605 1,941
Current portion of long-term debt (Note 5)................................... 185 1,200 1,200
Payables to related parties (Note 8)......................................... 48 1,725 1,500
--------- --------- -----------
Total current liabilities.................................................. 468 16,023 16,487
--------- --------- -----------
Long-Term Debt (Note 5)........................................................ -- 12,850 13,146
Related Party Obligations (Note 8)............................................. 1,000 7,500 7,125
Commitments and Contingencies (Note 9).........................................
Stockholders' Equity (Deficit) (Note 6):
Preferred stock, $0.01 par value, 4,000,000 shares authorized, 1,000,000
shares of Series A issued and outstanding at December 31, 1995 and March 31,
1996 ($10,000,000 liquidation preference)................................... -- 8,500 8,500
Common stock, $0.01 par value, 12,000,000 shares authorized; 2,498,100,
2,944,920 and 2,960,495 shares, issued and outstanding at December 31, 1994
and 1995 and March 31, 1996, respectively................................... 25 29 30
Additional paid-in capital................................................... 734 1,718 1,894
Stock subscriptions receivable............................................... -- (50) (50)
Accumulated deficit.......................................................... (2,221) (3,603) (4,326)
--------- --------- -----------
Total stockholders' equity (deficit)....................................... (1,462) 6,594 6,048
--------- --------- -----------
Total Liabilities and Stockholders' Equity..................................... $ 6 $ 42,967 $ 42,806
--------- --------- -----------
--------- --------- -----------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
APRIL 1, 1993 DECEMBER 31, MARCH 31,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales to Dow...................................... $ -- $ -- $ 1,644 $ -- $ 6,864
Net Sales to Others................................... -- -- 6,426 -- 21,616
------- --------- --------- --------- ---------
Total Net Sales....................................... -- -- 8,070 -- 28,480
Cost of Goods Sold.................................... -- -- 5,656 -- 17,954
------- --------- --------- --------- ---------
Gross Margin.......................................... -- -- 2,414 -- 10,526
Operating Expenses:
Selling, general and administrative expenses........ 565 557 3,496 93 10,843
Technology acquired from a related party (Note 8)... 1,000 -- -- -- --
------- --------- --------- --------- ---------
Total operating expenses.......................... 1,565 557 3,496 93 10,843
------- --------- --------- --------- ---------
Operating Loss........................................ (1,565) (557) (1,082) (93) (317)
Interest Expense...................................... (40) (59) (300) (18) (414)
Other Income.......................................... -- -- -- -- 8
------- --------- --------- --------- ---------
Net Loss.............................................. $ (1,605) $ (616) $ (1,382) $ (111) $ (723)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Net Loss per Share.................................... $ (.44) $ (.15) $ (.34) $ (.03) $ (.18)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Weighted Average Common and Common Equivalent Shares
Outstanding.......................................... 3,658 4,086 4,086 4,086 4,086
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM APRIL 1, 1993 (INCEPTION) TO DECEMBER 31, 1993,
THE YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THE THREE MONTHS ENDED MARCH 31,
1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
---------------------- ------------------------ PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
--------- ----------- ----------- ----------- ----------- --------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization --
for cash................ -- $ -- 2,244 $ 22 $ 12 $ -- $ -- $ 34
Issuance of common stock
for cash................ -- -- 254 3 382 -- -- 385
Grants of non-cash stock
option credits.......... -- -- -- -- 129 -- -- 129
Net loss................. -- -- -- -- -- -- (1,605) (1,605)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, December 31,
1993.................. -- -- 2,498 25 523 -- (1,605) (1,057)
Grants of non-cash stock
option credits.......... -- -- -- -- 211 -- -- 211
Net loss................. -- -- -- -- -- -- (616) (616)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, December 31,
1994.................. -- -- 2,498 25 734 -- (2,221) (1,462)
Issuance of Series A
preferred stock......... 1,000 8,500 -- -- -- -- -- 8,500
Issuance of common stock
for cash................ -- -- 135 1 214 -- -- 215
Issuance of common stock
for services............ -- -- 156 1 236 -- -- 237
Issuance of common stock
for stock
subscriptions........... -- -- 73 1 99 (100) -- --
Grants of non-cash stock
option credits.......... -- -- -- -- 311 -- -- 311
Conversion of notes
payable to common
stock................... -- -- 83 1 124 -- -- 125
Reduction of stock
subscriptions
receivable.............. -- -- -- -- -- 50 -- 50
Net loss................. -- -- -- -- -- -- (1,382) (1,382)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, December 31,
1995.................. 1,000 8,500 2,945 29 1,718 (50) (3,603) 6,594
Grants of non-cash stock
option credits
(unaudited)............. -- -- -- -- 83 -- -- 83
Stock grants to employees
(unaudited)............. -- -- 15 1 93 -- -- 94
Net loss (unaudited)..... -- -- -- -- -- -- (723) (723)
--------- ----------- ----- --- ----------- ------ ------------ ---------
Balance, March 31,
1996 (unaudited)...... 1,000 $ 8,500 2,960 $ 30 $ 1,894 $ (50) $ (4,326) $ 6,048
--------- ----------- ----- --- ----------- ------ ------------ ---------
--------- ----------- ----- --- ----------- ------ ------------ ---------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
APRIL 1, 1993 31, MARCH 31,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss............................................... $ (1,605) $ (616) $ (1,382) $ (111) $ (723)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
License fee not currently payable.................... 1,000 -- -- -- --
Noncash credits for services......................... 129 211 213 43 83
Issuance of common stock for services................ -- -- 52 -- 94
Depreciation and amortization........................ 1 2 144 -- 321
Effect of changes in:
Receivables........................................ -- -- 3,777 -- (3,355)
Inventories........................................ -- -- 528 -- 872
Other assets....................................... -- -- (92) -- 1
Payables........................................... 154 38 (1,699) 5 296
Accrued expenses................................... 36 55 329 14 168
------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities...................................... (285) (310) 1,870 (49) (2,243)
------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Additions to furniture and equipment................... (5) (2) (128) -- (72)
Acquisition of PCD..................................... -- -- (13,689) -- 665
------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities...................................... (5) (2) (13,817) -- 593
------- --------- --------- --------- ---------
Cash Flows From Financing Activities:
Borrowings............................................. -- 185 14,515 60 596
Repayments of debt..................................... -- -- (300) -- (675)
Costs paid for public offering......................... -- -- (147) -- (153)
Proceeds from sales of stock........................... 419 -- 215 -- --
------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities...................................... 419 185 14,283 60 (232)
------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash.......................... 129 (127) 2,336 11 (1,882)
Cash at Beginning of Period.............................. -- 129 2 2 2,338
------- --------- --------- --------- ---------
Cash at End of Period.................................... $ 129 $ 2 $ 2,338 $ 13 $ 456
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest................... $ 3 $ 5 $ --
Noncash financing activities:
License fee acquired with debt....................... 1,000 -- --
Common stock issued for subscriptions receivable..... -- -- 100
Conversion of notes payable to common stock.......... -- -- 125
Acquisition of PCD (see Note 1):
Issuance of preferred stock.......................... -- -- 8,500
Issuance of convertible subordinated note............ -- -- 5,000
Issuance of credits to Dow........................... -- -- 3,000
Common stock issued for acquisition related
services............................................ -- -- 185
Reduction of subscription receivable through services
performed........................................... -- -- 50
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Electronic Hair Styling, Inc. (the "Company"), a Delaware corporation, is
the successor to Electronic Hair Styling, Inc., which was incorporated in the
State of Washington on April 1, 1993 (the "Predecessor"). Effective March 18,
1996, Predecessor merged with and into its wholly-owned subsidiary, the Company.
In connection with the merger, the Company issued .660 shares of common stock in
exchange for each issued and outstanding share of Predecessor common stock. The
accompanying Company financial statements, which are substantially identical to
Predecessor's financial statements for periods prior to the merger, give
retroactive effect to the merger.
The Company is engaged in the early stages of research on, and development
of, hair styling appliances and products applying an electronics-based
technology. The Company licensed the technology from Intertec Ltd., which is the
sole limited partner of Intertec Holdings, L.P., the principal stockholder of
the Company (see Note 8). From inception though November 15, 1995, the Company
had no revenues. Prior to the acquisition discussed below, the Company was a
development stage company.
Effective November 15, 1995, the Company acquired certain assets and
liabilities of PCD, the Personal Care Division of DowBrands L.P. ("PCD").
DowBrands L.P. is a limited partnership whose managing partner is DowBrands,
Inc., a wholly owned subsidiary of The Dow Chemical Company (collectively
"Dow"). PCD, which was renamed Lamaur after the acquisition, develops,
manufactures and markets hair care products. The acquisition has been accounted
for as a purchase and did not result in any goodwill. The total purchase price,
including related acquisition costs, was $30.2 million consisting of $13.7
million in cash (funded with revolving and term credit facilities, see Note 5),
$8.5 million (one million shares) of the Company's Series A convertible
preferred stock (see Note 6), a $5.0 million convertible subordinated note (the
"Dow Convertible Note", see Note 8) and $3.0 million of credits to be issued to
Dow for future purchases. The acquisition was accounted for as if it occurred on
November 30, 1995 and the Company's financial statements include the results of
PCD effective December 1, 1995.
The purchase price was allocated to acquired assets and liabilities based on
their estimated fair values as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable................................................ $ 16,458
Inventories........................................................ 11,668
Property, plant and equipment...................................... 16,805
Other assets....................................................... 35
Accounts payable and accrued expenses.............................. (14,268)
---------
Estimated fair value of assets and liabilities..................... 30,698
Total purchase price............................................... (30,187)
---------
Excess of estimated fair value of assets and liabilities over the
purchase price.................................................... $ 511
---------
---------
</TABLE>
The excess of the estimated fair value of assets and liabilities over the
purchase price was recorded as a reduction of property, plant and equipment.
Accounts payable and accrued expenses at December 31, 1995 included a reserve
for severance costs of $675,000 for an overall reduction in the workforce and
the replacement of a key employee. Such terminations are expected to be
completed by December 31, 1996. Through March 31, 1996, approximately $300,000
had been charged against the reserve.
F-7
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND OPERATIONS (CONTINUED)
The following unaudited pro forma summary results of operations for each of
the years ended December 31, 1994 and 1995 gives effect to the acquisition of
PCD as if it had occurred at the beginning of each period presented. The pro
forma results have been prepared for comparative purposes only and do not
purport to reflect the results of operations which would have actually occurred
had the combination been effective on the dates indicated or which may occur in
the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
----------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total net sales......................................... $ 121,277 $ 117,766
Net loss................................................ $ (124,856) $ (11,212)
Net loss per share...................................... $ (30.23) $ (2.71)
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
CASH balances are held in a collateral account with the Company's lender
(see Note 5). After residing in the account for two days, such balances are
applied against the Company's debt obligations.
ACCOUNTS RECEIVABLE, NET includes an allowance for doubtful accounts, which
is not material.
RECEIVABLES FROM DOW represent amounts due under a contract manufacturing
agreement with Dow (see Note 8) and at December 31, 1995 included a $665,000
refund resulting from an adjustment to the initial purchase price paid to Dow,
which was received in the first quarter of 1996.
INVENTORIES are stated at the lower of weighted average cost or market.
PROPERTY, PLANT, AND EQUIPMENT is recorded at cost and is being depreciated
using the straight-line method over the estimated useful lives of the related
assets which range from 20 to 50 years for buildings and improvements and 3 to
10 years for machinery and equipment.
OTHER ASSETS primarily represent costs incurred in connection with an
initial public offering anticipated to occur in 1996 and will be netted against
the proceeds from the offering.
INCOME TAXES -- Under Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, the Company provides taxes equal to the net change
in the deferred tax assets and liabilities during the year. Deferred income
taxes represent loss carryforwards and future tax effects resulting from
temporary differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
NET LOSS PER SHARE was computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents, which consist of
Series A convertible preferred stock, warrants and options issued within one
year of the Company's anticipated initial public offering. In accordance with
the rules of the Securities and Exchange Commission, these common stock
equivalents have been considered as outstanding since the inception of the
Company and have been included in the calculation of weighted average common and
common equivalent shares outstanding for all periods presented using the
treasury stock method at an assumed market price of $8.00, even though they are
anti-dilutive in loss periods. Primary and fully diluted earnings per share are
equivalent in 1995 because the assumed conversion of the Dow Convertible Note is
anti-dilutive.
F-8
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK -- The Company sells the majority of its
products to large U.S. retailers. Excluding sales to Dow, sales to the Company's
two largest customers were $1.6 million and $0.9 million, respectively, in 1995.
No other customer accounted for more than 10% of total net sales in 1995. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses, which have been insignificant.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Generally accepted accounting
principles require the disclosure of the fair value of certain financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate fair value. The Company estimated the fair values
presented below using appropriate valuation methodologies and market information
available as of year-end. Considerable judgment is required to develop estimates
of fair value, and the estimates presented are not necessarily indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumptions or estimation methodologies could have a material
effect on the estimated fair values. Additionally, these fair values were
estimated at year-end, and current estimates of fair value may differ
significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND SHORT-TERM BORROWINGS -- The
carrying amount of these items approximates fair value.
DEBT -- To estimate the fair value of debt the Company uses those
interest rates that are currently available to it for issuance of debt with
similar terms and remaining maturities. At December 31, 1995, the carrying
value of debt approximated fair value.
UNAUDITED INTERIM INFORMATION -- The financial information with respect to
the quarters ended March 31, 1995 and 1996 is unaudited. In the opinion of
management, such information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of such
periods. The results of operations for the quarter ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
NEW ACCOUNTING STANDARDS -- In 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 121 establishes recognition of impairment losses when a company no
longer expects to recover the carrying value of a long-lived asset. The effect
of adopting SFAS No. 121 was not material.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires adoption of its
disclosure provisions in 1996. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. The new standard encourages, but does not require, adoption of
the fair value method of accounting for employee stock-based transactions. SFAS
No. 123 permits companies to continue to account for such transactions under
Accounting Principles Board Opinion ("APBO") No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, but requires a disclosure of pro forma net income and earnings per
share as if the Company had applied the new method of accounting. The Company
has elected to continue to account for stock-based compensation under APBO No.
25 and will include the disclosure requirements of SFAS No. 123 in its financial
statements for the year ending December 31, 1996.
F-9
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31. -------------
1995
---------------- (UNAUDITED)
<S> <C> <C>
Finished goods......................................................... $ 6,393,000 $ 5,526,000
Work in process........................................................ 480,000 662,000
Raw materials.......................................................... 4,267,000 4,080,000
---------------- -------------
Total.................................................................. $ 11,140,000 $ 10,268,000
---------------- -------------
---------------- -------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1994 1995
--------- -------------
Land and land improvements................................................. $ -- $ 1,662,000
Buildings and improvements................................................. -- 4,981,000
Machinery and equipment.................................................... 7,000 9,599,000
Construction in progress................................................... -- 185,000
--------- -------------
Total.................................................................... 7,000 16,427,000
Less accumulated depreciation.............................................. (3,000) (144,000)
--------- -------------
Total...................................................................... $ 4,000 $ 16,283,000
--------- -------------
--------- -------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt at December 31, 1995 includes the following:
<TABLE>
<S> <C>
Revolving loan.............................................. $ 8,050,000
Term loan................................................... 6,000,000
------------
Total..................................................... 14,050,000
Less current portion........................................ (1,200,000)
------------
Long-term portion........................................... $ 12,850,000
------------
------------
</TABLE>
In November 1995, the Company obtained revolving and term loans to finance
the acquisition of PCD. Under the terms of the revolving facility, the Company
can borrow up to $14.0 million or a lesser amount as determined by the borrowing
base (as defined in the loan agreement, comprising a percentage of eligible
receivables and inventory). The term loan provides for a single advance of $6.0
million and is payable in monthly installments beginning January 1, 1996 of
$100,000, plus interest. Interest is payable monthly at prime plus 1.25% for the
revolving facility (9.75% at December 31, 1995) and at prime plus 1.50% for the
term loan (10.0% at December 31, 1995). Both credit facilities mature on
November 15, 1998. The credit facilities are secured by virtually all assets of
the Company. Additionally, the credit facilities prohibit the payment of
dividends, restrict the Company's ability to incur additional indebtedness and
require the Company to comply with certain financial covenants regarding
profitability, minimum net worth, leverage and cash flow. The Company was in
compliance with these covenants as of December 31, 1995 and March 31, 1996.
Current portion of long-term debt at December 31, 1994 represented
short-term borrowings which were secured by a certificate of deposit maintained
by the Company's Chief Executive Officer and were repaid in 1995.
F-10
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK -- The Company has authorized 4,000,000 shares of $.01 par
value preferred stock, the terms of which are established at the time of
issuance by the Board of Directors. In connection with the acquisition described
in Note 1, the Company issued one million shares of Series A convertible
preferred stock ("Series A Preferred"). The Series A Preferred has a liquidation
preference of $10.00 per share or $10.0 million in the aggregate and has
dividend and voting rights equal to common stock on an as-converted
basis. Each share of Series A Preferred is convertible into .660 shares of
common stock at the option of the holder, however, if the trading price of the
common equals or exceeds $21.21 per share for a 30-day trading period, the
Company may force conversion.
Also in connection with the acquisition, the Company's Board of Directors
authorized 763,500 shares of Series B convertible preferred stock ("Series B
Preferred") to be issued in the event of conversion of the $5.0 million Dow
Convertible Note (see Note 8). Series B Preferred bears an 8% cumulative
dividend, payable quarterly, has a liquidation preference of $6.55 per share or
$5.0 million in the aggregate, has dividend and voting rights equal to common
stock on an as-converted basis and is redeemable at face value at the option of
the Company in $1.0 million increments at any time. Each share of Series B
Preferred is convertible into .660 shares of common stock at the option of the
holder, however, if the trading price of the common equals or exceeds $21.21 per
share for a 30-day trading period, the Company may force conversion.
STOCK OPTION PLANS -- the Company maintains various stock option plans for
employees and directors. Under all plans, the option price per share has not
been less than the fair market value on the date of grant. Options granted to
directors and certain employees fully vest one year after the grant date and
options granted to other employees typically vest 25% on the grant date with the
remaining 75% vesting over three years. At December 31, 1995, 291,720 shares
were available for grants under these plans. A summary of changes in common
stock options during 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER
OF SHARES SHARE RANGE
----------- --------------
<S> <C> <C>
April 1, 1993 (Inception)
Granted.................................................................. 79,200 $1.52
-----------
Outstanding at December 31, 1993......................................... 79,200 1.52
Granted.................................................................. 42,900 1.52
-----------
Outstanding at December 31, 1994......................................... 122,100 1.52
Granted.................................................................. 623,700 1.52 - 6.06
Canceled................................................................. (9,900) 1.52
-----------
Outstanding at December 31, 1995......................................... 735,900 1.52 - 6.06
-----------
-----------
</TABLE>
Options exercisable at December 31, 1994 and 1995 were 79,200 and 122,100
respectively.
These stock option plans also provide for the issuance of incentive stock
rights, stock appreciation rights and restricted stock, none of which had been
granted as of December 31, 1995.
Subsequent to December 31, 1995, 163,600 options were granted at exercise
prices of $6.06 and $7.50 per share. In connection with Predecessor's merger
with the Company (discussed in Note 1), all of Predecessor's outstanding stock
options were assumed by the Company under the 1996 Stock Incentive Plan or The
Stock Option Plan for Outside Directors and Advisory Board Members. Total shares
authorized under these two plans are 1,250,000 and 150,000, respectively. Total
shares available for grant under these plans were 461,300 and 70,800,
respectively, at December 31, 1995.
EMPLOYEE STOCK PLAN -- In November 1995 the Company adopted the Employee
Stock Plan for the purpose of issuing up to an aggregate of 16,500 shares to
former Dow employees at no cost to the employee. In January 1996, 15,575 shares
were issued pursuant to this plan.
F-11
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
NON-CASH CREDITS -- Certain of the Company's employees and consultants have
received a portion of their salary or fees, respectively, in the form of
non-cash credits which may be applied to 80% of the exercise price of options
granted to them. Such credits, $651,000 at December, 31, 1995, have been
recorded as expense or cost of acquisition and additional paid-in capital as the
related salary or consulting fees were earned.
STOCK SUBSCRIPTION RECEIVABLE -- In 1995, the Company issued 66,000 shares
of common stock for two 6% notes receivable of $50,000 each, due August 1996 and
July 2001, respectively, or 30 days after the sale of such common stock,
whichever is earlier.
WARRANTS -- In consideration for short-term borrowings of $225,000 in
November 1995 (see Note 8), the Company issued warrants to purchase 74,250
shares of common stock at $3.03 per share. The warrants become exercisable in
May 1996 and expire in November 1998.
7. INCOME TAXES
Deferred taxes are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1994 1995
----------- -------------
License fee.............................................................. $ 401,000 $ 401,000
Net operating loss carryforwards......................................... 293,000 670,000
Noncash credits.......................................................... 136,000 261,000
----------- -------------
Gross deferred tax assets................................................ 830,000 1,332,000
Deferred tax asset valuation allowance................................... (830,000) (1,332,000)
----------- -------------
Net deferred tax asset................................................... $ -- $ --
----------- -------------
----------- -------------
</TABLE>
As it is more likely than not that sufficient taxable income will not be
generated in future periods to utilize the deferred tax assets, a valuation
allowance has been recorded.
At December 31, 1995, the Company had net operating loss carryforwards for
tax purposes of approximately $1.8 million which expire in 2008-2010.
8. RELATED PARTY TRANSACTIONS
Related party obligations includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
<S> <C> <C>
1994 1995
------------ -------------
Promissory note for license rights...................................... $ 1,000,000 $ 1,000,000
Dow Convertible Note.................................................... -- 5,000,000
Dow purchase credits.................................................... -- 3,000,000
Short-term borrowings................................................... -- 225,000
------------ -------------
Total................................................................... 1,000,000 9,225,000
Less current portion.................................................... -- (1,725,000)
------------ -------------
Long-term portion....................................................... $ 1,000,000 $ 7,500,000
------------ -------------
------------ -------------
</TABLE>
In May 1993, the Company licensed proprietary technology from Intertec Ltd.,
a limited partnership controlled by the Company's Chairman of the Board, Chief
Executive Officer and principal shareholder, pursuant to an exclusive 30-year,
nonassignable, license agreement (the "License Agreement"). According to the
terms of the License Agreement, the Company is required to pay a $1.0 million
license fee, plus royalties, to Intertec Holdings, L.P. ("Intertec Holdings") as
agent for Intertec Ltd. Due to uncertainty
F-12
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
regarding recoverability from future operations, the license fee was expensed in
1993. A note for the license fee ("Intertec Note") is payable in four equal
annual installments of $250,000 commencing on the earlier of (i) one year after
the closing of an initial public offering, or (ii) May 31, 1998. Interest, at
5.5%, is payable in arrears on the date each installment of principal is due.
The Company will pay a royalty to Intertec Ltd. equal to (i) 1.0% of the
Company's proceeds from any direct sales made by the Company of products,
instruments or components using, or derived from, the technology, and (ii) 1.0%
of the "revenue base" of the Company's sub-licensees. The "revenue base" is the
proceeds received by the sub-licensees for their sales of products using the
technology. This royalty declines in steps as the revenue base increases,
ultimately declining to 0.4% when cumulative sales from all products using the
Company's technology reach $10.0 billion. No royalty fees have been paid to
date.
In March 1996, the Company and Intertec Holdings entered into a stock
purchase agreement pursuant to which Intertec Holdings agreed to purchase from
the Company, and the Company agreed to sell to Intertec Holdings, shares of
common stock at the initial public offering price per share. The aggregate
number of shares of common stock which Intertec Holdings is required to purchase
is equal to (x) the outstanding principal of, and all accrued and unpaid
interest on the Intertec Note as of the closing of the Company's initial public
offering, divided by (y) the initial public offering price per share. Intertec
Holdings is obligated, subject to there being no event of default under the
Company's loan agreements and certain other conditions, to purchase and pay for
the shares in four equal installments commencing on the first anniversary of the
closing of the Company's initial public offering. The deferred purchase price
under the stock purchase agreement accrues interest from and after the closing
of the Company's initial public offering at 5.5% per annum, payable with each
installment. Intertec Holdings may elect to accelerate one or more purchases
under the stock purchase agreement on 30 days' prior notice to the Company. The
Company may, at any time or from time to time, terminate Intertec Holdings's
purchase rights with respect to one or more of the installments, on 10 days'
prior notice to Intertec Holdings.
The $5.0 million Dow Convertible Note bears interest at 8.0%, due quarterly,
is subordinated to any bank borrowings and is convertible, at the option of the
holder, into Series B Preferred (see Note 6) at a conversion ratio of one share
for each $6.55 principal amount of the Dow Convertible Note. Additionally, in
the event of an initial public offering, the Dow Convertible Note automatically
converts into Series B Preferred at the same conversion rate discussed above,
but only to the extent that the conversion does not cause the holder of the Dow
Convertible Note to be the owner of 20% or more of the voting equity of the
Company. The Dow Convertible Note is due in quarterly installments of $250,000
each beginning on December 31, 2000.
In connection with the acquisition described in Note 1, Dow has agreed to
purchase 100% of its requirements for certain Dow products from the Company for
a period of two years beginning November 16, 1995. In connection with this
requirements agreement, Dow agreed to accept as part of the purchase price $3
million of credits to be applied against its future purchases. These credits
will be issued to Dow through credit memos each quarter in the amount of
$375,000 until the credits are fully used. At December 31, 1995, $1.5 million of
such credits were classified as a current liability. Revenues from this
arrangement totaled $1.6 million in 1995. Services are priced based on direct
material and labor costs incurred plus an agreed upon profit margin.
In November 1995, the Company borrowed $225,000 from employees and
stockholders. The borrowings were repaid in February 1996 with interest at 12%.
The lenders received warrants to purchase 74,250 shares of common stock (see
Note 6).
The Company leases its offices in Mill Valley, California from a related
party under a noncancellable lease expiring in June 1996 with monthly rentals of
$6,000. The Company also leases office equipment from a
F-13
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
related party on a month-to-month basis with monthly rentals of $1,513. Both of
those related parties are controlled by the Company's Chairman of the Board,
Chief Executive Officer and principal shareholder. Rental expense for all leases
was $53,887, $89,428, and $90,156 for 1993, 1994 and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company has various purchase and sales commitments and obligations
entered into in the ordinary course of business which management does not
believe will have a material adverse effect on its financial position or results
of operations.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Dow Chemical Company:
We have audited the accompanying statements of operations of PCD, the
Personal Care Division of DowBrands L.P., ("PCD"), a limited partnership whose
managing partner is DowBrands Inc., a wholly owned subsidiary of The Dow
Chemical Company, for the years ended December 31, 1993 and 1994, and for the
period from January 1, 1995 to November 30, 1995, and the related statements of
net invested capital and cash flows for the periods then ended. These financial
statements are the responsibility of PCD's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations of PCD for the years ended December 31, 1993
and 1994, and for the period from January 1, 1995 to November 30, 1995, and the
changes in its net invested capital, and its cash flows for the periods then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared from the separate
records maintained by PCD and may not be indicative of the conditions that would
have existed or the results of operations if PCD had been operated as an
unaffiliated company. As discussed in Note 1, Statement of Financial Accounting
Standards No. 109 requires that the consolidated amount of current and deferred
tax expenses for a group that files a consolidated tax return be allocated among
members of the group when those members issue separate financial statements. On
the basis that PCD is a division and not a separate subsidiary, current and
deferred income taxes have not been provided for in the accompanying financial
statements.
DELOITTE & TOUCHE LLP
San Francisco, California
January 26, 1996
F-15
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1995
------------------------ TO NOVEMBER 30,
1993 1994 1995
----------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Sales to Dow.................................................... $ 16,592 $ 19,253 $ 19,783
Net Sales to Others................................................. 95,439 102,024 89,913
----------- ----------- -----------------
Total Net Sales..................................................... 112,031 121,277 109,696
Cost of Goods Sold.................................................. 71,061 71,735 67,088
----------- ----------- -----------------
Gross Margin........................................................ 40,970 49,542 42,608
Operating Expenses.................................................. 53,851 57,830 42,344
Write-down of Assets................................................ -- 120,100 11,000
----------- ----------- -----------------
Operating Loss...................................................... (12,881) (128,388) (10,736)
Other:
Interest expense from Dow......................................... (6,643) (5,805) (1,603)
Other income, net................................................. 317 705 101
----------- ----------- -----------------
Total other..................................................... (6,326) (5,100) (1,502)
----------- ----------- -----------------
Net Loss............................................................ $ (19,207) $ (133,488) $ (12,238)
----------- ----------- -----------------
----------- ----------- -----------------
</TABLE>
See notes to financial statements.
F-16
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF NET INVESTED CAPITAL
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
----------------------- JANUARY 1, 1995
1993 1994 TO NOVEMBER 30, 1995
---------- ----------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net invested capital, beginning of period.......................... $ 179,654 $ 169,058 $ 47,493
Net loss for the period............................................ (19,207) (133,488) (12,238)
Net capital invested by (returned to) Dow.......................... 8,611 11,923 (3,489)
---------- ----------- --------
Net invested capital, end of period................................ $ 169,058 $ 47,493 $ 31,766
---------- ----------- --------
---------- ----------- --------
</TABLE>
See notes to financial statements.
F-17
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------- JANUARY 1, 1995 TO
1993 1994 NOVEMBER 30, 1995
---------- ----------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.......................................................... $ (19,207) $ (133,488) $ (12,238)
Adjustments to reconcile net loss to net cash provided by (used
in) by operating activities:
Write-down of assets............................................ -- 120,100 11,000
Depreciation.................................................... 3,822 3,956 2,010
Goodwill amortization........................................... 3,568 3,568 --
Changes in:
Accounts receivable........................................... 1,581 (3,299) 2,009
Inventories................................................... 3,479 (1,342) 792
Prepaid expenses and other.................................... 62 101 215
Accounts payable and accrued expenses......................... 285 (790) 268
---------- ----------- --------
Net cash provided by (used in) operating activities......... (6,410) (11,194) 4,056
---------- ----------- --------
Cash Flows Used In Investing Activities:
Additions to property, plant, and equipment..................... (2,542) (902) (1,011)
Other........................................................... 341 173 444
---------- ----------- --------
Net cash used in investing activities....................... (2,201) (729) (567)
---------- ----------- --------
Cash Flows From Financing Activities:
Net capital invested by (returned to) Dow....................... 8,611 11,923 (3,489)
---------- ----------- --------
Net Change in Cash................................................ -- -- --
Cash at Beginning of Period....................................... 1 1 1
---------- ----------- --------
Cash at End of Period............................................. $ 1 $ 1 $ 1
---------- ----------- --------
---------- ----------- --------
</TABLE>
F-18
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- PCD, the Personal Care Division of DowBrands L.P., ("PCD") a
limited partnership whose managing partner is DowBrands Inc., a wholly owned
subsidiary of The Dow Chemical Company (collectively "Dow"), develops,
manufactures and markets hair care products.
Effective November 15, 1995, pursuant to an Asset Purchase Agreement, Dow
sold substantially all of the assets and liabilities of PCD to Electronic Hair
Styling, Inc. (the "Company") for $28.8 million comprised of $12.3 million in
cash, a $5.0 million 8.0% subordinated note (convertible into Series B preferred
stock), $8.5 million in Series A convertible preferred stock and $3.0 million in
credits to be issued to Dow for future purchases. Through its Series A
convertible preferred stock holdings, Dow will maintain an approximate 18%
ownership interest in the voting equity of the Company. The sale was accounted
for as if it occurred on November 30, 1995.
BASIS OF PRESENTATION -- The accompanying financial statements present
operations, net invested capital and cash flows of PCD on a historical basis. In
1987, DowBrands L.P. acquired PCD's predecessor for approximately $183 million.
As a result of this acquisition, Dow's new accounting basis, determined in
accordance with the purchase method of accounting, was "pushed-down" to PCD and,
accordingly, the assets and liabilities of PCD were adjusted to reflect their
fair values. The excess of Dow's cost of PCD over the estimated fair value of
net assets acquired was recorded as goodwill and was being amortized over 40
years. During 1994, in contemplation of Dow's sale of PCD, Dow wrote down its
investment in PCD by approximately $120 million. This write-down was applied to
PCD's unamortized goodwill of $117 million and to property, plant and equipment
of $3 million. In 1995 the proposed buyer withdrew its offer. During 1995, Dow
further wrote down its investment in PCD by an additional $11 million, which was
recorded as a reduction of property, plant and equipment.
RELATIONSHIP WITH DOW -- PCD uses certain resources and administrative staff
of Dow, including accounting, legal, tax, treasury, data processing, risk
management, human resources and corporate relations. PCD is charged a fee for
these services at an amount that Dow estimates to be based on actual time or
costs incurred. These charges were $2,237,000 and $1,465,000 in 1993 and 1994,
respectively and $733,500 for the period from January 1, 1995 to November 30,
1995 and are included in operating expenses.
In addition, PCD is charged interest by Dow on an imputed amount of debt
required to fund Dow's total capital investment in PCD. Such interest charges
were $6,643,000 and $5,805,000 in 1993 and 1994, respectively, and $1,603,000
for the period from January 1, 1995 to November 30, 1995.
INCOME TAXES -- Statement of Financial Accounting Standards No. 109 requires
that the consolidated amount of current and deferred tax expense for a group
that files a consolidated tax return be allocated among the members of the group
when those members issue separate financial statements. However, management of
PCD believes that such requirement applies only to separate financial statements
of subsidiaries and since PCD is a division of Dow and not a separate
subsidiary, current and deferred income taxes have not been provided for in the
accompanying financial statements.
CONCENTRATION OF CREDIT RISK -- PCD sells the majority of its products to
large U.S. retailers. Excluding sales to Dow, sales to PCD's largest customer
were $21.6 million and $22.3 million in 1993 and 1994, respectively, and $19.7
million for the period from January 1, 1995 to November 30, 1995. No other
customer accounted for more than 10% of net sales in any period. PCD performs
ongoing credit evaluations of its customers and generally does not require
collateral. PCD maintains reserves for potential credit losses, which have been
insignificant.
F-19
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD
FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
2. RELATED PARTY TRANSACTIONS
PCD provides contract packaging and manufacturing services for Dow. Revenues
from this arrangement totaled $16,592,000 and $19,253,000 in 1993 and 1994,
respectively and $19,783,000 for the period from January 1, 1995 to November 30,
1995. Services are priced based on direct material and labor costs incurred plus
an agreed upon profit margin.
3. EMPLOYEE BENEFIT PLANS
Through November 15, 1995, PCD's employees were eligible to participate in
Dow's retirement, 401(k) and postretirement health and welfare benefit plans.
Contributions to the plans by PCD on behalf of PCD's employees were
approximately $1,789,000, and $1,657,000 in 1993 and 1994, respectively and
$1,432,000 for the period from January 1, 1995 to November 30, 1995.
4. COMMITMENTS AND CONTINGENCIES
PCD has various purchase and sales commitments and obligations entered into
in the ordinary course of business which management does not believe will have a
material adverse effect on PCD's financial statements.
F-20
<PAGE>
3 Pictures of Company Manufacturing Facility
(Testing Laboratory (Bottling Plant)
(Aerial View)
2 Pictures of Models
5 Laboratory Pictures
1 Salon Picture
<PAGE>
Lamaur created Pativa to help its salon partners grow their business by
offering the innovative products, progressive education and effective
promotions necessary to achieve financial and personal success.
3 MODELS
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFER MADE BY
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION TO BUY
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL JUNE 17, 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Use of Proceeds................................. 12
Dividend Policy................................. 13
Capitalization.................................. 13
Dilution........................................ 14
Unaudited Pro Forma Financial Information....... 15
Selected Financial Data......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 18
Business........................................ 23
Management...................................... 34
Principal Stockholders.......................... 46
Certain Transactions............................ 48
Description of Capital Stock.................... 49
Shares Eligible for Future Sale................. 51
Underwriting.................................... 52
Legal Matters................................... 54
Experts......................................... 54
Additional Information.......................... 54
Index to Financial Statements................... F-1
</TABLE>
[LOGO]
ELECTRONIC HAIR STYLING, INC.
2,600,000 SHARES
COMMON STOCK
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PROSPECTUS
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RODMAN & RENSHAW, INC.
SANDS BROTHERS & CO., LTD.
MAY 22, 1996
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