UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 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
incorporation of organization) Identification No.)
One Lovell Avenue, Mill Valley, California 94941
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 380-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 1997 was approximately $14,034,814. This number is
calculated by excluding all shares held by directors, Intertec Holdings L.P. and
DowBrands, Inc. without conceding that all such persons or entities are
affiliates of registrant.
As of February 28, 1997, there were 5,642,995 outstanding shares of the
registrant's common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE.
PART III: Portions of Proxy Statement for 1997 annual meeting of stockholders.
<PAGE>
PART I
Item I. BUSINESS
Overview
The Lamaur Corporation (the "Company") was incorporated under the laws of the
State of Delaware on January 4, 1996. The Company's predecessor, Electronic Hair
Styling, Inc., was incorporated in the State of Washington on April 1, 1993 and,
effective March 18, 1996, it merged with the Company to accomplish a Delaware
reincorporation. Effective November 15, 1995, as a result of the acquisition of
the Personal Care Division of DowBrands L.P. (an affiliate of The Dow Chemical
Company), the Company became a successor to a business started in 1930 known
prior to its acquisition by DowBrands in 1987 as Lamaur Inc. On March 26, 1997,
the Company changed its name to The Lamaur Corporation. The Company is a major
producer of personal hair care products in North America.
Through its Lamaur division based in Fridley, Minnesota, 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. Corporate
functions, including corporate development, investor relations, science and
technology, and financial and legal services, are managed at the Company's
headquarters in Mill Valley, California.
The Company's products are distributed to consumer retail outlets, professional
salons and specialty shops. The Company also contract manufactures a variety of
aerosol and other liquid filling products. The Company believes it was among the
ten largest manufacturers in the United States in 1996 in three categories of
hair care products - shampoos, conditioners and styling aids. The Company is
also engaged in the early stages of research and development of Electronic
Chemistry(TM), 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's patented technology is
licensed from an affiliate. Research activities during 1996 have been primarily
directed towards conducting early-stage coloring and styling experiments with
respect to the reaction of hair samples to electromagnetic signals.
During 1996, the Company integrated the new senior management team, restructured
the national sales organization, reduced manufacturing costs, implemented an
"Americas" expansion strategy with its initial phase to develop markets in
Canada, Puerto Rico and Mexico, developed and implemented corrective marketing
strategies for existing retail products, introduced and began shipments of
Willow Lake(TM) and Apple Pectin(R) Naturals, brands of premium priced products
in the retail and salon markets, respectively, and doubled the number of
exclusive professional market distributors for the Pativa(R) line of products.
The Company restructured its contract manufacturing activity, forming a new
profit center and increased the level of contract manufacturing business in
1996. In addition, the Company raised $18.1 million through an initial public
offering, applying $8 million to reduce acquisition debt and $10 million to
working capital. The Company also continues to explore opportunities for
acquisitions or strategic relationships that may enable it to expand its hair
care product lines or diversify its business into other segments of the personal
care market.
The Company's product lines are sold through consumer retail outlets by its
Retail Group (the "Retail Group") under the premium-priced Willow Lake(TM) and
Perma Soft(R), mid-priced Salon Style(R) and value-priced Style(R) brand names.
Most product lines contain 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 Group (the "Salon
Group") under the Nucleic A(R), Apple Pectin(R), Apple Pectin Naturals,
Vita/E(R) and Pativa(R) brand names. Sales by the Retail Group during 1996
accounted for 59.3% of the Company's total revenues, and 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 Group 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 during 1996 accounted for 14.4% of the Company's total
revenues. The Company also manufactures certain products, principally aerosol
sprays, on a contract basis for third parties. Those activities during 1996
accounted for 26.3% of the Company's revenues.
Industry Overview and Investment Considerations
Worldwide retail sales of chemical hair care products in 1995 were approximately
$26 billion, of which approximately $4.6 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 has
been experiencing both a consolidation in the number of competitors and a
globalization in the marketing efforts. The Company believes that currently five
companies (L'Oreal, Unilever, N.V. The Procter & Gamble Company, Wella, and
Alberto-Culver Company) account for approximately 65% of worldwide sales in the
hair care products industry.
The Company has a limited operating history evolving from its development stage
in 1995 by acquiring the operations of the Personal Care Division of DowBrands.
The Personal Care Division had experienced nine consecutive years of losses and
even though new management implemented a turnaround strategy which resulted in
operating profits for 1996, management does not consider the turnaround to be
complete and no assurance can be given that earnings will be available for 1997
or for future periods. Because of significant competition, additional working
capital may be needed to correct brand marketing strategy and to introduce new
brands. With the Company's historical losses and the uncertainty of future
earnings, additional working capital may not be available, and the absence of
such working capital could have a material adverse impact on the Company. It is
for the above reasons that the Company's Common Stock could be subject to
substantial volatility.
Because of the complexity of the turnaround, the loss of senior management could
also have a material adverse effect on performance. In addition, for the next
several years the Company will have a dependence on its largest customers,
including DowBrands and Wal-Mart. Any significant change in sales to these
customers could materially effect the Company's performance. The Company's new
Electronic Chemistry(TM) technology and its underlying principles have not been
commercially developed, and no assurance can be given that products will ever be
derived from the technology and if successfully developed that such products
will be accepted by the market or would comply with government regulations.
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 sales and
marketing plans for 1997, plans with respect to the Company's technology,
liquidity and capital resources, potential for growth in revenue and earnings in
1997, the turnaround of the Company, and the Company's growth potential. These
forward looking statements involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements. Such
risks include market acceptance of the Company's products, effectiveness of
recently adopted initiatives, competition, the Company's ability to implement
appropriate cost controls, price changes by the Company or its competitors and
fluctuations in capital and operating results.
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 Willow
Lake (TM), Perma Soft(R), Salon Style(R), and Style(R) brand names most of which
are widely recognized by retailers and consumers. Most lines contain a broad
assortment of shampoos, conditioners and styling products and are positioned
toward 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(R), Nucleic A(R), Apple Pectin(R), Apple Pectin Naturals
and Vita/E(R) brand names. In addition, the Company also manufactures products,
principally aerosol sprays, under contract for third parties.
<PAGE>
The following table sets forth the Company's principal brands and products sold
within each brand during 1996:
<TABLE>
<CAPTION>
Retail Brands
Brand Shampoos and Conditioners Styling Aids and Perms
<S> <C> <C>
Willow Lake (TM).................. Cherry Bark & Irish Moss Conditioning Shampoo;
Citrus & Rosemary Shampoo; Lavender & Mint
Shampoo; Witch Hazel & Honeysuckle Shampoo;
Hops, Apricot & Almond Conditioner; Sunflower,
Honey & Hibiscus Conditioner; Vitamin E,
Carrot Extract & Milk Protein Conditioner
Perma Soft(R).................... Revitalizing Shampoo, Moisturizing Shampoo, Hair Sprays (aerosol and nonaerosol),
Extra Body Shampoo, Shampoo Plus Conditioner, Mousse, Gel, Frizz Control Cream, Shine
Revitalizing Conditioner, Moisturizing Treatment, Conditioning Foam,
Conditioner, Extra Body Conditioner, Deep Revitalizing Spray
Reconditioning Treatment, Moisturizing Mist
Conditioner
Salon Style(R)................... Moisture Potion(R)Shampoo, Therapy Shampoo, Hair Sprays (aerosol and nonaerosol),
Strengthening Shampoo, NutriShine Shampoo, Spray Gel, Vitafixx(TM)Spritz, Body
Hydration Conditioning Shampoo, Botanical Boost(R)Mousse, Defrizz 'N Shine(R)
Reconstructing Conditioner, Moisture Potion(R) Hydrating Cream
Conditioner, Detangling Conditioner, Pro Mist
Leave-On Conditioner, Hydro Balance Hair Masque
Style(R)......................... Moisturizing Shampoo, Extra Body Shampoo, Hair Sprays (aerosol and non-aerosol),
Regular Shampoo, Strawberry Shampoo, Nourishing Gel, Mousse, Dry Style(R)Hair Spray for
Shampoo, Coconut & Papaya Shampoo, Moisturizing Men (aerosol)
Conditioner, Extra Body Conditioner, Regular
Conditioner, Strawberry Conditioner, Deep
Conditioning Conditioner, Coconut & Papaya
Conditioner
Salon Brands
Brand Shampoos and Conditioners Styling Aids and Perms
Pativa(R)........................ Curl Cleanse Shampoo, Revitalizing Volumizing Mousse, Spritz, Design Creme,
Cleanse Shampoo, Moisturizing Cleanse Shampoo, Alternative Wave (Normal), Alternative
Curl Revitalizer Conditioner, Leave-In Wave (Tinted), Sprae Concentrate Hair
Fortifier, Moisturizing Rinse, Replenishing Spray
Hair Masque
Nucleic A(R)..................... Body Plus(R)Shampoo, Proteplex(R)Shampoos and Botanical(TM)Hair Spray, Gel
Conditioner
Apple Pectin(R).................. Shampoo and Conditioner, Moisturizing Shampoo, Moisturizing Hair Spray, Acid Perm,
ScentSates(TM)Shampoos and Conditioners, Apple Apple Pectin Plus(R)Perm, Ten-Minute
Pectin Plus(R)Shampoo and Conditioner in One Wave, Ultra Hold Mousse, Styling Creme
Apple Pectin Naturals.......... Witch Hazel &
Honeysuckle Shampoo, Irish Moss & Cherry Bark
Shampoo; Rosemary & Grapefruit Shampoo; Hops,
Apricots & Almonds Conditioner; Sunflower, Honey
& Hibiscus Conditioner; Milk Protein, Carrot
Extract & Vitamin E Conditioner; Peppermint &
Lavender Bath & Body [Body Wash]
Vita/E(R)........................ 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, Bone Marrow(R) Natural Man(R) Styling Creme, Natural
Conditioners Man(R) Hair Spray, Natural Woman(R) Hair
Spray, CO-A(R)Perm, CO-A Kinetics(R)Perm,
Lamaur Inception(R) Thio-Free Perm, Strata(R)
Perm, Gamma pHactor(R) Wave Set and Concentrate,
Beauti-Lac(R) Hair Spray, Stylac(R) Hair Spray,
Sprayage(R) Hair Spray, Body Plus Mousse, Axiom(R)
Perm, Body for Sure(R) Perm
</TABLE>
<PAGE>
Willow Lake(TM), a new "high-end" retail hair care product line positioned as
"Nature's Prescription for Beautiful Hair(TM)" began shipments in the fourth
quarter of 1996. The line of shampoos and conditioners is the Company's newest
entry in the "naturals" segment of the hair care category.
Perma Soft(R), which is a "high-end" retail product line, is intended to meet
the needs of a large segment of consumers who use permanent wave products or
color treat their hair.
Salon Style(R), launched in 1994, is a line of "mid-priced" shampoos,
conditioners and styling aids positioned as "Salon Quality at a Fraction of the
Price."
Style(R) is the Company's "value priced" brand, intended for use by the entire
family.
Apple Pectin Naturals was introduced to the salon industry at the Beauty and
Barber Supply Institute (BBSI) convention in Las Vegas, Nevada in July 1996. The
Company began shipments in the fourth quarter of 1996. The new Apple Pectin
Naturals product line will further the Salon Group's sales of "natural" products
into the professional market.
Apple Pectin(R), originally introduced to salons in 1978, was one of the first
product lines based on an ingredient found in nature.
Pativa(R) is a full line of professional salon shampoos, conditioners and
styling products which includes an innovative wave technology that eliminates
the neutralizer step. Launched in March 1995, Pativa(R) line provides the Salon
Group with a product line distributed by exclusive dealers to full service
salons.
The following table sets forth certain information concerning the Company's net
sales by group in each of the last three fiscal years:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Retail........................... $ 69,432 59.3 % $ 73,256 62.2 % $ 80,669 66.5%
Salon............................ 16,833 14.4 16,947 14.4 16,928 14.0
Contract Manufacturing (1)....... 30,818 26.3 27,563 23.4 23,680 19.5
Total:........................... $117,083 100.0 % $117,766 100.0% $121,277 100.0%
- - -------------------------------------
</TABLE>
(1) Contract manufacturing sales included sales to DowBrands of $22.2
million, $21.4 million and $19.3 million in each of the years ended December 31
1996, 1995, and 1994, 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 Group are carried
out through a combination of the Company's own sales force and independent
brokers. Salon Group 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 the
Company's total net sales in any of the last three years. DowBrands accounted
for 16%, 18% and 19% of the Company's total net sales in each of 1994, 1995 and
1996, respectively, and Wal-Mart accounted for 18%, 18% and 17% of the Company's
total net sales in each of 1994, 1995 and 1996, 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 to make continuing purchases from the
Company, although DowBrands has agreed to purchase all of its future
requirements for certain products from the Company through November 1997. The
Company is currently engaged in discussions to extend the term of this
agreement.
The Company promotes sales of its products utilizing substantial advertising,
consumer promotions and merchandising support programs. During the years ended
December 31, 1994, 1995 and 1996, the Company's marketing support expense was
approximately $31.4 million, $23.8 million and $23.8 million, respectively.
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 costs 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 substantial
cash resources to fund those activities. These activities include (i) expanding
its product mix by introducing new products, particularly Willow Lake(TM), (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 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, factors unique to those
markets, as well as to comply with any local regulatory requirements.
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. The Company relies principally on the experience
of its staff in connection with formulating new products. The Company's research
and technical staff of approximately 21 persons works closely with the Company's
sales and marketing groups to keep current with 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 include (i)
the Willow Lake(TM) product line, a complete consumer-oriented line of natural
hair care products introduced in 1996, and (ii) Apple Pectin (R) Naturals for
the professional salon and specialty market, introduced in 1996.
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
using licensed technology 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.
Research activities during 1996 have been primarily directed towards conducting
early-stage coloring and styling experiments with respect to the reaction of
hair samples to electromagnetic signals. These experiments have been conducted
under contract with the Company's virtual laboratory at TRI/Princeton. Such
services are expected to continue through 1997. 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. The timing of introduction of its first commercial product will also
depend on the time required to obtain any required regulatory approvals. 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
<PAGE>
Manufacturing and Supply
All the Company's manufacturing, packaging and warehousing operations are
located in a 438,000 square foot facility in Fridley, Minnesota. 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 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 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 20% or more to the Company's sales in each of the last
three years. Since the beginning of 1996, the Company has obtained new contract
manufacturing orders from new customers. The Company recognizes revenues from
such orders only upon shipment. 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.
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 its 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 DowBrands Personal Care Division 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
acquisition.
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.
Patents and Trademarks
The Company markets its 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 Group include
Willow Lake (TM) Perma Soft(R), Color Soft(TM), Salon Style(R) and Style(R). The
Salon Group trademarks include Pativa(R), Nucleic A(R), Apple Pectin(R), Apple
Pectin Naturals and Vita/E(R). 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 the Company owns certain patents, its
business is not materially dependent upon any patent, license, franchise or
concession, whether owned by or licensed to the Company.
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 its business. It seeks to protect its interests through a
combination of patent protection and confidentiality agreements with all its
critical 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 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 its research activities. Mr. Hoff, Chairman and Chief
Executive Officer, and Mr. Stiley, Director and Company consultant, are
affiliates of the Company. 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.
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 the Company's products are very 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.
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 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 it was among
the ten largest manufacturers in the United States in 1996 of three categories
of hair care products- shampoos, conditioners and styling aids. Principal
competitors 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 Group include Bristol-Myers
Squibb Company (Clairol and Matrix), Nexxus, and Wella AG (Redken).
Personnel
The Company employed 336 persons as of December 31, 1996. None of the Company's
employees is a member of a labor union. The Company considers its relationship
with its employees to be good.
<PAGE>
Item 2. 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 excess production capacity, which it intends to utilize for new
products and for possible expansion of its contract manufacturing activities.
The Company leases its 6,008 square foot office facility in Mill Valley,
California, near San Francisco, from Intertec, a division of Innovative Capital
Management, Inc.. The term of the lease is for three years commencing October 1,
1996.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<TABLE>
<CAPTION>
Executive Officers of the Registrant
ELECTED TO PRESENT
- - ------------------------- -------------------------------------------- ----------- POSITION
<S> <C> <C> <C>
NAME POSITION AGE
Don G. Hoff Chairman of the Board and Chief Executive 62 1993
Officer
- - --------------------------
John D. Hellmann Vice President, Chief Financial Officer 47 1995
- - --------------------------
John A. Anzur Vice President, General Counsel 41 1996
- - --------------------------
Donald E. Porter Vice President, Corporate Development. 57 1993
- - --------------------------
Richard T. Loda Vice President, Science and Technology 48 1996
- - --------------------------
Dominic J. LaRosa President and CEO - Lamaur Division 54 1995
- - --------------------------
Ronald P. Williams Executive Vice President - Lamaur Division 53 1996
- - --------------------------
William M. Boswell Vice President, Sales - Retail Group of the 55 1995
Lamaur Division
- - --------------------------
Michele L. Redmon Vice President, Marketing - Retail Group of 41 1995
the Lamaur Division
- - --------------------------
Jay T. Olson Vice President , Finance - Lamaur Division 45 1996
- - --------------------------
Michael L. Flahaven Vice President - Salon Group of the Lamaur 40 1997
Division
</TABLE>
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ National Market under the
symbol LMAR. The table below sets forth the range of the high and low sale
prices, as reported by the NASDAQ stock market during last year. Previous to
March 26, 1997 the Company traded under the symbol EHST.
1996
High Low
Second Quarter * $ 8 .250 $ 5.250
Third Quarter 6.000 3.750
Fourth Quarter 4.875 3.125
*Includes only the period May 23, 1996, the first trading date after the
Company's initial public offering, to June 30, 1996.
As of March 3, 1997, the number of holders of record of the Company's Common
Stock was 377 and the number of holders of record of the Company's Preferred
Stock was one. As for the Common Stock, this number does not include beneficial
holders where shares are held of record by nominees.
Dividends are payable with respect to the Series A Preferred Stock only to the
extent (on an as-converted basis) that dividends are declared payable on the
Common Stock. The Series B Preferred Stock is entitled to cumulative cash
dividends at the rate of 8.0% per annum, payable quarterly ($400,000 annually).
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 Preferred Stock.
In January 1996, the Company issued 15,575 shares of Common Stock to 311
employees for services rendered to the Company. The securities were valued at
$6.00 per share. These securities were exempt from registration under Rule 701
under the Securities Act of 1933.
In May 1996 in connection with the Company's initial public offering, the
Company issued warrants to purchase 182,000 shares of Common Stock to the
Representatives of the Underwriters for a nominal amount. Also in May 1996 in
connection with certain financial advisory services to be provided to the
Company, the Company issued warrants to purchase 39,000 shares of Common Stock
to Rodman & Renshaw, Inc. for a nominal amount. These securities were exempt
from registration under Section 4(2) of the Securities Act. These warrants are
initially exercisable at a price of $9.60 per share of Common Stock for a period
of four years, commencing May 1997. The exercise price of the warrants and the
number of shares of Common Stock issuable upon exercise thereof are subject to
adjustment under certain circumstances. The 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 for a 60-day period.
In June, 1996, the Company issued 9,900 shares pursuant to the exercise of a
stock option. These securities were exempt from registration under Rule 701
under the Securities Act of 1933.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
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 twelve months ended December 31, 1996, 1995,
1994 and for the period from April 1, 1993 (Inception) to December 31, 1993, and
the balance sheet data of the Company at December 31, 1996, 1995, 1994 and 1993.
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 the Personal Care Division was effective as of
January 1, 1995. 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 the Personal Care Division for the period from
January 1, 1995 to November 30, 1995 (the effective date of the acquisition for
financial reporting purposes) and the years ended December 31, 1994, 1993 and
1992, and the balance sheets of the Personal Care Division at December 31, 1994,
1993 and 1992. Such data were derived from the Personal Care Division financial
statements, certain of which are included herein.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEARS ENDED ---------------------
DECEMBER 31, APRIL 1, 1993
---------------------------------------- (INCEPTION) TO
DECEMBER 31, 1993 YEAR ENDED DECEMBER
1996 1995 (1) 1994 31, 1995
- - --------------------------------- ----------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF
OPERATIONS DATA:
Total Net Sales $ 117,083 $ 8,070 $ - $ - $ 117,766
Cost of Goods Sold 70,215 5,656 - - 71,395
Gross Margin 46,868 2,414 - - 46,371
Operating Expenses 45,641 3,496 557 1,565 45,130
Write-Down of Assets - - - - 11,000
Operating Income (Loss) 1,227 (1,082) (557) (1,565) (9,759)
Interest Expense (1,386) (300) (59) (40) (1,554)
Other Income 712 - - - 101
Net Income (Loss) $ 553 $(1,382) $(616) $ (1,605) $ (11,212)(2)
Net Income (Loss) Per Share $ .06 $ (.34) $(.15) $ (.44) $ (2.74)
Weighted Average Shares
Outstanding (3) 5609 4086 4086 3658 4086
BALANCE SHEET DATA:
Working Capital (Deficit) $ 26,376 $ 10,346 $(466) $ (27)
Total Assets 61,566 42,967 6 134
Long Term Debt, less Current
Portion 14,723 20,350 1,000 1,000
Stockholders' Equity (Deficit) 30,252 6,594 (1,462) 1,057)
</TABLE>
<PAGE>
Financial Data of the Personal Care Division
<TABLE>
<CAPTION>
Period from January 1,
Years Ended December 31, 1995 through
1994 1993 1992 November 30, 1995 (4)
<S> <C> <C> <C> <C>
Selected Statements of Operations Data:
- - ----------------------------------------
Total net sales..................... $121,277 $112,031 $124,288 $109,696
- - ----------------------------------------
Cost of goods sold.................. 71,735 71,061 77,613 67,088
- - ----------------------------------------
------------- ----------- ---------- --------
- - ----------------------------------------
Gross margin........................ 49,542 40,970 46,675 42,608
- - ----------------------------------------
Operating expenses.................. 57,830 53,851 56,014 42,344
- - ----------------------------------------
Write-down of assets................ 120,100 - - 11,000
- - ----------------------------------------
------------- ----------- ---------- ---------
- - ----------------------------------------
Operating income (loss)............. (128,388) (12,881) (9,339) (10,736)
- - ----------------------------------------
Interest expense from Dow........... (5,805) (6,643) (6,055) (1,603)
- - ----------------------------------------
Other income (expense), net......... 705 317 (328) 101
- - ----------------------------------------
------------- ------------ ----------- ----------
- - ----------------------------------------
Net loss............................ $(133,488) $(19,207) $(15,722) $(12,238)
- - ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1994 1993 1992
<S> <C> <C> <C>
Selected Balance Sheet Data:
- - -------------------------------------------
Working capital....................... $16,787 $11,457 $16,517
Total assets.......................... 58,021 180,376 190,605
Net invested capital.................. 47,493 169,058 179,654
- - -----------
</TABLE>
(1) Includes the results of operations of the Personal Care Division 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 The Personal Care Division to its net realizable
value in connection with Dow's decision to sell the Personal Care
Division. 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 the Personal Care Division.
(3) In accordance with the rules of the Securities and Exchange
Commission, all common stock equivalents of the Company issued within
one year of its initial public offering have been considered as
outstanding since the inception of the Company using the treasury
stock method even though they are anti-dilutive in loss periods.
Common stock equivalents issued prior to one year of the Company's
initial public offering are excluded in loss periods as they are
anti-dilutive.
(4) Results of operations of the Personal Care Division 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.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 historical statement of operations information in
dollars and as a percentage of total net sales for the year ended December 31,
1996. The pro forma information gives effect to the acquisition of the Personal
Care Division as if it had occurred at the beginning of each period. The pro
forma information is not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(In Thousands)
-----------------------------------------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
1996 1995 1994
% % %
- - ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Net Sales $ 117,083 100.0 % $117,766 100.0 % $121,277 100.0 %
- - ------------------------------
Cost of goods sold 70,215 60.0 71,395 60.6 69,764 57.5
- - ------------------------------ ---------- ------- -------- ----- -------- -------
Gross margin 46,868 40.0 46,371 39.4 51,513 42.5
- - ------------------------------
Operating expenses 45,641 39.0 45,130 38.3 54,600 45.0
- - ------------------------------
Write-down of assets - - 11,000 9.4 120,100 99.0
- - ------------------------------ ---------- ------- -------- ----- -------- -------
Operating income (loss) 1,227 1.0 (9,759) (8.3) (123,187) (101.5)
Other income (expense)
Interest expense (1,386) (1.1) (1,554) (1.3) (2,374) (2.0)
Other income 712 .6 101 .1 705 .6
- - ------------------------------ ---------- ------- ------- ----- -------- -------
Net income (loss) $ 553 .5 % $(11,212) (9.5)% $(124,856) (102.9) %
========== ======= ========= ===== ========== =========
</TABLE>
Year Ended December 31, 1996 (Historical) Compared to Year Ended
December 31, 1995 (Pro Forma)
Total net sales of $117.1 million for the year ended December 31, 1996 declined
0.6% compared to pro forma net sales of $117.8 million in 1995. During 1996, the
Company experienced sales growth from its new product line Willow Lake(TM),
contract manufacturing and its Style(R) product line. These increases were
offset by sales decreases in the Perma Soft(R) and Salon Style(R) product lines.
The Company's management implemented a new marketing strategy that included
increasing advertising that began in the quarter ended June 30, 1996, intended
to stem the decline in Perma Soft(R) sales. In addition to supporting the brand
with advertising, the Company is testing new line extensions designed to reverse
the decline in sales.
In April 1995, DowBrands discontinued advertising of Salon Style(R) in
conjunction with the decision to sell the Personal Care Division. During the
next ten months, Salon Style(R) was not supported with any advertising funds.
Although the Company reinstituted a marketing campaign which included
advertising in the first quarter of 1996, Salon Style(R) continued to lose
market share. The Company is developing and expects to implement a new marketing
strategy for the Salon Style(R) brand in 1997.
In November 1995, the Company entered into a two-year contract in which
DowBrands has agreed to purchase all of its future requirements for certain
products. Contract manufacturing sales for 1996 were $30.8 million which
included sales to DowBrands of $22.2 million or 18.9% of total net sales.
Gross margin as a percentage of sales was 40.0% for the year ended December 31,
1996, as compared with a pro forma gross margin of 39.4% for the same period in
1995. The increase in gross margin percentage is attributable to the product
cost savings which were realized through operating efficiencies and the high
gross margin generated from the Willow Lake(TM) product line that began shipping
in the fourth quarter of 1996. The gross margin percentage improvements were
partially offset by an increase in sales of the lower-margin Style(R) line of
products and contract manufacturing, and a decrease in consumer retail purchases
of the higher margin Perma Soft(R) and Salon Style(R) product line.
Although investment was necessary in 1996 resulting from the takeover of
operations from DowBrands and from the implementation of the Company's
turnaround strategy, operating expenses of $45.6 million for the year ended
December 31, 1996, were relatively unchanged as compared with pro forma
operating expenses of $45.1 million for the same period in 1995.
The $11.0 million write-down of assets by DowBrands in the first quarter of 1995
reflected a further adjustment in the carrying value of the Personal Care
Division to its net realizable value in connection with DowBrands decision to
sell the Personal Care Division. Future significant charges are not expected as
all assets and liabilities were recorded at their estimated fair value at the
date of the Company's acquisition of the Personal Care Division.
As a result of the foregoing factors, the operating income for the year ended
December 31, 1996, was $1.2 million, as compared with a pro forma operating loss
of $9.8 million in the same period in 1995. Excluding the write-down of assets,
the pro forma operating income for the year ended December 31, 1995, would have
been $1.2 million.
Interest Expense of $1.4 million for the year ended December 31, 1996, declined
10.8% compared to pro forma Interest Expense of $1.6 million in 1995. The
decrease was due to the additional cash available for working capital in 1996 as
a result of the Company's initial public offering in May 1996.
Other income for the year ended December 31, 1996, was $0.7 million as compared
with $0.1 million for the same period in 1995. This increase is attributable to
the increase in interest income from the investment of the additional cash
available as a result of the Company's initial public offering in the second
quarter of 1996, and gain on the sale of equipment.
As a result of the foregoing factors, net income for the year ended December 31,
1996, was $0.6 million, as compared with a pro forma net loss of $11.2 million
for the same period in 1995.
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(R) product line and
contract manufacturing experienced sales growth, these increases were more than
offset by decreases in the Perma Soft(R) and Style(R) product lines. The
decrease in Perma Soft(R) sales in 1995 followed moderate sales increases in
1994 after a heavily funded marketing campaign. As part of that 1994 marketing
effort, the Perma Soft(R) product line was reformulated and repackaged which
together with the substantial reduction in advertising support in 1995 and a
reduction in perm incidence, caused the decline in Perma Soft(R) sales in 1995.
Contract manufacturing increased $3.9 million and 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 Perma Soft(R)
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(R), and a reduction of employee benefit expenses in
1995; of which $874,000 was reflected in pro forma adjustments related to the
elimination of postretirement benefits and 401(k) matching contributions, and
$160,000 related to a reduction in the Company's vacation benefits. Comparable
reductions were not included in the 1994 pro forma gross margins.
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 Perma Soft(R) marketing campaign and the introduction of a new product
line, Salon Style(R). 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.
The $120.1 million write-down of assets by Dow in 1994 was required to adjust
the carrying value of the Personal Care Division to its net realizable value in
connection with Dow's decision to sell the Personal Care Division. 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 the Personal Care Division.
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-downs, 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 the Personal Care Division 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, 1996, 1995 and 1994
The Company was in a development stage and had no revenues until it completed
the acquisition of the Personal Care Division in November 1995. Operating
expenses of $45.6 million were incurred in the year ended December 31, 1996,
compared with $3.5 million in the year ended December 31, 1995, and $0.6 million
in the year ended December 31, 1994. The higher operating expenses for 1996
reflect the inclusion of the Personal Care Division's operating expenses after
its acquisition in late 1995. Prior to the 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 Company's net income for the year ended December 31, 1996 was
$0.6 million as compared with a loss of $1.4 million and $0.6 million for the
years ended December 31, 1995 and 1994 respectively.
Liquidity and Capital Resources
In 1996, the Company primarily financed its working and other capital
requirements from operations, the initial public offering and borrowing under
its term loan and revolving credit line with Norwest Business Credit. (See Note
6 to the Financial Statements.)
At December 31, 1996, the Company had $12.1 million in cash and cash
equivalents. In May 1996, the Company completed its initial public offering for
the sale of 2,600,000 shares of common stock at $8 per share. Net proceeds to
the Company from the offering were approximately $18.0 million.
In November 1995, the Company entered into a loan agreement with Norwest
Business Credit. The Norwest Credit Agreement is for three years, 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 annual principal payments 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 which at December 31, 1996, was 8.5%. The interest
rates on the revolver and the term loan are currently 8.75% and 9.0%,
respectively. 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.
In June 1996, the Company used $8.0 million of the net proceeds from its initial
public offering to pay down a portion of its revolving credit line with Norwest
Business Credit, Inc. As of December 31, 1996, the Company had approximately
$9.8 million of debt outstanding under its revolving credit line agreement with
Norwest.
Upon completion of the Company's initial public offering, its $5.0 million
convertible note with DowBrands 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.
Accounts receivable at December 31, 1996, increased $6.0 million from December
31, 1995, principally due to higher sales in December 1996 as compared with
December 1995. Inventory increased at December 31, 1996, as compared to 1995 as
the Company began building its inventory for the launch of its new Willow
Lake(TM) product line.
The Company's launch of Willow Lake(TM) as well as the introduction of other new
products in 1997 will be supported by a major marketing campaign including
advertising and consumer promotions. The funds required for this marketing
campaign are expected to come primarily from working capital and the Company's
line of credit facility. The Company also intends to increase this facility
during 1997 but no assurance can be made that Norwest will agree to an increase.
Capital expenditures for 1996 were approximately $3.5 million and are
anticipated to be $2.9 million for 1997.
At December 31, 1996, the Company had a net operating loss carry forward for
federal income tax purposes of approximately $2.8 million which expires at
various dates between 2008 and 2111.
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 12 months.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
<S> <C>
THE LAMAUR CORPORATION Page
Independent Auditors' Report................................................................ F-1
Balance Sheets for the Years Ended December 31, 1996 and 1995............................... F-2
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994............... F-3
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-4
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............... F-5
Notes to Financial Statements for the Years Ended December 31, 1996, 1995 and 1994.......... F-6
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
Independent Auditors' Report................................................................ F-16
Statements of Operations for the Period from January 1, 1995 to November 30, 1995 and for the Year
Ended December 31, 1994.................................................................. F-17
Statements of Net Invested Capital for the Period from January 1, 1995 to November 30, 1995 and for
the Year Ended December 31, 1994......................................................... F-18
Statements of Cash Flows for the Period from January 1, 1995 to November 30, 1995 and for the Year
Ended December 31, 1994.................................................................. F-19
Notes to Financial Statements for the Period from January 1, 1995 to November 30, 1995 and for the
Year Ended December 31, 1994............................................................. F-20
</TABLE>
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's 1997 Proxy Statement in the
material captioned "Election of Directors." Information with respect to
Executive Officers of the registrant is presented at the end of Part I hereof.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1997 Proxy Statement in the
material captioned `Compensation of Executive Officers" and "Additional
Information Relating to Directors and Officers of the Company."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANGEMENT
Incorporated by reference from the Company's 1997 Proxy Statement in the
material captioned "Security Ownership of Certain Beneficial Owners and
Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1997 Proxy Statement in the
material captioned "Certain Transactions."
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules - See index in Item 8.
(b) Reports on Form 8-K. Form 8-K dated October 30, 1996 reporting an Item 5
event. No financial statements were filed with the Report.
(c) List of Exhibits.
<TABLE>
<S> <C>
Exhibit
Number Description
*2.1 Asset Purchase Agreement, dated as of November 15, 1995, between DowBrands, Inc. and Registrant.
*2.2 Plan of Merger, dated March 15, 1996.
*3.1 Restated Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant.
3.3 Certificate of Amendment of Restated Certificate of Incorporation.
*4.1 Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibits 3.1 and 3.3 hereof).
*4.2 Specimen Copy of Stock Certificate for shares of Common Stock.
*4.3 Form of Warrant issued to the Representatives.
*4.4 Form of Common Stock Purchase Warrant, dated as of November 1995, issued to certain investors.
*4.5 Registration Rights Agreement, dated as of November 15, 1995, between Dow and Registrant.
*4.6 Form of Registration Rights Agreement between Registrant and certain holders of Registrant
Common Stock.
*10.1 License Agreement by and between Registrant and Intertec Ltd., dated May 5, 1993.
*10.2 Credit and Security Agreement, dated as of November 16, 1995, between Registrant and Norwest
Business Credit, Inc.
10.3 First Amendment to Credit Agreement, Second Amendment to Credit
Agreement, Amendment Agreement and Third Amendment to Credit
Agreement between Registrant and Norwest Business Credit, Inc.
*10.4 Manufacturing Agreement between DowBrands L.P. and Registrant, dated November 16, 1995.
*10.5 1996 Stock Incentive Plan of the Registrant.
*10.6 1996 Stock Incentive Plan for Non-Employee Directors and Advisory Board Members of the
Registrant.
*10.7 Employment Agreement between Registrant and Don G. Hoff, made as of
June 1, 1994, and modified as of November 6, 1995.
10.8 1996 Non-Qualified Stock Option Plan of the Registrant.
10.9 Sublease dated October 1, 1996 between Registrant and Intertec, Ltd.
11.1 Statement regarding computation of per share earnings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule
*99.1 U.S. Patent Number 5,395,490, issued March 7, 1995, registered to Don
G. Hoff and Joseph F. Stiley, III, for a method of treating materials
by the application of electromagnetic energy at resonant absorption
frequencies.
*Incorporated by reference from the Form S-1 Registration Statement (File No. 333-2722).
</TABLE>
<PAGE>
1. SIGNATURES
Pursuant to the requirements of Section 13 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.
Date: March 27, 1997 THE LAMAUR CORPORATION
(Registrant)
By: /s/ DON G. HOFF
Don G. Hoff, Chairman of the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ DON G. HOFF
- - ---------------------------- Chairman of the Board and Chief March 27, 1997
Don G. Hoff Executive Officer
- - ---------------------------- (Principal Executive Officer)
/s/ JOHN D. HELLMANN
- - ------------------------------ Vice President, Chief Financial March 27, 1997
John D. Hellmann Officer
- - ------------------------------ (Principal Financial and Accounting
Officer)
/s/ DOMINIC J. LaROSA
- - --------------------------- President and CEO - Lamaur Division March 27, 1997
Dominic J. LaRosa and Director
- - ---------------------------
/s/ HAROLD M. COPPERMAN
- - --------------------------- Director March 27, 1997
Harold M. Copperman
- - ---------------------------
/s/ GERALD A. EPPNER
- - --------------------------- Director March 27, 1997
Gerald A. Eppner
- - ----------------------------
/s/ PAUL E. DEAN
- - ---------------------------- Director March 27, 1997
Paul E. Dean
- - ----------------------------
/s/ PERRY D. HOFF
- - ---------------------------- Director March 27, 1997
Perry D. Hoff
- - ----------------------------
/s/JOSEPH F. STILEY, III
- - ---------------------------- Director March 27, 1997
Joseph F. Stiley, III
<PAGE>
F-1
INDEPENDENT AUDITORS' REPORT
The Lamaur Corporation:
We have audited the accompanying balance sheets of The Lamaur
Corporation, formerly Electronic Hair Styling, Inc., (the "Company"), as of
December 31, 1996, and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years ended December
31, 1996, 1995 and 1994. 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, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years ended December 31, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
March 26, 1997
<PAGE>
F-2
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
1996 1995
- - --------------------------------------------------------------------
<S> <C> <C>
ASSETS
- - --------------------------------------------------------------------
Current Assets:
- - --------------------------------------------------------------------
Cash and cash equivalents................................. $ 12,081 $ 2,338
- - --------------------------------------------------------------------
Receivables from DowBrands................................ 1,450 2,374
- - --------------------------------------------------------------------
Accounts receivable, net.................................. 17,214 10,305
- - --------------------------------------------------------------------
Inventories (Note 4)...................................... 11,699 11,140
- - --------------------------------------------------------------------
Prepaid expenses and other current assets................. 523 212
- - --------------------------------------------------------------------
Total current assets.................................. 42,967 26,369
- - --------------------------------------------------------------------
Property, Plant and Equipment, Net (Note 5).................... 18,475 16,283
- - --------------------------------------------------------------------
Other Assets................................................... 124 315
- - --------------------------------------------------------------------
Total Assets.......................................... $ 61,566 $ 42,967
- - --------------------------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable.......................................... $ 6,724 $ 5,525
Accrued expenses.......................................... 4,637 4,849
Accrued salaries, wages and employee-related expenses 2,458 2,724
Current portion of long-term debt (Note 6)................ 1,272 1,200
Payables to related parties (Note 10)..................... 1,500 1,725
Total current liabilities............................. 16,591 16,023
Long-Term Debt (Note 6)........................................ 13,723 12,850
Related Party Obligations (Note 10)............................ 1,000 7,500
Commitments and Contingencies (Note 11)........................
Stockholders' Equity (Note 7):
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 December 31, 1996
and 1995.($10.0 million liquidation preference)........... 8,500 8,500
Series B Preferred stock, $.01 par value, 763,500
shares issued and outstanding at December 31,1996.
($5.0 million liquidation preference)..................... 5,000 -
Common stock, $.01 par value, 12,000,000 shares authorized,
5,603,395 and 2,944,920 shares, issued and outstanding at
December 31, 1996 and 1995, respectivley.................. 56 29
Additional paid-in capital................................ 19,796 1,718
Stock subscriptions receivable............................ (50) (50)
Accumulated deficit....................................... (3,050) (3,603)
Total stockholders' equity............................ 30,252 6,594
Total Liabilities and Stockholders' Equity..................... $ 61,566 $ 42,967
- - --------------------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE>
F-3
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended
December 31,
1996 1995 1994
- - --------------------------------------------------------------
- - --------------------------------------------------------------
<S> <C> <C> <C>
Net Sales.................................................. $ 94,912 $ 6,426 $ -
- - --------------------------------------------------------------
Net Sales to DowBrands (Note 10)............................ 22,171 1,644 -
- - --------------------------------------------------------------
Total Net Sales (Note 1).................................... 117,083 8,070 -
- - --------------------------------------------------------------
Cost of Goods Sold.......................................... 70,215 5,656 -
- - --------------------------------------------------------------
Gross Margin................................................ 46,868 2,414 -
- - --------------------------------------------------------------
Selling, General and Administrative Expenses................ 45,641 3,496 557
- - --------------------------------------------------------------
Operating Income (Loss)..................................... 1,227 (1,082) (557)
- - --------------------------------------------------------------
Interest Expense............................................ (1,386) (300) (59)
- - --------------------------------------------------------------
Interest and Other Income.................................. 712 - -
- - --------------------------------------------------------------
Net Income (Loss).......................................... 553 (1,382) (616)
- - --------------------------------------------------------------
Dividends on Series B Preferred Stock....................... (233) - -
- - --------------------------------------------------------------
Net Income (Loss) Available to Common Shareholders........ $ 320 $ (1,382) $ (616)
- - --------------------------------------------------------------
Net Income (Loss) per Common Share........................ $ .06 $ (.34) $ (.15)
- - --------------------------------------------------------------
Weighted Average Common and Common Equivalent Shares
Outstanding................................................ 5,609 4,086 4,086
==============================================================
</TABLE>
See notes to financial statements
<PAGE>
F-4
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands)
Stock
<CAPTION>
Series A Series B ------------ Subscriptions Accumulated
Preferred Stock ------------------- Common Stock Additional Receivable Deficit Total
Preferred Stock Paid-in
Capital
Shares Amount Shares Amount Shares Amount
- - ------------------
- - ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
----------------
Issuance of Series B
preferred stock - - 764 $ 5,000 - - - - - 5,000
- - ------------------
Issuance of common
stock - - - - 2,643 26 18,086 - - 18,112
- - ------------------
Grants of non-cash
stock option credits - - - - - - 132 - - 132
- - ------------------
Stock grants to
employees - - - - 15 1 93 - - 94
- - ------------------
Dividends on
preferred stock - - - - - - (233) - - (233)
- - ------------------
Net income - - - - - - - - 553 553
- - ------------------
Balance, December 31,
1996 1,000 $8,500 764 $5,000 5,603 $ 56 $19,796 $ (50) $(3,050) $30,252
======= ======= ===== ======== ====== ==== ======= ======== ======== =======
</TABLE>
See notes to financial statements
<PAGE>
F-5
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)..................................... $ 553 $ (1,382) $ (616)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Noncash credits for services....................... 132 213 211
Issuance of common stock for services.............. 94 52 -
Utilization of DowBrands credits................... (1,500) - -
Gain on disposal of assets......................... (214) - -
Depreciation and amortization...................... 1,365 144 2
Effect of changes in:
Receivables..................................... (5,985) 3,779 -
Inventories..................................... (559) 528 -
Other assets.................................... (177) (94) -
Payables........................................ 999 (2,643) 38
Accrued expenses................................ (478) 1,273 55
Net cash provided by (used in) operating activities (5,770) 1,870 (310)
Cash Flows From Investing Activities:
Additions to property, plant and equipment............ (3,110) (128) (2)
Proceeds from sale of assets.......................... 225 - -
Acquisition of PCD.................................... - (13,689) -
Net cash used in financing activitiees............. (2,885) (13,817) (2)
Cash Flows From Financing Activities:
Revolving credit agreement, net....................... 1,764 8,050 -
Borrowings of long-term debt.......................... - 6,465 185
Repayments of long-term debt.......................... (1,445) (300) -
Proceeds from sales of common stock, net.............. 18,112 68 -
Payment of preferred dividends........................ (33) - -
Net cash provided by financing activities.......... 18,398 14,283 185
Net Increase (Decrease) in Cash and Cash Equivalents...... 9,743 2,336 (127)
Cash and Cash Equivalents at Beginning of Period.......... 2,338 2 129
Cash and Cash Equivalents at End of Period................ $ 12,081 $ 2,338 $ 2
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest.................. $ 1,186 $ - $ 5
Noncash investing and financing activities:
Capital lease obligations entered into ............ 401 - -
Dividends payable preferred stock.................. 200 - -
Common stock issued for subscriptions receivable... - 100 -
Conversion of notes payable to common stock........ - 125 -
Conversion of convertible subordinated note into
preferred stock 5,000 - -
Acquisition of PCD (see Note 1):
Issuance of preferred stock........................ - 8,500 -
Issuance of convertible subordinated note......... - 5,000 -
Issuance of DowBrands credits..................... - 3,000 -
Common stock issued for acquisition-related services - 185 -
Reduction of subscription receivable through services - 50 -
performed..
==============================================================
</TABLE>
See notes to financial statements
<PAGE>
F-6
THE LAMAUR CORPORATION
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
Effective March 26, 1997, Electronic Hair Styling, Inc. changed its name
to The Lamaur Corporation (the "Company"). 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 (see Note 10). 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
"DowBrands"). PCD, which was renamed Lamaur after the acquisition, develops,
manufactures, and markets hair care products. The acquisition was 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 6),
$8.5 million (one million shares) of the Company's Series A convertible
preferred stock (see Note 7),a $5.0 million convertible subordinated note (the
"DowBrands's Convertible Note," Note 10) and $3.0 million of credits to be
issued to DowBrands for future purchases. After giving effect to the conversion
of Series A and Series B Preferred Stock (Note 7), DowBrands owns approximately
17% of the Company. 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)
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
-----------------------------------------------------------
================================================================================
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.
<PAGE>
F-7
The following unaudited pro forma summary results of operations for each
of the years ended December 31, 1995 and 1994, 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.
December 31,
1995 1994
(In thousands, except per share amounts)
- - ------------------
Total net sales $ 117,766 $ 121,277
Net loss $ (11,212) $ (124,856)
Net loss per share $ (2.74) $ (30.56)
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 and Cash Equivalent - Certain balances are held in a collateral
account with the Company's lender (Note 6). After residing in the account for
one day, such balances are applied against the Company's revolving debt. The
Company 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 December 31, 1996 were $11,496,000.
Accounts Receivable, net includes an allowance for doubtful accounts.
Receivables from DowBrands represent amounts due under a contract
manufacturing agreement with DowBrands (see Note 10) and at December 31, 1995
included a $665,000 refund resulting from an adjustment to the initial purchase
price paid to DowBrands, 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. 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.
Income Tax amounts in the financial statements related to income taxes are
calculated using the principles of SFAS No. 109, "Accounting for Income Taxes."
Under SFAS 109, prepaid and deferred taxes reflect the impact of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for tax purposes as well
as tax credit carryforwards and loss carryforwards. These deferred taxes are
measured by applying currently enacted tax rates. A valuation allowance reduces
deferred tax assets as future profits are not yet predictable and utilization of
deferred tax assets are not determinable.
Stock Based Compensation - The Company accounts for stock based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its plans.
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.
<PAGE>
F-8
Concentration of Credit Risk - The Company sells the majority of its
products to large U.S. retailers. Excluding sales to DowBrands, sales to the
Company's largest customer was $19.1 million and $1.6 million, in 1996 and 1995,
respectively. No other customer accounted for more than 10% of total net sales
in 1996. 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 aren't 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, 1996 and
1995, the carrying value of debt approximated fair value.
Reclassification - Certain reclassifications have been made in the
accompanying financial statements in order to conform with the 1996
presentation.
3. ACCOUNTS RECEIVABLE
Accounts Receivable include the following:
December 31,
--------------------------------
1996 1995
--------------------------------
(In thousands)
- - ----------------------------------------
Accounts receivable trade.............. $ 17,380 $ 10,030
Non-trade accounts receivable......... 391 767
Allowance for doubtful accounts and returns (557) (492)
Total................................... $ 17,214 $ 10,305
- - ------------------------------------------
================================================================================
Write-offs to accounts receivable were $55,000 and $3,000 for the years
ended December 31, 1996, and 1995, respectively. There were no write-offs to
accounts receivable for the year ended December 31, 1994.
<PAGE>
F-9
4. INVENTORIES
Inventories include the following:
December 31,
---------------------------------------------
1996 1995
(In thousands)
---------------------------------
Finished goods................... $ 7,324 $ 6,393
Work in process.................. 118 480
Raw materials.................... 4,257 4,267
Total............................ $ 11,699 $ 11,140
----------------------------------
================================================================================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
---------------------------------------------
1996 1995
(In thousands)
---------------------------------
Land and land improvements........ $ 1,662 $ 1,662
Buildings and improvements........ 5,253 4,981
Machinery and equipment........... 12,120 9,599
Construction in progress.......... 883 185
Total............................. 19,918 16,427
Less accumulated depreciation..... (1,443) (144)
Total............................. $ 18,475 $ 16,283
----------------------------------
================================================================================
6. LONG-TERM DEBT
Long-term debt includes the following:
December 31,
---------------------------------------------
1996 1995
(In thousands)
----------------------------------
Revolving loan.................... $ 9,814 $ 8,050
Term loan......................... 4,800 6,000
Obligations under capital leases... 381 -
Total............................... 14,995 14,050
Less current portion................ (1,272) (1,200)
Long-term portion...................$ 13,723 $ 12,850
----------------------------------
================================================================================
<PAGE>
F-10
In November 1995, the Company obtained from Norwest Business Credit
(Norwest) a $20.0 million credit facility. The facility consists of a $14.0
million revolving line of credit and a $6.0 million term loan. 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).
Interest is payable monthly on the revolving line of credit at 8.75% and 9.75%
at December 31, 1996 and 1995, respectively. These rates are .5% and 1.25% above
Norwest Bank's base rate.
The term loan provided 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 on the term loan at 9.0% and 10.0% at December 31,
1996 and 1995, respectively. These rates are .75 % and 1.50% above Norwest
Bank's base rate .
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,
capital expenditures and cash flow.
The obligations under capital leases are at fixed interest rates ranging
from 4.8% to 10.0% and are collateralized by equipment and a letter of credit
for $319,000. Machinery and equipment under capital leases were $395,000 (net of
$6,000 of accumulated depreciation) as of December 31, 1996. Minimum payments on
operating leases obligations are for buildings, autos and office equipment.
Future minimum principal payments on long term debt, capital lease and operating
lease obligations are as follows:
<TABLE>
<CAPTION>
Principal Payments on Minimum Payments on
Long-Term Debt and Operating Lease
Capital Lease Obligations
Year Ending Obligations
--------------------------------------------- ------------------------ -----------------------
(In thousands)
<S> <C> <C> <C>
1997 $ 1,272 $ 270
1998 13,491 254
1999 81 188
2000 86 20
2001 65 4
2002 and thereafter - -
Total minimum principal payments $ 14,995 $ 736
---------------------------------------------
==============================================================================================================================
</TABLE>
The fair value of the Company's long-term debt approximates the carrying
amount based on the current rates offered to the Company on similar debt.
7. STOCKHOLDERS' EQUITY
Effective May 22, 1996, the Company completed its initial public offering
of 2,600,000 shares of its common stock. Net proceeds to the Company aggregated
approximately $18.1 million. As of the closing date of the offering, the $5.0
million convertible note with DowBrands converted into 763,500 shares of Series
B preferred stock (see below).
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.
<PAGE>
F-11
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") which was issued in May 1996 upon conversion of the $5.0 million
DowBrands Convertible Note (Note 1 and Note 10). Series B Preferred bears an
8.0% per annum 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.
Equity Incentive Plans - The Company maintains three equity incentive
plans for employees, consultants, directors and advisory board members. These
plans are the 1996 Stock Incentive Plan, the 1996 Nonqualified Stock Option Plan
and the Stock Option Plan for Non-Employee Directors and Advisory Board Members.
In connection with Predecessor's merger with the Company (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 Non-Employee Directors
and Advisory Board Members. Stock options under these plans are issued at an
option price not less than market value on date of grant. Total shares
authorized under these three plans are 1,250,000, 250,000 and 150,000,
respectively. Total shares available for grant under these plans were 18,650,
215,000 and 60,900, respectively, at December 31, 1996. Options granted to
directors and advisory board members generally vest one year from the date of
grant, and options currently granted to employees and consultants generally vest
annually over three years. The 1996 Stock Incentive Plan also provides for the
issuance of stock appreciation rights and restricted stock, none of which have
been granted as of December 31, 1996.
A summary of changes in common stock options during 1994, 1995, and 1996
is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Share Price
<S> <C> <C>
Outstanding at December 31, 1993.......... 79,200 $ 1.52
Granted................................... 42,900 1.52
Outstanding at December 31,1994........... 122,100 1.52
Granted (average fair value of $1.04)..... 623,700 3.08
Canceled.................................. (9,900) 1.52
Outstanding at December 31,1995 735,900 2.84
Granted (average fair value of $2.33)..... 1,036,050 4.61
Canceled.................................. (416,500) 5.77
Exercised................................. (42,900) 1.64
Outstanding at December 31, 1996 1,312,550 $ 3.35
</TABLE>
During 1996, 340,350 options were canceled at exercise prices ranging from
$6.06 to $8.00 per share and reissued at $4.25 per share. The reissued shares
are included in the above table.
Options exercisable at December 31, 1996 and 1995, were 526,300 and
476,850, respectively.
<PAGE>
F-12
The following table summarizes information about the three equity incentive
plans at December 31, 1996:
Options Outstanding Options
Excercisable
- - -------------------------------------------------------- ------------------
Weighted-Average Weighted
Remaining Average Weighted
Range of Contractual Life Exercise Average
Exercise (in years) Price Excercise
Prices Number Number Price
- - --------------------------------------------------------------------------------
$ 1.52 323,532 8.33 $1.52 316,932 $ 1.52
3.03 234,168 8.55 3.03 159,918 3.03
4.00 - 4.38 754,850 9.08 4.23 49,450 4.25
--------- -----------
1,312,550 526,300
========== ===========
The Company applies APB No. 25 "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock-based compensation plans.
Had compensation cost been determined based on the fair value of the 1996 and
1995 stock option grants consistent with the requirements of SFAS No. 123
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
1996 1995
---------------- ---------------
(In thousands, except per
share amounts)
Net income (loss) As reported $ 553 $ (1,382)
Pro forma $ (142) $ (1,479)
Net income (loss) per share As reported $ .06 $ (.34)
Pro forma $ (.03) $ (.36)
============================================
================================================================================
In determining the above pro forma amounts under SFAS 123, the fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995, respectively: expected volatility of 65% and 0%,
risk-free interest rates of 6.4% and 6.4 %, expected lives of 6.5 years and 6.5
years and no expected dividends. The effects of applying SFAS123 in this pro
forma disclosure are not indicative of future amounts. SFAS 123 does not apply
to awards prior to 1995, and additional awards are anticipated.
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 DowBrands employees at no cost to the employee. As of December 31, 1996,
15,575 shares were issued pursuant to this plan.
Noncash 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, $132,000 and $651,000 at December 31, 1996 and
1995, respectively, have been recorded as expense or cost of acquisition and
additional paid-in capital as the related salary or consulting fees were earned.
The Company ceased issuing any additional noncash credits at December 31, 1996.
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 November 1995, the Company borrowed $225,000 from employees
and stockholders. The borrowings were repaid in February 1996 with interest at
12% (Note 10). In addition, the lenders received warrants to purchase 74,250
shares of common stock at $3.03 per share. The warrants became exercisable in
May 1996 and expire in November 1998.
8. EMPLOYEE BENEFIT PLANS
The Company established an Employee Savings Plan (401K) during 1996
covering substantially all employees. Contributions to this plan are at the
discretion of the Board of Directors, subject to certain limitations. No
contributions were made by the Company to the plan during the year ending
December 31, 1996.
<PAGE>
F-13
The Company does not provide other post-retirement benefits to its
employees.
9. INCOME TAXES
The provision (benefit) for income taxes has been offset by the change in
the valuation allowance for the years ended December 31, 1996, 1995 and 1994,
because the Company's net operating losses could not be carried back and future
profits are not yet predictable and utilization of deferred tax assets are not
determinable.
The actual income tax provision (benefit) attributable to earnings from
continuing operations for the years ended December 31, 1996, 1995, and 1994
differed from the amounts computed by applying the U.S. federal tax rate of 34 %
to pretax earnings from continuing operations as a result of the following;
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
-----------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax provision (benefit).. $ 188 $ (470) $ (209)
State income taxes, net of federal income tax
provision (benefit)........................... 37 (37) (16)
Other items................................... 26 56 (16)
Change in valuation allowance................. (251) 451 241
Provision for income tax...................... $ - $ - $ -
-----------------------------------------------
</TABLE>
The significant components of deferred income taxes as of December 31 are
as follows (prior year amounts have been adjusted to reflect changes in current
and deferred tax assets and liabilities):
================================================================================
1996 1995
Tax effects of: (In thousands)
- - ----------------------------
Current deferred tax assets and liabilities:
Accounts Receivable, principally due to
reserves. $ 212 $ 187
Inventories, partially due to additional costs
inventoried for tax purposes 336 470
Employee benefits 316 29
Other (includes contingencies, other assets and
other accruals) (86) 45
----------- ----------
778 731
Long-term deferred tax assets and liabilities:
License fee 380 380
Noncash credits 297 254
Federal and state operating loss 1,089 758
Property, plant and equipment (768) (96)
----------- ----------
998 1,296
----------- ----------
Gross deferred tax assets 1,776 2,027
Valuation allowance (1,776) (2,027)
Net deferred taxes $ - $ -
- - -------------------------------------------
Due to the Company's net operating losses, the Company has not paid any
income taxes. The Company has accumulated approximately $2.8 million of federal
and state operating loss carryforwards (NOLs) at December 31, 1996. These NOLs
expire as follows:
================================================================================
(In thousands)
2008.................................................... $ 340
2009.................................................... $ 598
2010.................................................... $ 1,006
2011.................................................... $ 877
<PAGE>
F-14
10. RELATED PARTY TRANSACTIONS
Related party obligations includes the following:
December 31,
1996 1995
(In thousands)
Promissory note for license rights.... $ 1,000 $ 1,000
DowBrands Convertible Note 8%......... - 5,000
DowBrands purchase credits............ 1,500 3,000
Short-term borrowings................. - 225
------------ ------------
Total................................. 2,500 9,225
Less current portion.................. (1,500) (1,725)
------------ ------------
Long-term portion..................... $ 1,000 $ 7,500
- - --------------------------------------
================================================================================
Promissory Note - In May 1993, the Company licensed its proprietary
technology from Intertec Ltd., a limited partnership controlled by the Company's
Chairman of the Board, 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. as agent for Intertec Ltd. Due to
uncertainty 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 in May 1997. 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 sublicensees. 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.
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 $8.00 per
share. The aggregate number of shares of common stock which Intertec Holdings,
L.P. is required to purchase is 146,125 shares. Intertec Holdings, L.P. 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 in May 1997. The deferred purchase price
under the stock purchase agreement accrues interest from and after May 1996 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 Holding, L.P.'s purchase rights with respect to one or
more of the installments, on 10 days' prior notice to Intertec Holdings, L.P..
DowBrands Convertible Note 8% - The $5.0 million DowBrands Convertible
Note had an interest rate of 8.0% per annum, due quarterly, and was subordinated
to any bank borrowings. Upon the completion of the Company's initial public
offering, the $5.0 million DowBrands Convertible Note was converted into 763,500
shares of Series B preferred stock (Note 7).
DowBrands Purchase Credits - In connection with the acquisition described
in Note 1, DowBrands has agreed to purchase 100% of its requirements for certain
DowBrands products from the Company for a period of two years beginning November
16, 1995. In connection with this requirements agreement, DowBrands agreed to
accept, as part of the purchase price, $3 million of credits to be applied
against future purchases. These credits will be issued to DowBrands through
credit memos each quarter in the amount of $375,000 until the credits are fully
used. At December 31, 1996 and 1995, $1.5 million of such credits were
classified as a current liability. Revenues from this arrangement totaled $22.2
million and $1.6 million for the years ended December 31, 1996 and 1995.
Services are priced based on direct material and labor costs incurred plus an
agreed-upon profit margin.
<PAGE>
F-15
Short-term Borrowings - 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 (Note 7).
Leases - The Company leases its offices and certain office equipment in
Mill Valley, California, from Innovative Capital Management, Inc., (ICM) a
related party, under a noncancellable lease expiring in September 1999 with
monthly rentals of $10,786. The Company's Chairman of the Board and Chief
Executive Officer, and his family own 100% of the outstanding stock of ICM.
Rental expense was $99,975, $90,156, and $89,428 for 1996, 1995 and 1994,
respectively.
Legal Fees - During 1996 and 1995, the Company paid legal fees of
approximately $676,000 and $150,000, respectively, to a law firm in which a
Director of the Company is a partner. The legal fees related to general
services, the acquisition of PCD, and the Company's initial public offering.
11. 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.
<PAGE>
F-16
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 period from January 1, 1995 to November 30, 1995 and
for the year ended December 31, 1994, 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 period from January
1, 1995 to November 30, 1995, and for the year ended December 31, 1994, 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
<PAGE>
F-17
<TABLE>
<CAPTION>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF OPERATIONS
Period From January 1, 1995 to November 30, 1995
and the Year Ended December 31, 1994
<CAPTION>
Period from January 1, 1995 Year Ended December
to November 30, 1995 31, 1994
-----------------------------------------------
(In thousands)
<S> <C> <C>
Net Sales to DowBrands...................... $ 19,783 $ 19,253
Net Sales to Others......................... 89,913 102,024
Total Net Sales............................. 109,696 121,277
Cost of Goods Sold.......................... 67,088 71,735
Gross Margin................................ 42,608 49,542
Operating Expenses.......................... 42,344 57,830
Write-down of Assets........................ 11,000 120,100
Operating Loss.............................. (10,736) (128,388)
Other:
Interest expense from Dow................ (1,603) (5,805)
Other income, net........................ 101 705
Total other........................... (1,502) (5,100)
Net Loss.................................... $ (12,238) $ (133,488)
-----------------------------------------------
==============================================================================================================================
</TABLE>
See notes to financial statements.
<PAGE>
F-18
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF NET INVESTED CAPITAL
Period From January 1, 1995 to November 30, 1995
and the Year Ended December 31, 1994
Period From
January 1, 1995
to November 30, Year Ended December 31,
1995 1994
------------------------------------
(In thousands)
Net invested capital, beginning of
period...................... $ 47,493 $ 169,058
Net loss for the period........ (12,238) (133,488)
Net capital invested by (returned
to) Dow..................... (3,489) 11,923
---------- -------------
Net invested capital, end of period $ 31,766 $ 47,493
- - ------------------------------------
================================================================================
See notes to financial statements.
<PAGE>
F-19
<TABLE>
<CAPTION>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENTS OF CASH FLOWS
Period From January 1, 1995 to November 30, 1995
and the Year Ended December 31, 1994
<CAPTION>
Period From
January 1, 1995
to November 30, 1995 Year Ended December 31,
1994
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss............................................. $ (12,238) $ (133,488)
Adjustments to reconcile net loss to net cash provided
by (used in) by operating activities:.............
Write-down of assets.............................. 11,000 120,100
Depreciation...................................... 2,010 3,956
Goodwill amortization............................. - 3,568
Changes in:
Accounts receivable............................ 2,009 (3,299)
Inventories.................................... 792 (1,342)
Prepaid expenses and other..................... 215 101
Accounts payable and accrued expenses.......... 268 (790)
Net cash provided by (used in) operating activities 4,056 (11,194)
Cash Flows Used In Investing Activities:.............
Additions to property, plant, and equipment....... (1,011) (902)
Other............................................. 444 173
Net cash used in investing activities........ (567) (729)
Cash Flows From Financing Activities:
Net capital invested by (returned to) Dow......... (3,489) 11,923
Net Change in Cash...................................
Cash at Beginning of Period.......................... 1 1
Cash at End of Period................................ $ 1 $ 1
----------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE>
F-20
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
NOTES TO FINANCIAL STATEMENTS
Period From January 1, 1995 to November 30, 1995
and the Year Ended December 31, 1994
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 $1,465,000 in 1994 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 $5,805,000 in 1994 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 $22.3 million in 1994 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.
2. RELATED PARTY TRANSACTIONS
PCD provides contract packaging and manufacturing services for Dow.
Revenues from this arrangement totaled $19,253,000 in 1994 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.
<PAGE>
F-21
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 $1,657,000 in 1994 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.
EXHIBIT-3.3
CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF
INCORPORATION OF ELECTRONIC HAIR STYLING, INC. Electronic Hair Styling, Inc., a
corporation duly organized and existing under the General Corporation of Law of
the State of Delaware (the "Corporation"), does hereby certify that: I. The
amendment to the Corporation's Certificate of Incorporation set forth below was
duly adopted in accordance with the provisions of Section 242 and has been
consented to in writing by the stockholders, in accordance with Section 228 of
the General Corporation Law of the State of Delaware. II. Article FIRST of the
Corporation's Restated Certificate of Incorporation is amended to read in its
entirety as follows: FIRST: The name of the corporation is The Lamaur
Corporation (hereinafter called the "Corporation"). IN WITNESS WHEREOF, the
Corporation has caused this Certificate to be executed by Don G. Hoff, its
authorized officer, on this 26th day of March, 1997.
_/s/ Don G. Hoff_______
Title: Chairman and Chief Executive Officer
FIRST AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the 15th day of March, 1996 by and between
Electronic Hair Styling, Inc., a Washington corporation (the "Borrower"), and
Norwest Business Credit, Inc., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into the Credit and Security Agreement
dated as of November 16, 1995 (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 term note dated November 16, 1995
in the original principal amount of $2,300,000, the real estate loan is
evidenced by the Borrower's real estate note dated November 16, 1995 in the
original principal amount of $3,700,000 and the loan advances under the Credit
Agreement are evidenced by the Borrower's revolving note dated as of November
16, 1995, in the maximum principal amount of $14,000,000, 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 6.13 of the Credit Agreement is hereby amended by deleting
the portion of said Section set forth in table form and replacing the
same with the following:
<PAGE>
Book Net Worth
For the Month Ending Plus Subordinated Indebtedness
December 31, 1995 $10,050,000
January 31, 1996 $8,550,000
February 29,1996 $8,550,000
March 31, 1996 $8,250,000
April 30, 1996 $8,250,000
May 31, 1996 $8,250,000
June 30, 1996 $8,250,000
July 31, 1996 $8,550,000
August 31, 1996 $8,850,000
September 30,1996 $8,850,000
October 31, 1996 $9,250,000
November 30, 1996 $9,750,000
December 31, 1996 $10,050,000
(b) Section 6.14 of the Credit Agreement is hereby amended by deleting
the portion of said Section set forth in table form and replacing the
same with the following:
For the Month Ending Leverage Ratio
-------------------- --------------
January 31, 1996 4.06 to 1.0
February 29, 1996 4.35 to 1.0
March 31, 1996 4.39 to 1.0
April 30, 1996 4.45 to 1.0
May 31, 1996 4.26 to 1.0
June 30, 1996 4.36 to 1.0
July 31, 1996 4.52 to 1.0
August 31, 1996 4.49 to 1.0
September 30, 1996 4.14 to 1.0
October 31, 1996 3.86 to 1.0
November 30, 1996 3.59 to 1.0
December 31, 1996 3.58 to 1.0
(c) Section 6.15 of the Credit Agreement is hereby amended by deleting
the portion of said Section set forth in table form and replacing the
same with the following:
For the Month Ending Net Income
-------------------- ----------
January 31, 1996 ($1,500,000)
February 29, 1996 ($1,500,000)
March 31, 1996 ($1,500,000)
April 30, 1996 ($1,800,000)
May 31, 1996 ($1,800,000)
June 30, 1996 ($1,800,000)
July 31, 1996 ($1,500,000)
August 31, 1996 ($1,200,000)
September 30, 1996 ($1,200,000)
October 31, 1996 ($800,000)
November 30, 1996 ($300,000)
December 31, 1996 -0-
(d) Section 6.16 of the Credit Agreement is hereby amended by adding to
said Section the following proviso:
"; provided, however, that the Borrower may reduce the
outstanding principal balance of the Subordinated Indebtedness
by up to $5,000,000, solely out of the proceeds of the
Borrower's initial public offering of its common stock, if and
only if the net proceeds from any such initial public offering
are equal to or in excess of $15,000,000."
(e) Section 6.17 of the Credit Agreement is hereby amended by adding to
said Section a new sentence, reading as follows:
"In addition to the foregoing, the Lender shall have the right
to modify (i) any or all of such covenants in its discretion,
within 60 days after the close of the Borrower's initial
public offering of its common stock, and (ii) Leverage Ratio
and Book Net Worth Plus Subordinated Indebtedness covenants if
at any time the value of the Borrower's Class A preferred
stock is determined to be greater than $7,000,000."
(f) Section 7.5 of the Credit Agreement is hereby amended by adding to the
end of said Section the following proviso:
"provided, further, however, that the Borrower may redeem up
to $5,000,000 of its Class B preferred stock, solely out of
the proceeds of the Borrower's initial public offering of the
its common stock, if and only if the net proceeds from any
such initial public offering are equal to or in excess of
$15,000,000."
(g) Section 8.1(q) of the Credit Agreement is hereby amended by adding to
the end of said Section the following proviso:
"; provided, however, that such minimum ownership percentage
requirement shall be reduced to 24% of the voting stock of the
Borrower if the Borrower raises at least $15,000,000 of net
proceeds from the Borrower's initial public offering of its
common stock."
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 an executed
facsimile copy hereof, to be supplemented with an executed original hereof
within two (2) business days, together with the following, in substance and form
acceptable to the Lender in its sole discretion:
(a) Certificate of the Secretary of the Borrower certifying as to (i)
the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the
Articles of Incorporation and Bylaws of the Borrower, which were
certified and delivered to the Lender pursuant to the Certificate of
the Borrower's Secretary dated as of November 16, 1995 in connection
with the execution and delivery of the Credit Agreement continue in
full force and effect and have not been amended or otherwise modified
except as set forth in the Certificate to be delivered, and (iii)
certifying that the officers and agents of the Borrower who have been
certified to the Lender, pursuant to the Certificate of the Borrower's
Secretary dated as of November 16, 1995, as being authorized to sign
and to act on behalf of the Borrower continue to be so authorized or
setting forth the sample signatures of each of the officers and agents
of the Borrower authorized to execute and deliver this Amendment and
all other documents, agreements and certificates on behalf of the
Borrower.
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 to the extent that such
representations and warranties relate solely to an earlier date.
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 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
ELECTRONIC HAIR STYLING, INC.
By: _________/s/ DON G. HOFF_____
Its: _________________________________
NORWEST BUSINESS CREDIT, INC.
By: ___________________________________
Its: _________________________________
69493_4
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the 30th day of August, 1996 by and between
Electronic Hair Styling, Inc., 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 Credit and Security Agreement
dated as of November 16, 1995, as amended by the First Amendment To Credit
Agreement dated as of March 15, 1996 (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 term note dated November 16, 1995
in the original principal amount of $2,300,000, the real estate loan is
evidenced by the Borrower's real estate note dated November 16, 1995 in the
original principal amount of $3,700,000 and the loan advances under the Credit
Agreement are evidenced by the Borrower's revolving note dated as of November
16, 1995, in the maximum principal amount of $14,000,000, 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) The definition of "Revolving Loan Floating Rate" set forth in
Section 1.1 of the Credit Agreement is hereby amended, effective as of
July 1, 1996, by deleting the phrase "one and one-quarter percent
(1.25%)" therefrom and replacing the same with the phrase "one-half of
one percent (0.50%)".
(b) The definition of "Term Loan Floating Rate" set forth in Section
1.1 of the Credit Agreement is hereby amended, effective as of July 1,
1996, by deleting the phrase "one and one-half percent (1.50%)"
therefrom and replacing the same with the phrase "three-fourths of one
percent (0.75%)".
(c) Section 1.1 of the Credit Agreement is hereby further amended by
adding to said Section new definitions of "Availability", "L/C Amount",
"Letter of Credit", "Obligation of Reimbursement", "Special Account"
and "L/C Application", reading as follows:
"Availability" means the Borrowing Base minus the outstanding
balance under the Revolving Note, minus the L/C Amount. "L/C Amount"
means the sum of (i) the face amount of any issued and outstanding
Letters of Credit and (ii) the unpaid amount of the Obligation of
Reimbursement. "L/C Application" means an application and agreement
for letters of credit in Lender's then-current standard form. "Letter
of Credit" has the meaning specified in Section 2.15 hereof.
"Obligation of Reimbursement" has the meaning specified in Section
2.16 hereof. "Special Account" means a specified cash collateral
account maintained by the Lender in connection with Letters of Credit,
as contemplated by Sections 2.17 and 3.1a. hereof.
(d) Section 2.1 of the Credit Agreement is hereby amended by deleting
the first paragraph, as well as sub-paragraph (a) thereof in their
entirety and replacing the same with the following:
"Section 2.1 Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make Advances
to the Borrower from time to time during the period from the
date hereof to and including the Termination Date, or the
earlier date of termination in whole of the Credit Facility
pursuant to Sections 2.6 or 8.2 hereof, in an aggregate amount
at any time outstanding not to exceed the Borrowing Base less
the L/C Amount, which advances shall be secured by the
Collateral as provided in Article III hereof. The Credit
Facility should be a revolving facility and it is contemplated
that the Borrower will request advances, make prepayments and
request additional Advances. The Borrower agrees to comply
with the following procedures in requesting Advances under
this Section 2.1:
(a) Borrower will not request any Advance under this
Section 2.1, if, after giving effect to such
requested Advance, the sum of the outstanding and
unpaid Advances under this Section 2.1 or otherwise
would exceed the Borrowing Base less the L/C Amount."
(e) Section 2.5 of the Credit Agreement is hereby amended by
adding thereto a new sub-section (e), reading as follows:
"(e) Notwithstanding the interest payable pursuant to Sections
2.5(a), (b) and (c) hereof, the Borrower shall be liable to
the Lender for interest hereunder of not less than $600,000
for each calendar year during the term of the Agreement other
than any calendar year in which this Agreement is terminated
prior to the Termination Date (such amount, the "Minimum
Interest Charge"), and the Borrower shall pay any deficiency
between the Minimum Interest Charge and the amount of interest
otherwise calculated under Sections 2.5(a), (b), and (c)
hereof for each such calendar year on the day immediately
succeeding the last day of each such calendar year."
(f) Section 2.6(d) of the Credit Agreement is hereby amended by
deleting clauses (c) and (d) thereof in their entirety, and by
inserting the word "and" immediately before clause (b) thereof.
(g) Section 2.8 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the following:
"Section 2.8 Payment. All payments of principal and interest
on the Advances, the Term Loan, the Real Estate Loan, the
Obligation of Reimbursement, the Commissions and Fees
hereunder and amounts required to be paid to the Lender for
deposit in the Special Account shall be made to the Lender in
immediately available funds. The Borrower hereby authorizes
the Lender to charge against the Borrower's account with the
Lender an amount equal to the Obligation of Reimbursement,
principal, accrued interest, commissions and fees from time to
time due and payable to the Lender hereunder and amounts
required to be paid to the Lender for deposit in the Special
Account and further authorizes the Lender, in its discretion,
and without request by Borrower to make an Advance under the
Credit Facility to the extent necessary to pay any such
amounts and any fees, costs or expenses hereunder or under the
Loan Documents."
(h) Section 2.11 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the following:
"Section 2.11 Liability Records. Lender may maintain from time
to time, at its discretion, liability records as to any and
all Advances, the Term Loan, the Real Estate Loan and the
Obligation of Reimbursement made or repaid in interest accrued
or paid under this Agreement. All entries made on any such
record shall be presumed correct until the Borrower
establishes the contrary. On demand by the Lender, the
Borrower will admit and certify in writing the exact principal
balance that the Borrower then asserts to be outstanding to
the Lender for Advances, the Term Loan, the Real Estate Loan,
and all Obligations of Reimbursement under this Agreement. Any
billing statement or accounting rendered by the Lender shall
be conclusive and fully binding on the Borrower unless
specific written notice of exception is given to the Lender by
the Borrower within thirty days after its receipt by the
Borrower."
(i) Section 2.12 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the following:
"Section 2.12 Setoff. The Borrower agrees that the Lender may
at any time or from time to time, at its sole discretion and
without demand and without notice to anyone, setoff any
liability owed to Borrower by the Lender, whether or not due,
against any indebtedness owed to the Lender by the Borrower
(for Advances, the Term Loan, the Real Estate Loan, any
Obligations of Reimbursement or for any other transaction or
event), whether or not due. In addition, each other Person
holding a participating interest in any Advances, the Term
Loan, the Real Estate Loan and/or any Letters of Credit made
to or issued for the benefit of the Borrower by the Lender
shall have the right to appropriate or setoff a deposit or
other liability then owed by such Person to the Borrower,
whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating
interest."
(j) Section 2.13 of the Credit Agreement is hereby amended by deleting
sub-section (b) thereof in its entirety and replacing the same with the
following:
"(b) Intentionally omitted."
(k) Section 2.13 of the Credit Agreement is hereby further amended by
deleting the number "four (4)" contained in subsection (c) thereof and
replacing the same with the number "three (3)".
(l) Section 2.13 of the Credit Agreement is hereby further amended by
adding to said Section a new sub-section (d) reading as follows:
"(d) The Borrower hereby agrees to pay the Lender a commission
with respect to each Letter of Credit, if any, accruing on a
daily basis and computed at the annual rate of one and
one-half percent (1.5%) of the available amount of such Letter
of Credit (as it may be changed from time to time) from and
including the date of issuance of such Letter of Credit until
such date as such Letter of Credit shall terminate by its
terms, payable monthly in arrears, and prorated for any part
of a full calendar month in which such Letter of Credit
remains outstanding. The Borrower further agrees to pay the
Lender, on written demand, the administrative fees charged by
the Lender in the ordinary course of business in connection
with the honoring of drafts under any Letter of Credit,
amendments thereto, transfers thereof and all other activity
with respect to the Letters of Credit at the then-current
rates published by the Lender for services rendered on behalf
of customers of the Lender generally."
(m) The Credit Agreement is hereby amended by adding thereto the
following new Sections 2.15, 2.16, 2.17 and 2.18, reading as follows:
Section 2.15. Issuance of Letters of Credit.
(a) The Lender may, in its sole discretion, issue one or more
letters of credit for the account of the Borrower (each a
"Letter of Credit") from time to time during the period from
the date hereof until the Termination Date or until the Credit
Facility is terminated pursuant to Section 8.2(a), whichever
first occurs, in an aggregate amount at any time outstanding
not to exceed the Borrowing Base less the sum of (i) all
outstanding and unpaid Advances hereunder and (ii) the unpaid
amount of the Obligation of Reimbursement. Each Letter of
Credit, if any, shall be issued pursuant to a separate L/C
Application entered into between the Borrower and the Lender,
completed in a manner satisfactory to the Lender. The terms
and conditions set forth in each such L/C Application shall
supplement the terms and conditions hereof, but in the event
of inconsistency between the terms of any such L/C Application
and the terms hereof, the terms hereof shall control.
(b) The Borrower will not request the issuance of any Letter
of Credit under this Section 2.15 if, after the issuance of
such requested Letter of Credit, the sum of the face amounts
of all issued and outstanding Letters of Credit would exceed
the Borrowing Base less the sum of (i) all outstanding and
unpaid Advances hereunder and (ii) the unpaid amount of the
Obligation of Reimbursement.
(c) No Letter of Credit shall be issued with an expiry date
later than the Termination Date in effect as of the date of
issuance.
(d) Any request for the issuance of a Letter of Credit under
this Section 2.15 shall be deemed to be a representation by
the Borrower that (i) the condition set forth in Section
2.15(b), hereof has been met, and (ii) the statements set
forth in Article V hereof are correct as of the time of the
request.
Section 2.16. Payment of Amounts Drawn Under Letters of Credit. Draws
under any Letter of Credit shall be reimbursed to the Lender in
accordance with the applicable L/C Application and as follows:
(a) The Borrower hereby agrees to pay the Lender on the day a
draft is honored under any Letter of Credit a sum equal to all
amounts drawn under such Letter of Credit plus any and all
reasonable charges and expenses that the Lender may pay or
incur relative to such draw, plus interest on all such
amounts, accruing from the date such draft is honored through
and including the date of payment by the Borrower at the
interest rate then applicable to Advances hereunder, charges
and expenses as set forth below (all such amounts are
hereinafter referred to, collectively, as the "Obligation of
Reimbursement").
(b) The Borrower hereby agrees to pay the Lender on demand
interest on all amounts, charges and expenses payable by the
Borrower to the Lender under this Section 2.16, accrued from
the date any such draft, charge or expense is paid by the
Lender until payment in full by the Borrower at the Default
Rate.
If the Borrower fails to pay to the Lender promptly the amount
of its Obligation of Reimbursement in accordance with the
terms hereof and the L/C Application pursuant to which such
Letter of Credit was issued, the Lender is hereby irrevocably
authorized and directed, in its sole discretion, to make an
Advance in an amount sufficient to discharge the Obligation of
Reimbursement, including all interest accrued thereon but
unpaid at the time of such Advance, and such Advance shall be
evidenced by the Revolving Note and shall bear interest as
provided therein.
Section 2.17 Special Account. If the Credit Facility is terminated
pursuant to Section 8.2(a), or the Credit Facility is otherwise
terminated for any reason whatsoever, while any Letter of Credit is
outstanding, the Borrower shall thereupon pay the Lender in immediately
available funds for deposit in the Special Account an amount equal to
the maximum aggregate amount available to be drawn under all Letters of
Credit then outstanding, assuming compliance with all conditions for
drawing thereunder. Amounts in the Special Account may be invested as
Lender shall determine, including in certificates of deposit issued by
Lender. Any interest and earnings on such amounts shall be credited to
the Special Account. The Borrower shall not be responsible for any
losses from the investment or use of funds in the Special Account.
Amounts on deposit in the Special Account may be applied by the Lender
at any time or from time to time to the Borrower's Obligation of
Reimbursement, and shall not be subject to withdrawal by the Borrower
so long as the Lender maintains a security interest therein; provided,
however, that, upon the occurrence of any Event of Default, the Lender
may apply such amounts to any of the Obligations in its sole
discretion. The Lender agrees to transfer any balance in the Special
Account to the Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable
law.
Section 2.18 Obligations Absolute. The obligations of the Borrower
arising under this Agreement shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement, under all circumstances whatsoever, including (without
limitation) the following circumstances:
(a) any lack of validity or enforceability of any Letter of
Credit or any other agreement or instrument relating to any
Letter of Credit (collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure
from all or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right
which the Borrower may have at any time, against any
beneficiary or any transferee of any Letter of Credit (or any
persons or entities for whom any such beneficiary or any such
transferee may be acting), or other person or entity, whether
in connection with this Agreement, the transactions
contemplated herein or in the Related Documents or any
unrelated transactions;
(d) any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being
untrue or inaccurate in any respect whatsoever;
(e) payment by or on behalf of the Lender under any Letter of
Credit against presentation of a draft or certificate which
does not strictly comply with the terms of such Letter of
Credit; or
(f) any other circumstance or happening whatsoever, whether
or not similar to any of the foregoing."
(n) Section 3.1 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the following:
"Section 3.1 Grant of Security Interest. The Borrower hereby
assigns and grants to the Lender a security interest
(collectively referred to as the "Security Interests") in the
Collateral, as security for the payment and performance of
each and every debt, liability and obligation of every type
and description which the Borrower may now or at any time
hereafter owe to the Lender (whether such debt, liability or
obligation now exists or is hereafter created or incurred,
whether it arises in a transaction involving the Lender alone
or in a transaction involving other creditors of the Borrower,
and whether it is direct or indirect, due or to become due,
absolute or contingent, primary or secondary, liquidated or
unliquidated, or sole, joint, several or joint and several,
and including specifically, but not limited to, the Obligation
of Reimbursement and all indebtedness of the Borrower arising
under this Agreement, any L/C Application completed by the
Borrower or any other loan or credit agreement or guaranty
between Borrower and Lender, whether now in effect or
hereafter entered into; all such debts, liabilities and
obligations are herein collectively referred to as the
"Obligations")."
(o) The Credit Agreement is hereby amended by adding thereto a new Section
3.1a., reading as follows: "3.1a. Security Interest in Special
Account. The Borrower
hereby pledges and grants to the Lender a security interest in
all funds held in the Special Account from time to time and
all proceeds thereof, as security for the payment of all
present and future Obligations of Reimbursement and all other
amounts due hereunder or under the Loan Documents."
(p) Section 3.2 of the Credit Agreement is hereby amended by deleting the
parenthetical phrase contained in the first sentence of said Section
and replacing the same with the following: "(but only after the
occurrence of an Event of Default)".
(q) Section 6.1(d) of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the
following:
"(d) within 15 days of the end of each month, a schedule of
assigned receivables, a collection report and such other
documents regarding the Borrower's accounts receivable and
collections as the Lender may request, on forms provided by
the Lender; provided, however, that if the Borrower's
Availability becomes less than $5,000,000, such reports and
schedules shall be provided to the Lender on a weekly basis;
provided, further, that if the Borrower's Availability becomes
less than $5,000,000 during any weekly reporting period, such
reports and schedules shall thereafter be provided to the
Lender on a daily basis.
(r) Section 6.1(j) of the Credit Agreement is hereby amended by adding the
following phrase to the end of clause (i) thereof: "which seek a
monetary recovery against the Borrower in excess of $50,000", and by
adding the following phrase to the end of clause (ii) thereof: "with
an aggregate invoice price in excess of $50,000".
(s) Section 6.13 of the Credit Agreement is hereby amended by deleting the
portion of said Section set forth in table form and replacing the same
with the following:
Book Net Worth
For the Month Ending Plus Subordinated Indebtedness
July 31, 1996 $28,310,000
August 31, 1996 $28,610,000
September 30,1996 $28,610,000
October 31, 1996 $29,010,000
November 30, 1996 $29,510,000
December 31, 1996 $29,810,000
January 31, 1997 $28,310,000
February 28, 1997 $28,310,000
March 31, 1997 $28,310,000
April 30, 1997 $28,310,000
(t) Section 6.14 of the Credit Agreement is hereby amended by deleting the
portion of said Section set forth in table form and replacing the same
with the following:
For the Month Ending Leverage Ratio
July 31, 1996 1.2 to 1.0
August 31, 1996 1.2 to 1.0
September 30, 1996 1.2 to 1.0
October 31, 1996 1.2 to 1.0
November 30, 1996 1.2 to 1.0
December 31, 1996 1.2 to 1.0
January 31, 1997 1.2 to 1.0
February 29, 1997 1.2 to 1.0
March 31, 1997 1.2 to 1.0
April 30, 1997 1.2 to 1.0
(u) Section 6.15 of the Credit Agreement is hereby amended by deleting the
portion of said Section set forth in table form and replacing the same
with the following:
For the Month Ending Net Income
July 31, 1996 ($1,500,000)
August 31, 1996 ($1,200,000)
September 30, 1996 ($1,200,000)
October 31, 1996 ($800,000)
November 30, 1996 ($300,000)
December 31, 1996 -0-
January 31, 1997 ($1,500,000)
February 29, 1997 ($1,500,000)
March 31, 1997 ($1,500,000)
April 30, 1997 ($1,500,000)
(v) Section 7.4(a) of the Credit Agreement is hereby amended by deleting
the introductory paragraph thereof in its entirety and replacing the
same with the following:
"(a) The Borrower will not purchase or hold beneficially any
stock or other securities or evidence of indebtedness of, make
or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other
Person, including specifically but without limitation any
partnership or joint venture, except:".
(w) Section 7.4(a) of the Credit Agreement is hereby further amended by
deleting subparagraph (4) thereof in its entirety and re-numbering
subparagraph (5) as subparagraph (4).
(x) Section 7.10 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the
following:
"Section 7.10 Capital Expenditures. The Borrower will not
expend or contract to expend Capital Expenditures more than
$3,400,000 in the aggregate during the Borrower's fiscal year
ending December 31, 1996, or more than $2,000,000 in the
aggregate during any fiscal year thereafter or more than
$500,000 in any one transaction (except that the Borrower may
expend up to $1,700,000 in 1996 in a single transaction for
the purchase of a new computer system)."
(y) Section 7.12 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the
following:
"Section 7.12 Discounts, etc.. The Borrower will not, after
notice from the Lender, grant any discount, credit or
allowance to any customer of the Borrower or accept any return
of goods sold or modify, amend, subordinate, cancel or
terminate the obligation of any account debtor or other
obligor of the Borrower."
(z) Section 7.17 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the
following:
"Section 7.17 Salaries. The Borrower will not pay excessive
or unreasonable salaries, bonuses, commissions, consultant fees
or other compensation."
(aa) Section 8.1(a) of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the
following:
"(a) Default in the payment of any interest on or principal of
the Note, or failure to pay any amount specified in Section
2.16 hereof relating to the Borrower's Obligation of
Reimbursement or shall fail to pay any amounts required to be
paid for deposit in the Special Account under Section 2.17
hereof, in each case when the same becomes due and payable
hereunder; or".
(bb) Section 8.1(c) of the Credit Agreement is hereby amended by
deleting said Section in its entirety and replacing the same with
the following:
"(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement;
provided, however, that if and as long as the Borrower
maintains availability in excess of $4,000,000, the Borrower's
non-compliance with the covenants set forth in Sections 6.12,
6.13, 6.14, 6.15 and/or 7.10 of this Agreement shall
constitute a Event of Default or an Event of Default only if
such non-compliance continues for in excess of 31 consecutive
days; or".
(cc) Section 8.2 of the Credit Agreement is hereby amended by deleting
said Section in its entirety and replacing the same with the following:
"(a) The Lender may, by notice, to the Borrower, declare the
Credit Facility to be terminated, where upon the same shall
forthwith terminate, and/or may refuse to issue or cause to be
issued any Letter of Credit;".
(dd) Section 8.2 of the Credit Agreement is hereby further amended by
adding to said Section a new sub-section (g), reading as follows:
"(g) The Lender may make demand upon the Borrower and,
forthwith upon such demand, the Borrower will pay to the
Lender in immediately available funds for deposit in the
Special Account pursuant to Section 2.17 hereof an amount
equal to the maximum aggregate amount available to be drawn
under Letters of Credit then outstanding assuming compliance
with all conditions for drawing thereunder."
(ee) Section 9.7 of the Credit Agreement is hereby amended by adding to
said Section a new second sentence reading as follows:
"Without limiting the foregoing in any way, the Borrower
agrees to pay on demand all costs and expenses, including
without limitation reasonable attorney's fees, incurred by the
Lender in connection with the Obligations, this Agreement, the
Loan Documents, any Letters of Credit and any other document
or Agreement related hereto or thereto, and the transactions
contemplated hereby."
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. The Borrower hereby acknowledges that, on July 6, 1996, the Borrower prepaid
the Revolving Note in part in the amount of $8,000,000, out of the proceeds of
the Borrower's initial public offering (the "Prepayment"). The Borrower further
acknowledges and agrees that, pursuant to Section 2.6(d) of the Credit
Agreement, the Borrower was obligated to pay to the Lender a prepayment premium
in the amount of $160,000, in connection with the Prepayment and that the
Borrower has not paid such prepayment premium. The Lender hereby waives the
prepayment premium which would otherwise have been payable with respect to the
Prepayment. The Borrower shall pay a fee in the amount of $80,000 if, but only
if, and when the Revolving Note is prepaid in whole, and the Credit Facility is
terminated, before November 15, 1998, except for any prepayment from the
proceeds of a refinancing with the Lender or an affiliate of Lender. If the
Borrower prepays the Revolving Note in full from the proceeds of a refinancing
with the Lender or an affiliate of the Lender and subsequently prepays the
loan(s) relating to such refinancing in whole before November 15, 1998, the
$80,000 fee described in the immediately preceding sentence shall be due and
payable in full to the Lender at the time of such prepayment. The provisions of
this Section 4 are in addition to, and not in replacement or substitution of,
the prepayment provisions set forth in the Credit Agreement, which shall remain
in full force and effect, as otherwise amended in this Amendment.
5. This Amendment shall be effective upon receipt by the Lender of (a) an
executed original hereof within two (2) business days, and (b) a Certificate of
the Secretary of the Borrower in a form acceptable to the Lender. The Borrower
shall pay to the Lender an amendment fee in the amount of $80,000 on or before
February 28, 1997.
6. 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 to the extent that such
representations and warranties relate solely to an earlier date.
7. 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.
8. The execution of this Amendment and acceptance of any documents related
hereto shall not be deemed to be a 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.
9. 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.
10. 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.
11. 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
ELECTRONIC HAIR STYLING, INC.
By: __/s/ JOHN D. HELLMANN ______
Its: _Vice President Finance__________
NORWEST BUSINESS CREDIT, INC.
By: _/s/ MICHELLE GUETTER__________
Its: _/s/ AVP________________________
STATE OF MINNESOTA )
) ss
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 30th day of August,
1996, by John Hellmann, the VP of Finance of Electronic Hair Styling, Inc., a
California corporation, for and on behalf of said corporation.
/s/ J.D. GRAHAM
Notary Public
STATE OF MINNESOTA )
) ss
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 30th day of August,
1996, by Michelle Guetter, the AVP of Norwest Business Credit, Inc., a Minnesota
corporation, for and on behalf of said corporation.
/s/ J.D. GRAHAM
Notary Public
89128_4
<PAGE>
AMENDMENT AGREEMENT
October 18, 1996
Reference is hereby made to (a) that certain Credit and Security Agreement dated
November 16, 1995 by and between Electronic Hair Styling, Inc., a Delaware
corporation (the "Company") and Norwest Business Credit, Inc., a Minnesota
corporation ("NBCI"), as amended (the "Credit Agreement") and (b) that certain
Collateral Account Agreement dated November 16, 1995 by and among the Company,
NBCI and Norwest Bank Minnesota, National Association, a national banking
association (the "Bank"), as the same may have been amended (the "Collateral
Account Agreement").
1. Section 4 of the Collateral Account Agreement is hereby amended by replacing
the number "2" set forth therein and replacing the same with the number "1".
2. Section 6.10 of the Credit Agreement is hereby amended by deleting the number
"2" set forth in the seventh sentence of said section and replacing the same
with the number "1".
3. In consideration of the Bank's agreement to the amendments set forth above,
NBCI agrees to indemnify and reimburse the Bank, within ten (10) days after
demand, for any item which constitutes cash receipts of NBCI's "Collateral" (as
defined in the Credit Agreement) deposited in the "Collateral Account" (as
defined in the Collateral Account Agreement) which is returned unpaid and for
which the Company does not reimburse the Bank, provided that the Bank shall
notify NBCI within five business days of the day the Bank learns that any such
item shall be or has been returned unpaid (whichever occurs first).
This Agreement shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. Each
party consents to the personal jurisdiction of the state and federal courts
located in the State of Minnesota in connection with any controversy related to
this Agreement, waives any argument that venue in any such forum is not
convenient, and agrees that any litigation initiated by any of them in
connection with this Agreement shall be venued in either the District Court of
Hennepin County, Minnesota, or the United States District Court, District of
Minnesota, Fourth Division. The parties waive any right to trial by jury in any
action or proceeding based on or pertaining to this Agreement. This Agreement
may be executed in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument.
COMPANY: ELECTRONIC HAIR STYLING, INC.
By: __/s/ JOHN D. HELLMANN_____________
Its: _Vice President______________________
BANK: NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION
By: __/s/ LYNN S. HULSTRAND__________
Its: _Vice President____________
NBCI: NORWEST BUSINESS CREDIT, INC.
By: _/s/ MICHELLE GUETTER_____________
Its: __AVP________________________
THIRD AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the 30th day of January, 1997 by and between
Electronic Hair Styling, Inc., 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 Credit and Security Agreement
dated as of November 16, 1995, as amended by the First Amendment To Credit
Agreement dated as of March 15, 1996 and by the Second Amendment to Credit
Agreement dated as of August 30, 1996 (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 term note dated November 16, 1995
in the original principal amount of $2,300,000, the real estate loan is
evidenced by the Borrower's real estate note dated November 16, 1995 in the
original principal amount of $3,700,000 and the loan advances under the Credit
Agreement are evidenced by the Borrower's revolving note dated as of November
16, 1995, in the maximum principal amount of $14,000,000, 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 6.12 of the Credit Agreement is hereby amended by deleting
the number "1.2" therefrom and replacing the same with the number
"1.0".
(b) Section 6.13 of the Credit Agreement is hereby amended by (i)
deleting the number "$29,510,000" (the minimum figure applicable to
November 30, 1996) therefrom and replacing the same with the number
"$29,310,000", and (ii) deleting the number "$29,810,000" (the minimum
figure applicable to December 31, 1996) therefrom and replacing the
same with the number "$29,577,000".
(c) Section 8.2 of the Credit Agreement is hereby amended by adding
thereto sub-sections (b) through (f), together with the paragraph
immediately following sub-section (f), in each case in form and
substance identical to that which existed prior to the Second Amendment
to Credit Agreement dated as of August 30, 1996, by and between the
Borrower and the Lender.
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 within two (2) business days after the date hereof, and
(b) a Certificate of the Secretary of the Borrower in a form 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 to the extent that such
representations and warranties relate solely to an earlier date.
<PAGE>
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 Borrower has indicated to the Lender
that the Borrower intends to redeem certain of its presently issued and
outstanding common stock. Pursuant to Section 7.5 of the Credit Agreement, the
Borrower is prohibited from making any payment on account of the purchase,
redemption or any other retirement of any shares of its stock, without the
Lender's prior written consent. The Lender hereby consents to the Borrowers's
payment of up to $1,500,000 on account of the Borrower's redemption of its $.01
par value common stock, provided that such redemption is consummated, and such
payment is made, on or before July 31, 1997. Except as set forth in the
immediately preceding sentence, 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
ELECTRONIC HAIR STYLING, INC.
By: _/s/ JOHN D. HELLMANN____________
Its: __Vice President________________
NORWEST BUSINESS CREDIT, INC.
By: __/s/ MICHELLE GUETTER_____________
Its: ___AVP_________________________
STATE OF MINNESOTA )
) ss
COUNTY OF ANOKA )
The foregoing instrument was acknowledged before me this 30th day of January,
1997, by John D. Hellmann, the Vice President Finance of Electronic Hair
Styling, Inc., a California corporation, for and on behalf of said corporation.
/s/ KATHLEEN M. KELLY
Notary Public
STATE OF MINNESOTA )
) ss
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 30th day of January,
1997, by Michell Guetter, the AVP of Norwest Business Credit, Inc., a Minnesota
corporation, for and on behalf of said corporation.
/s/ CONSTANCE NESBITT
Notary Public
106098-3
<PAGE>
Electronic Hair Styling, Inc.
Certificate of Secretary
I, John D. Hellmann, Secretary of Electronic Hair Styling, Inc., a Delaware
corporation (the "Company"), hereby certify that:
(a) attached hereto as Exhibit A is a true and complete copy of resolutions
duly adopted by the Board of Directors of the Company, and such resolutions
have not been amended, modified or rescinded, and remain in full force and
effect;
(b) the Certificate of Incorporation of the Company (the "Certificate"), and
the By-Laws of the Company (the "By-Laws"), in the forms delivered to
Norwest on August 30, 1996 pursuant to a Secretary's Certificate dated
August 30, 1996, delivered in connection with the execution and delivery of
that certain Second Amendment to the Credit Agreement (the "Amendment"),
between the Company and Norwest, are true and correct copies of the same,
including all amendments thereto, and said Certificate and By-Laws have not
been further amended except as set forth in any amendments attached hereto,
and no action has been taken by the Company or its shareholders, directors
or officers in contemplation of any such amendment, and are in full force
and effect on the date hereof; and
(c) each person who, as an officer of the Company, signed the Amendment was
duly elected or appointed, qualified and acting as such officer at the time
of signing and delivery, and the signature of such person appearing on the
Amendment is a genuine signature.
In witness whereof, I have hereunto signed this Certificate as of this 30 day of
January, 1997.
_/s/ JOHN D. HELLMANN__________________
John D. Hellmann, Secretary
<PAGE>
Exhibit A to Certificate of Secretary
RESOLVED, that the Chairman of the Board and Chief Executive Officer, and the
Vice President, Finance and Chief Financial Officer, acting alone or together,
be, and each of them hereby is authorized to execute, deliver and perform a
certain Third Amendment to Credit Agreement (the "Amendment") by and between the
Company and Norwest Business Credit, Inc. ("Norwest"), and any and all other
documents and agreements required by Norwest in connection with the Amendment,
the approval and acceptability of the Amendment and all such other documents and
agreements to the Company to be conclusively evidenced by the execution thereof
by either of the above referenced officers.
EXHIBIT-10.8
Electronic Hair Styling, Inc. 1996 NONQUALIFIED STOCK OPTION PLAN 1.
Purposes of the Plan. The purposes of this Plan are: to attract and retain the
best available personnel for positions of responsibility, to provide additional
incentive to Employees, Directors and Consultants, and to promote the success of
the Company's business. Nonqualified Stock Options may be granted under the
Plan. 2. Definitions. As used herein, the following definitions shall apply: (a)
"Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan. (b)
"Applicable Laws" means the legal requirements relating to the administration of
stock option plans and issuance of stock and stock options under U. S. state
corporate laws, U.S. federal and state securities laws, the Code and the
applicable laws of any foreign country or jurisdiction where Options will be or
are being granted under the Plan. (c) "Board" means the Board of Directors of
the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e)
"Committee" means a Committee appointed by the Board in accordance with Section
4 of the --------- Plan. (f) "Common Stock" means the Common Stock of the
Company. (g) "Company" means Electronic Hair Styling, Inc., a Delaware
corporation. (h) "Consultant" means any person, including an advisor, engaged by
the Company to render services. The term "Consultant" shall not include any
person who is also an Officer or Director of the Company. (i) "Director" means a
member of the Board. (j) "Disability" means total and permanent
disability as defined in Section 22(e)(3) of the ---------- Code. (k) "Employee"
means any person, except for Officers and Directors, employed by the Company.
(l) "Fair Market Value" means the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable. (m) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option grant. The Notice of Grant
is part of the Option Agreement. (n) "Officer" means a person who is an officer
of the Company within the meaning of Section 16 of the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder. (o)
"Option" means a stock option granted pursuant to the Plan. Options granted
under the Plan are nonstatutory stock options. (p) "Option Agreement" means a
written agreement between the Company and an Optionee evidencing the terms and
conditions of an individual Option grant. The Option Agreement is subject to the
terms and conditions of the Plan. (q) "Optioned Stock" means the Common Stock
subject to an Option. (r) "Optionee" means an Employee, Director or Consultant
who holds an outstanding Option. (s) "Plan" means this Nonstatutory Stock Option
Plan. (t) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 12 of the ----- Plan. 3. Stock Subject to the Plan. Subject to the
provisions of Section 12 of the Plan, the maximum aggregate number of Shares
which may be optioned and sold under the Plan is 250,000 Shares; provided that
no more than 20,000 Shares may be optioned and sold to Directors. The Shares may
be authorized, but unissued, or reacquired Common Stock. If an Option expires or
becomes unexercisable without having been exercised in full, the unpurchased
Shares which were subject thereto shall become available for future grant or
sale under the Plan (unless the Plan has terminated or the Shares have been
allocated to another plan of the Company)
4. Administration of the Plan. (a) Administration. The Plan shall be
administered by (i) the Board or (ii) a Committee designated by the Board, which
Committee shall be constituted to satisfy Applicable Laws. Once appointed, such
Committee shall serve in its designated capacity until otherwise directed by the
Board. The Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of
the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion: (i) to determine the Fair Market Value of the
Common Stock, in accordance with Section 2(l) of the Plan; (ii) to select the
Consultants, Directors and Employees to whom Options may be granted hereunder;
(iii) to determine whether and to what extent Options are granted hereunder;
(iv) to determine the number of shares of Common Stock to be covered by each
Option granted hereunder; (v) to approve forms of agreement for use under the
Plan; (vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any restriction
or limitation regarding any Option or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine; (vii) to construe and interpret the terms of the
Plan and awards granted pursuant to the Plan; (viii) to prescribe, amend and
rescind rules and regulations relating to the Plan, including rules and
regulations relating to sub-plans established for the purpose of qualifying for
preferred tax treatment under foreign tax laws; (ix) to modify or amend each
Option (subject to Section 14(b) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options longer
than is otherwise provided for in the Plan; (x) to authorize any person to
execute on behalf of the Company any instrument required to effect the grant of
an Option previously granted by the Administrator; (xi) to determine the terms
and restrictions applicable to Options; (xii) to allow Optionees to satisfy
withholding tax obligations by electing to have the Company withhold from the
Shares to be issued upon exercise of an Option that number of Shares having a
Fair Market Value equal to the amount required to be withheld; and (xiii) to
make all other determinations deemed necessary or advisable for administering
the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options. 5. Eligibility. Stock Options may be granted
to Employees, Directors and Consultants. 6. Limitations. Neither the Plan nor
any Option shall confer upon an Optionee any right with respect to continuing
the Optionee's employment or consulting relationship or as a Director with the
Company, nor shall they interfere in any way with the Optionee's right or the
Company's right to terminate such employment or consulting or director
relationship at any time, with or without cause. 7. Term of Plan. The Plan shall
become effective upon its adoption by the Board. It shall continue in effect
until terminated under Section 14 of the Plan. 8. Term of Option. The term of
each Option shall be stated in the Notice of Grant. 9. Option Exercise Price and
Consideration. (a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In so doing, the Administrator may specify that an
Option may not be exercised until either the completion of a service period or
the achievement of performance criteria with respect to the Company or the
Optionee. (c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of: (i) cash; (ii) check;
(iii) promissory note; (iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised; (v) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price; (vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement; (vii) any
combination of the foregoing methods of payment; or (viii) such other
consideration and method of payment for the issuance of Shares to the extent
permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for
Exercise; Rights as a Shareholder. Any Option granted hereunder shall be
exercisable according to the terms of the Plan and at such times and under such
conditions as determined by the Administrator and set forth in the Option
Agreement. An Option may not be exercised for a fraction of a Share. An Option
shall be deemed exercised when the Company receives: (i) written or electronic
notice of exercise (in accordance with the Option Agreement) from the person
entitled to exercise the Option, and (ii) full payment for the Shares with
respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as provided
in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment or Consulting or Director
Relationship. In the event an Optionee ceases to be an Employee or Consultant or
Director, other than upon the Optionee's death or Disability, the Optionee may
exercise his or her Option within such period of time as is specified in the
Notice of Grant to the extent that he or she is entitled to exercise it on the
date of termination (but in no event later than the expiration of the term of
such Option as set forth in the Notice of Grant). In the absence of a specified
time in the Notice of Grant, the Option shall remain exercisable for three (3)
months following the Optionee's termination. If, on the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change
in status as a Consultant, Employee or Director, the Optionee's status as an
Employee, Consultant or Director shall not automatically terminate solely as a
result of such change in status.
(c) Disability of Optionee. In the event an Optionee ceases to be
an Employee or Consultant or Director as a result of the Optionee's Disability,
the Optionee may exercise his or her Option at any time within twelve (12)
months (or such other period of time as is determined by the Administrator) from
the date of termination, but only to the extent that the Optionee is entitled to
exercise it on the date of termination (and in no event later than the
expiration of the term of the Option as set forth in the Notice of Grant). If,
on the date of termination, the Optionee is not entitled to exercise his or her
entire Option, the Shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the Option
shall become fully exercisable, including as to Shares for which it would not
otherwise be exercisable and may be exercised at any time within twelve (12)
months (or such other period of time as is determined by the Administrator)
following the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Notice of Grant), by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance. If, after death, the Optionee's estate or a person who acquired
the right to exercise the Option by bequest or inheritance does not exercise the
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan. 11. Non-Transferability
of Options. Unless otherwise specified by the Administrator in the Option
Agreement, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. 12. Adjustments Upon Changes in Capitalization,
Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the number of Shares covered
by each outstanding Option and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of Shares of
stock of any class, or securities convertible into Shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option. (b) Dissolution or
Liquidation. In the event of the proposed dissolution or liquidation of the
Company, the Administrator shall notify each Optionee as soon as practicable
prior to the effective date of such proposed transaction. The Administrator in
its discretion may provide for all Options to vest and for an Optionee to have
the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be vested and exercisable. To the extent
it has not been previously exercised, an Option will terminate immediately prior
to the consummation of such proposed action. (c) Merger or Asset Sale. In the
event of a merger of the Company with or into another corporation, or the sale
of substantially all of the assets of the Company, each outstanding Option shall
be assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation, or in the
event that the successor corporation refuses to assume or substitute for the
Option, the Option shall fully vest and the Optionee shall have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which it would not otherwise be vested and exercisable. If an Option is
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the merger or
sale of assets, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets was
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option, for each Share
of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets. 13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant. 14. Amendment and Termination of
the Plan. (a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan. The Plan shall terminate upon the approval by
stockholders of a new plan which provides that Shares under this Plan, including
unissued Shares and Shares which become available as a result of termination of
Options, shall be reserved under the new plan. (b) Effect of Amendment or
Termination. No amendment, alteration, suspension or termination of the Plan
shall impair the rights of any Optionee, unless mutually agreed otherwise
between the Optionee and the Administrator, which agreement must be in writing
and signed by the Optionee and the Company. 15. Conditions Upon Issuance of
Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all Applicable Laws, and the
requirements of any stock exchange or quotation system upon which the Shares may
then be listed or quoted, and shall be further subject to the approval of
counsel for the Company with respect to such compliance. (b) Investment
Representations. As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required. 16.
Liability of Company. The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained. 17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
EXHIBIT-10.9
SUBLEASE made as of the 1st day of October, 1996, by and
between INTERTEC, A DIVISION OF INNOVATIVE CAPITAL MANAGEMENT, INC., a
California corporation, having an office at 25 Corte Madera Avenue, Mill Valley,
California 94941 (hereinafter called "Sublandlord"), and ELECTRONIC HAIR
STYLING, INC., a Delaware corporation, having an office at One Lovell Avenue,
Mill Valley, California 94941 (hereinafter called "Subtenant").
W I T N E S S E T H:
WHEREAS: A. By lease (hereinafter called the "Overlease") dated as of
October 1, 1996, RAINIER CONCEPTS, LTD. (hereinafter called "Overlandlord")
leased to Sublandlord the building known as One Lovell Avenue, Mill Valley,
California (hereinafter called the "Building") in accordance with the terms of
the Overlease. A copy of the Overlease (from which certain terms which do not
relate to Subtenant's obligations hereunder have been deleted) has been
previously delivered by Sublandlord to Subtenant; and B. Sublandlord and
Subtenant desire to consummate a subleasing of a portion of the Building on
terms and conditions contained in this agreement (hereinafter called the
"Sublease"). NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, it is hereby agreed as follows: 1. 1.1.
Sublandlord hereby leases to Subtenant and Subtenant hereby hires from
Sublandlord the portion of the Building (approximately 6,008 square feet) shown
on Exhibit A annexed hereto and made a part hereof (hereinafter called the
"Premises") for a term (hereinafter called the "Sublease Term") to commence on
the date hereof (hereinafter called the "Sublease Commencement Date") and to end
on the day preceding the expiration of the Overlease, as same may be extended in
accordance with the provisions thereof (hereinafter called the "Sublease
Expiration Date"), at an annual fixed rent (hereinafter called "fixed annual
rent") of $108,144 per annum, to be paid by Subtenant to Sublandlord at
Sublandlord's office (or such other location as Sublandlord shall designate) in
equal monthly installments of $9,012 in advance, on the first day of each month
during the Sublease Term without any setoff, offset, abatement or reduction
whatsoever. Sublandlord shall not, without the consent of Subtenant (which, so
long as Subtenant is fully performing hereunder, may be withheld in Subtenant's
sole discretion), modify the Overlease or exercise any option granted to
Sublandlord so as to provide for the termination of the Overlease prior to the
Sublease Expiration Date. 1.2. Subtenant shall also be permitted to use the
fixtures and equipment listed on Exhibit B annexed hereto and made a part here
during the term of this Sublease for an additional monthly charge of $1,774.00
per month. 2. 2.1. Subtenant shall not (a) assign this Sublease, nor (b) permit
this Sublease to be assigned by operation of law or otherwise, nor (c) underlet
all or any part of the Premises nor (d) permit the Premises or any desk space
therein to be occupied by any person(s) other than employees or consultants of
Subtenant, without first obtaining: (i) Overlandlord's consent and all other
required consents and requirements with respect to such assignment or subletting
as set forth in and pursuant to the Overlease, and (ii) Sublandlord's consent
which, so long as Overlandlord's consent is obtained, shall not be unreasonably
withheld or delayed and shall be given or withheld within the time periods
provided therefor under the Overlease. 2.2. Sublandlord shall cooperate with
Subtenant and, after notice, shall, at Subtenant's expense, use reasonable good
faith efforts in seeking to obtain Overlandlord's consent and/or performance
under the Overlease. 2.3. If Overlandlord shall default in any of its
obligations with respect to the Premises, or there shall exist a bona fide
dispute with Overlandlord under the terms, covenants, conditions, provisions and
agreements of this Sublease and/or the Overlease and Subtenant notifies
Sublandlord in writing that Subtenant has previously notified Overlandlord of
such dispute and that such default or notice has been disregarded or not
reasonably satisfactorily acted upon, then Sublandlord shall notify Overlandlord
of such default or dispute in its name on Subtenant's behalf. Subtenant shall be
entitled to participate with Sublandlord in the enforcement of Sublandlord's
rights against Overlandlord, but Sublandlord shall have no obligation to bring
any action or proceeding nor to take any steps to enforce Sublandlord's rights
against Overlandlord. If, after written request from Subtenant, Sublandlord
shall fail or refuse to take appropriate action for the enforcement of
Sublandlord's rights against Overlandlord with respect to the Premises,
Subtenant shall have the right to take such action in its own name, and for such
purpose and only to such extent, all of the rights of Sublandlord under the
Overlease are hereby conferred upon and assigned to Subtenant and Subtenant
hereby is subrogated to such rights to the extent that the same shall apply to
the Premises. If any such action against Overlandlord, in Subtenant's name,
shall be barred by reason of lack of privity, non-assignability or otherwise,
Subtenant may take such action in Sublandlord's name provided Subtenant has
obtained the prior written consent of Sublandlord (in each instance), which
consent shall not be unreasonably withheld or delayed (and if it is apparent
that Subtenant must act promptly in order to preserve its rights, any failure on
Sublandlord's part to respond to Subtenant's request to take action in
Sublandlord's name within ten (10) days after Subtenant's request shall be
automatically deemed Sublandlord's consent thereto), and in connection
therewith, Subtenant does hereby agree to indemnify and hold Sublandlord
harmless from and against all liability, loss or damage including, without
limitation, reasonable attorneys' fees and disbursements, which Sublandlord
shall suffer by reason of such action. In any event, Subtenant shall not be
allowed any abatement or diminution of fixed rent or additional rent under this
Sublease because of Overlandlord's failure to perform any of its obligations
under the Overlease.
2.4. If Sublandlord elects to pursue any remedy provided for
in the Overlease in addition to or in cooperation with Subtenant, Subtenant
shall not be required to reimburse Sublandlord for its expenses in connection
therewith if such reimbursement would be in addition to its own expenses, so
that Subtenant shall only be required to pay legal fees and expenses one time
(per occasion) in connection with the pursuit of its remedies under the
Overlease.
3.
3.1. Except as herein otherwise expressly provided and except
for the obligation to pay rent and additional rent under the Overlease, all of
the terms, covenants, conditions, benefits, enjoyments, privileges, services,
and provisions set forth in the Overlease are hereby incorporated in, and made a
part of this Sublease, and such rights and obligations as are contained in the
Overlease are hereby imposed upon and granted to the respective parties hereto;
the Sublandlord herein being substituted for the Landlord in the Overlease and
the Subtenant herein being substituted for the Tenant named in the Overlease;
provided, however, that Sublandlord herein shall not be liable for any defaults
by Overlandlord other than those caused (i) solely as a result of the gross
negligence or wilful misconduct of Sublandlord or (ii) by breach of the
Underlying Lease not occasioned in whole or in part by any act, omission or
breach hereunder by Subtenant; and, if Overlandlord is not the fee owner, the
owner in fee of the land and Building of which the Premises are a part. If the
Overlease shall be terminated for any reason during the term hereof, then and in
that event this Sublease shall thereupon automatically terminate and Sublandlord
shall have no liability to Subtenant by reason thereof. Upon the termination of
this Sublease, whether by forfeiture, lapse of time or otherwise, or upon the
termination of Subtenant's right to possession, Subtenant will at once surrender
and deliver up the Premises in good condition and repairs, reasonable wear and
tear excepted.
3.2. For the purposes of this Sublease, the Witnesseth clause,
Articles 2, 15, 34, 39 and 43 of the Overlease shall not be deemed incorporated
in or made a part hereof and shall be deemed deleted from the Overlease for
purposes of this Sublease.
3.3. Notwithstanding anything to the contrary contained
elsewhere herein, in the event that Sublandlord's rights under the Overlease are
terminated or Sublandlord surrenders the Premises, for any reason whatsoever,
Overlandlord shall have the right (but not the obligation) to recognize
Subtenant as a direct tenant of the Premises, upon notice to Subtenant given on
or before the date which is fifteen (15) days following the termination of
Sublandlord's rights under the Overlease or the surrender of the Premises, in
which event Subtenant shall attorn to and recognize Overlandlord as Landlord
(with Subtenant as Tenant) under the Overlease upon all of the terms and
conditions thereof; provided, however, that in such event, the financial terms
(i.e. the rent, additional rent and other charges) under the Overlease shall be
deemed automatically modified so that such financial terms shall in no event be
more onerous than the financial terms contained in this Sublease.
4.
4.1. Subtenant has examined the Premises, is aware of the
physical condition thereof, and agrees to take the same "as is," with the
understanding that there shall be no obligation on the part of Sublandlord to
incur any expense whatsoever in connection with the preparation of the Premises
for Subtenant's occupancy thereof.
4.2. Notwithstanding anything to the contrary contained in
Section 4.1 above, Sublandlord represents that, to the best of its knowledge,
the cabling and phone switching presently existing in the Premises is in working
order as of the date hereof.
5.
5.1. Subtenant agrees that the Premises shall be occupied only as executive,
administrative and general offices for Subtenant's business.
6.
6.1. This Sublease is conditioned upon the consent thereto by
Overlandlord which consent shall be evidenced by Overlandlord's signature
appended hereto or a separate consent in the form utilized by Overlandlord for
such purposes.
6.2. Except as otherwise specifically provided herein,
wherever in this Sublease Subtenant is required to obtain Sublandlord's consent
or approval, Subtenant understands that Sublandlord may be required to first
obtain the consent or approval of Overlandlord. Sublandlord agrees to reasonably
cooperate (without expenditure of funds or resort to or threat of litigation)
with Subtenant in obtaining Overlandlord's consent or approval as provided in
the Overlease.
7.
7.1. Subtenant acknowledges that the services to be rendered
to the Premises are to be rendered by Overlandlord. Anything in this Sublease to
the contrary notwithstanding, if there exists a breach by Sublandlord of any of
its obligations under this Sublease and, concurrently, a corresponding breach by
Overlandlord under the Overlease of its obligations under the Overlease exists,
then and in such event, Subtenant's sole remedy against Sublandlord in the event
of any breach of obligations under this Sublease shall be the right to pursue a
claim in the name of Sublandlord against Overlandlord, and Sublandlord agrees
that it will, at Subtenant's expense, cooperate with Subtenant in the pursuit of
such claim.
<PAGE>
7.2. Anything contained in any provisions of this Sublease to
the contrary notwithstanding, Subtenant agrees, with respect to the Premises, to
comply with and remedy any default claimed by Overlandlord and caused by
Subtenant, within the period allowed to Sublandlord as tenant under the
Overlease, even if such time period is shorter than the period otherwise allowed
in the Overlease, due to the fact that notice of default from Sublandlord to
Subtenant is given after the corresponding notice of default from Overlandlord.
Provided that the corresponding payment has been made by Subtenant to
Sublandlord hereunder, Sublandlord agrees to pay the then due installment(s) of
rent and additional rent due under the Overlease. Sublandlord agrees to forward
to Subtenant, upon receipt thereof by Sublandlord, a copy of each notice of
default received by Sublandlord in its capacity as tenant under the Overlease.
Subtenant agrees to forward to Sublandlord, upon receipt thereof, copies of any
notices received by Subtenant with respect to the Premises from Overlandlord or
from any governmental authorities. Sublandlord agrees that in the event
Sublandlord receives any abatement under the Overlease as a result of
Overlandlord's failure to provide services thereunder, Subtenant shall be
entitled to a corresponding abatement hereunder.
8.
8.1. Sublandlord represents (a) that it is the holder of the
interest of the tenant under the Overlease, (b) that the overlease is in full
force and effect and (c) that the copy of the Overlease delivered to Subtenant,
as referenced above, remains unamended and unmodified.
9.
9.1. This Sublease is subject to, and Subtenant accepts this
Sublease subject to, any amendments and supplements to the Overlease hereafter
made between Overlandlord and Sublandlord, provided that any such amendment or
supplement to the overlease will not prevent or adversely affect the use by
Subtenant of the Premises in accordance with the terms of this Sublease,
increase the obligations of Subtenant or decrease its rights under the Sublease
or in any other way materially adversely affect Subtenant.
9.2. This Sublease is subject and subordinate to the Overlease
and to all ground or underlying leases and to all mortgages which may now or
hereafter affect such leases or the real property of which the Premises are a
part and all renewals, modifications, replacements and extensions of any of the
foregoing. This Section 9.2 shall be selfoperative and no further instrument of
subordination shall be required. To confirm such subordination, Subtenant shall
execute promptly any certificate that Sublandlord may request.
10.
10.1. Subtenant covenants, represents and warrants that
Subtenant has had no dealings or communications with any broker or agent in
connection with the consummation of this Sublease, and Subtenant covenants and
agrees to pay, hold harmless and indemnify Sublandlord from and against any and
all cost, expense (including reasonable attorneys' fees) or liability for any
compensation, commissions or charges claimed by any broker or agent other than
such brokers with respect to this Sublease or the negotiation thereof.
11.
11.1. Subtenant acknowledges that it is familiar with the
provisions of the Overlease. In the event any payment of Additional Rent (as
defined in the Overlease) is due and owing by Sublandlord to Overlandlord during
the term of this Sublease, then Subtenant shall pay as additional rent pursuant
to this Sublease an amount equal to 100% of such Additional Rent. At any time
payment of any Additional Rent is due under the Overlease, Sublandlord may
deliver to Subtenant a statement with respect to such payment, within ten (10)
days after delivery of such statement, Subtenant shall pay to Sublandlord
additional rent determined as aforesaid in this Section 11.1.
12.
12.1. Any notice, demand or communication which, under the
terms of this Sublease or under any statute or municipal regulation must or may
be given or made by the parties hereto, shall be in writing and given or made by
either hand delivery, overnight delivery by a nationally recognized courier
service or by mailing the same by certified mail, return receipt requested,
addressed to the party for whom intended at its address set forth above. Either
party, however, may designate such new or other address to which such notices,
demands or communications thereafter shall be given, made or mailed by notice
given in the manner prescribed herein. Any such notice, demand or communication
shall be deemed given or served, as the case may be, on the date of first
attempted delivery, if by hand or overnight delivery, or three (3) days after
delivery to the Post Office, if delivery by certified mail, return receipt
requested.
13.
13.1. Subtenant may make no changes, alterations, additions,
improvements or decorations in, to or about the Premises without Sublandlord's
prior written consent in each instance.
14.
14.1. So long as Subtenant pays all of the rent and additional
rent due under this Sublease and performs all of Subtenant's other obligations
hereunder, Subtenant shall peacefully and quietly have, hold and enjoy the
Premises subject, however, to the terms, provisions and obligations of this
Sublease and the Overlease.
14.2. Sublandlord agrees that, in the event Sublandlord
defaults under the terms, covenants, conditions, provisions and agreements of
the Overlease (provided same was not caused by Subtenant or was the result of
Subtenant's actions or inactions with respect to Subtenant's obligations
hereunder), then in such event, Sublandlord covenants and agrees to defend,
indemnify and hold Subtenant harmless from any and all claims, causes of action
against or damages to Subtenant resulting solely and directly therefrom.
15.
15.1. This Sublease may not be changed orally, but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
15.2. This Sublease shall not be binding upon Sublandlord
unless and until it is signed by Sublandlord and delivered to Subtenant. This
Section 15.2 shall not be deemed to modify the provisions of Article 6 hereof.
15.3. This Sublease constitutes the entire agreement between
the parties and all representations and understandings have been merged herein.
15.4. This Sublease shall inure to the benefit of all of the
parties hereto, their successors and (subject to the provisions hereof) their
assigns.
15.5. This Sublease may be executed in one or more
counterparts, all of which together shall constitute one and the
same instrument.
15.6. Nothing herein contained shall be deemed to release
Sublandlord from its obligations under the Overlease, which such obligations
shall remain throughout the term of the Overlease.
15.7.This Sublease shall be governed by or construed in accordance
with the laws of the State of California.
16.
16.1. "Change of Control" means the occurrence of any of the
following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities; or
(ii) A change in the composition of the Board of directors of
the Company as a result of which fewer than a majority of the directors are
"Incumbent Directors." "Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board of Directors with the affirmative votes
(either by a specific vote or by approval of the proxy statement of the Company
in which such person is named as a nominee for election as a director without
objection to such nominations) of at least three-quarters of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors of the Company);
or
(iii) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets.
16.2 Notwithstanding any other provision in this Sublease or
the Overlease, in the event of a Change of Control Sublandlord may at any time
thereafter terminate the term of this Sublease provided in Section 1.1 upon 30
days written notice to Subtenant.
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands
and seals as of the day and year first above written.
INTERTEC, A DIVISION OF INNOVATIVE CAPITAL MANAGEMENT, INC.
Sublandlord
By_____/s/ Sandra L. Hoff_____
Sandra L. Hoff, Vice President
ELECTRONIC HAIR STYLING, INC.,
Subtenant
By _/s/ John D. Hellmann_____________
John D. Hellmann, Vice President, Chief Financial Officer
THE FOREGOING IS CONSENTED
TO BY RAINIER CONCEPTS, LTD.,
Overlandlord
By__/s/ Sandra L. Hoff______
Partner
EXHIBIT-11.1
THE LAMAUR CORPORATION
--------------------------------------------------
COMPUTATION OF PER SHARE EARNINGS $(000)
--------------------------------------------------
Years Ended December 31,
1996 1995 1994
Net Income (loss) $ 553 $(1,382) $ (616)
- - ---------------------
Dividends on Series B Preferred Stock (233)
- - ------------------------------ --------------- ------------ ------------
Net Income (Loss) Available to
Common Shareholders $ 320 $(1,382) $ (616)
Number of Shares:
Weighted Average Shares Outstanding 4,541 2,667 2,498
Effect of Shares Issued within One Year
of Public Offering 16 294 463
Incremental Shares from the Exercise
of Warrants and Options (1) 392 465 465
Shares Issued Upon the Conversion of
Series A Preferred Stock 660 660 660
Total Weighted Average Common and
Common Equivalent Shares Outstanding 5,609 4,086 4,086
=========== ============= =============
Net Income (Loss) Per Share $ .06 $ (.34) $ (.15)
=========== ============== ============
(1) In accordance with the rules of the Securities and Exchange Commission,
common stock and common stock equivalents of the Company issued within one year
of its initial public offering have been considered as outstanding since the
inception of the Company using the treasury stock method, even though they are
anti-dilutive in loss periods. Common stock equivalents issued prior to one year
of the Company's initial public offering are excluded in loss periods as they
are anti-dilutive.
(2) Fully diluted earnings per share is not presented since it is anti-dilutive.
EXHIBIT-23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-12029 on Form S-8 of The Lamaur Corporation (formerly Electronic Hair
Styling, Inc.) of our report dated March 26, 1997 on the financial statements of
The Lamaur Corporation and of our report dated January 24, 1996 on the financial
statements of PCD, the Personal Care division of DowBrands L.P. (which report
expresses an unqualified opinion on such financial statements and includes an
explanatory paragraph referring to PCD's basis of presentations), both appearing
in this Annual Report on Form 10-K of The Lamaur Corporation for the year ended
December 31, 1996.
Deloitte & Touche LLP
San Francisco, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
audited financial statements of The Lamaur Corporation for the year ended
December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001011154
<NAME> The Lamaur Corporation
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,081
<SECURITIES> 0
<RECEIVABLES> 19,541
<ALLOWANCES> 850
<INVENTORY> 11,699
<CURRENT-ASSETS> 42,967
<PP&E> 19,918
<DEPRECIATION> 1,443
<TOTAL-ASSETS> 61,566
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<BONDS> 14,723
0
13,500
<COMMON> 56
<OTHER-SE> 16,696
<TOTAL-LIABILITY-AND-EQUITY> 30,252
<SALES> 117,083
<TOTAL-REVENUES> 117,083
<CGS> 70,215
<TOTAL-COSTS> 70,215
<OTHER-EXPENSES> 45,641
<LOSS-PROVISION> 64
<INTEREST-EXPENSE> 1,386
<INCOME-PRETAX> 553
<INCOME-TAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 553
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
