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, 1997 Commission file number 0-28174
The Lamaur Corporation
(Exact name of registrant as specified in its charter)
Delaware 68-0301547
(State or other jurisdiction of (I.R.S. Employer
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.[X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 20, 1998 was approximately $8.5 million. 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 March 20, 1998, there were 5,857,125 outstanding shares of the
registrant's common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Proxy Statement for 1998 annual meeting of stockholders
<PAGE>
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 1998, plans with respect to the Company's technology,
liquidity and capital resources and competition in the marketplace. 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.
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. The Company also
contract manufactures a variety of aerosol and other liquid filling products.
Corporate functions, including corporate development, investor relations,
science and technology, 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 believes it was among the ten largest
manufacturers in the United States in 1997 in three mass retail categories of
hair care products - shampoos, conditioners and styling aids. The Company has
conducted 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.
During 1997, based upon market research, all original retail brands that existed
at the time of the acquisition from DowBrands were re-staged consistent with the
Company's strategic shift to focus on higher margin brands. Re-staging includes
repackaging, reformulating and development of new marketing strategies for a
brand. In addition to the re-staging, the Company launched into the naturals
product segment Willow Lake(R) and Apple Pectin(R) Naturals, brands of premium
priced products in the retail and salon markets, respectively. The Company
increased the number of exclusive distributors for the Pativa(R) professional
brand from 15 to 23.
The Company's product lines are sold through mass retail outlets by its Retail
Group (the "Retail Group") under the premium-priced Willow Lake(R), Perma
Soft(R) and Color Soft(TM), mid-priced Salon Style(R) and value-priced Style(R)
and Style Natural Reflections(TM) 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 other 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(R) Naturals, Vita/E(R) and Pativa(R) brand names.
The Company also manufactures certain products, principally aerosol sprays, on a
contract basis for third parties (the "Custom Manufacturing Group").
Sales by the Retail Group during 1997 accounted for 63.9% 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, to a
lesser degree in selected markets, by brokers. During 1997, the Salon Group and
the Custom Manufacturing Group accounted for 14.7% and 21.4% of the Company's
total revenues, respectively.
During 1997, the Company chose to focus the substantial portion of its marketing
efforts to the growing naturals product segment of the market. Investment
spending on Willow Lake(R) during 1997 was approximately $20.8 million. Original
brands, although re-staged, experienced significant declines from the previous
year, including Salon Style(R) down 53%, Perma Soft(R) down 50% and Style(R)
down 26%. The decline of approximately $25.5 million for the original retail
brands was partially offset by $25.1 million of new revenues from Willow Lake(R)
which have higher gross margins.
The Company's loss for 1997 of approximately $19.4 million was principally due
to increased investment spending supporting new brands, an increase of $19.9
million from the previous year, and lower than expected revenues from original
retail brands discussed above which had a negative impact on revenues, earnings,
overhead allocation and cash flow.
In November 1997, the Manufacturing Agreement with DowBrands expired. As a
result of the expired agreement and the operational results discussed above, the
Company restructured its operations by eliminating 90 positions in the
production, administrative and management areas and consolidated manufacturing
from three to two shifts.
Approximately $311,000 was expended for Electronic Chemistry(TM) research
activities during 1997 which were primarily directed towards continuing
early-stage coloring and styling experiments with respect to the reaction of
hair samples to electronic signals. As a result of experimental work in 1997 the
Company was able to file an additional patent application which management
believes will further broaden the Company's proprietary position relative to the
application of Electronic Chemistry(TM) to hair care. Because of budget
constraints the Company discontinued all activity related to advanced technology
development in December of 1997. Until sufficient financial resources can be
obtained from operations or from capital, efforts related to advanced technology
would be limited to completing the prosecution of the Company patents and to
exploring opportunities with prospective licensees.
At December 31, 1997 the Company was not in compliance with certain loan
covenants of its credit facility Following the restructuring described above,
the Company re-negotiated the terms and covenants of the loan agreement.
On March 16, 1998, the Company announced that it had retained the investment
banking firm of McCabe, Mintz & Company, L.L.P. to assist in evaluating various
strategic alternatives seeking to enhance stockholder value. These alternatives
could include a sale of the Company, a business combination, strategic alliance
or merger with a third party. The Company is evaluating opportunities to acquire
scale or be acquired by a larger entity which will be able to leverage the brand
equity the Company has developed. This process is in an early stage and no
assurance can be given as to whether any transaction will be consummated. The
Company does not intend to comment further regarding these matters unless and
until it determines to proceed with a particular transaction.
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 hindered 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 S.A., Unilever, N.V. The Procter & Gamble Company,
Bristol-Myers Squibb Company, 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, management does
not consider the turnaround to be complete and no assurance can be given that
the Company will have earnings in 1998 or for future periods. The Company will
need additional working capital to support re-staged brand marketing strategy
and to introduce new brands. Additional working capital may not be available,
and the absence of such working capital has had and could continue to have a
material adverse impact on the Company. The Company's Common Stock could be
subject to substantial volatility.
The loss of senior management could also have a material adverse effect on the
Company, its results of operations, its financial condition and its prospects.
In addition, the Company will have a dependence on its largest customers,
including Wal-Mart and Sally Beauty Company. 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. Until sufficient financial resources can be obtained from
operations or from capital, efforts related to advanced technology would be
limited to completing the prosecution of the Company patents and to exploring
opportunities with prospective licensees.
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(R), Perma Soft(R), Color Soft(TM), Salon Style(R), Style(R) and Style
Natural Reflections(TM) 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), Nucleic A Botanicals, 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 1997:
<TABLE>
Retail Brands
<CAPTION>
Brand Shampoos and Conditioners Styling Aids and Perms
<S> <C> <C>
Willow Lake(R)................... Cherry Bark & Irish Moss Conditioning Shampoo; Raspberry & Vitamin E Non-Aero Hair
Citrus & Rosemary Shampoo; Lavender & Mint Spray; White Lily & Jasmine Hair Spray;
Shampoo; Witch Hazel & Honeysuckle Shampoo; Aloe & Clover Blossom Mousse; Rosehips
Hops, Apricot & Almond Conditioner; Sunflower, & Ivy Spray Gel; Orange Blossom & Clove
Honey & Hibiscus Conditioner; Vitamin E, Spritz
Carrot Extract & Milk Protein Conditioner
Perma Soft(R).................... Revitalizing Shampoo, Moisturizing Shampoo, Hair Sprays (aerosol and non-aerosol),
Extra Body Shampoo, Shampoo Plus Conditioner, Mousse, Gel, Frizz Control Cream
Revitalizing Conditioner, Moisturizing
Conditioner, Extra Body Conditioner,
Moisturizing Mist Conditioner
Color Soft(TM)................... Daily Cleansing Shampoo; Moisturizing Shampoo; Aerosol Finishing Spray; Styling
Clean Rinsing Conditioner; Moisturizing Mousse; Spray Gel
Conditioner; Spray-On Conditioner
Salon Style(R)................... Moisture Potion(R) Shampoo, Therapy Shampoo, Hair Sprays (aerosol and non-aerosol),
Strengthening Shampoo, NutriShine Shampoo, Spray Gel, Body Boost(R) Mousse
Botanical Conditioner, Moisture Potion(R)
Conditioner, Detangling Conditioner, Hydro
Balance Deep Conditioner
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, Rainwater Men (aerosol)
Shampoo; Moisturizing Conditioner, Extra Body
Conditioner, Regular Conditioner, Strawberry
Conditioner, Deep Conditioning Conditioner,
Coconut & Papaya Conditioner; Rainwater
Conditioner; Style Plus(R) Extra Conditioning
Shampoo and Conditioner In-One
Style Natural Reflections(TM).... Clarifying Shampoo; Volumizing Shampoo;
Moisturizing Shampoo; Daily Finishing
Conditioner; Volumizing Conditioner;
Moisturizing Conditioner
</TABLE>
<TABLE>
Salon Brands
<CAPTION>
Brand Shampoos and Conditioners Styling Aids and Perms
<S> <C> <C>
Pativa(R)........................ Curl Cleanse Shampoo, Volumizing Cleanse Mousse, Spritz, Design Creme,
Shampoo, Moisturizing Cleanse Shampoo, Alternative Wave (Normal), Alternative
Purifying Cleanse, Curl Revitalizer Wave (Tinted), Sprae Concentrate Hair
Conditioner, Leave-In Fortifier, Moisturizing Spray
Rinse, Purifying Rinse, Replenishing Hair
Masque
Nucleic A(R)..................... Body Plus(R) Shampoo, Proteplex(R)Shampoos and Botanical(TM) Hair Spray, Glaz(R) 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 & Gel, Mousse, Spritz, Hair Spray
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
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............. Lamaur(R) Moisturizing Shampoo, Lamaur Smoothing Natural Woman(R) Hair Spray, CO-A(R)
Shampoo, Bone Marrow(R) Conditioners 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, Lamaur
Straightening Balm, Lamaur Sealing
Spray, Lamaur Plus Styling Spray
</TABLE>
<PAGE>
Willow Lake(R), a new premium priced retail hair care product of shampoos,
conditioners and styling aids is the Company's newest entry in the "naturals"
segment of the hair care category. During 1997, Willow Lake(R) became the number
two brand after Clairol(R) Herbal Essences(R) in the "naturals" product segment.
Perma Soft(R), which is a premium priced retail product line, is intended to
meet the needs of a segment of consumers who use permanent wave products or
color treat their hair. During 1997, as a result of market research, Perma
Soft(R) was reformulated for consumers who use perming products and a new brand,
Color Soft(TM), was developed and marketed for consumers who color treat their
hair.
Salon Style(R) is a line of mid-priced shampoos, conditioners and styling aids
targeted the salon segment of the retail market. During 1997, as a result of
market research, selected products in the Salon Style brand were reformulated
and the entire brand was repackaged and repositioned.
Style(R) is the Company's "value priced" brand, intended for use by the entire
family.
Style Natural Reflections(TM) was launched in 1997 as a "mid-priced" entry in
the fast growing "naturals" segment.
The Apple Pectin Naturals product line will further the Salon Group's sales of
"natural" products into the professional market. During 1997, as a result of
market research the Company developed and introduced a line of bath and body
products for sale in the salon industry, as well as styling and finishing items.
Apple Pectin(R) is based on the use of pectin from apples as a key ingredient in
the products. Pectin is a natural protein that strengthens and conditions the
hair. The Apple Pectin(R) line provides stylists with shampoos, conditioners,
styling products, and perms.
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. The Pativa(R) line provides the Salon Group with a product
line distributed by exclusive dealers to full service salons.
Vita/E(R) products contain vitamin E, a natural antioxidant which protects the
hair and prevents color fading.
Nucleic A(R) is a full line of salon products that can be prescribed to meet any
hair care need.
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>
(1) 1997 1996 1995(2)
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Retail........................... $ 75,695 63.9% $ 69,432 59.3% $ 73,256 62.2%
Salon............................ $ 17,403 14.7% 16,833 14.4 16,947 14.4
Contract Manufacturing (3)....... $ 25,377 21.4% 30,818 26.3 27,563 23.4
-------- ------ -------- ------ -------- ------
Total:........................... $118,475 100.0% $117,083 100.0% $117,766 100.0%
======== ====== ======== ====== ======== ======
<FN>
(1) Numbers are stated in thousands of dollars.
(2) Includes sales of the Personal Care Division for the 11 months prior to the
acquisition by the Company.
(3) Contract manufacturing sales included sales to DowBrands of $16.4 million,
$22.2 million and $21.4 million in each of the years ended December 31
1997, 1996 and 1995, respectively. In November 1997, the Manufacturing
Agreement with DowBrands expired.
</FN>
</TABLE>
Marketing and Distribution
The Company's Retail Group 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 managed by the
Company's direct sales force.
The Company currently maintains more than 1,800 active customer accounts and in
1997 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,
whose manufacturing agreement has expired, accounted for 18%, 19% and 14% of the
Company's total net sales in each of 1995, 1996 and 1997, respectively. Wal-Mart
accounted for 18%, 17% and 15% of the Company's total net sales in each of 1995,
1996 and 1997, respectively. The loss of sales to Wal-Mart or other significant
customers would 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.
The Company promotes sales of its products utilizing substantial advertising,
consumer promotions and merchandising support programs. During the years ended
December 31, 1995, 1996 and 1997, the Company's marketing support expense was
approximately $23.8 million, $23.8 million and $43.7 million, respectively. The
significant increase in these expenses in 1997 was principally due to the launch
of the Company's new premium-priced brand, Willow Lake(R).
The Company anticipates a need to increase expenditures in connection with its
marketing activities in the next several years, and expects to require
substantial cash resources to fund those activities. These activities include
expanding its product mix by introducing new products, particularly for the
Willow Lake(R) brand and re-staging certain other existing products. The
Company's strategy in 1998 is to focus its limited resources to support the new
Willow Lake(R) brand and to provide maintenance promotional support behind the
original re-staged brands.
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 (14 persons at February 28, 1998) 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 the
Willow Lake(R) styling aids, Style Natural Reflections(TM), and Apple Pectin(R)
Naturals bath and body products.
The Company believes that the absence of any fundamental change in the
technology underlying hair care products for several decades, combined with the
substantial global market for hair care products, presents an opportunity for
new technologically oriented products. In the Company's view, electronically
controlled and managed hair styling products that use chemicals and provide
quick and convenient application can gain widespread consumer acceptance if they
are successfully developed and properly marketed. The Company's strategy is to
use 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.
Approximately $311,000 was expended for Electronic Chemistry(TM) research
activities during 1997 which were primarily directed towards continuing
early-stage coloring and styling experiments with respect to the reaction of
hair samples to electromagnetic signals. As a result of experimental work in
1997 the Company was able to file an additional patent application which
management believes will further broaden the Company's proprietary position
relative to the application of Electronic Chemistry(TM) to hair care. Because of
budget constraints the Company discontinued all activity related to advanced
technology development in December of 1997. Until sufficient financial resources
can be obtained from operations or from capital, efforts related to advanced
technology will be limited to completing the prosecution of the Company patents
and to exploring opportunities with prospective licensees. 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
twelve to twenty-four months after funding is restored. 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 476,000 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 automated hair care product manufacturing. 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, corrugated 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 suppliers, 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.
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
corrugated shipping containers. A separate tank farm for above-ground bulk
storage of chemicals and aerosol propellants is located in a secured area
outside of 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 goods inventory is warehoused for distribution throughout the
United States at the Company's on-site warehouse, but products produced for
third parties are in most cases 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 third parties, 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 Company's sales in each of the
last three years. During 1997, the Company's Manufacturing Agreement with
DowBrands expired. The Company recognizes revenues from orders only upon
shipment.
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.
Regulatory agencies continue to monitor activities related to the Company's
products, and no assurance can be given that additional regulatory requirements
will not be developed.
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 if and when it
commences operations or marketing activities in other foreign countries.
Principal trademarks of the Retail Group include Willow Lake(R), Perma Soft(R),
Color Soft(TM), Salon Style(R), Style(R) and Style Natural Reflections(TM). The
Salon Group trademarks include Pativa(R), Nucleic A(R), Apple Pectin(R), Apple
Pectin(R) 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. 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 one of the Company's co-inventors of the
Electronic Chemistry(TM) technology, 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.
During 1997, the Company applied for an additional patent which broadens the
coverage of the initial filing described above to include the use of electronic
signals with surface polymers.
The Company believes that its current and anticipated business does 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 1997 of three mass retail
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 323 persons as of February 28, 1998. None of the Company's
employees is a member of a labor union. The Company considers its relationship
with its employees to be good.
Item 2. PROPERTIES
The Company owns its facility in Fridley, Minnesota, near Minneapolis. This
facility contains administrative, laboratory, production and warehousing areas.
The 476,000 square foot air conditioned facility is located on a 25 acre site,
and includes an approximately 38,000 square foot 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.
At December 31, 1997, the Company leased its 6,008 square foot office facility
in Mill Valley, California, near San Francisco, from Intertec, a division of
Innovative Capital Management, Inc., a related party. 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.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on 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. Previous to March 26, 1997 the
Company traded under the symbol EHST.
1997 1996
----------------- -----------------
High Low High Low
First Quarter $4.250 $2.750
Second Quarter 3.813 2.375 $8.250* $5.250
Third Quarter 3.500 2.500 6.000 3.750
Fourth Quarter 2.938 1.500 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 20, 1998, the number of holders of record of the Company's Common
Stock was 471 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).
As of December 31, 1997 the Company is $200,000 in arrears on the payment of
dividends on its Series B preferred stock held by Dow. The preferred stock
provides for an annual dividend of $400,000 payable quarterly.
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 March 1997, the Company issued 16,500 shares of Common Stock to Dominic J.
LaRosa upon exercise of a warrant. The exercise price was $3.03 per share. These
securities were exempt from registration under Section 4(2) of the Securities
Act of 1933.
In May 1997, the Company issued 36,526 shares to Intertec Holdings, L.P.
pursuant to the terms of a Common Stock Purchase Agreement. The purchase price
was $8.00 per share. These securities were exempt from registration under
Section 4(2) of 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, 1997, 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, 1997, 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 and 1993,
and the balance sheets of the Personal Care Division at December 31, 1994 and
1993. Such data were derived from the Personal Care Division financial
statements, certain of which are included herein.
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
- - ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
--------------------------------------------------
April 1, 1993
(INCEPTION) TO
1997 1996 1995(1) 1994 DECEMBER 31, 1993 DECEMBER 31, 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENTS
OF OPERATIONAL DATA:
Total Net Sales $118,475 $117,083 $ 8,070 $ - $ - $117,766
Cost of Goods Sold 69, 626 70,215 5,656 - - 71,395
Gross Margin 48,849 46,868 2,414 - - 46,371
Operating Expenses 66,375 45,641 3,496 557 1,565 45,130
Write-Down of Assets - - - - - 11,000
Operating (Loss) Income (17,526) 1,227 (1,082) (557) (40) (9,759)
Interest Expense (2,236) (1,386) (300) (59) (1,554)
Other Income 402 712 - - - 101
Net (Loss) Income $(19,360) $ 553 $ (1,382) $ (616) $ (1,605) $(11,212)(2)
========= ========= ========= ========= ========= =========
Basic (Loss) Income Per
Common Share $(3.48) $.07 $(.52) $( .25) (.78) $(4.20)
========= ========= ========= ========= ========= =========
Average Number of Basic
Common Shares Outstanding(3) 5,685 4,557 2,667 2,498 2,070 2,667
Diluted (Loss) Income Per
Common Share $(3.48) $(.06) $(.52) $(.25) $(.78) $(4.20)
Average Number of Diluted
Common Share Outstanding(3) 5,685 5609 2667 2498 2,070 2,667
BALANCE SHEET DATA:
Working Capital (Deficit) $15,794 26,126 10,346 $(466) $(27)
Total Assets 58,326 61,566 42,967 6 134
Long Term Debt, less current
Portion 24,046 14,473 20,350 1,000 1,000
Stockholders' Equity (Deficit) 10,949 30,252 6,594 (1,462) (1,057)
</TABLE>
<PAGE>
<TABLE>
Financial Data of the Personal Care Division
<CAPTION>
Years Ended December 31,
------------------------
Period from January
1, 1995 through
November 30, 1995 1994 1993
(4)
--------------------------------------------------
<S> <C> <C> <C>
Selected Statements of
Operations Data:
Total net sales.................... $ 109,696 $ 121,277 $ 112,031
Cost of goods sold................. 67,088 71,735 71,061
--------------------------------------------------
Gross Margin....................... 42,608 49,542 40,970
Operating expenses................. 42,344 57,830 53,851
Write-down of assets............... 11,000 120,100 -
--------------------------------------------------
Operating income (loss)............ (10,736) (128,388) (12,881)
Interest expense from Dow (1,603) (5,805) (6,643)
Other income (expense), net 101 705 317
Net loss $ (12,238) $(133,488) $(19,207)
==================================================
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1994 1993
--------- ---------
<S> <C> <C>
Selected Balance Sheet Data:
Working capital............... $ 16,787 $ 11,457
Total assets.................. 58,021 180,376
Net invested capital.......... 47,493 169,058
<FN>
(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 SEC Staff Accounting Bulletin 98, when computing basic
and diluted earnings per share, all common stock, options, and warrants that
were issued for nominal consideration during periods prior to the initial public
offering have been considered as outstanding for all historical periods
presented.
(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.
</FN>
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Historical Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total net sales for the year ended December 31, 1997 were $118.5 million,
compared with $117.1 million in 1996 an increase of 1.2%. The increase in net
sales for the year ended December 31, 1997 is principally due to sales from
Willow Lake(R) and ColorSoft(TM) the Company's premium-priced retail hair care
product lines and Style Natural Reflections(TM) a mid priced retail hair care
product line. Willow Lake(R), targeted for the Natural's segment and positioned
as "Nature's Prescription for Beautiful Hair,"(TM) began shipping in the fourth
quarter of 1996. Color Soft(TM), formulated to retain color longer for color
treated hair began shipping in the first quarter of 1997. Style Natural
Reflections(TM) positioned as a mid priced brand in the "Natural's" segment
began shipping in the third quarter of 1997. Sales growth of Willow Lake(R),
Color Soft(TM) and Style Natural Reflections(TM) will be dependent upon
competition from other brands, consumer acceptance and marketing support behind
these brands.
Sales for the twelve months ended December 31, 1997 were adversely affected by
sales declines in the Company's established brands, Perma Soft(R), Style(R) and
Salon Style(R), and in contract manufacturing, principally DowBrands. Perma
Soft(R), Style(R) and Salon Style(R) have continued to decline in sales since
management began its turnaround efforts in the first quarter of 1996. Perma
Soft(R), Style(R) and Salon Style(R) had sales declines of $8.8 million, $8.4
million and $8.3, respectively during the twelve months ended December 31, 1997
as compared with 1996. Notwithstanding re-staging of the brands during 1997,
management believes sales of these brands will continue to decline but at a
lesser rate.
Gross margin as a percentage of net sales was 41.2% for the twelve months ended
December 31,1997 as compared with 40.0% for the same period in 1996. The
improvement in the gross margin as a percentage of net sales for the twelve
months ended December 31, 1997 is due to a change in product mix resulting from
the Company's strategic shift to focus on higher margin brands driven by Willow
Lake(R) and Color Soft(TM).
Selling, general, and administrative expenses (SG&A) were $66.4 million or 56.0%
of net sales for the twelve months ended December 31, 1997 as compared with
$45.6 million or 39.0% of net sales for the same period last year, an increase
of $20.8 million. As general and administrative expenses have remained
relatively flat, the increase is principally attributable to increased marketing
expense of $19.9 million and fees to brokers in the Company's distribution chain
supporting the launch of Willow Lake(R), Color Soft(TM) and Style Natural
Reflections(TM). As discussed in note 2 in the accompanying financial statement,
the Company plans to reduce its level of marketing support in 1998 more in line
with 1996 spending levels. There can be no assurance concerning the future
performance of either or both of the Willow Lake(R) and Color Soft(TM) lines or
the Company's ability to attain any particular level of sales or to be
profitable in the future.
Interest expense increased to $2.2 million for the twelve months ended December
31, 1997 as compared with $1.4 million in the same period last year. The
increase in interest expense during the twelve months ended December 31, 1997 is
attributable to higher borrowings under the Company's revolving line of credit
with Norwest Business Credit to support the Company's working capital needs and
the increased interest rate invoked by Norwest as a result of the Company being
out of compliance with certain financial loan covenants during a portion of
1997.
Other income decreased to $.4 million for the twelve months ended December 31,
1997 as compared with $.7 million for the same period in 1996. The decrease in
other income in 1997 is principally due to absence of a one-time gain on the
sale of equipment that was realized in 1996.
Primarily because of the $19.9 million increase in marketing expense
attributable to the launch of new products and lower than expected revenues from
the Company's established brands, the net loss for the twelve months ended
December 31, 1997 increased to $19.4 million as compared with net income of $.6
million for the same period in 1996.
Pro Forma and Historical Results of Operations
The following table sets forth pro forma statement of operations information in
dollars and as a percentage of total net sales for the year 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.
YEARS ENDED DECEMBER 31,
(In Thousands)
--------------------------------------------------
HISTORICAL PRO FORMA
1996 % 1995 %
--------- ------ --------- ------
Total Net Sales $117,083 100.0% $117,766 100.0%
Cost of goods sold 70,215 60.0 71,395 60.6
--------- ------ --------- ------
Gross margin 46,868 40.0 46,371 39.4
Operating expenses 45,641 39.0 45,130 38.3
Write-down of assets - - 11,000 9.4
--------- ------ --------- ------
Operating income (loss) 1,227 1.0 (9,759) (8.3)
Other income (expense)
Interest expense (1,386) (1.1) (1,554) (1.3)
Other income 712 .6 101 .1
--------- ------ --------- ------
Net income (loss) 553 .5 $(11,212) (9.5)
========= ====== ========= ======
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(R),
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(R) 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.
Liquidity and Capital Resources
The Company's net working capital at December 31, 1997 was $15.8 million
compared to $26.1 million at December 31, 1996. This decrease is due in large
part to the net loss of $19.4 million incurred in 1997. The loss in 1997
required increased borrowings under the Company's revolving and term loan
facility with Norwest Business Credit. As of December 31, 1997, the amounts
outstanding under Company's revolving and term loan facility were $17.7 million
and $6.2 million, respectively as compared with $9.8 million and $4.8 million
respectively as of December 31, 1996.
In May 1997, the Company increased its revolving credit line from $14.0 million
to $20.0 million and its term loan from $6.0 million to $7.0 million, for a
total credit facility of $27.0 million with the lender. The interest rate on the
loans are variable and are tied to Norwest Bank's base rate which at December
31, 1997 was 8.5%. At December 31, 1997, the Company was out of compliance with
certain financial loan covenants.
In March 1998, Norwest Business Credit amended the Company's loan agreement in
conjunction with providing the waiver to the Company. The amendment provides for
restructuring financial covenants on the credit facility and increasing the
interest rate on the revolver from 1.5% to 2.5% above the base rate and
increasing the interest rate on the term loan from 1.75% to 2.75% above the base
rate. The interest rates on the revolver and the term loan are currently 11% and
11.25%, respectively. In addition, Norwest lowered the advance rates on eligible
receivable by 5% and eligible inventory by 6%. The term loan requires monthly
principal payments of $116,666.
The revolving line of credit and term loan with Norwest are secured by all of
the assets of the Company and are payable in full by November 15, 2000.
Total accounts payable exceeding their normal payment terms were approximately
$7.0 million as of December 31, 1997. Major trade creditors and other creditors
have extended their "normal" terms to allow time for the Company to make
payments. To date the Company has been able to make timely shipments to its
customers. As of December 31, 1997 the Company is $200,000 in arrears on the
payment of dividends on its Series B preferred stock held by Dow. The preferred
stocks provide for an annual dividend of $400,000 payable quarterly.
In 1997 the Company supported the launch of Willow Lake(R) as well as the
introduction of other new products by a major marketing campaign including
advertising and consumer promotions. In addition the Company also increased its
inventory levels. The major marketing campaign and increased inventory levels
were funded from the Company's working capital line. The Company plans to reduce
its marketing spending and reduce its inventory levels in 1998. The Company
currently plans to resume advertising in the second half of 1998. This will be
dependent upon available working capital. No assurance can be made of the
Company's ability to attain any particular level of sales or to be profitable in
the future as a result of the reduced marketing and timing of future
advertising.
The Company had been operating under a two year manufacturing contract with
DowBrands that expired by its terms in November 1997. In October 1997, Dow
Chemical announced that it had sold DowBrands. The Company had revenues from
DowBrands of $16.4 million for the year ended December 31, 1997 and $22.2
million in 1996. In addition to covering the costs associated with the DowBrands
business, the Company's earnings from the DowBrands contract were sufficient to
cover certain other fixed costs. The Company has reduced certain direct labor
associated with the loss of the DowBrands business.
Based upon the results of operations for the year ended December 31, 1997, and
the uncertain level of operations during the next twelve months, the Company can
give no assurance that it will be able to meet its working capital needs during
this period. Therefore, the Company believes it could require additional
financing in the foreseeable future. The Company cannot predict whether such
financing will be in the form of equity or debt and cannot assure whether or on
what terms any such financing will be available to the Company. Should the
Company be unable to obtain additional funding on terms reasonably acceptable to
it, the Company's operations could be curtailed and its business could be
materially adversely affected.
Year 2000 Compliance
The Year 2000 Issue is the result of potential problems with computer systems or
any equipment with computer chips that use dates where the date has been stored
as just two digits (e.g. 97 for 1997). On January 1, 2000, any clock or date
recording mechanism including date sensitive software which uses only two digits
to represent the year, may recognize a date using 00 as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruption of operations, including among other things, a temporary
inability to process transactions, send invoices, or engage in similar
activities.
The Company determined that it would be required to replace or modify
significant portions of its business application software so that its computer
systems would properly utilize dates beyond December 31, 1999. As a result, the
Company is currently in the early stages of implementing an upgraded version of
its business application software that has been produced and tested to be Year
2000 compliant. The Company will primarily utilize internal resources to
implement, replace and test software and related assets affected by the Year
2000 Issue. The Company expects to complete the majority of its implementation
efforts by December 31, 1998 leaving adequate time to assess and correct any
significant issues that may materialize. The total cost of the upgrade will be
funded through operating budgets and is not expected to have a material impact
on the operations, cash flows, or financial condition of the Company, taken as a
whole, in future periods.
In 1998, the Company also plans to initiate formal communications with all of
its significant suppliers and large customers to determine the extent to which
the Company is vulnerable to those third parties failure to remediate their own
Year 2000 Issues. However, these efforts are secondary to the Company's primary
focus of upgrading its own business application software by its December 31,
1998 deadline date. The Company can give no guarantee that the systems of other
companies on which the Company's systems rely will be converted on time or that
a failure to convert by another company or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The costs of the project and the timetable in which the Company plans to
complete the Year 2000 compliance requirements are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
these plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
NEW ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income,", which will be effective for the Company beginning January 1, 1998.
SFAS 130 requires the disclosure of comprehensive income and its components in
the general-purpose financial statements. For the years ended December 31, 1997,
1996, 1995, the Company did not engage in transactions related to foreign
currency translation, unrealized gains in securities, or minimum pension
liability adjustments. Accordingly, Lamaur anticipates that SFAS 130 will not
have a significant impact on its current comprehensive income disclosures.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be effective for the Company
beginning January 1, 1998. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. LaMaur has not yet completed
its analysis of operating segments on which it will report. However, a
preliminary analysis has concluded that the current reportable segments are
consistent with the "management approach" methodology outlined in SFAS 131.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP requires that entities
capitalize certain internal-use software costs once certain criteria are met.
The provisions of the SOP are effective for fiscal years beginning after
December 15, 1998, and the adoption by the Company is not expected to have a
material effect on results of operations or financial position.
Inflation
The impact of inflation on operations has not been significant in the past few
years due to the relatively low inflation that has been experienced throughout
the United States. Raw material costs, labor costs, and interest costs are
important components of the Company's costs. Increased operating costs are
reflected in its products pricing with any limitations on price increases
determined by the marketplace.
SAFE HARBOR CAUTIONARY STATEMENT
Statements in this report regarding the Company's outlook for its business and
their respective markets, such as projections of future performance, statements
of management's plans and objectives, forecasts of market trends and other
matters, are forward-looking statements, some of which may be identified by such
words or phrases as "will likely result," "are expected to," "will continue,"
"outlook," "is anticipated," "estimate," "project" or similar expressions. No
assurance can be given that the results in any forward-looking statement will be
achieved and actual results could be affected by one or more factors which could
cause them to differ materially. For these statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not yet applicable.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
----
THE LAMAUR CORPORATION
Independent Auditors' Report.......................................... F-1
Balance Sheets for the Years Ended December 31, 1997 and 1996......... F-2
Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995.................................................... F-3
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995................................. F-4
Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995.................................................... F-5
Notes to Financial Statements......................................... F-6
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
Independent Auditors' Report.......................................... F-16
Statement of Operations for the Period from January 1, 1995 to
November 30, 1995................................................ F-17
Statement of Net Invested Capital for the Period from January 1,
1995 to November 30, 1995........................................ F-18
Statement of Cash Flows for the Period from January 1, 1995 to
November 30, 1995................................................ F-19
Notes to Financial Statements......................................... F-20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE
Not applicable.
<PAGE>
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's 1998 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1998 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's 1998 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1998 Proxy Statement.
<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. None.
(c) List of Exhibits.
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 Amended Credit and Security Agreement between Registrant and
Norwest Business Credit, Inc.
****10.5 First Amendment to Amended Credit and Security Agreement between
Registrant and Norwest Business Credit, Inc.
10.6 Second Amendment to Amended and Restated Credit and Security
Agreement between Registrant and Norwest Business Credit, Inc.
10.7 Third Amendment to Amended and Restated Credit and Security
Agreement and Waiver of Defaults between Registrant and Norwest
Business Credit, Inc.
*10.8 Manufacturing Agreement between DowBrands L.P. and Registrant,
dated November 16, 1995.
*10.9 1996 Stock Incentive Plan of the Registrant.
*10.10 1996 Stock Incentive Plan for Non-Employee Directors and Advisory
Board Members of the Registrant.
*10.11 Employment Agreement between Registrant and Don G. Hoff, made as
of June 1, 1994, and modified as of November 6, 1995.
**10.12 1996 Non-Qualified Stock Option Plan of the Registrant.
**10.13 Sublease dated October 1, 1996 between Registrant and Intertec,
Ltd.
10.14 Form of Employee Severance Agreement
10.15 Memorandum from the Company to Dominic J LaRosa re Insurance
Coverage
*****10.16 1997 Stock Plan
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.
99.2 Restated Financial Data Schedule with respect to 6 month period
ended June 30, 1996, 9 month period ended September 30, 1996, and
12 month period ended December 31, 1996
99.3 Restated Financial Data Schedule wit respect to 3 month period
ended March 31, 1997, 6 month period ended June 30, 1997 and 9
month period ended September 30, 1997
*Incorporated by reference from the Form S-1 Registration
Statement (File No. 333-2722).
**Incorporated by reference from Annual Report on Form 10-K for
fiscal year ended 12/31/96
***Incorporated by reference from Quarterly Report on Form 10-Q
for quarter ended 6/30/97
****Incorporated by reference from Quarterly Report on Form 10-Q
for quarter ended 9/30/97
*****Incorporated by reference to Form S-8 Registration Statement
(File No. 333-26811)
<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 30, 1998 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
- - -------------------------
Don G. Hoff Chairman of the Board and Chief March 30, 1998
Executive Officer
(Principal Executive Officer)
/s/ JOHN D. HELLMANN
- - -------------------------
John D. Hellmann Vice President, Chief Financial March 30, 1998
Officer
(Principal Financial and Accounting
(Officer)
/s/ DOMINIC LaROSA
- - -------------------------
Dominic J. LaRosa President and CEO - Lamaur March 30, 1998
and Director
/s/ HAROLD M. COPPERMAN
- - -------------------------
Harold M. Copperman Director March 30, 1998
/s/ GERALD A. EPPNER
- - -------------------------
Gerald A. Eppner Director March 30, 1998
/s/ PAUL E. DEAN
- - -------------------------
Paul E. Dean Director March 30, 1998
/s/ PERRY D. HOFF
- - -------------------------
Perry D. Hoff Director March 30, 1998
/s/ JOSEPH F. STILEY
- - -------------------------
Joseph F. Stiley, III Director March 30, 1998
<PAGE>
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,
1997, and 1996, and the related statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
March 31, 1998
<PAGE>
THE LAMAUR CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
ASSETS 1997 1996
Current Assets:
Cash and cash equivalents $ 6,465 $ 12,081
Receivables from DowBrands (Note 12) 741 1,450
Accounts receivable, net (Note 4) 15,943 17,214
Inventories (Note 5) 15,523 11,699
Prepaid expenses and other current assets 453 523
Total Current Assets 39,125 42,967
Property, Plant and Equipment, Net (Note 6) 19,131 18,475
Other Assets 70 124
Total Assets $ 58,326 $ 61,566
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 14,592 $ 6,724
Accrued expenses 4,666 4,637
Accrued salaries, wages and employee-related 2,211 2,458
expenses 1,612 1,272
Current portion of long-term debt (Note 7) 250 1,750
Payables to related parties (Note 12)
Total Current Liabilities 23,331 16,841
Long-Term Debt (Note 7) 23,546 13,723
Related Party Obligations (Note 12) 500 750
Commitments and Contingencies (Note 14)
Stockholders' Equity (Note 8):
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, 1997 and 1996.
($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, 1997 and 1996.
($5.0 million liquidation preference) 5,000 5,000
Common stock, $.01 par value, 12,000,000 shares
authorized, 5,747,544 and 5,603,395 shares
issued and outstanding at December 31, 1997
and 1996, respectively 57 56
Additional paid-in-capital 19,852 19,796
Stock subscriptions receivable (50) (50)
Accumulated deficit (22,410) (3,050)
Total Stockholders' Equity 10,949 30,252
Total Liabilities and Stockholders' Equity $ 58,326 $ 61,566
See notes to financial statements
F-2
<PAGE>
THE LAMAUR CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
December 31,
<S> <C> <C> <C>
1997 1996 1995
Net Sales.......................................... $102,104 $ 94,912 $ 6,426
Net Sales to DowBrands (Note 12)................... 16,371 22,171 1,644
Total Net Sales (Note 1)........................... 118,475 117,083 8,070
Cost of Goods Sold................................. 69,626 70,215 5,656
Gross Margin....................................... 48,849 46,868 2,414
Selling, General and Administrative Expenses....... 66,375 45,641 3,496
Operating (Loss) Income............................ (17,526) 1,227 (1,082)
Interest Expense................................... (2,236) (1,386) (300)
Interest and Other Income.......................... 402 712 --
Net (Loss) Income.................................. (19,360) 553 (1,382)
Dividends on Series B Preferred Stock.............. (400) (233) --
Net (Loss) Income Available to Common Shareholders. $(19,760) $ 320 $ (1,382)
Basic (Loss) Income per Common Share............... $ (3.48) $ 0.07 $ (0.52)
Average Number of Basic Common Shares Outstanding.. 5,685 4,557 2,667
Diluted (Loss) Income per Common Share............. $ (3.48) $ 0.06 $ (0.52)
Average Number of Diluted Common Shares Outstanding
5,685 5,609 2,667
</TABLE>
See notes to financial statements
F-3
<PAGE>
THE LAMAUR CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Series A Series B Additional Stock
Preferred Stock Preferred Stock Common Stock Paid-In Subscriptions Accumulated
Shares Amount Shares Amount Shares Amount Capital Receivable Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - --------------------------
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
- - --------------------------
Issuance of common stock
- - - - 145 1 456 - - 457
- - --------------------------
Dividends on preferred
stock - - - - - - (400) - - (400)
- - --------------------------
Net loss - - - - - - - - (19,360) (19,360)
- - --------------------------
Balance
December 31, 1997 1,000 $8,500 764 $5,000 5,748 $57 $19,852 $ (50) $(22,410) $10,949
- - --------------------------
</TABLE>
See notes to financial statements
F4
<PAGE>
THE LAMAUR CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income.......................................... $ (19,360) $ 553 $ (1,382)
Adjustments to reconcile net (loss) income
to net cash (used in) provided
by operating activities:
Noncash credits for services...................... - 132 213
Issuance of common stock for services............. - 94 52
Utilization of DowBrands credits.................. (1,500) (1,500) -
Loss (gain) on disposal of assets................. 41 (214) -
Depreciation and amortization..................... 1,697 1,365 144
Effect of changes in:
Receivables.................................. 1,980 (5,985) 3,779
Inventories.................................. (3,824) (559) 528
Other assets................................. 39 (177) (94)
Payables..................................... 7,868 999 (2,643)
Accrued expenses............................. (218) (478) 1,273
Net cash (used in) provided by operating
activities........................................ (13,277) (5,770) 1,870
Cash Flows From Investing Activities:
Additions to property, plant and equipment............ (1,236) (3,110) (128)
Proceeds from sale of property, plant and equipment... 16 225 -
Acquisition of PCD.................................... - - (13,689)
Net cash used in investing activities............. (1,220) (2,885) (13,817)
Cash Flows From Financing Activities:
Revolving credit agreement, net....................... 7,837 1,764 8,050
Borrowings of long-term debt.......................... 2,738 - 6,465
Repayments of long-term debt.......................... (1,751) (1,445) (300)
Proceeds from sales of common stock, net.............. 457 18,112 68
Payment of preferred dividends........................ (400) (33) -
Net cash provided by financing activities 8,881 18,398 14,283
Net (Decrease) Increase in Cash and Cash Equivalents....... (5,616) 9,743 2,336
Cash and Cash Equivalents at Beginning of Period........... 12,081 2,338 2
Cash and Cash Equivalents at End of Period................. $ 6,465 $ 12,081 $ 2,338
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest.................. $ 2,315 $ 1,186 $ -
Noncash investing and financing activities:
Capital lease obligations entered into............ 1,088 401 -
Dividends payable preferred stock................. 200 200 100
Common stock issued for subscriptions receivable..
- - 125
Conversion or convertible subordinated note into
stock............................................. - 5,000 -
Acquisition of PCD (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 performed................................ - - 50
</TABLE>
See notes to financial statements
F 5
<PAGE>
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 12). 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 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. 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 following unaudited pro forma summary results of operations for the
year ended December 31, 1995, gives effect to the acquisition of PCD as if it
had occurred at the beginning of 1995. The pro forma results do not purport to
reflect the results of operations which would have actually occurred had the
combination been effective on the date indicated or which may occur in the
future.
1995
(In thousands
except per share
amount
Total net sales..................................... $117,766
Net loss............................................ (11,212)
Net loss per share.................................. (2.74)
2. MANAGEMENT'S PLANS REGARDING OPERATING LOSSES
In 1997, the Company incurred a net loss of approximately $19.4 million and
negative cash flows from operating activities of approximately $13.3 million. In
addition, the Company was not in compliance with certain covenants of its credit
facility at various measurement dates during 1997. The lender waived the
covenants and amended the agreement subsequent to year end. The Company's
ability to continue operations is dependent on its ability to generate
sufficient cash flow to meet its obligations as they become due, to comply with
the terms and conditions of the amended financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately attain
sales and operating levels to support its cost structure. Management's plans
regarding operating losses and its plans concerning the above matters are
presented below.
In conjunction with the introduction of the Willow Lake(R) and Color
Soft(TM) product lines, the Company increased its promotional spending in 1997
to $43.7 million from $23.8 million in 1996. The Company plans to decrease its
promotional spending by approximately $20.0 million in 1998.
In 1998, the Company also plans to reduce operating costs and improve
operating margins through workforce reductions which have been implemented and
delays in expenditures related to the development of its electronic technology.
Approximately 90 positions in the production, administrative, and management
areas were eliminated in early 1998. Further, manufacturing operations were
consolidated from three to two shifts.
As of December 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $6.5 million, accounts
receivable of approximately $16.7 million and inventories of approximately $15.5
million. In 1998, the Company plans to reduce its excess inventory balances in
order to enhance liquidity. As discussed in Note 7, the Company amended its
financing agreement and related covenants in March 1998. Management is also
investigating the possibility of obtaining additional sources of financing. The
Company believes that its anticipated funds from operations and existing sources
of liquidity, combined with its amended credit facility agreement, will satisfy
the Company's projected working capital requirements for 1998.
3. 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 reporting period. Significant accounting estimates reflected in the
Company's financial statements include the allowances for doubtful accounts,
sales returns and cash discounts, inventory valuation reserve, accrued coupon
redemption reserve, accrued market development reserve, accrued employee
benefits, and employee stock option and stock purchase plan pro forma
disclosures. Actual results could differ from those estimates.
Cash and Cash Equivalents - Certain balances are held in a collateral
account with the Company's lender (Note 7). 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 and U.S. Treasuries which were $6.2 million and
$11.5 million at December 31, 1997 and 1996, respectively. The U.S. Treasuries
at December 31, 1997 represent restricted securities which are maintained as
collateral in support of the revolving line of credit with Norwest Business
Credit (Note 7).
Accounts Receivable, net includes an allowance for doubtful accounts.
Receivables from DowBrands represent amounts due under a contract
manufacturing agreement (Note 12).
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 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 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 - In 1996 the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted under this standard, the
Company will continue to apply the recognition and measurement principles of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" to its stock option and other stock-based employee compensation
awards. The disclosure of the pro forma net income and pro forma earnings per
share as if the fair value method of SFAS 123 had been applied can be found in
Note 9.
Earnings Per Share - In 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share." SFAS 128 requires disclosure
of Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated using
income available to common shareholders divided by the weighted average of
common shares outstanding during the year. Diluted EPS is similar to Basic EPS
except that the weighted average common shares outstanding is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares, such as options, had been issued. The
treasury stock method is used to calculate dilutive shares which reduces the
gross number of dilutive shares by the number of shares purchasable from the
proceeds of the options assumed to be exercised. All prior year Earnings per
Share have been restated in accordance with the provisions of SFAS 128. Adoption
of SFAS 128 did not have a material effect on the Company's historically
disclosed Earnings per Share. See Note 9 for more information regarding the
Earnings Per Share calculations.
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 were $18.4 million and $19.1 million, in 1997 and
1996, respectively. No other customer accounted for more than 10% of total net
sales in 1997 or 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, 1997 and
1996, the carrying value of debt approximated fair value.
Reclassifications - Certain prior year amounts have been reclassified in
the accompanying financial statements in order to conform with the 1997
presentation.
4. ACCOUNTS RECEIVABLE
Accounts Receivable include the following:
December 31,
1997 1996
(In thousands)
Accounts receivable trade......................... $16,259 $17,380
Non-trade accounts receivable..................... 519 391
Allowance for doubtful accounts and returns....... (835) (557)
Total........................................ $15,943 $17,214
Write-offs of accounts receivable were $21,000, $55,000, and $3,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
5. INVENTORIES
Inventories include the following:
December 31,
1997 1996
(In thousands)
Finished goods........................$ 9,233 $ 7,324
Work in process....................... 93 118
Raw materials......................... 6,197 4,257
Total............................$15,523 $11,699
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
1997 1996
(In thousands)
Land and land improvements................. $ 1,662 $ 1,662
Buildings and improvements................. 5,290 5,253
Machinery and equipment.................... 14,822 12,120
Construction in progress................... 398 883
Total................................. 22,172 19,918
Less accumulated depreciation............. (3,041) (1,443)
Total................................ $19,131 $18,475
7. LONG-TERM DEBT
Long-term debt includes the following:
December 31,
1997 1996
(In thousands)
Revolving loan............................. $17,651 $ 9,814
Term loan.................................. 6,222 4,800
Obligations under capital leases........... 1,285 381
Total................................. 25,158 14,995
Less current portion....................... (1,612) (1,272)
Long-term portion..................... $23,546 $13,723
In May 1997, the Company entered into an Amended and Restated Credit and
Security Agreement with Norwest Business Credit (the "Lender"). The Amendment
provides for an increase in the credit facility from $20.0 million to $27.0
million, and extends the termination date to November 15, 2000. The facility
consists of a $20 million revolving line of credit and a $7.0 million term loan.
Under the terms of the revolving line of credit, the company can borrow up
to $20 million or a lesser amount as determined by the borrowing base (as
defined in the loan agreement, comprising a percentage of eligible receivables
and inventory). The loan provides that the Lender will advance funds to the
Company subject to the terms and conditions of the loan agreement and amendments
thereto and as long as the Company maintains $1.0 million of availability under
its revolving line of credit. If availability is less than $1.0 million advances
are at the Lender's discretion. Availability as defined under the loan agreement
is borrowing base minus the outstanding balance under the revolving line of
credit, minus letters of credit outstanding At December 31, 1997 and 1996, the
annual interest rates were 12% and 8.75%, respectively. As a result of the
Company being out of compliance with certain financial loan covenants, the
Lender invoked a 2% default rate on the revolving line during a portion of 1997
which was still in effect at December 31, 1997.
The term loan provides for monthly installments of $116,666 plus interest.
At December 31, 1997 and 1996, the annual interest rates were 12.25% and 9.0%
respectively. As a result of the Company being out of compliance with certain
financial loan covenants, the Lender invoked a 2% default rate on the term loan
during a portion of 1997 which was still in effect at December 31, 1997.
Both credit facilities are secured by virtually all the 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.
As a result of the losses during 1997, the Company was out of compliance
with certain financial loan covenants at various measurement dates throughout
the year. The Company has received a waiver from the Lender in regard to these
covenants. In addition to receiving a waiver, the Company entered into a loan
amendment with Norwest Business Credit in March 1998. The amendment increases
the annual interest rates by 1% on both the revolving line of credit and term
loan to 11% and 11.25%, respectively. In addition, advance rates on accounts
receivable and certain eligible inventory were reduced by 5% and 6%,
respectively.
The obligations under capital leases are at fixed interest rates ranging
from 4.9% to 20.2% and are collateralized by equipment and a letter of credit
for $319,000. Machinery and equipment under capital leases were $1,290,000 (net
of $172,000 of accumulated depreciation) and $395,000 (net of $6,000 of
accumulated depreciation) as of December 31, 1997 and 1996, respectively.
Minimum payments on noncancellable operating leases obligations are for
buildings, autos and office equipment. Rent expense for the years ended December
31, 1997, 1996 and 1995 were approximately $380,000, $150,000 and $187,000,
respectively.
Future minimum principal payments on long-term debt, capital lease and
noncancellable operating lease obligations are as follows:
<TABLE>
<CAPTION>
Principal Payments on Minimum Payments on Operating
Long-Term Debt and Capital Lease Obligations
Year Ending Lease Obligations
<S> <C> <C>
1998 $ 1,612 $ 272
1999 1,629 $ 197
2000 21,302 $ 33
2001 212 6
2002 149 -
2003 and thereafter 254 -
Total minimum principal payments $ 25,158 $ 508
========== ==========
</TABLE>
8. 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.
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 a $5.0 million
DowBrands Convertible Note. 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.
At December 31, 1997, the Company was in arrears on its September and December
quarterly dividend payments, totaling $200,000 on the Series B Preferred Stock.
Fixed Stock Option Plans - The Company maintains four fixed stock option
plans for employees, consultants, directors and advisory board members. These
plans are the 1997 Stock Plan, 1996 Stock Incentive Plan, the 1996 Nonstatutory
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 four plans are 863,799, 528,201, 45,300 and
150,000, respectively. Total shares available for grant under the 1997 Stock
Plan and the Stock Option Plan for Non-Employee Directors and Advisory Board
Members were 260,549 and 51,000, respectively. No additional shares were
available for grant under the 1996 Stock Incentive Plan or the 1996 Nonstatutory
Stock Option Plan. 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, 1997.
A summary of changes in common stock options during 1995, 1996, and 1997 is
as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Share Price
------------ -----------------
<S> <C> <C>
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 (416,650) 1.64
Exercised (42,900) 1.64
Outstanding at December 31, 1996 1,312,400 3.35
Granted (average fair value of $2,99) 656,950 2.37
Canceled (673,799) 3.95
Exercised (56,100) 2.76
Outstanding at December 31, 1997 1,239,451 $2.53
==========
</TABLE>
During 1997, 587,000 options were canceled at exercise prices ranging from
$3.03 to $4.25 per share and reissued at $2.25 per share. 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, 1997 and 1996, were 751,599 and
526,300, respectively. The following table summarizes information about the
three equity incentive plans at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- - -------------------------------------------------------------------------------- -------------------------------------
Weighted-Average
Remaining
Range of Exercise Contractual Weighted-Average Weighted-Average
Prices Number Life (in years) Exercise Price Number Exercise Price
- - -------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.50 - 2.25 902,882 8.98 $2.00 613,303 $1.88
2.50 - 3.03 58,868 8.39 2.96 36,168 3.03
3.13 - 4.38 277,701 8.75 4.17 102,128 4.25
--------- --------
1,239,451 751,599
========== ==========
</TABLE>
Employee Stock Purchase Plan - In 1997, the Company adopted the 1997
Employee Stock Purchase Plan. Under the terms of the plan, the Company is
authorized to issue up to 400,000 shares of common stock to its full-time
employees, nearly all of whom are eligible to participate. Employees can choose
to have up to 20% of their annual base earnings withheld to purchase the
Company's common stock. The purchase price of the stock is 85% of the fair
market value of a share of the Company's common stock on the enrollment date or
on the exercise date, whichever is lower. Approximately 49% of eligible
employees participated in the Plan at December 31, 1997. The Company sold 34,833
shares to employees in 1997.
The Company applies APB No. 25, "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its fixed stock option plans and
stock purchase plan. Accordingly, no compensation cost has been recognized for
these stock-based compensation plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method 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:
<TABLE>
<CAPTION>
1997 1996 1995
In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
Net (loss) income: *As reported $(19,360) $553 $(1,382)
Pro forma $(20,413) $(142) $(1,479)
Basic (loss) income per Common Share:
As reported $(3.48) $0.07 $(0.52)
Pro forma $(3.66) $(0.08) $(0.55)
Diluted (loss) income per Common Share:
As reported $(3.48) $0.06 $(0.52)
Pro forma $(3.66) $(0.08) $(0.55)
</TABLE>
In determining the above pro forma amounts under SFAS 123, fair values for
the fixed stock option plans are estimated on the date of grant using the
Black-Scholes pricing model, with the following weighted-average assumptions
used for grants in 1997 and 1996, respectively: expected volatility of 77% and
65%, risk-free interest rates of 5.9% and 6.4%, expected lives of 6.5 years in
both years, and no expected dividends. The assumptions and proforma effects
underlying the Employee Stock Purchase Plan are immaterial to the financial
statements at December 31, 1997. The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future amounts.
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 employees. As of December 31, 1996,
15,575 shares were issued pursuant to this plan and had an immaterial impact on
the Company's financial statements. No other grants have been issued under the
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 noncash
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 12). 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.
9. EARNINGS PER SHARE
<TABLE>
<CAPTION>
-------------- ----------- -----------
1997 1996 1995
(In thousands, except per share data)
- - -------------------------------------------------------------
<S> <C> <C> <C>
Net (Loss) Income. $ (19,360) $ $553 $(1,382)
Less: Dividends on Series B Preferred Stock (400) $ (233) -
Net (Loss) Income Available to Common Shareholders $ (19,760) $ 320 $(1,382)
Basic Earnings per Share:
Average Number of Basic Common Shares Outstanding 5,685 4,557 2,667
Basic (Loss) Income per Common Share $ (3.48) 0.07 $ (0.52)
Dilutive Earnings per Share:
Weighted Average Shares
Outstanding 5,685 4,557 2,667
Dilutive Shares Issuable in Connection with:
Conversion of Series A Preferred Stock - 660 -
Stock Plans - 998 -
Less: Shares Purchasable with proceeds from stock - (606) -
plans
Average Number of Diluted common Shares Outstanding 5,685 5,609 2,667
Diluted (Loss) Income per Common Share $ (3.48) $ 0.06 $ (0.52)
- - -------------------------------------------------------------
</TABLE>
Options to purchase 706,500 shares of common stock at range of $4.25 to
$4.75 per share were outstanding as of December 31, 1996, but were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares. These
options will expire in 2006. At December 31, 1997, the number of options
outstanding decreased by 72,949 from 1996.
10. EMPLOYEE BENEFIT PLANS
The Company established an Employee Savings Plan (401k) during 1996
covering substantially all employees. Company 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, 1997 and 1996, respectively.
The Company does not provide other post-retirement benefits to its
employees.
11. INCOME TAXES
The (benefit) provision for income taxes has been offset by the change in
the valuation allowance for the years ended December 31, 1997, 1996 and 1995.
the Company's net operating losses could not be carried back, future profits are
not yet predictable, and utilization of deferred tax assets is not determinable.
A reconciliation of the provision for income taxes to the amount computed
using U.S. federal statutory rates is as follows:
1997 1996 1995
(In thousands)
(Benefit) provision for income
at U.S. federal statutory rates...... $(6,582) $188 $(470)
Other items............................ 488 63 19
Change in valuation allowance.......... 6,094 (251) 451
Provision for income tax............... $ - $ - $ -
The significant components of deferred income taxes as of December 31 are
as follows:
--------- -----------
1997 1996
(In thousands)
Tax effects of:
Current deferred tax assets and liabilities:
Accounts Receivable, principally due to reserves... $ 317 $212
Inventories, partially due to additional costs
capitalized for tax purposes.................... 482 336
Employee benefits.................................. 389 316
Other (includes contingencies, other assets and
other accruals)................................. (25) (86)
1,163 778
Long-term deferred tax assets and liabilities:
License fee........................................ 285 380
Tax credits........................................ 110 297
Federal and state operating loss................... 7,534 1,089
Property, Plant and equipment...................... (1,222) (768)
6,707 998
Gross deferred tax assets............................ 7,870 1,776
Valuation allowance.................................. (7,870) (1,776)
Net deferred taxes........................................ $ - $ -
Due to the Company's net operating losses, the Company has not paid any
income taxes. The Company has accumulated approximately $22.2 million of federal
and state operating loss carryforwards (NOLs) at December 31, 1997. These NOLs
expire periodically between the years 2008 and 2012.
<PAGE>
12. RELATED PARTY TRANSACTIONS
Related party obligations include the following:
December 31,
--------------------------
1997 1996
-------- --------
(In thousands)
Promissory note for license rights........ $ 750 $ 1,000
DowBrands purchase credits................ - 1,500
-------- --------
Total 750 2,500
Less current portion...................... (250) (1,750)
-------- --------
Long-term portion......................... $ 500 $ 750
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. The first installment was made 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 sublicensees 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 146,107 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 annual installments. In May, 1997, Intertec purchased the first
installment of 36,526 shares of the Company's common stock at $8.00 per share.
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 Purchase Credits - In connection with the acquisition described
in Note 1, DowBrands 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 in credits to be applied
against future purchases. These credits were issued to DowBrands each quarter in
the amount of $375,000 until the credits were fully used. At December 31, 1997
and 1996, $0 and $1.5 million of such credits were classified as currently
payable. Revenues from this arrangement totaled $16.4 million and $22.2 million
for the years ended December 31, 1997 and 1996, respectively. Services are
priced based on direct material and labor costs incurred plus an agreed upon
profit margin.
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 8).
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 $121,919, $99,975, and $90,156 for the years ended 1997, 1996
and 1995, respectively.
Legal Fees - During 1997 and 1996, the Company paid legal fees of
approximately $5,000 and $676,000, 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.
13. LEGAL PROCEEDINGS
The Company is a party to a number of other legal proceedings none of which
are for substantial amounts. It is of the opinion of management that any losses
in connection with these matters will not have a material effect on the
Company's net income, financial position or liquidity.
14. COMMITMENTS AND CONTINGENCIES
The Company has entered into various purchase and sales commitments and
obligations 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>
INDEPENDENT AUDITORS' REPORT
The Dow Chemical Company:
We have audited the accompanying statement 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
the related statements of net invested capital and cash flows for the period
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 the changes in its net invested capital, and cash flows
for the period 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>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENT OF OPERATIONS
Period From January 1, 1995 to November 30, 1995
Period from
January 1,
1995 to
November 30,
1995
-------------
(In thousands)
Net Sales to DowBrands..................... $ 19,783
Net Sales to Others........................ 89,913
---------
Total Net Sales............................ 109,696
Cost of Goods Sold......................... 67,088
---------
Gross Margin............................... 42,608
Operating Expenses......................... 42,344
Write-down of Assets....................... 11,000
---------
Operating Loss............................. (10,736)
Other:
Interest expense from Dow............... (1,603)
Other income, net....................... 101
---------
Total other.......................... (1,502)
---------
Net Loss................................... $(12,238)
=========
See notes to financial statements.
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENT OF NET INVESTED CAPITAL
Period From January 1, 1995 to November 30, 1995
Period From
January 1, 1995
to November 30,
1995
---------------
(In thousands)
Net invested capital, beginning of
period...................... $ 47,493
Net loss for the period........ (12,238)
Net capital invested by (returned to)
Dow......................... (3,489)
---------
Net invested capital, end of period $ 31,766
=========
See notes to financial statements.
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENT OF CASH FLOWS
Period From January 1, 1995 to November 30, 1995
Period From
January 1, 1995
to November 30, 1995
--------------------
(In thousands)
Cash Flows From Operating Activities:
Net loss............................................. $(12,238)
Adjustments to reconcile net loss to net cash provided by
(used in) by operating activities:................
Write-down of assets.............................. 11,000
Depreciation...................................... 2,010
Goodwill amortization............................. -
Changes in:
Accounts receivable............................ 2,009
Inventories.................................... 792
Prepaid expenses and other..................... 215
Accounts payable and accrued expenses.......... 268
---------
Net cash provided by (used in) operating activities 4,056
---------
Cash Flows Used In Investing Activities:.............
Additions to property, plant, and equipment....... (1,011)
Other............................................. 444
Net cash used in investing activities........ (567)
---------
Cash Flows From Financing Activities:
Net capital invested by (returned to) Dow......... (3,489)
---------
Net Change in Cash...................................
Cash at Beginning of Period.......................... 1
---------
Cash at End of Period................................ $ 1
=========
See notes to financial statements
<PAGE>
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
NOTES TO FINANCIAL STATEMENTS
Period From January 1, 1995 to November 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business - PCD, the Personal Care Division of DowBrands L.P., ("PCD"), a
limited partnership whose managing partner is DowBrands Inc., a wholly owned
subsidiary of The Dow Chemical Company (collectively "Dow"), develops,
manufactures and markets hair care products.
Effective November 15, 1995, pursuant to an Asset Purchase Agreement, Dow
sold substantially all of the assets and liabilities of PCD to Electronic Hair
Styling, Inc. (the "Company") for $28.8 million comprised of $12.3 million in
cash, a $5.0 million 8.0% subordinated note (convertible into Series B preferred
stock), $8.5 million in Series A convertible preferred stock and $3.0 million in
credits to be issued to Dow for future purchases. Through its Series A
convertible preferred stock holdings, Dow will maintain an approximate 17%
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 $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 $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 $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 $19,783,000 for the period from
January 1, 1995 to November 30, 1995. Services are priced based on direct
material and labor costs incurred plus an agreed upon profit margin.
3. EMPLOYEE BENEFIT PLANS
Through November 15, 1995, PCD's employees were eligible to participate in
Dow's retirement, 401(k) and postretirement health and welfare benefit plans.
Contributions to the plans by PCD on behalf of PCD's employees were
approximately $1,432,000 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.
SECOND AMENDMENT TO AMENDED AND
RESTATED CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of November __, 1997, is made by and
between THE LAMAUR CORPORATION, a Delaware corporation (the "Borrower"), and
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into an Amended and
Restated Credit and Security Agreement dated as of May 16, 1997, as amended by
the First Amendment to Amended and Restated Credit Agreement dated as of August
13, 1997 (as amended, the "Credit Agreement"). Capitalized terms used in these
recitals have the meanings given to them in the Credit Agreement unless
otherwise specified.
The Borrower is in default of various obligations under the
Credit Agreement as set forth in a letter from the Borrower to the Lender dated
November 6, 1997.
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. Defined Terms. Capitalized terms used in this Amendment
which are defined in the Credit Agreement shall have the same meanings as
defined therein, unless otherwise defined herein. In addition, Section 1.1 of
the Credit Agreement is amended by adding or amending the following definitions:
"'Borrowing Base' means, at any time and subject to change
from time to time in the Lender's sole discretion, the lesser of
(a) the Commitment, or
(b) the sum of
(i) 80% of Eligible Accounts, plus
(ii) the lesser of (A) the sum of (1) 60% of
Eligible Finished Goods Inventory, plus (2)
50% of Eligible Raw Materials Inventory,
plus (3) the lesser of (I) 35% of Eligible
Carton Inventory or (II) $200,000, or (B)
$7,500,000, plus
(iii) the lesser of (A) 100% of the (i) the
purchase price of any United States Treasury
Securities with an initial maturity date of
not greater than 90 days held from time to
time in the Investment Account and (ii) the
cash held in the Investment Account , or (B)
$6,000,000, less
(iv) $1,000,000."
"First GE Funds" means the funds in the form of 7 day GE
commercial paper in the principal amount of $600,000, with a maturity
date of November 17, 1997, maintained by the Borrower at Bank of
America.
"'Revolving Loan Floating Rate' means an annual rate equal to
the sum of the Base Rate plus one and one-half percent (1.50%), which
Revolving Loan Floating Rate shall change when and as the Base Rate
Changes."
"'Second Amendment' means that certain Second Amendment to
Amended and Restated Credit and Security Agreement, dated as of
November __, 1997, by and between the Borrower and Lender."
"'Second Amendment Effective Date' means the date on which all
of the items listed in paragraph 7 of the Second Amendment are
satisfied in full."
"Second GE Funds" means the funds in the form of 14 day GE
commercial paper in the principal amount of $2,585,000 with a maturity
date of November 19, 1997, maintained by the Borrower at Bank of
America.
"'Term Loan Floating Rate' means an annual rate equal to the
sum of the Base Rate plus one and three-quarters percent (1.75%) which
Term Loan Floating Rate shall change when and as the Base Rate
Changes."
2. Additional Events of Default. Section 8.1 of the Credit
Agreement is amended by adding the following subsections:
(r) The Borrower shall fail to transfer to the
Investment Account the First GE Funds by wire transfer posted
to the Investment Account by the end of the day on November
18, 1997.
(s) The Borrower shall fail to transfer to the
Investment Account the Second GE Funds by wire transfer posted
to the Investment Account by the end of the day on November
20, 1997.
3. No Other Changes. 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 advance or letter of credit
thereunder.
4. Transfer of the First GE Funds and the Second GE Funds. The
Borrower agrees to transfer the First GE Funds to the Investment Account by wire
transfer on or before November 18, 1997, and the Borrower agrees to transfer the
Second GE Funds to the Investment Account on or before November 20, 1997.
5. Acknowledgment of Implementation of Default Rate. The
Borrower hereby acknowledges that (i) it was in default of certain provisions of
the Credit Agreement (the Defaults as defined in Section 5 of the Second
Amendment) and (ii) as a result of the Defaults, the Lender may, at its
discretion, implement the Default Rate as of July 1, 1997. The Lender hereby
elects to implement the Default Rate for the period from July 1, 1997 through
the Second Amendment Effective Date (the "Default Period"). The incremental
difference between (i) the interest that would have been charged had the Default
Rate been in effect during the Default Period and (ii) the interest that was
charged during the Default Period, shall be due and payable to the Lender on the
Second Amendment Effective Date.
6. Waiver of Defaults. The Borrower is in default of the
following provisions of the Credit Agreement (collectively, the "Defaults"):
- - --------------------------- ------------- ----------------- ------------------
Section/Covenant Date Required Actual
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
ss. 6.13 Minimum Book Net
Worth Plus Subordinated
Debt 7/31/97 $28,120,000 $26,994,000
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
8/31/97 $28,490,000 $24,954,000
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
9/30/97 $29,050,000 $22,702,000
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
ss. 6.14 Maximum Leverage
Ratio 7/31/97 1.30 to 1.00 1.46 to 1.00
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
8/31/97 1.30 to 1.00 1.71 to 1.00
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
9/30/97 1.30 to 1.00 1.88 to 1.00
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
ss. 6.15 Minimum Net Income 7/31/97 ($1,900,000) ($3,411,000)
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
8/31/97 ($1,510,000) ($5,420,000)
- - --------------------------- ------------- ----------------- ------------------
- - --------------------------- ------------- ----------------- ------------------
9/30/97 ($900,000) ($7,632,000)
- - --------------------------- ------------- ----------------- ------------------
Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Defaults. If the Borrower fails to transfer either the
First GE Funds or the Second GE Funds to the Investment Account pursuant to
paragraph 5 above, the waiver set forth in this paragraph 6 will be null and
void, and the Lender shall have all of its rights, and persevere all of its
remedies, as if the waiver set forth in this paragraph 6 had never been granted.
This waiver shall be effective only in this specific instance and for the
specific purpose for which it is given, and this waiver shall not entitle the
Borrower to any other or further waiver in any similar or other circumstances.
7. Conditions Precedent. This Amendment, and the waiver set
forth in Paragraph 6 hereof, shall be effective when the Lender shall have
received an executed original hereof, together with each of the following, each
in substance and form acceptable to the Lender in its sole discretion:
(a) 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 Authority of the Borrower's Secretary dated as of May 16, 1997
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 Authority of the Borrower's Secretary dated as of May
16, 1997, 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.
8. Representations and Warranties. The Borrower hereby
represents and warrants to the Lender as follows:
(a) The Borrower has all 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.
9. References. 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.
10. No Other Waiver. Except as set forth in Paragraph 6
hereof, the execution of this Amendment 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.
11. Release. 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 or such Guarantor 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.
12. Costs and Expenses. 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[ and the fee
required under paragraph 6 hereof].
13. Miscellaneous. 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.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first written above.
THE LAMAUR CORPORATION. NORWEST BUSINESS CREDIT, INC.
By _________________________________ By _________________________________
John D. Hellmann Brian F. Fitzpatrick
Its Vice President Its Vice President
-8-
THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT AND
WAIVER OF DEFAULTS
This Amendment, dated as of March __, 1998, is made by and
between THE LAMAUR CORPORATION, a Delaware corporation (the "Borrower"), and
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into an Amended and
Restated Credit and Security Agreement dated as of May 16, 1997, as amended by a
First Amendment to Amended a Restated Credit and Security Agreement dated as of
August 13, 1997 and a Second Amendment to Amended and Restated Credit and
Security Agreement dated as of November 13, 1997 (as so amended, the "Credit
Agreement"). Capitalized terms used in these recitals have the meanings given to
them in the Credit Agreement unless otherwise specified.
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. Defined Terms. Capitalized terms used in this Amendment
which are defined in the Credit Agreement shall have the same meanings as
defined therein, unless otherwise defined herein. In addition, Section 1.1 of
the Credit Agreement is amended by adding or amending, as the case may be, the
following definitions:
"'Borrowing Base' means, at any time and subject to change
from time to time at the Lender's sole discretion, the lesser of:
(a) the Commitment, or
(b) the sum of
(i) 75% of Eligible Accounts, plus
(ii) the lesser of (A) the sum of (1) 54% of
Eligible Finished Goods Inventory, plus (2)
44% of Eligible Raw Materials Inventory,
plus (3) the lesser of (I) 29% of Eligible
Carton Inventory or (II) $200,000, or (B)
the Inventory Sub-Limit, plus
(iii) the lesser of (A) 100% of the (i) the
purchase price of any United States Treasury
Securities with an initial maturity date of
not greater than 90 days held from time to
time in the Investment Account and (ii) the
cash held in the Investment Account , (B)
$6,000,000, or (C) after April 2, 1998, zero
dollars ($0)."
"'Inventory Sub-Limit' means the following: (i) from the Third
Amendment Effective Date up to and including June 29, 1998, $7,000,000,
(ii) from June 30, 1998, up to and including September 30, 1998,
$6,500,000, and (iii) after September 30, 1998, $6,000,000."
"'Revolving Loan Floating Rate' means an annual rate equal to
the sum of the Base Rate plus two and one-half percent (2.50%), which
Revolving Loan Floating Rate shall change when and as the Base Rate
Changes."
"'Revolving Note Indebtedness' means all amounts owing from
the Borrower to the Lender under the Revolving Note."
"'Term Note Indebtedness' means the amount owing from the
Borrower to the Lender under the Term Note."
"'Third Amendment' means that certain Third Amendment to
Amended and Restated Credit and Security Agreement, dated as of March
__, 1998, by and between the Borrower and Lender."
"'Third Amendment Effective Date' means the date on which all
of the items listed in paragraph 15 of the Third Amendment are
satisfied in full."
"'Term Loan Floating Rate' means an annual rate equal to the
sum of the Base Rate plus two and three-quarters percent (2.75%) which
Term Loan Floating Rate shall change when and as the Base Rate
Changes."
2. Advances. Section 2.1 of the Credit Agreement is hereby
amended by deleting the first sentence thereto, and replacing it with the
following:
"2.1 Advances. Provided that the Borrower maintains
Availability of One Million Dollars ($1,000,000) or greater
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 Third Amendment Effective
Date 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 the event that the Borrower
requests any Advance which would result in, if such Advance
were made, the Borrower's Availability becoming less than One
Million Dollars ($1,000,000), the Lender may or may not, in
the Lender's sole discretion, make such Advance to the
Borrower. In no event shall the aggregate amount of
outstanding Advances exceed the Borrowing Base less the L/C
Amount. The Advances shall be secured by the Collateral as
provided in Article III hereof."
3. Voluntary Prepayment; Termination of Agreement by Borrower;
Permanent Reduction of Commitment. Section 2.6 of the Credit Agreement is
amended as follows:
a.) Subsection (a) of Section 2.6 is amended by deleting the
reference to "prepayment fee under Sections 2.6 (d) and (e) below, if
applicable" in the last line thereto and replacing it with "any fee required
under the terms of the Credit Agreement."
b.) Subsection (b) of Section 2.6 is amended by deleting the
reference to "provided for in subsection (d) and (e) below" in the third line
thereto and replacing it with "provided for in the Credit Agreement."
c.) Subsections (d) and (e) to Section 2.6 are deleted in
their entirety,
d.) Subsection (f) to Section 2.6 is amended by relabeling it
as subsection "(d)."
4. Fees. Section 2.13 of the Credit Agreement is amended by
deleting the reference to "three (3)" in the second line of Subsection (a) and
inserting "six (6)" in its place.
5. Reporting Requirements. Section 6.1 of the Credit Agreement
is hereby amended by deleting subsection (c) thereto and replacing it with the
following:
"(c) within (i) 15 days after the end of each month, agings of
the Borrower accounts receivable and its accounts payable as
of the end of such month, and (ii) 3 days after the end of
each week an inventory certification report as of the end of
such week, which inventory certification report shall contain
a break-out of the Eligible Finished Goods Inventory by brand
name and any other itemization requested by the Lender."
6. Waiver of Defaults. The Borrower is in default of the
following provisions of the Credit Agreement (collectively, the "Defaults"):
- - -------------------------------- ------------- --------------- ----------------
Section/Covenant Date Required Actual
- - -------------------------------- ------------- --------------- ----------------
- - -------------------------------- ------------- --------------- ----------------
ss. 6.1 Monthly Reporting 1/98 2/20/98 Not yet
Requirements delivered
- - -------------------------------- ------------- --------------- ----------------
- - -------------------------------- ------------- --------------- ----------------
ss. 6.13 Debt Service 12/31/97 1.1 to 1.0 (3.7)
Coverage Ratio
- - -------------------------------- ------------- --------------- ----------------
- - -------------------------------- ------------- --------------- ----------------
ss. 6.13 Minimum Book Net
Worth Plus Subordinated Debt 12/31/97 $30,050,000 $11,627,000
- - -------------------------------- ------------- --------------- ----------------
- - -------------------------------- ------------- --------------- ----------------
ss. 6.14 Maximum Leverage Ratio 12/31/97 1.20 to 1.00 4.05 to 1.00
- - -------------------------------- ------------- --------------- ----------------
- - -------------------------------- ------------- --------------- ----------------
ss. 6.15 Minimum Net Income 12/31/97 $200,000 ($18,677,000)
- - -------------------------------- ------------- --------------- ----------------
Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Defaults. This waiver shall be effective only in this
specific instance and for the specific purpose for which it is given, and this
waiver shall not entitle the Borrower to any other or further waiver in any
similar or other circumstances.
7. Financial Covenants. Section 6.12, 6.13, 6.14, and 6.15 of
the Credit Agreement are hereby amended as follows:
"Section 6.12 Debt Service Coverage Ratio. The Borrower shall
maintain (exclusive of any Subsidiaries or Affiliates unless the Lender
specifically consents in writing to their inclusion in such
calculation) a Debt Service Coverage Ratio of at least 3.00 to 1.00 for
the twelve month period ending December 31, 1998."
"Section 6.13 Book Net Worth Plus Subordinated Indebtedness.
The Borrower shall at all times maintain (exclusive of any Subsidiaries
or Affiliates unless the Lender specifically consents in writing to
their inclusion in such calculation), Book Net Worth plus Subordinated
Indebtedness of at least the following, calculated monthly as of the
following dates:
- - ---------------------------------- ---------------------------------------------
For the Month Ending Minimum Book Net Worth Plus Subordinated
Indebtedness
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
3/31/98 $10,300,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
4/30/98 $10,200,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
5/31/98 $10,401,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
6/30/98 $10,800,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
7/31/98 $10,800,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
8/31/98 $10,800,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
9/30/98 $11,000,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
10/31/98 $11,100,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
11/30/98 $11,400,000
- - ---------------------------------- ---------------------------------------------
- - ---------------------------------- ---------------------------------------------
12/31/98 $11,500,000
- - ---------------------------------- ---------------------------------------------
"Section 6.14 Leverage Ratio. The Borrower shall at all times
maintain (exclusive of any Subsidiaries or Affiliates unless the Lender
specifically consents in writing to their inclusion in such
calculation) a Leverage Ratio of not greater than the following,
calculated monthly as of the following dates:
- - --------------------------------------- ----------------------------------------
For the Month Ending Leverage Ratio
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
3/31/98 4.3 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
4/30/98 4.3 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
5/31/98 4.3 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
6/30/98 4.3 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
7/31/98 4.2 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
8/31/98 4.0 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
9/30/98 4.0 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
10/31/98 4.0 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
11/30/98 3.8 to 1.00
- - --------------------------------------- ----------------------------------------
- - --------------------------------------- ----------------------------------------
12/31/98 3.8 to 1.00
- - --------------------------------------- ----------------------------------------
"Section 6.15 Net Income. The Borrower shall at all times
maintain (exclusive of any Subsidiaries or Affiliates unless the Lender
specifically consents in writing to their inclusion in such
calculation) Net Income calculated on a fiscal year-to-date basis of at
least the following amounts for the following dates:
- - ------------------------------ ------------------------------
For the Month Ending Net Income
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
3/31/98 ($500,000)
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
4/30/98 ($600,000)
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
5/31/98 ($400,000)
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
6/30/98 $0
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
7/31/98 $100,000
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
8/31/98 $200,000
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
9/30/98 $400,000
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
10/31/98 $600,000
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
11/30/98 $800,000
- - ------------------------------ ------------------------------
- - ------------------------------ ------------------------------
12/31/98 $1,000,000
- - ------------------------------ ------------------------------
8. Covenants for Subsequent Periods. Section 6.16 of the
Credit Agreement is hereby amended by deleting the reference to "May 1, 1998" in
the fourth line thereto and replacing it with "January 1, 1999" and by deleting
the reference to "April 30, 1998" in the final line thereto and replacing it
with "December 31, 1998".
9. Additional Events of Default. Section 8.1 of the Credit
Agreement is amended by adding the following subsection:
"(t) The Borrower shall fail to reduce, by April 2,
1998, the amount of the United States Treasury Securities
maintained in the Investment Account to zero."
10. Reduction of Amounts in Investment Account. Borrower
shall, on or before April 2, 1998, reduce the amount held in the Investment
Account to zero. In the event that, after April 2, 1998, the amount held in the
Investment Account is greater than zero, Lender shall have the right, in the
Lender's sole discretion, to apply the amount remaining in the Investment
Account to the outstanding Obligations.
11. Outside Consultant. Upon the occurrence of a Default or an
Event of Default, the Borrower agrees to retain an outside consultant,
acceptable to Lender, within two weeks from the first day of the occurrence of
such Event of Default.
12. No Other Changes. Except as explicitly amended by the
Third Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any Advance or Letter of
Credit thereunder.
13. Restructuring Fee. The Borrower shall pay the Lender as of
the date hereof a fully earned, non-refundable fee in the amount of $75,000 in
consideration of the Lender's execution of this Amendment.
14. Continuation Fee. In consideration of the Lender's
execution of this Amendment and continuing the Credit Facility, the Borrower
shall pay the Lender a fully earned, non refundable fee, as follows:
(a) The Borrower shall pay to the Lender a fee in connection
with the payment in full of the Revolving Note Indebtedness,
or any reduction of the Commitment, which fee shall be fully
earned as of the Third Amendment Effective Date, but payable
upon the payment in full of the Revolving Note Indebtedness
(or reduction of the Commitment, as the case may be), in an
amount equal to one and one half percent (1.5%) of the
Commitment (or the reduction of the Commitment, as the case
may be), provided, however, that in the event that the
Borrower pays the Revolving Note Indebtedness in full on or
before September 1, 1998, than the fee set forth in this
subsection (a) shall be an amount equal to one percent (1.0%)
of the Commitment.
(b) The Borrower shall pay to the Lender a fee in connection
with the payment in full of the Term Note Indebtedness, or any
reduction of the Term Note Indebtedness in excess of the
amount due under the amortization schedule for the Term Note,
which fee shall be fully earned as of the Third Amendment
Effective Date, but payable upon such payment in full of the
Term Note Indebtedness (or any reduction of the Term Note
Indebtedness in excess of the amortization schedule, as the
case may be) in an amount equal to one and one half percent
(1.5%) of amount of the Term Note Indebtedness at the time
such payment in full is made (or of the amount of any
reduction of the Term Note Indebtedness in excess of the
amortization schedule, as the case may), provided, however,
that in the event that the Borrower repays the Term Note
Indebtedness in full on or before September 1, 1998, than the
fee set forth in this subsection (b) shall be an amount equal
to one percent (1.0%) of the Term Note Indebtedness at the
time such payment in full is made."
15. Conditions Precedent. This Amendment, and the waiver set
forth in Paragraph 4 hereof, shall be effective when the Lender shall have
received an executed original hereof, together with each of the following, each
in substance and form acceptable to the Lender in its sole discretion:
(Error! Unknown switch argument.) A Certificate of the
Secretary of the Borrower certifying as to (Error! Unknown switch
argument.) the resolutions of the board of directors of the Borrower
approving the execution and delivery of this Amendment, (Error! Unknown
switch argument.) 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 Authority of the Borrower's
Secretary dated as of May 16, 1997 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 (Error! Unknown switch argument.)
certifying that the officers and agents of the Borrower who have been
certified to the Lender, pursuant to the Certificate of Authority of
the Borrower's Secretary dated as of May 16, 1997, 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.
(b) Payment of the fee described in Paragraph 13.
(c) Such other matters as the Lender may require.
16. Representations and Warranties. The Borrower hereby
represents and warrants to the Lender as follows:
(Error! Unknown switch argument.) The Borrower has all
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.
(Error! Unknown switch argument.) The execution, delivery and
performance by the Borrower of this Amendment have been duly authorized
by all necessary corporate action and do not (Error! Unknown switch
argument.) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (Error! Unknown switch argument.)
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 (Error! Unknown switch argument.) 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.
(Error! Unknown switch argument.) 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.
17. References. 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.
18. No Other Waiver. Except as set forth in Paragraph 5
hereof, the execution of this Amendment 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.
19. Release. 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.
20. Costs and Expenses. The Borrower hereby reaffirms its
agreement under the Credit Agreement to pay or reimburse the Lender on demand
for all fees, 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.
21. Miscellaneous. 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.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first written above.
THE LAMAUR CORPORATION NORWEST BUSINESS CREDIT, INC.
By _________________________________ By _________________________________
John D. Hellmann Brian F. Fitzpatrick
Its Vice President Its Vice President
M1:
3/31/98 12:45 AM
<PAGE>
CONSENT OF PARTICIPANT
This Consent is given effective as of the ____ day of March, 1998, by MERCANTILE
BUSINESS CREDIT, INC. ("Mercantile") in favor of NORWEST BUSINESS CREDIT, INC.
("Norwest").
1. Norwest and Mercantile entered into that certain Participation Agreement
dated February 10, 1997, as amended by that certain First Amendment to
Participation Agreement dated as of May 16, 1997, relating to that certain
Credit and Security Agreement dated as of November 16, 1995 by and between
Norwest and Electronic Hair Styling, Inc., a Delaware corporation now known as
The Lamaur Corporation (the "Borrower"), as amended and restated pursuant to
that certain Amended and Restated Credit and Security Agreement dated as of May
16, 1997 by and between Norwest and the Borrower, as amended by that certain
First Amendment to Amended and Restated Credit Agreement dated as of August 13,
1997, and that certain Second Amendment to Amended and Restated Credit Agreement
dated as of November 13, 1997 (the "Participation Agreement").
2. Mercantile hereby consents to the terms of that certain Third Amendment to
Amended and Restated Credit and Security Agreement in the form attached hereto
as Exhibit A, and all other documents, instruments and agreements executed in
connection therewith.
MERCANTILE BUSINESS CREDIT, INC.
By__________________________________
Its____________________________
EXHIBIT 10.14
EMPLOYEE SEVERANCE AGREEMENT
This Agreement is entered into and delivered and effective as of July 1,
1997.
WHEREAS, the Board of Directors and the Compensation Committee of The
Lamaur Corporation, a Delaware corporation (the "Company"), have determined it
to be in the best interests of the Company and its stockholders to provide
certain key employees (the "Designated Employees") with certain protection from
events that could occur in connection with certain changes of control of the
Company, and
WHEREAS, to accomplish this objective and encourage the Designated
Employees to continue employment with the Company, the Company desires to enter
into this Agreement.
NOW, THEREFORE, for good and valuable consideration, the Company and the
undersigned employee (the "Employee") hereby agree as follows:
1. Change of Control. "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 35% or more of the total voting power
represented by the Company's then outstanding voting securities (other than any
person who owns in excess of 20% of such total voting power as of the date
hereof or other than any person who acquires 35% or more of such total voting
power with the approval of the Board), or any "person" is or becomes the
"beneficial owner", 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 (other than any person who owns in excess of
20% of such total voting power as of the date hereof); 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 stockholders 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 stockholders 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.
2. Involuntary Termination.
(i) "Involuntary Termination" shall mean:
(a) a termination by the Company of the Employee's employment with the
Company other than for Cause; or
(b) a material reduction of or material variation in the Employee's duties,
authority or responsibilities, relative to the Employee's duties, authority or
responsibilities as in effect immediately prior to such reduction or variation,
and the Employee resigns from employment with the Company in accordance with
Paragraph 2(ii) below; or
(c) a reduction by the Company in the base salary of the Employee as in
effect immediately prior to such reduction, and the Employee resigns from
employment with the Company in accordance with Paragraph 2(ii) below; or
(d) a reduction by the Company in the kind or level of employee benefits,
including bonuses, to which the Employee was entitled immediately prior to such
reduction with the result that the Employee's overall benefits package is
reduced, and the Employee resigns from employment with the Company in accordance
with Paragraph 2(ii) below; or
(e) the proposed relocation or the relocation of the Employee to a facility
or a location other than the Employee's then present location, and the Employee
resigns from employment with the Company in accordance with Paragraph 2(ii)
below.
(ii) For purposes of this paragraph, the Employee's resignation letter
shall set forth a final day of employment which shall be not less than one week
nor more than one month from the date the resignation letter is delivered to the
Company. The Company shall inform the Employee in writing no later than five
days from the delivery of the resignation letter if the Company does not agree
that an Involuntary Termination will occur on the resignation date and the
reasons for the Company's position. If the Company and the Employee do not agree
that an Involuntary Termination will occur on the resignation date:
(a) the burden of proving that an Involuntary Termination will not occur
shall be on the Company;
(b) the Employee may withdraw the resignation letter until a determination
is made that an Involuntary Termination will occur, and the Employee shall be
entitled to continue his employment as in effect at the time the Employee
delivered the resignation letter to the Company until a determination regarding
Involuntary Termination is made under Paragraphs 2(ii) and 10 hereof (subject to
the Company's right to terminate the Employee's employment with the Company
under Paragraph 2(i)(a)); and
(c) the determination whether an Involuntary Termination has occurred shall
be made based upon the facts and circumstances at the time the Employee
delivered the resignation letter to the Company and shall be made in accordance
with Paragraph 10 hereof.
A pending dispute or arbitration under this Paragraph shall not prevent an
Involuntary Termination occurring as a result of other action or inaction by the
Company.
3. Cash Severance Payment and Other Benefits. In the event of a Change of
Control and an Involuntary Termination of the Employee within 24 months of such
Change of Control, then as of the date of such Involuntary Termination:
(i) the Company shall pay in cash to the Employee on the date of the
Involuntary Termination an amount equal to one and one-half times the Employee's
most recent annual full-time base compensation in effect prior to such Change of
Control; and
(ii) the Company shall provide at the Company's expense medical, dental and
basic life insurance (one times base annual compensation) no less favorable than
such insurance in effect for the Employee and dependents during his or her most
recent full time period of employment prior to the Change of Control, for a
period equal to the shorter of eighteen months from end of the month in which
the Involuntary Termination occurs or the date such Employee becomes covered
under another insurance plan as a result of obtaining new employment. For the
purposes of Title X of the Consolidated Budget Reconciliation Act of 1985
("COBRA"), the date of the qualifying event for the Employee and his or her
covered dependents shall be the date upon which this Company-paid coverage
terminates; and.
(iii) the Company shall pay in cash to the Employee an amount equal to 25%
the Employee's most recent annual full-time base compensation in effect prior to
such Change of Control provided that such Employee's principal place of
residence at any time within twenty-four months from the Involuntary Termination
changes from the principal place of residence in effect immediately prior to the
Involuntary Termination and further provided that the payment under this
paragraph shall be reduced by the amount of any moving expenses paid by a new
employer of Employee; and.
(iv) at the option of the Employee within six months from the Involuntary
Termination, borrow from the Company the principal sum equal to one and one-half
times the Employee's most recent annual full-time base compensation in effect
immediately prior to such Change of Control at the lowest rate of interest
permitted by Internal Revenue Service Rules to avoid the imputation of income.
The loan shall be unsecured, be full recourse to the Employee, be due and
payable two years from the date of the Involuntary Termination, and be made
pursuant to the form of Promissory Note attached hereto as Exhibit A.
If a dispute arises under Paragraph 2 whether an Involuntary Termination will
occur, then the payments and benefits under this Paragraph shall be payable to
the Employee upon an Involuntary Termination even if that Involuntary
Termination occurs more than 24 months from the date of the Change of Control.
4. Cause. "Cause" shall mean:
(i) any willful act of personal dishonesty, fraud or misrepresentation
taken by the Employee in connection with his or her responsibilities as an
employee which was intended to result in substantial gain or personal enrichment
of the Employee; or
(ii) Employee's conviction of a felony on account of any act which was
materially and demonstrably injurious to the Company; or
(iii) the Employee's willful and continued failure to substantially perform
his or her principal duties and obligations of employment (other than any such
failure resulting from incapacity due to physical or mental illness), which
failure is not remedied in a reasonable period of time after receipt of written
notice from the Company. For the purposes of this Section, no act or failure to
act shall be considered "willful" unless done or omitted to be done in bad faith
and without reasonable belief that the act or omission was in or not opposed to
the best interests of the Company. Any act or failure to act based upon
authority given pursuant to a resolution duly adopted by the Board of Directors
of the Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done or omitted to be done in good faith and in the
best interests of the Company. Notwithstanding anything herein to the contrary,
the Employee shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to the Employee a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board of Directors of the Company at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee with Employee's counsel to be heard before
the Board) finding that in the good faith opinion of the Board the Employee was
properly terminated for Cause.
5. Voluntary Resignation; Termination for Cause. If the Employee's
continuous status as an employee of the Company terminates by reason of the
Employee's voluntary resignation (and not Involuntary Termination) or if the
Employee's continuous status as an employee of the Company is terminated for
Cause, in either case prior to a Change of Control and an Involuntary
Termination, then the Employee shall not be entitled to receive the severance
payment and other benefits.
6. Company's Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, merger or consolidation) shall assume the
obligations under this Agreement and agree expressly to perform the obligations
in the absence of a succession.
7. Successors. The terms of this Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
8. Modification Waiver. No provision of this Agreement shall be modified or
waived unless the modification or waiver is agreed to in writing and signed by
the Employee and by an authorized officer of the Company (other than the
Employee).
9. Entire Agreement. This Agreement represents the entire agreement of the
parties hereto with respect to the subject matter thereof.
10. Choice of Law, Arbitration. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
{Minnesota/California}. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
the County of {Hennepin, Minnesota/Marin, California}, by three arbitrators in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The Company shall bear all costs and expenses arising out of or in
connection with any arbitration pursuant to this Section 10, including, without
limitation, attorneys' fees and costs of counsel to Employee. The Company shall
not be entitled to recover any costs or expenses arising out of or in connection
with any arbitration pursuant to this Section 10 from the Employee, including,
without limitation, attorneys' fees and costs of counsel, even if the Company
prevails in the arbitration.
11. No Employment Agreement. This Agreement shall not constitute an
employment agreement. The Employee's employment with the Company shall
constitute employment "at will," unless otherwise provided in some other written
agreement between the Company and Employee.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year set
forth above.
THE LAMAUR CORPORATION EMPLOYEE
By____________________________ ______________________________
Don G. Hoff
Chairman of the Board and
Chief Executive Officer
<PAGE>
EXHIBIT A TO EMPLOYEE SEVERANCE AGREEMENT
PROMISSORY NOTE
$________ {Friley, Minnesota/Mill Valley, California}
____________, 19__
For value received, the undersigned promises to pay to The Lamaur Corporation, a
Delaware corporation (the "Company"), the principal sum of $__________, together
with interest on the unpaid principal hereof from the date hereof at the rate of
___%, compounded annually.
Principal and interest shall be due and payable on (the date two years from the
date of the Involuntary Termination). Payments shall be made in lawful money of
the United States of America.
The undersigned may at any time prepay all or any portion of the principal or
interest owing hereunder.
The holder of this Note shall have full recourse against the undersigned.
Should any action be instituted for the collection of this Note, the reasonable
costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
The validity, interpretation, construction and performance of this Note shall be
governed by the laws of the State of {Minnesota/California}.
______________________________
EXHIBIT 10.15
MEMORANDUM
To: Dominic J. LaRosa
From: Don G. Hoff
Date: February 4, 1998
Re: Life Insurance and Disability Insurance
As you know, effective December 29, 1997 your annual base pay has been set at
$125,000 per annum. During this period, the Company would like to provide to you
the following additional benefits:
1. The Company shall provide $125,000 of life insurance to you on the same
terms and conditions as the policy issued by Hartford Life and Accident
Insurance Company ("Hartford"). The payment shall be made within 60 days
after Hartford makes full life insurance payments to your beneficiaries
under such policy. The Company shall make payment to the same beneficiaries
set forth in the Hartford policy.
2. The Company shall provide short term disability benefits to you at the rate
of $9,615 bi-weekly administered in accordance with the Company's standard
policies and procedures.
3. The Company shall supplement the long term disability policy provided by
Hartford so as to provide coverage at the rate of $20,833 per month. The
amount of any supplemental payment shall be determined with reference to
the policy. The payment shall be made within 60 days after Hartford makes a
monthly payment under such policy.
This memorandum supersedes and replaces the memorandum dated December 29, 1997
regarding this subject.
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in The Lamaur Corporation's
(formerly Electronic Hair Styling, Inc.) Registration Statements No. 333-12029
and No. 333-26811 of our report dated March 31, 1998 on the financial statements
of The Lamaur Corporation and of our report dated January 26, 1996 on the
financial statements of The Lamaur Corporation and of our report dated January
26, 1998 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, 1997.
Deloitte & Touche LLP
San Francisco, California
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,465
<SECURITIES> 0
<RECEIVABLES> 17,797
<ALLOWANCES> 1,113
<INVENTORY> 15,523
<CURRENT-ASSETS> 39,125
<PP&E> 22,172
<DEPRECIATION> (3,041)
<TOTAL-ASSETS> 58,326
<CURRENT-LIABILITIES> 23,331
<BONDS> 24,046
0
13,500
<COMMON> 57
<OTHER-SE> (2,608)
<TOTAL-LIABILITY-AND-EQUITY> 58,326
<SALES> 118,475
<TOTAL-REVENUES> 118,475
<CGS> 69,626
<TOTAL-COSTS> 69,626
<OTHER-EXPENSES> 66,375
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> 2,236
<INCOME-PRETAX> (19,360)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,360)
<EPS-PRIMARY> (3.48)
<EPS-DILUTED> (3.48)
</TABLE>
Exhibit 27.3
restated yes yes yes
period type 3 months 6 months 9 months
fiscal year end 31-Dec-97 31-Dec-97 31-Dec-97
period start 1-Jan-97 1-Jan-97 1-Jan-97
period end 31-Mar-97 30-Jun-97 30-Sep-97
exchange rate blank blank blank
cash 7,528 7,373 6,534
securities 0 0 0
receivables 22,892 20,689 20,274
allowances 948 861 920
inventory 13,454 15,042 14,025
current assets 43,324 46,644 45,566
pp&e 20,349 21,332 22,139
accumulated depreciation -1,798 -2,165 -2,541
total assets 62,064 65,974 65,358
current liabilities 14,405 16,871 19,466
bonds 18,859 21,435 23,190
preferred mandatory 0 0 0
preferred 13,500 13,500 13,500
common 57 57 57
other stockholders equity 15,243 14,111 9,145
total liability and equity 62,064 65,974 65,358
sales 29,213 59,729 91,721
total revenue 29,213 59,729 91,721
cgs 17,316 35,383 53,825
total costs 17,316 35,383 53,825
other expenses 13,128 26,560 44,487
loss provision 17 18 20
interest expense 398 833 1,360
income pre tax -1,437 -2,766 -7,632
income tax 0 0 0
income continuing -1,437 -2,766 -7,632
discontinued 0 0 0
extraordinary 0 0 0
changes 0 0 0
net income -1,437 -2,766 -7,632
eps basic -0.27 -0.52 -1.40
eps diluted -0.27 -0.52 -1.40
restated yes yes yes
period type 6 months 9 months 12 months
fiscal year end 31-Dec-96 31-Dec-96 31-Dec-96
period start 1-Jan-96 1-Jan-96 1-Jan-96
period end 30-Jun-96 30-Sept-96 31-Dec-96
exchange rate blank blank blank
cash 11,805 12,599 12,081
securities 0 0 0
receivables 19,186 18,421 19,514
allowances 790 854 850
inventory 8,873 8,542 11,699
current assets 39,460 39,114 42,967
pp&e 17,156 18,663 19,918
accumulated depreciation -791 -1,109 -1,443
total assets 56,012 56,912 61,566
current liabilities 16,848 15,331 16,841
bonds 9,419 11,284 14,473
preferred mandatory 0 0 0
preferred 13,500 13,500 13,500
common 56 56 56
other stockholders equity 16,189 16,741 16,696
total liability and equity 56,012 56,912 61,566
sales 60,162 89,411 117,083
total revenue 60,162 89,411 117,083
cgs 37,737 55,275 70,215
total costs 37,737 55,275 70,215
other expenses 21,731 32,949 45,641
loss provision 186 36 64
interest expense 832 1,083 1,386
income pre tax -66 573 553
income tax 0 29 0
income continuing -66 544 553
discontinued 0 0 0
extraordinary 0 0 0
changes 0 0 0
net income -66 544 553
eps basic -0.03 0.10 0.07
eps diluted -0.03 0.08 0.06
