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.
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.
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.
Item 4.
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.
PART II
Item 5.
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.
Item 6.
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.
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.
Item 7.
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.
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.
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.
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.
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.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- THE LAMAUR CORPORATION
Independent Auditors' Report
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1999, 1998, and 1997
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998, and 1997
Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997
Notes to Financial Statements for Years December 31, 1999, 1998, and 1997
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL STATEMENT DISCLOSURE
Not applicable.
PART III
Item 10.
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:
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.
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.
Item 11.
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
- ------------------------- (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.
(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:
- ------- (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.
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.
- --------------------------- (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.
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.
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.
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
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.
Item 12
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.
- ---------- (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.
(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.
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.
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.
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.
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.
PART IV
Item 14.
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.
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
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.
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
THE LAMAUR CORPORATION BALANCE SHEETS (In thousands, except share and per share data)
See notes to financial statements
THE LAMAUR CORPORATION STATEMENTS OF OPERATIONS (In thousands, except per share data)
See notes to financial statements
THE LAMAUR CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997 (In thousands)
See notes to financial statements
THE LAMAUR CORPORATION STATEMENTS OF CASH FLOWS (In thousands)
See notes to financial statements
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.
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.
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.
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 ======= =======
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").
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.
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 ==========
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:
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) ======== ======= ========
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.
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.
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.
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.
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.