UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 0-28174
The Lamaur Corporation
(Exact name of registrant as specified in its charter)
Delaware 68-0301547
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Lovell Avenue, Mill Valley CA 94941
(Address of principal executive offices) (Zip Code)
(415) 380-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
At October 31, 1997, there were 5,699,511 shares of the Registrant's $.01 par
value Common Stock outstanding.
<PAGE>
This quarterly report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995, including statements regarding market strategy
for declining brands, level of future sales for declining brands, continued
sales increases from WILLOW LAKE(TM) and COLOR SOFT(TM), impact of increased
marketing cost on near-term operating results and future revenues and earnings,
future performance of either or both of the WILLOW LAKE(TM) or COLOR SOFT(TM)
lines or the Company's ability to attain any particular level of sales or to be
or remain profitable in the future, launch of WILLOW LAKE(TM) as well as the
introduction of other new products in 1997 continuing to be supported by
significant marketing campaigns, new products will require an increase in
inventory levels and extended credit terms, renewal of the DowBrands contract
and the effect of the loss of the contract on the Company's financial condition
or results of operations in 1997, ability to gain new contract manufacturing
business in 1998 for products that will result in higher margins, adjustment to
manufacturing and reduction of certain other expenses associated with operations
in 1998, ability to meet working capital requirements for the remainder of 1997,
need for additional financing in the foreseeable future, form of future
financing and whether or on what terms it would be available, impact on Company
of being unable to obtain additional financing, restructuring financial
covenants and the Company's ability to be in compliance with its loan agreement
and availability and terms of future financing. They involve known and unknown
risks and uncertainties that may cause the Company's actual results in future
periods to be materially different from any future performance suggested herein.
Further, the Company operates in an industry sector where securities values may
be volatile and may be influenced by economic and other factors beyond the
Company's control. In the context of the forward-looking information provided in
this Form 10-Q and in other reports, please refer to the discussions of risk
factors and investment considerations detailed in, as well as the other
information contained in, the Company's filings with the Securities and Exchange
Commission during the past 12 months.
<PAGE>
THE LAMAUR CORPORATION
Index to Form 10-Q
September 30, 1997
Page No.
Part I - Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheets as of September 30, 1997 and December 31, 1996 4
Statements of Operations for the Three and Nine Months Ended 5
September 30, 1997 and 1996
Statements of Cash Flows for the Nine Months Ended 6
September 30, 1997 and 1996
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information 10
Signature 11
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
THE LAMAUR CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 6,534 $ 12,081
Receivables from DowBrands...................................... 1,581 1,450
Accounts receivable, net........................................ 18,666 17,214
Inventories..................................................... 14,025 11,699
Prepaid expenses and other current assets....................... 4,760 523
------------- ------------
Total current assets.......................................... 45,566 42,967
Property, Plant and Equipment, Net.................................. 19,598 18,475
Other Assets........................................................ 194 124
-------------- ------------
Total Assets.................................................... $ 65,358 $ 61,566
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................ $ 13,708 $ 6,724
Accrued expense................................................. 2,271 4,637
Accrued salaries, wages and employee-related expenses........... 1,592 2,458
Current portion of long-term debt............................... 1,520 1,272
Payables to related parties..................................... 375 1,500
-------------- -----------
Total current liabilities..................................... 19,466 16,591
Long-Term Debt.................................................. 22,440 13,723
Related Party Obligations....................................... 750 1,000
Stockholders' Equity
Preferred stock, $.01 par value, 4,000,000 shares authorized:
Series A Preferred stock, $.01 par value, 1,000,000 shares issued
and outstanding at September 30, 1997 and December 31, 1996.
($10.0 million liquidation preference)........................ 8,500 8,500
Series B Preferred stock, $.01 par value, 763,500 shares issued
and outstanding at September 30, 1997 and December 31, 1996.
($5.0 million liquidation preference)......................... 5,000 5,000
Common stock, $.01 par value, 12,000,000 shares authorized,
5,699,321 and 5,603,395 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively........ 57 56
Additional paid-in-capital..................................... 19,877 19,796
Stock subscriptions receivable................................. (50) (50)
Accumulated deficit............................................ (10,682) (3,050)
-------------- ------------
Total stockholders' equity.................................... 22,702 30,252
-------------- ------------
Total Liabilities and Stockholders' Equity.................... $ 65,358 $ 61,566
============== ============
See notes to financial statements
</TABLE>
<PAGE>
THE LAMAUR CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales................................................... $ 27,308 $ 23,970 $ 78,989 $ 70,636
Net Sales to DowBrands...................................... 4,684 5,279 12,732 18,775
-------------- ------------- ------------- -------------
Total Net Sales............................................. 31,992 29,249 91,721 89,411
Cost of Goods Sold.......................................... 18,441 17,538 53,825 55,275
-------------- ------------- ------------- -------------
Gross Margin................................................ 13,551 11,711 37,896 34,136
Selling, General and Administrative Expenses................ 17,928 11,218 44,487 32,949
-------------- ------------- ------------- -------------
Operating Income (Loss)..................................... (4,377) 493 (6,591) 1,187
Interest Expense............................................ (527) (251) (1,360) (1,083)
Other Income................................................ 38 397 319 469
-------------- ------------- ------------- --------------
Net Income (Loss) before Income Taxes....................... (4,866) 639 (7,632) 573
Income Taxes................................................ - 29 - 29
-------------- ------------- ------------- --------------
Net Income (Loss)........................................... (4,866) 610 (7,632) 544
Dividends on Series B Preferred Stock....................... (100) (100) (300) (133)
-------------- ------------- ------------- --------------
Net Income (Loss) Available to Common Shareholders.......... $ (4,966) $ 510 $ (7,932) $ 411
============== ============= ============= ==============
Net Income (Loss) per Common Share.......................... $ (0.78) $ 0.08 $ (1.23) $ (0.08)
============== ============= ============= ==============
Weighted Average Common and Common Equivalent
Shares Outstanding...................................... 6,399 6,526 6,433 5,291
============== ============= ============= ==============
See notes to financial statements
<PAGE>
</TABLE>
THE LAMAUR CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)............................................................... $ (7,632) $ 544
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Noncash credits for services........................................... - 155
Issuance of common stock for services.................................. - 108
Utilization of DowBrands credits....................................... (1,125) (1,125)
Loss (gain) on disposal of assets...................................... 44 (214)
Depreciation and amortization.......................................... 1,182 1,017
Effect of changes in:
Receivables........................................................ (1,583) (4,661)
Inventories........................................................ (2,326) 2,598
Other assets....................................................... (4,376) (168)
Payables........................................................... 7,084 245
Accrued expenses................................................... (3,232) (845)
--------------- --------------
Net cash used in operating activities.................................. (11,964) (2,346)
Cash Flows From Investing Activities:
Additions to property, plant and equipment.................................. (2,296) (2,256)
Proceeds from sale of assets................................................ 16 -
--------------- --------------
Net cash used in investing activities.................................. (2,280) (2,256)
Cash Flows From Financing Activities:
Revolving credit agreement, net............................................. 6,214 (2,041)
Borrowings of long-term debt................................................ 3,842 -
Repayments of long-term debt................................................ (1,091) (1,125)
Proceeds from sales of common stock, net.................................... 132 18,029
Payment of preferred dividends.............................................. (400) -
--------------- --------------
Net cash provided by financing activities.............................. 8,697 14,863
--------------- --------------
Net (Decrease) Increase in Cash and Cash Equivalents............................ (5,547) 10,261
Cash and Cash Equivalents at Beginning of Period................................ 12,081 2,338
=============== ==============
Cash and Cash Equivalents at End of Period...................................... $ 6,534 $ 12,599
=============== ==============
See notes to financial statements
<PAGE>
</TABLE>
<PAGE>
THE LAMAUR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND OPERATIONS
Effective March 26, 1997, Electronic Hair Styling, Inc. changed its name
to The Lamaur Corporation. 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 develops, formulates, manufactures and markets personal hair
care products, consisting of shampoos, conditioners, hair sprays, permanent wave
products and other styling aids, for both consumer and professional hair care
markets. The Company is also engaged in the early stages of research and
development with respect to a new hair styling concept which is intended to
combine electronics and chemicals to create new products designed to color,
style and condition hair quickly, without the damaging side effects often
experienced with most chemical-based hair styling products. 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. Prior to the
acquisition, the Company was a development stage company.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed financial statements are unaudited and
include all adjustments, which consist of only normal recurring accruals, that
management considered necessary to fairly present the results for such periods.
These financial statements should be read in conjunction with the financial
statements and notes contained in The Lamaur Corporation's ("Company") Annual
Report on Form 10-K for the year ended December 31, 1996. Results for interim
periods are not necessarily indicative of results for the full year.
Cash and Cash Equivalents considers all investments with an original
maturity of three months or less on their acquisition date to be cash
equivalents. These investments consist of A1+/P1 rated commercial paper which at
September 30, 1997 and December 31, 1996 were $5,511,000 and $11,496,000,
respectively. Included in cash equivalents at September 30, 1997, are restricted
securities of $3,001,000 which are maintained as collateral in support of the
Norwest Business Credit revolving line of credit.
Net Income (Loss) Per Share was computed by dividing net income (loss) by
the weighted average number of shares of common stock and common stock
equivalents, which consist of Series A preferred stock, warrants and options. In
accordance with the rules of the Securities and Exchange Commission, common
stock equivalents issued within one year of the Company's initial public
offering, 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, even though they are antidilutive in loss periods. Fully diluted
earnings per share has not been presented since the computation would not be
dilutive.
Reclassification - Certain reclassifications have been made in the
accompanying financial statements in order to conform with the 1997
presentation.
3. DEBT
As a result of the Company's losses for the first nine months of 1997, it
was as of September 30, 1997, out of compliance with certain financial loan
covenants. The Company has received a waiver from Norwest Business Credit in
regards to these covenants. The Company is currently discussing with Norwest
Business Credit a restructuring of its financial loan covenants, but no
assurance can be given that the Company will be successful in that regard. If
the Company is not successful in obtaining the revised terms it requires, it may
seek one or more substitute financing sources, the availability or terms of
which cannot be assured.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). The Company is required to adopt SFAS 128 in the fourth quarter of 1997
and will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
<PAGE>
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods,
basic loss per share would have been $.87 and basic income per share would have
been $.09 for the three months ended September 30, 1997 and 1996, respectively.
In addition, basic loss per share would have been $1.40 and the basic income per
share would have been $.10 for the nine months ended September 30, 1997 and
1996, respectively. Diluted income and loss per share under SFAS 128 would not
have been significantly different than net income and net loss per share
reported for the periods.
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from nonowner sources; and
No. 131, "Disclosure about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these statements will not
impact the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Nine months and three months ended September 30, 1997 compared to the nine
months and three months ended September 30, 1996.
Net sales for the nine months ended September 30, 1997 were $91.7
million, compared with $89.4 million for the same period in 1996, an increase of
2.6% Net sales for the three months ended September 30, 1997 were $32.0 million,
compared with $29.2 million for the same period in 1996, an increase of 9.4 %.
The increase in net sales for the nine months and three months ended September
30, 1997 is principally due to sales from WILLOW LAKE(TM) and COLOR SOFT(TM),
the Company's new premium-priced retail hair care product lines. WILLOW
LAKE(TM), targeted for the natural's segment and positioned as "Nature's
Prescription for Beautiful Hair(TM)," began shipping in the fourth quarter of
1996. COLOR SOFT(TM), formulated to retain color longer for color treated hair,
began shipping in the first quarter of 1997. Continued sales growth of WILLOW
LAKE(TM) and COLOR SOFT(TM) will be in part dependent upon competition from
other brands, consumer acceptance and marketing support behind these brands.
Sales in the nine months and three months ended September 30,1997 were
adversely affected by sales declines in PERMA SOFT(R), STYLE(R) and SALON
STYLE(R) brands and in contract manufacturing, principally sales to DowBrands.
PERMA SOFT(R), STYLE(R) and SALON STYLE(R) brands have continued to decline in
sales since new management began its turn around efforts in the first quarter of
1996. PERMA SOFT(R), STYLE(R) and SALON STYLE(R) had sales declines of $7.9
million, $7.1 million and $6.1 million, respectively, in the last twelve months
compared with the previous twelve months and $2.6 million, $.5 million and $3.3
million in the last six months compared with the previous six months.
The Company is continuously reviewing and, where management believes
appropriate, revising its marketing strategy with respect to the brands that
experience sales declines. The PERMA SOFT(R) and SALON STYLE(R) brands have been
under significant scrutiny by management and have been the subject of various
marketing initiatives undertaken by the Company during the last approximately 18
months, but sales of these brands have not responded to those initiatives by
reaching an acceptably favorable sales levels to date and the Company is
continuing to revise its marketing strategies. Management believes that sales of
these brands are likely to continue to decline before new strategies are
implemented, and there can be no assurance that the trend in sales can be
reversed.
Gross margin as a percentage of net sales was 41.3% for the nine months
ended September 30, 1997 as compared with 38.2% for the same period in 1996.
Gross margin as a percentage of net sales was 42.4% for the three months ended
September 30, 1997 as compared with 40.0% for the same period in 1996. The
improvement in the gross margin as a percentage of net sales for the nine months
and three months ended September 30, 1997 is due to a change in product mix and
increased sales of higher margin products driven by the new WILLOW LAKE(TM) and
COLOR SOFT(TM) lines.
Selling general and administrative expenses (SG&A) were $44.5 million,
or 48.5% of net sales for the nine months ended September 30, 1997 as compared
with $32.9 million, or 36.9% of net sales for the same period last year, an
increase of $11.6 million. SG&A expenses were $17.9 million, or 56.0% of net
sales for the three months ended September 30, 1997 as compared with $11.2
million, or 38.4% of net sales for the same period last year, an increase of
$6.7 million. As general and administrative expenses have remained relatively
flat, the increase is principally attributable to increased marketing expense of
$10.4 million and $5.8 million for the nine months and three months ended
September 30, 1997, respectively, and fees to brokers in our distribution chain
supporting the launch of WILLOW LAKE(TM) and the COLOR SOFT(TM) lines. The
increased marketing costs related to investment spending for WILLOW LAKE(TM) and
COLOR SOFT(TM) in 1997 will have an impact on near term operating results but
the Company believes it is essential to building a platform for future revenues
and earnings. There can be no assurance concerning the future performance of
either or both of the WILLOW LAKE(TM) and COLOR SOFT(TM) lines or the Company's
ability to attain any particular level of sales or to be or remain profitable in
the future.
Interest expense increased to $1.4 million and $.5 million in the nine
months and three months ended September 30, 1997, respectively, as compared with
$1.1 million and $.3 million in the same periods last year. The increase in
interest expense in the nine months and three months ended September 30, 1997 is
attributable to higher borrowings under the Company's revolving line of credit
and term loan with Norwest Business Credit to support the Company's working
capital needs.
Other income decreased to $.3 million and $.04 million for the nine
months and three months ended September 30, 1997, respectively, as compared with
$.5 million and $.4 million in the same periods last year. The decrease in other
income in 1997 is due to lower interest income since the Company had less cash
available to invest as compared to 1996. In addition, in 1996 other income
included a gain on the sale of equipment.
As a result of the foregoing factors, the net loss for the nine months
ended and three months ended September 30, 1997 increased to $7.6 million and
$4.9 million respectively as compared with net income of $.5 million for the
nine months and $.6 million for the three months ended September 30, 1996.
Liquidity and Capital Resources
Inventory levels increased $2.3 million at September 30, 1997 compared
with December 31, 1996 to support the Company's launch of WILLOW LAKE(TM) and
COLOR SOFT(TM) and the phase-in of new product packaging of the STYLE(R) and
PERMA SOFT(R) brands. Prepaid expenses increased $4.2 million at September 30,
1997 compared with December 31, 1996 primarily due to the front-end costs
associated with the launch of WILLOW LAKE(TM) and COLOR SOFT(TM) which are being
expensed during 1997. The Company's launch of WILLOW LAKE(TM) as well as the
introduction of other new products in 1997 will continue to be supported by
significant marketing campaigns which include advertising and consumer
promotions.
The Company has been operating under a two-year manufacturing contract
with DowBrands that expires by its terms in November 1997. In October 1997, Dow
Chemical announced that it had sold DowBrands. The Company had revenues from
DowBrands of $22.2 million in 1996 and $12.7 million through September 30, 1997,
with total 1997 revenue under the contract expected to be approximately $18
million. In addition to covering the costs associated with the DowBrands
business, the Company's revenues from DowBrands were sufficient to cover certain
other fixed costs. The loss of the contract will not have any material effect on
Lamaur's financial condition or results of operations in 1997.
Based upon the results of operations for the nine months ended
September 30, 1997, and the uncertain level of operations during the next twelve
months, the Company can give no assurance that it will be able to meet its
working capital needs during this period. Therefore, the Company believes it
could require additional financing in the foreseeable future. The Company cannot
predict whether such financing will be in the form of equity or debt and cannot
assure whether or on what terms any such financing will be available to the
Company. Should the Company be unable to obtain additional funding on terms
reasonably acceptable to it, the Company's operations could be curtailed and its
business could be materially adversely affected.
The amount outstanding on the Company's revolving line of credit with
Norwest Business Credit, a subsidiary of Norwest Bank ("Lender"), increased to
$16.0 million at September 30, 1997, as compared to $9.8 million at December 31,
1996, principally reflecting increased levels of accounts receivable and
inventory. In May 1997, the Company increased its revolving credit line to $20.0
million and its term loan from $6.0 million to $7.0 million, for a total credit
facility of $27.0 million with the Lender. As a result of the Company's losses
for the first nine months of 1997, it was as of September 30, 1997, out of
compliance with certain financial loan covenants. The Company has received a
waiver from Norwest Business Credit in regards to these covenants. The Company
is currently discussing with Norwest Business Credit a restructuring of its
financial loan covenants, but no assurance can be given that the Company will be
successful in that regard. If the Company is not successful in obtaining the
revised terms it requires, it may seek one or more substitute financing sources,
the availability or terms of which cannot be assured.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits: Exhibit Number 10.1: First Amendment to Amended and Restated
Credit Agreement.
Exhibit Number 19.1: Chairman's Report on the Status of the
Turnaround
Reports on Form 8-K. None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LAMAUR CORPORATION
(Registrant)
/S/ JOHN D. HELLMANN
---------------------------------
DATE: November 13, 1997 John D. Hellmann
Vice President-Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT 10.1
FIRST AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
This Amendment is made as of the 13th day of August, 1997 by and
between The Lamaur Corporation, a Delaware corporation (the "Borrower"),
and Norwest Business Credit, Inc., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into the Amended and Restated
Credit and Security Agreement dated as of May 16, 1997 (the "Credit
Agreement").
The Lender has agreed to make a term loan, a real estate loan and
certain loan advances to the Borrower pursuant to the terms and conditions
set forth in the Credit Agreement.
The term loan is evidenced by the Borrower's amended and restated term
note dated May 16, 1997 in the original principal amount of $2,300,000, the
real estate loan is evidenced by the Borrower's amended and restated real
estate note dated May 16, 1997 in the original principal amount of
$4,700,000 and the loan advances under the Credit Agreement are evidenced
by the Borrower's amended and restated revolving note dated as of May 16,
1997, in the maximum principal amount of $20,000,000, each of which notes
are payable to the order of the Lender (collectively, the "Note").
All indebtedness of the Borrower to the Lender is secured pursuant to
the terms of the Credit Agreement and all other Security Documents as
defined therein (collectively, the "Security Documents").
The Borrower has requested that certain amendments be made to the
Credit Agreement, which the Lender is willing to make pursuant to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Terms used in this Amendment which are defined in the Credit
Agreement shall have the same meanings as defined therein, unless otherwise
defined herein.
2. The Credit Agreement is hereby amended as follows:
a) Section 1.1 of the Credit Agreement is hereby amended by
adding thereto the following definitions of "Collateral Pledge
Agreement", "Control Agreement", "Investment Account" and
"Investment Property":
"Collateral Pledge Agreement" means that certain Collateral
Pledge Agreement dated August 13, 1997 executed by the
Borrower in favor of the Lender.
"Control Agreement" means that certain Notice of Pledge and
Control Agreement dated August 13, 1997 by and between the
Borrower and the Lender and acknowledged by Norwest
Investment Services, Inc. "Investment Account" means the
Borrower's account no. 10296739 with Norwest Investment
Services, Inc.
"Investment Property" means all of the Borrower's investment
property, as such term is defined in the UCC, deposited or
held in the Investment Account from time to time, whether
now owned or hereafter acquired.
b) Section 1.1 of the Credit Agreement is hereby further amended
by deleting the period at the end of sub-paragraph (b) (ii) of
the definition of "Borrowing Base" contained therein and
replacing the same with ", plus" and by adding to such
definition a new sub-paragraph (iii) as follows:
(iii) the lesser of (A) 100% of the purchase price
of any United States Treasury Securities with an
initial maturity date of not greater than 90 days
held from time to time in the Investment Account, or
(B) $6,000,000.
c) Section 1.1 of the Credit Agreement is hereby further amended
by adding to the definition of "Collateral" contained therein,
the words "Investment Property," immediately before the word
"Equipment".
d) Section 1.1 of the Credit Agreement is hereby further amended
by adding to the definition of "Security Documents" contained
therein, the words "the Collateral Pledge Agreement, the
Control Agreement," immediately after the word
"collectively,".
3. Except as explicitly amended by this Amendment, all of the
terms and conditions of the Credit Agreement shall remain in full
force and effect and shall apply to any loan or advance thereunder.
4. This Amendment shall be effective upon receipt by the Lender
of (a) an executed original hereof, (b) a Certificate of the Secretary
of the Borrower in a form acceptable to the Lender, (c) executed
original UCC amendment documents in form and substance acceptable to
the Lender amending the collateral description to add "Investment
Property" thereto, (d) an original Notice of Pledge and Control
Agreement executed by the Borrower and by Norwest Investment Services,
Inc. in form and substance acceptable to the Lender, and (e) an
original Collateral Pledge Agreement executed by the Borrower in form
and substance acceptable to the Lender.
5. The Borrower hereby represents and warrants to the Lender as
follows:
a) The Borrower has requisite power and authority to execute this
Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action
and do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of
any law, rule or regulation or of any order, writ, injunction or
decree presently in effect, having applicability to the Borrower, or
the articles of incorporation or by-laws of the Borrower, or (iii)
result in a breach of or constitute a default under any indenture or
loan or credit agreement or any other agreement, lease or instrument
to which the Borrower is a party or by which it or its properties may
be bound or affected.
c) All of the representations and warranties contained in Article V of
the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except (i) to the extent that such
representations and warranties relate solely to an earlier date, (ii)
that the Borrower is in default of the Leverage Ratio covenant set
forth in Section 6.14 of the Credit Agreement as of April 30, 1997,
and (iii) the Borrower is in default of its covenant to provide
financial statements to the Lender as and when required under Section
6.1 of the Credit Agreement.
6. All references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit
Agreement shall be deemed to refer to the Credit Agreement as amended
hereby.
7. The execution of this Amendment and acceptance of any
documents related hereto shall not be deemed to be a consent to or
waiver of any Default or Event of Default under the Credit Agreement
or breach, default or event of default under any Security Document or
other document held by the Lender, whether or not known to the Lender
and whether or not existing on the date of this Amendment.
8. The Borrower hereby absolutely and unconditionally releases
and forever discharges the Lender, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations,
insurers, indemnitors, successors and assigns thereof, together with
all of the present and former directors, officers, agents and
employees of any of the foregoing, from any and all claims, demands or
causes of action of any kind, nature or description, whether arising
in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has
made claim to have against any such person for or by reason of any
act, omission, matter, cause or thing whatsoever arising from the
beginning of time to and including the date of this Amendment, whether
such claims, demands and causes of action are matured or unmatured or
known or unknown.
9. The Borrower hereby reaffirms its agreement under the Credit
Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated
thereby, including without limitation all reasonable fees and
disbursements of legal counsel. Without limiting the generality of the
foregoing, the Borrower specifically agrees to pay all fees and
disbursements of counsel to the Lender for the services performed by
such counsel in connection with the preparation of this Amendment and
the documents and instruments incidental hereto. The Borrower hereby
agrees that the Lender may, at any time or from time to time in its
sole discretion and without further authorization by the Borrower,
make a loan to the Borrower under the Credit Agreement, or apply the
proceeds of any loan, for the purpose of paying any such fees,
disbursements, costs and expenses.
10. This Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall
constitute one and the same instrument.
11. The Borrower has advised the Lender that the Borrower has
certain funds ("Borrower Funds") on deposit in an account maintained
by the Borrower at the Bank of America (the "Bank of America
Account"). The Borrower has advised the Lender that the Borrower
intends to use a portion of the Borrower Funds to purchase United
States Treasury Securities to be held in the Investment Account. The
Borrower has further advised the Lender that the Borrower may in
future from time to time make a prepayment of the Revolving Note with
some or all of the Borrower Funds. The Lender hereby agrees that the
Lender will not charge any prepayment premium in connection with any
such prepayment. The Lender further agrees that in the event any such
prepayment is made, and the Borrower thereafter desires to obtain an
Advance for purposes of returning an amount less than or equal to the
amount of such prepayment to the Bank of America Account or any other
account owned by the Borrower, subject to the terms and conditions of
the Credit Agreement and so long as (i) no Default or Event of Default
then exists or would occur as a result of any such Advance, and (ii)
Availability after taking into account such Advance is greater than
$1,000,000; the Lender will allow the proceeds of such Advance to be
deposited in the Bank of America Account or such other account
notwithstanding the provisions of Section 2.10 of the Credit Agreement
regarding use of proceeds and notwithstanding the provisions of
Section 7.4(a) of the Credit Agreement regarding investments.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the day and year first above written.
THE LAMAUR CORPORATION
By: __/s/JOHN D. HELLMANN______________
Its: __Vice President, CFO _____________
NORWEST BUSINESS CREDIT, INC.
By: __/s/VIPA CHIRAPRUT________________
Its: _Assistant Vice President_________
-5-
<TABLE>
EXHIBIT
11.1
<CAPTION>
THE LAMAUR CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
UNAUDITED
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET INCOME ( LOSS) ($4,866) $610 ($7,632) $544
DIVIDENDS ON SERIES B PREFERRED STOCK (100) (100) (300) (133)
----------------------- -------------------------
NET INCOME ( LOSS) AVAILABLE TO
COMMON SHAREHOLDERS (4,966) 510 (7,932) 411
======================= =========================
WEIGHTED AVERAGE SHARES OUTSTANDING 5699 5570 5674 4208
INCREMENTAL SHARES FROM THE EXERCISE OF WARRANTS AND
OPTIONS (1) 40 296 99 423
SHARES ISSUED UPON THE CONVERSION OF SERIES A PREFERRED
STOCK 660 660 660 660
TOTAL WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 6399 6526 6433 5291
======================= =========================
NET INCOME (LOSS) PER SHARE ($0.78) $0.08 ($1.23) $0.08
(1) IN ACCORDANCE WITH THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION COMMON STOCK AND COMMON STOCK EQUIVALENTS
ISSUED WITHIN ONE YEAR OF AN INITIAL PUBLIC OFFERING ARE TO BE INCLUDED IN THE CALCULATION OF WEIGHTED AVERAGE COMMON AND
COMMON STOCK EQUIVALENT SHARES OUTSTANDING FOR ALL PERIODS PRESENTED USING THE TREASURY STOCK METHOD, EVEN THOUGH THEY ARE
ANTIDILUTIVE IN LOSS PERIODS
2) FULLY DILUTED EARNINGS PER SHARE IS NOT PRESENTED SINCE IT IS ANTIDILUTIVE
</TABLE>
LAMAUR
November 14, 1997
CHAIRMAN'S REPORT
ON THE
STATUS OF THE TURNAROUND
Our Initial Public Offering, in May of last year, was structured to help
finance the turnaround of a $100 million hair care products division formerly
owned by DowBrands. At that time we could not forecast with any accuracy just
how the market would respond to new management's initiatives and the time and
capital needed to return the division to profitability. This report discusses
our accomplishments to date and the status of the turn around.
It has been 24 months since our acquisition of the DowBrands Personal Care
Division and the beginning of our challenge to turn around the Company's nine
year history of operating losses. During 1996, our first year of ownership, we
implemented new short term sales and marketing initiatives designed to stem the
declines in revenues from our PERMA SOFT(R) and SALON STYLE(R) brands. With cost
cutting measures and a reduction of operating cost and overhead expense combined
with interest income from invested funds from our Initial Public Offering in May
of 1996, the Company was able to achieve marginally profitable results for 1996.
As the incidence of perming hair continued its decline and the number of
new competitive product offerings in the category continue to rise, even a
return to television and print advertising did not slow the decline in PERMA
SOFT revenues. SALON STYLE which had a successful launch in 1994 experienced a
reduction in market position and revenues when Dow stopped advertising in 1995.
Following our acquisition in November and a return to advertising in 1996, the
SALON STYLE brand continued to experience revenue declines. The Company's
STYLE(R) brand, in what we call the "price value" segment, held steady during
1996 and began to lose some market share in 1997. The performance of these
retail brands in 1996 indicated the importance of understanding the market
changes occurring in the hair care products business.
Product velocity, or speed at which products are sold to consumers, margins
for retailers and market share are criteria for determining shelf position in
retail stores. Large firms with substantial advertising and promotion budgets
dominate retail distribution. As consolidations continue, competition has become
more intense. Retailers experience pressure on margins from suppliers of major
brands which, as a result of large advertising budgets, have strong consumer
demand. Low priced hair care products, which are important to consumers, take a
lot of shelf space yet have very little profit. Add over 100 new product
offerings each year from suppliers of all sizes and we see a very competitive
landscape. We recognize that even with our strong management team and dedicated
workforce, the turn around of Lamaur could take longer and require more
investment than anticipated. We are exploring all options in connection with
formulating an appropriate response to these conditions for the good of the
Company.
To win in this environment it is essential to meet the market on its terms.
The consolidation of retailers caused Lamaur to place special attention on the
25% of the distribution within the industry which represented 75% of our retail
volume. Their needs are clearly to have new brand offerings which will result in
higher cash register rings and to move away from promoting lower priced
products. In response, Lamaur completed the development of and launched the
WILLOW LAKE(TM) brand of hair care products beginning in 1997. Positioned as
"Nature's Prescription for Beautiful Hair(TM)", WILLOW LAKE(TM) is now Lamaur's
leading brand with revenues and margins which have offset the declines being
experienced by PERMA SOFT(R) and SALON STYLE(R). In addition, after completing
market research and the development of new formulations, Lamaur recently
introduced COLOR SOFT(TM) and STYLE NATURAL REFLECTIONS(TM) brands, each
carefully positioned to meet consumer needs and providing higher cash register
rings for retailers. WILLOW LAKE(TM) and COLOR SOFT(TM) brands include a full
line of shampoos, conditioners, and styling products. We are encouraged with the
results of the Company's investment in development, sales and marketing of
Lamaur's new products, including television advertising and sending product
samples to ten million households. As a result of these efforts, the Company's
retail revenues are up and gross margins have continued to improve. We believe
that the Retail Group, which represented the most serious challenge to the
turnaround of our business, is now on a good path.
Our Salon Group is expected to experience modest growth in 1997. We believe
that the PATIVA(R) brand continues to represent an important growth opportunity.
PATIVA(R) is our line of salon products developed to compete with the major
firms that supply their products to salons on an exclusive basis. Growth in this
segment is a "slow build" process because of the need for providing education
and training to stylists. During 1997, contributions from the Salon Group's
semi-exclusive and open products business supported the expansion of PATIVA(R)
from 16 distributors to 24. In addition to improving PATIVA(R) formulations,
Lamaur developed and introduced APPLE PECTIN(R) NATURALS and new NUCLEIC A(R)
BOTANICALS salon products. Salon products generally have margins that are higher
than average retail margins. As we continue to strengthen distribution, our
Salon Group is expected to increase its contribution to the Company's operating
results.
In 1996, Lamaur manufactured household products for DowBrands and hair care
products for others on a contract basis. Because contract manufacturing utilized
excess capacity, in early 1997 management elected to formalize a "Custom
Manufacturing Group" creating a new P&L center. A marketing director was added
to begin a sales effort in order to increase contract volume and reduce our
dependency on the DowBrands account which represented 14% of the Company's total
revenues for the nine months ended September 30, 1997. In October of 1997
DowBrands was sold to S.C. Johnson which will manufacturer all household
products beginning in 1998. Although the contract business is generally low
margin, it does absorb overhead during periods of underutilized capacity. Lamaur
will continue the marketing of its custom manufacturing capability.
Another important segment of the turnaround activity includes the
restructuring of the Research and Development team. Becoming market-driven and
working very closely with the Retail and Salon Groups, the R&D staff developed,
tested and delivered over to production the largest number of new products in
the Company's 60 year history. New products that perform and meet or exceed
consumer expectations gave the marketing and sales staff tools to be
competitive. To develop new products without a material increase in personnel,
the R&D management turned to suppliers for free technical support called "Growth
Partnering"; we save money developing new products and suppliers sell Lamaur
more of their raw materials.
Growth Partnering began in Lamaur's manufacturing group to reduce
production costs. Suppliers of bottles, cartons and other materials could reduce
their prices in consideration for a larger share of our business. In our
opinion, Lamaur's production facilities are among the best of their type in the
world. The contribution to the turn around process of our operations team has
been significant. Their goal is to continue to provide superior customer service
at lower cost.
Cutting over to a new Management Information System (MIS) during this very
dynamic stage has been one of Lamaur's most difficult challenges. Although not
directly related, the new MIS project did impact the turn around. In 1996 the
new MIS selection process began by the Company's retaining Deloitte & Touche to
help analyze our business and procedures and assist the Company in selecting the
most appropriate hardware and software products. The transition to the new
system has been extremely difficult as software and system problems seem to have
developed in virtually every segment of the project. System problems combined
with new product introductions and changes in product mix made developing
financial reports and production processing time consuming and taxing on all
levels of the Company. We believe going into 1998, most if not all of the MIS
issues will have been resolved.
Lamaur's advanced technology development is making progress working through
TRI in Princeton, New Jersey, which operates as a "virtual laboratory" for
Lamaur. The Company has successfully curled and colored hair under laboratory
conditions using our proprietary Electronic Chemistry(R) technology. The Company
has had its primary patent, related to bringing together electronics and
chemistry for hair styling, issued. In 1997 a second patent has been applied for
which can further strengthen our proprietary position. The advanced technology
development program continues to be below budget, and we believe its low cost
justifies its continuation even though actual products using our new technology
to curl and color hair are several years away. Management has elected to develop
a technology licensing program which will be implemented in 1998. Thereafter
further development of the Company's advanced technology is expected to be self
supporting and patent licenses fees could contribute to operating results.
The remaining segment of our turnaround review is Lamaur's Corporate
Development activity. Financing for operations has come from capital, cash flow
and a working capital line with Norwest Bank. Because there could be no
assurance that a turnaround could be completed within the financial resources
available to the Company, Corporate Development continues to examine business
combinations and financing alternatives, including joint ventures and private
investments, that could provide options as the turnaround process continues to
unfold. Corporate Development has conducted these activities with several large
domestic and international concerns.
Lower than expected revenues from older brands within the retail group
contributed to operating losses in 1997 and, combined with investment spending
on new products, operating losses are expected to continue through the balance
of 1997 and perhaps into the first half of 1998. Although no assurance can be
given, with the market position established for our new products we expect
Lamaur to complete its turnaround in the second half of 1998.
The Company's accomplishments during this turnaround phase have been
significant. With limited financial resources, management completely
restructured each operating group while rationalizing brands and driving the
marketing process to focus on higher margin product offerings. Although
investment spending to create and launch new brands has definitely contributed
to operating losses, our choice was to invest in building what we hoped would be
long term earnings growth or to concentrate on near term results. We chose the
former, and, with the benefit of hindsight we believe this was the best
strategy. Our inherited brands have continued to lose market share, and our new
products will represent 50% of our retail revenue in 1998. We believe Lamaur is
now positioned for a better future.
Sincerely,
Don G. Hoff
This report contains forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the period and
the amount of investment needed for the turn around of Lamaur, positioning of
the Company's brands, future results of the Company's investment in new
products, the future direction of the Retail Group, contribution of the Salon
Group to operating results, resolution of the MIS issues in 1998, timing of
products using advanced technology, development of the Company's advanced
technology as self-supporting and patent fees contributing to operating results,
future operating losses in 1997 and the first half of 1998, and positioning of
Lamaur for a better future.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001011154
<NAME> THE LAMAUR CORPORATION
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<PERIOD-START> JAN-1-1997
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0
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</TABLE>
