<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
THE LAMAUR CORPORATION
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
N/A
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(2) Aggregate number of securities to which transaction applies:
N/A
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11(1):
N/A
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(4) Proposed maximum aggregate value of transaction:
$20,000,000
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(5) Total fee paid:
$4,000
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
THE LAMAUR CORPORATION
October 2, 1998
Dear Stockholder:
This year's annual meeting of stockholders will be held on November 2, 1998
at 10:00 a.m. local time, in the conference room at the Company's principal
offices located at One Lovell Avenue, Mill Valley, California 94941. You are
cordially invited to attend.
The Notice of Annual Meeting of Stockholders and a Proxy Statement, which
describe the formal business to be conducted at the meeting, follow this letter.
As a result of the Company's economic difficulty, we have retained
investment bankers and, with their assistance, have been actively pursuing
strategic transactions in order to satisfy the needs of our creditors and to
rationalize our business going forward. The Company recently sold its Salon
brands to a subsidiary of Shiseido for $11 million. To further improve our
financial condition we are restructuring operations to reduce overhead expenses
and enhance value and we are actively pursuing a buyer for the manufacturing
business. A final decision as to whether to sell the manufacturing business will
depend upon the offers we receive and our analysis of the potential of that
business. The enclosed Proxy Statement provides a summary of the status of such
activities, and our current thinking about a possible reorganization. Most
importantly, we are seeking your approval of the sale of our manufacturing
business, should an offer be negotiated. Your vote on this and the other matters
before the meeting is critical, and we ask you to return your proxy promptly.
After reading the Proxy Statement and accompanying materials, please mark,
sign and promptly return the enclosed proxy card in the prepaid envelope to
assure that your shares will be represented. Your shares cannot be voted unless
you date, sign, and return the enclosed proxy card or attend the annual meeting
in person. Regardless of the number of shares you own, your careful
consideration of, and vote on, the matters before our stockholders is important.
A copy of the Company's Annual Report is also enclosed for your
information. At the annual meeting we will review the activities of The Lamaur
Corporation over the past year and our plans for the future. The Board of
Directors and Management look forward to seeing you at the annual meeting.
Very truly yours,
/s/ DON G. HOFF
DON G. HOFF
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
THE LAMAUR CORPORATION
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 2, 1998
TO THE STOCKHOLDERS:
Please take notice that the Annual Meeting of the Stockholders of The
Lamaur Corporation, a Delaware corporation (the "Company"), will be held on
November 2, 1998, at 10:00 a.m., local time, in the conference room at the
Company's principal offices located at One Lovell Avenue, Mill Valley,
California 94941, for the following purposes:
1. To elect five directors to hold office for a one year term and
until their respective successors are elected and qualified;
2. To ratify a reduction in the number of members of the board of
directors from seven to five;
3. To consider and vote upon a proposal to approve and adopt a
potential sale of certain assets relating to the Company's manufacturing
operations in consideration for the highest bid and on such other terms as
the Company negotiates as described under "Proposal 3: Approval and
Adoption of Sale Transaction" in the accompanying Proxy Statement.
4. To consider, approve and ratify the appointment of Deloitte &
Touche LLP as the Company's independent public auditors for the year ending
December 31, 1998; and
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Stockholders of record at the close of business on September 10, 1998 are
entitled to notice of, and to vote at, this meeting and any adjournment or
postponement thereof. For ten days prior to the meeting, a complete list of
stockholders entitled to vote at the meeting will be available for examination
by any stockholder, for any purpose relating to the meeting, during ordinary
business hours at the Company's principal offices located at One Lovell Avenue,
Mill Valley, California 94941.
By order of the Board of Directors,
/s/ John D. Hellmann
-----------------------
JOHN D. HELLMANN
Secretary
Mill Valley, California
October 2, 1998
IMPORTANT: PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD
IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE TO ASSURE THAT YOUR SHARES WILL BE
REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY CHOOSE TO VOTE IN
PERSON EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY CARD.
<PAGE> 4
THE LAMAUR CORPORATION
------------------------
PROXY STATEMENT
FOR 1998 ANNUAL MEETING OF STOCKHOLDERS
The accompanying proxy is solicited by the Board of Directors (the "Board")
of The Lamaur Corporation, a Delaware corporation ("Lamaur" or the "Company"),
for use at its annual meeting of stockholders to be held on November 2, 1998, or
any adjournment or postponement thereof at 10:00 a.m., local time, in the
conference room at the Company's principal offices located at One Lovell Avenue,
Mill Valley, California 94941, for the purposes set forth in the accompanying
Notice of Annual Meeting of Stockholders. The date of this Proxy Statement is
October 2, 1998, the approximate date on which this Proxy Statement and the
accompanying form of proxy were first sent or given to stockholders.
SOLICITATION AND VOTING OF PROXIES
The cost of soliciting proxies will be borne by the Company. In addition to
soliciting stockholders by mail through its employees, the Company will request
banks and brokers, and other custodians, nominees and fiduciaries, to solicit
their customers who hold stock of the Company registered in the names of such
persons and will reimburse them for their reasonable, out-of-pocket costs. The
Company may use the services of its officers, directors and others to solicit
proxies, personally or by telephone, without additional compensation.
On September 10, 1998 (the "Record Date"), the Company had outstanding
5,894,468 shares of its common stock (the "Common Stock"), all of which are
entitled to vote with respect to all matters to be acted upon at the annual
meeting. Each stockholder of record as of that date is entitled to one vote for
each share of Common Stock held by such stockholder. Also, as of the Record
Date, the Company had outstanding 1,000,000 shares of Series A Preferred Stock
and 763,500 shares of Series B Preferred Stock (the Series A Preferred Stock and
the Series B Preferred Stock together, the "Preferred Stock"). The Preferred
Stock is convertible into an aggregate of 1,163,910 shares of Common Stock at a
rate of 0.66 shares of Common Stock per share of Preferred Stock held. Each
holder of Preferred Stock is entitled to one vote for each share of Common Stock
into which such Preferred Stock held by such stockholder is convertible.
The Company's Bylaws provide that a majority of all of the shares of the
stock entitled to vote, whether present in person or represented by proxy, shall
constitute a quorum for the transaction of business at the meeting. The
Preferred Stock votes with the Common Stock on an as-converted basis on all
matters, except as otherwise required by Delaware law or by the Company's
Certificate of Incorporation. Votes for and against, abstentions and "broker
non-votes" will each be counted as present for purposes of determining the
presence of a quorum.
All shares represented by a proxy will be voted, and where a stockholder
specifies by means of his or her proxy a choice with respect to any matter to be
acted upon, the shares will be voted in accordance with the specification so
made. If no choice is indicated on the proxy, the shares will be voted in favor
of the proposal. A stockholder giving a proxy has the power to revoke his or her
proxy at any time before the time it is exercised by delivering to the Secretary
of the Company a written instrument revoking the proxy or a duly executed proxy
with a later date, or by attending the meeting and voting in person.
INFORMATION ABOUT LAMAUR
This Proxy Statement includes forward-looking statements regarding
expectations as to the purchase price that might be received for the
Manufacturing Assets (as defined below), the plans for continuation of a retail
brands business, and other statements which include words such as "believes,"
"expects," "anticipates" or words of similar effect. While these statements
reflect management's reasonable judgment, numerous factors may cause actual
results to vary materially from those expressed in such statements, including
those factors set forth under the caption "Certain Factors" below and elsewhere
in this Proxy Statement. Actual
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results are particularly dependent upon management's ability to (i) identify and
conclude negotiations for the sale of the Manufacturing Assets with an
appropriate buyer, (ii) reorganize operations whether or not such a sale occurs
and (iii) continue to work with creditors until they are being timely paid.
RECENT EVENTS
In March 1998, the Company retained the investment banking firm of McCabe,
Mintz & Company, L.L.C. ("MMC") to explore strategic alternatives to maximize
stockholder value. In 1998, the Company reported earnings of $616,000 in the
first quarter, and losses of $1,710,000 in the second quarter. Expected revenues
for future periods are not expected to generate sufficient cash to meet the
Company's current operating needs and to satisfy its extended obligations. To
address the cash requirements, MMC, in conjunction with management, has
identified numerous potential acquirers of some or all of the assets of the
Company and has sought bids or other proposals from such parties. The Board has
been meeting on a regular basis to review the status of these proposals and to
consider various alternatives available to the Company. In June, based upon such
review, management and the Board determined that a sale of the Salon brands and
certain related assets was most likely to reach a definitive agreement in the
near future. Accordingly, the Board approved the sale of the brands, inventory
and certain intellectual property to the third party making the most favorable
bid, subject to certain minimum bid requirements. On July 15, 1998 the Company
entered into a definitive agreement with Shiseido Co. Ltd.'s subsidiary, Zotos
International, Inc. ("Zotos"), to sell certain assets of the Company's
Professional Salon Brands, including inventory and other related assets, for a
purchase price of $11,000,000, subject to adjustment based on inventory levels.
The transaction closed on July 31, 1998. The proceeds of the sale were used to
pay down a portion of the Company's bank debt, reduce trade payables and for
working capital. However, even after such sale, the Company needs to generate
additional cash through one or more transactions to meet its obligations. The
Company believes a sale of its manufacturing assets is the most effective means
to generate such cash, and such a sale is discussed in Proposal 3.
The Company currently intends to continue its retail business, which
generated approximately $67 million in revenue in the last twelve months from
branded products to traditional mass, food and drug retailers. The Company's
WILLOW LAKE(R) brand of shampoos, conditioners and styling aids, launched in
1997, presently accounts for approximately fifty percent of Retail division
revenues. The Company believes that the WILLOW LAKE(R) product line, properly
supported, can provide the foundation upon which additional products can be
added such as bath and body or skin care products. In addition to revenues from
the Company's other retail brands, future growth may come from acquisition or
licensing of other products in the niche segment of the personal care market.
The Company also is considering plans to sell or continue its manufacturing
operations on a contract basis.
Management believes that the Company may be able to generate more cash to
pay creditors through ongoing, reorganized retail operations than through a sale
of its retail assets, and that the sale of such assets would not be sufficient
to effect any distribution of proceeds to stockholders. Further, management
believes that there is an opportunity for a future return to stockholders
through such reorganized operations. However, the Company with MMC is actively
exploring additional asset sales and will consider offers to acquire all of the
Company's assets or outstanding shares of the Company's stock through a merger,
acquisition or tender offer. Based on information currently available, the
Company believes that a sale of additional assets is likely, and it is currently
anticipated that the Company's manufacturing facility and related assets in
Fridley, Minnesota may be sold. An important factor in any decision to pursue
this plan is the price that the Company might receive for its manufacturing
business and/or its Retail division assets.
No assurance can be given that management and the Board will continue to
carry out its plan for reorganized operations or that if the plan is pursued
that the Company will be successful in carrying out this plan or that the
Company will not determine based upon future offers that it is in the best
interests of the Company, its creditors and its stockholders to sell the Retail
division assets as well as the manufacturing business.
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If the Company determines that a sale of all of its assets (i.e., both the
plant and Retail division assets) would be in the best interests of the Company,
its creditors and its stockholders, it is anticipated that a plan of liquidation
would be proposed to stockholders. The preferred stockholder is entitled in a
liquidation to a preference of approximately $15 million before any payment may
be made to common stockholders. Based upon discussions to date, there will be
less than $15 million available for distribution to the preferred stockholder if
all of the assets are sold currently. Therefore, unless the preferred
stockholder waives this right or converts to common, no distribution would be
available to common stockholders. The availability of funds for distribution to
common stockholders is one of the matters that the Board will consider in
determining whether it is in the interests of the Company, its creditors and/or
its stockholders to continue the operation of the business.
No assurance can be given that any such asset sales will occur at all or
will occur on terms favorable to the Company. The Company finances its ongoing
operations through its credit agreement with Norwest Business Credit, its
primary lender ("Norwest"), and by extended terms from its creditors. The
Company is currently in compliance with all financial covenants in its
agreements with Norwest, but no assurance can be given that the Company will
continue to be in compliance with such covenants. Norwest holds a security
interest in substantially all of the Company's assets, including cash.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership as of July 31, 1998 of the Company's Common Stock by (i) each
director, (ii) each of the executive officers listed in the Summary Compensation
Table below, (iii) all executive officers and directors as a group and (iv) each
person known by the Company to be the beneficial owner of five percent or more
of the outstanding Common Stock. The percentage owned is calculated based upon
5,894,468 shares of Common Stock outstanding as of July 31, 1998. Unless
otherwise indicated, each of the stockholders has sole voting investment power
with respect to the shares beneficially owned, subject to applicable community
property laws.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME OF BENEFICIAL OWNER OWNERSHIP OWNED
------------------------ ---------- ----------
<S> <C> <C>
Don G. Hoff(1).............................................. 2,044,725 33.4%
One Lovell Avenue, Mill Valley, CA 94941
Perry D. Hoff(2)............................................ 1,841,485 31.1%
East 5058 Grapeview Loop, Allyn, WA 98524
Intertec Holdings, L.P.(3).................................. 1,810,425 30.7%
East 5058 Grapeview Loop, Allyn, WA 98524
DowBrands Inc.(4)........................................... 1,163,910 16.5%
9550 Zionsville Road, Indianapolis, IN 46268
Parsow Partnership, Ltd.(5)................................. 543,200 9.2%
P.O. Box 0449, Elkhorn, NE 68022
Futurtec, L.P.(6)........................................... 419,842 7.1%
111 Great Neck Road, Suite 301, Great Neck, NY 11021
Kennedy Capital Management, Inc............................. 340,350 5.8%
10829 Olive Boulevard, St. Louis, MO 63141
Dominic J. LaRosa(7)........................................ 272,733 4.5%
Gerald Eppner(8)............................................ 93,100 1.6%
Ronald P. Williams(9)....................................... 60,420 1.0%
William M. Boswell(10)...................................... 65,634 1.1%
Michele L. Redmon(11)....................................... 41,507 *
Joseph F. Stiley, III(12)................................... 37,200 *
Paul Dean(13)............................................... 23,900 *
Harold M. Copperman(13)..................................... 14,900 *
All executive officers and directors of the Company as a
group
(14 persons)(14).......................................... 2,898,706 43.5%
</TABLE>
- ---------------
* Represents less than one percent (1%)
(1) Includes 234,300 shares that may be acquired by Mr. Hoff upon the exercise
of options exercisable within 60 days of July 31, 1998. Includes 1,810,425
shares held by Intertec Holdings, L.P. See footnote 3. Mr. Hoff is the
father of Perry D. Hoff.
(2) Includes 10,560 shares held directly by Mr. Perry Hoff and 20,500 shares
that may be acquired by Perry D. Hoff upon the exercise of options
exercisable within 60 days of July 31, 1998. Includes 1,810,425 shares held
by Intertec Holdings, L.P. See footnote 3. Mr. Perry Hoff is the son of Don
G. Hoff. See footnote 1.
(3) 1,810,425 shares are by Intertec Holdings, L.P., an investment partnership
whose general partner is Intertec Holdings, Inc., a corporation of which
Don G. Hoff is a director, Perry D. Hoff is president and a director and
other members of the Hoffs' immediate family are the remaining officers and
directors and whose sole limited partner is Intertec Ltd., a limited
partnership in which Don G. Hoff, together with his wife, holds a 25%
limited partner interest, Perry D. Hoff holds a 25% limited partner
interest and members of the Hoffs' immediate family own the remainder of
limited partnership interest, and
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whose general partner is a corporation of which Don G. Hoff is a director, Perry
D. Hoff is an officer and a director and other members of the Hoffs' immediate
family are the remaining officers and directors.
(4) Consists of 1,163,910 shares that may be acquired upon the conversion of
Series A and Series B Convertible Preferred Stock. DowBrands Inc. owns 100%
of the outstanding Series A and Series B Preferred Stock.
(5) Includes 130,000 shares held by Elkhorn Partners Limited Partnership, an
affiliate of Parsow Partnership, Ltd., as to which Parsow Partnership, Ltd.
disclaims beneficial ownership.
(6) Futurtec Capital Corp., the general partner of Futurtec, L.P., exercises
sole voting and investment power over the shares held by Futurtec, L.P. Ido
Klear is the sole stockholder of Futurtec Capital Corp.
(7) Includes 20,000 shares held by members of Mr. LaRosa's immediate family, as
to which Mr. LaRosa disclaims beneficial ownership. Includes 166,000 shares
that may be acquired upon the exercise of options exercisable on or after
September 30, 1998. See "Compensation of Directors and Executive
Officers -- Compensation Committee Report -- Repricing of Options."
(8) Includes 20,500 shares that may be acquired upon the exercise of options
exercisable within 60 days of July 31, 1998.
(9) Includes 54,950 shares that may be acquired upon the exercise of options
and warrants exercisable on or after September 30, 1998. See "Compensation
of Directors and Executive Officers -- Compensation Committee
Report -- Repricing of Options."
(10) Includes 59,600 shares that may be acquired upon the exercise of options
and warrants exercisable within 60 days of July 31, 1998.
(11) Includes 36,500 shares that may be acquired upon the exercise of options
and warrants on or after September 30, 1998. See "Compensation of Directors
and Executive Officers -- Compensation Committee Report -- Repricing of
Options."
(12) Includes 7,300 shares that may be acquired upon the exercise of options
exercisable within 60 days of July 31, 1998.
(13) Includes 13,900 shares that may be acquired upon the exercise of options
exercisable within 60 days of July 31, 1998.
(14) Includes 769,475 shares that may be acquired upon the exercise of options
and warrants exercisable within 60 days of July 31, 1998. 293,050 of these
options are not exercisable until September 30, 1998. See "Compensation of
Directors and Executive Officers -- Compensation Committee Report --
Repricing of Options."
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DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Set forth below for all directors are the names, ages, positions with the
Company and period of service. The term of office of each person elected as a
director will continue until the next annual meeting of stockholders or until a
successor has been elected and qualified or until resignation or removal.
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE POSITION(S)
---------------- --- -----------
<S> <C> <C>
Don G. Hoff 62 Chairman of the Board and Chief
Executive Officer
Dominic J. LaRosa 55 President and CEO -- Lamaur
Division and Director
Harold M. Copperman(1)(4)(6) 64 Director
Perry D. Hoff(3) 39 Director
Joseph F. Stiley, III(2)(5) 59 Director
</TABLE>
- ---------------
(1) Chairman of the Audit Committee.
(2) Member of the Audit Committee.
(3) Chairman of the Nominating Committee.
(4) Member of the Nominating Committee.
(5) Chairman of the Compensation Committee.
(6) Member of the Compensation Committee.
The Employment Agreement between the Company and Don G. Hoff (the "Hoff
Employment Agreement") provides that Mr. Hoff will continue to be nominated for
election as a director of the Company at each annual meeting of stockholders
through 1998 and be appointed as Chairman of the Board for so long as he serves
as the Company's Chief Executive Officer. See "Employment Agreements and Change
of Control Agreements -- Hoff Employment Agreement."
Don G. Hoff is the founder of the Company and has served as its Chairman of
the Board and Chief Executive Officer since its formation in 1993. Mr. Hoff has
also served as Chairman and Chief Executive Officer of Intertec Holdings, Inc.,
a private investment company specializing in technology, since 1975. Mr. Hoff
serves as a Director for a number of mutual funds with major financial
institutions. He is currently Chairman of Baring's Asia Pacific Fund and has
been a Director of the fund since 1991. He also serves as a Director of a
cluster of Prudential Mutual Funds, including since 1990 the Prudential Short
Term Global Income Fund. He also has been a Director of Baring's Greater China
Fund since 1992. Mr. Hoff spends the majority of his time on the business of the
Company.
Dominic J. LaRosa joined the Company as a director in September 1995, and
has been President and CEO of the Lamaur Division since November 1995. From 1993
to 1995, Mr. LaRosa was the founding President and Chief Executive Officer of
J.B. Williams Company, Inc., a personal care products company. From 1982 to
1992, he held senior management positions at Colgate Palmolive/The Mennen
Company, including President and CEO of the Aromatic Industries Division
(1989 - 1992), General Manager of the Personal Care Division (1987 - 1989) and
Vice President, Marketing (1982 - 1987).
Harold M. Copperman has been a Director of the Company since September
1995. Mr. Copperman is Vice Chairman of Impulse Telecommunications Corporation
("ITC"), a position he has held since 1990. ITC provides strategic management
and engineering consulting resources to enterprises and investors. Mr. Copperman
has held chief executive officer and other senior management, business
development and marketing positions with large multi-national organizations and
entrepreneurial start-up ventures.
Perry D. Hoff has been a Director of the Company since April 1993. He has
been the President and a Director of Intertec Holdings, Inc., since 1990, and a
Director and Vice President of Operations of Innovative
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<PAGE> 10
Capital Management, Inc., a private investment company affiliated with Intertec
Holdings, L.P., a major stockholder of the Company, since 1980. Perry D. Hoff is
the son of Don G. Hoff.
Joseph F. Stiley, III has been a Director of the Company since March 1994.
From 1993 to 1994, Mr. Stiley was Vice President of the Company, responsible for
research and development. From December 1987 to 1993, Mr. Stiley was a
consultant to high technology companies, including Intertec Ltd. Mr. Stiley has
consulted to the governments of Canada and France, European and domestic
corporations, and has participated in the development of international standards
for communications.
Meetings of the Board of Directors. The Board of Directors of the Company
held a total of seven meetings during the year ended December 31, 1997. The
Audit Committee held four meetings and the Compensation Committee held four
meetings during the year ended December 31, 1997. Each director attended at
least 75% of Board and, where applicable, committee meetings held in 1997.
The Audit Committee, established in April 1993, consisted of Messrs. Eppner
(Chairman), Dean and Copperman until the resignation of Messrs. Eppner and Dean
on July 27, 1998. On August 11, 1998, the Board elected to change the
composition of the Audit Committee. Currently, Messrs. Copperman (Chairman) and
Stiley serve on the Audit Committee. The functions of the Audit Committee are to
recommend annually to the Board of Directors the appointment of the independent
public accountants of the Company, review the scope of their annual audit and
other services the accountants are asked to perform, review their report on the
Company's financial statements following the audit, review the accounting and
financial policies of the Company and review management's procedures and
policies with respect to the Company's internal accounting controls.
The Compensation Committee, also established in April 1993, currently
consists of Messrs. Stiley (Chairman) and Copperman. Mr. Dean was also a member
until his resignation. The functions of the Compensation Committee are to review
and approve salaries, benefits and bonuses for all executive officers of the
Company, and to review and recommend to the Board of Directors matters relating
to employee compensation and employee benefit plans. The Compensation Committee
also administers the Company's stock option plans.
The Nominating Committee, established in February 1997, currently consists
of Messrs. Perry Hoff (Chairman) and Copperman. Mr. Dean was also a member until
his resignation. The purpose of the Nominating Committee is to develop criteria
for nominating new members of the Board and to identify potential candidates for
such nomination. The Nominating Committee will consider stockholder
recommendations for new directors with the potential nominee's consent. However,
the final determination of whether a candidate will be nominated to become a
member of the Board is reserved for the Nominating Committee. Any suggestions
may be submitted in writing, attention "Nominating Committee of the Board of
Directors," at the Company's headquarters.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
License Agreement. In May 1993, the Company acquired from Intertec Ltd., a
Delaware limited partnership ("Intertec Ltd."), for a 30-year period, the
exclusive worldwide rights to use all technology owned by Intertec Ltd. relating
to cosmetic hair care applications. The 30-year exclusive license agreement (the
"License") gives the Company the right to develop, manufacture and sell products
for cosmetic hair care applications based on the technology. Intertec Ltd.,
which is entirely owned by Mr. Don Hoff and members of his immediate family, is
the sole limited partner in Intertec Holdings, L.P., the Company's principal
shareholder. The License is non-assignable, but the Company may sublicense the
rights granted to it provided the sublicense includes certain protective
provisions. The Company issued, as consideration for the grant of the license, a
promissory note in the principal amount of $1.0 million, and agreed to pay a
royalty as described below. The Company's promissory note, as amended effective
as of May 1993 (the "Intertec Note"), is payable to Intertec Holdings, L.P., as
agent for Intertec Ltd., in four equal annual installments of $250,000,
commencing May 29, 1997. The Intertec Note accrues interest in arrears at 5.5%
per annum, payable with each installment of principal. The Company has also
agreed to pay certain legal expenses, which have been
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incurred by Intertec Ltd. in connection with preparing and prosecuting the
patent application for the patent covering the technology. The Company paid
$5,064 of such expense during 1997.
The Company will pay a royalty to Intertec Ltd. equal to (i) 1.0% of the
Company's proceeds from any direct sales made by the Company of products,
instruments or components using, or derived from, the technology, and (ii) 1.0%
of the "revenue base" of the Company's sub-licensees. The "revenue base" is the
proceeds received by the sub-licensees for their sales of products using the
technology. This royalty declines in steps as the revenue base increases,
ultimately declining to 0.4% when cumulative sales from all products using the
technology reach $10.0 billion. The Company has no sub-licenses as of the date
of this Proxy Statement, and there can be no assurance it will enter into any
sub-license on terms favorable to the Company. Upon expiration in 2012 of the
patent held by Intertec Ltd., the Company will be unable to deny competitors
access to the underlying technology.
The terms of the license agreement were not established by arm's length
negotiations or independent appraisal.
Common Stock Purchase Agreement. In March 1996, the Company and Intertec
Holdings, L.P. entered into a stock purchase agreement pursuant to which
Intertec Holdings, L.P. agreed to purchase from the Company, and the Company
agreed to sell to Intertec Holdings, L.P., shares of Common Stock at $8.00 per
share. Intertec Holdings, L.P. is required to purchase an aggregate of 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 customary
conditions, to purchase and pay for the shares in four equal installments
commencing on May 29, 1997. The deferred purchase price under the stock purchase
agreement accrues interest from and after the closing of the Company's initial
public offering on May 22, 1996 at 5.5% per annum, payable with each
installment.
On May 29, 1997, Intertec Holdings, L.P. was issued 36,526 shares of the
Company's Common Stock in the first installment. On May 29, 1997, the Company
made the first scheduled payment on the Intertec Note.
Intertec Holdings, L.P. had the option to accelerate one or more purchases
under the stock purchase agreement on 30 days prior notice to the Company. The
Company had the option, at any time or from time to time, to terminate Intertec
Holdings, L.P.'s purchase rights with respect to one or more of the
installments, on 10 days prior notice to Intertec Holdings, L.P. On February 16,
1998, Intertec Holdings, L.P. elected to accelerate all purchases under the
stock purchase agreement, and on March 18, 1998 Intertec Holdings L.P. was
issued 109,581 shares of the Company's Common Stock in consideration of which
the balance of the Intertec Note was cancelled.
Facilities and Equipment. Pursuant to a lease dated October 1, 1996 (the
"Sublease"), the Company subleased from Intertec, a division of Innovative
Capital Management Inc. ("Intertec"), an affiliate of Messrs. Don Hoff and Perry
Hoff, directors of the Company, for a 36-month term expiring in September 1999,
office space (6,008 square feet) in Mill Valley, CA, together with most of the
furniture and office equipment at that location. The space was leased for a rent
of $9,012 per month. Under the terms of the Sublease, the Company is responsible
for property taxes, insurance and maintenance. The furniture and office
equipment are leased for $1,774 per month. Total payments for the office space
to Intertec in 1997 were $128,801, comprised of $102,144 in building rent,
$6,882 in equipment rent, and $19,775 in taxes. Based upon research conducted by
the Company, the Intertec lease payments are 25% to 50% below market rates.
Intertec uses a small office at the facility and has provided and received
office services from time to time. In addition, at no charge to the Company,
Intertec manages the headquarters office and has been responsible for Lamaur's
human resources functions there. The Company believes the value of such office
space is insignificant but that the provision of such services by Intertec
without charge has resulted in significant cost savings to the Company. Except
for the foregoing, Intertec and Company expenses incurred at the facility are
fully segregated and separately accounted for.
On December 4, 1997, the Company notified Intertec that it would like to
terminate the Sublease with respect to 1,784 square feet of the space, and as of
March 31, 1998 the Sublease was amended to terminate the sublease of that space
and to provide that the Company shall have no further obligations to Intertec
with
8
<PAGE> 12
respect to the terminated space. Intertec agreed to relieve the Company of this
obligation without any consideration to Intertec.
Travel Agent Services. The Company uses as a travel agent Diana Weeck, who
is the sister of Mr. Don Hoff. In addition to standard commissions, the Company
paid fees to Mrs. Weeck of $1,996 during 1997. Management believes the fees
charged by Mrs. Weeck are consistent with charges normally charged in the
industry, and that her services result in significant cost savings to the
Company.
Manufacturing Agreement with DowBrands. In connection with the acquisition
by the Company of the Personal Care Division of DowBrands in November 1995, the
Company and DowBrands entered into a two-year agreement (with two additional
one-year extensions at DowBrand's election) pursuant to which the Company
continued to serve as DowBrands sole supplier of certain household cleaning
products, subject to the Company maintaining competitive pricing and delivery
schedules. Pursuant to the agreement, DowBrands agreed to accept $3.0 million of
credits to be applied towards purchases of finished products in eight equal
quarterly installments of $375,000 commencing February 1996. During 1997, net
sales to DowBrands were $16.4 million. On November 15, 1997, the Manufacturing
Agreement expired without extension by Dow.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the
"SEC"). Such officers, directors and ten percent stockholders are also required
by SEC rules to furnish the Company with copies of all Section 16(a) reports
they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that Forms 5 have been
filed for such persons as required, the Company believes that, during the year
ended December 31, 1997, all reporting persons complied with Section 16(a)
filing requirements applicable to them, except as follows: Mr. LaRosa and
Michael G. Piff filed Form 5s for the year ended December 31, 1997 approximately
one week late, for two and three transactions, respectively.
9
<PAGE> 13
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth, for the three years ended December 31,
1997, certain compensation information with respect to the Company's Chief
Executive Officer and each of the four most highly compensated executive
officers other than the Chief Executive Officer who were serving as executive
officers as of December 31, 1997 (collectively, the "Named Executive Officers"),
based upon salary and bonus earned by such executive officers and individuals in
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1)(2) OPTIONS(3) (4)
--------------------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Don G. Hoff..................... 1997 $278,253 -- $3,229 -- --
Chairman and Chief Executive 1996 250,000 $195,000 2,808 -- --
Officer 1995 31,730 -- -- -- --
Dominic J. LaRosa............... 1997 246,086 -- 37,765 232,000 --
President and CEO -- Lamaur 1996 200,000 145,000 33,191 100,000 50,000
Division 1995 15,384 -- 4,371 132,000 52,750
William M. Boswell.............. 1997 177,796 -- 1,170 59,600 --
Vice President, Sales, Retail 1996 144,371 53,000 12,715 59,600 30,000
Group of Lamaur Division 1995 11,538 -- 4,371 39,600 19,750
Ronald P. Williams.............. 1997 151,005 -- 2,105 69,800 --
Executive Vice President 1996 102,540 36,000 55,935 69,800 15,000
Lamaur Division 1995 8,402 -- 7,796 19,800 16,275
Michele L. Redmon............... 1997 138,111 -- 153 39,800 --
Vice President, Marketing, 1996 119,165 50,000 4,304 39,800 15,000
Retail Group of Lamaur 1995 9,230 -- 7,840 19,800 13,875
Division
</TABLE>
- ---------------
(1) For 1997, includes (i) $36,415 of reimbursed expenses for Mr. LaRosa
including $15,140 for rental of an apartment, and $12,806 cash to assist in
the payment of taxes due on the amount of such reimbursed expenses; (ii)
$1,500 for Mr. Williams for relocation expenses. Also includes imputed
income in 1997 resulting from life insurance premiums in the amount of
$3,229 for Mr. Hoff, $1,350 for Mr. LaRosa, $1,170 for Mr. Boswell, $605 for
Mr. Williams and $153 for Ms. Redmon.
(2) For 1996, includes (i) $31,700 for Mr. LaRosa for relocation expenses
includes $11,555 cash to assist in the payment of taxes, $12,139 for Mr.
Boswell includes $2,373 cash to assist in the payment of taxes, $55,589 for
Mr. Williams includes $17,543 cash to assist in the payment of taxes, and
$4,161 for Ms. Redmon includes $1,213 cash to assist in the payment of
taxes, (ii) imputed income in 1996 resulting from life insurance premiums in
the amount of $2,808 for Mr. Hoff, $864 for Mr. LaRosa, $576 for Mr.
Boswell, $346 for Mr. Williams and $143 for Ms. Redmon and (iii) vehicle
allowance of $627 paid to Mr. LaRosa in 1996.
(3) Represents stock options granted in the years shown with exercise prices
equal to or not less than fair market value on the date of grant. No SARs
were granted in such years. For 1997, includes options granted with the
cancellation of a similar number of options in connection with the Company's
repricing program. Options repriced for Messrs. Hoff, LaRosa, Boswell,
Williams and Redmon were 0, 232,000, 59,600, 69,800 and 39,800,
respectively.
(4) Represents non-cash credits that can be used to exercise options.
10
<PAGE> 14
OPTION GRANTS IN LAST YEAR
The following table sets forth information with respect to stock options
granted to the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM(2)
OPTIONS IN FISCAL EXERCISE OR EXPIRATION -----------------------
NAME GRANTED(1) YEAR BASE PRICE DATE 5% 10%
---- ---------- ----------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Don G. Hoff..................... -- -- -- --
Dominic J. LaRosa............... 132,000 20.1 $2.25 12/31/02 $84,876 $188,496
100,000 15.2 $2.25 8/28/06 $64,300 $142,800
William M. Boswell.............. 39,600 6.0 $2.25 8/28/06 $47,872 $117,362
20,000 3.0 $2.25 8/28/06 $24,178 $ 59,274
Ronald P. Williams.............. 20,000 3.0 $2.25 8/28/06 $24,178 $ 59,274
19,800 3.0 $2.25 8/28/06 $23,936 $ 58,681
30,000 4.6 $2.25 12/03/06 $37,616 $ 92,882
Michele L. Redmon............... 20,000 3.0 $2.25 8/28/06 $24,178 $ 59,274
19,800 3.0 $2.25 8/28/06 $23,936 $ 58,681
</TABLE>
- ---------------
(1) All options were granted on November 5, 1997 in connection with the
Company's option repricing which involved cancellation of a similar number
of options at higher exercise prices ranging from $ 3.03 to $4.25. These
options have the same vesting schedule as the cancelled options. See
"Compensation of Directors and Executive Officers -- Compensation Committee
Report -- Repricing of Options."
(2) Potential realizable value is based on the assumption that the price of the
Common Stock appreciates at the rate shown, compounded annually, from the
date of grant until the end of the option term. The values are calculated in
accordance with rules promulgated by the Securities and Exchange Commission
and do not reflect the Company's estimate of future stock price
appreciation.
AGGREGATE OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding options to
purchase shares of the Company's Common Stock that were held by the Named
Executive Officers during 1997. No such options were exercised during 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997
------------------------------ ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Don G. Hoff.............. 234,300 -- $0 $0
Dominic J. LaRosa........ 133,000 99,000 0 0
William M. Boswell....... 36,500 23,100 0 0
Ronald P. Williams....... 31,850 37,950 0 0
Michele L. Redmon........ 21,650 18,150 0 0
</TABLE>
COMPENSATION OF DIRECTORS
During 1997, the Company's non-employee Directors were paid $1,000 per
quarter (plus reasonable out-of-pocket expenses), plus $500 per day for each
meeting beyond the four regularly scheduled meetings. The Directors held three
telephonic Board Meetings during 1997 in addition to the four regularly
scheduled meetings. The Directors received no additional compensation for
attendance at these meetings. In addition, non-employee Directors are entitled
to receive options to purchase shares of Common Stock under the
11
<PAGE> 15
Company's Stock Option Plan for Non-Employee Directors and Advisory Board
Members (the "Outside Director Option Plan").
On May 8, 1997, each of the non-employee Directors received an option to
purchase 3,300 shares under the Outside Director Option Plan, which had an
exercise price of $2.88 per share. These options vest one year from the date of
grant.
NON-CASH CREDITS
Prior to 1997 the Company granted non-cash credits ("Non-Cash Credits") to
its executive officers and other employees and consultants which can be used by
the recipient to exercise stock options. As of December 31, 1997 Non-Cash
Credits held by Messrs. Hoff, LaRosa, Boswell, Williams and Ms. Redmon were as
follows: $355,000, $102,750, $49,750, $31,275 and $28,875, respectively. As of
December 31, 1997 total Non-Cash Credits outstanding were $692,213.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board currently consists of Joseph F.
Stiley, III (Chairman) and Harold M. Copperman. None of these individuals were
at any time during 1997, or at any other time, an officer or employee of the
Company. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Board or the Compensation Committee.
COMPENSATION COMMITTEE REPORT
The following is the report of the Compensation Committee of the Board
describing compensation policies and rationales applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the year ended December 31, 1997. The information contained in the
performance graphs shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.
Compensation Philosophy. The philosophy of the Company's Compensation
Committee regarding executive compensation is to attract and retain highly
talented executives and to motivate them to high levels of performance,
recognizing the different impact that various executives have on the achievement
of corporate goals. To achieve these objectives the Company pays executives on a
total compensation approach that includes varying combinations of base salary,
annual bonus (dependent on corporate and individual performance), and stock
options. After evaluating management's performance, the Compensation Committee
approves compensation and pay levels. Stock option grants to executive officers
are approved by the Compensation Committee.
Base Salary. Salaries for executive officers are reviewed annually, and are
adjusted based upon performance contribution, management recommendation and
market conditions.
Bonus. The Compensation Committee determines the level of bonus
compensation for the entire corporate bonus program based upon corporate and
senior management performance, which are judged based on corporate earnings.
Bonuses within that pool are then allocated.
Stock. The Company believes that stock options granted to key employees,
including executive officers, provide such persons with compensation based on
overall Company performance as reflected by the stock price, create a valuable
retention device through three-year vesting schedules and help align employees'
and stockholders' interests. Stock options are typically granted at the time of
hire, at the time of promotion or at the time of achievement of a significant
corporate objective. Individual stock option award levels are determined
primarily by a matrix that allocates the available shares based on position
within the Company, with discretionary adjustments based on subjective
performance factors.
12
<PAGE> 16
Compensation of Chief Executive Officer. The compensation of Don G. Hoff in
1997 was approved by the Compensation Committee. The Compensation Committee
determined the Chief Executive Officer's compensation after considering the same
factors used to determine the compensation of other executive officers. For
1997, the Compensation Committee approved an increase in Mr. Hoff's base salary
from $250,000 to $280,000 per annum.
Repricing of Options. The Compensation Committee determined that the
purposes of the Company's stock option plan were not being adequately achieved
with respect to those employees holding options that were exercisable above
current market value and that it was essential to the best interest of the
Company and the Company's stockholders that the Company retain and motivate such
employees. The Compensation Committee further determined that it would be in the
best interest of the Company and the Company's stockholders to provide such
optionees the opportunity to exchange their above-market value options for
options exercisable at current market value. On November 5, 1997, upon approval
by the Compensation Committee, the Company offered holders of 587,000
outstanding options under the 1996 Stock Incentive Plan, at exercise prices
ranging from $3.03 to $4.25, the opportunity to exchange such options for new
options with the same vesting schedule as the cancelled options, at an exercise
price of $2.25 per share, the fair market value of the Company's Common Stock. A
total of 587,000 options at a weighted average exercise price of $3.91 were
exchanged. Pursuant to the terms of the Company's repricing offer, in February
1998 these options would have reverted to the exercise price set forth in the
cancelled option. However, the Compensation Committee adopted an Option
Amendment Program whereby certain optionees were offered the opportunity to have
certain options remain priced at $2.25 per share. The amended options are not
exercisable until September 30, 1998. A total of 516,900 options at a weighted
average exercise price of $3.90 were exchanged pursuant to the Option Amendment
Program. If an optionee's employment with the Company is terminated for any
reason or no reason prior to September 30, 1998 the optionee is not entitled to
exercise any portion of the amended option. However if an optionee's employment
with the Company is terminated as a result of the death or disability of such
optionee then the amended option may be exercised in accordance with its terms.
Messrs. Hoff, LaRosa, Boswell, Williams, and Ms. Redmon included 0, 232,000,
59,600, 69,800 and 39,800 options in the Option Amendment Program.
The following table sets forth information with respect to the repricing of
those options held by executive officers of the Company at the time of the
repricing.
TEN-YEAR OPTION REPRICING
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL OPTION
NUMBER OF TERM IN YEARS
SECURITIES MARKET PRICE REMAINING AT
UNDERLYING OF STOCK AT EXERCISE PRICE NEW DATE OF
DATE OF OPTIONS TIME OF AT TIME OF EXERCISE REPRICING OR
NAME AND PRINCIPAL POSITION REPRICING REPRICED REPRICING REPRICING PRICE AMENDMENT
--------------------------- --------- ---------- ------------ -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Dominic J. LaRosa.................. 11/5/97 132,000 $2.25 $3.03 $2.25 5.2
President and CEO 11/5/97 100,000 $2.25 $4.25 $2.25 8.8
of Lamaur Division
William M. Boswell(1).............. 11/5/97 39,600 $2.25 $4.25 $2.25 8.8
Vice President, Sales -- 11/5/97 20,000 $2.25 $4.25 $2.25 8.8
Retail Group of Lamaur Division 8/28/96 39,600 $4.25 $6.06 $4.25 9.13
Richard T. Loda(2)................. 8/28/96 25,000 $4.25 $6.06 $4.25 9.54
Vice President, Science and
Technology
Michele L. Redmon.................. 11/5/97 19,800 $2.25 $4.25 $2.25 8.8
Vice President, Marketing -- 11/5/97 20,000 $2.25 $4.25 $2.25 8.8
Retail Group of Lamaur Division 8/28/96 19,800 $4.25 $6.06 $4.25 9.13
Ronald P. Williams................. 11/5/97 19,800 $2.25 $4.25 $2.25 8.8
Executive Vice President -- 11/5/97 20,000 $2.25 $4.25 $2.25 8.8
Lamaur Division 11/5/97 30,000 $2.25 $4.00 $2.25 9.1
8/28/96 19,800 $4.26 $6.06 $4.25 9.13
John D. Hellmann................... 11/5/97 16,500 $2.25 $3.03 $2.25 5.2
Vice President, 11/5/97 20,000 $2.25 $4.25 $2.25 8.8
Chief Financial Officer
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL OPTION
NUMBER OF TERM IN YEARS
SECURITIES MARKET PRICE REMAINING AT
UNDERLYING OF STOCK AT EXERCISE PRICE NEW DATE OF
DATE OF OPTIONS TIME OF AT TIME OF EXERCISE REPRICING OR
NAME AND PRINCIPAL POSITION REPRICING REPRICED REPRICING REPRICING PRICE AMENDMENT
--------------------------- --------- ---------- ------------ -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald E. Porter................... 11/5/97 20,000 $2.25 $4.25 $2.25 8.8
Vice President, Corporate
Development
Michael G. Piff.................... 11/5/97 8,000 $2.25 $4.00 $2.25 9.1
Vice President, Sales -- 11/5/97 1,400 $2.25 $4.25 $2.25 5.25
Retail Group, Lamaur Division 11/5/97 5,000 $2.25 $4.25 $2.25 5.25
Jay T. Olson....................... 11/5/97 9,900 $2.25 $4.25 $2.25 8.8
Vice President, Finance 11/5/97 15,000 $2.25 $4.25 $2.25 8.8
Lamaur Division 11/5/97 10,000 $2.25 $4.25 $2.25 9.1
John A. Anzur(2)................... 11/5/97 50,000 $2.25 $4.25 $2.25 8.8
Vice President, General Counsel 11/5/97 20,000 $2.25 $4.25 $2.25 8.8
John G. Hewson(2).................. 8/28/96 13,200 $4.25 $6.06 $4.25 9.17
Vice President, Business
Development Planning and
Administration -- Lamaur Division
Patrick T. Parenty(2).............. 8/28/96 13,200 $4.25 $6.06 $4.25 9.17
Vice President, Sales -- Lamaur
Salon Division
</TABLE>
- ---------------
(1) Such executive officer is no longer employed at the Company.
(2) Such executive officers are no longer employed at the Company and these
options expired without being exercised.
Summary. It is the opinion of the Compensation Committee that the executive
compensation policies and programs in effect for the Company's executive
officers provide an appropriate level of total remuneration that properly aligns
the Company's performance and interests of the Company's stockholders with
competitive and equitable executive compensation in a balanced and reasonable
manner.
COMPENSATION COMMITTEE
Harold M. Copperman
Joseph F. Stiley, III
14
<PAGE> 18
STOCK PERFORMANCE GRAPH
In accordance with Exchange Act regulations, the following performance
graph compares the cumulative total stockholder return on the Company's Common
Stock to the cumulative total return on the Nasdaq Stock Market and a selected
group of peer issuers over the same period. The peer issuers consist of DEP
Corporation, BeautiControl Cosmetics, Inc., DEL Laboratories, Inc., and The
Stephan Co. The graph assumes that the value of the investment in the Company's
Common Stock and each index was $100 on May 23, 1996 (the date of the Company's
initial public offering) and that all dividends were reinvested. The information
contained in the performance graphs shall not be deemed to be "soliciting
material" or to be "filed" with the Securities and Exchange Commission, nor
shall such information be incorporated by reference into any future filing under
the Securities Act of 1933, as amended, or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference into such
filing.
<TABLE>
<CAPTION>
THE LAMAUR
CORPORATION NASDAQ PEER GROUP
<S> <C> <C> <C>
May-96 100 100 100
Dec-96 51.56 103.75 125.77
Dec-97 18.75 127.34 154.41
</TABLE>
CONSULTING FEES TO JOSEPH F. STILEY, III AND HAROLD M. COPPERMAN
During 1997, Messrs. Copperman and Stiley performed Consulting Services for
the Company and were paid $13,000 and $13,500, respectively. These fees were in
addition to the fees paid to these individuals as directors.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Hoff Employment Agreement
In November 1995 the Board approved an employment agreement (the "Hoff
Employment Agreement") with Don G. Hoff, Chairman and Chief Executive Officer,
originally entered into as of June 1, 1994, and modified as of November 6, 1995,
and which took effect immediately following the closing of the Company's
acquisition of the Personal Care Division of DowBrands on November 16, 1995. The
Hoff Employment Agreement provides for Mr. Hoff's continued employment as Chief
Executive Officer of the Company for a term ending on December 31, 1998 (the
"term of employment"), reporting to the Board, and devoting so much of his
business time to the affairs of the Company as the Board requires. The Hoff
Employment Agreement provides that Mr. Hoff's salary as Chief Executive Officer
(which was increased from $250,000 to $280,000 per annum effective December 30,
1996) may not be decreased without his
15
<PAGE> 19
consent. In the event Mr. Hoff is unable to perform his duties as Chief
Executive Officer because of a disability, he shall be entitled to his full base
salary for a period of twelve months from the date of disability and 50% of such
base salary for twelve additional months. In addition, the Employment Agreement
provides that Mr. Hoff will continue to be nominated for election as a director
of the Company at each annual meeting of stockholders and be appointed as
Chairman of the Board so long as he serves as the Company's Chief Executive
Officer.
Under the Employment Agreement, Mr. Hoff shall be required during the term
of his employment and for one year thereafter not to engage in any activity
competitive with the Company or any of its subsidiaries or affiliates (except
that he may own up to 5% of the voting stock of any publicly held corporation).
Mr. Hoff is also required to assign to the Company all inventions, discoveries,
know-how or other proprietary technology relating to hair care which he
conceives, reduces to practice or otherwise creates during the term of
employment.
If, prior to the expiration of the term of employment, Mr. Hoff is
discharged by the Company with "cause" (defined in the Hoff Employment Agreement
to mean a discharge for any reason other than conviction of a felony, disability
or a discharge as a result of a material breach of any other provision of the
Hoff Employment Agreement by the Company which Mr. Hoff elects to treat as a
discharge with cause, including, but not limited to, certain events which would
constitute a "change of control" of the Company, as defined in the Hoff
Employment Agreement, without Mr. Hoff's written consent), Mr. Hoff will be
entitled to all benefits under the Hoff Employment Agreement as if he had
continued to be employed during the full term of employment. In addition, if
there is a discharge with cause (i) in lieu of further salary payments under the
Hoff Employment Agreement, Mr. Hoff will be entitled to receive within three
days after the date of discharge, an amount equal to the sum of the discounted
present value of the base salary to which he would have been entitled under the
Hoff Employment Agreement from the date of discharge through December 31, 1998
(assuming a 5% yearly increase in his base salary for each remaining calendar
year during the term of employment), and (ii) all options previously granted to
Mr. Hoff, to the extent not then vested or exercisable, shall become immediately
vested and exercisable in full.
As of December 29, 1997, Mr. Hoff had elected to defer 50% of his base
salary and was paid at the rate of $140,000 per annum. Effective April 30, 1998,
Mr. Hoff informed the Company he wished to return his salary to $280,000 per
annum retroactive to December 29, 1997.
Employee Severance Agreements
On May 6, 1997, the Board of Directors and the Compensation Committee
approved employee severance agreements (the "Severance Agreements") with ten
officers of the Company, including the following Named Executive Officers:
Dominic J. LaRosa, Ronald P. Williams, Michelle Redmon and William M. Boswell.
The Agreements were entered into as of July 1, 1997.
The Severance Agreements are intended to provide certain key employees with
certain protection from events that could occur in connection with certain
changes of control of the Company. In the event of an Involuntary Termination
(as defined in the Severance Agreements) of the employee within 24 months of
such Change of Control (as defined in the Severance Agreements), then as of the
date of such Involuntary Termination:
(i) the Company shall pay in cash on the date of the Involuntary
Termination one and one-half times the employee's most recent annual
full-time base compensation in effect prior to the Change of Control;
(ii) the Company shall provide medical, dental and basic life
insurance no less favorable than such insurance that was in effect for the
employee and his or her 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 18 months from the end of the month in which the Involuntary
Termination occurs or the date the employee becomes covered under another
insurance plan as a result of obtaining new employment;
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<PAGE> 20
(iii) the Company shall pay in cash to the employee an amount equal to
25% of 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 24 months from the
Involuntary Termination changes from the employee's principal place of
residence immediately prior to the Involuntary Termination and provided
further that the payment under this paragraph of the Agreement shall be
reduced by the amount of any moving expenses paid by a new employer of
employee;
(iv) at the option of the employee within six months from the
Involuntary Termination, the Employee may 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 the Internal
Revenue Service to avoid the imputation of income.
AUDIT COMMITTEE REVIEW
The Audit Committee of the Board is conducting a review of transactions
between the Company and its directors and officers and related parties of such
directors and officers. See "Proposal No. 2 -- Reduction in the Number of
Directors."
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<PAGE> 21
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NOMINEES
On July 14, 1998, the Board of Directors resolved to reduce the number of
directions of the Company from seven to five, and a board of five directors is
to be elected at the Annual Meeting of Stockholders. See "Proposal No.
2 -- Reduction in the Number of Directors." Unless otherwise instructed, the
proxy holders will vote the proxies received by them for the Company's nominees
named below. In the event that any nominee of the Company is unable or declines
to serve as a director at the time of the Annual Meeting of the Stockholders,
the proxies will be voted for any nominee who shall be designated by the present
Board of Directors to fill the vacancy. It is not expected that any nominee will
be unable or will decline to serve as a director. In the event that additional
persons are nominated for election as directors, the proxy holders intend to
vote all proxies received by them in such a manner as will assure the election
of as many of the nominees listed below as possible, and in such event the
specific nominees to be voted for will be determined by the proxy holders. The
term of office of each person elected as a director will continue until the next
Annual Meeting of the Stockholders or until a successor has been elected and
qualified or until resignation or removal.
The nominees are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) DIRECTOR SINCE
---- --- ----------- --------------
<S> <C> <C> <C>
Don G. Hoff.......... 62 Chairman of the Board and Chief 1993
Executive Officer
Dominic J. LaRosa.... 55 President and CEO -- Lamaur Division 1995
and Director
Harold M. Copperman.. 64 Director 1995
Perry D. Hoff........ 39 Director 1993
Joseph F. Stiley, 59 Director 1994
III................
</TABLE>
Please see "Directors and Executive Officers -- Directors" above for
information concerning the nominees. If elected, the nominees will serve as
directors until the next Annual Meeting of Stockholders and until their
successors are elected and qualified. If any of the nominees declines to serve
or becomes unavailable for any reason, or if a vacancy occurs before the
election (although the Company knows of no reason to anticipate that this will
occur), the proxies may be voted for such substitute nominees as the Company may
designate.
If a quorum is present and voting, the nominees receiving the highest
number of votes will be elected as directors. Abstentions and broker non-votes
have no effect on the vote.
The five directors nominated for election voted in favor of the proposal to
nominate such directors. Gerald A. Eppner and Paul E. Dean who were then
directors abstained from the vote. See "Proposal No. 2 -- Reduction in the
Number of Directors."
A MAJORITY OF THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" THE NOMINEES NAMED ABOVE.
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<PAGE> 22
PROPOSAL NO. 2
REDUCTION IN THE NUMBER OF DIRECTORS
The Company's Bylaws provide that the number of directors may be reduced by
a resolution of the Board. On July 14, 1998 the Board elected to reduce the
number of directors on the Board from seven to five. Mr. Eppner abstained from
voting on the proposal to reduce the number of directors to five and all other
directors voted in favor of the proposal. The Board also voted to nominate
Messrs. Don Hoff, Perry Hoff, Joseph Stiley, Harold Copperman and Dominic LaRosa
as nominees for such five Board seats. The purpose of the proposal was to reduce
the Board to a number of directors which management believes will be more
appropriate and effective in running the Company in the future, based upon the
Company's currently proposed plan for ongoing operations as described in this
Proxy Statement. See "Information About Lamaur -- Recent Events." On July 27,
1998 each of Messrs. Eppner and Dean submitted resignations from the Board,
effective as of such date.
There have been a number of disagreements among members of the Board in the
recent past, including disagreements regarding maintaining the Company's
headquarters office. Management believes that closing the headquarters would
interfere with necessary corporate functions, and that relocation of the three
officers and one support person would be disruptive to the Company's business.
The Board has voted against proposals to close the headquarters office on May
18, 1998 and June 12, 1998 by votes of four to three and five to two,
respectively. The directors who will not be continuing as members of the Board
voted for the proposals in each case.
On April 30, 1998 the Audit Committee, of which Mr. Eppner was the
Chairman, and Mr. Dean a member, initiated a review of officers' and directors'
expenses and related party transactions, which review was to include an
examination of internal control practices involving relocation and
headquarters-related expenses, compensation, and legal fees. Prior to their
resignations, Messrs. Eppner and Dean expressed their concerns about such
matters and about whether the committee's review process was being interfered
with. Management does not believe such concerns have merit.
Because the review includes payments made to all members of the Board and
the Audit Committee, the Board proposed that the Audit Committee engage
independent counsel to assist in completing the review. Six of seven directors,
including two of the three members of the Audit Committee, voted in favor of the
proposal. Mr. Eppner, the former Chairman of the Audit Committee, abstained;
however, at the time of his resignation, Mr. Eppner had also agreed with the
Board's recommendation to engage independent counsel. The Audit Committee has
engaged former United States District Judge Charles Renfrew to assist with the
timely completion of the independent review.
The reduction in the number of directors requires approval only of the
directors of the Company. However, stockholder approval of the matter is sought
to ensure that the vote of the directors on the measure will not be challenged
based upon the fact that the five directors voting in favor of the matter are
also the directors nominated to stand for election at the Annual Meeting. If the
reduction in the number of directors is not ratified by the stockholders, the
Board does not intend to reconsider the matter, and the Company will continue to
have a five member Board unless and until the Board reconsiders the number of
directors.
A MAJORITY OF THE BOARD OF DIRECTORS RECOMMENDS
APPROVAL OF THE REDUCTION IN THE NUMBER OF DIRECTORS.
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<PAGE> 23
PROPOSAL NO. 3
APPROVAL AND ADOPTION OF SALE TRANSACTION
Approval is sought for the sale of certain assets of the Company. The Board
has evaluated the Company's business, results of operations, financial position
and prospects were it to continue operations as currently conducted. As
discussed above under "Information About Lamaur -- Recent Events," revenues from
operations for future periods are not expected to generate sufficient cash to
meet the Company's current operating needs and to satisfy its extended
obligations. In addition, the Board believes that competitive industry
conditions make it extremely difficult for the Company to continue its
operations as currently structured. As a result the Company believes it should
sell additional assets and restructure its ongoing retail operations, and is
seeking approval of the sale of certain manufacturing assets in one or more
transactions at a purchase price at least equal to $14,000,000. The approval of
the sale transaction includes authorization by the stockholders for the Board
and management to negotiate and approve all actions and terms necessary for
management to complete such a transaction. Depending upon whether the sale
transaction constitutes a "sale of substantially all assets" under Delaware law,
management may in certain cases proceed with the sale even if stockholder
approval has not been obtained, as described below. See "Approval and Adoption
of Sale Transaction -- Requirements Regarding Approval by Stockholders."
SALE OF THE MANUFACTURING BUSINESS
The Company is seeking approval by its stockholders of the sale of the
assets relating to its manufacturing business (the "Sale Transaction"). The
assets proposed to be sold (the "Manufacturing Assets") would consist of some or
all of the Company's assets, properties, rights and business relating to the
manufacturing activities conducted at the Company's facility in Fridley,
Minnesota (the "Facility"). The Company owns, subject to Norwest's security
interest, the real property, plant equipment and fixtures at the Facility,
substantially all of which are expected to be included in the Manufacturing
Assets. The Manufacturing Assets may include some or all of the Company's raw
materials and contracts to manufacture for third parties (including Zotos) as
well as other various assets. The Manufacturing Assets would not include (i)
existing finished inventory, those patents, trademarks and tradenames, and
pending applications and other intellectual property, and rights and interests
under contracts and commitments, relating to retail brands, except to the
extent, if any, licenses thereunder were necessary for the purchaser to conduct
ongoing manufacturing operations at the Facility and (ii) other assets necessary
for the management of the retail business. The Company anticipates that a
proposed purchaser would assume certain liabilities relating to the
Manufacturing Assets, but such terms will be subject to the specific terms
negotiated with a potential acquirer. The Company expects that the Manufacturing
Assets would be sold to a single acquirer, but stockholder approval is sought
for one or more sales provided the aggregate purchase price exceeds the Minimum
Price, as defined below.
CONSIDERATION
The Board of Directors will evaluate the proposed consideration offered in
a Sale Transaction in relation to the market value, book value and cash flow
derived from the Manufacturing Assets. In addition, the Board may determine that
any Sale Transaction may be subject to the receipt by the Board of a fairness
opinion from MMC to the effect that the transactions contemplated by the Sale
Transaction are fair, from a financial point of view, to the Company, its
stockholders and creditors. The Board has not made a definitive determination as
to whether to obtain such an opinion. The Board is seeking approval from the
stockholders to sell the Manufacturing Assets at a minimum price of $14,000,000
(the "Minimum Price"). The Minimum Price may include the assumption by the
Purchaser of certain liabilities which would reduce the cash purchase price
deliverable to the Company. The Minimum Price also may include proceeds from the
sale of certain raw materials. The Board is seeking stockholder approval for any
sale that the Company negotiates and closes prior to January 31, 1999 that is,
in the Board's judgment, the highest price obtainable for the Manufacturing
Assets, in the best interest of the creditors and stockholders of the Company,
and which meets or exceeds the Minimum Price.
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<PAGE> 24
OTHER TERMS
The principal terms in any Sale Transaction will be the purchase price,
identification of assets and assumption of liabilities. Other provisions which
may be negotiated are the extent of the representations and warranties, the
indemnification for breach thereof and the escrow, if any, of a portion of the
purchase price. Due to its financial position and need for cash to finance
ongoing operations, the Company believes that any indemnity and/or escrow must
be minimal. However, management will negotiate such terms as it deems reasonable
and in the interests of creditors and stockholders in light of the purchase
price and other terms proposed by each potential buyer. The approval by the
stockholders of this proposal includes authorization of management and the Board
to agree to such terms as they deem advisable in concluding the sale.
REQUIREMENTS REGARDING APPROVAL BY STOCKHOLDERS
The Company believes that the sale of the Manufacturing Assets potentially
may be a sale of "substantially all assets" under Section 271 of the Delaware
Corporation Law (the "Delaware Law"). Such transactions require the approval of
a majority of the Company's stockholders and, under the Company's Certificate of
Incorporation, approval of a majority of the Preferred Stock. However, under the
Delaware law, whether the Sale Transaction constitutes a sale of substantially
all assets depends upon certain facts and circumstances. Generally, a sale of
substantially all assets does not occur unless (i) the value of the assets sold,
or the contribution of such assets to profits and revenues is greater than 50%
of the value of all assets, profits or revenues of a corporation, or (ii) the
sale would change the nature of a corporation's business in a fundamental
manner. The determination of whether a sale of substantially all assets has
occurred is dependent upon the facts and circumstances at the time of the sale.
Currently, the Company believes that the Manufacturing Assets do not constitute
more than 50% of its assets or contribute more than 50% of profits or revenues.
Further, the Company believes that its primary business is developing, marketing
and selling consumer products, and that the sale of the Manufacturing Assets
will not alter this business. It has become common amongst the entities with
whom the Company competes to subcontract the manufacturing of products as a
means of lowering costs and/or capital requirements. For the foregoing reasons,
the Sale Transaction may not constitute a sale of "substantially all assets."
However, for avoidance of doubt and in order to have the opportunity to expedite
a Sale Transaction, should it be negotiated, the Board believes that it is in
the interest of the Company's constituencies to obtain stockholder approval
prior to entering into an agreement for a Sale Transaction. If such approval is
obtained in advance, the time between the signing of an agreement and the
closing may be reduced by sixty days or more. If for any reason stockholder
approval is not obtained, the Board will reconsider this matter and may proceed
with a Sale Transaction if it obtains an opinion from legal counsel that, based
upon the facts and circumstances at the time, such sale does not constitute a
sale of substantially all assets. The Board intends to maintain flexibility to
conclude the Sale Transaction if possible, as it believes it is vital to the
interests of the Company, its creditors and stockholders.
The holders of the Company's preferred stock have the right under the
Company's Certificate of Incorporation to elect to treat any sale of
substantially all assets as a liquidation. Assuming that the Sale Transaction is
a sale of substantially all assets, the Company will seek the commitment of the
preferred stockholders not to exercise this right (the "Waiver"). Further, it is
unclear what the exercise of this right would mean in the context of a Sale
Transaction, as it is essential that the Company use the proceeds to pay
creditors and finance operations, and no money is likely to be available for
distribution to the preferred stockholders. Nevertheless, the Company is seeking
the Waiver to clarify this matter.
BACKGROUND OF THE TRANSACTION
During 1997, the Company experienced financial difficulty including
declining sales and a substantial loss for the full year. In 1998, the Company
reported earnings of $616,000 in the first quarter, and losses of $1,710,000 in
the second quarter. Expected revenues for future periods, however, are not
expected to generate sufficient cash to meet the Company's operating needs as
currently organized and to satisfy its extended obligations. To address these
cash requirements, MMC, in conjunction with management, has identified numerous
potential acquirers of some or all of the assets of the Company and has sought
bids or other proposals from such parties. The Board has met on a regular basis
to review the status of these proposals and
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<PAGE> 25
to consider various alternatives available to the Company. In June, based upon
such review, management and the Board determined that a sale of the Salon brands
and certain related assets was most likely to reach a definitive agreement in
the near future. Accordingly, the Board approved the sale of the Salon brands,
inventory and certain intellectual property to the third party making the most
favorable bid, subject to certain minimum bid requirements. On July 15, 1998 the
Company entered into a definitive agreement with Zotos to sell certain assets of
the Company's Professional Salon Brands, including inventory and other related
assets, for a purchase price of $11,000,000, subject to adjustment based on
inventory levels. The transaction closed on July 31, 1998. The proceeds of the
sale were used to pay down a portion of the Company's bank debt, reduce trade
payables and for working capital.
At Board meetings subsequent to the transaction with Zotos, the Board has
determined that the sale of the Manufacturing Assets is an important part of the
Company's strategy related to satisfying its obligations to creditors and
continuing its retail operations. Such a sale will generate cash while
dramatically lowering the Company's operating expenses. The Board has also
determined to seek the highest price currently available for such assets
provided the other terms of the transaction are reasonable. Depending upon the
price and timing of offers, it may be necessary for the Company to operate its
manufacturing business as a subsidiary, to seek a joint venture, to merge the
operations with others, or if profitable operations are not sustainable, to
outsource the Company's production, close the facility and sell it for its real
estate value. The Company believes the value of the Manufacturing Assets under
such circumstances could be less than the Minimum Price. However, the Company
has no current intention to sell the business for a lower price unless it
appears appropriate at the time, at which time the Board will need to seek
stockholder approval for such sale if it finds such sale would constitute a sale
of "substantially all assets" under the Delaware Law at that time.
REASONS FOR THE TRANSACTION
As described above, after the sale of the Manufacturing Assets, the Company
believes that it will be able to satisfy its existing obligations to creditors
and continue operations. However, without such sale the Company may not be able
to generate enough cash to continue existing operations, assuming the Company
determines to proceed with its plan for the operation of the retail brands. The
Company has, through MMC, extensively canvassed the market over a period of five
months and believes that it will be able to obtain the highest possible price
for the Manufacturing Assets through this process. As a result, the Board
believes that the Sale Transaction will be in the best interest of creditors and
stockholders as it will provide a means to satisfy creditor obligations and an
opportunity to finance ongoing operations assuming the Company determines to and
is able to generate sufficient capital to pursue such operations. It is also
possible that the Company will determine to sell off all of its assets,
including the Manufacturing Assets, and then to propose a plan of liquidation
and dissolution for the Company. This decision has not been made and will depend
upon numerous factors including the bid prices obtained for the Company's
assets, including the Manufacturing Assets, the results of operations over the
next two quarters, the Company's ability to pay creditors, and the determination
of the Board and management regarding whether to pursue ongoing operations. The
Company may also determine to sell other assets or restructure operations in a
different manner than currently contemplated. While the Board has not made a
final determination on the Sale Transaction or any of these matters, the Board
believes it is important to be prepared to sell the Manufacturing Assets
promptly if an appropriate transaction can be negotiated. Essentially, this will
put the Company in the best possible position to be able to meet any demands
from creditors. For example, it is possible that the Company's future operating
results could result in a breach of covenants in the Company's agreement with
Norwest, the Company's supplier of revolving credit. In such case, all the
Company's obligations to Norwest would become immediately due and payable.
Further, it is possible that one or more of the Company's creditors whose
accounts are beyond the 60 day terms negotiated between the Company and such
creditors, could seek to force the Company into bankruptcy. Without the
flexibility to promptly close a sale of the Manufacturing Assets, the Company
could lose substantial control in negotiating with Norwest and other creditors.
Stockholder approval is the most likely and time consuming delay that would
impede a rapid close. Further, a sale of the Manufacturing Assets and the
continuing of retail operations will position the Company to be able to obtain
the highest value for its inventory and accounts receivable. Finally, the Board
has considered the possibility of operating the Facility as a contract
manufacturer but does not believe, at present, that the Company is in a
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<PAGE> 26
position to successfully undertake such operations. For all of the above
reasons, the Board recommends approval of the proposal to sell the Manufacturing
Assets.
CONDITIONS TO CONSUMMATION OF A SALE TRANSACTION
The obligations of the Company to consummate the Sale Transaction will be
subject to the satisfaction or waiver of closing conditions which the Company
anticipates will be in standard form, including, among others: (i) the absence
of any injunction or other order of any governmental agency that prevents
consummation of the Sale Transaction; (ii) the receipt of all authorizations,
consents or approvals of any and all governmental regulatory authorities
necessary to consummate the Sale Transaction, including the termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, if applicable; (iii) the accuracy in all material respects
of the representations and warranties contained in any agreement by which a Sale
Transaction is consummated (a "Purchase Agreement"); and (iv) the performance in
all material respects of all obligations required to be performed prior to
closing by a Purchase Agreement. In addition, in order to sell the Manufacturing
Assets and continue retail operations, the Company will need to negotiate a
manufacturing services agreement with the purchaser or with a third party, and
the completion of such an agreement is expected to be a condition to the closing
of the Sale Transaction. The approval of the Sale Transaction includes
authorization by the stockholders for the Board and management to negotiate and
approve such conditions, and such other terms as they deem necessary and
reasonable in order to conclude the Sale Transaction.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a description of certain material U.S. federal
income tax consequences of the Sale Transaction. This discussion does not
address all federal tax consequences that may result from the Sale Transaction,
but is a general and abbreviated summary, based on interpretations of existing
sources of law. In addition, this discussion does not address any state, local,
or foreign tax consequences, or any federal tax consequences other than those
relating to the income tax. No assurances can be given that future legislation,
regulations, administrative pronouncements or court decisions will not
significantly change the law and materially affect the conclusions expressed
herein. The Company has not obtained an opinion of tax counsel regarding the tax
consequences of the Sale Transaction. The Company is not requesting a ruling
from the Internal Revenue Service ("IRS") regarding the tax consequences of the
Sale Transaction, and there is no assurance that the IRS will not adopt
positions contrary to the consequences discussed below.
The Sale Transaction should be treated for U.S. federal income tax purposes
as a taxable sale by the Company to the purchaser of the Manufacturing Assets in
exchange for the actual purchase price, (including the sum of cash, any property
received, and the value of any liabilities assumed by the purchaser (the "Sale
Proceeds"). As a result, the Company would recognize gain (or loss) on each of
the Manufacturing Assets (the "Assets") measured by the difference between the
Company's tax basis in each Asset and the portion of the Sale Proceeds allocable
to that Asset. In general, the Sale Proceeds should be allocable among the
Assets in proportion to the fair market value of the Assets. The Company
generally has no more than a nominal basis in any of the Assets.
The Company may utilize capital losses only to the extent of capital gains.
To the extent that the Assets constitute capital assets, the Company would
generally recognize capital gain (or loss) on the sale, subject to the
depreciation recapture rules of Section 1245 of the Internal Revenue Code of
1986, as amended (the "Code"). Under Section 1245 of the Code, a portion of the
gain from the sale of certain capital assets (generally gain attributable to the
sale of depreciable tangible personal property) may be treated as ordinary
income. To the extent that the Assets are subject to Section 1231 of the Code
(generally depreciable property, other than inventory, held for more than one
year and used in the Company's business) other than capital assets, special
rules may apply. If the Company's Section 1231 gains for the taxable year exceed
the Company's Section 1231 losses for the year, such gain and losses are treated
as long-term capital gains and long-term capital losses (subject to depreciation
recapture and a special rule that treats the Company's net Section 1231 gain for
the year as ordinary income to the extent of the Company's unrecaptured net
Section 1231 losses for the five preceding taxable years). If the Company's
Section 1231 gains do not exceed
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<PAGE> 27
its Section 1231 losses for the year, such gains and losses are treated as
ordinary income and losses. The Company would recognize ordinary income (or
loss), subject to the provisions of Section 1231 of the Code. Section 1231 of
the Code, in certain circumstances and subject to a number of restrictions,
treats as capital gain certain gain that otherwise would be taxed as ordinary
income. The Company may offset gain recognized on the sale of the Assets by
other losses, including net operating loss carryforwards that the Company
currently has available. The Company anticipates that it currently has
sufficient net operating loss carryforwards to offset any gains, capital or
ordinary, that the Company would realize on the sale of the Assets.
Because the Sale Transaction does not involve an exchange of, or change in
the terms of, the outstanding shares of the Company's Common Stock, and because
the Sale Transaction will not result in a liquidation of the Company, the Sale
Transaction should have no federal income consequences for the Company's
stockholders. However, stockholders having specific questions regarding the tax
consequences impact of the Sale Transaction should consult their own tax
advisors.
ACCOUNTING TREATMENT
The transaction will be accounted for as a sale transaction and the Company
will recognize as income or loss the difference between the book value of the
assets sold and the purchase price.
CERTAIN FACTORS
In considering the proposal to approve the Sale Transaction, stockholders
should consider the following, in addition to the other information in this
Proxy Statement:
Proceeds May be Insufficient to Meet Needs. While the Company believes that
the proceeds from a Sale Transaction, together with expense reductions from
reorganization will permit the Company to bring its liabilities in line with
ongoing operations, depending upon the actual purchase price, the results of
future operations, the status of the Company's compliance with its covenants to
Norwest, and the liabilities of the Company at the time of a Sale Transaction,
the proceeds of a Sale Transaction together with the Company's other assets may
not be sufficient to meet its obligations to creditors. Further, no assurance
can be given that a Sale Transaction will be negotiated or that stockholder
approval of such transaction and its consummation will allow the Company to
continue operations. No assurance can be given that even if a Sale Transaction
is completed that the Company will not elect to or be forced into bankruptcy
proceedings. However, management believes that a Sale Transaction at the Minimum
Price will permit the Company to continue its operations.
No Distribution to Stockholders. The Sale Transaction will not produce
proceeds sufficient to allow a distribution to stockholders. Proceeds will be
used exclusively to pay obligations to Norwest and to other creditors and for
working capital. A distribution to common stockholders could occur only if the
Company sold the Manufacturing Assets as well as the Retail division assets.
Because the preferred stockholders would receive the first $15,000,000 of
proceeds should all of the Company's assets be sold, there would be no
distribution to common stockholders in such circumstances. No assurance can be
given that a Sale Transaction will be consummated or that the approval of a Sale
Transaction or its consummation will be sufficient to permit the Company to
manage or satisfy its existing obligations, or that if a Sale Transaction is
consummated, that the Company will be able to either operate the remaining
assets or dispose of them in a manner which will lead to a distribution to the
common stockholders or to improved financial performance.
No Assurance Regarding Future Operations. The Sale Transaction may generate
some cash to facilitate the Company's ability to finalize and carry out a
reorganization around its retail brands. However, no assurance can be given that
the Company will determine to proceed with such a plan, that the Company will
have sufficient working capital to proceed with such a plan, or that such a plan
will be successfully implemented, or if implemented, that such a plan will be
successful or result in profitable operations. The success of such a plan will
be dependent, among other things, on the continued market acceptance of the
Company's retail products, reduced operational expenses, sustained or increased
sales and the availability of advertising and marketing resources.
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<PAGE> 28
Triggering Event for Severance. As disclosed under the caption
"Compensation of Directors and Executive Officers -- Employment Contracts and
Termination of Employment and Change of Control Arrangements -- Employee
Severance Arrangements," certain employees and officers of the Company are
entitled to severance benefits under the Severance Agreements if they are
terminated within 24 months of specified "change of control" events. Such events
include stockholder approval of a sale of substantially all assets. The Company
has not determined whether the sale of the Manufacturing Assets will trigger a
change of control or whether any of the persons with such Severance Agreements
will be terminated. Further, the Company believes that such Severance Agreements
may not have been intended to cover transactions such as the Sale Transaction
and intends to preserve its rights to review and dispute the applicability of
such provisions of the Severance Agreements to the Sale Transaction, if
appropriate. However, if such provisions of the Severance Agreements were
applicable and assuming all of such persons were subsequently terminated, the
aggregate payment for severance is estimated at approximately $2,000,000.
Additional benefits are also payable. No assurance can be given that terminated
employees, if any, who are parties to the Severance Agreements would not assert
claims for such amounts or that the Company would not determine that it was
obligated to pay such amounts.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
APPROVAL OF THE POTENTIAL SALE TRANSACTIONS.
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PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC AUDITORS
The Board has nominated Deloitte & Touche LLP as independent public
auditors to audit the consolidated financial statements of the Company for the
year ending December 31, 1998. Deloitte & Touche LLP has acted in such capacity
since its appointment in 1995. A representative of Deloitte & Touche LLP is
expected to be present at the annual meeting, with the opportunity to make a
statement if the representative desires to do so, and is expected to be
available to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPOINTMENT
OF DELOITTE & TOUCHE LLP AS THE COMPANY'S INDEPENDENT PUBLIC AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1998.
VOTE REQUIRED
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTES CAST AFFIRMATIVELY OR
NEGATIVELY AT THE ANNUAL MEETING OF STOCKHOLDERS AT WHICH A QUORUM REPRESENTING
A MAJORITY OF ALL OUTSTANDING SHARES OF COMMON STOCK OF THE COMPANY IS PRESENT
AND VOTING, EITHER IN PERSON OR BY PROXY, IS REQUIRED FOR APPROVAL OF THIS
PROPOSAL. VOTES FOR AND AGAINST, ABSTENTIONS AND BROKER NON-VOTES WILL EACH BE
COUNTED AS PRESENT FOR PURPOSES OF DETERMINING THE PRESENCE OF A QUORUM. NEITHER
ABSTENTIONS NOR BROKER NON-VOTES WILL HAVE ANY EFFECT ON THE OUTCOME OF THE
PROPOSAL.
INTERIM FINANCIAL INFORMATION; UNAUDITED PRO FORMA
FINANCIAL INFORMATION
Appendix 1 to this Proxy Statement which is a part of this Proxy Statement
contains the Company's Financial Statements and Management's Discussion and
Analysis for the period ended June 30, 1998. Appendix 2 to this Proxy Statement
which is a part of this Proxy Statement contains an unaudited pro forma balance
sheet and certain unaudited pro forma statements of operations.
ANNUAL REPORT TO STOCKHOLDERS AND INCORPORATION BY REFERENCE
Accompanying this Proxy Statement is a copy of the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 (the "Form 10-K"). The
following information contained in the Annual Report is incorporated by
reference into this Proxy Statement: (i) the section captioned "Business," (ii)
the section captioned "Properties," (iii) the section captioned "Legal
Proceedings," (iv) the section captioned "Selected Financial Data," (v) the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations," (vi) the section captioned "Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure," and
(vii) the section captioned "Financial Statements and Supplementary Data." No
other information contained in the Annual Report is or is deemed incorporated by
reference in this Proxy Statement. Any statement contained in the Annual Report
shall be deemed to be modified or superseded to the extent that it is modified
or superseded by information contained in this Proxy Statement.
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act
of 1934, as amended, the Company's proxy for its 1999 Annual Meeting of
Stockholders may confer discretionary authority to vote on any proposal
submitted by a stockholder if written notice of such proposal was not received
at the Company's executive office on or before March 30, 1999.
26
<PAGE> 30
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the Board knows of no other business
that will be conducted at the 1998 Annual Meeting of Stockholders of The Lamaur
Corporation other than as described in this Proxy Statement. If any other matter
or matters are properly brought before the meeting, or any adjournment or
postponement of the meeting, it is the intention of the persons named in the
accompanying form of proxy to vote the proxy on such matters in accordance with
their best judgment.
By Order of the Board of Directors
/s/ JOHN D. HELLMANN
JOHN D. HELLMANN
Secretary
October 2, 1998
27
<PAGE> 31
APPENDIX 1
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
Part I -- Financial Information
Item Condensed Financial Statements (Unaudited)..................
1. 2
Condensed Balance Sheets as of June 30, 1998 and December
31, 1997.................................................... 3
Condensed Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997......................... 4
Condensed Statements of Cash Flows for the Six Months Ended
June 30, 1998
and 1997.................................................... 5
Notes to Condensed Financial Statements..................... 6
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations for the Three and Six Months Ended
June 30, 1998 and 1997...................................... 8
</TABLE>
-1-
<PAGE> 32
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
[See next page.]
-2-
<PAGE> 33
THE LAMAUR CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 232 $ 6,465
Receivables from DowBrands................................ 3 741
Accounts receivable, net.................................. 12,857 15,943
Inventories............................................... 13,372 15,523
Prepaid expenses and other current assets................. 401 453
-------- --------
Total current assets.............................. 26,865 39,125
Property, Plant and Equipment, Net.......................... 18,477 19,131
Other Assets................................................ 51 70
-------- --------
Total Assets...................................... $ 45,393 $ 58,326
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 12,876 $ 14,592
Accrued expenses.......................................... 3,120 4,666
Accrued salaries, wages and employee-related expenses..... 1,700 2,211
Current portion of long-term debt......................... 1,629 1,612
Payables to related parties............................... -- 250
-------- --------
Total current liabilities......................... 19,325 23,331
Long-Term Debt............................................ 15,511 23,546
Related Party Obligations................................. -- 500
Stockholders' Equity
Preferred stock, $.01 par value, 4,000,000 shares
authorized:
Series A Preferred stock, $.01 par value, 1,000,000
shares issued and outstanding at June 30, 1998 and
December 31, 1997 ($10.0 million liquidation
preference)........................................... 8,500 8,500
Series B Preferred stock, $.01 par value, 763,500
shares issued and outstanding at June 30, 1998 and
December 31, 1997 ($5.0 million liquidation
preference)........................................... 5,000 5,000
Common stock, $.01 par value, 12,000,000 shares
authorized, 5,884,468 and 5,747,544 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively.......................................... 59 57
Additional paid-in-capital............................. 20,552 19,852
Stock subscriptions receivable......................... (50) (50)
Accumulated deficit.................................... (23,504) (22,410)
-------- --------
Total stockholders' equity........................ 10,557 10,949
-------- --------
Total Liabilities and Stockholders' Equity........ $ 45,393 $ 58,326
======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 34
THE LAMAUR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales......................................... $19,645 $25,401 $42,477 $51,681
Net Sales to DowBrands............................ -- 5,115 -- 8,048
------- ------- ------- -------
Total Net Sales......................... 19,645 30,516 42,477 59,729
Cost of Goods Sold................................ 11,426 18,068 24,467 35,384
------- ------- ------- -------
Gross Margin...................................... 8,219 12,448 18,010 24,345
Selling, General and Administrative Expenses...... 9,330 13,431 17,745 26,559
------- ------- ------- -------
Operating Income (Loss)........................... (1,111) (983) 265 (2,214)
Interest Expense.................................. (590) (435) (1,403) (833)
Other Income (Expense)............................ (9) 89 44 281
------- ------- ------- -------
Net Loss.......................................... (1,710) (1,329) (1,094) (2,766)
Dividends on Series B Preferred Stock............. (100) (100) (200) (200)
------- ------- ------- -------
Net Loss Available to Common Shareholders......... $(1,810) $(1,429) $(1,294) $(2,966)
======= ======= ======= =======
Basic Loss per Common Share....................... $ (0.31) $ (0.25) $ (0.22) $ (0.52)
======= ======= ======= =======
Average Number of Basic Common Shares
Outstanding..................................... 5,863 5,675 5,814 5,661
======= ======= ======= =======
Diluted Loss per Common Share..................... $ (0.31) $ (0.25) $ (0.22) $ (0.52)
======= ======= ======= =======
Average Number of Diluted Common Shares
Outstanding..................................... 5,863 5,675 5,814 5,661
======= ======= ======= =======
</TABLE>
See notes to financial statements.
-4-
<PAGE> 35
THE LAMAUR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................... $(1,094) $ (2,766)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Utilization of DowBrands credits....................... -- (750)
Loss on disposal of assets............................. 3 12
Depreciation and amortization.......................... 1,014 774
Effect of changes in:
Receivables.......................................... 3,824 (1,164)
Inventories.......................................... 2,151 (3,343)
Prepaid expenses and other assets.................... 52 (3,961)
Payables............................................. (1,916) 4,429
Accrued expenses..................................... (1,930) (3,347)
------- --------
Net cash provided by (used in) operating activities.... 2,104 (10,116)
Cash Flows From Investing Activities:
Additions to property, plant and equipment................ (344) (1,450)
Proceeds from sale of assets.............................. -- 16
------- --------
Net cash used in investing activities.................. (344) (1,434)
Cash Flows From Financing Activities:
Borrowings (repayments) under revolving credit agreement,
net.................................................... (7,255) 4,190
Borrowings of long-term debt.............................. -- 3,496
Repayments of long-term debt.............................. (763) (676)
Proceeds from sales of common stock, net.................. 25 132
Payment of preferred dividends............................ -- (300)
------- --------
Net cash provided by (used in) financing activities.... (7,993) 6,842
------- --------
Net Decrease in Cash and Cash Equivalents................... (6,233) (4,708)
Cash and Cash Equivalents at Beginning of Period............ 6,465 12,081
------- --------
Cash and Cash Equivalents at End of Period.................. $ 232 $ 7,373
======= ========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 36
THE LAMAUR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND OPERATIONS
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.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed financial statements are unaudited and include
all adjustments, which consist of only normal recurring accruals, that
management considers necessary to fairly present the results for such periods.
These financial statements should be read in conjunction with the financial
statements and notes contained in The Lamaur Corporation's ("the Company")
Annual Report on Form 10-K for the year ended December 31, 1997. Results for
interim periods are not necessarily indicative of results for the full year.
Cash and Cash Equivalents -- 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 U.S. Treasuries which at June 30, 1998
and December 31, 1997 were $0 and $6.2 million, respectively. These U.S.
Treasuries represent restricted securities which are maintained as collateral in
support of the revolving line of credit with Norwest Business Credit.
Earnings Per Share -- Basic EPS is calculated using loss 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
outstanding items, such as options had been exercised. 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 Statement of Financial Accounting Standards
No. 128, "Earnings Per Share."
Comprehensive Income -- Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 requires the disclosure of comprehensive income
and its components in the general-purpose financial statements. For the periods
ended June 30, 1998 and 1997, the Company did not engage in transactions related
to foreign currency translation, unrealized gains in securities, or minimum
pension liability adjustments. Accordingly, comprehensive income equals net
income.
Disclosures About Segments of an Enterprise and Related Information -- In
June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which is 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.
Reclassification -- Certain reclassifications have been made in the
accompanying financial statements in order to conform with the 1998
presentation.
-6-
<PAGE> 37
THE LAMAUR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Inventories are stated at the lower of weighted average cost or market and
include the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods........................................ $ 8,568 $ 9,233
Work in process....................................... 44 93
Raw materials......................................... 4,760 6,197
------- -------
Total....................................... $13,372 $15,523
======= =======
</TABLE>
-7-
<PAGE> 38
THE LAMAUR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS AND
THREE MONTHS ENDED JUNE 30, 1997.
Net sales for the six months ended June 30, 1998 were $42.5 million
compared with $59.7 million for the same period in 1997, a decrease of $17.2
million or 28.8%. Net sales for the three months ended June 30, 1998 were $19.6
million compared with $30.5 million for the same period in 1997, a decrease of
$10.9 million or 35.7%. The decrease in net sales for the six months and three
months ended June 30, 1998 is principally due to the decline in sales of
contract manufacturing as a result of the expiration of the manufacturing
agreement with DowBrands in November 1997 and the decline in sales of Perma
Soft(R), Salon Style(R), Style(R), and the Color Soft(TM) retail brands and the
brands in the Company's salon division. There were no sales to DowBrands for the
six months or three months ended June 30, 1998 as compared with $8.0 million and
$5.1 million, respectively, for the same periods in 1997. Perma Soft(R), Salon
Style(R), Style(R), Color Soft(TM) retail brands and the salon division brands
had sales declines of $4.4 million, $3.5 million, $2.7 million, $1.8 million and
$1.5 million, respectively, during the six months ended June 30, 1998, and
declines of $2.1 million, $1.6 million, $1.4 million, $1.2 million and $1.6
million respectively during the three months ended June 30, 1998 as compared
with the same periods in 1997. Perma Soft(R), Salon Style(R) and Style(R) have
continued to decline in sales since management began its turnaround efforts in
the first quarter of 1996. Management believes that sales of these and the
Company's other retail brands are likely to continue to decline.
The Company experienced sales growth from Willow Lake(R) during the six
months and three months ended June 30, 1998 as compared with the same periods in
1997. The increased sales of Willow Lake(R) in 1998 are principally attributable
to the launch of the Willow Lake(R) fixative line which started shipping in the
fourth quarter of 1997. Willow Lake(R), the Company's premium-priced retail hair
care product line targeted for the Naturals category and positioned as "Nature's
Prescription for Beautiful Hair"(TM), was introduced in the fourth quarter of
1996. Sales growth of Willow Lake(R) will be in part dependent upon competition
from other brands, consumer acceptance and marketing support behind this brand.
Gross margin as a percentage of net sales was 42.4% for the six months
ended June 30, 1998, as compared with 40.8% for the same period in 1997. Gross
margin as a percentage of net sales was 41.8% for the three months ended June
30, 1998 as compared with 40.8% for the same period in 1997. The improvement in
the gross margin as a percentage of net sales for the six months and three
months ended June 30, 1998 is principally due to a change in product mix
including increased sales of higher margin Willow Lake(R) products.
Selling, general and administrative (SG&A) expenses were $17.7 million or
41.8% of net sales for the six months ended June 30, 1998, as compared with
$26.6 million or 44.5% of net sales for the same period last year, a decrease of
$8.9 million. SG&A expenses were $9.3 million or 47.5% of net sales for the
three months ended June 30, 1998, as compared with $13.4 million or 44.0% of net
sales for the same period last year, a decrease of $4.1 million. The decreases
are principally attributed to reduced marketing expenses of $7.4 million and
$3.6 million for the six and three months ended June 30, 1998, respectively, and
reduced personnel, travel and other expenses as a result of the Company's cost
cutting efforts. In 1997 the Company increased its marketing to support the
launch of Willow Lake(R), and in 1998 such support was substantially reduced. In
addition the Company has reduced marketing expenditures for other brands which
have continued to experience sales declines. The lower level of marketing
support in 1998 is a result of the Company's limited working capital. Because of
the Company's limited working capital and the competitive environment for hair
care products there can be no assurance concerning the future performance of
Willow Lake(R) and other brands or the Company's ability to attain any
particular level of sales or to be profitable in the future with the lower level
of marketing.
-8-
<PAGE> 39
THE LAMAUR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest expense increased to $1.4 million for the six months ended June
30, 1998, as compared with $0.8 million in the same period last year. Interest
expense increased to $0.6 million for the three months ended June 30, 1998, as
compared with $0.4 million in the same period last year. The increase in
interest expense is principally attributable to higher borrowings under the
Company's revolving line of credit with Norwest Business Credit to support the
Company's working capital needs, 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, and fees related to the loan amendment in
March 1998.
As a result of the foregoing factors, the net loss for the six months ended
June 30, 1998 was $1.1 million compared with $2.8 million for the same period in
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital decreased by $8.3 million, from $15.8
million at December 31, 1997 to $7.5 million at June 30, 1998.
As of June 30, 1998, the amounts outstanding under the Company's revolving
and term loan facilities were $10.4 million and $5.5 million, respectively, as
compared with $17.7 million and $6.2 million, respectively, as of December 31,
1997. In April 1998 the Company reduced its investment in US Treasury Securities
from approximately $4.3 million to zero in accordance with the March 31, 1998
Amended Loan Agreement with Norwest Business Credit. These funds were used to
pay down the revolving loan facility. The amendment also provided for setting
1998 financial covenants on the credit facility and increased the interest rate
on the revolver from 1.5% to 2.5% above the base rate and increased the interest
rate on the term loan from 1.75% to 2.75% above the base rate. The interest
rates on the loans are variable and are tied to Norwest's base rate which was
8.5% at June 30, 1998. The interest rates on the revolver and the term loan are
currently 11.0% and 11.25%, respectively. In addition Norwest lowered the
advance rates on eligible receivables by five percentage points and eligible
inventory by six percentage points. 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. As of June 30, 1998 the Company was not in compliance with
certain financial loan covenants. In August the Company received a waiver from
the lender in regards to these covenants. No assurance can be given that the
Company will continue to be in compliance with the financial loan covenants.
In March 1998 Intertec Holdings, L.P. purchased 109,581 shares of the
Company's common stock at $8.00 per share under a stock purchase agreement
entered into in March 1996 between the Company and Intertec Holdings, L.P.. This
was the basis upon which the Company paid off the remaining balance of $750,000
on a note payable to Intertec Holdings, L.P. for a license fee pursuant to a
1993 license agreement for its proprietary technology between the Company and
Intertec Ltd., a limited partnership controlled by the Company's Chairman of the
Board. The stock purchase fulfills the obligation of Intertec Holdings, L.P. to
purchase a total of 146,107 shares under the agreement.
Total accounts payable exceeding their normal payment terms were
approximately $8.0 million as of June 30, 1998. Because the Company has
announced its intent to obtain financing, and or establish an alliance through a
merger or sale, major trade creditors and other creditors have extended their
"normal" terms to allow the Company additional time to make payments. The
Company is operating its business to preserve working capital in order to pay
the Company's current and extended obligations. To date the Company has been
able to make timely shipments to its customers.
On July 31, 1998 the Company sold its Professional Salon Brands, including
trade names and inventory ($3.0 million) for $11.0 million to Zotos
International, Inc., a subsidiary of Shiseido Co., Ltd. Tokyo, Japan. The
Company received $10.5 million cash. The balance of $.5 million will be held in
an escrow account for six
-9-
<PAGE> 40
THE LAMAUR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
months in order to provide funds for product returns and indemnity payments that
the Company may become obligated to make to Zotos. The proceeds from this sale
will be used to pay down a portion of the Company's loan facility with Norwest
Business Credit, reduce past due obligations to other creditors and for working
capital.
As of June 30, 1998, the Company was $400,000 in arrears on the payment of
dividends on its Series B preferred stock. The preferred stock provides for an
annual dividend of $400,000, payable quarterly.
The Company's ability to continue operations in the long term is dependent
upon obtaining additional financing, which could occur as the result of a sale
or a restructuring and refinancing of its manufacturing operation. The Company
is actively pursuing these alternatives. No assurance can be given as to the
timing of such financing or that a financing will be concluded. The Company is
developing plans to restructure and continue its Retail operations.
-10-
<PAGE> 41
APPENDIX 2
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma balance sheet presents the financial
position of the Company as of June 30, 1998, assuming that the Sale Transaction
and the sale of the Salon Division on July 31, 1998 for $11 million, and the
application of the net proceeds therefrom, occurred as of January 1, 1998. The
unaudited pro forma statements of operations for the six months ended June 30,
1997 and for the year ended December 31, 1997 have been prepared assuming the
Sale Transaction and the sale of the Salon Division on July 31, 1998 for $11
million, and the application of the net proceeds therefrom occurred as of
January 1, 1997. The unaudited pro forma statement of operations for the six
months ended June 30, 1998 has been prepared assuming the Sale Transaction and
the sale of the Salon Division on July 31, 1998 for $11 million, and the
application of the net proceeds therefrom occurred as of January 1, 1998. The
unaudited pro forma balance sheet as of June 30, 1998, and the unaudited pro
forma statements of operations for the six months ended June 30, 1998, June 30,
1997 and for the year ended December 31, 1997 are based on the historical
balance sheet and statements of operations for the Company.
The unaudited pro forma financial information give effect to certain pro
forma adjustments which are described in the notes to these statements.
The unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the financial
position or results of operations which would have been achieved had the above
sales and the application of the proceeds therefrom been completed as of the
respective date or periods presented, nor is it necessarily indicative of the
Company's future financial position or results of operations. The unaudited pro
forma financial information should be read in conjunction with the historical
financial statements of the Company, including the notes thereto.
-1-
<PAGE> 42
THE LAMAUR CORPORATION
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............................... $ 232 $ 7,029 $ 7,261
Cash escrow account..................................... -- 500 500
Accounts receivable, net................................ 12,860 -- 12,860
Inventories............................................. 13,372 (3,583) 9,789
Prepaid expenses and other current assets............... 401 -- 401
-------- -------- --------
Total current assets............................ 26,865 3,946 30,811
Property, Plant and Equipment, Net........................ 18,477 (17,271) 1,206
Other Assets.............................................. 51 -- 51
-------- -------- --------
Total Assets.................................... $ 45,393 $(13,325) $ 32,068
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 12,876 $ -- $ 12,876
Accrued expenses........................................ 3,120 -- 3,120
Accrued salaries, wages and employee-related expenses... 1,700 -- 1,700
Current portion of long-term debt....................... 1,629 (1,629) --
-------- -------- --------
Total current liabilities....................... 19,325 (1,629) 17,696
Long-Term Debt.......................................... 15,511 (15,476) 35
Stockholders' Equity
Preferred stock, $.01 par value, 4,000,000 shares
authorized:
Series A Preferred stock, $.01 par value, 1,000,000
shares issued and outstanding at June 30, 1998
($10.0 million liquidation preference)............. 8,500 -- 8,500
Series B Preferred stock, $.01 par value, 763,500
shares issued and outstanding at June 30, 1998
($5.0 million liquidation preference).............. 5,000 -- 5,000
Common stock, $.01 par value, 12,000,000 shares
authorized, 5,884,468 shares issued and outstanding
at June 30, 1998................................... 59 -- 59
Additional paid-in-capital........................... 20,552 -- 20,552
Stock subscriptions receivable....................... (50) -- (50)
Accumulated deficit.................................. (23,504) 3,780 (19,724)
-------- -------- --------
Total stockholders' equity...................... 10,557 3,780 14,337
-------- -------- --------
Total Liabilities and Stockholders' Equity...... $ 45,393 $(13,325) $ 32,068
======== ======== ========
Book value per share (Note 1)........................... $ (0.76) $ (0.11)
======== ========
</TABLE>
- ---------------
Note 1: Book value per share is calculated by dividing total stockholders'
equity net of the liquidation preference of the Series A and Series B
Preferred Stock by the actual number of common shares outstanding at
June 30, 1998.
-2-
<PAGE> 43
THE LAMAUR CORPORATION
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------------------------------- --------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales...................... $42,477 $(13,632) $28,845 $59,729 $(22,196) $37,533
Cost of Goods Sold............. 24,467 (10,212) 14,255 35,384 (18,689) 16,695
------- -------- ------- ------- -------- -------
Gross Margin................... 18,010 (3,420) 14,590 24,345 (3,507) 20,838
Selling, General and
Administrative Expenses...... 17,745 (3,602) 14,143 26,559 (4,147) 22,412
------- -------- ------- ------- -------- -------
Operating Income (Loss)........ 265 182 447 (2,214) 640 (1,574)
------- -------- ------- ------- -------- -------
Gain on the Disposal of
Assets....................... -- 2,195 2,195 -- 893 893
Interest Expense............... (1,403) 1,403 -- (833) 833 --
Other Income................... 44 -- 44 281 -- 281
------- -------- ------- ------- -------- -------
Net Income (Loss).............. (1,094) 3,780 2,686 (2,766) 2,366 (400)
Dividends on Series B Preferred
Stock........................ (200) -- (200) (200) -- (200)
------- -------- ------- ------- -------- -------
Net Income (Loss) Available to
Common Shareholders.......... $(1,294) $ 3,780 $ 2,486 $(2,966) $ 2,366 $ (600)
======= ======== ======= ======= ======== =======
Basic Income (Loss) per Common
Share........................ $ (0.22) $ 0.43 $ (0.52) $ (0.11)
======= ======= ======= =======
Average Number of Basic Common
Shares Outstanding........... 5,814 5,814 5,661 5,661
======= ======= ======= =======
Diluted Income (Loss) per
Common Share................. $ (0.22) $ 0.43 $ (0.52) $ (0.11)
======= ======= ======= =======
Average Number of Diluted
Common Shares Outstanding.... 5,814 5,814 5,661 5,661
======= ======= ======= =======
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, 1997
--------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net Sales...................... $ 118,475 $(42,780) $ 75,695
Cost of Goods Sold............. 69,626 (35,422) 34,204
--------- -------- --------
Gross Margin................... 48,849 (7,358) 41,491
Selling, General and
Administrative Expenses...... 66,375 (8,546) 57,829
--------- -------- --------
Operating Income (Loss)........ (17,526) 1,188 (16,338)
--------- -------- --------
Gain on the Disposal of
Assets....................... -- 893 893
Interest Expense............... (2,236) 2,236 --
Other Income................... 402 -- 402
--------- -------- --------
Net Income (Loss).............. (19,360) 4,317 (15,043)
Dividends on Series B Preferred
Stock........................ (400) -- (400)
--------- -------- --------
Net Income (Loss) Available to
Common Shareholders.......... $ (19,760) $ 4,317 $(15,443)
========= ======== ========
Basic Income (Loss) per Common
Share........................ $ (3.48) $ (2.72)
========= ========
Average Number of Basic Common
Shares Outstanding........... 5,685 5,685
========= ========
Diluted Income (Loss) per
Common Share................. $ (3.48) $ (2.72)
========= ========
Average Number of Diluted
Common Shares Outstanding.... 5,685 5,685
========= ========
</TABLE>
-3-
<PAGE> 44
THE LAMAUR CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
A. BASIS OF PRESENTATION.
The unaudited pro forma balance sheet presents the financial position of
the Company as of June 30, 1998, assuming that the Sale Transaction and the sale
of the Salon Division on July 31, 1998 for $11 million, and the application of
net proceeds therefrom occurred as of January 1, 1998. The unaudited pro forma
balance sheet has been prepared assuming (i) the $14 million purchase price is
paid in cash, and (ii) that the assets sold include only the plant and equipment
at the Fridley Facility, and not inventory, work-in process or raw materials.
The actual purchase price from the Sale Transaction may be (and is anticipated
to be) higher, some of the purchase price may be paid by the assumption of
liabilities, and some of the inventory, work-in-process or raw materials may be
sold as part of the Manufacturing Assets. Such pro forma information is based on
the historical balance sheet of the Company. The unaudited pro forma statements
of operations for the six months ended June 30, 1997 and for the year ended
December 31, 1997 have been prepared assuming that the Sale Transaction and the
sale of the Salon Division on July 31, 1998 for $11 million, and the application
of the net proceeds therefrom occurred as of January 1, 1997. The unaudited pro
forma statement of operations for the six months ended June 30, 1998 has been
prepared assuming the Sale Transaction and the sale of the Salon Division on
July 31, 1998 for $11 million, and application of proceeds occurred January 1,
1998. The unaudited pro forma statements of operations are based on the
historical statements of operations of the Company. The Company believes that
the assumptions used in preparing the unaudited pro forma financial data provide
a reasonable basis for presenting all of the significant effects of the Sale
Transaction and the application of the net proceeds therefrom and that the pro
forma adjustments give effect to those assumptions in the unaudited pro forma
financial information. However, because the purchase price may be higher than
the Minimum Price, and because it may include the assumption of liabilities and
transfer of assets in addition to the plant and equipment, the pro forma
financial information may not reflect the actual net gain from the Sale
Transaction and the sale of the Salon Division, nor the actual proceeds that the
Company would be able to realize from the Sale Transaction.
In addition, the pro forma statements of operations were prepared assuming
that manufacturing for the Retail division would be performed by the buyer of
the manufacturing facility and that the cost to the Company would be the same as
the Company's historical cost. The pro forma statements of operations presented
reflect the allocation of selling, general and administrative expenses based
upon a variety of assumptions.
The Company plans to negotiate a manufacturing and services agreement with
the buyer of the Contract division. Therefore the actual costs the Company will
incur in the future will be different than the historical costs presented.
B. PRO FORMA ADJUSTMENTS.
Pro forma adjustments to the statements of operations are made to reflect
the following:
1. The elimination of the Contract division and the Salon division sales
and related cost of sales for the entire period presented;
2. The elimination of direct expense associated with these divisions
including marketing, selling expenses, freight and brokerage;
3. The elimination of allocated manufacturing and administrative overhead;
4. The elimination of interest expense as a result of paying off the
Company's revolving line of credit and term loan from the sale proceeds;
and
5. The net gain from the sale of the Contract and Salon divisions.
-4-
<PAGE> 45
Pro forma adjustments to the balance sheet are made to reflect the
following:
1. Increase in cash from the sale of the Contract and Salon divisions;
2. Reduction in inventory as part of the sale of the Salon division;
3. Reduction in fixed assets related to the sale of the Contract and Salon
divisions; and
4. Reduction in capital lease obligation, revolving line of credit, and the
term note which were paid down from the proceeds from the sale of the
Contract and Salon divisions.
-5-
<PAGE> 46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
<TABLE>
<S> <C>
DELAWARE 68-0301547
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 (sec. 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> 47
PART I
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 1. 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 and Apple Pectin 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").
1
<PAGE> 48
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
2
<PAGE> 49
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.
The following table sets forth the Company's principal brands and products
sold within each brand during 1997:
RETAIL BRANDS
<TABLE>
<CAPTION>
BRAND SHAMPOOS AND CONDITIONERS STYLING AIDS AND PERMS
----- ------------------------- ----------------------
<S> <C> <C>
Willow Lake(R).............. Cherry Bark & Irish Moss Conditioning Raspberry & Vitamin E Non-Aero Hair
Shampoo; Citrus & Rosemary Shampoo; Spray; White Lily & Jasmine Hair Spray;
Lavender & Mint Shampoo; Witch Hazel & Aloe & Clover Blossom Mousse; Rosehips &
Honeysuckle Shampoo; Hops, Apricot & Ivy Spray Gel; Orange Blossom & Clove
Almond Conditioner; Sunflower, Honey & Spritz
Hibiscus Conditioner; Vitamin E, Carrot
Extract & Milk Protein Conditioner
Perma Soft(R)............... Revitalizing Shampoo, Moisturizing Hair Sprays (aerosol and non-aerosol),
Shampoo, Extra Body Shampoo, Shampoo Plus Mousse, Gel, Frizz Control Cream
Conditioner, Revitalizing Conditioner,
Moisturizing Conditioner, Extra Body
Conditioner, Moisturizing Mist
Conditioner
</TABLE>
3
<PAGE> 50
<TABLE>
<CAPTION>
BRAND SHAMPOOS AND CONDITIONERS STYLING AIDS AND PERMS
----- ------------------------- ----------------------
<S> <C> <C>
Color Soft(TM).............. Daily Cleansing Shampoo; Moisturizing Aerosol Finishing Spray; Styling Mousse;
Shampoo; Clean Rinsing Conditioner; Spray Gel
Moisturizing Conditioner; Spray-On
Conditioner
Salon Style(R).............. Moisture Potion(R) Shampoo, Therapy Hair Sprays (aerosol and non-aerosol),
Shampoo, Strengthening Shampoo, Spray Gel, Body Boost(R) Mousse
NutriShine Shampoo, 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, Gel, Mousse, Dry Style(R) Hair Spray for
Nourishing Shampoo, Coconut & Papaya Men (aerosol)
Shampoo, Rainwater 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 Clarifying Shampoo; Volumizing Shampoo;
Reflections(TM)........... Moisturizing Shampoo; Daily Finishing
Conditioner; Volumizing Conditioner;
Moisturizing Conditioner
</TABLE>
SALON BRANDS
<TABLE>
<CAPTION>
BRAND SHAMPOOS AND CONDITIONERS STYLING AIDS AND PERMS
----- ------------------------- ----------------------
<S> <C> <C>
Pativa(R)................... Curl Cleanse Shampoo, Volumizing Cleanse Mousse, Spritz, Design Creme, Alternative
Shampoo, Moisturizing Cleanse Shampoo, Wave (Normal), Alternative Wave (Tinted),
Purifying Cleanse, Curl Revitalizer Sprae Concentrate Hair Spray
Conditioner, Leave-In Fortifier,
Moisturizing Rinse, Purifying Rinse,
Replenishing Hair Masque
Nucleic A(R)................ Body Plus(R) Shampoo, Proteplex(R) Botanical(TM) Hair Spray, Glaz(R) Gel
Shampoos and Conditioner
Apple Pectin(R)............. Shampoo and Conditioner, Moisturizing Moisturizing Hair Spray, Acid Perm, Apple
Shampoo, ScentSates(TM) Shampoos and Pectin Plus(R) Perm, Ten-Minute Wave,
Conditioners, Apple Pectin Plus(R) Ultra Hold Mousse, Styling Creme
Shampoo and Conditioner in One
Apple Pectin Naturals....... Witch Hazel & Honeysuckle Shampoo, Irish Gel, Mousse, Spritz, Hair Spray
Moss & Cherry Bark Shampoo; Rosemary &
Grapefruit Shampoo; Hops, Apricots &
Almonds Conditioner; Sunflower, Honey &
Hibiscus Conditioner; Milk Protein,
Carrot Extract & Vitamin E Conditioner;
Peppermint & Lavender Bath & Body 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 Natural Woman(R) Hair Spray, CO-A(R)
Smoothing Shampoo, Bone Marrow(R) Perm, CO-A Kinetics(R) Perm, Lamaur
Conditioners 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>
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.
4
<PAGE> 51
Salon Style(R) is a line of mid-priced shampoos, conditioners and styling
aids targeted the salon segment of the retial 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%
======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(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.
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
5
<PAGE> 52
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.
6
<PAGE> 53
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
7
<PAGE> 54
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.
8
<PAGE> 55
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.
9
<PAGE> 56
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.
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
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
</TABLE>
- ---------------
* 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.
10
<PAGE> 57
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 PRO FORMA
------------------------------------------------------- ------------
APRIL 1, 1993
(INCEPTION)
YEARS ENDED DECEMBER 31, TO YEAR ENDED
--------------------------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1995(1) 1994 1993 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 5,609 2,667 2,498 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>
Financial Data of the Personal Care Division
11
<PAGE> 58
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995
THROUGH YEARS ENDED DECEMBER 31,
NOVEMBER 30, -------------------------
1995(4) 1994 1993
--------------- --------- --------
<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
</TABLE>
- ---------------
(1) Includes the results of operations of the Personal Care Division for the
month of December 1995 following its acquisition by the Company.
(2) Includes an $11.0 million write-down of assets required to adjust the
carrying value of the Personal Care Division to its net realizable value in
connection with Dow's decision to sell the Personal Care Division. Future
significant charges are not expected as assets and liabilities were recorded
at their estimated fair values at the date of the Company's acquisition of
the Personal Care Division.
(3) In accordance with 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.
12
<PAGE> 59
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.
13
<PAGE> 60
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.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
HISTORICAL PRO FORMA
1996 % 1995 %
---------- ----- ------------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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)%
</TABLE>
Year Ended December 31, 1996 (Historical) Compared to Year Ended December 31,
1995 (Pro Forma)
Total net sales of $117.1 million for the year ended December 31, 1996
declined 0.6% compared to pro forma net sales of $117.8 million in 1995. During
1996, the Company experienced sales growth from its new product line Willow
Lake(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.
14
<PAGE> 61
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
15
<PAGE> 62
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.
16
<PAGE> 63
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
17
<PAGE> 64
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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-18
Statement of Operations for the Period from January 1, 1995
to November 30, 1995...................................... F-19
Statement of Net Invested Capital for the Period from
January 1, 1995 to November 30, 1995...................... F-20
Statement of Cash Flows for the Period from January 1, 1995
to November 30, 1995...................................... F-21
Notes to Financial Statements............................... F-22
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE
Not applicable.
18
<PAGE> 65
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.
19
<PAGE> 66
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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<C> <S>
*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.
</TABLE>
20
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<C> <S>
**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 -- Minnesota
10.15 Memorandum from the Company to Dominic J. LaRosa re
Insurance Coverage
*****10.16 1997 Stock Plan
11.1 Statement regarding computation of per share earnings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule
*99.1 U.S. Patent Number 5,395,490, issued March 7, 1995,
registered to Don G. Hoff and Joseph F. Stiley, III, for a
method of treating materials by the application of
electromagnetic energy at resonant absorption frequencies.
</TABLE>
- ---------------
* 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)
21
<PAGE> 68
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DON G. HOFF Chairman of the Board and March 30, 1998
- ----------------------------------------------------- Chief Executive Officer
Don G. Hoff (Principal Executive Officer)
/s/ JOHN D. HELLMANN Vice President, Chief Financial March 30, 1998
- ----------------------------------------------------- Officer (Principal Financial
John D. Hellmann and Accounting Officer)
/s/ DOMINIC LAROSA President and CEO -- Lamaur March 30, 1998
- ----------------------------------------------------- Division and Director
Dominic J. LaRosa
/s/ HAROLD M. COPPERMAN Director March 30, 1998
- -----------------------------------------------------
Harold M. Copperman
/s/ GERALD A. EPPNER Director March 30, 1998
- -----------------------------------------------------
Gerald A. Eppner
/s/ PAUL E. DEAN Director March 30, 1998
- -----------------------------------------------------
Paul E. Dean
/s/ PERRY D. HOFF Director March 30, 1998
- -----------------------------------------------------
Perry D. Hoff
/s/ JOSEPH F. STILEY Director March 30, 1998
- -----------------------------------------------------
Joseph F. Stiley, III
</TABLE>
22
<PAGE> 69
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
F-1
<PAGE> 70
THE LAMAUR CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
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 expenses..... 2,211 2,458
Current portion of long-term debt (Note 7)................ 1,612 1,272
Payables to related parties (Note 12)..................... 250 1,750
-------- -------
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
======== =======
</TABLE>
See notes to financial statements
F-2
<PAGE> 71
THE LAMAUR CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
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> 72
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
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... -- $ -- -- $ -- 2,498 $25
Issuance of Series A preferred
stock....................... 1,000 8,500 -- -- -- --
Issuance of common stock for
cash........................ -- -- -- -- 135 1
Issuance of common stock for
services.................... -- -- -- -- 156 1
Issuance of common stock for
stock subscriptions......... -- -- -- -- 73 1
Grants of non-cash stock
option credits.............. -- -- -- -- -- --
Conversion of notes payable to
common stock................ -- -- -- -- 83 1
Reduction of stock
subscriptions receivable.... -- -- -- -- -- --
Net loss...................... -- -- -- -- -- --
----- ------ --- ------ ----- ---
Balance December 31, 1995... 1,000 8,500 -- -- 2,945 29
Issuance of Series B preferred
stock....................... -- -- 764 5,000 -- --
Issuance of common stock...... -- -- -- -- 2,643 26
Grants of non-cash stock
option credits.............. -- -- -- -- -- --
Stock grants to employees..... -- -- -- -- 15 1
Dividends on preferred
stock....................... -- -- -- -- -- --
Net income.................... -- -- -- -- -- --
----- ------ --- ------ ----- ---
Balance, December 31,1996... 1,000 8,500 764 5,000 5,603 56
Issuance of common stock...... -- -- -- -- 145 1
Dividends on preferred
stock....................... -- -- -- -- -- --
Net loss...................... -- -- -- -- -- --
----- ------ --- ------ ----- ---
Balance, December 31,1997... 1,000 $8,500 764 $5,000 5,748 $57
===== ====== === ====== ===== ===
<CAPTION>
ADDITIONAL STOCK
PAID-IN SUBSCRIPTIONS ACCUMULATED
CAPITAL RECEIVABLE DEFICIT TOTAL
---------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.... $ 734 $ -- $ (2,221) $ (1,462)
Issuance of Series A preferred
stock....................... -- -- -- 8,500
Issuance of common stock for
cash........................ 214 -- -- 215
Issuance of common stock for
services.................... 236 -- -- 237
Issuance of common stock for
stock subscriptions......... 99 (100) -- --
Grants of non-cash stock
option credits.............. 311 -- -- 311
Conversion of notes payable to
common stock................ 124 -- -- 125
Reduction of stock
subscriptions receivable.... -- 50 -- 50
Net loss...................... -- -- (1,382) (1,382)
------- ----- -------- --------
Balance December 31, 1995... 1,718 (50) (3,603) 6,594
Issuance of Series B preferred
stock....................... -- -- -- 5,000
Issuance of common stock...... 18,086 -- -- 18,112
Grants of non-cash stock
option credits.............. 132 -- -- 132
Stock grants to employees..... 93 -- -- 94
Dividends on preferred
stock....................... (233) -- -- (233)
Net income.................... -- -- 553 553
------- ----- -------- --------
Balance, December 31,1996... 19,796 (50) (3,050) 30,252
Issuance of common stock...... 456 -- -- 457
Dividends on preferred
stock....................... (400) -- -- (400)
Net loss...................... -- -- (19,360) (19,360)
------- ----- -------- --------
Balance, December 31,1997... $19,852 $ (50) $(22,410) $ 10,949
======= ===== ======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 73
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 of 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> 74
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.
<TABLE>
<CAPTION>
1995
----------------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNT)
<S> <C>
Total net sales........................................ $117,766
Net loss............................................... (11,212)
Net loss per share..................................... (2.74)
</TABLE>
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.
F-6
<PAGE> 75
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
F-7
<PAGE> 76
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
F-8
<PAGE> 77
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods........................................... $ 9,233 $ 7,324
Work in process.......................................... 93 118
Raw materials............................................ 6,197 4,257
------- -------
Total.......................................... $15,523 $11,699
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
F-9
<PAGE> 78
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
Long-term debt includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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.
F-10
<PAGE> 79
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum principal payments on long-term debt, capital lease and
noncancellable operating lease obligations are as follows:
<TABLE>
<CAPTION>
PRINCIPAL PAYMENTS ON
LONG-TERM DEBT AND MINIMUM PAYMENTS ON
CAPITAL LEASE OPERATING LEASE
YEAR ENDING OBLIGATIONS OBLIGATIONS
----------- --------------------- -------------------
(IN THOUSANDS)
<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
F-11
<PAGE> 80
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
WEIGHTED
NUMBER OF AVERAGE SHARE
SHARES 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) 5.77
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 WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE (IN YEARS) PRICE NUMBER PRICE
- ------------ --------- --------------- --------- ------- ---------
<S> <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.
F-12
<PAGE> 81
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-13
<PAGE> 82
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.................. $ (348) $ 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
plans.......................................... -- (606) --
-------- ------ -------
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.
F-14
<PAGE> 83
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed
using U.S. federal statutory rates is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
(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......................... $ -- $ -- $ --
======= ===== =====
</TABLE>
The significant components of deferred income taxes as of December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
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....................................... $ -- $ --
======= =======
</TABLE>
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.
12. RELATED PARTY TRANSACTIONS
Related party obligations include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
----- -------
(IN THOUSANDS)
<S> <C> <C>
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
===== =======
</TABLE>
F-15
<PAGE> 84
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
F-16
<PAGE> 85
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
F-17
<PAGE> 86
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
F-18
<PAGE> 87
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 TO
NOVEMBER 30, 1995
------------------
(IN THOUSANDS)
<S> <C>
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)
========
</TABLE>
See notes to financial statements.
F-19
<PAGE> 88
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENT OF NET INVESTED CAPITAL
PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 TO
NOVEMBER 30, 1995
--------------------
(IN THOUSANDS)
<S> <C>
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
========
</TABLE>
See notes to financial statements.
F-20
<PAGE> 89
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 TO
NOVEMBER 30, 1995
------------------
(IN THOUSANDS)
<S> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(12,238)
Adjustments to reconcile net loss to net cash provided by
(used in) 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
========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 90
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.
F-22
<PAGE> 91
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 30, 1995
2. RELATED PARTY TRANSACTIONS
PCD provides contract packaging and manufacturing services for Dow.
Revenues from this arrangement totaled $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.
F-23
