UNITED STATES
SECURITIES AND 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, 1998
Commission file number 0-28174
The Lamaur Corporation
(Exact name of registrant as specified in its charter)
Delaware 68-0301547
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
One Lovell Avenue, Mill Valley CA 94941
(Address of principal executive offices) (Zip Code)
(415) 380-8200
(Registrant's telephone number, including area code)
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 (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] Yes [ ] No
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1999 was approximately $0.9 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 24, 1999, there were 7,309,561 outstanding shares of the
registrant's common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Proxy Statement for 1999 annual meeting of stockholders
<PAGE>
Item I. BUSINESS
Overview
The Lamaur Corporation (the "Company") was incorporated under the laws of the
State of Delaware on January 4, 1996. The Company's predecessor, Electronic Hair
Styling, Inc., was incorporated in the State of Washington on April 1, 1993 and,
effective March 18, 1996, it merged with the Company to accomplish a Delaware
reincorporation. Effective November 15, 1995, as a result of the acquisition of
the Personal Care Division of DowBrands L.P. (an affiliate of The Dow Chemical
Company), the Company became a successor to a business started in 1930 known
prior to its acquisition by DowBrands in 1987 as Lamaur Inc. On March 26, 1997,
the Company changed its name to The Lamaur Corporation.
Corporate functions, including financial and legal services, as well as
corporate development, investor relations, science and technology, are managed
at the Company's headquarters in Mill Valley, California. Through its Lamaur
Division based in Fridley, Minnesota, the Company operates three operating
segments, the Retail Group, the Salon Group, and the Custom Manufacturing Group.
As the Retail and Salon Groups have similar economic characteristics, they have
been aggregated into one reportable segment called the Retail and Salon Group.
The Retail and Salon Group develops, formulates, manufactures, and markets
personal hair care products consisting of shampoos, conditioners, hair sprays,
and other styling aids, for the consumer market and until July 1998, for the
professional hair care market. The Company's Custom Manufacturing Group
develops, formulates, and manufactures for third parties a variety of aerosol
and other liquid products, consisting of hair care, personal care, and household
products.
As a result of the Company's economic difficulty, it has retained investment
bankers and, with their assistance, has been actively pursuing strategic
transactions in order to satisfy the needs of its creditors and to rationalize
the business going forward. In July of 1998 the Company sold its Salon brands to
a subsidiary of Shiseido for net proceeds of $10.0 million. The net proceeds
were used primarily to pay down borrowings under the Company's credit agreement,
to pay down extended accounts payable, and for operations. To satisfy its
obligations to creditors and improve its financial condition, the Company is
continuing to restructure operations to reduce expenses and is actively pursuing
a buyer for the manufacturing operations and related assets. A final decision as
to whether to sell the manufacturing operations and related assets will depend
upon receiving offers, analysis of the economics of those offers, and may
require shareholder approval. The Company continues to experience declining
revenues and corresponding cash shortfalls. Without additional financing and
restructuring, no assurance can be given that the Company can continue as a
going concern.
The Company has conducted early stages of research and development of Electronic
Chemistry, 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. Because of budget constraints the Company
substantially discontinued activity related to advanced technology development
in 1998. 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. In 1999 an additional Electronic Chemistry patent
was issued to the Company.
The Company's Retail and Salon Group product lines are sold through mass retail
outlets under the premium-priced Willow Lake, Perma Soft and Color Soft,
mid-priced Salon Style and value-priced Style and Style Natural Reflections
brand names ("Retail Brands"). Most product lines contain a wide assortment of
shampoos, conditioners and styling products positioned towards distinct consumer
segments. In addition, until July 1998, a full line of high quality,
premium-priced products including shampoos, conditioners, hair sprays, perms and
a variety of other styling aids were sold to the professional salon and
specialty shops under the Nucleic A, Apple Pectin, Apple Pectin Naturals,
Vita/E and Pativa brand names ("Salon Brands").
During 1998, sales by the Retail and Salon Group accounted for 75.9% of the
Company's total net sales, and were made to mass merchandisers, food stores,
drug stores, professional salons, specialty outlets, and others by a combination
of the Company's direct sales force and a network of independent brokers. Sales
by the Custom Manufacturing Group accounted for 24.1% of the Company's total net
sales for the same period.
During 1998, the Company focused a substantial portion of its marketing efforts
to the growing naturals product segment of the market; however, all retail
brands experienced significant sales declines from the previous year, including
Style down 31%, Perma Soft down 79%, Willow Lake down 21%, and Salon Style down
61%.
<PAGE>
The Company's net loss for 1998 of approximately $0.2 million was principally
due to lower than expected revenues from retail brands discussed above which had
a negative impact on revenues, earnings, overhead allocation and cash flow. The
operating loss was substantially offset by the gain from the sale of the
Company's Salon Brands to Shiseido.
In 1998, as a result of the expired Manufacturing Agreement with DowBrands in
November 1997, lower Retail Brand sales and the sale of its Salon Brands
previously discussed, the Company restructured its operations by eliminating
positions in the sales, marketing, production, administrative and management
areas. On February 28, 1999, the Company had 225 employees compared with 323 on
February 28, 1998.
The Company was out of compliance with the financial loan covenants of its
credit agreement at December 31, 1998. The Company has received a waiver from
Norwest Business Credit ("Norwest") in regard to these covenants. In conjunction
with receiving a waiver, the Company has renegotiated the terms and covenants of
the loan agreement with Norwest on March 12, 1999. Although the Company is in
compliance, no assurances can be given that the Company will continue to remain
in compliance.
On March 16, 1998, the Company retained the investment banking firm of McCabe,
Mintz & Company, L.L.C. ("MMC") to assist in evaluating various strategic
alternatives seeking to satisfy the needs of creditors and enhance stockholder
value. These alternatives include a sale of the Company or selected assets, a
business combination, strategic alliance, or merger with a third party. This
process resulted in the sale of the Company's Salon Brands to Shiseido in July
of 1998 for net proceeds of $10.0 million. The Company continues to experience
financial difficulty and liquidity problems and to satisfy creditors may sell
its manufacturing operations and related assets and/or its retail assets. No
assurance can be given as to whether any further transactions will be
consummated.
Investment Considerations
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
new management's efforts to turn around operations have not been successful to
date. No assurance can be given that the Company will have earnings in future
periods. The Company will require additional financing to fund its term loan pay
off, and to satisfy the Company's projected working capital for 1999, and to
reduce its extended aged payables which at December 31, 1998 were approximately
$6.0 million. A portion of the working capital would be used to support a new
retail brand marketing strategy and to introduce new brands without which the
Company will not be successful. Additional working capital may not be available,
and the absence of such working capital has had and will continue to have a
material adverse impact on the Company. The price of the Company's Common Stock
went below $1.00 per share for an extended period, and in accordance with Nasdaq
listing requirements, the Company's shares were delisted in February of 1999. No
assurance can be given that the shares will be relisted on Nasdaq or any other
national exchange.
In March 1998, the Company retained the investment banking firm of McCabe, Mintz
& Company, L.L.C. to explore strategic alternatives to maximize stockholder
value. In 1998, the Company reported losses. 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, identified potential acquirers of some or
all of the assets of the Company and has sought bids or other proposals from
such parties. On July 31, 1998 the Company sold to Shiseido Co. Ltd.'s
subsidiary, Zotos International, Inc. ("Zotos"), its professional salon brands
and related inventory for net proceeds of $10.0 million. The net proceeds were
used primarily to pay down borrowings under the Company's credit agreement, to
pay down extended accounts payable, and for operations.
The Company currently intends to continue its retail business, selling branded
products to traditional mass, food and drug retailers. The Company's Willow
Lake brand of shampoos, conditioners and styling aids, launched in 1997,
accounts for approximately 40.2% of Retail and Salon Group net sales. The
Company believes that the Willow Lake product line, properly supported, may
provide the foundation upon which additional products can be added such as skin
care products. In addition to revenues from the Company's other or new 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 there could be an opportunity for a future return to
stockholders through reorganized operations. However, to satisfy its obligations
to creditors, the Company 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 operations 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 operations and related assets and/or
its Retail assets.
<PAGE>
If the Company determines that a sale of all of its assets (i.e., both the plant
and retail 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 stockholders are entitled in a
liquidation to a preference of approximately $15 million before any payment may
be made to the holders of Common Stock. Based upon discussions to date, there
will be less than $15 million available for distribution to the preferred
stockholders if all of the assets are sold currently. Therefore, unless the
preferred stockholders waive this right or convert to common, no distribution
would be available to common stockholders if such a liquidation were to occur.
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 assets as well as
the manufacturing operations and related assets. No assurance can be given that
any asset sales will occur 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 and by extended terms from its
creditors. The Company was out of compliance with the financial loan covenants
of its credit agreement at December 31, 1998. The Company has received a waiver
from Norwest in regards to these covenants. In conjunction with receiving a
waiver, the Company has renegotiated the terms and covenants of the loan
agreement with Norwest on March 12, 1999. Although the Company is in compliance,
no assurances can be given that the Company will continue to remain in
compliance. Norwest holds a security interest in substantially all of the
Company's assets, including cash.
Products
The Company formulates and manufactures a broad range of hair care product
lines, marketed under several distinct brand names. Product lines sold through
consumer retail outlets include Willow Lake, Perma Soft, Color Soft, Salon
Style, Style and Style Natural Reflections (Retail Brands). Most lines contain a
broad assortment of shampoos, conditioners, and styling products. Until July
1998 product lines used by stylists and sold by salons and beauty supply stores
throughout the United States and in Canada included shampoos, conditioners, hair
sprays, perms and a variety of styling aids sold under the Pativa, Nucleic A,
Nucleic A Botanicals, Apple Pectin, Apple Pectin Naturals and Vita/E brand names
(Salon Brands). In addition, the Company's Custom Manufacturing Group develops,
formulates, and manufactures for third parties a variety of aerosol and other
liquid products, consisting of hair care, personal care, and household products.
<PAGE>
The following table sets forth the Company's principal brands and products sold
within each brand by the Retail and Salon Group during 1998:
<TABLE>
<CAPTION>
Retail Brands
<S> <C> <C>
Brand Shampoos and Conditioners Styling Aids and Perms
Willow Lake................... Cherry Bark & Irish Moss Conditioning Raspberry & Vitamin E Non-Aero Hair
Shampoo; Citrus & Rosemary Shampoo; Lavender Spray; White Lily & Jasmine Hair
& Mint Shampoo; Witch Hazel & Honeysuckle Spray; Aloe & Clover Blossom Mousse;
Shampoo; Hops, Apricot & Almond Conditioner; Rosehips & Ivy Spray Gel; Orange
Sunflower, Honey & Hibiscus Conditioner; Blossom & Clove Spritz
Vitamin E, Carrot Extract & Milk Protein
Conditioner
Perma Soft.................... Revitalizing Shampoo, Moisturizing Shampoo, Aerosol Hair Sprays, Mousse, Gel,
Extra Body Shampoo, Shampoo Plus Conditioner, Frizz Control Cream
Revitalizing Conditioner, Moisturizing
Conditioner, Extra Body Conditioner,
Moisturizing Mist Conditioner
Color Soft.................... Daily Cleansing Shampoo; Moisturizing Aerosol Finishing Spray; Styling
Shampoo; Clean Rinsing Conditioner; Mousse; Spray Gel
Moisturizing Conditioner; Spray-On Conditioner
Salon Style................... Moisture Potion Shampoo, Therapy Shampoo, Hair Sprays (aerosol and non-aerosol),
Strengthening Shampoo, NutriShine Shampoo, Spray Gel, Body Boost Mousse
Botanical Conditioner, Moisture Potion
Conditioner, Detangling Conditioner, Hydro
Balance Deep Conditioner
Style......................... Moisturizing Shampoo, Extra Body Shampoo, Hair Sprays (aerosol and non-aerosol),
Regular Shampoo, Strawberry Shampoo, Gel, Mousse, Dry Style Hair Spray for
Nourishing Shampoo, Coconut & Papaya Shampoo, Men (aerosol)
Rainwater Shampoo; Moisturizing Conditioner,
Extra Body Conditioner, Regular Conditioner,
Strawberry Conditioner, Deep Conditioning
Conditioner, Coconut & Papaya Conditioner;
Rainwater Conditioner; Style Plus Extra
Conditioning Shampoo and Conditioner In-One
Style Natural Reflections..... Clarifying Shampoo; Volumizing Shampoo;
Moisturizing Shampoo; Daily Finishing
Conditioner; Volumizing Conditioner;
Moisturizing Conditioner
Salon Brands Until July 1998 (1)
Brand Shampoos and Conditioners Styling Aids and Perms
Pativa........................ Curl Cleanse Shampoo, Volumizing Cleanse Mousse, Spritz, Design Creme,
Shampoo, Moisturizing Cleanse Shampoo, Alternative Wave (Normal), Alternative
Purifying Cleanse, Curl Revitalizer Wave (Tinted), Sprae Concentrate Hair
Conditioner, Leave-In Fortifier, Moisturizing Spray
Rinse, Purifying Rinse, Replenishing Hair
Masque
Nucleic A..................... Body Plus Shampoo, Proteplex Shampoos and Botanicals Hair Spray, Glaz Gel
Conditioner
Apple Pectin .................. Shampoo and Conditioner, Moisturizing Moisturizing Hair Spray, Acid Perm,
Shampoo, ScentSates Shampoos and Apple Pectin Plus Perm, Ten-Minute
Conditioners, Apple Pectin Plus Shampoo and Wave, Ultra Hold Mousse, Styling Creme
Conditioner in One
Apple Pectin Naturals......... Witch Hazel & Honeysuckle Shampoo, Irish Moss Gel, Mousse, Spritz, Hair Spray
& Cherry Bark Shampoo; Rosemary & Grapefruit
Shampoo; Hops, Apricots & Almonds
Conditioner; Sunflower, Honey & Hibiscus
Conditioner; Milk Protein, Carrot Extract &
Vitamin E Conditioner; Peppermint & Lavender
Bath & Body Wash
Vita/E ........................ Shampoo, Conditioners Perm, Hair Spray, Ultrahold Hair
Spray, Unscented Hair Spray, Maximum
Hold Hair Spray, Ultra-hold
Concentrate Hair Spray
Other Salon Products........... Lamaur Moisturizing Shampoo, Lamaur Natural Woman Hair Spray, CO-A Perm,
Smoothing Shampoo, Bone Marrow Conditioners CO-A Kinetics Perm, Lamaur Inception
Thio-Free Perm, Strata Perm, Gamma
pHactor Wave Set and Concentrate,
Beauti-Lac Hair Spray, Stylac Hair
Spray, Sprayage Hair Spray, Body
Plus Mousse, Axiom Perm, Body for
Sure Perm, Lamaur Straightening
Balm, Lamaur Sealing Spray, Lamaur
Plus Styling Spray
</TABLE>
(1) Salon Brands were sold to a division of Shiseido for net proceeds of $10.0
million in July of 1998.
<PAGE>
Willow Lake, a premium priced retail hair care product of shampoos, conditioners
and styling aids is the Company's entry in the "naturals" segment of the hair
care category. Perma Soft, a premium-priced retail product line, is intended to
meet the needs of a segment of consumers who use permanent wave products. Color
Soft was developed and marketed for consumers who color treat their hair. Salon
Style is a line of mid-priced shampoos, conditioners, and styling aids targeted
toward the salon segment of the retail market. Style is the Company's "value
priced" brand, intended for use by the entire family. Style Natural Reflections
is a "mid-priced" entry in the "naturals" segment.
The Apple Pectin Naturals product line was positioned as "natural" products for
the professional market. Apple Pectin is based on the use of pectin from apples
as a key ingredient in the products. Pativa is a line of professional salon
shampoos, conditioners and styling products distributed by exclusive dealers to
full-service salons. Vita/E products contain vitamin E, a natural antioxidant
which protects the hair and prevents color fading. Nucleic A is a full line of
salon products prescribed to meet hair care needs.
The following table sets forth certain information concerning the Company's net
sales by operating segment in each of the last three fiscal years:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ------------------------------- ---------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Retail and
Salon Group (1) $ 56,216 75.9 % $ 93,098 78.6 % $ 86,265 73.7 %
Custom Manufacturing
Group (2) 17,827 24.1 25,377 21.4 30,818 26.3
--------------- ---------------- --------------- --------------- --------------- ------------
Total: $ 74,043 100.0 % $ 118,475 100.0 % $ 117,083 100.0 %
=============== ================ =============== =============== =============== =============
</TABLE>
(1) 1998 Salon revenues are for seven months due to the sale of the Salon Brands
in July 1998.
(2) Custom Manufacturing Group sales included sales to DowBrands of $0.0
million, $16.4 million and $22.2 million in each of the years ended December 31,
1998, 1997 and 1996, respectively. In November 1997, the Manufacturing Agreement
with DowBrands expired.
Marketing and Distribution
The Company's Retail and Salon Group sales are made to mass merchandisers, food
stores, drug stores and other retail outlets as well as to wholesalers who
service retail outlets, and until July 1998 to the professional market,
including sales to distributors who then sell to professional salons and
specialty outlets. Sales for the Retail and Salon Group are carried out through
a combination of the Company's own sales force and independent brokers.
The Company currently maintains more than 300 active customer accounts and in
1998 no customer other than Wal-Mart accounted for more than 10% of the
Company's total net sales. Wal-Mart accounted for 21%, 15% and 17% of the
Company's total net sales in each of 1998, 1997 and 1996, respectively.
DowBrands, whose manufacturing agreement expired in 1997, accounted for 0%, 14%
and 19% of the Company's total net sales in each of 1998, 1997 and 1996,
respectively. The loss of sales to Wal-Mart or other significant customers would
have a material adverse effect on the business and operations of the Company.
There are no contractual obligations from any customers to make continuing
purchases from the Company.
The Company promotes sales of its products utilizing advertising, consumer
promotions and merchandising support programs. During the years ended December
31, 1998, 1997 and 1996, the Company's marketing support expense was
approximately $14.0 million, $43.7 million and $23.8 million, respectively. The
significant decrease in these expenses from 1997 was principally due to the
launch of the Company's new premium-priced brand, Willow Lake in 1997 and
revenue and working capital shortfalls in 1998.
The Company anticipates a need to increase expenditures in connection with its
marketing activities, and will require additional financial resources to fund
those activities. The Company's strategy in 1999 is to focus its limited
resources to support the Willow Lake brand with advertising and consumer
promotion and to provide maintenance promotional support behind the other retail
brands.
Research and Development
The Company continuously engages in the development of new products and
improvements to its existing formulations. The Company relies principally on the
experience of its staff in connection with formulating new products. The Company
believes its research and development efforts are enhanced by the availability
of its on-site salon, which is fully equipped to permit the testing of new
products. The Company also maintains a laboratory, quality assurance and quality
control facilities.
<PAGE>
Manufacturing and Supply
All the Company's manufacturing, packaging, and warehousing operations are
located in a 475,000 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 has substantial excess production
capacity, which results in a high fixed overhead and contributes to unprofitable
operations. The Company is considering selling its manufacturing operations and
related assets and outsourcing production of its retail brands.
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.
Because of financial difficulty the Company has extended payables to vendors of
approximately $6 million and, in some cases, supply is provided on a
cash-on-delivery basis. Should the past due accounts not be reduced, supply of
materials could be discontinued. The Company is working with its vendors and
working on capital programs to resolve aged payables. No assurance can be given,
however, that payments can be made or that production will not be interrupted,
which would have a material adverse effect on the Company.
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 265,000
square foot warehouse. 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.
Custom manufacturing of 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
24.1%, 21.4%, and 26.3% to the Company's net sales in 1998, 1997, and 1996,
respectively.
The Company maintains a strict quality 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.
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. While there will be related capital investment,
the Company does not expect that compliance with those standards will adversely
affect its revenues or costs in 1999. The Company is also subject to federal
regulations concerning the content of its advertising, trade practices, and
certain other matters.
DowBrands Inc. has agreed, for a period of eight years from November 15, 1995,
(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.
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 enacted.
<PAGE>
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 trademarks and trade names if and when
it commences operations or marketing activities in other foreign countries.
Principal trademarks of the Retail Brands include Willow Lake, Perma Soft, Color
Soft, Salon Style, Style and Style Natural Reflections. The Salon Brands
trademarks, including Pativa, Nucleic A, Apple Pectin, Apple Pectin Naturals,
and Vita/E, were sold to Shiseido in July of 1998. 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
important 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) and (No. 5,858,179, issued to Dr. Rich Loda in January
1999) 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 technology, are affiliates of the Company. The Company
believes that its patents, which contain 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, as well as change the characteristics of certain chemical components,
provide 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.
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 new competitive products, often accompanied by major
advertising and promotional activities.
There have been significant changes in the personal care products market in the
last 24 months. The cost of goods and marketing expense in the hair care
products market has been rising steadily for several years. The result has been
an erosion in profit margins among the industry's competitors generally.
Consequently, the hair care industry has been experiencing both a consolidation
in the number of competitors as well as retailers.
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. Principal competitors include The
Procter & Gamble Company, Unilever N.V., Bristol-Myers Squibb Company (Clairol),
L'Oreal S.A. and Alberto-Culver Company.
Personnel
The Company employed 225 persons as of February 28, 1999. None of the Company's
employees is a member of a labor union. The Company considers its relationship
with its employees to be good.
<PAGE>
Item 2. PROPERTIES
The Company owns its facility in Fridley, Minnesota, near Minneapolis. This
facility contains administrative, laboratory, production and warehousing areas.
The 475,000 square foot air conditioned facility is located on a 25 acre site,
and includes an approximately 75,000 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 1980's is well maintained. The Company has excess production
capacity.
At December 31, 1998, the Company leased its 4,224 square foot office facility
in Mill Valley, California, near San Francisco, from Intertec, a division of
Innovative Capital Management, Inc., a related party, on a month-to-month basis.
Item 3. LEGAL PROCEEDINGS
On November 2, 1998, a class action and derivative lawsuit was filed by the
stockholders (on behalf of themselves and the Company) in the Delaware Court of
Chancery in and for New Castle County alleging that the defendant Board of
Directors breached their fiduciary duties to the Company and failed to disclose
certain information in the Company's 1998 Proxy Statement. Plaintiffs seek
injunctive relief, damages and a recision of all actions approved at the
November 2, 1998 Annual Meeting. In addition, the plaintiffs are seeking the
appointment of a receiver for the Company and changes in the disclosures to
correct what they allege are errors and costs and attorney's fees. The Company
believes the lawsuit is without merit and will defend the action in the best
interest of the stockholders. No discovery has been commenced against the
Company, only minimal discovery has been conducted by plaintiffs, and no
significant dates have been set in the litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In October 1998 the Company submitted to shareholders four matters all of which
were approved at the annual meeting held on November 2, 1998. The matters were:
To elect five directors to hold office for a one-year term and until their
respective successors are elected and qualified; to ratify a reduction in the
number of members of the board of directors from seven to five; to consider and
vote upon a proposal to approve and adopt a potential sale of certain assets
relating to the Company's manufacturing operations and to consider, approve and
ratify the appointment of Deloitte & Touche LLP as the Company's independent
auditors for the year ended December 31, 1998.
At the annual meeting, the following directors received the following votes:
FOR WITHHELD
Don G. Hoff 5,442,013 595,810
Dominic J. LaRosa 5,432,448 605,375
Harold M. Copperman 5,441,513 596,310
Perry D. Hoff 5,431,513 606,310
Joseph F. Stiley, III 5,442,013 595,810
The shareholders also approved a reduction in the number of directors to five
with voting as follows: 5,372,741 for, 659,760 against, and 5,322 abstaining.
The shareholders also approved a proposal for the sale of the manufacturing
facility at any time through January 1999, with voting as follows: 3,806,223
for, 604,513 against, 931 abstaining, and 1,626,156 broker non-votes.
The shareholders also ratified the selection of Deloitte & Touche LLP as
independent auditors for the Company for the fiscal year ending December 31,
1998 with voting as follows: 5,539,840 for, 495,433 against, and 2,550
abstaining.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until February 1999 the Company's Common Stock was 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:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- ----------------------------------
High Low High Low High Low
-------------- -------------- -------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 2.438 $ 1.250 $ 4.250 $ 2.750
Second Quarter 3.000 0.656 3.813 2.375 $8.250 (1) $ 5.250
Third Quarter 0.750 0.063 3.500 2.500 6.000 3.750
Fourth Quarter 0.313 0.031 2.938 1.500 4.875 3.125
</TABLE>
(1) Includes only the period May 23, 1996, the first trading date after the
Company's initial public offering, to June 30, 1996.
Because the Company's share price was below $1.00 per share for an extended
period, in accordance with Nasdaq listing requirements, LMAR was delisted from
the Nasdaq reporting system in February 1999. The Company's shares are currently
traded in the "Pink Sheets." No assurance can be given that LMAR will be
relisted in the future.
As of March 24, 1999, the number of holders of record of the Company's Common
Stock was 482 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 nominees hold shares of record.
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, 1998 the Company is $600,000 in arrears on the payment of
dividends on its Series B preferred stock held by DowBrands.
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.
On March 18, 1998, the Company issued 109,581 shares of its common stock to
Intertec Holdings, L.P. pursuant to the terms of a Common Stock Purchase
Agreement. The issue price was $8.00 per share. These securities were exempt
from registration under Section 4(2) of the Securities Act of 1933.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data with respect to the statements of
operations of the Company, for the twelve months ended December 31, 1998, 1997,
1996, 1995 and 1994, and the balance sheet data of the Company at December 31,
1998, 1997, 1996, 1995 and 1994.
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 year ended December 31, 1994, and the
balance sheet of the Personal Care Division at December 31, 1994. Such data
were derived from the Personal Care Division financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1994
-------- -------- -------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Statements of Operations Data:
Total Net Sales ......................... $ 74,043 $ 118,475 $ 117,083 $ 8,070 $ --
Cost of Goods Sold ...................... 46,062 69,626 70,215 5,656 --
Gross Margin ............................ 27,981 48,849 46,868 2,414 --
Operating Expenses ...................... 31,243 66,375 45,641 3,496 557
Operating (Loss) Income ................. (3,262) (17,526) 1,227 (1,082) (557)
Interest Expense ........................ 1,951 2,236 1,386 300 59
Other Income (Expense) .................. 432 (402) (712) -- --
Gain on sale of professional salon brands 5,436 -- -- -- --
Net (Loss) Income ....................... $ (209) $ (19,360) $ 553 $ (1,382) $ (616)
========= ========= ========= ========= =========
Basic (Loss) Income Per Common Share .... $ (0.10) $ (3.48) $ 0.07 $ (0.52) $ (0.25)
========= ========= ========= ========= =========
Weighted Average Common Shares
Outstanding - Basic (2) ................. 5,854 5,685 4,557 2,667 2,498
Diluted (Loss) Income Per Common Share .. $ (0.10) $ (3.48) $ 0.06 $ (0.52) $ (0.25)
Weighted Average Common Shares
Outstanding - Diluted (2) ............... 5,854 5,685 5,609 2,667 2,498
Balance Sheet Data
Working Capital (Deficit) ............... $ 2,116 $ 15,794 $ 26,126 $ 10,346 $ (466)
Total Assets ............................ 36,712 58,326 61,566 42,967 6
Long-Term Debt, less Current Portion .... 8,290 24,046 14,473 20,350 1,000
Stockholders' Equity (Deficit) .......... 11,246 10,949 30,252 6,594 (1,462)
</TABLE>
<PAGE>
Selected Financial Data of the Personal Care Division
<TABLE>
<CAPTION>
Period from
January 1, 1995
through Year Ended
November 30, December 31,
1995 (3) 1994
---------------------- -------------------
(In thousands)
<S> <C> <C>
Selected Statements of Operations Data:
Total Net Sales $ 109,696 $ 121,277
Cost of Goods Sold 67,088 71,735
---------------------- -------------------
Gross Margin 42,608 49,542
Operating Expenses 42,344 57,830
Write-Down of Assets 11,000 120,100
---------------------- -------------------
Operating Loss (10,736) (128,388)
Interest Expense from Dow (1,603) (5,805)
Other Expense 101 705
Net Loss $ (12,238) $ (133,488)
====================== ===================
At
December 31,
1994
-------------------
Balance Sheet Data
Working Capital $ 16,787
Total Assets 58,021
Net invested capital 47,493
</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) 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.
(3) Results of operations of the Personal Care Division following its
acquisition by the Company in November 1995 are included in the results of
operations of the Company for the year ended December 31, 1995.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Historical Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total net sales for the year ended December 31, 1998 were $74.0 million,
compared with $118.5 million in 1997, a decrease of 37.5%. The decrease is due
to the decline in sales of the Company's retail and salon brands, and decline in
sales of custom manufacturing as a result of the expiration of the manufacturing
agreement with DowBrands in November 1997. There were no sales to DowBrands for
the year ended December 31, 1998 compared to $16.4 million for the year ended
December 31, 1997.
Style, Perma Soft, Willow Lake, Salon Style, and Color Soft (retail brands)
had sales declines of $28.2 million, and the professional salon brands had
declines of $9.3 million during the year ended December 31, 1998. Style, Perma
Soft, and Salon Style 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 decrease in net sales of the professional salon brands for the
year ended December 31, 1998 is attributable to the sale of these brands to
Zotos on July 31, 1998. Beginning in August 1998 and continuing for six months,
the Company manufactures these professional salon brands for Zotos. However, net
sales of these brands will continue to decline since such brands will be sold by
the Custom Manufacturing Group to Zotos on a contract basis which provides for a
lower markup over cost. Zotos may terminate purchases from the Company at any
time after January 1999.
Gross margin as a percentage of net sales was 37.8% for the twelve months ended
December 31, 1998 as compared with 41.2% for the same period in 1997. The
reduction in gross margin as a percentage of net sales for the year ended
December 31, 1998 was principally due to the sale of lower-margin promotional
merchandise for the Willow Lake line, and a change in product mix. In addition,
as a result of the sale of the Salon Division and a decrease in sales of the
Company's retail brands, Custom Manufacturing sales, which are lower margin
sales, represented a greater percentage of net sales resulting in a reduced
gross margin as a percentage of sales.
Selling, general, and administrative expenses (SG&A) were $31.2 million or 42.2%
of net sales for the twelve months ended December 31, 1998 as compared with
$66.4 million or 56.0% of net sales for the same period last year, a decrease of
$35.2 million. The decrease is principally attributed to reduced marketing
expenses of $29.7 million, and reduced freight and brokerage as a result of the
decrease in sales. In addition, personnel, travel and other expenses declined as
a result of the Company's cost cutting efforts and the sale of the professional
salon brands to Zotos. In 1997 the Company increased its marketing to support
the launch of Willow Lake, 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 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 support.
Interest expense decreased to $2.0 million for the twelve months ended December
31, 1998 as compared with $2.2 million in the same period last year. The
decrease in interest expense during the twelve months ended December 31, 1998 is
principally attributable to lower borrowings under the credit facility with
Norwest Business Credit during 1998. This decrease was partially offset by
higher interest rates charged by Norwest Business Credit during the year.
Other expense increased as a result of loan fees charged by Norwest Business
Credit in conjunction with the amendments to the credit agreement in 1998 and
the reduction of interest income. The lower interest income is the result of
less cash available for investment in 1998.
On July 31, 1998, the Company sold its professional salon brands, including
inventory ($4.3 million), and trade names for net proceeds of $10.0 million to
Zotos. This transaction resulted in a pre-tax gain of approximately $5.4
million.
As a result of the foregoing factors, the net loss for the year ended December
31, 1998 was $0.2 million compared to a net loss of $19.4 million for the year
ended December 31, 1997.
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 is
principally due to sales from Willow Lake and Color Soft the Company's
premium-priced retail hair care product lines and Style Natural Reflections a
mid-priced retail hair care product line. Willow Lake, targeted for the
Natural's segment and positioned as "Nature's Prescription for Beautiful Hair,"
began shipping in the fourth quarter of 1996. Color Soft, formulated to retain
color longer for color- treated hair began shipping in the first quarter of
1997. Style Natural Reflections positioned as a mid-priced brand in the
"Natural's" segment began shipping in the third quarter of 1997. Sales growth of
Willow Lake, Color Soft, and Style Natural Reflections 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, Style and Salon
Style, and in custom manufacturing, principally DowBrands. Perma Soft, Style,
and Salon Style have continued to decline in sales since management began its
turnaround efforts in the first quarter of 1996. Perma Soft, Style and Salon
Style had sales declines of $8.8 million, $8.4 million and $8.3 million,
respectively, during the twelve months ended December 31, 1997 as compared with
1996.
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 was due to a change in product mix resulting from
the Company's strategic shift to focus on higher margin brands driven by
Willow Lake and Color Soft.
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 in 1996, 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, Color Soft and Style Natural Reflections.
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 in 1996. 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 $0.4 million for the twelve months ended December 31,
1997 as compared with $0.7 million for the same period in 1996. The decrease in
other income in 1997 is principally due to the 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 $0.6
million for the same period in 1996.
<PAGE>
Liquidity and Capital Resources
As of December 31, 1998, the amounts outstanding under the Company's revolving
and term loan facilities were $7.4 million and $3.1 million, respectively, as
compared with $17.7 million and $6.2 million, respectively, as of December 31,
1997. On July 31, 1998, the Company used a portion of the $10.0 million net
proceeds from the sale of its professional salon brands to pay down its
revolving line of credit and term loan facility. In addition, in April 1998, the
Company reduced its investments in US Treasury Securities from approximately
$4.3 million to zero to pay down the revolving loan facility in accordance with
the March 31, 1998 Amended Loan Agreement with Norwest. The interest rates on
the loans are variable and are tied to Norwest Bank's base rate, which was 7.75%
at December 31, 1998. As of December 31, 1998, the interest rates on the
revolving line of credit and the term loan facility were 10.25% and 10.50%,
respectively.
In October 1998, the Company entered into the Fourth Amendment to the Amended
and Restated Credit and Security Agreement with Norwest Business Credit (the
"Lender"). This amendment provides for an additional advance of approximately
$2.9 million under the term loan and a reduction in the revolving credit
facility from $20.0 million to $11.5 million. The Company incurred a fee of
$75,000 in conjunction with this loan amendment. Additionally, the amendment
reduces the borrowing base by excluding certain categories of inventory from the
calculation of the borrowing base and by reducing the advance rate on the
eligible inventory by four percentage points. The revolving line of credit is
payable in full by November 15, 2000.
Under the terms of the term loan, the Company may borrow up to $3.1 million. The
term loan is due on demand and is payable in full by September 1, 1999.
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 and capital expenditures.
The Company was out of compliance with the financial loan covenants of its
credit agreement at December 31, 1998. The Company has received a waiver from
Norwest in regard to these covenants. In conjunction with receiving this waiver,
the Company renegotiated the terms and covenants of the loan agreement with the
Lender on March 12, 1999 in the Fifth Amendment to the Amended and Restated
Credit and Security Agreement. This amendment provides for increased advance
rates on eligible receivables and inventory of three percentage points and five
percentage points, respectively. As of December 31, 1998 the Company's available
borrowing capacity was $1.3 million. Based on the amended loan agreement, the
Company's available borrowing capacity would have been approximately $3.4
million at December 31, 1998. The Company incurred a fee of $100,000 in
conjunction with this amendment, $50,000 of which is not payable until August 1,
1999.
In March 1998, the Company issued 109,581 shares of common stock at $8.00 per
share to Intertec Holdings, L.P. under a stock purchase agreement entered into
in March 1996 between the Company and Intertec Holdings, L.P. With the issuance
of these shares, the Company satisfied the remaining balance of $750,000 on a
note payable to Intertec Holdings, L.P., and Intertec Holdings, L.P. fulfilled
its obligation to acquire a total of 146,107 shares under the agreement. The
note was for a license fee for proprietary technology licensed from Intertec
Ltd., a limited partnership controlled by the Company's Chairman of the Board.
On July 31, 1998 the Company sold its professional salon brands, including
inventory ($4.3 million), and trade names for net proceeds of $10.0 million of
which $0.2 million is being held in escrow in order to provide funds for product
returns and indemnity payments that the Company may become obligated to make to
Zotos. The net proceeds were used primarily to pay down borrowings under the
Company's credit agreement, to pay down extended accounts payable, and for
operations.
Total accounts payable exceeding their normal payment terms were approximately
$6.0 million as of December 31, 1998. Because the Company has announced its
intent to obtain financing, and/or establish an alliance through a merger or
additional sale of assets, major trade creditors and other creditors have
extended their "normal" terms to allow the Company additional time to make
payments. In August 1998, the Company used a portion of the proceeds from the
sale of its professional salon brands to reduce its extended accounts payable.
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.
As of December 31, 1998, the Company was $600,000 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 in quarterly installments.
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 agreement, to
obtain additional financing or refinancing, to reduce aged payables, to reduce
its cost structure, and attain sales and operating levels to be profitable.
The Company's strategy in 1999 is to focus its limited resources to support the
Willow Lake brand with advertising and consumer promotion and to provide
maintenance promotional support for the other retail brands. The Company will
continue to evaluate sales and operating performance and, if necessary, initiate
further cost reductions.
Management is currently seeking additional sources of financing through a new
credit facility and/or the sale of its manufacturing operations and related
assets. No assurance can be given as to the timing of such financing or that
such financing will be obtained.
<PAGE>
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 taken
into consideration and increased pricing action is taken, where possible, within
competitive and marketplace limitations.
Year 2000 Compliance
Many computer systems were not designed to properly handle dates beyond the year
1999. Additionally, these systems may not properly handle certain dates in 1999.
Failure to process dates properly could result in failure or disruption of the
Company's information systems and/or processing equipment. To be Year 2000
compliant, computer systems must correctly process dates before and after the
Year 2000, recognize the Year 2000 as a leap year, accept and display dates
unambiguously and correctly process dates for non-date functions such as
archiving.
Disruptions to the Company's operations may also occur if key suppliers or
customers experience disruptions in their ability to purchase, supply or
transact with the Company due to Year 2000 issues. The Year 2000 readiness of
infrastructure suppliers (utilities, government agencies such as customs, and
shipping organizations) will be critical to the Company's ability to avoid
disruption of its operations.
The Company installed an enterprise-wide software solution in December 1996. At
that time, some modules of the system were not Year 2000 compliant. A newer
release of the same software is certified to be compliant by the software
vendor. The Company's current activity surrounds upgrading to this newer
release. It is the Company's intent to test the functionality and make the
necessary Company-specific modifications to the software. This process is
currently underway and should be completed during the third quarter in 1999. The
Company's contingency plan would be to use the certified-compliant software
without Company-specific modifications. The operating system on the computer is
Year 2000 compliant.
The Company is also reviewing its computer-dependent manufacturing activities to
determine the necessary hardware and software changes. For all non-mainframe
applications such as personal computers, production-related equipment, etc., an
inventory has been taken of the hardware and software involved. The Company has
researched the status of these items and determined a course of action to assure
compliance. This process is currently scheduled to be completed by the end of
the third quarter in 1999. The Company's electronic data interchange system,
which receives orders from its customers, has already been certified to be Year
2000 compliant by the software vendor.
The Company will perform remediation procedures concurrent with its assessment
planning. The Company intends to use internal resources to implement, replace
and test software and related assets affected by the Year 2000 issue. The
Company currently believes that the remediation costs of the Year 2000 issue
will not be material to the Company's results of operations or financial
position and will be absorbed by the Company through normal operating budgets.
The Company does not expect any incremental costs associated with its Year 2000
remediation activities to be significant. Cumulatively through December 31, 1998
the Company has not incurred a material amount of remediation expenses.
The Company will be working with key suppliers and customers to determine
whether the suppliers' operations and the products and services that they
provide are Year 2000 capable or to monitor their progress toward Year 2000
compliance. The Company is in the process of sending questionnaires to its
suppliers who furnish product or services to the Company. The Company may choose
to identify those suppliers it deems critical and pursue other methods of
assuring readiness. The Company is also in the process of surveying customers to
determine the status of their Year 2000 efforts.
While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in adequately addressing Year 2000
issues, or a failure to fully identify all Year 2000 dependencies in the
Company's systems and in the systems of its suppliers, customers and financial
institutions could have material adverse consequences, including delays in the
production, delivery or sale of products. In addition, time and cost estimates
are based on currently available information and are management's best
estimates. However, no assurance can be given that these estimates will be
achieved, and actual results may differ materially from those anticipated.
SAFE HARBOR CAUTIONARY STATEMENT
Statements in this report regarding the Company's outlook for its business and
their respective markets, such as projections of future performance, statements
of management's plans and objectives, forecasts of market trends and other
matters, are forward-looking statements, some of which may be identified by such
words or phrases as "will likely result," "are expected to," "will continue,"
"outlook," "is anticipated," "estimate," "project" or similar expressions. No
assurance can be given that the results in any forward-looking statement will be
achieved and actual results could be affected by one or more factors which could
cause them to differ materially. These forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially from the
forward-looking statements. Such risks include those described under "Investment
Considerations," including the Company's ability to raise capital through the
sale of assets or other financing, market acceptance of the Company's products,
effectiveness of recently adopted or planned 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.
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.
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
At December 31, 1998, the Company had $10.5 million of debt outstanding with
variable interest rates as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Term loan (10.50%, due September 1, 1999) $ 3,123
Revolving loan (10.25%, due November 15, 2000) 7,397
----------
$ 10,520
==========
</TABLE>
The interest rates are based on the Lender's base rate plus 2.75% for the term
loan and 2.50% for the revolving line of credit. A one percentage point increase
or decrease in the Lender's base rate would increase or decrease interest
expense by approximately $105,000 at December 31, 1998.
The Company does not have significant transactions denominated in foreign
currencies and does not purchase or hold any derivative financial instruments.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
Page
--------
<S> <C>
Independent Auditors' Report F-1
Balance Sheets at December 31, 1998 and 1997 F-2
Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 F-3
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Notes to Financial Statements for the Years Ended
December 31, 1998, 1997 and 1996 F-6
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE
Not applicable.
<PAGE>
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1999 Proxy Statement.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules - See index in Item 8.
(b) Reports on Form 8-K. None.
(c) List of Exhibits.
Exhibit
Number Description
*2.1 Asset Purchase Agreement, dated as of November 15, 1995, between
DowBrands, Inc. and Registrant.
*2.2 Plan of Merger, dated March 15, 1996.
*3.1 Restated Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant.
**3.3 Certificate of Amendment of Restated Certificate of Incorporation.
*4.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibits 3.1 and 3.3 hereof).
*4.2 Specimen Copy of Stock Certificate for shares of Common Stock.
*4.3 Form of Warrant issued to the Representatives.
*4.4 Form of Common Stock Purchase Warrant, dated as of November 1995,
issued to certain investors.
*4.5 Registration Rights Agreement, dated as of November 15, 1995,
between Dow and Registrant.
*4.6 Form of Registration Rights Agreement between Registrant and
certain holders of Registrant Common Stock.
*10.1 License Agreement by and between Registrant and Intertec Ltd.,
dated May 5, 1993.
*10.2 Credit and Security Agreement, dated as of November 16, 1995,
between Registrant and Norwest Business Credit, Inc.
**10.3 First Amendment to Credit Agreement, Second Amendment to Credit
Agreement, Amendment Agreement and Third Amendment to Credit
Agreement between Registrant and Norwest Business Credit, Inc.
***10.4 Amended Credit and Security Agreement between Registrant and
Norwest Business Credit, Inc.
****10.5 First Amendment to Amended Credit and Security Agreement between
Registrant and Norwest Business Credit, Inc.
******10.6 Second Amendment to Amended and Restated Credit and Security
Agreement between Registrant and Norwest Business Credit, Inc.
******10.7 Third Amendment to Amended and Restated Credit and Security
Agreement and Waiver of Defaults between Registrant and Norwest
Business Credit, Inc.
*10.9 1996 Stock Incentive Plan of the Registrant.
*10.10 1996 Stock Incentive Plan for Non-Employee Directors and Advisory
Board Members of the Registrant.
*10.11 Employment Agreement between Registrant and Don G. Hoff, made as of
June 1, 1994, and modified as of November 6, 1995.
**10.12 1996 Non-Qualified Stock Option Plan of the Registrant.
**10.13 Sublease dated October 1, 1996 between Registrant and Intertec,Ltd.
******10.14 Form of Employee Severance Agreement - Minnesota
******10.15 Memorandum from the Company to Dominic J LaRosa re Insurance
Coverage
*****10.16 1997 Stock Plan
10.17 Form of Stock Grant Agreement (Non-Plan)
10.18 Form of Stock Grant Agreement (Plan)
10.19 Fourth Amendment to Amended and Restated Credit and Security
Agreement
10.20 Fifth Amendment to Amended and Restated Credit and Security
Agreement
11.1 Statement regarding computation of per share earnings.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule
*99.1 U.S. Patent Number 5,395,490, issued March 7, 1995, registered to Don G.
Hoff and Joseph F. Stiley, III, for a method of treating materials by the
application of electromagnetic energy at resonant absorption frequencies.
*Incorporated by reference from the Form S-1 Registration Statement (File No.
333-2722).
**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)
******Incorporated by reference from Annual Report on Form 10-K for fiscal year
ended 12/31/97
<PAGE>
2. 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, 1999
The Lamaur Corporation
--------------------------------------------------
(Registrant)
By: /s/ DON G. HOFF
--------------------------------------------------
Don G. Hoff, Chairman of the Board and Chief Executive
Officer
--------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ DON G. HOFF
- - --------------- Chairman of the Board and Chief March 30, 1999
Don G. Hoff Executive Officer
(Principal Executive Officer)
/s/ JOHN D. HELLMANN
- - -------------------- Vice President, Chief Financial Officer March 30, 1999
John D. Hellmann (Principal Financial and Accounting
Officer)
/s/ DOMINIC J. LaROSA
- - ------------------ President and CEO - Lamaur Division and March 30, 1999
Dominic J. LaRosa Director
/s/ HAROLD M. COPPERMAN
- - ----------------------- Director March 30, 1999
Harold M. Copperman
/s/ PERRY D. HOFF
- - ----------------- Director March 30, 1999
Perry D. Hoff
/s/ JOSEPH F. STILEY
- - -------------------- Director March 30, 1999
Joseph F. Stiley, III
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Lamaur Corporation:
We have audited the accompanying balance sheets of The Lamaur Corporation (the
"Company"), as of December 31, 1998, and 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, at December 31, 1998 and 1997, the Company would not have
been in compliance with certain covenants of its credit agreement had the lender
not waived the covenants. The Company renegotiated the terms and covenants of
the loan agreement and also is seeking other sources of long-term financing. The
Company's difficulties in meeting its loan agreement covenants and financing
needs and its recurring losses from operations raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
San Francisco, California
March 30, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 3) $ 568 $ 6,465
Receivables from DowBrands (Note 12) - 741
Accounts receivable, net (Note 4) 10,244 15,943
Inventories (Note 5) 7,969 15,523
Prepaid expenses and other current assets 511 453
------------ -----------
Total Current Assets 19,292 39,125
Property, Plant and Equipment, Net (Note 6) 17,392 19,131
Other Assets 28 70
------------ -----------
Total Assets $ 36,712 $ 58,326
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 2) $ 10,056 $ 14,592
Accrued expenses 2,623 4,666
Accrued salaries, wages and employee-related expenses 1,147 2,211
Current portion of long-term debt (Note 7) 3,350 1,612
Payables to related parties (Note 12) - 250
------------ -----------
Total Current Liabilities 17,176 23,331
Long-Term Debt (Note 7) 8,290 23,546
Related Party Obligations (Note 12) - 500
Commitments and Contingencies (Notes 13 and 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, 1998 and 1997.
($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, 1998 and 1997.
($5.0 million liquidation preference) 5,000 5,000
Common stock, $.01 par value, 12,000,000 shares authorized,
5,939,761 and 5,747,544 shares issued and outstanding at
December 31, 1998 and 1997, respectively 59 57
Additional paid-in-capital 20,356 19,852
Stock subscriptions receivable (50) (50)
Accumulated deficit (22,619) (22,410)
------------ -----------
Total Stockholders' Equity 11,246 10,949
------------ -----------
Total Liabilities and Stockholders' Equity $ 36,712 $ 58,326
============ ===========
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended
December 31,
----------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Net Sales $ 74,043 $ 102,104 $ 94,912
Net Sales to DowBrands (Note 12) - 16,371 22,171
--------------- ---------------- ----------------
Total Net Sales (Note 3) 74,043 118,475 117,083
Cost of Goods Sold 46,062 69,626 70,215
--------------- ---------------- ----------------
Gross Margin 27,981 48,849 46,868
Selling, General and Administrative Expenses 31,243 66,375 45,641
--------------- ---------------- ----------------
Operating (Loss) Income (3,262) (17,526) 1,227
Interest Expense 1,951 2,236 1,386
Other Expense (Income) 432 (402) (712)
Gain on sale of professional salon brands (Note 1) 5,436 - -
--------------- ---------------- ----------------
Net (Loss) Income (209) (19,360) 553
Dividends on Series B Preferred Stock (400) (400) (233)
--------------- ---------------- ----------------
Net (Loss) Income Available to Common Shareholders $ (609) $ (19,760) $ 320
=============== ================ ================
Basic (Loss) Income per Common Share $ (0.10) $ (3.48) $ 0.07
=============== ================ ================
Weighted Average Common Shares Outstanding - Basic 5,854 5,685 4,557
=============== ================ ================
Diluted (Loss) Income per Common Share $ (0.10) $ (3.48) $ 0.06
=============== ================ ================
Weighted Average Common Shares Outstanding - Diluted 5,854 5,685 5,609
=============== ================ ================
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
Additional
Series A Series B Paid-In
------------------------ ---------------------- ----------------------- ------------
Shares Amount Shares Amount Shares Amount
---------- ------------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1995 .................. 1,000 $8,500 -- -- 2,945 $29 $ 1,718
Issuance of Series B
preferred stock ....................... -- -- 764 $5,000 -- -- --
Issuance of common
stock ................................. -- -- -- -- 2,643 26 18,086
Grants of non-cash
stock option credits .................. -- -- -- -- -- -- 132
Stock grants to
employees ............................. -- -- -- -- 15 1 93
Dividends on preferred
stock ................................. -- -- -- -- -- -- (233)
Net income ............................ -- -- -- -- -- -- --
----- ------ --- ------ ----- --- --------
Balance,
December 31, 1996 .................. 1,000 8,500 764 5,000 5,603 56 19,796
Issuance of common
stock ................................. -- -- -- -- 145 1 456
Dividends on preferred
stock ................................. -- -- -- -- -- -- (400)
Net loss .............................. -- -- -- -- -- -- --
----- ------ --- ------ ----- --- --------
Balance,
December 31, 1997 .................. 1,000 8,500 764 5,000 5,748 57 19,852
Issuance of common
stock ................................. -- -- -- -- 192 2 904
Dividends on preferred
stock ................................. -- -- -- -- -- -- (400)
Net loss .............................. -- -- -- -- -- -- --
----- ------ --- ------ ----- --- --------
Balance,
December 31, 1998 .................. 1,000 $8,500 764 $5,000 5,940 $59 $ 20,356
===== ====== === ====== ===== === ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Stock
Subscriptions Accumulated Total
Receivable Deficit
____________ ____________ _______
<S> <C> <C> <C>
Balance
December 31, 1995 . $ (50) $ (3,603) $ 6,594
Issuance of Series B
preferred stock ...... -- -- 5,000
Issuance of common
stock ................ -- -- 18,112
Grants of non-cash
stock option credits . -- -- 132
Stock grants to
employees ............ -- -- 94
Dividends on preferred
stock ................ -- -- (233)
Net income ........... -- 553 553
-------- -------- --------
Balance,
December 31, 1996 . (50) (3,050) 30,252
Issuance of common
stock ................ -- -- 457
Dividends on preferred
stock ................ -- -- (400)
Net loss ............. -- (19,360) (19,360)
-------- -------- --------
Balance,
December 31, 1997 . (50) (22,410) 10,949
Issuance of common
stock ................ -- -- 906
Dividends on preferred
stock ................ -- -- (400)
Net loss ............. -- (209) (209)
-------- -------- --------
Balance,
December 31, 1998 . $ (50) $(22,619) $ 11,246
======== ======== ========
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE LAMAUR CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income $ (209) $(19,360) $ 553
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Gain on sale of professional salon brands (5,436) - -
Noncash credits for services - - 132
Issuance of common stock for services - - 94
Utilization of DowBrands credits - (1,500) (1,500)
Loss (gain) on disposal of assets 18 41 (214)
Depreciation and amortization 2,177 1,697 1,365
Effect of changes in:
Receivables 6,323 1,980 (5,985)
Inventories 3,264 (3,824) (559)
Prepaid expenses and other assets (58) 39 (177)
Payables (4,936) 7,868 999
Accrued expenses (3,018) (176) (478)
--------------- -------------- --------------
Net cash used in operating activities (1,875) (13,235) (5,770)
Cash Flows From Investing Activities:
Additions to property, plant and equipment (642) (1,236) (3,110)
Net proceeds from sale of assets 10,166 16 225
--------------- -------------- --------------
Net cash provided by (used in) investing activities 9,524 (1,220) (2,885)
Cash Flows From Financing Activities:
(Repayments) borrowings under revolving credit agreement, net (10,254) 7,837 1,764
Borrowings of long-term debt 2,875 2,738 -
Repayments of long-term debt (6,196) (1,501) (1,445)
Proceeds from sales of common stock, net 29 165 18,112
Payment of preferred dividends - (400) (33)
--------------- -------------- --------------
Net cash (used in) provided by financing activities (13,546) 8,839 18,398
--------------- -------------- --------------
Net (Decrease) Increase in Cash and Cash Equivalents (5,897) (5,616) 9,743
Cash and Cash Equivalents at Beginning of Period 6,465 12,081 2,338
=============== ============== ==============
Cash and Cash Equivalents at End of Period $ 568 $ 6,465 $ 12,081
=============== ============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest $ 2,354 $ 2,315 $ 1,186
Noncash investing and financing activities:
Capital lease obligations entered into $ 57 $ 1,088 $ 401
Dividends payable on preferred stock 400 200 200
Exchange of related party note payable for common stock 877 292 -
Conversion of convertible subordinated note into stock - - 5,000
See notes to financial statements
</TABLE>
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND OPERATIONS
The Company develops, formulates, manufactures, and markets personal hair care
products, consisting of shampoos, conditioners, hair sprays, and other styling
aids, for both consumer and professional hair care markets. The Company began
operations in November 1995, upon the acquisition of 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").
In July 1998, the Company sold its professional salon brands and related
inventory to Zotos International, Inc., a subsidiary of Shiseido Co., Ltd.,
Tokyo, Japan ("Zotos") for net proceeds of $10.0 million of which $0.2 million
is being held in escrow. In conjunction with this sale, the Company recorded a
pre-tax gain of $5.4 million. Proceeds were used primarily to pay down
borrowings under the credit agreement and to pay down extended accounts payable.
2. MANAGEMENT'S PLANS REGARDING OPERATING LOSSES
AND EXTENDED CREDITOR OBLIGATIONS
In 1998, the Company incurred an operating loss of approximately $3.3 million
and negative cash flows from operating activities of approximately $1.9 million.
In addition, the Company was not in compliance with certain covenants of its
credit facility at December 31, 1998. The lender waived the covenants and
amended the agreement on March 12, 1999. 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 agreement, to obtain additional financing or refinancing
as may be required, and to reduce its cost structure and attain sales and
operating levels to be profitable. Management's plans regarding operating losses
and its plans concerning the above matters are presented below.
In 1998, the Company implemented its cost reduction program which included a
reduction in its workforce by approximately 120 employees and an overall
reduction in operating expenses. The Company also substantially discontinued
activity related to advanced technology development. As a result of the above
initiatives, the Company reduced its annual costs by approximately $6.0 million.
The Company's strategy in 1999 is to focus its limited resources to support the
Willow Lake brand with advertising and consumer promotion and to provide
maintenance promotional support for the other retail brands. The Company will
continue to evaluate sales and operating performance and, if necessary, initiate
further cost reductions.
As of December 31, 1998, the Company's principal sources of liquidity included
unrestricted cash and cash equivalents of approximately $0.4 million, accounts
receivable of approximately $10.2 million and inventories of approximately $8.0
million. As discussed in Note 7, the Company amended its credit agreement and
related covenants on March 12, 1999. Under the terms of the amended credit
agreement, the Company's term loan of $3.1 million becomes due on September 1,
1999. The Company will require additional financing to fund the term loan pay
off and to satisfy the Company's projected working capital for 1999 and to
reduce its extended aged payables which at December 31, 1998 were approximately
$6.0 million. Management is currently seeking additional sources of liquidity
through a new credit facility and or the sale of its manufacturing operations
and related assets. No assurance can be given as to the timing of such financing
or that such financing will be concluded.
<PAGE>
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, the 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.
Revenue recognition policy - The Company recognizes revenue when title passes,
normally upon shipment of product.
Cash and Cash Equivalents - For purposes of the statement of cash flows, the
Company considers all investments with an original maturity of three months or
less on their acquisition date to be cash equivalents. Restricted cash
equivalents consist of U.S. Treasuries which at December 31, 1997 were $6.2
million. The U.S. Treasuries were maintained as collateral in support of the
revolving line of credit with Norwest Business Credit (Note 7). The Company also
maintains a collateral account, certain balances of which are applied against
the Company's revolving debt after remaining in the account for one day (Note
7). Additionally, the Company considers the escrow account balance of $0.2
million at December 31, 1998, established in conjunction with the sale of the
professional salon brands to Zotos (Note 1), to be restricted cash.
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 10 to 50 years for buildings and improvements and 3 to
20 years for machinery and equipment. The Company evaluates the recoverability
of long-lived assets using discounted cash flows when events and circumstances
warrant such review. The Company adopted Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use," in
1998 which requires capitalization of the costs of developing software for
internal use. This statement had no material impact on the Company's December
31, 1998 financial statements.
Income Taxes - 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 is not determinable.
Stock Based Compensation - The Company applies the recognition and measurement
principles of Accounting Principles Board Opinion 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 under the fair value method of SFAS 123 may be found in Note
8.
Earnings Per Share - Basic EPS is calculated using income available to common
shareholders divided by the weighted average number of common shares outstanding
during the year. Diluted EPS is similar to Basic EPS except that the weighted
average number of 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. In loss years, diluted EPS equals basic EPS.
<PAGE>
Comprehensive Income - Comprehensive income equals net income.
Fair Value of Financial Instruments - Generally accepted accounting principles
require the disclosure of the fair value of certain financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. The Company estimated the fair values presented below using
appropriate valuation methodologies and market information available as of year
end. Considerable judgment is required to develop estimates of fair value, and
the estimates presented are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different market
assumptions or estimation methodologies could have a material effect on the
estimated fair values. Additionally, these fair values were estimated at year
end, and current estimates of fair value may differ significantly from the
amounts presented.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Accounts Receivable, Accounts Payable and Short-Term Borrowings - The carrying
amount of these items approximates fair value.
Debt - To estimate the fair value of debt, the Company uses those interest rates
that are currently available to it for issuance of debt with similar terms and
remaining maturities. At December 31, 1998 and 1997, the carrying value of debt
approximated fair value.
Reclassifications - Certain prior year amounts have been reclassified in the
accompanying financial statements in order to conform with the 1998
presentation. These reclassifications have no effect on net income or
stockholders' equity as previously reported.
4. ACCOUNTS RECEIVABLE
Accounts Receivable include the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------------- ---------------
(In thousands)
<S> <C> <C>
Accounts receivable trade $ 10,571 $ 16,669
Non-trade accounts receivable 52 109
Allowance for doubtful accounts and returns (379) (835)
--------------- ---------------
Total $ 10,244 $ 15,943
=============== ===============
</TABLE>
Write-offs of accounts receivable were $128,000, $21,000, and $55,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
5. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
----------------- -----------------
(In thousands)
<S> <C> <C>
Finished goods $ 3,263 $ 9,233
Work in process 164 93
Raw materials 4,542 6,197
----------------- -----------------
Total $ 7,969 $ 15,523
================= =================
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
----------------- -----------------
(In thousands)
<S> <C> <C>
Land and land improvements $ 1,662 $ 1,662
Buildings and improvements 5,318 5,290
Machinery and equipment 15,172 14,822
Construction in progress 311 398
----------------- -----------------
Total 22,463 22,172
Less accumulated depreciation (5,071) (3,041)
----------------- -----------------
Total $ 17,392 $ 19,131
================= =================
</TABLE>
<PAGE>
7. LONG-TERM DEBT
Long-term debt includes the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
----------------- -----------------
(In thousands)
<S> <C> <C>
Revolving loan $ 7,397 $ 17,651
Term loan 3,123 6,222
Obligations under capital leases 1,120 1,285
----------------- -----------------
Total 11,640 25,158
Less current portion (3,350) (1,612)
----------------- -----------------
Long-term portion $ 8,290 $ 23,546
================= =================
</TABLE>
In October 1998, the Company entered into the Fourth Amendment to the Amended
and Restated Credit and Security Agreement with Norwest Business Credit (the
"Lender"). This amendment provides for a reduction in the revolving credit
facility from $20.0 million to $11.5 million. The Company incurred a fee of
$75,000 in conjunction with this loan amendment.
Under the terms of the amended revolving line of credit, the Company may borrow
up to $11.5 million or a lesser amount as determined by the borrowing base. The
borrowing base is defined in the loan agreement and is comprised of a percentage
of eligible receivables, inventory, and equipment. The revolving line of credit
is payable in full by November 15, 2000. The interest rate on the revolving loan
is based on the Lender's base rate (7.75% at December 31, 1998) plus 2.50%. At
December 31, 1998 and 1997, the interest rates on the revolving loan were 10.25%
and 12.0%, respectively.
Under the terms of the term loan, the Company may borrow up to $3.1 million. The
term loan is due on demand and is payable in full by September 1, 1999. The
interest rate on the term loan is based on Lender's base rate plus 2.75%. At
December 31, 1998 and 1997, the annual interest rates were 10.50% and 12.25%,
respectively.
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 and capital expenditures.
The Company was out of compliance with the financial loan covenants of its
credit agreement at December 31, 1998. The Company has received a waiver from
Norwest in regard to these covenants. In conjunction with receiving this waiver,
the Company renegotiated the terms and covenants of the loan agreement with the
Lender on March 12, 1999 in the Fifth Amendment to the Amended and Restated
Credit and Security Agreement. This amendment provides for increased advance
rates on eligible receivables and inventory of three percentage points and five
percentage points, respectively. As of December 31, 1998 the Company's available
borrowing capacity was $1.3 million. Based on the amended loan agreement, the
Company's available borrowing capacity would have been approximately $3.4
million at December 31, 1998. The Company incurred a fee of $100,000 in
conjunction with this amendment, $50,000 of which is not payable until August 1,
1999.
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 $1,152,000 (net of
$368,000 of accumulated depreciation) and $1,290,000 (net of $172,000 of
accumulated depreciation) as of December 31, 1998 and 1997, respectively.
Minimum payments on noncancellable operating lease obligations are for
buildings, autos, and office equipment. Rent expense for the years ended
December 31, 1998, 1997 and 1996 was approximately $219,000, $380,000 and
$150,000, respectively.
<PAGE>
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
Year Ending Capital Lease Operating Lease
Obligations Obligations
----
- - ----------------------------------------------- --------------------------------------------------------------
(In thousands)
<S> <C> <C>
1999 $ 3,350 $ 68
2000 7,627 22
2001 210 6
2002 153 -
2003 115 -
2004 and thereafter 185 -
--------------- ---------------
Total minimum principal payments $ 11,640 $ 96
=============== ===============
</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, a $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, 1998 and 1997, the Company was in arrears on its quarterly
dividend payments by $600,000 and $200,000, respectively, 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. 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 972,852, 448,293, 16,155 and 113,700, respectively. Total shares
available for grant at December 31, 1998 under the 1997 Stock Plan and the Stock
Option Plan for Non-Employee Directors and Advisory Board Members were 384,928
and 64,200, 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, 1998.
<PAGE>
A summary of changes in common stock options during 1996, 1997, and 1998 is as
follows:
<TABLE>
<CAPTION>
Weighted
Shares Price
--------------- --------------------
<S> <C> <C>
Outstanding at December 31, 1995 735,900 $2.84
Granted (average fair value of $3.17) 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 $1.55) 656,950 2.37
Canceled (673,799) 3.95
Exercised (56,100) 2.76
---------------
Outstanding at December 31, 1997 1,239,451 2.53
Granted (average fair value of $2.41) 76,300 2.41
Canceled (213,879) 3.27
---------------
Outstanding at December 31, 1998 1,101,872 $2.51
===============
</TABLE>
During 1998, 16,000 options were cancelled at exercise prices ranging from $3.63
to $4.25 per share and reissued at $2.25 per share. 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, 1998 and 1997, were 874,432 and 751,599, respectively. The
following table summarizes information about the four equity incentive plans at
December 31, 1998:
<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>
$ 0.16 - 0.38 1,550 9.80 $0.22 -
1.52 - 1.94 308,932 6.40 1.52 307,032 $1.52
2.16 - 2.88 510,966 6.92 2.31 359,359 2.28
3.00 - 4.38 280,424 7.34 3.99 208,041 3.93
----------------- -----------------
1,101,872 874,432
================= =================
</TABLE>
<PAGE>
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 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) and
net income (loss) per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
(In thousands, except per
share amounts)
<S> <C> <C> <C>
Net (loss) income:
As reported $ (209) $ (19,360) $ 553
================= ================= =================
Pro forma $ (1,170) $ (20,413) $ (142)
================= ================= =================
Basic (loss) income per common share:
As reported $ (0.10) $ (3.48) $ 0.07
================= ================= =================
Pro forma $ (0.27) $ (3.66) $ (0.08)
================= ================= =================
Diluted (loss) income per common share:
As reported $ (0.10) $ (3.48) $ 0.06
================= ================= =================
Pro forma $ (0.27) $ (3.66) $ (0.08)
================= ================= =================
</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 1998, 1997 and 1996, respectively: expected volatility of
333%, 77%, and 65%; risk-free interest rates of 4.5%, 5.9% and 6.4%; expected
lives of 6.5 years for all three 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, 1998. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts.
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 8% of eligible employees participated in the
Plan at December 31, 1998. The Company sold 72,636 and 34,833 shares to
employees in 1998 and 1997, respectively.
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 have received a portion of
their salaries 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 at December
31, 1996, have been recorded as expense and additional paid-in capital as the
related salaries were earned. The Company ceased issuing any additional noncash
credits at December 31, 1996.
<PAGE>
Stock Subscription Receivable - In 1995, the Company issued 33,000 shares of
common stock in exchange for a $50,000 note receivable. The note bears interest
at 6% and is due July 2001 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%.
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
expired in November, 1998.
9. EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net (Loss) Income $ (209) $ (19,360) $ 553
Less: Dividends on Series B Preferred Stock (400) (400) (233)
--------------- --------------- ---------------
Net (Loss) Income Available to Common Shareholders $ (609) $ (19,760) $ 320
=============== =============== ===============
Weighted Average Common Shares Outstanding - Basic 5,854 5,685 4,557
--------------- --------------- ---------------
Basic (Loss) Income per Common Share $ (0.10) $ (3.48) $ 0.07
=============== =============== ===============
Weighted Average Common Shares Outstanding 5,854 5,685 4,557
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)
--------------- --------------- ---------------
Weighted Average Common Shares Outstanding - Diluted 5,854 5,685 5,609
--------------- --------------- ---------------
Diluted (Loss) Income per Common Share $ (0.10) $ (3.48) $ 0.06
=============== =============== ===============
</TABLE>
Options to purchase 706,500 shares of common stock at prices 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.
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. The
Company made no contributions to the plan during the years ending December 31,
1998, 1997, or 1996.
The Company does not provide other post-retirement benefits to its employees.
<PAGE>
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, 1998, 1997, and 1996. As
future profits are not yet predictable, the utilization of net operating loss
carryforwards is not determinable.
A reconciliation of the provision for income taxes to the amount computed using
U.S. federal statutory rates is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
(Benefit) provision for income at U.S. federal statutory rates (34%) $ (71) $ (6,582) $ 188
Other items 176 488 63
Change in valuation allowance (105) 6,094 (251)
-------------- -------------- --------------
Provision for income tax $ - $ - $ -
============== ============== ==============
</TABLE>
The significant components of deferred income taxes as of December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
(In thousands)
<S> <C> <C>
Tax effects of:
Current deferred tax assets and liabilities:
Accounts Receivable, principally due to reserves $ 144 $ 317
Inventories, partially due to additional costs
capitalized for tax purposes 518 482
Employee benefits 300 389
Other (includes contingencies, other assets and
other accruals) 210 (25)
-------------- --------------
1,172 1,163
Long-term deferred tax assets and liabilities:
License fee - 285
Tax credits 82 110
Federal and state operating loss 8,155 7,534
Property, plant and equipment (1,644) (1,222)
-------------- --------------
6,593 6,707
-------------- --------------
Gross deferred tax assets 7,765 7,870
Valuation allowance (7,765) (7,870)
-------------- --------------
Net deferred taxes $ - $ -
============== ==============
</TABLE>
Due to the Company's net operating losses, the Company has not paid significant
income taxes in 1998, 1997, or 1996. The Company has accumulated approximately
$24.0 million of federal and state operating loss carryforwards (NOLs) at
December 31, 1998. These NOLs expire periodically between the years 2009 and
2013.
<PAGE>
12. RELATED PARTY TRANSACTIONS
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") was payable in four equal annual
installments of $250,000. The first installment was made in May, 1997. At
December 31, 1997, related party obligations consisted of the $750,000
promissory note for license rights, of which $250,000 was classified as current.
The balance of the note plus accrued interest was satisfied in March 1998. 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 earned or paid to date.
Stock Purchase Agreement - In March 1996, the Company and Intertec Holdings,
L.P. entered into a stock purchase agreement whereby Intertec Holdings, L.P.
agreed to purchase from the Company, and the Company agreed to sell to Intertec
Holdings, L.P. a total of 146,107 shares of common stock at $8.00 per share.
Intertec Holdings, L.P. was 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, with the
option of accelerating one or more purchases on 30 days' notice to the Company.
In May 1997, Intertec acquired the first installment of 36,526 shares of the
Company's common stock based on $8.00 per share. In March 1998, Intertec
Holdings, L.P. elected to acqiure the remaining 109,581 shares of the Company's
common stock at $8.00 per share thereby fulfilling its obligation to acquire a
total of 146,107 shares.
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 month-to-month lease with monthly rentals of $5,779. 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 $86,196, $121,919, and
$99,975 for the years ended 1998, 1997 and 1996, respectively.
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 in 1997. Revenues from
this arrangement totaled $0, $16.4 million, and $22.2 million for the years
ended December 31, 1998, 1997 and 1996, respectively. Services were priced based
on direct material and labor costs incurred plus an agreed upon profit margin.
13. LEGAL PROCEEDINGS
On November 2, 1998, a class action and derivative lawsuit was filed by the
stockholders (on behalf of themselves and the Company) in the Delaware Court of
Chancery in and for New Castle County alleging that the defendant Board of
Directors breached their fiduciary duties to the Company and failed to disclose
certain information in the Company's 1998 Proxy Statement. Plaintiffs seek
injunctive relief, damages and a recision of all actions approved at the
November 2, 1998 Annual Meeting. In addition, the plaintiffs are seeking the
appointment of a receiver for the Company and changes in the disclosures to
correct what they allege are errors and costs and attorney's fees. The Company
believes the lawsuit is without merit and will defend the action in the best
interest of the stockholders. No discovery has been commenced against the
Company, only minimal discovery has been conducted by plaintiffs, and no
significant dates have been set in the litigation.
The Company is a party to other legal proceedings in the normal course of
business. It is the opinion of management that any losses in connection with
these matters will not have a material effect on its financial position or
operating results.
<PAGE>
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.
15. SEGMENT INFORMATION
The Company develops, formulates, manufactures, and markets personal hair care
products for the consumer market and, until July 1998, the professional hair
care market. In addition, the Company develops, formulates, and manufactures
hair care, personal care, and household products for third parties. The
Company's reportable segments have separate sales departments, and although the
products are similar, they are sold and marketed differently.
The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information,"
during 1998. Operating segments are defined by SFAS 131 as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker or decision making
group in deciding how to allocate resources in assessing performance (the
"management approach"). The Company's chief operating decision-maker who
determines the allocation of resources and assesses the performance of the
operating segments is the chief executive officer of the operating division.
The accounting policies of the segments are the same as those of the Company as
described in Note 3. The Company's operating segments include the Retail Group,
Salon Group, and the Custom Manufacturing Group. As the Retail and Salon Groups
have similar economic characteristics, they have been aggregated into one
reportable segment called the Retail and Salon Group. The Company evaluates
performance based on contribution before fixed expenses.
The Retail and Salon Group sells hair care products including shampoos,
conditioners, hair sprays, and other styling aids. These products are
distributed to consumer retail outlets and until July 1998, professional salon
and specialty shops. Products sold by the Retail and Salon Group require
substantial marketing support to maintain their sales.
The Custom Manufacturing Group develops, formulates, and manufactures hair care,
personal care, and household products for third parties. This group is service
oriented and no significant marketing is required to support its sales.
The Company does not allocate fixed expenses by segment for internal reporting
or decision making purposes and therefore has not disclosed operating profit by
segment. The majority of the Company's fixed expenses are shared expenses of
both reporting segments and consist principally of administration and
manufacturing overhead. The Company's products are manufactured on common
production lines and therefore the Company does not analyze fixed assets or
capital expenditures by segment.
<PAGE>
Following is the financial information related to the Company's segments:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Net sales
Retail and Salon Group $ 56,216 $ 93,098 $ 86,266
Custom Manufacturing Group 17,827 25,377 30,817
---------------- ---------------- ----------------
Total net sales 74,043 118,475 117,083
Profit before fixed expenses
Retail and Salon Group 13,342 4,842 19,365
Custom Manufacturing Group 4,634 5,012 6,104
---------------- ---------------- ----------------
Total profit before fixed expenses 17,976 9,854 25,469
Fixed expenses 21,238 27,380 24,242
Operating (loss) income (3,262) (17,526) 1,227
Interest expense 1,951 2,236 1,386
Other expense (income) 432 (402) (712)
Gain on sale of professional salon brands 5,436 - -
---------------- ---------------- ----------------
Net (loss) income $ (209) $ (19,360) $ 553
================ ================ ================
</TABLE>
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
$15.7, $18.4, and $19.1 million in 1998, 1997, and 1996, respectively. No other
customer accounted for more than 10% of total net sales in 1998, 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.
<PAGE>
Exhibit 10.19
FOURTH AMENDMENT TO AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of October 19, 1998, is made by and between THE LAMAUR
CORPORATION, a Delaware corporation (the "Borrower"), and NORWEST BUSINESS
CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into an Amended and Restated Credit and
Security Agreement dated as of May 16, 1997, as amended by a First Amendment to
Amended and Restated Credit and Security Agreement dated as of August 13, 1997,
a Second Amendment to Amended and Restated Credit and Security Agreement dated
as of November 13, 1997, and a Third Amendment to Amended and Restated Credit
and Security Agreement and Waiver of Defaults dated as of March 31, 1998 (as so
amended, the "Credit Agreement"). Capitalized terms used in these recitals have
the meanings given to them in the Credit Agreement unless otherwise specified.
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are defined in
the Credit Agreement shall have the same meanings as defined therein, unless
otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is
amended by adding or amending, as the case may be, the following definitions:
"'Borrowing Base' means, at any time and subject to change from time to time at
the Lender's sole discretion, the lesser of:
(a) the Commitment, or
(b) the sum of
(i) the lesser of (A) 75% of Eligible Accounts, or (B) $10,000,000; plus
(ii) the lesser of (A) 50% of Eligible Finished Goods Inventory, or (B)
$4,000,000." "'Commitment' means $11,500,000."
<PAGE>
"'Fourth Amendment means that certain Fourth Amendment to Amended and Restated
Credit and Security Agreement, dated as of October 19, 1998, by and between the
Borrower and Lender."
"'Fourth Amendment Effective Date' means the date on which all of the items
listed in paragraph 9 of the Fourth Amendment are satisfied in full."
"'Note' means collectively, the Revolving Note A, the Revolving Real Estate
Note, and the Real Estate Note."
"'Original Real Estate Loan' means the Real Estate Loan made pursuant to Section
2.3 of the Credit Agreement before such Section was amended pursuant to the
Fourth Amendment."
"'Real Estate Note' means the promissory note of the Borrower payable to the
order of the Lender in the amount of $3,123,333.43, in substantially the form of
Exhibit C to the Fourth Amendment (as such promissory note may be amended,
extended or otherwise modified from time to time) and also means all other
promissory notes accepted from time to time in substitution therefor or in
renewal thereof."
"'Revolving Note A' means the promissory note of the Borrower payable to the
order of the Lender in the amount of $9,375,000, in substantially the form of
Exhibit A to the Fourth Amendment (as such promissory note may be amended,
extended or otherwise modified from time to time) and also means all other
promissory notes accepted from time to time in substitution therefor or in
renewal thereof."
"'Revolving Notes' means collectively, the Revolving Note A and the Revolving
Real Estate Note."
"'Revolving Real Estate Note' means the promissory note of the Borrower payable
to the order of the Lender in the amount of $2,125,000, in substantially the
form of Exhibit B to the Fourth Amendment (as such promissory note may be
amended, extended or otherwise modified from time to time) and also means all
other promissory notes accepted from time to time in substitution therefor or in
renewal thereof."
"'Second Amendment to Mortgage' means the Second Amendment to Mortgage, Security
Agreement and Fixture Financing Statement and Assignment of Leases and Rents
dated as of October 19, 1998 by and between the Lender and the Borrower."
<PAGE>
"'Term Loan Floating Rate' means an annual rate equal to the sum of the Base
Rate plus two and three-quarters percent (2.75%) which Term Loan Floating Rate
shall change when and as the Base Rate Changes."
"'Term Loan Termination Date' means April 16, 1999."
2. Real Estate Loan. Section 2.3 of the Credit Agreement is hereby amended by
replacing it with the following:
"Section 2.3 Real Estate Loan. As of the Fourth Amendment Effective Date, the
outstanding balance of the Original Real Estate Loan is $248,333.43. The Lender
may, in its sole discretion, make an additional real estate term loan in the
original principal amount of $2,875,000, which is $3,123,333,43 less
$248,333.43. The real estate term loan described in the immediately preceding
sentence, together with the outstanding balance of the Original Real Estate Loan
as of the Fourth Amendment Effective Date is referred to herein as the "Real
Estate Loan." The Real Estate Loan shall be secured by the Collateral as
provided in Article III hereof and by the Real Estate as provided in the
Mortgage. Upon fulfillment of the applicable conditions set forth in paragraph 9
of the Fourth Amendment, the Lender shall disburse loan proceeds by crediting
the same to the Borrower's demand deposit account specified in Section 2.1(b)
unless the Lender and the Borrower shall agree in writing to another manner of
disbursement."
3. Notes. Sections 2.4(a) and 2.4(c) of the Credit Agreement are hereby amended
by replacing them with the following:
"(a) The Borrower's obligation to pay the Advances made by the Lender under
Section 2.1, to the extent the outstanding principal balance thereof is less
than or equal to $2,125,000, shall be evidenced by the Revolving Real Estate
Note and shall be secured by the Collateral, as provided in Article III hereof
and by the Real Estate as provided in the Mortgage. The Borrower's obligation to
pay the Advances made by the Lender under Section 2.1, to the extent the
outstanding principal balance thereof is greater than $2,125,000 shall be
evidenced by Revolving Note A and shall be secured by the Collateral as provided
in Article III. The principal of the Revolving Notes shall be payable as
provided herein and on the earlier of the Termination Date or acceleration by
the Lender pursuant to Section 8.2 hereof, and shall bear interest as provided
herein."
(c) The Borrowers obligation to pay the Real Estate Loan shall be evidenced by
and repayable with interest in accordance with the Real Estate Note. The
principal of the Real Estate Note shall be payable on demand or, if demand is
not sooner made, on the earlier of the Term Loan Termination Date or
acceleration by the Lender pursuant to Section 8.2 hereof. The Real Estate Note
shall bear interest as provided herein."
4. Interest. The final sentence of Section 2.5(c) of the Credit Agreement is
amended to read as follows:
"Interest accruing on the Principal balance of the Real Estate Loan outstanding
from time to time shall be payable on the first day of each month and on the
Term Loan Termination Date or earlier demand therefore or prepayment in full."
5. Revolving Notes. Except as explicitly amended by the Fourth Amendment, all
references in the Credit Agreement to the Revolving Note shall be deemed to
refer to the Revolving Notes.
6. No Other Changes. Except as explicitly amended by the Fourth Amendment, all
of the terms and conditions of the Credit Agreement shall remain in full force
and effect and shall apply to any Advance or Letter of Credit thereunder.
7. Restructuring Fee. The Borrower shall pay the Lender as of the date hereof a
fully earned, non-refundable fee in the amount of $75,000 in consideration of
the Lender's execution of this Amendment.
8. Existing Advances. As of October 16, 1998, the outstanding principal balance
of the Advances made by the Lender pursuant to Section 2.1 of the Credit
Agreement was $7,248,610.02, with accrued but unpaid interest of $32,691.39.
Such amounts are due and owing by the Borrower in accordance with the Credit
Agreement and the Borrower has no knowledge as of the execution hereof of any
claim, defense or offset to enforcement of the Credit Agreement. Upon execution
and delivery of this Amendment, such Advances and accrued but unpaid interest
shall be repayable in accordance with the Revolving Notes.
9. Conditions Precedent. This Amendment, and the waiver set forth in Paragraph 4
hereof, shall be effective when the Lender shall have received an executed
original hereof, together with each of the following, each in substance and form
acceptable to the Lender in its sole discretion:
(a) The Revolving Note A, duly executed on behalf of the Borrower.
(b) The Revolving Real Estate Note, duly executed on behalf of the Borrower.
(c) The Real Estate Note, duly executed on behalf of the Borrower.
<PAGE>
(d) Second Amendment to Mortgage, duly executed by the Borrower.
(e) A Certificate of the Secretary of the Borrower certifying as to (i) the
resolutions of the board of directors of the Borrower approving the execution
and delivery of this Amendment and the Notes, (ii) the fact that the Articles of
Incorporation and Bylaws of the Borrower, which were certified and delivered to
the Lender pursuant to the Certificate of Authority of the Borrower's Secretary
dated as of May 16, 1997 continue in full force and effect and have not been
amended or otherwise modified except as set forth in the Certificate to be
delivered, and (iii) certifying that the officers and agents of the Borrower who
have been certified to the Lender, pursuant to the Certificate of Authority of
the Borrower's Secretary dated as of May 16, 1997, as being authorized to sign
and to act on behalf of the Borrower continue to be so authorized or setting
forth the sample signatures of each of the officers and agents of the Borrower
authorized to execute and deliver this Amendment and all other documents,
agreements and certificates on behalf of the Borrower.
(f) An updated title insurance commitment, in form and substance satisfactory to
the Lender, issued by a title insurance company acceptable to the Lender, with
such commitment constituting a commitment by such title company to issue a
mortgagee's title policy in the Lender's favor as mortgagee under the Mortgage,
that will be free from all standard exceptions, including mechanics' liens and
all other exceptions not previously approved by the Lender and that will insure
the Mortgage to be a valid first lien on the Real Estate, subject only to such
prior liens and encumbrances as are approved by the Lender, in an amount not
less than the Maximum Line; such commitment shall be without the so-called
"pending disbursement" clause and shall include the following endorsements:
comprehensive 100, contiguity, easement, access, and zoning.
(g) Payment of the fee described in Paragraph 7.
(h) Such other matters as the Lender may require.
10. Representations and Warranties. The Borrower hereby represents and warrants
to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this Amendment
and the Notes and to perform all of its obligations hereunder, and this
Amendment and the Note have been duly executed and delivered by the Borrower and
constitute the legal, valid and binding obligations of the Borrower, enforceable
in accordance with their terms.
(b) The execution, delivery and performance by the Borrower of this Amendment
and the Notes have been duly authorized by all necessary corporate action and do
not (i) require any authorization, consent or approval by any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) violate any provision of any law, rule or regulation or of any
order, writ, injunction or decree presently in effect, having applicability to
the Borrower, or the articles of incorporation or by-laws of the Borrower, or
(iii) result in a breach of or constitute a default under any indenture or loan
or credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected.
<PAGE>
(c) All of the representations and warranties contained in Article V of the
Credit Agreement are correct on and as of the date hereof as though made on and
as of such date, except to the extent that such representations and warranties
relate solely to an earlier date.
11. References. All references in the Credit Agreement to "this Agreement" shall
be deemed to refer to the Credit Agreement as amended hereby; and any and all
references in the Security Documents to the Credit Agreement shall be deemed to
refer to the Credit Agreement as amended hereby.
12. No Waiver. The execution and acceptance of this Amendment and the Notes
shall not be deemed to be a waiver of any Default or Event of Default under the
Credit Agreement or breach, default or event of default under any Security
Document or other document held by the Lender, whether or not known to the
Lender and whether or not existing on the date of this Amendment.
13. Release. The Borrower hereby absolutely and unconditionally releases and
forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
14. Costs and Expenses. The Borrower hereby reaffirms its agreement under the
Credit Agreement to pay or reimburse the Lender on demand for all fees, costs
and expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel and
any mortgage registration tax payable in connection with the filing of the
Second Amendment to Mortgage. Without limiting the generality of the foregoing,
the Borrower specifically agrees to pay all fees and disbursements of counsel to
the Lender for the services performed by such counsel in connection with the
preparation of this Amendment and the documents and instruments incidental
hereto. The Borrower hereby agrees that the Lender may, at any time or from time
to time in its sole discretion and without further authorization by the
Borrower, make a loan to the Borrower under the Credit Agreement, or apply the
proceeds of any loan, for the purpose of paying any such fees, disbursements,
costs and expenses.
15. Miscellaneous. This Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original and all
of which counterparts, taken together, shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first written above.
THE LAMAUR CORPORATION NORWEST BUSINESS CREDIT, INC.
By _________________________________ By _________________________________
John D. Hellmann Brian F. Fitzpatrick
Its Vice President Its Vice President
<PAGE>
Exhibit A to Fourth Amendment
to Amended and Restated Credit Agreement
REVOLVING NOTE A
$9,375,000
Minneapolis, Minnesota
October 19, 1998
For value received, THE LAMAUR CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of Norwest Business Credit, Inc, a
Minnesota corporation (the "Lender"), at its main office in Minneapolis,
Minnesota, or at such other place as the holder hereof may hereafter from time
to time designate in writing, on the Termination Date, in lawful money of the
United States of America, the principal sum of Nine Million, Three Hundred and
Seventy-Five Thousand Dollars ($9,375,000), or, if less, the aggregate unpaid
principal amount of all advances made by the Lender to the Borrower pursuant to
the Amended and Restated Credit and Security Agreement dated as of May 16, 1997,
between the Borrower and the Lender as amended by a First Amendment to Amended
and Restated Credit and Security Agreement dated as of August 13, 1997, a Second
Amendment to Amended and Restated Credit and Security Agreement dated as of
November 13, 1997, a Third Amendment to Amended and Restated Credit and Security
Agreement and Waiver of Defaults dated as of March 31, 1998, and a Fourth
Amendment to Amended and Restated Credit Agreement of even date herewith (and as
the same may hereafter be amended or restated from time to time, the "Credit
Agreement"), and to pay interest on the principal balance of this Note
outstanding from time to time at the rate or rates and at the times determined
pursuant to the Credit Agreement.
To the extent this Note evidences the Borrower's obligation to pay Advances made
before the date hereof, this Note is issued in substitution for and replacement
of but not in payment of the Borrower's revolving promissory note dated as of
May 16, 1997, payable to the order of the Lender in the original principal
amount of $20,000,000.
This Note is issued pursuant to, and is subject to, the Credit Agreement, which
provides (among other things) for acceleration of the maturity hereof upon the
occurrence of an Event of Default (as defined therein) and for the mandatory
prepayment hereof as provided in Section 2.7 of the Credit Agreement. This Note
is the Revolving Note A referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents (other than the Mortgage) as therein defined, and may now or hereafter
be secured by one or more other security agreements, mortgages, deeds of trust,
assignments or other instruments or agreements.
The Borrower shall pay all costs of collection, including reasonable attorneys
fees and legal expenses, if this Note is not paid when due, whether or not legal
proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE LAMAUR CORPORATION
By____________________________________________________________
Its___________________________________________________________
<PAGE>
Exhibit B to Fourth Amendment
to Amended and Restated Credit Agreement
REVOLVING REAL ESTATE NOTE
$2,125,000
Minneapolis, Minnesota
October 19, 1998
For value received, THE LAMAUR CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of Norwest Business Credit, Inc, a
Minnesota corporation (the "Lender"), at its main office in Minneapolis,
Minnesota, or at such other place as the holder hereof may hereafter from time
to time designate in writing, on the Termination Date, in lawful money of the
United States of America, the principal sum of Two Million, One Hundred and
Twenty-Five Thousand Dollars ($1,125,000), or, if less, the aggregate unpaid
principal amount of all advances made by the Lender to the Borrower pursuant to
the Amended and Restated Credit and Security Agreement dated as of May 16, 1997,
between the Borrower and the Lender as amended by a First Amendment to Amended
and Restated Credit and Security Agreement dated as of August 13, 1997, a Second
Amendment to Amended and Restated Credit and Security Agreement dated as of
November 13, 1997, a Third Amendment to Amended and Restated Credit and Security
Agreement and Waiver of Defaults dated as of March 31, 1998, and a Fourth
Amendment to Amended and Restated Credit Agreement of even date herewith (and as
the same may hereafter be amended or restated from time to time, the "Credit
Agreement"), and to pay interest on the principal balance of this Note
outstanding from time to time at the rate or rates and at the times determined
pursuant to the Credit Agreement.
To the extent this Note evidences the Borrower's obligation to pay Advances made
before the date hereof, this Note is issued in substitution for and replacement
of but not in payment of the Borrower's revolving promissory note dated as of
May 16, 1997, payable to the order of the Lender in the original principal
amount of $20,000,000.
This Note is issued pursuant to, and is subject to, the Credit Agreement, which
provides (among other things) for acceleration of the maturity hereof upon the
occurrence of an Event of Default (as defined therein) and for the mandatory
prepayment hereof as provided in Section 2.7 of the Credit Agreement. This Note
is the Revolving Real Estate Note referred to in the Credit Agreement. This Note
is secured, among other things, pursuant to the Credit Agreement and the
Security Documents, including the Mortgage, as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower shall pay all costs of collection, including reasonable attorneys'
fees and legal expenses, if this Note is not paid when due, whether or not legal
proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE LAMAUR CORPORATION
By____________________________________________________________
Its______________________________________________________
<PAGE>
Exhibit C to Fourth Amendment
to Amended and Restated Credit Agreement
REAL ESTATE NOTE
$3,123,333.43
Minneapolis, Minnesota
October 19, 1998
For value received, THE LAMAUR CORPORATION, a Delaware corporation (the
"Borrower"), hereby promises to pay ON DEMAND, and if demand is not sooner made,
then as provided in the Credit Agreement (defined below), to the order of
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its
main office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Three Million, One Hundred
Twenty-Three Thousand, Three Hundred and Thirty-three Dollars and Forty-Three
Cents ($3,123,333.43) or, if less, the aggregate unpaid principal amount of all
Real Estate Loans made by the Lender to the Borrower under the Credit Agreement
(defined below) together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Amended and
Restated Credit and Security Agreement dated as of May 16, 1997, between the
Borrower and the Lender as amended by a First Amendment to Amended and Restated
Credit and Security Agreement dated as of August 13, 1997, a Second Amendment to
Amended and Restated Credit and Security Agreement dated as of November 13,
1997, a Third Amendment to Amended and Restated Credit and Security Agreement
and Waiver of Defaults dated as of March 31, 1998, and a Fourth Amendment to
Amended and Restated Credit Agreement of even date herewith (as the same may
hereafter be amended, supplemented or restated from time to time, the "Credit
Agreement") by and between the Lender and the Borrower. The principal hereof and
interest accruing thereon shall be due and payable as provided in the Credit
Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
To the extent this Note evidences the Borrower's obligation to pay Advances made
before the date hereof, this Note is issued in substitution for and replacement
of but not in payment of the Borrower's amended and restated real estate note
dated as of May 16, 1997, payable to the order of the Lender in the original
principal amount of $4,700,000.
This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof. This Note is the Real
Estate Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrower hereby agrees to pay all costs of collection, including attorneys'
fees and legal expenses in the event this Note is not paid when due, whether or
not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE LAMAUR CORPORATION
By____________________________________________________________
Its______________________________________________________
<PAGE>
Exhibit 10.20
FIFTH AMENDMENT TO AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of March 12, 1999, is made by and between THE LAMAUR
CORPORATION, a Delaware corporation (the "Borrower"), and NORWEST BUSINESS
CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into an Amended and Restated Credit and
Security Agreement dated as of May 16, 1997, as amended by a First Amendment to
Amended and Restated Credit and Security Agreement dated as of August 13, 1997,
a Second Amendment to Amended and Restated Credit and Security Agreement dated
as of November 13, 1997, a Third Amendment to Amended and Restated Credit and
Security Agreement and Waiver of Defaults dated as of March 31, 1998 and a
Fourth Amendment to Amended and Restated Credit and Security Agreement dated as
of October 19, 1998 (as so amended, the "Credit Agreement"). Capitalized terms
used in these recitals have the meanings given to them in the Credit Agreement
unless otherwise specified.
The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are defined in
the Credit Agreement shall have the same meanings as defined therein, unless
otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is
amended by adding or amending, as the case may be, the following definitions:
"'Borrowing Base' means, at any time and subject to change from time to time at
the Lender's sole discretion, the lesser of:
(a) the Commitment, or
(b) the sum of
(i) the lesser of (A) 78% of Eligible Accounts, or (B) $10,000,000; plus
(ii) the lesser of (A) 55% of Eligible Finished Goods Inventory, or (B)
$4,000,000; plus
<PAGE>
(iii) the lesser of (A) 100% of Equipment Eligibility, or (B) $2,000,000."
"'Contract Division Sale' has the meaning set forth in Paragraph 7 of the Fifth
Amendment."
"'Equipment Eligibility' means the forced sale liquidation value of the
Borrower's existing Equipment located at the address set forth in Schedule 1 to
the Fifth Amendment, not including any existing equipment in which the Lender
does not hold a first priority perfected security interest."
"'Fifth Amendment' means that certain Fifth Amendment to Amended and Restated
Credit and Security Agreement, dated as of March 12, 1999, by and between the
Borrower and Lender."
"'Revolving Note A' means the promissory note of the Borrower payable to the
order of the Lender in the amount of $6,875,000, in substantially the form of
Exhibit A to the Fifth Amendment (as such promissory note may be amended,
extended or otherwise modified from time to time) and also means all other
promissory notes accepted from time to time in substitution therefor or in
renewal thereof."
"'Revolving Real Estate Note' means the promissory note of the Borrower payable
to the order of the Lender in the amount of $4,625,000, in substantially the
form of Exhibit B to the Fifth Amendment (as such promissory note may be
amended, extended or otherwise modified from time to time) and also means all
other promissory notes accepted from time to time in substitution therefor or in
renewal thereof."
"'Term Loan Termination Dat' means September 1, 1999."
"'Third Amendment to Mortgage' means the Third Amendment to Mortgage, Security
Agreement and Fixture Financing Statement and Assignment of Leases and Rents
dated as of March 12, 1999 by and between the Lender and the Borrower."
2. Notes. Section 2.4(a) of the Credit Agreement is hereby amended by replacing
them with the following:
"(a) The Borrower's obligation to pay the Advances made by the Lender under
Section 2.1, to the extent the outstanding principal balance thereof is less
than or equal to $4,625,000, shall be evidenced by the Revolving Real Estate
Note and shall be secured by the Collateral, as provided in Article III hereof
and by the Real Estate as provided in the Mortgage. The Borrowe's obligation to
pay the Advances made by the Lender under Section 2.1, to the extent the
outstanding principal balance thereof is greater than $4,625,000 shall be
evidenced by Revolving Note A and shall be secured by the Collateral as provided
in Article III. The principal of the Revolving Notes shall be payable as
provided herein and on the earlier of the Termination Date or acceleration by
the Lender pursuant to Section 8.2 hereof, and shall bear interest as provided
herein."
<PAGE>
3. Financial Covenants. Sections 6.12, 6.13, 6.14, and 6.15 of the Credit
Agreement are hereby amended as follows:
"Section 6.12 [Reserved]."
Section 6.13 Book Net Worth Plus Subordinated Indebtedness. The Borrower shall
at all times maintain (exclusive of any Subsidiaries or Affiliates unless the
Lender specifically consents in writing to their inclusion in such calculation),
Book Net Worth plus Subordinated Indebtedness of at least the following,
calculated monthly as of the following dates:
.................................... .........................................
For the Month Ending Minimum Book Net Worth Plus Subordinated
Indebtedness
.................................... ..........................................
.................................... ..........................................
1/31/99 $10,200,000
.................................... ..........................................
.................................... ..........................................
2/28/99 $9,600,000
.................................... .........................................
.................................... .........................................
3/31/99 $9,450,000
.................................... .........................................
.................................... .........................................
4/30/99 $9,000,000
.................................... .........................................
.................................... .........................................
5/31/99 $9,100,000
.................................... .........................................
.................................... .........................................
6/30/99 $9,100,000
.................................... .........................................
.................................... .........................................
7/31/99 $9,100,000
.................................... .........................................
.................................... .........................................
8/31/99 $9,100,000
.................................... .........................................
.................................... .........................................
9/30/99 $9,500,000
.................................... .........................................
.................................... .........................................
10/31/99 $9,350,000
.................................... .........................................
.................................... .........................................
11/30/99 $9,250,000
.................................... .........................................
.................................... .........................................
12/31/99 $9,150,000
.................................... .........................................
This covenant will be adjusted dollar-for-dollar to account for any 1998 fiscal
year-end adjustment in the Borrower's Book Net Worth required by the Borrower's
certified public accountants that will change the Borrower's 1999 fiscal year
opening Book Net Worth."
"Section 6.14 [Reserved]."
<PAGE>
Section 6.15 Year to Date Net Income. The Borrower shall at all times maintain
(exclusive of any Subsidiaries or Affiliates unless the Lender specifically
consents in writing to their inclusion in such calculation) Net Income
calculated on a fiscal year-to-date basis of at least the following amounts for
the following dates:
..................................... ..............................
For the Month Ending Year-to-Date Net Income
..................................... ..............................
..................................... ..............................
1/31/99 ($1,000,000)
..................................... ..............................
..................................... ..............................
2/28/99 ($1,650,000)
..................................... ..............................
..................................... ..............................
3/31/99 ($1,800,000)
..................................... ..............................
..................................... ..............................
4/30/99 ($2,100,000)
..................................... ..............................
..................................... ..............................
5/31/99 ($2,100,000)
..................................... ..............................
..................................... ..............................
6/30/99 ($2,100,000)
..................................... ..............................
..................................... ..............................
7/31/99 ($2,100,000)
..................................... ..............................
..................................... ..............................
8/31/99 ($2,100,000)
..................................... ..............................
..................................... ..............................
9/30/99 ($1,800,000)
..................................... ..............................
..................................... ..............................
10/31/99 ($1,900,000)
..................................... ..............................
..................................... ..............................
11/30/99 ($2,000,000)
..................................... ..............................
..................................... ..............................
12/31/99 ($2,100,000)
..................................... ..............................
4. Capital Expenditures. Section 7. of the Credit Agreement is hereby amended as
follows:
"Section 7.10 Capital Expenditures. The Borrower will not expend or contract to
expend Capital Expenditures more than $400,000 in the aggregate during the
Borrower's 1999 fiscal year."
5. No Other Changes. Except as explicitly amended by the Fifth Amendment, all of
the terms and conditions of the Credit Agreement shall remain in full force and
effect and shall apply to any Advance or Letter of Credit thereunder.
6. Waiver of Defaults. The Borrower is in default of the following provisions of
the Credit Agreement (collectively, the "Defaults"):
<PAGE>
Section/Covenant Date Required Actual
..................................................... ............. ........
6.12 Debt Service
Coverage Ratio 12/31/98 3.00 to 1.00 2.24 to 1.00
..................................................... ............. .........
..................................................... ............. .........
6.13 Minimum Book Net
Worth Plus Subordinated
Debt 12/31/98 $11,500,000 $11,246,000
..................................................... ............. ..........
..................................................... ............. ..........
6.15 Minimum Year-to-Date
Net Income 12/31/98 $1,000,000 ($208,000)
..................................................... ............. ..........
Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Defaults. In consideration of the restructuring fee
payable under paragraph 9 of this Amendment, the Lender hereby waives the
Default Rate interest payable under Section 2.5 of the Credit Agreement as a
result of the Defaults. This waiver shall be effective only in this specific
instance and for the specific purpose for which it is given, and this waiver
shall not entitle the Borrower to any other or further waiver in any similar or
other circumstances.
7. Continuation Fee. Pursuant to the Fourth Amendment, the Commitment was
reduced from $20,000,000 to $11,500,000; therefore, the Borrower acknowledges
and agrees that pursuant to Paragraph 14 of the Third Amendment, a fee in the
amount of $127,500 is currently payable (the "Continuation Fee"). The Borrower
has informed the Lender that it intends to sell all or substantially all of the
assets comprised of the manufacturing plant and equipment of the Borrower
located in Fridley, Minnesota, together with third party manufacturing contracts
associated with said Fridley, Minnesota location (the "Contract Division Sale");
in lieu of the Contract Division Sale, the Borrower intends to refinance the
Credit Facility. The Lender hereby agrees to delay collection of the
Continuation Fee until the earlier of the Termination Date, the completion of
the Contract Division Sale, or other payment of the Credit Facility from any
source, including, but not limited to, refinancing or liquidation. Nothing in
this Paragraph should be construed as a consent to the Contract Division Sale.
This collection delay shall be effective only in this specific instance and for
the specific purpose for which it is given, and this delay shall not entitle the
Borrower to any other or further forbearance or waiver in any similar or other
circumstances. Moreover, the Borrower acknowledges that if the Commitment is
further reduced or refinanced before the Termination Date, the Borrower will owe
a fee equal to equal to one and one half percent (1.5%) of such reduction.
8. Appraisals. If the Borrower has not provided a signed purchase agreement
acceptable to the Lender relating to the Contract Division Sale on or before
June 30, 1999, Lender will require a real estate appraisal, an equipment
appraisal and an inventory appraisal, which appraisals shall be paid for by the
Borrower.
9. Restructuring Fee. The Borrower shall pay the Lender a fully earned,
non-refundable fee in the amount of $100,000 in consideration of the Lender's
execution of this Amendment, including the waiver of defaults set forth in
Paragraph 6 and the Lender's willingness to extend the Term Termination Date to
September 1, 1999. The Borrower shall pay the Lender $50,000 of such fee as of
the date hereof. If the Credit Facility is not paid in full on or before August
1, 1999, the Borrower shall pay the Lender, on August 1, 1999, the remaining
$50,000 of such fee, if the Credit Facility is paid in full on or before August
1, 1999, the Lender shall waive payment of such remainder.
10. Conditions Precedent. This Amendment, and the waiver set forth in Paragraph
6 hereof, shall be effective when the Lender shall have received an executed
original hereof, together with each of the following, each in substance and form
acceptable to the Lender in its sole discretion:
(a) The Revolving Note A, duly executed on behalf of the Borrower.
(b) The Revolving Real Estate Note, duly executed on behalf of the Borrower.
(c) Third Amendment to Mortgage, duly executed by the Borrower.
(d) A Certificate of the Secretary of the Borrower certifying as to (i) the
resolutions of the board of directors of the Borrower approving the execution
and delivery of this Amendment and the Notes, (ii) the fact that the Articles of
Incorporation and Bylaws of the Borrower, which were certified and delivered to
the Lender pursuant to the Certificate of Authority of the Borrower's Secretary
dated as of May 16, 1997 continue in full force and effect and have not been
amended or otherwise modified except as set forth in the Certificate to be
delivered, and (iii) certifying that the officers and agents of the Borrower who
have been certified to the Lender, pursuant to the Certificate of Authority of
the Borrower's Secretary dated as of May 16, 1997, as being authorized to sign
and to act on behalf of the Borrower continue to be so authorized or setting
forth the sample signatures of each of the officers and agents of the Borrower
authorized to execute and deliver this Amendment and all other documents,
agreements and certificates on behalf of the Borrower.
(e) An updated title insurance commitment, in form and substance satisfactory to
the Lender, issued by a title insurance company acceptable to the Lender, with
such commitment constituting a commitment by such title company to issue a
mortgagee's title policy in the Lender's favor as mortgagee under the Mortgage,
that will be free from all standard exceptions, including mechanics' liens and
all other exceptions not previously approved by the Lender and that will insure
the Mortgage to be a valid first lien on the Real Estate, subject only to such
prior liens and encumbrances as are approved by the Lender, in an amount not
less than the Maximum Line; such commitment shall be without the so-called
"pending disbursement" clause and shall include the following endorsements:
comprehensive 100, contiguity, easement, access, and zoning.
(f) A current equipment list of the Borrower, acceptable to the Lender.
(g) Payment of the fee described in Paragraph 97.
(h) Such other matters as the Lender may require.
11. Representations and Warranties. The Borrower hereby represents and warrants
to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this Amendment
and the Notes and to perform all of its obligations hereunder, and this
Amendment and the Note have been duly executed and delivered by the Borrower and
constitute the legal, valid and binding obligations of the Borrower, enforceable
in accordance with their terms.
(b) The execution, delivery and performance by the Borrower of this Amendment
and the Notes have been duly authorized by all necessary corporate action and do
not (i) require any authorization, consent or approval by any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) violate any provision of any law, rule or regulation or of any
order, writ, injunction or decree presently in effect, having applicability to
the Borrower, or the articles of incorporation or by-laws of the Borrower, or
(iii) result in a breach of or constitute a default under any indenture or loan
or credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V of the
Credit Agreement are correct on and as of the date hereof as though made on and
as of such date, except to the extent that such representations and warranties
relate solely to an earlier date.
12. References. All references in the Credit Agreement to "this Agreement" shall
be deemed to refer to the Credit Agreement as amended hereby; and any and all
references in the Security Documents to the Credit Agreement shall be deemed to
refer to the Credit Agreement as amended hereby.
13. No Other Waiver. Except as set forth in Paragraph 6 above, the execution and
acceptance of this Amendment and the Notes shall not be deemed to be a waiver of
any Default or Event of Default under the Credit Agreement or breach, default or
event of default under any Security Document or other document held by the
Lender, whether or not known to the Lender and whether or not existing on the
date of this Amendment.
14. Release. The Borrower hereby absolutely and unconditionally releases and
forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
15. Costs and Expenses. The Borrower hereby reaffirms its agreement under the
Credit Agreement to pay or reimburse the Lender on demand for all fees, costs
and expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel and
any mortgage registration tax payable in connection with the filing of the
Second Amendment to Mortgage. Without limiting the generality of the foregoing,
the Borrower specifically agrees to pay all fees and disbursements of counsel to
the Lender for the services performed by such counsel in connection with the
preparation of this Amendment and the documents and instruments incidental
hereto. The Borrower hereby agrees that the Lender may, at any time or from time
to time in its sole discretion and without further authorization by the
Borrower, make a loan to the Borrower under the Credit Agreement, or apply the
proceeds of any loan, for the purpose of paying any such fees, disbursements,
costs and expenses.
16. Miscellaneous. This Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original and all
of which counterparts, taken together, shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first written above.
THE LAMAUR CORPORATION NORWEST BUSINESS CREDIT, INC.
By _________________________________ By _________________________________
John D. Hellmann Brian F. Fitzpatrick
Its Vice President Its Vice President
<PAGE>
Exhibit A to Fifth Amendment
to Amended and Restated Credit Agreement
REVOLVING NOTE A
$6,875,000
Minneapolis, Minnesota
March 12, 1999
For value received, THE LAMAUR CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of Norwest Business Credit, Inc, a
Minnesota corporation (the "Lender"), at its main office in Minneapolis,
Minnesota, or at such other place as the holder hereof may hereafter from time
to time designate in writing, on the Termination Date, in lawful money of the
United States of America, the principal sum of Six Million, Eight Hundred and
Seventy-Five Thousand Dollars ($6,875,000), or, if less, the aggregate unpaid
principal amount of all advances made by the Lender to the Borrower pursuant to
the Amended and Restated Credit and Security Agreement dated as of May 16, 1997,
between the Borrower and the Lender as amended by a First Amendment to Amended
and Restated Credit and Security Agreement dated as of August 13, 1997, a Second
Amendment to Amended and Restated Credit and Security Agreement dated as of
November 13, 1997, a Third Amendment to Amended and Restated Credit and Security
Agreement and Waiver of Defaults dated as of March 31, 1998, a Fourth Amendment
to Amended and Restated Credit and Security Agreement dated as of October 19,
1998 and a Fifth Amendment to Amended and Restated Credit Agreement of even date
herewith (and as the same may hereafter be amended or restated from time to
time, the "Credit Agreement"), and to pay interest on the principal balance of
this Note outstanding from time to time at the rate or rates and at the times
determined pursuant to the Credit Agreement.
To the extent this Note evidences the Borrower's obligation to pay Advances made
before the date hereof, this Note is issued in substitution for and replacement
of but not in payment of the Borrower's revolving promissory note dated as of
October 19, 1998, payable to the order of the Lender in the original principal
amount of $9,375,000.
This Note is issued pursuant to, and is subject to, the Credit Agreement, which
provides (among other things) for acceleration of the maturity hereof upon the
occurrence of an Event of Default (as defined therein) and for the mandatory
prepayment hereof as provided in Section 2.7 of the Credit Agreement. This Note
is the Revolving Note A referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents (other than the Mortgage) as therein defined, and may now or hereafter
be secured by one or more other security agreements, mortgages, deeds of trust,
assignments or other instruments or agreements.
The Borrower shall pay all costs of collection, including reasonable attorneys'
fees and legal expenses, if this Note is not paid when due, whether or not legal
proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE LAMAUR CORPORATION
By____________________________________________________________
Its______________________________________________________
<PAGE>
Exhibit B to Fifth Amendment
to Amended and Restated Credit Agreement
REVOLVING REAL ESTATE NOTE
$4,625,000
Minneapolis, Minnesota
March 12, 1999
For value received, THE LAMAUR CORPORATION, a Delaware corporation (the
"Borrower"), promises to pay to the order of Norwest Business Credit, Inc, a
Minnesota corporation (the "Lender"), at its main office in Minneapolis,
Minnesota, or at such other place as the holder hereof may hereafter from time
to time designate in writing, on the Termination Date, in lawful money of the
United States of America, the principal sum of Fourt Million, Six Hundred and
Twenty-Five Thousand Dollars ($4,625,000), or, if less, the aggregate unpaid
principal amount of all advances made by the Lender to the Borrower pursuant to
the Amended and Restated Credit and Security Agreement dated as of May 16, 1997,
between the Borrower and the Lender as amended by a First Amendment to Amended
and Restated Credit and Security Agreement dated as of August 13, 1997, a Second
Amendment to Amended and Restated Credit and Security Agreement dated as of
November 13, 1997, a Third Amendment to Amended and Restated Credit and Security
Agreement and Waiver of Defaults dated as of March 31, 1998, a Fourth Amendment
to Amended and Restated Credit and Security Agreement dated as of October 19,
1998 and a Fifth Amendment to Amended and Restated Credit Agreement of even date
herewith (and as the same may hereafter be amended or restated from time to
time, the "Credit Agreement"), and to pay interest on the principal balance of
this Note outstanding from time to time at the rate or rates and at the times
determined pursuant to the Credit Agreement.
To the extent this Note evidences the Borrower's obligation to pay Advances made
before the date hereof, this Note is issued in substitution for and replacement
of but not in payment of the Borrower's revolving promissory note dated as of
October 19, 1998, payable to the order of the Lender in the original principal
amount of $2,125,000.
This Note is issued pursuant to, and is subject to, the Credit Agreement, which
provides (among other things) for acceleration of the maturity hereof upon the
occurrence of an Event of Default (as defined therein) and for the mandatory
prepayment hereof as provided in Section 2.7 of the Credit Agreement. This Note
is the Revolving Real Estate Note referred to in the Credit Agreement. This Note
is secured, among other things, pursuant to the Credit Agreement and the
Security Documents, including the Mortgage, as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower shall pay all costs of collection, including reasonable attorneys'
fees and legal expenses, if this Note is not paid when due, whether or not legal
proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE LAMAUR CORPORATION
By____________________________________________________________
Its______________________________________________________
<PAGE>
Exhibit 10.17 STOCK GRANT AGREEMENT (NON-PLAN)
THIS AGREEMENT is made as of the day of January __, 1999, (the "Effective Date")
by and between The Lamaur Corporation, a Delaware corporation (the "Company"),
and _______________, an individual ("Employee"), together described herein as
(the "Parties").
WITNESSETH:
WHEREAS, the Company is willing to grant to the Employee capital stock of the
Company as herein described according to the terms and subject to the conditions
hereinafter set forth;
WHEREAS, the Employee would like to receive a grant of the Company's capital
stock.
NOW, THEREFORE, in consideration for the mutual promises and covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Number of Shares and Price Per Share. The Company agrees, subject to the
execution of this Agreement, to grant to Employee, ______________ shares of the
Company's Common Stock, no par value (the "Shares") which shares are priced at
$_____ per share at close of market as of the Effective Date (the "Market
Price").
2. Unvested Share Repurchase Option. In the event the Employee's employment with
the Company is terminated for any reason, with or without cause, or if the
Employee or the Employee's legal representative attempts to sell, exchange,
transfer, pledge or otherwise dispose of any shares received pursuant to this
Agreement which have not vested pursuant to Section 2(a) below (the "Unvested
Shares"), the Company shall have the right to reacquire the Unvested Shares
under the terms and subject to the conditions set forth in this Section 2 (the
"Unvested Share Repurchase Option").
(a) Vesting of Shares. The term "Initial Vesting Date" shall mean the Effective
Date. As of the Initial Vesting Date, one-sixth (16.67%) of the shares of Common
Stock, consisting of ________________ of the Shares, will be vested in and
issued to the Employee. The balance of the Shares granted to the Employee will
become "Vested Shares" after the Initial Vesting Date in accordance with the
following schedule:
Date Portion Vested
On the Initial Vesting Date
(January 13, 1999) ___________ Shares
(16.67% of Grant)
For each full six months of the
Company's employment of Employee
Following the Initial Vesting Date,
and Until fully vested. ___________ Shares
(16.67% of Grant)
Provided that the aggregate percentage of the Shares constituting Vested Shares
may not exceed one hundred percent (100%), and that such numbers shall be
adjusted appropriately to reflect any stock splits, stock dividends,
recombinations, recapitalizations or the like by the Company.
(b) Exercise of Unvested Share Repurchase Option. If the Employee's employment
with the Company is terminated for any reason or for no reason, with or without
cause, or if the Employee or the Employee's legal representative attempts to
dispose of any Unvested Shares other than as allowed in this Agreement, the
Company may exercise the Unvested Share Repurchase Option by written notice to
the Employee or the Employee's legal representative within sixty (60) days after
such termination or after the Company has received notice of the attempted
disposition.
(c) Payment for Shares and Return of Shares. Payment by the Company to the
Employee or the Employee's legal representative shall be made in cash within
sixty (60) days after the date of the mailing of the written notice of exercise
of the Unvested Share Repurchase Option. The purchase price per share for the
shares being purchased by the Company shall be an amount equal to the Market
Price specified in Section.
(d) Legends. The Company will place a legend referencing the Unvested Share
Repurchase Option on any shares subject to the Unvested Share Repurchase Option.
(e) Assignment of Unvested Share Repurchase Option. In the event the Company is
unable to exercise the Unvested Share Repurchase Option, the Company shall have
the right to assign the Unvested Share Repurchase Option to one or more persons
as may be selected by the Company.
3. Market Stand Off Agreement. The Employee who's ownership of shares exceeds 1%
of the total issued shares of the Company, if requested by an underwriter of
common stock (or other securities) of the Company, shall agree not to sell or
otherwise transfer or dispose of any securities held by the Employee during the
one hundred eighty (180) day period following the effective date of a
registration statement of the Company filed under the Securities Act provided
that:
(a) such agreement shall only apply to the first such registration statement of
the Company including shares of common stock (or other securities) to be sold on
its behalf to the public in an underwritten offering; and
(b) all securities holders of the Company holding more than one percent of the
outstanding voting stock, all officers and directors of the Company and all
other holders of registration rights of the Company (whether or not pursuant to
this agreement) agree to be bound by similar instructions. Such agreement shall
be in writing in the form satisfactory to the Company and such underwriter. The
Company may impose stop-transfer instructions with respect to the Shares subject
to the foregoing restriction until the end of the foregoing period.
4. Dividends, etc. If, from time to time, there is any stock dividend, stock
split or other change in the character or amount of any of the outstanding stock
of the Company, then in such event any and all new substituted or additional
securities to which the Employee is entitled by reason of the Employee's
ownership of the shares granted pursuant to this Agreement shall be immediately
subject to the Unvested Share Repurchase Option and all other terms of this
Agreement immediately before such eventincluding and in accordance with the
formula set forth in Section 2(a) above.
5. Restrictions on Transfer of Unvested Shares. The Employee may not sell,
transfer, pledge or otherwise dispose of any Shares still subject to the
Unvested Share Repurchase.
6. Consent of Spouse. If the Employee is married on the date of this Agreement,
the Employee's spouse shall execute a Consent of Spouse in the form of Exhibit A
hereto, effective on the date hereof. Such consent shall not be deemed to confer
or convey to the spouse any rights in the Shares that do not otherwise exist by
operation of law or the agreement of the parties.
7. Legends. All certificates representing Unvested Shares subject to the
provisions of this Agreement shall have endorsed thereon the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A REPURCHASE
OPTION AND OTHER RESTRICTIONS ON TRANSFER SET FORTH IN AN AGREEMENT BETWEEN THE
COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST, A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS COMPANY."
(b) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH
RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
8. Warranties and Representations. In connection with the grant of the Shares,
the Employee hereby agrees, represents and warrants as follows:
(a) The Employee is receiving the Shares solely for the Employee's own account
for investment and not with a view to, or for sale in connection with, any
distribution thereof within the meaning of the Securities Act. The Employee
further represents that the Employee does not have any present intention of
selling, offering to sell or otherwise disposing of or distributing the Shares
or any portion thereof, and that the entire legal and beneficial interest of the
Shares the Employee is receiving is being received for, and will be held for the
account of, the Employee only and neither in whole nor in part for any other
person.
(b) The Employee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to receive the Shares. The Employee further
represents and warrants that the Employee has received all such information as
the Employee deems necessary and appropriate to enable the Employee to evaluate
the financial risk inherent in ownership of the Shares and has received
satisfactory and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect thereof.
(c) The Employee realizes that ownership of the Shares are highly speculative,
and the Employee is able, without impairing the Employee's financial condition,
to hold the Shares for an indefinite period of time and to suffer a complete
loss on the Shares.
(d). The Company has disclosed to the Employee that:
(i) The grant of the Shares has not been registered under the Securities Act,
and the Shares must be held indefinitely unless a transfer of them is
subsequently registered under the Securities Act or an exemption from such
registration is available, and that the Company is under no obligation to
register the Shares;
(ii) The Company will make a notation in its records of the aforementioned
restrictions on transfer and legends.
(e) The Employee is aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public sale of "restricted
securities" acquired, directly or indirectly, from the issuer thereof (or an
affiliate of such issuer), in a non-public offering subject to the satisfaction
of certain conditions, including among other things: the sale occurring not less
than one year from the date the Employee has received the Shares; the
availability of certain public information concerning the Company; the sale
being through a broker in an unsolicited "broker's transaction" or in a
transaction directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934, as amended); and that any sale of the Shares
may be made by the Employee only in limited amounts during any three-month
period not exceeding specified limitations. The Employee further represents that
the Employee understands that at the time the Employee wishes to sell the Shares
there may be no public market upon which to make such a sale, and that, even if
such a public market then exists, the Company may not be satisfying the current
public information requirements of Rule 144, and that, in such event, the
Employee would be precluded from selling the Shares under Rule 144 even if the
one-year minimum holding period had been satisfied. The Employee represents that
the Employee understands that in the event all of the requirements of Rule 144
are not satisfied, registration under the Securities Act or compliance with an
exemption from registration will be required; and that, notwithstanding the fact
that Rule 144 is not exclusive, the staff of the Securities and Exchange
Commission has expressed its opinion that persons proposing to sell private
placement securities other than in a registered offering and otherwise than
pursuant to Rule 144 will have a substantial burden of proof in establishing
that an exemption from registration is available for such offers or sales, and
that such persons and their respective brokers who participate in such
transactions do so at their own risk.
(f) Without in any way limiting the Employee's representations and warranties
set forth above, the Employee further agrees that the Employee shall in no event
make any disposition of all or any portion of the Shares which he or she is
receiving unless and until:
(i) There is then in effect a Registration Statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with said Registration Statement; or
(ii) The Employee shall have (1) notified the Company of the proposed
disposition and furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and (2) furnished the
Company with an opinion of the Employee's own counsel to the effect that such
disposition will not require registration of such shares under the Securities
Act, and such opinion of the Employee"s counsel shall have been concurred in by
counsel for the Company, and the Company shall have advised the Employee of such
concurrence.
9. Escrow. As security for the Employee's faithful performance of the terms of
this Agreement and to insure the availability for delivery of the Shares upon
exercise of the Unvested Share Repurchase Option herein provided for, the
Employee agrees to a deposit with the Company (hereinafter also known as the
"Escrow Agent"), as Escrow Agent in this transaction, two Stock Assignments duly
endorsed (with date and number of shares blank) in the form attached hereto as
Exhibit B, together with the certificate or certificates evidencing the Unvested
Shares; such documents are to be held by the Escrow Agent pursuant to the Escrow
Instructions of the Company and the Employee set forth in Exhibit C attached
hereto and incorporated by this reference, which instructions shall also be
delivered to the Escrow Agent at the closing hereunder.
10. Transfers in Violation of Agreement. The Company shall not be required
(i) to transfer on its books any Shares which shall have been sold or
transferred in violation of any of the provisions set forth in this Agreement or
(ii) to treat as owner of such shares or to accord the right to vote as such
owner or to pay dividends to any transferee to whom such shares shall have been
so transferred.
11. Rights as Stockholder. Subject to the provisions of this Agreement, the
Employee shall, during the term of this Agreement, exercise all rights and
privileges of a stockholder of the Company with respect to the Shares deposited
in escrow.
12. Further Instruments. The parties agree to execute such further instruments
and to take such further action as may reasonably be necessary to carry out the
intent of this Agreement.
13. Notice. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to the other party hereto at the address hereinafter
shown below the Employee's signature or at such other address as such party may
designate by ten (10) days' advance written notice to the other party hereto.
14. Successors and Assigns. This Agreement shall inure to the benefit of the
successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon the Employee, the Employee's heirs,
executors, administrators, successors and assigns.
15. Entire Agreement; Amendments. This Agreement, together with the Exhibits
hereto, shall be construed under the laws of the State of California (as it
applies to agreements between California residents, entered into and to be
performed entirely within California), and constitutes the entire agreement of
the parties with respect to the subject matter hereof superseding all prior
written or oral agreements, and no amendment or addition hereto shall be deemed
effective unless agreed to in writing by the parties hereto.
16. Right to Specific Performance. The Employee agrees that the Company shall be
entitled to a decree of specific performance of the terms hereof or an
injunction restraining violation of this Agreement, said right to be in addition
to any other remedies available to the Company.
17. Separability. If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
18. No Tax Advice. The grant of shares to the Employee shall represent income to
the Employee in 1999, based upon the value of all of the shares granted on the
Effective Date (not only on the shares vested). The income to the Employee shall
be the total number of shares granted times the value or share price, e.g. 1,000
shares granted times $0.12 - $120 of income. Employee should consider tax
consequence prior to agreeing to exchange Stock Options for Stock Grants. The
Company does not provide tax advice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
"COMPANY" "EMPLOYEE"
Signed: __________________ Signed: _____________________
Printed: _________________ Printed: ____________________
Title: ___________________ Address:____________________
EXHIBIT A
CONSENT OF SPOUSE
I, ____________________________, spouse of ___________, acknowledge that I have
read the Stock Grant Agreement dated as of January ___, 1999, to which this
Consent is attached as Exhibit A (the "Agreement") and that I know its contents.
I am aware that by its provisions that The Lamaur Corporation (the "Company")
has the option to purchase certain shares of the Company's common stock (the
"Shares") which my spouse owns pursuant to the Agreement including any interest
I might have therein.
I hereby agree that my interest, if any, in the Shares subject to the Agreement
shall be irrevocably bound by the Agreement and further understand and agree
that any community property interest I may have in the Shares shall be similarly
bound by the Agreement.
Dated as of the ____ day of January __, 1999.
Signed: ________________________________________________
Printed: ______________________________________________
EXHIBIT B
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, ____________________________, hereby sells, assigns and
transfers unto _______________________ _____________________ (______________)
shares of the Common Stock of The Lamaur Corporation, a Delaware corporation
(the "Company"), standing in the undersigned's name on the books of the Company
represented by Certificate No.____________ herewith, and does hereby
irrevocably constitute and appoint ____________________________ my attorney to
transfer the said stock on the books of the Company with full power of
substitution in the premises.
Dated: January ___, 1999
Signed: _________________________________
Printed: _________________________________
EXHIBIT C
ESCROW INSTRUCTIONS
January __, 1999
The Lamaur Corporation
One Lovell Avenue
Mill Valley, CA 94941
To Whom it May Concern:
The Lamaur Corporation, a Delaware corporation (the "Company") shall act as
Escrow Agent for itself and the undersigned grantee ("Employee") of Stock of the
Company (the "Shares"), and therefore is hereby authorized and directed to hold
the documents delivered to it pursuant to the terms of that certain Stock Grant
Agreement ("Agreement"), dated as of the date hereof, to which a copy of these
Escrow Instructions is attached as Exhibit C, in accordance with the following
instructions:
1. In the event the Company and/or any assignee of the Company (referred to
collectively for convenience herein as the "Company") shall elect to exercise
the Unvested Share Repurchase Option set forth in the Agreement, the Company
shall give to Employee a written notice specifying the number of Shares to be
purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Employee hereby irrevocably authorizes and
directs the Company to close the transaction contemplated by such notice in
accordance with the terms of such notice.
2. At the closing of a transaction pursuant to Paragraph 1, the Company is
directed (a) to date the stock assignments necessary for the transfer in
question, (b) to fill in the number of Shares being transferred, and (c) to
retain same, together with the certificates evidencing the Shares to be
transferred, against the simultaneous delivery to Employee of the purchase price
(by check) for the number of Shares being purchased pursuant to the exercise of
the Unvested Share Repurchase Option.
3. Employee irrevocably authorizes the Company to hold any certificates
evidencing Unvested Shares and any additions and substitutions to said Shares as
defined in the Agreement. Employee does hereby irrevocably constitute and
appoint the Company as the Employee's attorney-in-fact and agent for the term of
this escrow to execute with respect to such securities all stock certificates,
stock assignments, or other documents necessary or appropriate to make such
securities negotiable and complete any transaction herein contemplated. Subject
to the provisions of this paragraph 3, Employee shall exercise all rights and
privileges of a shareholder of the Company while the Shares are held by the
Company.
4. This escrow shall terminate at such time as there are no longer any Shares
subject to the Unvested Share Repurchase Option.
5. If at the time of termination of this escrow the Company should have in its
possession any documents, securities, or other property belonging to Employee,
the Company shall deliver all of same to Employee and shall be discharged of all
further obligations hereunder.
6. The Company's duties hereunder may be altered, amended, modified or revoked
only by writing signed by all of the parties hereto.
7. The Company shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by the Company to
be genuine and to have been signed or presented by the proper party or parties.
The Company shall not be personally liable for any act it may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Employee while acting in
good faith and in the exercise of its own good judgment, and any act done or
omitted by you pursuant to the advice of your own attorneys shall be conclusive
evidence of such good faith.
8. The Company is hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or company, excepting
only orders or process of courts of law, and is hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case the
Company obeys or complies with any such order, judgment or decree of any court,
the Company shall not be liable to any of the parties hereto or to any other
person, firm or company by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
9. The Company shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. The Company shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with the Company.
11. The Company shall be entitled to employ such legal counsel and other experts
as it may deem necessary or proper to advise it in connection with its
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. If the Company reasonably requires other or further instructions in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
13. It is understood and agreed that should any dispute arise with respect to
the delivery and/or ownership or rights of possession of the securities held by
the Company hereunder, the Company is authorized and directed to retain in its
possession without liability to any one all or any part of said securities until
such dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree, or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but the Company shall be under no duty whatsoever to institute
or defend any such proceedings.
14. Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the
United States Post, by registered or certified mail with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
COMPANY:
Printed: _______________________________________________
Signed: ________________________________________________
Title: _________________________________________________
EMPLOYEE:
Printed:________________________________________________
Signed: _______________________________________________
ESCROW AGENT: The Lamaur Corporation
One Lovell Avenue
Mill Valley, CA 94941
Attn.: ___________________________
15.______This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
"COMPANY" "EMPLOYEE"
Signed: _________ Signed: _________
Printed: ________ Printed: ________
Title: __________
"ESCROW AGENT"
Signed: _________
Printed: ________
Title: __________
<PAGE>
Exhibit 10.18
STOCK GRANT AGREEMENT (PLAN)
THIS AGREEMENT is made as of the day of January 13, 1999, (the "Effective Date")
by and between The Lamaur Corporation, a Delaware corporation (the "Company"),
and _______________, an individual ("Employee"), together described herein as
(the "Parties").
WITNESSETH:
WHEREAS, the Company is willing to grant to the Employee capital stock of the
Company pursuant to the Company's 1997 Stock Plan and as herein described
according to the terms and subject to the conditions hereinafter set forth;
WHEREAS, the Employee would like to receive a grant of the Company's capital
stock.
NOW, THEREFORE, in consideration for the mutual promises and covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Number of Shares and Price Per Share. The Company agrees, subject to the
execution of this Agreement, to grant to Employee, pursuant to the Company's
1997 Stock Plan, ______________ shares of the Company's Common Stock, no par
value (the "Shares") which shares are priced at $_____ per share at close of
market as of the Effective Date (the "Market Price").
2. Unvested Share Repurchase Option. In the event the Employee's employment with
the Company is terminated for any reason, with or without cause, or if the
Employee or the Employee's legal representative attempts to sell, exchange,
transfer, pledge or otherwise dispose of any shares received pursuant to this
Agreement which have not vested pursuant to Section 2(a) below (the "Unvested
Shares"), the Company shall have the right to reacquire the Unvested Shares
under the terms and subject to the conditions set forth in this Section 2 (the
"Unvested Share Repurchase Option").
(a) Vesting of Shares. The term "Initial Vesting Date" shall mean the Effective
Date. As of the Initial Vesting Date, one-sixth (16.67%) of the shares of Common
Stock, consisting of ________________ of the Shares, will be vested in and
issued to the Employee. The balance of the Shares granted to the Employee will
become "Vested Shares" after the Initial Vesting Date in accordance with the
following schedule:
Date Portion Vested
On the Initial Vesting Date
(January 13, 1999) ___________ Shares
(16.67% of Grant)
For each full six months of the
Company's employment of Employee
Following the Initial Vesting Date, and
Until fully vested. ____________ Shares
(16.67% of Grant)
Provided that the aggregate percentage of the Shares constituting Vested Shares
may not exceed one hundred percent (100%), and that such numbers shall be
adjusted appropriately to reflect any stock splits, stock dividends,
recombination's, recapitalizations or the like by the Company.
(b) Exercise of Unvested Share Repurchase Option. If the Employee's employment
with the Company is terminated for any reason or for no reason, with or without
cause, or if the Employee or the Employee's legal representative attempts to
dispose of any Unvested Shares other than as allowed in this Agreement, the
Company may exercise the Unvested Share Repurchase Option by written notice to
the Employee or the Employee's legal representative within sixty (60) days after
such termination or after the Company has received notice of the attempted
disposition.
(c) Payment for Shares and Return of Shares. Payment by the Company to the
Employee or the Employee's legal representative shall be made in cash within
sixty (60) days after the date of the mailing of the written notice of exercise
of the Unvested Share Repurchase Option. The purchase price per share for the
shares being purchased by the Company shall be an amount equal to the Market
Price specified in Section 1.
(d) Legends. The Company will place a legend referencing the Unvested Share
Repurchase Option on any shares subject to the Unvested Share Repurchase Option.
(e) Assignment of Unvested Share Repurchase Option. In the event the Company is
unable to exercise the Unvested Share Repurchase Option, the Company shall have
the right to assign the Unvested Share Repurchase Option to one or more persons
as may be selected by the Company.
3. Market Stand-Off Agreement. The Employee who's ownership of shares exceeds 1%
of the total issued shares of the Company, if requested by an underwriter of
common stock (or other securities) of the Company, shall agree not to sell or
otherwise transfer or dispose of any securities held by the Employee during the
one hundred eighty (180) day period following the effective date of a
registration statement of the Company filed under the Securities Act provided
that:
(a) such agreement shall only apply to the first such registration statement of
the Company including shares of common stock (or other securities) to be sold on
its behalf to the public in an underwritten offering; and
(b) all securities holders of the Company holding more than one percent of the
outstanding voting stock, all officers and directors of the Company and all
other holders of registration rights of the Company (whether or not pursuant to
this agreement) agree to be bound by similar instructions. Such agreement shall
be in writing in the form satisfactory to the Company and such underwriter. The
Company may impose stop-transfer instructions with respect to the Shares subject
to the foregoing restriction until the end of the foregoing period.
4. Dividends, etc. If, from time to time, there is any stock dividend, stock
split or other change in the character or amount of any of the outstanding stock
of the Company, then in such event any and all new substituted or additional
securities to which the Employee is entitled by reason of the Employee's
ownership of the shares granted pursuant to this Agreement shall be immediately
subject to the Unvested Share Repurchase Option and all other terms of this
Agreement immediately before such event including and in accordance with the
formula set forth in Section 2(a) above.
5. Restrictions on Transfer of Unvested Shares. The Employee may not sell,
transfer, pledge or otherwise dispose of any Shares still subject to the
Unvested Share Repurchase Option.
6. Consent of Spouse. If the Employee is married on the date of this Agreement,
the Employee's spouse shall execute a Consent of Spouse in the form of Exhibit A
hereto, effective on the date hereof. Such consent shall not be deemed to confer
or convey to the spouse any rights in the Shares that do not otherwise exist by
operation of law or the agreement of the parties.
7. Legends. All certificates representing Unvested Shares subject to the
provisions of this Agreement shall have endorsed thereon the following legend:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A REPURCHASE
OPTION AND OTHER RESTRICTIONS ON TRANSFER SET FORTH IN AN AGREEMENT BETWEEN THE
COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST, A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS COMPANY."
8. Warranties and Representations. In connection with the grant of the Shares,
the Employee hereby agrees, represents and warrants as follows:
(a) The Employee is receiving the Shares solely for the Employee's own account
for investment and not with a view to, or for sale in connection with, any
distribution thereof within the meaning of the Securities Act. The Employee
further represents that the Employee does not have any present intention of
selling, offering to sell or otherwise disposing of or distributing the Shares
or any portion thereof, and that the entire legal and beneficial interest of the
Shares the Employee is receiving is being received for, and will be held for the
account of, the Employee only and neither in whole nor in part for any other
person.
(b) The Employee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to receive the Shares. The Employee further
represents and warrants that the Employee has received all such information as
the Employee deems necessary and appropriate to enable the Employee to evaluate
the financial risk inherent in ownership of the Shares and has received
satisfactory and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect thereof.
(c) The Employee realizes that ownership of the Shares are highly speculative,
and the Employee is able, without impairing the Employee's financial condition,
to hold the Shares for an indefinite period of time and to suffer a complete
loss on the Shares.
9. Escrow. As security for the Employee's faithful performance of the terms of
this Agreement and to insure the availability for delivery of the Shares upon
exercise of the Unvested Share Repurchase Option herein provided for, the
Employee agrees to a deposit with the Company (hereinafter also known as the
"Escrow Agent"), as Escrow Agent in this transaction, two Stock Assignments duly
endorsed (with date and number of shares blank) in the form attached hereto as
Exhibit B, together with the certificate or certificates evidencing the Unvested
Shares; such documents are to be held by the Escrow Agent pursuant to the Escrow
Instructions of the Company and the Employee set forth in Exhibit C attached
hereto and incorporated by this reference, which instructions shall also be
delivered to the Escrow Agent at the closing hereunder.
10. Transfers in Violation of Agreement. The Company shall not be required
(i) to transfer on its books any Shares which shall have been sold or
transferred in violation of any of the provisions set forth in this Agreement or
(ii) to treat as owner of such shares or to accord the right to vote as such
owner or to pay dividends to any transferee to whom such shares shall have been
so transferred.
11. Rights as Stockholder. Subject to the provisions of this Agreement, the
Employee shall, during the term of this Agreement, exercise all rights and
privileges of a stockholder of the Company with respect to the Shares deposited
in escrow.
12. Further Instruments. The parties agree to execute such further instruments
and to take such further action as may reasonably be necessary to carry out the
intent of this Agreement.
13. Notice. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to the other party hereto at the address hereinafter
shown below the Employee's signature or at such other address as such party may
designate by ten (10) days' advance written notice to the other party hereto.
14. Successors and Assigns. This Agreement shall inure to the benefit of the
successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon the Employee, the Employee's heirs,
executors, administrators, successors and assigns.
15. Entire Agreement; Amendments. This Agreement, together with the Exhibits
hereto, shall be construed under the laws of the State of California (as it
applies to agreements between California residents, entered into and to be
performed entirely within California), and constitutes the entire agreement of
the parties with respect to the subject matter hereof superseding all prior
written or oral agreements, and no amendment or addition hereto shall be deemed
effective unless agreed to in writing by the parties hereto.
16. Right to Specific Performance. The Employee agrees that the Company shall be
entitled to a decree of specific performance of the terms hereof or an
injunction restraining violation of this Agreement, said right to be in addition
to any other remedies available to the Company.
17. Separability. If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
18. No Tax Advice. The grant of shares to the Employee shall represent income to
the Employee in 1999, based upon the value of all of the shares granted on the
Effective Date (not only on the shares vested). The income to the Employee shall
be the total number of shares granted times the value or share price, e.g. 1,000
shares granted times $0.12 = $120 of income. Employee should consider tax
consequence prior to agreeing to exchange Stock Options for Stock Grants. The
Company does not provide tax advice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
"COMPANY" "EMPLOYEE"
Signed: __________ Signed: ______________
Printed: _________ Printed: _____________
Title: __________ Address:__________
EXHIBIT A
CONSENT OF SPOUSE
I, ____________________________, spouse of _____________, acknowledge that I
have read the Stock Grant Agreement dated as of January ___, 1999, to which this
Consent is attached as Exhibit A (the "Agreement") and that I know its contents.
I am aware that by its provisions that The Lamaur Corporation (the "Company")
has the option to purchase certain shares of the Company's common stock (the
"Shares") which my spouse owns pursuant to the Agreement including any interest
I might have therein.
I hereby agree that my interest, if any, in the Shares subject to the Agreement
shall be irrevocably bound by the Agreement and further understand and agree
that any community property interest I may have in the Shares shall be similarly
bound by the Agreement.
I am aware that the legal, financial and related matters contained in the
Agreement are complex and that I am free to seek independent professional
guidance or counsel with respect to this Consent. I have either sought such
guidance or counsel or determined after reviewing the Agreement carefully that I
will waive such right.
Dated as of the ____ day of January __, 1999.
Signed: ________________________________________________
Printed: ______________________________________________
EXHIBIT B
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, ____________________________, hereby sells, assigns and
transfers unto _______________________ _____________________ (______________)
shares of the Common Stock of The Lamaur Corporation, a Delaware corporation
(the "Company"), standing in the undersigned's name on the books of the Company
represented by Certificate No.____________ herewith, and does hereby
irrevocably constitute and appoint ____________________________ my attorney to
transfer the said stock on the books of the Company with full power of
substitution in the premises.
Dated: January ___, 1999
Signed:_________________________________________________
Printed: _______________________________________________
EXHIBIT C
ESCROW INSTRUCTIONS
January 1999
The Lamaur Corporation
One Lovell Avenue
Mill Valley, CA 94941
To Whom it May Concern:
The Lamaur Corporation, a Delaware corporation (the "Company") shall act as
Escrow Agent for itself and the undersigned grantee ("Employee") of Stock of the
Company (the "Shares"), and therefore is hereby authorized and directed to hold
the documents delivered to it pursuant to the terms of that certain Stock Grant
Agreement ("Agreement"), dated as of the date hereof, to which a copy of these
Escrow Instructions is attached as Exhibit C, in accordance with the following
instructions:
1. In the event the Company and/or any assignee of the Company (referred to
collectively for convenience herein as the "Company") shall elect to exercise
the Unvested Share Repurchase Option set forth in the Agreement, the Company
shall give to Employee a written notice specifying the number of Shares to be
purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Employee hereby irrevocably authorizes and
directs the Company to close the transaction contemplated by such notice in
accordance with the terms of such notice.
2. At the closing of a transaction pursuant to Paragraph 1, the Company is
directed (a) to date the stock assignments necessary for the transfer in
question, (b) to fill in the number of Shares being transferred, and (c) to
retain same, together with the certificates evidencing the Shares to be
transferred, against the simultaneous delivery to Employee of the purchase price
(by check) for the number of Shares being purchased pursuant to the exercise of
the Unvested Share Repurchase Option.
3. Employee irrevocably authorizes the Company to hold any certificates
evidencing Unvested Shares and any additions and substitutions to said Shares as
defined in the Agreement. Employee does hereby irrevocably constitute and
appoint the Company as the Employee's attorney-in-fact and agent for the term of
this escrow to execute with respect to such securities all stock certificates,
stock assignments, or other documents necessary or appropriate to make such
securities negotiable and complete any transaction herein contemplated. Subject
to the provisions of this paragraph 3, Employee shall exercise all rights and
privileges of a shareholder of the Company while the Shares are held by the
Company.
4. This escrow shall terminate at such time as there are no longer any Shares
subject to the Unvested Share Repurchase Option.
5. If at the time of termination of this escrow the Company should have in its
possession any documents, securities, or other property belonging to Employee,
the Company shall deliver all of same to Employee and shall be discharged of all
further obligations hereunder.
6. The Company's duties hereunder may be altered, amended, modified or revoked
only by writing signed by all of the parties hereto.
7. The Company shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by the Company to
be genuine and to have been signed or presented by the proper party or parties.
The Company shall not be personally liable for any act it may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Employee while acting in
good faith and in the exercise of its own good judgment, and any act done or
omitted by you pursuant to the advice of your own attorneys shall be conclusive
evidence of such good faith.
8. The Company is hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or company, excepting
only orders or process of courts of law, and is hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case the
Company obeys or complies with any such order, judgment or decree of any court,
the Company shall not be liable to any of the parties hereto or to any other
person, firm or company by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
9. The Company shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. The Company shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with the Company.
11. The Company shall be entitled to employ such legal counsel and other experts
as it may deem necessary or proper to advise it in connection with its
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. If the Company reasonably requires other or further instructions in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
13. It is understood and agreed that should any dispute arise with respect to
the delivery and/or ownership or rights of possession of the securities held by
the Company hereunder, the Company is authorized and directed to retain in its
possession without liability to any one all or any part of said securities until
such dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree, or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but the Company shall be under no duty whatsoever to institute
or defend any such proceedings.
14. Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the
United States Post, by registered or certified mail with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
COMPANY: Printed: _______________________________________________
Signed: ________________________________________________
Title: _________________________________________________
EMPLOYEE: Printed:________________________________________________
Signed: ________________________________________________
ESCROW AGENT: The Lamaur Corporation
One Lovell Avenue
Mill Valley, CA 94941
Attn.: _____________________
15.______This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
"COMPANY" "EMPLOYEE"
Signed: _________ Signed: _________
Printed: ________ Printed: ________
Title: __________
"ESCROW AGENT"
Signed: _________
Printed: ________
Title: __________
<PAGE>
Exhibit 11.1
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net (Loss) Income $ (209) $ (19,360) $ 553
Less: Dividends on Series B Preferred Stock (400) (400) (233)
-------------- -------------- --------------
Net (Loss) Income Available to Common Shareholders $ (609) $ (19,760) $ 320
============== ============== ==============
Weighted Average Common Shares Outstanding - Basic 5,854 5,685 4,557
-------------- -------------- --------------
Basic (Loss) Income per Common Share $ (0.10) $ (3.48) $ 0.07
============== ============== ==============
</TABLE>
<PAGE>
EX 23.1
AUDITOR'S CONSENT
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in The Lamaur Corporation's
Registration Statements No. 333-12029 and No. 333-26811 of our report dated
March 30, 1999 on the financial statements of The Lamaur Corporation appearing
in this Annual Report on Form 10-K of The Lamaur Corporation for the year ended
December 31, 1998.
Deloitte & Touche LLP
San Francisco, California
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001011154
<NAME> The Lamaur Corporation
<MULTIPLIER> 1000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 568
<SECURITIES> 0
<RECEIVABLES> 10,724
<ALLOWANCES> 480
<INVENTORY> 7,969
<CURRENT-ASSETS> 19,292
<PP&E> 22,463
<DEPRECIATION> 5,071
<TOTAL-ASSETS> 36,712
<CURRENT-LIABILITIES> 17,176
<BONDS> 8,290
0
13,500
<COMMON> 59
<OTHER-SE> (2,313)
<TOTAL-LIABILITY-AND-EQUITY> 36,712
<SALES> 74,043
<TOTAL-REVENUES> 74,043
<CGS> 46,062
<TOTAL-COSTS> 46,062
<OTHER-EXPENSES> 31,243
<LOSS-PROVISION> 128
<INTEREST-EXPENSE> 1,951
<INCOME-PRETAX> (209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (209)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
