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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, 1999
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 (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ] Yes [X] No
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 10, 2000 was approximately $1.9 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 10, 2000, there were 7,422,571 outstanding shares of the
registrant's common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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Item I. BUSINESS
Overview
The Lamaur Corporation (the "Company") was incorporated under the laws of
the State of Delaware on January 4, 1996. The Company's predecessor, Electronic
Hair Styling, Inc., was incorporated in the State of Washington on April 1, 1993
and, effective March 18, 1996, it merged with the Company to accomplish a
Delaware reincorporation. Effective November 15, 1995, as a result of the
acquisition of the Personal Care Division of DowBrands L.P. (an affiliate of The
Dow Chemical Company), the Company became a successor to a business started in
1930 known prior to its acquisition by DowBrands in 1987 as Lamaur Inc. On March
26, 1997, the Company changed its name to The Lamaur Corporation.
The Company has two operating segments, the Retail Group and the Custom
Manufacturing Group. Until July 1998, the Company also operated the Salon Group.
As the Retail and Salon Groups have similar economic characteristics, they have
been aggregated into one reportable segment called the Retail Group. The Retail
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.
In July 1998, the Company sold its Salon brands to Zotos International,
Inc. ("Zotos"), a subsidiary of Shiseido Co., Ltd., Tokyo, Japan for net
proceeds of $10.0 million. The net proceeds were used primarily to pay down
borrowings under the Company's credit agreement with Norwest Business Credit,
Inc., to pay down extended accounts payable, and for operations.
On September 28, 1999, the Company signed an agreement to sell its
manufacturing facility including real and personal property at 5601 East River
Road, Fridley, Minnesota, to Tiro Industries, Inc. ("Tiro") for $13,250,000 in
cash plus the assumption of capital leases totaling $765,000. At the Company's
annual meeting of shareholders on November 22, 1999, the sale of the
manufacturing facility was voted upon and approved by the Company's
shareholders. The sale to Tiro was completed on December 22, 1999, thus
achieving the Company's planned strategy to improve asset liquidity.
Concurrently, to reduce long-term debt obligations and interest expense, in
accordance with the Company's agreement with its lender, Congress Financial
Corporation ("Congress"), approximately $11.5 million of the net proceeds from
the sale were used to pay off the Company's term and revolver loans with
Congress. The Company will continue its sales and marketing operations of its
retail brands in a portion of the facility at 5601 East River Road as a tenant
of Tiro for a term of two years pursuant to a lease agreement. The Company will
retain ownership of personal property necessary for sales and marketing
operations and Tiro will manufacture products for the Company for three years
pursuant to a Manufacturing Agreement. Effective with the sale of the
manufacturing facility, the Company no longer operates the Custom Manufacturing
Group.
Until 1998, the Company conducted early stages of research and development
of Electronic Chemistry(TM), a new hair styling concept which is intended to
combine electronics and chemicals to create new products designed to color,
style and condition hair quickly, without the damaging side effects often
experienced with most chemical-based hair styling products. 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's patent
applications and to exploring opportunities with prospective licensees. In 1999,
an additional Electronic Chemistry(TM) 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(R), Perma Soft(R) and Color
Soft(TM), mid-priced Salon Style(R) and value-priced Style(R) and Style Natural
Reflections(TM) brand names ("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(R), Apple Pectin(R), Apple Pectin(R)
Naturals, Vita/E(R) and Pativa(R) brand names ("Salon Brands").
During 1999, sales by the Retail Group accounted for 57.1% of the Company's
total net sales, and were made to mass merchandisers, food stores, drug stores,
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 42.9% of the Company's total net sales for the same period.
2
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During 1999, the Company focused a substantial portion of its marketing
efforts on the natural product segment of the market; however, all retail brands
experienced significant sales declines from the previous year, including
Style(R) (down 33.4%), Perma Soft(R) (down 76.5%), Willow Lake(R) (down 44.5%),
and Style Natural Reflections(TM) (down 50.9%).
In 1998, the Company restructured its operations by eliminating positions
in the sales, marketing, production, administrative and management areas, due to
the expiration of its manufacturing agreement with DowBrands in November 1997,
lower Retail Brand sales and the sale of its Salon Brands previously discussed.
In December 1999, as a result of the sale of its manufacturing facility to Tiro,
the Company further restructured its operations and reduced the number of
employees from 220 to 20. The reductions were principally in the production,
research and development, purchasing, and administrative areas.
The Company was not in compliance with the net worth covenant of its credit
facility at December 31, 1999, and will not comply with this covenant in 2000.
The Company has obtained a waiver from the lender, and is currently negotiating
new financial loan covenants.
Investment Considerations
The Company has had limited success since its acquisition of the operations
of the Personal Care Division of DowBrands in 1995. 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. The Company has
reported profits in only one year since incorporation in 1993. No assurance can
be given that the Company will have earnings in future periods. Working capital
will be provided from the revolving line of credit with Congress and from
earnings, if any. A portion of the working capital will be used to support a new
retail brand marketing strategy and to introduce new brands without which the
Company will not be successful, and to pay down the Company's creditors.
Additional working capital may not be available. 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 1999. No assurance can be given that the shares will be relisted on
Nasdaq or any other national exchange.
The Company currently intends to continue its retail business, selling
branded products to traditional mass, food and drug retailers. The Company's
Willow Lake(R) brand of shampoos, conditioners and styling aids, launched in
1997, accounts for approximately 44.4% of Retail and Salon Group net sales. The
Company believes that the Willow Lake(R) 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.
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. 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 Congress, its primary lender and by extended terms from its creditors. The
Company was not in compliance with the net worth covenant of its credit facility
at December 31, 1999, and will not comply with this covenant in 2000. The
Company has obtained a waiver from the lender, and is currently negotiating new
financial loan covenants. Congress holds a security interest in substantially
all of the Company's assets, including cash.
Because of its financial difficulties, the Company has extended payables to
vendors of approximately $5.4 million at December 31, 1999 and, in some cases,
supply is provided on a cash-on-delivery basis. In January 2000, the Company
assisted certain key creditors in forming a creditors committee to negotiate a
payment plan for the Company's obligations to its unsecured creditors. In the
first quarter of 2000, the creditors committee signed a forbearance agreement on
behalf of all general unsecured creditors of the Company whereby the committee
agreed until December 31, 2001 to forbear from exercising any remedies they may
have against the Company as a result of their status as an unsecured creditor.
The Company's lender requested minor changes to the forbearance agreement that
the Company expects the creditors will agree to. There can be no assurance that
the creditors committee will agree to these changes. The forbearance agreement
provides for a 100% payment plan through December 31, 2001 to the creditors who
sign the forbearance agreement. No assurance can be given, however, that
payments can continue to be made under the payment plan to creditors or that
creditor actions will not cause production interruptions, which would have a
material adverse effect on the Company. The Company is in arrears on its
quarterly dividend payments by $1.0 million on its Series B preferred stock.
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Products
The Company formulates and until December 22, 1999, manufactured a broad
range of hair care product lines, marketed under several distinct brand names.
Product lines sold through consumer retail outlets include Willow Lake(R), Perma
Soft(R), Color Soft(TM), Salon Style(R), Style(R) and Style Natural
Reflections(TM) (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(R), Nucleic A(R), Nucleic A(R)
Botanicals, Apple Pectin(R), Apple Pectin(R) Naturals and Vita/E(R) 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.
Effective with the sale of the manufacturing facility to Tiro, the Company no
longer operates its Custom Manufacturing Group.
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The following table sets forth the Company's principal brands and products
sold within each brand by the Retail and Salon Group during 1999:
Retail Brands
<TABLE>
<CAPTION>
Brand Shampoos and Conditioners Styling Aids and Perms
- ----- ------------------------- ----------------------
<S> <C> <C>
Willow Lake(R)................... Cherry Bark & Irish Moss Conditioning Raspberry & Vitamin E Non-Aero Hair
Shampoo, Citrus & Rosemary Shampoo, Lavender Spray, White Lily & Jasmine Hair
& Mint Shampoo, Witch Hazel & Honeysuckle Spray, Aloe & Clover Blossom Mousse,
Shampoo, Primrose & Thyme Shampoo, Tea Tree Rosehips & Ivy Spray Gel, Orange
Oil & Sage Shampoo, Hops, Apricot & Almond Blossom & Clove Spritz
Conditioner, Sunflower, Honey & Hibiscus
Conditioner, Vitamin E, Carrot Extract & Milk
Protein Conditioner, Red Clover & Wild Ginger
Conditioner
Perma Soft(R).................... Revitalizing Shampoo, Moisturizing Shampoo, Aerosol Hair Sprays, Mousse, Frizz
Shampoo Plus Conditioner, Revitalizing Control Cream
Conditioner, Moisturizing Conditioner,
Moisturizing Mist Conditioner
Color Soft(TM).................... Daily Cleansing Shampoo, Moisturizing Aerosol Finishing Spray, Styling Mousse
Shampoo, Moisturizing Conditioner
Design Elements(TM)by Salon Pro Mist Hair Spray, Clean Mist Hair
Style(R).......................... Spray, Non-Aerosol Hair Spray, Body
Boost Mousse, Root Boost Spray Mousse,
Frizz Control Cream, Spray-on Styling
Gel, Hold & Shine Mega Gel
Style(R).......................... Moisture Shampoo, Extra Body Shampoo, Daily Firm Hold Aerosol and Non-Aerosol Hair
Shampoo, Revitalize Shampoo, Moisture Sprays, Unscented Firm Hold Aerosol
Conditioner, Extra Body Conditioner, Daily and Non-Aerosol Hair Sprays, Mega Hold
Conditioner, Revitalize Conditioner, Style(R) Aerosol and Non-Aerosol Hair Sprays,
Plus Shampoo Conditioner in One Natural Hold Aerosol Hair Spray
Style Natural Reflections(TM)..... Clarifying Shampoo, Volumizing Shampoo,
Moisturizing Shampoo, Daily Finishing
Conditioner, Volumizing Conditioner,
Moisturizing Conditioner
</TABLE>
Salon Brands Until July 1998 (1)
<TABLE>
<CAPTION>
Brand Shampoos and Conditioners Styling Aids and Perms
- ----- ------------------------- ----------------------
<S> <C> <C>
Pativa(R)........................ Curl Cleanse Shampoo, Volumizing Cleanse Mousse, Spritz, Design Creme,
Shampoo, Moisturizing Cleanse Shampoo, Alternative Wave (Normal), Alternative
Purifying Cleanse, Curl Revitalizer Wave (Tinted), Sprae Concentrate Hair
Conditioner, Leave-In Fortifier, Moisturizing Spray
Rinse, Purifying Rinse, Replenishing Hair
Masque
Nucleic A(R)..................... Body Plus(R)Shampoo, Proteplex(R) Shampoos and Botanicals(TM)Hair Spray, Glaz(R)Gel
Conditioner
Apple Pectin(R).................. Shampoo and Conditioner, Moisturizing Moisturizing Hair Spray, Acid Perm,
Shampoo, ScentSates(TM) Shampoos and Apple Pectin Plus(R)Perm, Ten-Minute
Conditioners, Apple Pectin Plus(R)Shampoo and Wave, Ultra Hold Mousse, Styling Creme
Conditioner in One
Apple Pectin(R)Naturals......... Witch Hazel & Honeysuckle Shampoo, Irish Moss Gel, Mousse, Spritz, Hair Spray
& Cherry Bark Shampoo; Rosemary & Grapefruit
Shampoo; Hops, Apricots & Almonds
Conditioner; Sunflower, Honey & Hibiscus
Conditioner; Milk Protein, Carrot Extract &
Vitamin E Conditioner; Peppermint & Lavender
Bath & Body Wash
Vita/E(R)........................ Shampoo, Conditioners Perm, Hair Spray, Ultrahold Hair
Spray, Unscented Hair Spray, Maximum
Hold Hair Spray, Ultra-hold
Concentrate Hair Spray
Other Salon Products........... Lamaur(R) Moisturizing Shampoo, Lamaur(R) Natural Woman(R)Hair Spray, CO-A(R)Perm,
Smoothing Shampoo, Bone Marrow(R)Conditioners CO-A Kinetics(R)Perm, Lamaur Inception(R)
Thio-Free Perm, Strata(R) Perm, Gamma
pHactor(R) Wave Set and Concentrate,
Beauti-Lac(R) Hair Spray, Stylac(R) Hair
Spray, Sprayage(R) Hair Spray, Body
Plus(R) Mousse, Axiom(R) Perm, Body for
Sure(R) Perm, Lamaur(R) Straightening
Balm, Lamaur(R) Sealing Spray, Lamaur(R)
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.
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Willow Lake(R), a premium priced retail hair care product line of shampoos,
conditioners and styling aids is the Company's entry in the "natural" segment of
the hair care category. Perma Soft(R), a premium-priced retail product line, is
intended to meet the needs of a segment of consumers who use permanent wave
products. Color Soft(TM) was developed and marketed for consumers who color
treat their hair. Salon Style(R) is a line of mid-priced shampoos, conditioners,
and styling aids targeted toward the salon segment of the retail market.
Style(R) is the Company's "value priced" brand, intended for use by the entire
family. Style Natural Reflections(TM) is a "mid-priced" entry in the "naturals"
segment.
The Apple Pectin(R) Naturals product line was positioned as "natural"
products for the professional market. Apple Pectin(R) is based on the use of
pectin from apples as a key ingredient in the products. Pativa(R) is a line of
professional salon shampoos, conditioners and styling products distributed by
exclusive dealers to full-service salons. Vita/E(R) products contain vitamin E,
a natural antioxidant which protects the hair and prevents color fading. Nucleic
A(R) is a full line of salon products prescribed to meet hair care needs.
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,
contributed 42.9%, 24.1%, and 21.4% to the Company's net sales in 1999, 1998,
and 1997, respectively. However, as a result of the sale of the manufacturing
facility to Tiro, the Company will no longer operate its Custom Manufacturing
group.
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>
1999 1998 1997
---------------- ---------------- -----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Retail Group (1) $ 28,681 57.1% $ 56,216 75.9% $ 93,098 78.6%
Custom Manufacturing Group (2) 21,527 42.9 17,827 24.1 25,377 21.4
-------- ----- -------- ----- --------- -----
Total $ 50,208 100.0% $ 74,043 100.0% $ 118,475 100.0%
======== ===== ======== ===== ========= =====
</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 $16.4
million during the year ended December, 31, 1997. 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 1999 no customer other than Wal-Mart accounted for more than 10% of the
Company's total net sales. Wal-Mart accounted for 19%, 21% and 15% of the
Company's total net sales in each of 1999, 1998 and 1997, respectively.
DowBrands, whose manufacturing agreement expired in 1997, accounted for 14% of
the Company's total net sales in 1997. 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, 1999, 1998 and 1997, the Company's marketing support expense was
approximately $8.1 million, $14.0 million and $43.7 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(R) in 1997 and
revenue and working capital shortfalls in 1998 and 1999.
The Company's strategy in 2000 is to focus its limited resources to support
the Willow Lake(R) brand with advertising and consumer promotion and to provide
maintenance promotional support behind the other retail brands.
6
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Research and Development
The Company, to the extent it is financially able, engages in the
development of new products and improvements to its existing formulations. Prior
to the sale of the manufacturing facility to Tiro, the Company relied
principally on the experience of its staff in connection with formulating new
products. Effective with the sale of the manufacturing facility, the Company
will rely on Tiro and its research and development staff, many of whom are
previous employees of the Company, for development of new products.
Manufacturing and Supply
Prior to the sale of the manufacturing facility to Tiro in December 1999,
all the Company's manufacturing, packaging, and warehousing operations were
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 had substantial excess production
capacity, which resulted in a high fixed overhead and contributed to
unprofitable operations. In conjunction with the sale of the manufacturing
facility to Tiro, the Company entered into a three year manufacturing agreement
with Tiro. The agreement provides that Tiro will be the exclusive manufacturer
of all of the Company's aerosol and non-aerosol hair care and skin care
products, except those products which Tiro, at its option, elects not to
manufacture. The Company's inventory will be stored in 50,000 square feet of
warehouse space at the Tiro facility in Fridley, Minnesota.
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. As part of the terms of its manufacturing agreement, the Company will
continue to purchase packaging materials, and Tiro will purchase the chemicals
used in production of the Company's products.
Prior to the sale of the manufacturing facility, the Company used tank
railcars to transport certain high volume raw materials. Trucks were 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 maintained 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 was warehoused for distribution throughout the United
States at the Company's on-site warehouse, but products produced for third
parties were in most cases immediately released to third-party warehouses and
did not remain on the Fridley site as inventory. As many as twelve over-the-road
truck trailers could be loaded and unloaded in the plant's warehousing and
shipping area at one time. The Company will continue to warehouse its finished
goods in the Fridley facility as part of the manufacturing agreement entered
into with Tiro.
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. Tiro
will perform quality control testing on all chemicals it purchases for use in
production of the Company's products and on each batch produced as part of its
manufacturing agreement with the Company.
7
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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. Aerosol-based products are also expected to be subject to state
and, possibly, federal standards relating to permissible levels of volatile
organic compounds. The Company is also subject to federal regulations concerning
the content of its advertising, trade practices, and certain other matters.
Since the Company no longer is a manufacturer, the Company does not expect that
compliance with those standards will adversely affect its revenues or operations
in 2000.
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.
In conjunction with the sale of the manufacturing facility to Tiro, a Phase
II environmental site assessment was performed at 5601 East River Road, Fridley,
Minnesota, by an independent environmental consulting firm to assess possible
soil and ground water contamination. Based upon a review of the test results,
the Minnesota Pollution Control Agency issued a limited no-action determination.
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.
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(R), Perma Soft(R),
Color Soft(TM), Salon Style(R), Style(R) and Style Natural Reflections(TM). The
Salon Brands trademarks, including Pativa(R), Nucleic A(R), Apple Pectin(R),
Apple Pectin(R) Naturals, and Vita/E(R), were sold to Shiseido in July 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, who passed away in July 1999, was
the former Chairman and Chief Executive Officer of the Company, and Mr. Stiley
was a director until March 2000 and one of the Company's co-inventors of
Electronic Chemistry(TM). 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.
8
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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
Prior to the sale of the Company's manufacturing facility to Tiro on
December 22, 1999, the Company employed 220 persons. As a result of this sale,
the Company reduced its staff to 20 persons. Approximately 200 of the Company's
employees were hired by Tiro. The reduction in the number of employees was
principally in the production, research and development, purchasing and
administrative areas. The Company employed 20 persons as of February 29, 2000.
None of the Company's employees is a member of a labor union. The Company
considers its relationship with its employees to be good.
Item 2. PROPERTIES
The Company owned its facility in Fridley, Minnesota, near Minneapolis
until the Company sold it to Tiro on December 22, 1999. 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 will continue its sales and marketing
operations in a portion of the facility (10,440 square feet) as a tenant of Tiro
for a term of two years pursuant to a lease agreement.
During the year ended December 31, 1999, 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. The lease expired in September 1999.
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 members of the
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, unspecified damages to the shareholders and restitution
of unspecified profits to the Company. Plaintiffs also seek a recission of all
actions approved by shareholders at the November 2, 1998 Annual Meeting and
demand a revised Proxy Statement. Any monetary judgment resulting from
Plaintiffs' derivative claims would accrue to the benefit of the Company. The
Company believes the lawsuit is without merit and will defend the action in the
best interest of the shareholders.
9
<PAGE>
Dominic LaRosa, The Company's former President and CEO - Lamaur Division -
commenced an arbitration action against the Company in January of 2000,
asserting a claim for severance payments. Mr. LaRosa's employment with the
Company terminated on April 15, 1999. Mr. LaRosa alleges that he entered into a
severance agreement with the Company on July 7, 1997 and that this severance
agreement provided for certain payments in the event of an Involuntary
Termination (as defined in the severance agreement) of his employment within 24
months of a Change of Control (as defined in the severance agreement) of the
Company. Mr. LaRosa alleges that he was the subject of an Involuntary
Termination within 24 months of a Change of Control and that he is entitled to
receive severance payments from the Company. He is seeking an award of: one and
one-half times his most recent annual full-time base compensation at the
Company; medical, dental and basic life insurance benefits for the shorter of
eighteen months from his termination or when new insurance is obtained from a
new employer; moving expenses of up to 25% of his most recent annual full-time
base compensation at the Company; a low interest rate loan of up to one and
one-half times his most recent annual full-time base compensation at the
Company; and unspecified attorneys' fees and costs. The Company has answered the
arbitration demand and has denied that it is liable to LaRosa for severance
payments. Among other things, the Company has denied that there was a Change of
Control as defined in the severance agreement. The arbitration proceeding is at
an early stage and no discovery has been taken or dates established. The Company
intends to vigorously defend this claim.
Ronald Williams, the Company's former Executive Vice President - Lamaur
Division - commenced an arbitration action against the Company on March 17,
2000. Mr. Williams' arbitration demand does not specify the details of his
claim. Prior to instituting the arbitration action, however, Mr. Williams sent
correspondence dated February 17, 2000 to the Company, in which he demanded
payment of severance benefits under a severance agreement that he entered into
with the Company on July 1, 1997. Mr. Williams resigned his employment with the
Company on February 29, 2000. The severance agreement entered into between Mr.
Williams and the Company provided for certain payments in the event of an
Involuntary Termination (as defined in the severance agreement) of his
employment within 24 months of a Change of Control (as defined in the severance
agreement) of the Company. Mr. Williams alleges that he was the subject of an
Involuntary Termination within 24 months of a Change in Control and that he is
entitled to receive severance payments from the Company. He is seeking an award
of: one and one-half times his most recent annual full-time base compensation at
the Company; medical, dental and basic life insurance benefits for the shorter
of eighteen months from his termination or when new insurance is obtained from a
new employer; moving expenses of up to 25% of his most recent annual full-time
base compensation at the Company; a low interest rate loan of up to one and one-
half times his most recent annual full-time base compensation at the Company;
and unspecified attorneys' fees and costs. The Company intends to vigorously
defend this claim. This arbitration proceeding is at an early stage. No answer
has yet been filed, no discovery has been taken, and no dates have been
established.
On February 3, 2000, Donald E. Porter, the Company's former Vice
President -- Corporate Development, filed a Demand for Arbitration with the
American Arbitration Association alleging that the Company failed to pay him
severance pay in accordance with the Employee Severance Agreement ("Agreement"),
executed on July 1, 1997. Mr. Porter also alleges that the Company failed to
reimburse him for approved expenses. Mr. Porter is seeking $237,878.96 in
damages for breach of the severance agreement, $4,273.38 for unreimbursed and
approved expenses, $6,250.00 for repurchase of stock and unspecified amounts for
costs of arbitration, attorneys fees and interest on the above. The Company has
responded to Mr. Porter's Demand for Arbitration and intends to vigorously
defend this claim.
10
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In November 1999, the Company submitted to shareholders four matters all of
which were approved at the annual meeting held on November 22, 1999. The matters
were: to elect three directors to hold office for a one-year term and until
their respective successors are elected and qualified; to consider and vote upon
a proposal to approve the sale of the Company's manufacturing facility to Tiro
Industries, Inc.; to approve an amendment to the Company's 1997 Stock Plan
increasing the number of shares of common stock reserved for issuance thereunder
by 1,000,000 shares; to consider, approve and ratify the appointment of Deloitte
& Touche LLP as the Company's independent auditors for the year ended December
31, 1999.
At the annual meeting, the following directors received the following
votes:
FOR WITHHELD
--------- --------
Harold M. Copperman 7,654,278 387,316
Perry D. Hoff 7,920,778 120,816
Joseph F. Stiley, III 7,971,427 70,167
The shareholders approved the sale of the Company's manufacturing facility
to Tiro Industries, Inc. with voting as follows: 5,499,045 for, 32,108 against,
273 abstaining, and 2,510,168 broker non-votes.
The shareholders approved an amendment to the Company's 1997 Stock Plan,
increasing the number of shares of common stock reserved for issuance thereunder
by 1,000,000 shares, with voting as follows: 4,776,866 for, 645,789 against,
108,771 abstaining, and 2,510,168 broker non-votes.
The shareholders ratified the selection of Deloitte & Touche LLP as
independent auditors for the Company for the year ended December 31, 1999 with
voting as follows: 8,026,701 for, 10,990 against, and 3,903 abstaining.
11
<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. Beginning in February 1999, the Company's
stock was traded on the Over the Counter Bulletin Board (OTC BB). The table
below sets forth the range of the high and low sale prices, as reported by
Nasdaq and the OTC BB:
1999 1998
------------------ ------------------
High Low High Low
------- ------- ------- -------
First Quarter $ 0.250 $ 0.063 $ 2.438 $ 1.250
Second Quarter 0.250 0.125 3.000 0.656
Third Quarter 0.219 0.063 0.750 0.063
Fourth Quarter 0.300 0.094 0.313 0.031
As of March 7, 2000, the number of holders of record of the Company's
Common Stock was 484 and the number of holders of record of the Company's
Preferred Stock was one.
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, 1999 the Company is $1,000,000 in arrears on the payment of
dividends on its Series B Preferred Stock, all of which is 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, the terms of the Congress credit agreement
restrict the payment of dividends, other than on the Company's Series B
Preferred Stock.
In January 1999, the Company issued 1,369,800 shares of its Common Stock to
certain employees and directors. The stock grants were made in conjunction with
the cancellation of outstanding options held by employees and directors. These
shares have vesting schedules ranging from two years to two and one-half years.
The majority of the shares were vested during 1999 pursuant to acceleration
clauses under the agreements. The Company recorded compensation expense of
approximately $168,000 in connection with these stock grants. The Company has
the right under certain conditions to repurchase unvested shares at the market
price on the date of grant. 1,129,800 of the shares were issued pursuant to the
Company's 1997 Stock Plan. In addition, the Company issued 90,000 shares to
certain members of the Board of Directors as compensation.
12
<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, 1999,
1998, 1997, 1996 and 1995, and the balance sheet data of the Company at December
31, 1999, 1998, 1997, 1996 and 1995.
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). Such data were derived from the Personal Care
Division financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995 (1)
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Statements of Operations Data:
Total Net Sales $ 50,208 $ 74,043 $ 118,475 $ 117,083 $ 8,070
Cost of Goods Sold 38,100 46,062 69,626 70,215 5,656
--------- --------- --------- --------- ---------
Gross Margin 12,108 27,981 48,849 46,868 2,414
Operating Expenses 20,599 31,243 66,375 45,641 3,496
Loss on sale of manufacturing facility 623 -- -- -- --
Gain on sale of professional salon brands -- 5,436 -- -- --
--------- --------- --------- --------- ---------
Operating (Loss) Income (9,114) 2,174 (17,526) 1,227 (1,082)
Interest Expense 1,413 1,951 2,236 1,386 300
Other (Income) Expense (172) 432 (402) (712) --
--------- --------- --------- --------- ---------
Net (Loss) Income $ (10,355) $ (209) $ (19,360) $ 553 $ (1,382)
========= ========= ========= ========= =========
Basic (Loss) Income Per Common Share $ (1.50) $ (0.10) $ (3.48) $ 0.07 $ (0.52)
========= ========= ========= ========= =========
Weighted Average Common Shares
Outstanding - Basic (2) 7,168 5,854 5,685 4,557 2,667
Diluted (Loss) Income Per Common Share $ (1.50) $ (0.10) $ (3.48) $ 0.06 $ (0.52)
========= ========= ========= ========= =========
Weighted Average Common Shares
Outstanding - Diluted (2) 7,168 5,854 5,685 5,609 2,667
At December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995 (1)
--------- --------- --------- --------- ---------
Balance Sheet Data
Working Capital (Deficit) $ (216) $ 2,116 $15,794 $ 26,126 $ 10,346
Total Assets 12,771 36,712 58,326 61,566 42,967
Long-Term Debt, less Current Portion -- 8,290 24,046 14,473 20,350
Stockholders' Equity 677 11,246 10,949 30,252 6,594
</TABLE>
13
<PAGE>
Selected Financial Data of the Personal Care Division
Period from
January 1, 1995
through
November 30,
1995 (3)
---------------
(In thousands)
Selected Statements of Operations Data:
Total Net Sales $ 109,696
Cost of Goods Sold 67,088
---------
Gross Margin 42,608
Operating Expenses 42,344
Write-Down of Assets 11,000
---------
Operating Loss (10,736)
Interest Expense from Dow (1,603)
Other Expense 101
---------
Net Loss $ (12,238)
=========
- -----------------------
(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.
14
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Historical Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total net sales for the year ended December 31, 1999 were $50.2 million,
compared with $74.0 million in 1997, a decrease of 32.2%. The decrease is due to
the decline in sales of the Company's retail brands and to the disposition of
the Company's salon brands in July 1998. Willow Lake(R), Style(R), Perma
Soft(R), Color Soft(TM), and Style Natural Reflections(TM), the retail brands,
and the salon brands had sales declines of $26.8 million during the year ended
December 31, 1999 as compared with the same period in 1998. Sales of Style(R)
and Perma Soft(R) have continued to decline 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. There were no sales of the professional salon brands for the year ended
December 31, 1999 as a result of the sale of these brands to Zotos on July 31,
1998. During 1999, the Company continued to manufacture certain of these
professional salon brands for Zotos, which were sold by the Custom Manufacturing
Group at a lower markup over cost.
Partially offsetting the net sales declines incurred by the Company's
retail and salon brands was an increase in net sales of the Custom Manufacturing
Group. Net sales of the Custom Manufacturing Group increased $3.7 million for
the year ended December 31, 1999, as compared with the same period in 1998. The
increased sales in 1999 are principally due to a full year of production in 1999
for a customer obtained in mid-1998, the addition of a new customer in 1999, and
increased production for existing customers. On December 22, 1999, the Company
sold its manufacturing facility and will no longer operate its Custom
Manufacturing Group.
Gross margin as a percentage of net sales was 24.1% for the twelve months
ended December 31, 1999 as compared with 37.8% for the same period in 1998. The
reduction in gross margin as a percentage of net sales for the year ended
December 31, 1999 was principally due to Custom Manufacturing Group sales, which
are lower-margin sales, representing a greater percentage of net sales in 1999,
and the increase in fixed manufacturing overhead as a percent of sales due to
the overall decrease in sales. The increased percentage of total sales by the
Custom Manufacturing Group is a result of the sale of the professional salon
brands to Zotos, the decrease in the sales of the Company's retail brands, and
the increase in Custom Manufacturing sales.
Selling, general, and administrative expenses were $20.6 million or 41.0%
of net sales for the year ended December 31, 1999 as compared with $31.2 million
or 42.2% of net sales for the same period last year, a decrease of $10.6
million. The decrease is principally attributed to reduced marketing expenses of
$5.9 million, and reduced freight and brokerage costs 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 1999 the Company decreased its overall marketing
expenditures; however, as a percentage of retail brand net sales, marketing was
28.1% and 26.2% for the years ending December 31, 1999 and 1998, respectively.
In addition, the Company has reduced marketing expenditures for brands which
have continued to experience sales declines. The lower level of marketing
support in 1999 is a result of the Company's limited working capital. Because of
the Company's limited working capital and the competitive environment for hair
care products, there can be no assurance concerning the future performance of
Willow Lake(R), Design Elements(TM) by Salon Style(R), and other brands or the
Company's ability to attain any particular level of sales or to be profitable in
the future with the lower level of marketing support.
Interest expense decreased to $1.4 million for the twelve months ended
December 31, 1999 as compared with $2.0 million in the same period last year.
The decrease in interest expense during the twelve months ended December 31,
1999 is principally attributable to lower borrowings and lower interest rates
under the Company's revolving line of credit and term loans.
In 1999, the Company reported other income of $172,000. Other income
consisted primarily of warehouse rental income and a refund related to the sale
of the salon division. Partially offsetting this income were other expenses
consisting primarily of loan fees. In 1998, the Company reported other expense
of $432,000 which consisted primarily of loan fees charged by Norwest Business
Credit in conjunction with the amendments to the credit agreement in 1998.
On December 22, 1999, the Company completed the sale of its manufacturing
facility, including real and personal property, to Tiro for net proceeds of
$13.1 million and the assumption of approximately $765,000 in capital lease
obligations. The sale of the manufacturing facility to Tiro resulted in a pretax
loss of $623,000.
15
<PAGE>
As a result of the foregoing factors, the net loss for the year ended
December 31, 1999 was $10.4 million compared to a net loss of $0.2 million for
the year ended December 31, 1998.
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 by the Custom Manufacturing Group as a result of the expiration of a
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(R), Perma Soft(R), Willow Lake(R), Salon Style(R), and Color Soft(TM)
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(R),
Perma Soft(R), and Salon Style(R) have continued to decline in sales since
management began its turnaround efforts in the first quarter of 1996. 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, the Custom Manufacturing Group manufactured
and sold these professional salon brands to Zotos on a contract basis which
provided for a lower markup over cost.
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(R) 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 Group 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 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 costs 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(R), and in 1998 such support was
substantially reduced. In addition, the Company has reduced marketing
expenditures for other brands which have continued to experience sales declines.
The lower level of marketing support in 1998 is a result of the Company's
limited working capital. Because of the Company's limited working capital and
the competitive environment for hair care products, there can be no assurance
concerning the future performance of Willow Lake(R) and other brands or the
Company's ability to attain any particular level of sales or to be profitable in
the future with the lower level of marketing 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 amendments to its 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.
16
<PAGE>
Liquidity and Capital Resources
In May 1999, the Company entered into a three-year Loan and Security
Agreement with Congress Financial Corporation ("Congress") for a $20 million
loan facility. This facility consists of a revolving loan of up to $10.3 million
and term loans of $3.0 million and $6.7 million each. The $6.7 million term loan
is amortized over five years with monthly principal payments of $111,667. The
revolving loan and the term loans are payable in full in May 2002. The Company
incurred a closing fee of $200,000 in conjunction with the loan agreement,
$100,000 of which was paid at the loan closing, and $100,000 which is payable in
May 2000. Approximately $14.1 million of the proceeds from the Congress loans
were used to pay off the outstanding revolving line of credit and term loans
with the Company's former lender, Norwest Business Credit ("Norwest").
On December 22, 1999, the Company completed the sale of its manufacturing
facility at 5601 East River Road, Fridley, Minnesota, including real and
personal property, to Tiro for net proceeds of $13.1 million and the assumption
of approximately $765,000 in capital lease obligations thus achieving the
Company's planned strategy to improve asset liquidity. Concurrently, to reduce
long-term debt obligations and interest expense, in accordance with the
Company's agreement with its lender, approximately $11.5 million of the net
proceeds from the sale of the manufacturing facility were used to pay off the
Company's term and revolver loans with Congress. In accordance with the loan
agreement, the term loan was terminated as a result of the sale of the
manufacturing facility and subsequent loan pay off. However the Company
continues to have a revolving loan facility with Congress.
As of December 31, 1999, as a result of the loan pay off discussed above,
there were no amounts outstanding under the Company's revolving and two term
loan facilities, as compared with $7.4 million under the revolving loan and $3.1
million under the term loan with Norwest as of December 31, 1998. The interest
rate on the revolving loan with Congress is prime (8.5% at December 31, 1999)
plus 0.75%.
The revolving loan with Congress is secured by virtually all of the assets
of the Company. Additionally, the loan agreement restricts the payment of
dividends other than on the Company's Series B Preferred Stock, restricts the
Company's ability to incur additional indebtedness and requires the Company to
comply with certain financial loan covenants. As of December 31, 1999, the
Company was not in compliance with the net worth covenant in its credit
facility and will not comply with such covenant in 2000. The Company has
obtained a waiver from the lender and is currently negotiating new financial
loan covenants.
Because of financial difficulty, the Company's accounts payables to vendors
exceeding normal terms were approximately $5.4 million. In January 2000, the
Company assisted certain key creditors in forming a creditors committee to
negotiate a payment plan for the Company's debt to its unsecured creditors. In
the first quarter of 2000, the creditors committee signed a forbearance
agreement on behalf of all general unsecured creditors of the Company whereby
the committee agreed until December 31, 2001 to forbear from exercising any
remedies they may have against the Company as a result of their status as an
unsecured creditor. The Company's lender requested minor changes to the
forbearance agreement that the Company expects the creditors will agree to.
There can be no assurance that the creditor committee will agree to these
changes. The creditors committee has entered into the forbearance agreement;
however, there can be no assurance that all of its creditors will sign the
agreement. The committee has agreed to use good-faith efforts to contact any
creditor who engages in collection efforts against the Company and solicit such
creditor to be bound by the terms of the forbearance agreement. The forbearance
agreement provides for a 100% payment plan through December 31, 2001 to the
creditors who sign the forbearance agreement. No assurance can be given,
however, that payments can continue to be made under the payment plan to
creditors or that creditor actions will not cause production interruptions,
which would have a material adverse effect on the Company.
In January 1999, the Company issued 1,369,800 shares of its Common Stock to
certain employees and directors. The stock grants were made in conjunction with
the cancellation of outstanding options held by employees and directors. These
shares have vesting schedules ranging from two years to two and one-half years.
The majority of the shares were vested during 1999 pursuant to acceleration
clauses under the agreements. The Company recorded compensation expense of
approximately $168,000 in connection with these stock grants. The Company has
the right under certain conditions to repurchase unvested shares at the market
price on the date of grant. 1,129,800 of the shares were issued pursuant to the
Company's 1997 Stock Plan. Management and the Board of Directors believed it was
essential to offer such a package in order to retain employees and preserve the
value of the enterprise while the Company evaluated and pursued alternatives.
17
<PAGE>
Subsequent to the sale of the manufacturing facility to Tiro, the Company
will continue its sales and marketing operations in a portion of the facility at
5601 East River Road as a tenant of Tiro for a term of two years pursuant to a
lease agreement entered into simultaneously with the sale transaction. The
Company retains ownership of personal property necessary for its sales and
marketing operations. Tiro will manufacture products for the Company for three
years from the closing date pursuant to a manufacturing agreement entered into
simultaneously with the sale transaction. In conjunction with this sale, the
Company recorded a pre tax loss of $0.6 million. The Company believes the
reduction of expenses from transferring manufacturing to a third party and the
generation of cash from the sale of the manufacturing facility present an
opportunity for the Company to bring liabilities in line with ongoing
operations. However the Company may not be able to sustain operations following
the sale.
As of December 31, 1999, the Company was $1,000,000 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 current obligations as they become
due, to comply with the payment terms of the forbearance agreement, to comply
with the terms and conditions of the loan facility, and attain sales and
operating levels to be profitable.
The Company's strategy in 2000 is to focus its limited resources to support
the Willow Lake(R) 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.
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.
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. These statements are forward-looking statements under the Private
Securities Litigation Reform Act of 1995. 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 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At December 31, 1999, the Company had no long-term debt outstanding.
The Company does not have significant transactions denominated in foreign
currencies and does not purchase or hold any derivative financial instruments.
18
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
----
THE LAMAUR CORPORATION
Independent Auditors' Report F-1
Balance Sheets as of December 31, 1999 and 1998 F-2
Statements of Operations for the Years Ended
December 31, 1999, 1998, and 1997 F-3
Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 1998, and 1997 F-4
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997 F-5
Notes to Financial Statements for Years
December 31, 1999, 1998, and 1997 F-6
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE
Not applicable.
19
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below for all directors are the names, ages, positions with the
Company and period of service as December 31, 1999. The term of office of each
person elected as a director will continue until the next annual meeting of
stockholders or until a successor has been elected and qualified or until
resignation or removal.
Name of Director Age Position(s) Director
Since
Chairman of the Board and
Lawrence Pesin........... 54 Chief Executive Officer 1999
Harold M. Copperman...... 65 Director 1995
Perry D. Hoff............ 40 Director 1993
Joseph F. Stiley, III.... 60 Director 1994
Set forth below for all executive officers are the names, ages, positions
with the Company and period of service as of December 31, 1999:
<TABLE>
<CAPTION>
Name of Executive Officer Age Position Executive
Officer Since
<S> <C> <C> <C>
Lawrence Pesin.......... 54 Chairman of the Board and Chief Executive Officer 1999
John D. Hellmann........ 49 Vice President, Chief Financial Officer 1995
Ronald P. Williams...... 55 Executive Vice President - Lamaur Division 1995
Michael G. Piff......... 46 Vice President, Sales - Retail Group - Lamaur Division 1997
Jay T. Olson............ 47 Vice President, Finance - Lamaur Division 1996
</TABLE>
Lawrence Pesin has been the Chairman of the Board and Chief Executive
Officer of Lamaur since December 1999. He has been General Manager, the
Americas, Concord Camera Corp. from January 1996 until July 1999, a manufacturer
of cameras to the retail and OEM trade. From January 1994 to December 1995, he
served as Vice President - Marketing at Pavion, Ltd. From November 1983 to
December 1992, he was Chief Executive Officer of Colonia, Inc., USA Subsidiary
of Ferd. Muelhens, KG, Cologne, Germany. From November 1980 to November 1983, he
served as President of Helena Rubinstein, USA. These companies manufactured and
marketed cosmetics, fragrances and other personal care items. Prior to this, he
held sales and marketing positions for Revlon and Helene Curtis.
Harold M. Copperman has been a Director of Lamaur since September 1995. Mr.
Copperman is Vice Chairman of Impulse Telecommunications Corporation ("ITC"), a
position he has held since 1990. ITC provides strategic management and
engineering consulting resources to enterprises and investors. Mr. Copperman has
held chief executive officer and other senior management, business development
and marketing positions with large multi-national organizations and
entrepreneurial start-up ventures.
Perry D. Hoff has been a Director of Lamaur since April 1993. He has been
the President and a Director of Intertec Holdings, Inc., since 1990, and a
Director and Vice President of Operations of Innovative Capital Management,
Inc., a private investment company affiliated with Intertec Holdings, L.P., a
major stockholder of Lamaur, since 1980. Perry D. Hoff is the son of the late
Don G. Hoff.
Joseph F. Stiley, III has been a Director since March 1994 and was acting
Chief Executive Officer and Chairman of the Board from July to December 1999.
Mr. Stiley resigned from the Board of Directors in March 2000. From 1993 to
1994, Mr. Stiley was Vice President of Lamaur, responsible for research and
development. From December 1987 to 1993, Mr. Stiley was a consultant to high
technology companies, including Intertec Ltd. Mr. Stiley has consulted to the
governments of Canada and France, European and domestic corporations, and has
participated in the development of international standards for communications.
John D. Hellmann joined the Company as Vice President - Finance and Chief
Financial Officer in September 1995. Prior to that, for more than nine years, he
served in various capacities, including as General Manager with Liberty
Electronics, a manufacturer of computer equipment. Mr. Hellmann is a certified
public accountant.
20
<PAGE>
Ronald P. Williams joined the Company as Vice President - Operations of
Lamaur in November 1995. From 1994 until the time he joined the Company, Mr.
Williams was Executive Vice President of Snowblade Corporation, a recreational
equipment manufacturer. From 1993 to 1994 he served as Vice President - USA
Operations of the J.B. Williams Company, Inc. a personal care company during its
start-up phase. Mr. Williams terminated his employment with the Company on
February 29, 2000.
Michael G. Piff became Vice President, Sales - Retail Group in January
1998. From August 1997 to January 1998 he was Vice President, International -
Lamaur Division, from December 1996 to August 1997 he was General Manager,
Canada & Mexico/Vice President, Trade Marketing - Retail - Lamaur Division, and
from November 1995 to December 1996 he was Director, National Sales - Retail -
Lamaur Division. From January 1, 1987 to November 1995 he held various positions
with the Personal Care Division of DowBrands.
Jay T. Olson became Vice President, Finance - Lamaur Division in December
1996. From November 1995 to December 1996 he was Controller - Lamaur Division.
From January 1993 to November 1995 he was Controller of the Personal Care
Division of DowBrands.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Lamaur's
executive officers and directors and persons who own more than ten percent of a
registered class of Lamaur's equity securities to file reports of ownership on
Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and
Exchange Commission (the "SEC"). Such officers, directors and ten percent
stockholders are also required by SEC rules to furnish Lamaur with copies of all
Section 16(a) reports they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that Forms 5 have been
filed for such persons as required, Lamaur believes that, during the year ended
December 31, 1999, all reporting persons complied with Section 16(a) filing
requirements applicable to them, except as follows: One transaction was reported
late for each of Messrs. Pesin, Stiley, and Copperman.
21
<PAGE>
Item 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth, for each of the three years ended December
31, 1999, certain compensation information with respect to each person who
served as Lamaur's Chief Executive Officer during 1999 and each of the four most
highly compensated executive officers other than the Chief Executive Officer who
were serving as executive officers as of December 31, 1999 (collectively, the
"Named Executive Officers"), based upon salary and bonus earned by such
executive officers and individuals in 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Awards
--------------------------------------------- ----------
Other Annual Securities All Other
Compensation Underlying Compensation
Name and Principal Position Year Salary Bonus (3) (4)(5)(6) Options (7) (8)
- --------------------------- ---- ------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Pesin (1) 1999 $ 4,038 $ - $ - 600,000 $ -
Chairman and Chief 1998 - - - - -
Executive Officer 1997 - - - - -
Don G. Hoff (2) 1999 154,343 - 36,111 - 29,288
Chairman and Chief 1998 290,790 - 3,229 - -
Executive Officer 1997 278,253 - 3,229 - -
Joseph F. Stiley, III (3) 1999 33,335 - - - -
Chairman and Chief 1998 - - - - -
Executive Officer 1997 - - - - -
Ronald P. Williams 1999 154,462 - 542 - 12,500
Executive Vice President 1998 160,966 20,000 945 - -
Lamaur Division 1997 151,005 - 2,105 69,800 -
Dominic J. LaRosa (4) 1999 74,431 - 55,221 - 31,250
President and CEO 1998 259,616 30,000 6,046 - -
Lamaur Division 1997 246,086 - 37,765 232,000 -
Michael G. Piff 1999 129,864 - 144 - 9,375
Vice President - Retail Sales 1998 125,848 10,000 278 - -
Retail Group of Lamaur 1997 105,585 - 114 14,400 -
Division
John D. Hellmann 1999 124,865 - 135 - 12,500
Vice President, Chief 1998 129,808 20,000 261 - -
Financial Officer 1997 124,039 - 261 36,500 -
</TABLE>
- -------------------------
(1) Mr. Pesin was hired as Chief Executive Officer on December 7, 1999.
(2) Mr. Hoff passed away on July 18, 1999.
(3) Mr. Stiley served as Acting Chief Executive Officer from July 19, 1999
until December 7, 1999. Prior to this, Mr. Stiley served as a consultant to
the Company. See "Certain Relationships and Related Transactions -
Consulting Fees to Mr. Stiley."
(4) Mr. LaRosa's employment with Lamaur terminated effective April 15, 1999.
See "Directors and Executive Officers - Certain Relationships and Related
Transactions - LaRosa Severance."
(5) In 1998, represents bonuses earned but not paid.
(6) For 1999, includes (i) one-time payment of accrued vacation to Messrs. Hoff
and LaRosa of $34,289 and $53,690, respectively, upon termination of
employment; (ii) imputed income in 1999 resulting from life insurance
premiums in the amount of $1,822 for Mr. Hoff, $542 for Mr. Williams,
$1,032 for Mr. LaRosa, $144 for Mr. Piff and $135 for Mr. Hellmann and
(iii) vehicle allowance of $499 paid to Mr. LaRosa.
22
<PAGE>
(7) For 1998, includes (i) $2,958 for Mr. LaRosa for relocation expenses
including $1,078 cash to assist in the payment of taxes and; (ii) imputed
income in 1998 resulting from life insurance premiums in the amount of
$3,229 for Mr. Hoff, $945 for Mr. Williams, $1,800 for Mr. LaRosa, $278 for
Mr. Piff and $261 for Mr. Hellmann and (iii) vehicle allowance of $1,288
paid to Mr. LaRosa.
(8) For 1997, includes (i) $36,415 of reimbursed expenses for Mr. LaRosa
including $15,140 for rental of an apartment, and $12,806 cash to assist in
the payment of taxes due on the amount of such reimbursed expenses; (ii)
$1,500 for Mr. Williams for relocation expenses. Also includes imputed
income in 1997 resulting from life insurance premiums in the amount of
$3,229 for Mr. Hoff, $605 for Mr. Williams, $1,350 for Mr. LaRosa, $114 for
Mr. Piff and $261 for Mr. Hellmann.
(9) Represents stock options granted in the years shown with exercise prices
equal to or not less than fair market value on the date of grant. No SARs
were granted in such years. For 1997, includes options granted with the
cancellation of a similar number of options in connection with the
Company's repricing program. Options repriced for Messrs. Hoff, Williams,
LaRosa, Piff, and Hellmann were 0, 69,800, 232,000, 14,400, and 36,500
respectively.
(10) Represents the fair market value at the time of grant of stock granted to
such persons. "See Option and Stock Grants In Last Fiscal Year."
Option and Stock Grants In Last Fiscal Year
The following table sets forth information with respect to stock options
granted to the Named Executive Officers in 1999:
<TABLE>
<CAPTION>
Potential
Realized Value at
Number of % of Total Assumed Annual
Securities Options Rates of Stock Price
Underlying Granted to Exercise Appreciation
Options Employees or Base for Option Term (2)
Granted in Fiscal Price Expiration ----------------------
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
- ---------------------- ---------- ----------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Pesin (1) 600,000 100% $ 0.13 12/07/09 $ 47,167 $119,530
Don G. Hoff - - - - - -
Joseph F. Stiley, III - - - - - -
Ronald P. Williams - - - - - -
Dominic J. LaRosa - - - - - -
Michael G. Piff - - - - - -
John D. Hellmann - - - - - -
</TABLE>
- -------
(1) 600,000 stock options were granted to Lawrence Pesin on December 7, 1999 at
$0.125 per share.
(2) Potential realizable value is based on the assumption that the price of the
common stock appreciates at the rate shown, compounded annually, from the
date of grant until the end of the option term. The values are calculated
in accordance with rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
appreciation.
In January 1999, Lamaur issued 1,369,800 shares of its common stock to
certain employees and directors. The stock grants were made in conjunction with
the cancellation of outstanding options held by employees and directors. These
shares have vesting schedules ranging from two years to two and one-half years.
The majority of the shares were vested during 1999 pursuant to acceleration
clauses under the agreements. Lamaur recorded compensation expense of
approximately $168,000 in connection with these stock grants. Lamaur has the
right under certain conditions to repurchase unvested shares at the market price
at the date of grant. 1,129,800 of the shares were issued pursuant to Lamaur's
1997 stock plan. Management and the board of directors believed it was essential
to offer such package in order to retain employees and preserve the value of the
enterprise while Lamaur evaluated and pursued alternatives. Messrs. Hoff,
Williams, LaRosa, Piff and Hellmann received 234,300; 100,000; 250,000; 75,000
and 100,000 shares, respectively.
23
<PAGE>
Aggregate Option Exercises In Last Fiscal Year And Fiscal Year-End Option Values
The following table sets forth certain information regarding options to
purchase shares of Lamaur common stock that were held by the Named Executive
Officers during 1999. No such options were exercised during 1999.
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1999 December 31, 1999
--------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Lawrence Pesin -- 600,000 $0 $18,750
Don G. Hoff (1) -- -- 0 0
Joseph F. Stiley, III -- -- 0 0
Ronald P. Williams (1) -- -- 0 0
Dominic J. LaRosa(1) -- -- 0 0
Michael G. Piff (1) -- -- 0 0
John D. Hellmann (1) -- -- 0 0
</TABLE>
- ---------------------------
(1) In January 1999, options were canceled in conjunction with the grant of
759,300 shares of common stock at the then fair market value. See "Certain
Transactions."
Stock Plans
The Company maintains the following stock plans under which officers,
directors and consultants of the Company receive benefits.
1997 Stock Plan
The purpose of the Plan is to attract and retain the best available
personnel for positions of responsibility with the Company, to provide
additional incentive to the employees, directors, and consultants of the Company
and to promote the success of the Company's business. Options granted under the
Plan may be either "incentive stock options," as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock
options. In addition, shares of the Company's Common Stock may be granted under
the Plan. As of December 31, 1999, 603,929 options were outstanding under the
plan, 1,219,800 shares had been issued under the plan, and 544,344 shares
remained available for grant under the plan.
1996 Non Qualified Stock Option Plan
The purpose of the Plan is to attract and retain the best available
personnel for positions of responsibility with the Company, to provide
additional incentive to the employees, directors, and consultants of the Company
and to promote the success of the Company's business. Options granted under the
Plan must be nonstatutory stock options. As of December 31, 1999, 1,102 options
were outstanding under the plan, 0 shares had been issued under the plan, and 0
shares remained available for grant under the plan.
24
<PAGE>
1996 Stock Incentive Plan
The purpose of the Plan is to provide incentive compensation to employees
and consultants of the Company by affording them an opportunity to acquire an
interest in the Company. Awards under this Plan may be of three types: stock
options, stock appreciation rights and restricted shares. An option may be
granted as an incentive stock option or as a nonqualified stock option. As of
December 31, 1999, 68,125 options were outstanding under the plan, 62,700 shares
had been issued under the plan, and 0 shares remained available for grant under
the plan.
1997 Employee Stock Purchase Plan
The purpose of the Purchase Plan is to provide employees with an
opportunity to purchase Common Stock of the Company through payroll deductions.
Each employee of the Company (including officers), whose customary
employment with the Company is at least 20 hours per week and more than five
months in any calendar year, is eligible to participate in an Offering Period as
defined below.
The Purchase Plan is implemented by offering periods lasting for two years
(an "Offering Period"), with a new Offering Period commencing every year. Common
Stock may be purchased under the Purchase Plan every six months (a "Purchase
Period"), unless the participant withdraws or terminates employment earlier. To
the extent the fair market value of the Common Stock on any exercise date in an
Offering Period is lower than the fair market value of the Common Stock on the
first day of the Offering Period, then all participants in such Offering Period
will be automatically withdrawn from such Offering Period immediately after the
exercise of their options on such exercise date and automatically reenrolled in
the immediately following Offering Period as of the first day thereof. The Board
may change the duration of the Purchase Periods or the length or date of
commencement of an Offering Period. To participate in the Purchase Plan, each
eligible employee must authorize payroll deductions pursuant to the Purchase
Plan. Such payroll deductions may not exceed 20% of a participant's
compensation. Once an employee becomes a participant in the Purchase Plan, the
employee will automatically participate in each successive Offering Period until
such time as the employee withdraws from the Purchase Plan or the employee's
employment with the Company terminates. At the beginning of each Offering
Period, each participant is automatically granted options to purchase shares of
the Company's Common Stock. Each option expires at the end of a Purchase Period
or upon termination of employment, whichever is earlier, but is exercised at the
end of each Purchase Period to the extent of the payroll deductions accumulated
during such Purchase Period. In no event shall an employee be permitted to
purchase during each Purchase Period more than 7,500 shares of the Company's
Common Stock (subject to any adjustment pursuant to the terms of the Purchase
Plan).
Shares of Common Stock may be purchased under the Purchase Plan at a price
not less than 85% of the lesser of the fair market value of the Common Stock on
(i) the first day of the Offering Period or (ii) the last day of Purchase
Period. For purposes of the Purchase Plan, the "fair market value" of the Common
Stock on any relevant date will be the closing price per share as reported on
The Nasdaq National Market as quoted on such exchange or reported in The Wall
Street Journal. The number of shares of Common Stock a participant purchases in
each Purchase Period is determined by dividing the total amount of payroll
deductions withheld from the participant's compensation during that Purchase
Period by the purchase price. As of December 31, 1999, 130,479 shares had been
issued under the plan and 269,521 shares remained available under the plan. No
officers purchased any shares under this plan in 1999.
Because the Company's share price was below $1.00 per share for an extended
period, in accordance with Nasdaq listing requirements, the Company was delisted
from the Nasdaq reporting system in February 1999. The Company's shares are
currently traded Over The Counter Bulletin Board (OTCBB). In May of 1999, the
Board of Directors elected to suspend participation in the plan, and therefore,
the Company did not initiate a new Offering Period on June 1, 1999. The Board of
Directors continues to evaluate this matter.
25
<PAGE>
Stock Option Plan for Non-Employee Directors and Advisory Board Members
The Stock Option Plan for Non-Employee Directors and Advisory Board Members
(the "Director Plan") provides for the grant of options for the purchase of up
to 150,000 shares of Common Stock of the Company to non-employee directors of
the Company and members of Advisory Boards established by the Company.
Currently, approximately two persons are eligible for grants of options under
the Director Plan. No director may be granted options with respect to more than
75,000 shares during the term of this Plan. The Director Plan is administered by
a "Committee" (currently the Compensation Committee) which is composed of at
least two directors of the Company, one of whom is a non-employee director
within the meaning of Rule 16b-3. Under the terms of the Plan, each non-employee
director, on commencement of office will receive an option to purchase 6,600
shares of Common Stock upon the date of election. In addition, on the date of
the Company's annual meeting of shareholders, each non-employee director
continuing in office will receive an option to purchase 3,300 shares of Common
Stock. This provision was waived in 1999 by the Company's Non-Employee Directors
due to the stock grant they received in 1999 see ("Compensation of Directors and
Executive Officers--Options and Stock Grants in the Last Fiscal Year"). The
Board of Directors may reinstitute the granting of options. The exercise price
per share for all options granted under the Director Plan will be equal to the
market price of the Common Stock as of the date of grant and may be paid (i) in
cash, (ii) by transferring shares to the Company, or (iii) a combination of the
foregoing. Options become exercisable in full beginning one year after their
date of grant and are exercisable only while the director is serving as a
director of the Company or within 180 days after the Participant ceases to serve
as a director of the Company (except that if a director dies or becomes disabled
while he or she is serving as a director of the Company, the option is
exercisable for a period of 12 months from the date of death or disability).
However, upon a change in control of the Company, options become immediately and
fully exercisable. The Director Plan also authorizes the issuance of options to
individuals serving on Advisory Boards established by the Company on terms
substantially similar to those applicable to directors. As of December 31, 1999,
no options were outstanding, 36,300 shares had been issued under the plan, and
113,700 shares of Common Stock were reserved for future issuance under the
Director Plan.
Non-Cash Credits
Prior to 1998 Lamaur granted non-cash credits to its executive officers and
other employees and consultants which can be used by the recipient to exercise
stock options. As of December 31, 1999 non-cash credits held by officers of the
Company totaled $52,838.
Compensation Committee Interlocks and Insider Participation
In 1999, the Compensation Committee of the board consisted of Joseph F.
Stiley, III and Harold M. Copperman. None of these individuals were at any time
during 1999, or at any other time, an officer or employee of Lamaur, except that
Mr. Stiley assumed the role of Acting Chief Executive Officer upon the death of
Mr. Don Hoff from July 1999 until December 1999. Both Mr. Stiley and Mr.
Copperman serve as consultants to the Company. No executive officer of Lamaur
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the board
or the compensation committee of Lamaur.
Compensation Committee Report
The following is the report of the compensation committee of the Board
describing compensation policies and rationales applicable to Lamaur's executive
officers with respect to the compensation paid to such executive officers for
the year ended December 31, 1999. The information contained in the performance
graphs shall not be deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act of 1933 or the
Exchange Act of 1934, except to the extent that Lamaur specifically incorporates
it by reference into such filing.
Compensation Philosophy. The philosophy of Lamaur's compensation committee
regarding executive compensation is to attract and retain highly talented
executives and to motivate them to high levels of performance, recognizing the
different impact that various executives have on the achievement of corporate
goals. To achieve these objectives Lamaur pays executives on a total
compensation approach that includes varying combinations of base salary, annual
bonus (dependent on corporate and individual performance), and stock options.
After evaluating management's performance, the compensation committee approves
compensation and pay levels. Stock option grants to executive officers are
approved by the compensation committee.
26
<PAGE>
Base Salary. Salaries for executive officers are reviewed annually, and are
adjusted based upon performance contribution, management recommendation and
market conditions.
Bonus. The compensation committee determines the level of bonus
compensation for the entire corporate bonus program based upon corporate and
senior management performance, which are judged based on corporate earnings.
Bonuses within that pool are then allocated.
Stock. Lamaur believes that stock options granted to key employees,
including executive officers, provide such persons with compensation based on
Lamaur's overall performance as reflected by the stock price, create a valuable
retention device through three-year vesting schedules and help align employees'
and stockholders' interests. Stock options are typically granted at the time of
hire, at the time of promotion or at the time of achievement of a significant
corporate objective. Individual stock option award levels are determined
primarily by a matrix that allocates the available shares based on position
within Lamaur, with discretionary adjustments based on subjective performance
factors.
Compensation of Chief Executive Officer. The compensation of Don G. Hoff in
1999 was approved by the compensation committee. The compensation committee
determined the Chief Executive Officer's compensation after considering the same
factors used to determine the compensation of other executive officers.
The compensation of Lawrence Pesin was approved by the compensation
committee.
Cancellation of Options and Stock Grants. In January 1999, Lamaur issued
1,369,800 shares of its common stock to certain employees and directors. The
stock grants were made in conjunction with the cancellation of outstanding
options held by employees and directors. These shares have vesting schedules
ranging from two years to two and one-half years. The majority of the shares
were vested during 1999 pursuant to acceleration clauses under the agreements.
Lamaur recorded compensation expense of approximately $168,000 in connection
with these stock grants. Lamaur has the right under certain conditions to
repurchase unvested shares at the market price at the date of grant. 1,129,800
of the shares were issued pursuant to Lamaur's 1997 Stock Plan. Management and
the board of directors believed it was essential to offer such package in order
to retain employees and preserve the value of the enterprise while Lamaur
evaluated and pursued alternatives.
Summary. It is the opinion of the compensation committee that the executive
compensation policies and programs in effect for Lamaur's executive officers
provide an appropriate level of total remuneration that properly aligns Lamaur's
performance and interests of Lamaur's stockholders with competitive and
equitable executive compensation in a balanced and reasonable manner.
COMPENSATION COMMITTEE
Harold M. Copperman
Joseph F. Stiley, III
27
<PAGE>
Stock Performance Graph
In accordance with Exchange Act regulations, the following performance
graph compares the cumulative total stockholder return on Lamaur's common stock
to the cumulative total return on the Nasdaq Stock Market and a selected group
of peer issuers over the same period. The peer issuers consist of DEP
Corporation, BeautiControl Cosmetics, Inc., DEL Laboratories, Inc., and The
Stephan Co. DEP Corporation was acquired in 1998 and is not included in the data
for the years ended December 31, 1998 and 1999. The graph assumes that the value
of the investment in Lamaur's common stock and each index was $100 on May 23,
1996 (the date of Lamaur's initial public offering) and that all dividends were
reinvested. The information contained in the performance graphs shall not be
deemed to be "soliciting material" or to be "filed" with the Securities and
Exchange Commission, nor shall such information be incorporated by reference
into any future filing under the Securities Act or the Exchange Act, except to
the extent that Lamaur specifically incorporates it by reference into such
filing.
[LINE GRAPH]
THE LAMAUR
CORPORATION NASDAQ PEER GROUP
----------- ------- ----------
05/1996 $100.00 $100.00 $100.00
12/1996 51.56 103.75 125.77
12/1997 18.75 127.34 154.41
12/1998 0.78 179.01 126.20
12/1999 1.95 323.39 43.85
Compensation of Directors
During 1999, Lamaur's non-employee directors were paid the following as
directors of the Company (not including reasonable out of pocket expenses): Mr.
Stiley, $4,850, Mr. Copperman, $4,550, Mr. Perry Hoff, $3,800. The directors
held five telephonic board meetings during 1999 in addition to seven in-person
meetings. In addition, non-employee directors are entitled to receive options to
purchase shares of common stock under Lamaur's Stock Option Plan for
Non-Employee Directors and Advisory Board Members.
In December 1999, Mr. Copperman and Mr. Stiley received 40,000 shares and
50,000 shares, respectively, of Lamaur common stock as additional compensation.
28
<PAGE>
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership as of December 31, 1999 of Lamaur's Common Stock by (i) each director,
(ii) each of the executive officers listed in the Summary Compensation Table
below, (iii) all executive officers and directors as a group and (iv) each
person known by the Company to be the beneficial owner of 5% or more of Lamaur's
outstanding Common Stock. The percentage owned is calculated based upon
7,422,571 shares of Common Stock outstanding as of December 31, 1999 and, in the
case of DowBrands Inc., is calculated assuming that all of the preferred stock
is converted into common stock. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percentage
Name of Beneficial Owner Ownership Owned
- ------------------------ ----------- ----------
<S> <C> <C>
Don G. Hoff (1) 2,044,725 27.5%
One Lovell Avenue, Mill Valley, CA 94941
Perry D. Hoff (2) 1,846,485 24.9%
East 5058 Grapeview Loop, Allyn WA 98524
Intertec Holdings, L.P. (3) 1,810,425 24.4%
East 5058 Grapeview Loop, Allyn WA 98524
DowBrands Inc. (4) 1,163,910 13.6%
9550 Zionsville Road, Indianapolis, IN 46268
Parsow Partnership, Ltd. (5) 543,200 7.3%
P.O. Box 0449, Elkhorn, NE 68022
Futurtec, L.P. (6) 419,842 5.7%
111 Great Neck Road, Suite 301, Great Neck, NY 11021
Dominic J. LaRosa (7) 356,733 4.8%
Harold M. Copperman 292,795 3.9%
Joseph F. Stiley, III 139,900 1.9%
John D. Hellmann 109,450 1.5%
Ronald P. Williams 105,470 1.4%
Michael G. Piff 76,077 1.0%
Lawrence Pesin (8) 50,000 1.0%
All executive officers and directors of the Company as a group (9)
(8 persons) 2,670,802 35.7%
</TABLE>
- ----------
(1) Mr. Hoff passed away on July 18, 1999. All shares listed are held by his
estate pending settlement thereof. Includes 1,810,425 shares held by
Intertec Holdings, L.P. See footnote 3. Mr. Hoff was the father of Perry D.
Hoff.
(2) Includes 36,060 shares held directly by Mr. Perry Hoff. Includes 1,810,425
shares held by Intertec Holdings, L.P. See footnote 3. Mr. Perry Hoff is
the son of the late Don G. Hoff. See footnote 1.
(3) 1,810,425 shares are by Intertec Holdings, L.P., an investment partnership
whose general partner is Intertec Holdings, Inc., a corporation of which
the late Don G. Hoff was a director, Perry D. Hoff is president and a
director and other members of the Hoffs' immediate family are the remaining
officers and directors and whose sole limited partner is Intertec Ltd., a
limited partnership in which the estate of Don G. Hoff, together with his
widow, hold a 25% limited partner interest, Perry D. Hoff holds a 25%
limited partner interest and members of the Hoffs' immediate family own the
remainder of limited partnership interest, and whose general partner is a
corporation of which the late Don G. Hoff was a director, Perry D. Hoff is
an officer and a director and other members of the Hoffs' immediate family
are the remaining officers and directors.
29
<PAGE>
(4) Consists of 1,163,910 shares that may be acquired upon the conversion of
Series A and Series B Convertible Preferred Stock. DowBrands Inc. owns 100%
of the outstanding Series A and Series B Preferred Stock.
(5) Includes 130,000 shares held by Elkhorn Partners Limited Partnership, an
affiliate of Parsow Partnership, Ltd., as to which Parsow Partnership, Ltd.
disclaims beneficial ownership.
(6) Futurtec Capital Corp., the general partner of Futurtec, L.P., exercises
sole voting and investment power over the shares held by Futurtec, L.P. Ido
Klear is the sole stockholder of Futurtec Capital Corp.
(7) Includes 20,000 shares held by members of Mr. LaRosa's immediate family, as
to which Mr. LaRosa disclaims beneficial ownership.
(8) Includes 50,000 shares that may be acquired upon the exercise of options
exercisable within 60 days of December 31, 1999.
(9) Does not include shares owned directly by the late Don Hoff.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACITONS
License Agreement. In May 1993, Lamaur acquired from Intertec Ltd., a
Delaware limited partnership, for a 30-year period, the exclusive worldwide
rights to use all technology owned by Intertec Ltd. relating to cosmetic hair
care applications. The 30-year exclusive license agreement gives Lamaur the
right to develop, manufacture and sell products for cosmetic hair care
applications based on the technology. Intertec Ltd., which is entirely owned by
the estate of Mr. Don Hoff and members of his immediate family, is the sole
limited partner in Intertec Holdings, L.P., Lamaur's principal shareholder. The
license is non-assignable, but Lamaur may sublicense the rights granted to it
provided the sublicense includes certain protective provisions. Lamaur issued,
as consideration for the grant of the license, a promissory note in the
principal amount of $1.0 million, and agreed to pay a royalty as described
below. A note for the license fee was payable in four equal installments of
$250,000. The first installment was made in May 1997. The balance of the note
plus accrued interest of $126,645 was paid in March 1998. Lamaur has also agreed
to pay certain legal expenses incurred by Intertec Ltd. in connection with
preparing and prosecuting a patent application covering the technology. Lamaur
paid none of this expense in 1999.
Lamaur will pay a royalty to Intertec Ltd. equal to 1% of Lamaur's proceeds
from any direct sales made by Lamaur of products, instruments or components
using or derived from the technology, plus 1% of the "revenue base" of Lamaur's
sub-licensees. The "revenue base" is the proceeds received by the sub-licensees
for their sales of products using the technology. This royalty declines in steps
as the revenue base increases, ultimately declining to 0.4% when cumulative
sales from all products using the technology reach $10.0 billion. Lamaur has no
sub-licenses as of the date of this Form 10K, and Lamaur may not enter
into any sub-license on favorable terms. Upon expiration in 2012 of the patent
held by Intertec Ltd., Lamaur will be unable to deny competitors access to the
underlying technology.
The terms of the license were not established by arm's length negotiations
or independent appraisal.
Common Stock Purchase Agreement. In March 1996, Lamaur and Intertec
Holdings, L.P. entered into a stock purchase agreement pursuant to which
Intertec Holdings, L.P. agreed to purchase from Lamaur, shares of common stock
at $8.00 per share. Intertec Holdings, L.P. was required to purchase an
aggregate of 146,107 shares. Intertec Holdings, L.P. was obligated, subject to
there being no event of default under Lamaur's loan agreements and certain other
customary conditions, to purchase and pay for the shares in four equal
installments commencing on May 29, 1997. The deferred purchase price under the
stock purchase agreement accrued interest from and after the closing of Lamaur's
initial public offering on May 22, 1996 at 5.5% per annum, payable with each
installment.
On May 29, 1997, Intertec Holdings, L.P. was issued 36,526 shares of
Lamaur's common stock in the first installment. On May 29, 1997, Lamaur made the
first scheduled payment to Intertec Holdings, L.P. on the Note.
30
<PAGE>
Intertec Holdings, L.P. had the option to accelerate one or more purchases
under the stock purchase agreement on 30 days' prior notice to Lamaur. Lamaur
had the option, at any time or from time to time, to terminate Intertec
Holdings, L.P.'s purchase rights with respect to one or more of the
installments, on 10 days' prior notice to Intertec Holdings, L.P. On February
16, 1998, Intertec Holdings, L.P. elected to accelerate all purchases under the
stock purchase agreement, and on March 18, 1998 Intertec Holdings L.P. was
issued 109,581 shares of Lamaur's common stock and the balance of the Intertec
Note was canceled.
Facilities and Equipment. Pursuant to a lease dated October 1, 1996, Lamaur
subleased office space (6,008 square feet) in Mill Valley, CA, together with
most of the furniture and office equipment at that location, from Intertec, a
division of Innovative Capital Management Inc. ("Intertec"), an affiliate of
Messrs. Don Hoff and Perry Hoff, directors of Lamaur. The original term of the
sublease was 36 months, expiring in September 1999. The office space was leased
for monthly rental of $9,012 and the furniture and office equipment were leased
for monthly rental of $1,774. Under the terms of the sublease, Lamaur is
responsible for property taxes, insurance and maintenance.
On December 4, 1997, Lamaur notified Intertec that it would like to
terminate the sublease with respect to 1,784 square feet of the space, and as of
March 31, 1998 the sublease was amended to terminate the sublease of that space
and to provide that Lamaur shall have no further obligations to Intertec with
respect to the terminated space. Intertec agreed to relieve Lamaur of this
obligation without any consideration to Intertec. The new monthly rent was
$6,336. Furthermore, on June 1, 1998, the sublease was terminated and Lamaur
leased the office space on a month-to-month basis for a monthly rental of
$3,600. In February 1998, payment of the rent applicable to the furniture and
equipment was deferred until 1999.
Total payments to Intertec in 1999 were $24,029, comprised of $21,600 in
building rent, $0 in equipment rent, and $2,429 in taxes. Based upon research
conducted by Lamaur, the Intertec lease payments are 25% to 50% below market
rates. Intertec used a small office and provided and received office services
from time to time.
Manufacturing Agreement with DowBrands. In connection with the acquisition
by Lamaur of the Personal Care Division of DowBrands in November 1995, Lamaur
and DowBrands entered into a two-year agreement (with two additional one-year
extensions at DowBrands' election) pursuant to which Lamaur continued to serve
as DowBrands sole supplier of certain household cleaning products, subject to
Lamaur maintaining competitive pricing and delivery schedules. Pursuant to the
agreement, DowBrands agreed to accept $3.0 million of credits to be applied
towards purchases of finished products in eight equal quarterly installments of
$375,000 commencing February 1996. On November 15, 1997, the manufacturing
agreement expired without extension by DowBrands. There were no sales to
DowBrands during 1999 or 1998.
Consulting Fees to Joseph F. Stiley, III and Harold M. Copperman
During 1999, Messrs. Copperman and Stiley performed consulting services for
Lamaur and were paid $73,027 and $30,748, respectively. These amounts include
the fair market value on the date of grant of stock granted. These fees are in
addition to fees paid to these individuals as directors, and, in the case of Mr.
Stiley, are in addition to amounts earned while serving as Chief Executive
Officer.
31
<PAGE>
Employment Contracts and Termination of Employment and Change of Control
Arrangements
Pesin Employment Agreement
In December 1999, the board of directors approved an employment agreement
with Lawrence Pesin. This agreement expires on December 31, 2001 and shall be
automatically renewed for periods of one year each unless notice is given by
either party at least one year before the end of the agreement and one year
before the end of subsequent renewals. The employment agreement provides that
Mr. Pesin's salary as Chief Executive Officer will be $75,000 per annum. In
addition to the base salary described above, the Company agrees to pay Mr. Pesin
a bonus based upon attaining certain operating results. The Company granted Mr.
Pesin options to purchase 600,000 shares of the Company's common stock at $0.125
per share. The vesting of these options occurs monthly during the term of the
agreement in equal installments of 25,000 shares per month. The Company will
also provide a car allowance of up to $1,000 per month.
The Board of Directors shall have the right to terminate Mr. Pesin at any
time during the term of the agreement, and Mr. Pesin is entitled to all the
benefits provided for in the agreement unless the Company terminates the
agreement because Mr. Pesin has been convicted of a felony or intentional fraud
against the Company, in which case, the Company shall have no further obligation
to Mr. Pesin.
Employee Severance Agreements
On May 6, 1997, the board of directors and the compensation committee
approved employee severance agreements with ten officers of Lamaur.
The severance agreements are intended to provide certain key employees with
certain protection from events that could occur in connection with certain
changes of control of Lamaur. In the event of an Involuntary Termination (as
defined in the severance agreements) of the employee within 24 months of such
Change of Control (as defined in the severance agreements), then as of the date
of such Involuntary Termination:
(i) Lamaur shall pay in cash on the date of the Involuntary Termination one
and one-half times the employee's most recent annual full-time base compensation
in effect prior to the Change of Control;
(ii) Lamaur shall provide medical, dental and basic life insurance no less
favorable than such insurance that was in effect for the employee and his or her
dependents during his or her most recent full time period of employment prior to
the Change of Control for a period equal to the shorter of 18 months from the
end of the month in which the Involuntary Termination occurs or the date the
employee becomes covered under another insurance plan as a result of obtaining
new employment;
(iii) Lamaur shall pay in cash to the employee an amount equal to 25% of
the employee's most recent annual full-time base compensation in effect prior to
such Change of Control provided that such employee's principal place of
residence at any time within 24 months from the Involuntary Termination changes
from the employee's principal place of residence immediately prior to the
Involuntary Termination and provided further that the payment under this
paragraph of the Agreement shall be reduced by the amount of any moving expenses
paid by a new employer of employee;
(iv) at the option of the employee within six months from the Involuntary
Termination, the Employee may borrow from Lamaur the principal sum equal to one
and one-half times the employee's most recent annual full-time base compensation
in effect immediately prior to such Change of Control at the lowest rate of
interest permitted by the Internal Revenue Service to avoid the imputation of
income.
LaRosa Severance. The employment of Dominic LaRosa, Lamaur's former
President and CEO -- Lamaur Division, terminated on April 15, 1999. Mr. LaRosa
has asserted a claim for severance payments pursuant to the severance agreement
described under the caption "Compensation of Directors and Executive Officers --
Employment Contracts and Termination of Employment and Change of Control
Arrangements -- Employee Severance Arrangements." The Company intends to
vigorously defend this claim.
Porter Severance. The employment of Donald E. Porter, Lamaur's former Vice
President -- Corporate Development, terminated on November 30, 1999. Mr. Porter
has asserted a claim for severance payments pursuant to the severance agreement
described under the caption "Compensation of Directors and Executive Officers --
Employment Contracts and Termination of Employment and Change of Control
Arrangements -- Employee Severance Arrangements." The Company intends to
vigorously defend this claim.
32
<PAGE>
Williams Severance. The employment of Ronald P. Williams, Lamaur's former
Executive Vice President - Lamaur Division, terminated on February 29, 2000. Mr.
Williams has asserted a claim for severance payments pursuant to the severance
agreement described under the caption "Compensation of Directors and Executive
Officers - Employment Contracts and Termination of Employment and Change of
Control Arrangements - Employee Severance Arrangements." The Company intends to
vigorously defend this claim.
33
<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.
Item 2. Other Events.
On September 28, 1999, the Company agreed to sell its manufacturing
facilities in Fridley, Minnesota to Tiro Industries, Inc. for a purchase
price of $13.25 million in cash, the assumption of capital leases in the
amount of approximately $745,000 and $1.5 million in discounts on future
manufacturing services. The proceeds of the sale were used to pay down a
portion of the Company's term loan, reduce trade payables and for working
capital. In connection with the sale of assets, the Company and Tiro also
entered into a manufacturing agreement pursuant to which Tiro will provide
manufacturing services to the Company.
(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.
*********2.3 Asset Purchase Agreement by and between Lamaur and Tiro
dated September 28, 1999
*********2.4 Purchase and Sale Agreement by and between Lamaur and
Tiro dated September 28, 1999
*********2.5 Manufacturing Agreement by and between Lamaur and Tiro
dated September 28, 1999
*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 DowBrands 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.
34
<PAGE>
Exhibit Number Description
-------------- -----------
******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 dated October 19, 1998
*******10.20 Fifth Amendment to Amended and Restated Credit and
Security Agreement dated March 12, 1999
********10.21 Loan and Security Agreement by and between Congress
Financial Corporation and Registrant dated May 27, 1999
10.23 Employment Agreement between Registrant and Lawrence
Pesin, made as of December 7, 1999.
10.24 Forbearance Agreement by and between Registrant and
the Committee of Unsecured Creditors.
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
******* Incorporated by reference from Annual Report on Form
10-K for fiscal year ended 12/31/98
******** Incorporated by reference from Quarterly Report on Form
10-Q for quarter ended 6/30/99
********* Incorporated by reference from Current Report on Form
8-K dated September 29, 1999
35
<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.
THE LAMAUR CORPORATION
(Registrant)
/s/ Lawrence Pesin
--------------------------------------
DATE: March 30, 2000 LAWRENCE PESIN
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lawrence Pesin
------------------------------------------ Chairman of the Board and Chief March 30, 2000
LAWRENCE PESIN Executive Officer
(Principal Executive Officer)
/s/ John D. Hellmann
------------------------------------------ Vice President, Chief Financial Officer March 30, 2000
JOHN D. HELLMANN (Principal Financial and Accounting
Officer)
/s/ Harold M. Copperman
------------------------------------------ Director March 30, 2000
HAROLD M. COPPERMAN
/s/ Perry D. Hoff
------------------------------------------ Director March 30, 2000
PERRY D. HOFF
</TABLE>
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Lamaur Corporation:
We have audited the accompanying balance sheets of The Lamaur
Corporation (the "Company") as of December 31, 1999, and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, 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, the Company's recurring losses from operations and its
inability to generate sufficient cash flow to meet its obligations and sustain
its operations raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to 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
Oakland, California
March 30, 2000
F-1
<PAGE>
THE LAMAUR CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 3) $ 360 $ 568
Accounts receivable, net (Note 4) 5,974 10,244
Inventories (Note 5) 5,286 7,969
Prepaid expenses and other current assets 258 511
-------- --------
Total Current Assets 11,878 19,292
Property, Plant and Equipment, Net (Note 6) 663 17,392
Other Assets 230 28
-------- --------
Total Assets $ 12,771 $ 36,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 2) $ 8,020 $ 9,456
Accrued expenses 1,833 2,623
Accrued salaries, wages and employee-related expenses 1,230 1,147
Dividends Payable (Note 8) 1,000 600
Current portion of long-term debt (Note 7) 11 3,350
-------- --------
Total Current Liabilities 12,094 17,176
Long-Term Debt (Note 7) -- 8,290
Commitments and Contingencies (Notes 12 and 13)
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, 1999 and 1998.
($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, 1999 and 1998.
($5.0 million liquidation preference) 5,000 5,000
Common stock, $.01 par value, 12,000,000 shares authorized,
7,422,571 and 5,939,761 shares issued and outstanding at
December 31, 1999 and 1998, respectively 74 59
Additional paid-in-capital 20,127 20,356
Stock subscriptions receivable (50) (50)
Accumulated deficit (32,974) (22,619)
-------- --------
Total Stockholders' Equity 677 11,246
-------- --------
Total Liabilities and Stockholders' Equity $ 12,771 $ 36,712
======== ========
</TABLE>
See notes to financial statements
F-2
<PAGE>
THE LAMAUR CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Sales $ 50,208 $ 74,043 $ 102,104
Net Sales to DowBrands (Note 11) -- -- 16,371
--------- --------- ---------
Total Net Sales (Note 3) 50,208 74,043 118,475
Cost of Goods Sold 38,100 46,062 69,626
--------- --------- ---------
Gross Margin 12,108 27,981 48,849
Selling, General and Administrative Expenses 20,599 31,243 66,375
Loss on sale of manufacturing facility (Note 1) 623 -- --
Gain on sale of professional salon brands (Note 1) -- 5,436 --
--------- --------- ---------
Operating (Loss) Income (9,114) 2,174 (17,526)
Interest Expense 1,413 1,951 2,236
Other (Income) Expense (172) 432 (402)
--------- --------- ---------
Net Loss (10,355) (209) (19,360)
Dividends on Series B Preferred Stock (400) (400) (400)
--------- --------- ---------
Net Loss Available to Common Shareholders $ (10,755) $ (609) $ (19,760)
========= ========= =========
Basic Loss per Common Share $ (1.50) $ (0.10) $ (3.48)
========= ========= =========
Weighted Average Common Shares Outstanding - Basic 7,168 5,854 5,685
========= ========= =========
Diluted Loss per Common Share $ (1.50) $ (0.10) $ (3.48)
========= ========= =========
Weighted Average Common Shares Outstanding - Diluted 7,168 5,854 5,685
========= ========= =========
</TABLE>
See notes to financial statements
F-3
<PAGE>
THE LAMAUR CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Additional Stock
Series A Series B Paid-in Subscriptions Accumulated
Preferred Stock Preferred Stock Common Stock Capital Receivable Deficit Total
------------------- ------------------- ------------------- -------- ------------- ----------- ---------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 1,000 $ 8,500 764 $ 5,000 5,603 $ 56 $ 19,796 $ (50) $ (3,050) $ 30,252
Issuance of
common stock -- -- -- -- 145 1 456 -- -- 457
Dividends on
preferred stock -- -- -- -- -- -- (400) -- -- (400)
Net loss -- -- -- -- -- -- -- -- (19,360) (19,360)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1997 1,000 8,500 764 5,000 5,748 57 19,852 (50) (22,410) 10,949
Issuance of
common stock -- -- -- -- 192 2 904 -- -- 906
Dividends on
preferred stock -- -- -- -- -- -- (400) -- -- (400)
Net loss -- -- -- -- -- -- -- -- (209) (209)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1998 1,000 8,500 764 5,000 5,940 59 20,356 (50) (22,619) 11,246
Issuance of
common stock -- -- -- -- 1,483 15 171 -- -- 186
Dividends on
preferred stock -- -- -- -- -- -- (400) -- -- (400)
Net loss -- -- -- -- -- -- -- -- (10,355) (10,355)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1999 1,000 $ 8,500 764 $ 5,000 7,423 $ 74 $ 20,127 $ (50) $(32,974) $ 677
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to financial statements
F-4
<PAGE>
THE LAMAUR CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(10,355) $ (209) $(19,360)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale of manufacturing facility 623 -- --
Gain on sale of professional salon brands -- (5,436) --
Noncash compensation expense 168 -- --
Utilization of DowBrands credits -- -- (1,500)
(Gain) loss on disposal of property, plant and equipment (31) 18 41
Depreciation and amortization 2,248 2,177 1,697
Effect of changes in:
Receivables 4,270 6,323 1,980
Inventories 2,683 3,264 (3,824)
Prepaid expenses and other assets 253 (58) 39
Payables (1,436) (4,936) 7,868
Accrued expenses (58) (3,018) (176)
-------- -------- --------
Net cash used in operating activities (1,635) (1,875) (13,235)
Cash Flows From Investing Activities:
Proceeds from sale of property, plant and equipment 48 11 16
Net proceeds from sale of manufacturing facility 13,121 -- --
Net proceeds from sale of professional salon brands -- 10,018 --
Additions to property, plant and equipment (293) (505) (1,236)
-------- -------- --------
Net cash provided by (used in) investing activities 12,876 9,524 (1,220)
Cash Flows From Financing Activities:
(Repayments) borrowings under revolving credit agreements, net (1,261) (10,254) 7,837
Borrowings of long-term debt -- 2,875 2,738
Repayments of long-term debt (10,044) (6,196) (1,501)
Payment of loan fees (162) -- --
Proceeds from sales of common stock 18 29 165
Payment of preferred dividends -- -- (400)
-------- -------- --------
Net cash (used in) provided by financing activities (11,449) (13,546) 8,839
-------- -------- --------
Net Decrease in Cash and Cash Equivalents (208) (5,897) (5,616)
Cash and Cash Equivalents at Beginning of Period 568 6,465 12,081
-------- -------- --------
Cash and Cash Equivalents at End of Period $ 360 $ 568 $ 6,465
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest $ 1,416 $ 2,354 $ 2,315
Noncash investing and financing activities:
Capital lease obligations entered into $ -- $ 57 $ 1,088
Dividends payable on preferred stock 400 400 200
Repayment of Norwest debt by Congress 14,089 -- --
Fees associated with debt refinancing by Congress 441 -- --
Assumption of capital lease obligations by Tiro 765 -- --
Exchange of related party note payable for common stock -- 877 292
</TABLE>
See notes to financial statements
F-5
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
The Lamaur Corporation ("the Company") 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, the professional hair care market. The Company began operations in
November 1995, upon the acquisition of certain assets and liabilities of the
Personal Care Division of DowBrands L.P. DowBrands L.P. is a limited partnership
whose managing partner is DowBrands Inc., a wholly-owned subsidiary of The Dow
Chemical Company (collectively "DowBrands").
On December 22, 1999, the Company completed the sale of its manufacturing
facility in Fridley, Minnesota, including real and personal property, to Tiro
Industries, Inc. ("Tiro") for net proceeds of $13.1 million and the assumption
of approximately $765,000 in lease obligations, thus achieving the Company's
planned strategy to improve asset liquidity. The Company will continue its sales
and marketing operations in a portion of the Fridley facility as a tenant of
Tiro for a term of two years pursuant to a lease agreement. The Company retained
ownership of personal property necessary for its sales and marketing operations.
Tiro will manufacture products for the Company for three years from the closing
date pursuant to a manufacturing agreement. In conjunction with this sale, the
Company recorded a pre-tax loss of $0.6 million. Proceeds were used primarily to
pay down borrowings under the Company's credit agreement.
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. 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 1999, the Company incurred an operating loss of approximately $9.1
million and negative cash flows from operating activities of approximately $1.6
million. In addition, the Company was not in compliance with the net worth
covenant of its credit facility at December 31, 1999, and will not comply with
this covenant in 2000. The Company has obtained a waiver from the lender, and is
currently negotiating new financial covenants.
The Company's ability to continue operations is dependent on its ability to
generate sufficient cash flow to meet its current obligations as they become
due, to comply with the payment terms of the forbearance agreement with its
unsecured creditors, to comply with the terms and conditions of the loan
facility, and to attain sales and operating levels to be profitable.
Management's plans regarding operating losses and its plans concerning the
above matters are presented below:
On December 22, 1999, the Company completed the sale of its manufacturing
facility in Fridley, Minnesota, including real and personal property, to Tiro
for net proceeds of $13.1 million and the assumption of approximately $765,000
in capital lease obligations, thus achieving the Company's planned strategy to
improve asset liquidity. Concurrently, to reduce long-term debt obligations and
interest expense, in accordance with the Company's agreement with its lender,
approximately $11.5 million of the net proceeds from the sale of the
manufacturing facility were used to pay off the Company's term and revolver
loans with Congress.
As of December 31, 1999, as a result of the loan pay off, there were no
amounts outstanding under the Company's revolving and two term loan facilities.
The Company continues to have a revolving loan facility which the Company will
use for working capital.
The Company reduced its fixed overhead significantly as a result of the
sale of the manufacturing facility. The Company restructured its operations and
reduced the number of employees from 220 to 20. The reductions were principally
in the production, research and development, purchasing, and administrative
areas.
The Company will continue sales and marketing operations of its retail
brands in a portion of the facility in Fridley, Minnesota, as a tenant of Tiro
for a term of two years pursuant to a lease agreement.
F-6
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
Because of its inability to generate sufficient cash flows, the Company has
extended payables to vendors of approximately $5.4 million at December 31, 1999
and is in arrears on its quarterly dividend payments by $1.0 million on its
Series B preferred stock. In January 2000, the Company assisted certain key
creditors in forming a creditors committee to negotiate a payment plan for the
Company's obligations to its unsecured creditors. In the first quarter of 2000,
the creditors committee signed a forbearance agreement on behalf of all general
unsecured creditors of the Company whereby the committee agreed until December
31, 2001 to forbear from exercising any remedies they may have against the
Company as a result of their status as an unsecured creditor. The Company's
lender requested minor changes to the forbearance agreement that the Company
expects the creditors will agree to. There can be no assurance that the
creditors committee will agree to these changes. The forbearace agreement
provides for a 100% payment plan through December 31, 2001 to the creditors who
sign the forbearance agreement. No assurance can be given, however, that
payments can continue to be made under the payment plan to creditors or that
creditor actions will not cause production interruptions, which would have a
material adverse effect on the Company.
The Company believes the reduction of expenses from transferring
manufacturing to a third party, the reduction in personnel, the generation of
cash from the sale of the manufacturing facility, and the forbearance agreement
with creditors present an opportunity for the Company to reduce operating losses
and bring liabilities in line with ongoing operations.
Although no assurance can be given, the Company believes that its cash
flows from operations and its borrowing capacity under its credit facility will
be sufficient to meet its obligations during 2000.
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, lower of cost or market write down on
inventory, 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. The December 31, 1998
escrow account balance of $0.2 million, established in conjunction with the sale
of the professional salon brands to Zotos (Note 1), was classified as restricted
cash.
Accounts Receivable, net includes an allowance for doubtful accounts.
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.
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.
F-7
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
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 had been issued. The Company's only potential
dilutive items are stock options and convertible preferred stock. 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.
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, 1999 and 1998, 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 1999
presentation. These reclassifications have no effect on net income or
stockholders' equity as previously reported.
New Accounting Principles - In September 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 137, an
amendment to SFAS No. 133, was issued in June 1999 and defers the effective date
of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company has
not yet determined the impact of this pronouncement on its financial statements.
F-8
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
Accounts Receivable include the following:
December 31,
--------------------------
1999 1998
------- --------
(In thousands)
Trade accounts receivable $ 5,957 $ 10,571
Non-trade accounts receivable 708 52
Allowance for doubtful accounts and returns (691) (379)
------- --------
Total $ 5,974 $ 10,244
======= ========
Write-offs of accounts receivable were $36,000, $128,000, and $21,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
5. INVENTORIES
Inventories include the following:
December 31,
--------------------------
1999 1998
------- --------
(In thousands)
Finished goods $ 3,340 $ 3,263
Work in process 46 164
Raw materials 1,900 4,542
------- -------
Total $ 5,286 $ 7,969
======= =======
F-9
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consist of the following:
December 31,
--------------------------
1999 1998
------- --------
(In thousands)
Land and land improvements -- $ 1,662
Buildings and improvements -- 5,318
Machinery, equipment, furniture & fixtures $ 1,855 15,172
Construction in progress -- 311
------- -------
Total 1,855 22,463
Less accumulated depreciation (1,192) (5,071)
------- -------
Total $ 663 $17,392
======= =======
7. LONG-TERM DEBT
Long-term debt includes the following:
December 31,
--------------------------
1999 1998
------- --------
(In thousands)
Revolving loan $ -- $ 7,397
Term loan -- 3,123
Obligations under capital leases 11 1,120
------- -------
Total 11 11,640
Less current portion (11) (3,350)
------- -------
Long-term portion $ -- $ 8,290
======= =======
In May 1999, the Company entered into a three-year Loan and Security
Agreement with Congress Financial Corporation ("Congress") for a $20 million
loan facility. This facility consisted of a revolving loan of up to $10.3
million and term loans of $3.0 million and $6.7 million each. The revolving loan
and the term loans are payable in full in May 2002. The Company incurred a
closing fee of $200,000 in conjunction with the loan agreement, $100,000 of
which was paid at the loan closing, and $100,000 which is payable in May 2000.
Approximately $14.1 million of the proceeds from the Congress loans were used to
pay off the outstanding revolving line of credit and term loans with the
Company's former lender, Norwest Business Credit ("Norwest").
F-10
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
The Company used approximately $11.5 million of the net proceeds from the
sale of its manufacturing facility to pay off its revolving line of credit and
term loan facility with Congress. In accordance with the loan agreement, the
term loan was terminated as a result of the sale of the manufacturing facility
and subsequent loan pay off. However the Company continues to have a $10.3
million revolving loan facility with Congress.
As of December 31, 1999, as a result of the loan pay off discussed above,
there were no amounts outstanding under the Company's revolving and two term
loan facilities. The interest rate on the revolving loan with Congress is prime
(8.5% at December 31, 1999) plus 0.75%.
The revolving loan with Congress is secured by virtually all of the assets
of the Company. Additionally, the loan agreement restricts the payment of
dividends other than on the Company's Series B Preferred Stock, restricts the
Company's ability to incur additional indebtedness and requires the Company to
comply with certain financial loan covenants. As of December 31, 1999, the
Company was not in compliance with the net worth covenant in its credit
facility, and will not comply with this covenant in 2000. The Company has
obtained a waiver from the lender and is currently negotiating new financial
loan covenants.
The obligations under capital leases are at fixed interest rates ranging
from 12.2% to 20.2% and are collateralized by equipment. Machinery and equipment
under capital leases were $18,000 (net of $10,000 of accumulated depreciation)
and $1,152,000 (net of $368,000 of accumulated depreciation) as of December 31,
1999 and 1998, respectively. Minimum payments on noncancellable operating lease
obligations are for office space, autos, and office equipment. Rent expense for
the years ended December 31, 1999, 1998 and 1997 was approximately $179,000,
$219,000 and $380,000, respectively.
Future minimum principal payments on long-term debt, capital lease, and
noncancellable operating lease obligations are as follows:
Principal Payments on
Long-Term Debt and Minimum Payments on
Capital Lease Operating Lease
Year Ending Obligations Obligations
----------------------------------------------------------------------
(In thousands)
2000 $ 11 $ 104
2001 -- 88
---- -----
Total minimum
principal payments $ 11 $ 192
==== =====
8. STOCKHOLDERS' EQUITY
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.
F-11
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
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, 1999 and 1998, the Company was in arrears on its quarterly
dividend payments by $1,000,000 and $600,000, respectively, on the Series B
Preferred Stock.
Stock Option Plans - The Company maintains four 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. At the 1999 annual meeting, the
Company's stockholders approved an amendment to the 1997 Stock Plan increasing
the number of shares of common stock reserved for issuance thereunder by
1,000,000 shares. Total shares authorized under these four plans are 2,368,073;
130,825; 1,102 and 150,000, respectively. Total shares available for grant at
December 31, 1999 under the 1997 Stock Plan and the Stock Option Plan for
Non-Employee Directors and Advisory Board Members were 544,344 and 113,700,
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, 1999.
A summary of changes in common stock options during 1997, 1998, and 1999 is
as follows:
Weighted
Number of Average Exercise
Shares Price
--------- ----------------
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
Granted (average fair value of $0.13) 600,000 0.13
Canceled (1,028,716) 2.41
----------
Outstanding at December 31, 1999 673,156 $0.54
==========
F-12
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
During 1998, 16,000 options were canceled 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. The reissued shares are included in the above
table. Options exercisable at December 31, 1999 and 1998, were 72,230 and
874,432, respectively. The following table summarizes information about the four
equity incentive plans at December 31, 1999:
<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>
$ 0.13 - 0.38 600,391 9.93 $0.13 391 $0.24
1.52 - 1.94 7,500 4.65 1.57 6,906 1.54
2.50 - 2.88 468 7.67 2.61 468 2.61
3.00 - 4.25 64,797 6.69 4.21 64,465 4.21
------- ------
673,156 72,230
======= ======
</TABLE>
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:
1999 1998 1997
-------- -------- --------
(In thousands, except per
share amounts)
Net loss:
As reported $(10,355) $ (209) $(19,360)
======== ======= ========
Pro forma $(10,401) $(1,170) $(20,413)
======== ======= ========
Basic loss per
common share:
As reported $ (1.50) $ (0.10) $ (3.48)
======== ======= ========
Pro forma $ (1.51) $ (0.27) $ (3.66)
======== ======= ========
Diluted loss per
common share:
As reported $ (1.50) $ (0.10) $ (3.48)
======== ======= ========
Pro forma $ (1.51) $ (0.27) $ (3.66)
======== ======= ========
F-13
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
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 1999, 1998 and 1997, respectively: expected volatility of
431%, 333%, and 77%; risk-free interest rates of 5.2%, 4.5%, and 5.9%; expected
lives of 6.5 years for all three years; and no expected dividends. The
assumptions and pro forma effects underlying the Employee Stock Purchase Plan
are immaterial to the financial statements at December 31, 1999. 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 6% of eligible employees
participated in the Plan during the year ended December 31, 1999. The Company
sold 23,010 and 72,636 shares to employees in 1999 and 1998, respectively.
In May of 1999, the Board of Directors elected to suspend participation in
the plan, and therefore, the Company did not initiate a new offering period on
June 1, 1999. The Board of Directors continues to evaluate this matter.
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.
Common Stock - In January 1999, the Company issued 1,369,800 shares of its
Common Stock to certain employees and directors. The stock grants were made in
conjunction with the cancellation of outstanding options held by employees and
directors. These shares have vesting schedules ranging from two years to two and
one-half years. The majority of the shares were vested during 1999 pursuant to
acceleration clauses under the agreements. The Company recorded compensation
expense of approximately $168,000 in connection with these stock grants. The
Company has the right under certain conditions to repurchase unvested shares at
the market price on the date of grant. 1,129,800 of the shares were issued
pursuant to the Company's 1997 Stock Plan.
In December 1999, the Company issued 90,000 shares of its common stock to
two directors as part of their compensation.
9. 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,
1999, 1998, or 1997.
The Company does not provide other post-retirement benefits to its
employees.
F-14
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
10. INCOME TAXES
The (benefit) provision for income taxes has been offset by the change in
the valuation allowance for the years ended December 31, 1999, 1998, and 1997.
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:
1999 1998 1997
------- ------ -------
(In thousands)
(Benefit) provision for income at U.S.
federal statutory rates (34%) $(3,521) $ (71) $(6,582)
Other items (195) 176 488
Change in valuation allowance 3,716 (105) 6,094
------- ------ -------
Provision for income tax $ -- $ -- $ --
======= ====== =======
The significant components of deferred income taxes as of December 31 are
as follows:
1999 1998
-------- -------
(In thousands)
Tax effects of:
Current deferred tax assets and liabilities:
Accounts Receivable, principally due to reserves $ 263 $ 144
Inventories, partially due to additional costs
capitalized for tax purposes 323 518
Employee benefits 444 300
Other (includes contingencies, other assets and
other accruals) 196 210
-------- -------
1,226 1,172
Long-term deferred tax assets and liabilities:
Tax credits 82 82
Federal and state operating loss 9,995 8,155
Property, plant and equipment 178 (1,644)
-------- -------
10,255 6,593
-------- -------
Gross deferred tax assets 11,481 7,765
Valuation allowance (11,481) (7,765)
-------- -------
Net deferred taxes $ -- $ --
======== =======
Due to the Company's net operating losses, the Company has not paid
significant income taxes in 1999, 1998, or 1997. The Company has accumulated
approximately $29.3 million of federal and state operating loss carryforwards
(NOLs) at December 31, 1999. These NOLs expire periodically between the years
2009 and 2014.
F-15
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
Promissory Note - In May 1993, the Company licensed its proprietary
technology from Intertec Ltd., a limited partnership which is entirely owned by
the estate of Mr. Don Hoff, the Company's late Chairman of the Board, and
members of his immediate family, 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. The balance of the note plus accrued interest was satisfied in March
1998.
The Company is obligated to 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 acquire 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 leased 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
estate of Company's late Chairman of the Board and Chief Executive Officer and
his family own 100% of the outstanding stock of ICM. The original term of the
lease was 36 months, expiring in September 1999. Rental expense was $48,366,
$86,196, and $121,919 for the years ended 1999, 1998 and 1997, 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 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 $16.4 million for the year ended December 31, 1997. Services
were priced based on direct material and labor costs incurred plus an agreed
upon profit margin.
F-16
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
12. 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 members of the
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, unspecified damages to the shareholders and restitution
of unspecified profits to the Company. Plaintiffs also seek a recission of all
actions approved by shareholders at the November 2, 1998 Annual Meeting and
demand a revised Proxy Statement. Any monetary judgment resulting from
Plaintiffs' derivative claims would accrue to the benefit of the Company. The
Company believes the lawsuit is without merit and will defend the action in the
best interest of the shareholders.
Certain of the Company's executives have severance agreements that provide
defined severance if the executive is involuntarily terminated (as defined)
within twenty-four months of a change of control (as defined). Three of the
Company's former executives have alleged that they entered into such agreements,
that they were the subject of an involuntary termination within twenty-four
months of a change of control, and that they are therefore entitled to certain
benefits. The total severance claimed is approximately $1.0 million. The Company
intends to vigorously defend these claims. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on the
Company's results of operations.
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.
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into various purchase and sales commitments and
obligations in the ordinary course of business which management does not believe
will have a material adverse effect on its financial position or results of
operations.
F-17
<PAGE>
THE LAMAUR CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (continued)
- --------------------------------------------------------------------------------
14. SEGMENT INFORMATION
The Company's operating segments include the Retail Group, Salon Group, and
until the December 1999 sale of the manufacturing facility, 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 Group. The Company evaluates performance based on contribution before
fixed expenses. The accounting policies of the segments are the same as those of
the Company as described in Note 3.
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.
The Company's reportable segments have separate sales departments, and
although the products are similar, they are sold and marketed differently. The
Retail 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 Group require substantial marketing support to
maintain their sales. Until December 1999, the Custom Manufacturing Group
developed and formulated 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.
Following is the financial information related to the Company's segments:
1999 1998 1997
-------- ------- --------
(In thousands)
Net sales
Retail Group $ 28,681 $56,216 $ 93,098
Custom Manufacturing Group 21,527 17,827 25,377
-------- ------- --------
Total net sales 50,208 74,043 118,475
Profit before fixed expenses
Retail Group 4,470 13,342 4,842
Custom Manufacturing Group 5,307 4,634 5,012
-------- ------- --------
Total profit before fixed expenses 9,777 17,976 9,854
Fixed expenses 18,268 21,238 27,380
Loss on sale of manufacturing facility 623 -- --
Gain on sale of professional salon brands -- 5,436 --
-------- ------- --------
Operating loss (9,114) 2,174 (17,526)
Interest expense 1,413 1,951 2,236
Other (income) expense (172) 432 (402)
-------- ------- --------
Net loss $(10,355) $ (209) $(19,360)
======== ======= ========
The Company sells the majority of its products to large U.S. retailers.
Sales to the Company's largest retail customer were $9.3, $15.7, and $18.4
million in 1999, 1998, and 1997, respectively. 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.
F-18
<PAGE>
EXHIBIT 10.23
Employment Agreement between Registrant and
Lawrence Pesin made as of December 7, 1999
Employment Agreement
Agreement made as of the 7th day of December 1999 between The Lamaur
Corporation, a Delaware Corporation, with offices at 5601 E. River Road,
Fridley, MN 55432, (hereinafter referred to as Company) and Lawrence Pesin
residing at 700 Astri Terrace, Valley Cottage, NY 10989 (hereinafter referred to
as Employee).
1. Employment and Duties: The Company, a public Corporation, hereby employs
Employee as the Chief Executive Officer of Company to perform Executive duties
generally accepted as the duties such titles entail. Such duties will include,
but not be limited to: managing the Company's resources to achieve
stabilization, growth and profit goals; developing 1-year Operating Plans and
3-to-5 year Business Plans; and managing the implementation of defined
strategies and tactics to achieve near-term and long-range objectives with focus
on increasing shareholder value. In addition, Employee has been elected to the
Company's Board of Directors and will serve as the Chairman of the Board.
2. Performance: Employment shall commence on December 7, 1999. Employee shall
devote all or such part of his time to the performance of his duties described
in paragraph 1 above and to the performance of such other Executive duties as
may be assigned to him from time to time by the majority of Directors of the
Company. Acceptable performance of Employee is based on the judgement of the
majority of the Company's Board and/or achievement of defined milestones such as
those defined herein and/or profit goals specified in the Company's Board
approved 1-year operating plan and/or long-term business plan.
The Company's Board of Directors shall have the right to terminate Employee at
any time during the term of this Agreement, as long as all provisions of the
Agreement are fulfilled by the Company to the Employee to the end of the
Agreement term. However, in the event the Company terminates this agreement
because Employee has been convicted of a felony, or any intentional fraud
against the Company, the Company shall have no further obligations to Employee
(whether stock, salary, or bonus). If Employee should voluntarily terminate
employment prior to the end of the term of the Agreement, Employee shall have
prorated rights only to vested portions of stock options and no further rights
to unvested stock options. Additionally, Employee shall be entitled to the
prorated share only of any earned bonus as identified in paragraph five herein.
3. Term: The term of this Agreement for Company and Employee shall be two years
and 24 days (i.e. commencing on Dec. 7, 1999 and ending on Dec. 31, 2001). At
the end of such term, the agreement, with the exception of the granting of
further stock, shall be automatically renewed for periods of one year each,
unless notice is given by either party at least one year before the end of the
agreement and one year before the end of subsequent renewals.
4. Compensation: For services to be rendered by Employee in his capacity as
Chairman of the Board and Chief Executive Officer, Company agrees to pay
Employee a salary of $75,000 per annum, payable in equal semi-monthly
installments. Employee shall be granted common stock options pursuant to the
Company's Stock Option Plan and is subject to the execution of the Company's
stock option agreement under that plan. Stock options granted shall total
600,000 authorized and registered shares. Stock option price shall be 12.5 cents
per share. Vesting of total stock options shall occur monthly during the term of
this agreement commencing on January 31, 2000 in equal installments of 25,000
shares.
1
<PAGE>
In the event of newly authorized shares issued by the Company, Employee shall be
granted additional and similar stock options as per the original grant in order
to maintain Employee's same percentage of total shares. No other operating
Executive shall be entitled to receive more stock option shares than Employee
during the term of this agreement. This provision shall not apply at any time
following the termination of Employee's employment for any reason.
Employee shall have the right to exercise vested stock options at any time
through two years after the termination of this agreement. If employee desires
to sell all or a portion of vested options, Company may at its discretion,
purchase vested stock options at market price as quoted by NASDAQ on the day of
the transaction.
Employee and his family shall be provided the standard benefits under the
Company's existing and future health, medical and other employee benefit plans
made available to the Company's salaried, non-union employees. Employee shall be
entitled to four weeks vacation.
5. Bonus: In addition to the base compensation described above, Company agrees
to pay Employee an additional sum in the amount of $25,000 within sixty days
following the first operating quarter in which Company attains breakeven in
profit before taxes and legal expenses as defined herein. Additionally, Company
agrees to provide an annual bonus of 5.0% of the profit before taxes and legal
expenses as defined herein, of the Company to Employee, payable no later than 60
days after the end of the fiscal Year. The determination of whether there is a
profit before taxes shall be made in accordance with generally accepted
accounting principles. However, any professional legal fees incurred by the
Company related to the Parsow Litigation, Campbell Mithun Esty claim, trade
creditors and/or employee severance situations will be excluded from such
calculation. Confirmation of bonus compensation shall be made by Deloitte,
Touche, the Company's auditors or other such auditors then regularly employed by
the Company, and the determination of such auditor shall be binding on the
parties to this agreement.
6. Expenses: In addition to the compensation provided in paragraph 4 hereof,
Company will pay Employee such sums so as to reimburse Employee for reasonable
expenses incurred in the performance of his duties. These shall include, but not
be limited to, travel, hotel or lodging, meals, car rental and other such
miscellaneous expenses in connection with his duties. Additionally, if Employee
elects to lease or buy a vehicle, the Company will reimburse the monthly cost of
such vehicle, its operating expenses and the tax liability incurred, such
allowance not to exceed $1,000 per month.
7. Death: In the event of Employee's death or disability during the term of this
Agreement or subsequent renewals, this Agreement shall terminate immediately
except that Employee's family shall be entitled to receive the then current
compensation, excluding additional stock options, for a period of six months
from death or disability after the last day of the month in which death
occurred. Additionally, Employee's Estate via its legal representatives shall be
entitled to the prorata share of any bonuses earned in the year of Employee's
death. Employee's legal representatives shall also have the right to exercise
all vested stock options within the six-month period after death for the benefit
of Employee's Estate.
8. Relocation: During the term of this Agreement or during subsequent renewal
periods, Employee shall not be required to relocate to the area of the Company's
corporate offices without his agreement, and Company will continue to reimburse
employee for expenses as described in paragraph 6 throughout the term of this
Agreement.
2
<PAGE>
9. Director's and Officers Liability Insurance: Company agrees to maintain a
policy in force providing no less than $5 million in liability insurance.
Company additionally agrees to indemnify Employee from any personal liability
occurring as a result of legal actions against the Company including the payment
of all legal expenses related to such action.
10. Effect of waiver: The waiver by either party of a breach of any provision of
this Agreement shall not be construed a waiver of any subsequent breach thereof.
This agreement contains the entire contractual understanding of the parties and
may not be changed orally but only by a written instrument signed by the parties
thereto.
11. Arbitration: Minnesota law shall be applicable to this contract and any
controversy arising from, or related to this Agreement shall be determined by
arbitration in the city of Minneapolis or other such location as mutually
agreeable in accordance with the Rules of the American Arbitration Association,
and judgment upon any such determination or award may be entered in any court
having jurisdiction.
12. Transfer of Ownership or Control: In the event of transfer of ownership or
control of the Company or its assets, this Agreement shall be binding on the new
controlling interests or entity except that the then unvested stock options
shall become immediately vested.
13. Entire Agreement: This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
negotiations and agreements, whether written or oral.
14. Notices: Any and all notices referred to herein shall be sufficient if
furnished in writing, sent by registered mail or Fedex to the respective
addresses noted above or other such addresses as may be given by the parties in
writing in the future.
In witness whereof, the parties hereto have caused this Agreement to be executed
by its duly authorized Director and its corporate seal to be hereunto affixed,
the day and year indicated above.
/s/ Harold M. Copperman /s/ Lawrence Pesin
- --------------------------------- ---------------------------------
Harold M. Copperman, Director Lawrence Pesin
For the Lamaur Board of Directors Employee
3
<PAGE>
Exhibit 10.24
Forbearance Agreement by and between Registrant
and the Committee of Unsecured Creditors
FORBEARANCE AGREEMENT
This Forbearance Agreement is entered into as of , 2000, by and
between The Lamaur Corporation ("Lamaur") and the Committee of Unsecured
Creditors of Lamaur, acting on behalf of all general unsecured Creditors of
Lamaur, by and through its members, Owens Illinois, Inc., U.S. Can Company,
Sequist Perfect, AeroPres Corp., Longview Fibre, Cognis Corp., and National
Starch and Chemical (the "Committee").
RECITALS
A. WHEREAS, Lamaur is indebted to its general unsecured creditors in the
approximate aggregate amount of $8,000,000, as of February 29, 2000, (the
"Existing Debt"). Lamaur and the Committee desire to address Lamaur's repayment
of the Existing Debt in accordance with the terms of this Forbearance Agreement.
B. WHEREAS, as a result of the Existing Debt, Lamaur's general unsecured
creditors are entitled to pursue certain remedies to attempt to recover the
Existing Debt according to state law. Lamaur has asked the Committee, on behalf
of all general unsecured creditors of Lamaur, to forbear from exercising those
remedies relating to the recovery of the Existing Debt and to encourage other
unsecured creditors to do likewise and the Committee on behalf of all general
unsecured creditors of Lamaur has agreed.
NOW, THEREFORE, for good and valuable consideration, the parties agree as
follows:
1. Acknowledgment of Liability. As of the date of this Forbearance
Agreement, Lamaur owes its general unsecured creditors an amount equal to the
Existing Debt. Notwithstanding the foregoing, Lamaur reserves any and all
claims, offsets or defenses that Lamaur may now have with respect to the payment
of the Existing Debt.
2. Forbearance. Lamaur acknowledges and agrees that neither the Committee,
nor Lamaur's general unsecured creditors is in any way agreeing to waive any
claim against Lamaur as a result of this Forbearance Agreement or the
performance by the parties of their respective obligations hereunder. Subject to
the conditions contained herein and performance by Lamaur of all of the terms of
this Forbearance Agreement after the date hereof, the Committee shall, until
December 31, 2001, forbear from exercising any remedies they may have against
Lamaur as a result of their status as unsecured creditors of Lamaur as of the
date hereof or the occurrence of any default(s) under any agreement(s) relating
thereto by and between Lamaur and the Committee or any general unsecured
creditors. In the event that an unsecured creditor who is not a member of the
Committee, but who is owed a portion of the Existing Debt attempts to engage in
collection efforts against Lamaur, Lamaur will promptly notify the committee of
the existence of such creditor and the Committee will use good faith efforts to
contact such creditor for the purpose of soliciting that Creditor's agreement to
be bound by the terms hereof to the same extent that current Committee members
have agreed to be bound. This forbearance shall not be deemed a continuing
waiver or forbearance with respect to any default which may occur under any such
agreement(s) or hereunder after the date of this Forbearance Agreement.
3. Grant of Security Interest. For and in consideration of this Forbearance
Agreement, Lamaur hereby grants to the Committee, on behalf of all of Lamaur's
general unsecured creditors, a security interest in certain presently existing
collateral (as described in that certain form UCC-1 financing statement, in
substantially the form attached hereto as Exhibit "A") in order to secure prompt
repayment of the Existing Debt; provided, however, that the security interest
granted herein shall be junior in priority to any and all existing liens and to
any and all interests of Congress Financial Corporation ("CFC"). As a result
hereof, Lamaur agrees to execute that certain Security Agreement attached hereto
as Exhibit "B." The Security Agreement shall remain in full force and effect
until the Existing Debt is satisfied in full. The Committee hereby authorizes
its attorney, James Chatz, Esq., to terminate and release the UCC upon full
payment to unsecured creditors as provided for hereunder, upon receipt of a
written representation of such payment by an authorized Lamaur representative.
1
<PAGE>
4. Access to Corporate Records. For an in further consideration of this
Forbearance Agreement, Lamaur agrees to make available to the Committee certain
"Sensitive and Confidential Information," as defined in, pursuant to and
conditioned upon execution by the Committee of that certain Lamaur Corporation
Confidential Non-Disclosure Agreement, in substantially the form attached here
as Exhibit "C", as requested by the Committee, including but not limited to,
monthly financial information.
5. Payment Terms. Lamaur agrees to provide each of its general unsecured
creditors with a choice of payment of such creditor's portion of existing debt
to be made in writing by each creditor, consisting of:
A. Either an immediate 60% payment in full of the total nondisputed
outstanding debt to the individual creditors holding claims of up to a total of
$5,000, or those creditors holding claims of larger than $5,000 who elect to
reduce their claim to $5,000 to obtain 60% of $5,000, or
B. 100% payment of the total nondisputed outstanding debt as follows:
1. 40% of the total allowed claim to be paid upon execution of this
agreement to accept the payment schedule,
2. 5% to be paid on or before June 30, 2000,
3. 22% to be paid on or before January 2, 2001,
4. 5% to be paid on or before June 30, 2001,
5. 28% to be paid on or before December 31, 2001
6. Miscellaneous.
a. Successors and Assigns. This Forbearance Agreement shall be binding upon
and shall inure to the benefit of the Committee and Lamaur and their respective
constituents, successors and assigns; provided, however, that the foregoing
shall not authorize any assignment by the Committee of any of its rights or
duties hereunder.
b. Entire Agreement. This Forbearance Agreement contains the entire
agreement of the parties hereto and supersedes any other oral or written
agreements or understandings with respect to the subject matter hereof.
c. Governing Law. The parties acknowledge and agree that the conditions,
validity and enforceability of any terms or provisions of this Forbearance
Agreement shall be determined by the laws of the State of Minnesota governing
contracts entered into and to be performed in the State of Minnesota.
d. Interpretation of Agreement. This Agreement, the exhibits hereto, and
the documents to be executed in connection herewith, constitute a fully
negotiated agreement among commercially sophisticated parties and therefore
shall not be construed or interpreted for or against any party.
e. Venue. Any action to enforce, interpret or challenge the terms of this
Agreement, the exhibits hereto, and the documents to be executed in connection
herewith shall be brought within the State or Federal Courts of Minnesota, as
appropriate.
f. Attorneys' Fees and Costs. The parties hereto shall bear their own costs
and attorneys' fees related to this Forbearance Agreement.
g. Time is of the Essence. Time is of the essence as to each and every term
and provision of this Forbearance Agreement.
h. Counterparts. This Forbearance Agreement may be signed in counterparts
and all of such counterparts when properly executed by the appropriate parties
thereto together shall serve as a fully executed document, binding upon the
parties.
2
<PAGE>
i. Legal Effect. If any provision of this Forbearance Agreement conflicts
with applicable law, such provision shall be deemed severed from this
Forbearance Agreement, and the balance of this Forbearance Agreement shall
remain in full force and effect.
j. Due Authorization. Each individual executing this Forbearance Agreement
on behalf of an entity is duly authorized to so execute this Forbearance
Agreement and the entity on behalf of which this Forbearance Agreement is so
executed is valid, binding and enforceable against such entity.
IN WITNESS WHEREOF, the undersigned have executed this Forbearance
Agreement as of the first date above written.
THE LAMAUR CORPORATION
By:
-----------------------------------
Title:
--------------------------------
The Committee of Unsecured Creditors of
Lamaur Corporation
By: Owens Illinois, Inc.
-------------------------------------
Lawrence Levey
Its: Co-Chairman
By: U.S. Can Company
--------------------------------------
Pete Andres
Its: Co-Chairperson
By: Seaquist Perfect
--------------------------------------
Steve Trojan
By: AeroPres Corp
--------------------------------------
Richard Bianchi
By: Longview Fibre
---------------------------------------
Michael Guilday
By: Cognis Corporation
---------------------------------------
Frank Wertalik
By: National Starch & Chemical
---------------------------------------
Tony Gaeta
3
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Net Loss $(10,355) $ (209) $(19,360)
Less: Dividends on Series B Preferred Stock (400) (400) (400)
-------- -------- --------
Net Loss Available to Common Shareholders $(10,755) $ (609) $(19,760)
======== ======== ========
Weighted Average Common Shares Outstanding - Basic 7,168 5,854 5,685
-------- -------- --------
Basic Loss per Common Share $ (1.50) $ (0.10) $ (3.48)
======== ======== ========
Weighted Average Common Shares Outstanding 7,168 5,854 5,685
Dilutive Shares Issuable in Connection with:
Conversion of Series A Preferred Stock -- -- --
Stock Plans -- -- --
Less: Shares purchasable with proceeds from stock plans -- -- --
-------- -------- --------
Weighted Average Common Shares Outstanding - Diluted 7,168 5,854 5,685
-------- -------- --------
Diluted Loss per Common Share $ (1.50) $ (0.10) $ (3.48)
======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 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, 2000 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, 1999.
Deloitte & Touche LLP
Oakland, California
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 360
<SECURITIES> 0
<RECEIVABLES> 6,723
<ALLOWANCES> 749
<INVENTORY> 5,286
<CURRENT-ASSETS> 11,878
<PP&E> 1,855
<DEPRECIATION> 1,192
<TOTAL-ASSETS> 12,771
<CURRENT-LIABILITIES> 12,094
<BONDS> 0
0
13,500
<COMMON> 74
<OTHER-SE> (12,897)
<TOTAL-LIABILITY-AND-EQUITY> 12,771
<SALES> 50,208
<TOTAL-REVENUES> 50,208
<CGS> 38,100
<TOTAL-COSTS> 38,100
<OTHER-EXPENSES> 20,599
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 1,413
<INCOME-PRETAX> (10,355)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,355)
<EPS-BASIC> (1.50)
<EPS-DILUTED> (1.50)
</TABLE>
