-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OXQUnAQA5TTsIs+GV5AinLeqGcgSRkoERZh5jP0tEp1vbyBbCA8JYrP3l8n7ac39 g5VfCIA8CWLLy/5y0RkYOQ== 0001011154-97-000006.txt : 19980910 0001011154-97-000006.hdr.sgml : 19980910 ACCESSION NUMBER: 0001011154-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAMAUR CORP CENTRAL INDEX KEY: 0001011154 STANDARD INDUSTRIAL CLASSIFICATION: 2844 IRS NUMBER: 680301547 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28174 FILM NUMBER: 97568325 BUSINESS ADDRESS: STREET 1: ONE LOVELL AVE CITY: MILL VALLEY STATE: CA ZIP: 94941 BUSINESS PHONE: 4153808200 MAIL ADDRESS: STREET 1: ONE LOVELL AVE CITY: MILL VALLEY STATE: CA ZIP: 94941 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC HAIR STYLING INC DATE OF NAME CHANGE: 19960325 10-K 1 FORM 10-K UNITED STATES SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 0-28174 The Lamaur Corporation (Exact name of registrant as specified in its charter) Delaware 68-0301547 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) One Lovell Avenue, Mill Valley, California 94941 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 380-8200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of February 28, 1997 was approximately $14,034,814. This number is calculated by excluding all shares held by directors, Intertec Holdings L.P. and DowBrands, Inc. without conceding that all such persons or entities are affiliates of registrant. As of February 28, 1997, there were 5,642,995 outstanding shares of the registrant's common stock, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE. PART III: Portions of Proxy Statement for 1997 annual meeting of stockholders. PART I Item I. BUSINESS Overview The Lamaur Corporation (the "Company") was incorporated under the laws of the State of Delaware on January 4, 1996. The Company's predecessor, Electronic Hair Styling, Inc., was incorporated in the State of Washington on April 1, 1993 and, effective March 18, 1996, it merged with the Company to accomplish a Delaware reincorporation. Effective November 15, 1995, as a result of the acquisition of the Personal Care Division of DowBrands L.P. (an affiliate of The Dow Chemical Company), the Company became a successor to a business started in 1930 known prior to its acquisition by DowBrands in 1987 as Lamaur Inc. On March 26, 1997, the Company changed its name to The Lamaur Corporation. The Company is a major producer of personal hair care products in North America. Through its Lamaur division based in Fridley, Minnesota, the Company develops, formulates, manufactures and markets personal hair care products, consisting of shampoos, conditioners, hair sprays, permanent wave products and other styling aids, for both the consumer and professional hair care markets. Corporate functions, including corporate development, investor relations, science and technology, and financial and legal services, are managed at the Company's headquarters in Mill Valley, California. The Company's products are distributed to consumer retail outlets, professional salons and specialty shops. The Company also contract manufactures a variety of aerosol and other liquid filling products. The Company believes it was among the ten largest manufacturers in the United States in 1996 in three categories of hair care products - shampoos, conditioners and styling aids. The Company is also engaged in the early stages of research and development of Electronic Chemistry(TM), a new hair styling concept which is intended to combine electronics and chemicals to create new products designed to color, style and condition hair quickly, without the damaging side effects often experienced with most chemical-based hair styling products. The Company's patented technology is licensed from an affiliate. Research activities during 1996 have been primarily directed towards conducting early-stage coloring and styling experiments with respect to the reaction of hair samples to electromagnetic signals. During 1996, the Company integrated the new senior management team, restructured the national sales organization, reduced manufacturing costs, implemented an "Americas" expansion strategy with its initial phase to develop markets in Canada, Puerto Rico and Mexico, developed and implemented corrective marketing strategies for existing retail products, introduced and began shipments of Willow Lake(TM) and Apple Pectin(R) Naturals, brands of premium priced products in the retail and salon markets, respectively, and doubled the number of exclusive professional market distributors for the Pativa(R) line of products. The Company restructured its contract manufacturing activity, forming a new profit center and increased the level of contract manufacturing business in 1996. In addition, the Company raised $18.1 million through an initial public offering, applying $8 million to reduce acquisition debt and $10 million to working capital. The Company also continues to explore opportunities for acquisitions or strategic relationships that may enable it to expand its hair care product lines or diversify its business into other segments of the personal care market. The Company's product lines are sold through consumer retail outlets by its Retail Group (the "Retail Group") under the premium-priced Willow Lake(TM) and Perma Soft(R), mid-priced Salon Style(R) and value-priced Style(R) brand names. Most product lines contain a wide assortment of shampoos, conditioners and styling products positioned towards distinct consumer segments. In addition, a full line of high quality, premium-priced products including shampoos, conditioners, hair sprays, perms and a variety of styling aids are sold to the professional salon and specialty shops market by its Salon Group (the "Salon Group") under the Nucleic A(R), Apple Pectin(R), Apple Pectin Naturals, Vita/E(R) and Pativa(R) brand names. Sales by the Retail Group during 1996 accounted for 59.3% of the Company's total revenues, and are made to mass merchandisers, food stores, drug stores and others by a combination of the Company's direct sales force and a network of independent brokers. Sales by the Salon Group to the professional market, including sales to distributors who then sell to professional salons and specialty outlets, are made directly by the in-house sales force, and during 1996 accounted for 14.4% of the Company's total revenues. The Company also manufactures certain products, principally aerosol sprays, on a contract basis for third parties. Those activities during 1996 accounted for 26.3% of the Company's revenues. Industry Overview and Investment Considerations Worldwide retail sales of chemical hair care products in 1995 were approximately $26 billion, of which approximately $4.6 billion represented sales in North America. It is estimated that by 2000, worldwide retail sales of hair care products will reach approximately $32.8 billion, with approximately $5.6 billion attributable to sales in North America. There have been changes in consumers' buying patterns toward higher priced shampoos and conditioners and specialty niche products. In addition, the cost of goods sold in the hair care products market has been rising steadily for several years; however, intense competition has prevented manufacturers and distributors from passing those increases on to customers. The result has been an erosion in profit margins among the industry's competitors generally, although this effect has been less pronounced in certain market niches that are characterized by premium pricing and fewer competitors. Consequently, the hair care industry has been experiencing both a consolidation in the number of competitors and a globalization in the marketing efforts. The Company believes that currently five companies (L'Oreal, Unilever, N.V. The Procter & Gamble Company, Wella, and Alberto-Culver Company) account for approximately 65% of worldwide sales in the hair care products industry. The Company has a limited operating history evolving from its development stage in 1995 by acquiring the operations of the Personal Care Division of DowBrands. The Personal Care Division had experienced nine consecutive years of losses and even though new management implemented a turnaround strategy which resulted in operating profits for 1996, management does not consider the turnaround to be complete and no assurance can be given that earnings will be available for 1997 or for future periods. Because of significant competition, additional working capital may be needed to correct brand marketing strategy and to introduce new brands. With the Company's historical losses and the uncertainty of future earnings, additional working capital may not be available, and the absence of such working capital could have a material adverse impact on the Company. It is for the above reasons that the Company's Common Stock could be subject to substantial volatility. Because of the complexity of the turnaround, the loss of senior management could also have a material adverse effect on performance. In addition, for the next several years the Company will have a dependence on its largest customers, including DowBrands and Wal-Mart. Any significant change in sales to these customers could materially effect the Company's performance. The Company's new Electronic Chemistry(TM) technology and its underlying principles have not been commercially developed, and no assurance can be given that products will ever be derived from the technology and if successfully developed that such products will be accepted by the market or would comply with government regulations. This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding sales and marketing plans for 1997, plans with respect to the Company's technology, liquidity and capital resources, potential for growth in revenue and earnings in 1997, the turnaround of the Company, and the Company's growth potential. These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Such risks include market acceptance of the Company's products, effectiveness of recently adopted initiatives, competition, the Company's ability to implement appropriate cost controls, price changes by the Company or its competitors and fluctuations in capital and operating results. Products The Company formulates and manufactures a broad range of hair care product lines, consisting of approximately 90 products, marketed under several distinct brand names. Product lines sold through consumer retail outlets include Willow Lake (TM), Perma Soft(R), Salon Style(R), and Style(R) brand names most of which are widely recognized by retailers and consumers. Most lines contain a broad assortment of shampoos, conditioners and styling products and are positioned toward a distinct consumer segment. Product lines used by stylists and sold by salons and beauty supply stores throughout the United States and in Canada include shampoos, conditioners, hair sprays, perms and a variety of styling aids sold under the Pativa(R), Nucleic A(R), Apple Pectin(R), Apple Pectin Naturals and Vita/E(R) brand names. In addition, the Company also manufactures products, principally aerosol sprays, under contract for third parties. The following table sets forth the Company's principal brands and products sold within each brand during 1996:
Retail Brands Brand Shampoos and Conditioners Styling Aids and Perms Willow Lake (TM).................. Cherry Bark & Irish Moss Conditioning Shampoo; Citrus & Rosemary Shampoo; Lavender & Mint Shampoo; Witch Hazel & Honeysuckle Shampoo; Hops, Apricot & Almond Conditioner; Sunflower, Honey & Hibiscus Conditioner; Vitamin E, Carrot Extract & Milk Protein Conditioner Perma Soft(R).................... Revitalizing Shampoo, Moisturizing Shampoo, Hair Sprays (aerosol and nonaerosol), Extra Body Shampoo, Shampoo Plus Conditioner, Mousse, Gel, Frizz Control Cream, Shine Revitalizing Conditioner, Moisturizing Treatment, Conditioning Foam, Conditioner, Extra Body Conditioner, Deep Revitalizing Spray Reconditioning Treatment, Moisturizing Mist Conditioner Salon Style(R)................... Moisture Potion(R)Shampoo, Therapy Shampoo, Hair Sprays (aerosol and nonaerosol), Strengthening Shampoo, NutriShine Shampoo, Spray Gel, Vitafixx(TM)Spritz, Body Hydration Conditioning Shampoo, Botanical Boost(R)Mousse, Defrizz 'N Shine(R) Reconstructing Conditioner, Moisture Potion(R) Hydrating Cream Conditioner, Detangling Conditioner, Pro Mist Leave-On Conditioner, Hydro Balance Hair Masque Style(R)......................... Moisturizing Shampoo, Extra Body Shampoo, Hair Sprays (aerosol and non-aerosol), Regular Shampoo, Strawberry Shampoo, Nourishing Gel, Mousse, Dry Style(R)Hair Spray for Shampoo, Coconut & Papaya Shampoo, Moisturizing Men (aerosol) Conditioner, Extra Body Conditioner, Regular Conditioner, Strawberry Conditioner, Deep Conditioning Conditioner, Coconut & Papaya Conditioner Salon Brands Brand Shampoos and Conditioners Styling Aids and Perms Pativa(R)........................ Curl Cleanse Shampoo, Revitalizing Volumizing Mousse, Spritz, Design Creme, Cleanse Shampoo, Moisturizing Cleanse Shampoo, Alternative Wave (Normal), Alternative Curl Revitalizer Conditioner, Leave-In Wave (Tinted), Sprae Concentrate Hair Fortifier, Moisturizing Rinse, Replenishing Spray Hair Masque Nucleic A(R)..................... Body Plus(R)Shampoo, Proteplex(R)Shampoos and Botanical(TM)Hair Spray, Gel Conditioner Apple Pectin(R).................. Shampoo and Conditioner, Moisturizing Shampoo, Moisturizing Hair Spray, Acid Perm, ScentSates(TM)Shampoos and Conditioners, Apple Apple Pectin Plus(R)Perm, Ten-Minute Pectin Plus(R)Shampoo and Conditioner in One Wave, Ultra Hold Mousse, Styling Creme Apple Pectin Naturals.......... Witch Hazel & Honeysuckle Shampoo, Irish Moss & Cherry Bark Shampoo; Rosemary & Grapefruit Shampoo; Hops, Apricots & Almonds Conditioner; Sunflower, Honey & Hibiscus Conditioner; Milk Protein, Carrot Extract & Vitamin E Conditioner; Peppermint & Lavender Bath & Body [Body Wash] Vita/E(R)........................ Shampoo, Conditioners Perm, Hair Spray, Ultrahold Hair Spray, Unscented Hair Spray, Maximum Hold Hair Spray, Ultra-hold Concentrate Hair Spray Other Salon Products........... Natural Man(TM) Conditioning Shampoo, Bone Marrow(R) Natural Man(R) Styling Creme, Natural Conditioners Man(R) Hair Spray, Natural Woman(R) Hair Spray, CO-A(R)Perm, CO-A Kinetics(R)Perm, Lamaur Inception(R) Thio-Free Perm, Strata(R) Perm, Gamma pHactor(R) Wave Set and Concentrate, Beauti-Lac(R) Hair Spray, Stylac(R) Hair Spray, Sprayage(R) Hair Spray, Body Plus Mousse, Axiom(R) Perm, Body for Sure(R) Perm
Willow Lake(TM), a new "high-end" retail hair care product line positioned as "Nature's Prescription for Beautiful Hair(TM)" began shipments in the fourth quarter of 1996. The line of shampoos and conditioners is the Company's newest entry in the "naturals" segment of the hair care category. Perma Soft(R), which is a "high-end" retail product line, is intended to meet the needs of a large segment of consumers who use permanent wave products or color treat their hair. Salon Style(R), launched in 1994, is a line of "mid-priced" shampoos, conditioners and styling aids positioned as "Salon Quality at a Fraction of the Price." Style(R) is the Company's "value priced" brand, intended for use by the entire family. Apple Pectin Naturals was introduced to the salon industry at the Beauty and Barber Supply Institute (BBSI) convention in Las Vegas, Nevada in July 1996. The Company began shipments in the fourth quarter of 1996. The new Apple Pectin Naturals product line will further the Salon Group's sales of "natural" products into the professional market. Apple Pectin(R), originally introduced to salons in 1978, was one of the first product lines based on an ingredient found in nature. Pativa(R) is a full line of professional salon shampoos, conditioners and styling products which includes an innovative wave technology that eliminates the neutralizer step. Launched in March 1995, Pativa(R) line provides the Salon Group with a product line distributed by exclusive dealers to full service salons. The following table sets forth certain information concerning the Company's net sales by group in each of the last three fiscal years:
1996 1995 1994 Retail........................... $ 69,432 59.3 % $ 73,256 62.2 % $ 80,669 66.5% Salon............................ 16,833 14.4 16,947 14.4 16,928 14.0 Contract Manufacturing (1)....... 30,818 26.3 27,563 23.4 23,680 19.5 Total:........................... $117,083 100.0 % $117,766 100.0% $121,277 100.0% - - -------------------------------------
(1) Contract manufacturing sales included sales to DowBrands of $22.2 million, $21.4 million and $19.3 million in each of the years ended December 31 1996, 1995, and 1994, respectively. Marketing and Distribution The Company's consumer retail sales are made to mass merchandisers, food stores, drug stores and other retail outlets, as well as to wholesalers who service retail outlets, resulting in the Company's products being sold in more than 60,000 retail outlets in North America. Sales for the Retail Group are carried out through a combination of the Company's own sales force and independent brokers. Salon Group products are distributed to professional salons and specialty shops through a network of independent distributors served by the Company's sales force. The Company currently maintains more than 1,800 active customer accounts and no customer other than DowBrands and Wal-Mart accounted for more than 10% of the Company's total net sales in any of the last three years. DowBrands accounted for 16%, 18% and 19% of the Company's total net sales in each of 1994, 1995 and 1996, respectively, and Wal-Mart accounted for 18%, 18% and 17% of the Company's total net sales in each of 1994, 1995 and 1996, respectively. The loss of sales to DowBrands, Wal-Mart or other significant customers could have a material adverse effect on the business and operations of the Company. There are no contractual obligations from any customers to make continuing purchases from the Company, although DowBrands has agreed to purchase all of its future requirements for certain products from the Company through November 1997. The Company is currently engaged in discussions to extend the term of this agreement. The Company promotes sales of its products utilizing substantial advertising, consumer promotions and merchandising support programs. During the years ended December 31, 1994, 1995 and 1996, the Company's marketing support expense was approximately $31.4 million, $23.8 million and $23.8 million, respectively. In view of the intensely competitive nature of the personal hair care products industry, new product introductions require proportionally higher costs relative to sales than costs for well-established products during the introductory period. While those expenditures materially impact results of operations in the particular period in which they are incurred, they assist in the Company's growth beyond that period if the new product is ultimately successful. The Company anticipates incurring increased expenditures in connection with its marketing activities in the next two years, and expects to utilize substantial cash resources to fund those activities. These activities include (i) expanding its product mix by introducing new products, particularly Willow Lake(TM), (ii) restaging certain other existing products, and (iii) enhancing the Company's marketing efforts, particularly in connection with its commencement of activities outside the United States. The Company plans to increase retail sales in Mexico and Canada during 1997, and is considering expansion into other international markets. Expanding the Company's international market share in Mexico, Canada and elsewhere will require the Company to address competitive factors similar to those it faces in the United States, factors unique to those markets, as well as to comply with any local regulatory requirements. Research and Development The Company continuously engages in the development of new products and improvements to its existing formulations and maintains extensive laboratory facilities for those purposes. The Company relies principally on the experience of its staff in connection with formulating new products. The Company's research and technical staff of approximately 21 persons works closely with the Company's sales and marketing groups to keep current with changes in consumer tastes and new product developments in the industry. The Company believes its research and development efforts are enhanced materially by the availability of its on-site salon, which is fully equipped to permit the testing of new products and improvements in conditions that simulate those actually encountered by consumers. The Company maintains extensive laboratory, quality assurance and quality control facilities. Examples of products recently developed include (i) the Willow Lake(TM) product line, a complete consumer-oriented line of natural hair care products introduced in 1996, and (ii) Apple Pectin (R) Naturals for the professional salon and specialty market, introduced in 1996. The Company believes that the absence of any fundamental change in the technology underlying hair care products for several decades, combined with the substantial global market for hair care products, presents an opportunity for new technologically oriented products. In the Company's view, electronically controlled and managed hair styling products that use chemicals and provide quick and convenient application can gain widespread consumer acceptance if they are successfully developed and properly marketed. The Company's strategy is using licensed technology to develop a line of advanced hair styling products and, if it is successful in doing so, eventually to compete significantly on that basis. There can be no assurance, however, that the Company will be able to develop such advanced hair styling products or, if it does, that they will be commercially successful. Research activities during 1996 have been primarily directed towards conducting early-stage coloring and styling experiments with respect to the reaction of hair samples to electromagnetic signals. These experiments have been conducted under contract with the Company's virtual laboratory at TRI/Princeton. Such services are expected to continue through 1997. Substantial additional research and development will be required before any prototype product containing its licensed technology could be delivered, and the Company believes that the earliest any prototype product might be introduced would be the second half of 1998. The timing of introduction of its first commercial product will also depend on the time required to obtain any required regulatory approvals. There can be no assurance however, that the Company will be able to develop such advanced hair styling products or, if it does, that they will be commercially successful Manufacturing and Supply All the Company's manufacturing, packaging and warehousing operations are located in a 438,000 square foot facility in Fridley, Minnesota. The production area comprises 135,000 square feet and includes formula compounding areas, quality control laboratories, multiple fully-automated, high speed aerosol and liquid filling lines and state-of-the-art packaging facilities. The compounding or mixing department utilizes a combination of manual and fully-automated batch processing systems. A portion of the aerosol batching is controlled by an automated computer-driven blending system which has significantly improved efficiencies and product integrity. The high speed fully-automated packaging equipment used for both liquid filling and aerosol lines runs at speeds of up to 300 containers per minute. The Company believes it is an industry leader in fully automating its production facilities. The Company has substantial excess production capacity, which it currently intends to utilize in connection with any expansion of its contract manufacturing activities. The Company maintains a strict internal control system to monitor the quality of its products. The quality control laboratory is well equipped and capable of conducting both micro and analytical testing. The Company also maintains product liability insurance at levels it believes to be adequate. Raw materials used by the Company are principally alcohol, surfactants, fragrances, propellants and a wide variety of packaging materials and compounds including containers such as aerosol cans, cardboard boxes and plastic containers, container caps, tops, valves and labels, all of which are purchased from outside sources. The Company's principal raw materials and packaging components are available from several domestic suppliers and it is not dependent on the availability of supplies from any single source. While at times the hair care industry has experienced a shortage of raw materials of the types essential to the Company's business, because the Company has long-established supplier relationships and has developed alternative raw material substitutes, it does not anticipate any difficulty in obtaining adequate supplies of raw materials to meet its needs. Similarly, while the industry has from time to time experienced raw material cost increases, the Company believes it has been and remains able to purchase its requirements at competitive prices from sources that are readily available in the vicinity of the Fridley, Minnesota, facility. The Company uses tank railcars to transport certain high volume raw materials. Trucks are used to transfer smaller volume raw material requirements as well as packaging components such as aerosol cans, plastic bottles and caps, and cardboard shipping containers. A separate tank farm for above-ground bulk storage of chemicals and aerosol propellants is located adjacent to the plant. The Company maintains inventory of raw materials and packaging materials as well as certain finished goods in its on-site warehouse that comprises 265,000 square feet. Finished inventory generally is warehoused for distribution throughout the United States at the Company's plant, but products produced for third parties are immediately released to third party warehouses and do not remain on the Fridley site as inventory. As many as twelve over-the-road truck trailers can be loaded and unloaded in the plant's warehousing and shipping area at one time. Contract manufacturing of household cleaning and hair care aerosol sprays and liquid products for others, particularly with respect to the production of aerosol spray products utilizing the Company's automated high speed production lines, has contributed 20% or more to the Company's sales in each of the last three years. Since the beginning of 1996, the Company has obtained new contract manufacturing orders from new customers. The Company recognizes revenues from such orders only upon shipment. In November 1995, the Company and DowBrands entered into a two-year agreement (with two additional one-year extensions at Dow's election) pursuant to which the Company will continue to serve as DowBrands' sole supplier of certain household cleaning products, subject to the Company maintaining competitive pricing and delivery schedules. Government Regulation The Company's manufacturing and packaging operations are subject to a wide range of federal, state and local regulations. These regulations include the applicable cosmetic purity and labeling requirements prescribed by the federal Food, Drug and Cosmetic Act, the applicable labeling provisions of the Fair Packaging and Labeling Act, the discharge, handling and disposal of hazardous wastes regulations contained in applicable environmental laws, and the plant and laboratory safety requirements of various applicable occupational safety and health laws. Existing and future aerosol-based products are also expected to be subject to state and, possibly, federal standards relating to permissible levels of volatile organic compounds. The Company does not expect that compliance with those standards will adversely affect its revenues or costs. The Company is also subject to federal regulations concerning the content of its advertising, trade practices and certain other matters. A Phase I environmental assessment of the Fridley facility was performed in late 1995. No environmental pollution was identified. The Company is not aware of any environmental pollution or liabilities arising out of any past or present activities of either DowBrands Personal Care Division or the Company. Additionally, DowBrands Inc. has agreed, for a period of eight years (but only until May 15, 1996, with respect to asbestos related matters, if any) to indemnify the Company against environmental liabilities in excess of $150,000 arising at the Fridley facility from events that occurred prior to the acquisition. The Company believes it has complied in all material respects with regard to governmental regulations applicable to it. To date, those regulations have not materially restricted or impeded the Company's operations. Patents and Trademarks The Company markets its products under a number of trademarks and trade names that are registered in the United States and several foreign countries. The Company will seek to register significant marks and names in other foreign countries when it enters them. Principal trademarks of the Retail Group include Willow Lake (TM) Perma Soft(R), Color Soft(TM), Salon Style(R) and Style(R). The Salon Group trademarks include Pativa(R), Nucleic A(R), Apple Pectin(R), Apple Pectin Naturals and Vita/E(R). The Company believes its position in the marketplace is significantly dependent upon the goodwill engendered by its trademarks and trade names, and therefore considers trademark protection to be material to its business. Although the Company owns certain patents, its business is not materially dependent upon any patent, license, franchise or concession, whether owned by or licensed to the Company. The Company believes that protection of its proprietary technology (which includes certain technology licensed from an affiliate) and know-how is critical to the development of its business. It seeks to protect its interests through a combination of patent protection and confidentiality agreements with all its critical employees, as well as by limiting the availability of certain critical information to a small number of key employees. The Company intends to pursue a vigorous patent application program in the United States. To date, it has obtained the rights, pursuant to an exclusive license, to cosmetic hair care applications of the technology reflected in a United States patent (No. 5,395,490, issued to Messrs. Don Hoff and Joseph Stiley in March 1995, and expiring in March 2012), that it believes is important to the protection of the core technology underlying its research activities. Mr. Hoff, Chairman and Chief Executive Officer, and Mr. Stiley, Director and Company consultant, are affiliates of the Company. The Company believes that the patent, which contains claims relating to the method of applying electronic signals at frequencies determined by the natural characteristics of a material in order to alter certain molecular bonds in that material, provides broad coverage, and hence significant protection, for its proprietary technology; however, there can be no assurance that this will be the case. Moreover, the Company currently has no patent protection for its technology outside the United States, and may be unable to obtain even limited protection for its proprietary technology in foreign countries. The Company believes that its current and anticipated business does not and will not infringe on any patent owned by others. Competition The markets for the Company's products are very competitive and sensitive to changing consumer needs and preferences. They are characterized by frequent introductions of competitive products, often accompanied by major advertising and promotional activities. The Company competes primarily on the basis of product quality, price, marketing and brand name recognition. As a result of competitive conditions in the industry, which have adversely affected profit margins, and growing consumer demand for greater product convenience and performance, the industry has been experiencing a consolidation and a globalization in the activities of its members. The hair care products market is dominated by large, multi-national corporations, all of which compete with the Company and have greater financial and other resources than those of the Company. The Company believes it was among the ten largest manufacturers in the United States in 1996 of three categories of hair care products- shampoos, conditioners and styling aids. Principal competitors include The Procter & Gamble Company, Unilever N.V. (Helene Curtis), Bristol-Myers Squibb Company (Clairol), L'Oreal S.A. (Cosmair) and Alberto-Culver Company, and those of the Salon Group include Bristol-Myers Squibb Company (Clairol and Matrix), Nexxus, and Wella AG (Redken). Personnel The Company employed 336 persons as of December 31, 1996. None of the Company's employees is a member of a labor union. The Company considers its relationship with its employees to be good. Item 2. PROPERTIES The Company owns its facility in Fridley, Minnesota, near Minneapolis. This facility contains administrative, laboratory, production and warehousing areas. The 438,000 square foot, primarily single story, air conditioned plant is located on a 25 acre site, and includes an approximately 38,000 square foot, two story office center that houses the administrative staff, research laboratories, computer services and the test salon. The Company believes the facility, which was constructed in 1969 and improved during the 1980s at a total cost in excess of $60 million, is well maintained and adequate for its contemplated needs. The Company has excess production capacity, which it intends to utilize for new products and for possible expansion of its contract manufacturing activities. The Company leases its 6,008 square foot office facility in Mill Valley, California, near San Francisco, from Intertec, a division of Innovative Capital Management, Inc.. The term of the lease is for three years commencing October 1, 1996. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
Executive Officers of the Registrant ELECTED TO PRESENT - - ------------------------- -------------------------------------------- ----------- POSITION NAME POSITION AGE Don G. Hoff Chairman of the Board and Chief Executive 62 1993 Officer - - -------------------------- John D. Hellmann Vice President, Chief Financial Officer 47 1995 - - -------------------------- John A. Anzur Vice President, General Counsel 41 1996 - - -------------------------- Donald E. Porter Vice President, Corporate Development. 57 1993 - - -------------------------- Richard T. Loda Vice President, Science and Technology 48 1996 - - -------------------------- Dominic J. LaRosa President and CEO - Lamaur Division 54 1995 - - -------------------------- Ronald P. Williams Executive Vice President - Lamaur Division 53 1996 - - -------------------------- William M. Boswell Vice President, Sales - Retail Group of the 55 1995 Lamaur Division - - -------------------------- Michele L. Redmon Vice President, Marketing - Retail Group of 41 1995 the Lamaur Division - - -------------------------- Jay T. Olson Vice President , Finance - Lamaur Division 45 1996 - - -------------------------- Michael L. Flahaven Vice President - Salon Group of the Lamaur 40 1997 Division
PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the NASDAQ National Market under the symbol LMAR. The table below sets forth the range of the high and low sale prices, as reported by the NASDAQ stock market during last year. Previous to March 26, 1997 the Company traded under the symbol EHST. 1996 High Low Second Quarter * $ 8 .250 $ 5.250 Third Quarter 6.000 3.750 Fourth Quarter 4.875 3.125 *Includes only the period May 23, 1996, the first trading date after the Company's initial public offering, to June 30, 1996. As of March 3, 1997, the number of holders of record of the Company's Common Stock was 377 and the number of holders of record of the Company's Preferred Stock was one. As for the Common Stock, this number does not include beneficial holders where shares are held of record by nominees. Dividends are payable with respect to the Series A Preferred Stock only to the extent (on an as-converted basis) that dividends are declared payable on the Common Stock. The Series B Preferred Stock is entitled to cumulative cash dividends at the rate of 8.0% per annum, payable quarterly ($400,000 annually). The Company does not anticipate paying any dividends on its Common Stock in the foreseeable future. The payment of future dividends will depend on the evaluation by the Company's Board of Directors of such factors as it deems relevant at the time. Currently, the Board of Directors believes that all of the Company's earnings, if any, should be retained for the development of the Company's business. In addition, payment of dividends on the Common Stock is prohibited by the terms of the Norwest Credit Agreement and is restricted by the terms of its Preferred Stock. In January 1996, the Company issued 15,575 shares of Common Stock to 311 employees for services rendered to the Company. The securities were valued at $6.00 per share. These securities were exempt from registration under Rule 701 under the Securities Act of 1933. In May 1996 in connection with the Company's initial public offering, the Company issued warrants to purchase 182,000 shares of Common Stock to the Representatives of the Underwriters for a nominal amount. Also in May 1996 in connection with certain financial advisory services to be provided to the Company, the Company issued warrants to purchase 39,000 shares of Common Stock to Rodman & Renshaw, Inc. for a nominal amount. These securities were exempt from registration under Section 4(2) of the Securities Act. These warrants are initially exercisable at a price of $9.60 per share of Common Stock for a period of four years, commencing May 1997. The exercise price of the warrants and the number of shares of Common Stock issuable upon exercise thereof are subject to adjustment under certain circumstances. The warrants are redeemable by the Company on prior notice if the price of the Common Stock two years after the closing of the offering exceeds $20.00 for a 60-day period. In June, 1996, the Company issued 9,900 shares pursuant to the exercise of a stock option. These securities were exempt from registration under Rule 701 under the Securities Act of 1933. Item 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (In thousands, except per share data) Set forth below is selected financial data with respect to the statements of operations of the Company, for the twelve months ended December 31, 1996, 1995, 1994 and for the period from April 1, 1993 (Inception) to December 31, 1993, and the balance sheet data of the Company at December 31, 1996, 1995, 1994 and 1993. In addition, set forth below is selected financial data with respect to the pro forma statement of operations for the Company for the twelve months ended December 31, 1995. Such data presents the combined results of operations of the Company as if the acquisition of the Personal Care Division was effective as of January 1, 1995. The pro forma combined financial data includes all adjustments which the Company considers necessary for a fair presentation, in accordance with generally accepted accounting principles, of its results of operations for that period. The pro forma combined financial data does not purport to represent what the Company's results of operations would actually have been had the acquisition in fact occurred on the indicated date or to project the Company's results of operations for any future date or period. In addition, included below is selected financial data with respect to the statements of operations for the Personal Care Division for the period from January 1, 1995 to November 30, 1995 (the effective date of the acquisition for financial reporting purposes) and the years ended December 31, 1994, 1993 and 1992, and the balance sheets of the Personal Care Division at December 31, 1994, 1993 and 1992. Such data were derived from the Personal Care Division financial statements, certain of which are included herein.
HISTORICAL PRO FORMA YEARS ENDED --------------------- DECEMBER 31, APRIL 1, 1993 ---------------------------------------- (INCEPTION) TO DECEMBER 31, 1993 YEAR ENDED DECEMBER 1996 1995 (1) 1994 31, 1995 - - --------------------------------- ----------------------------------------- ---------------------- SELECTED STATEMENTS OF OPERATIONS DATA: Total Net Sales $ 117,083 $ 8,070 $ - $ - $ 117,766 Cost of Goods Sold 70,215 5,656 - - 71,395 Gross Margin 46,868 2,414 - - 46,371 Operating Expenses 45,641 3,496 557 1,565 45,130 Write-Down of Assets - - - - 11,000 Operating Income (Loss) 1,227 (1,082) (557) (1,565) (9,759) Interest Expense (1,386) (300) (59) (40) (1,554) Other Income 712 - - - 101 Net Income (Loss) $ 553 $(1,382) $(616) $ (1,605) $ (11,212)(2) Net Income (Loss) Per Share $ .06 $ (.34) $(.15) $ (.44) $ (2.74) Weighted Average Shares Outstanding (3) 5609 4086 4086 3658 4086 BALANCE SHEET DATA: Working Capital (Deficit) $ 26,376 $ 10,346 $(466) $ (27) Total Assets 61,566 42,967 6 134 Long Term Debt, less Current Portion 14,723 20,350 1,000 1,000 Stockholders' Equity (Deficit) 30,252 6,594 (1,462) 1,057)
Financial Data of the Personal Care Division
Period from January 1, Years Ended December 31, 1995 through 1994 1993 1992 November 30, 1995 (4) Selected Statements of Operations Data: - - ---------------------------------------- Total net sales..................... $121,277 $112,031 $124,288 $109,696 - - ---------------------------------------- Cost of goods sold.................. 71,735 71,061 77,613 67,088 - - ---------------------------------------- ------------- ----------- ---------- -------- - - ---------------------------------------- Gross margin........................ 49,542 40,970 46,675 42,608 - - ---------------------------------------- Operating expenses.................. 57,830 53,851 56,014 42,344 - - ---------------------------------------- Write-down of assets................ 120,100 - - 11,000 - - ---------------------------------------- ------------- ----------- ---------- --------- - - ---------------------------------------- Operating income (loss)............. (128,388) (12,881) (9,339) (10,736) - - ---------------------------------------- Interest expense from Dow........... (5,805) (6,643) (6,055) (1,603) - - ---------------------------------------- Other income (expense), net......... 705 317 (328) 101 - - ---------------------------------------- ------------- ------------ ----------- ---------- - - ---------------------------------------- Net loss............................ $(133,488) $(19,207) $(15,722) $(12,238) - - ----------------------------------------
At December 31, 1994 1993 1992 Selected Balance Sheet Data: - - ------------------------------------------- Working capital....................... $16,787 $11,457 $16,517 Total assets.......................... 58,021 180,376 190,605 Net invested capital.................. 47,493 169,058 179,654 - - -----------
(1) Includes the results of operations of the Personal Care Division for the month of December 1995 following its acquisition by the Company. (2) Includes an $11.0 million write-down of assets required to adjust the carrying value of The Personal Care Division to its net realizable value in connection with Dow's decision to sell the Personal Care Division. Future significant charges are not expected as assets and liabilities were recorded at their estimated fair values at the date of the Company's acquisition of the Personal Care Division. (3) In accordance with the rules of the Securities and Exchange Commission, all common stock equivalents of the Company issued within one year of its initial public offering have been considered as outstanding since the inception of the Company using the treasury stock method even though they are anti-dilutive in loss periods. Common stock equivalents issued prior to one year of the Company's initial public offering are excluded in loss periods as they are anti-dilutive. (4) Results of operations of the Personal Care Division following its acquisition by the Company in November 1995 are included in the results of operations of the Company for the year ended December 31, 1995. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Pro Forma and Historical Results of Operations The following table sets forth pro forma statements of operations information in dollars and as a percentage of total net sales for each of the two years ended December 31, 1995, and the historical statement of operations information in dollars and as a percentage of total net sales for the year ended December 31, 1996. The pro forma information gives effect to the acquisition of the Personal Care Division as if it had occurred at the beginning of each period. The pro forma information is not necessarily indicative of future results of operations.
YEARS ENDED DECEMBER 31, (In Thousands) ----------------------------------------------------------------------------------- HISTORICAL PRO FORMA PRO FORMA 1996 1995 1994 % % % - - ------------------------------ Total Net Sales $ 117,083 100.0 % $117,766 100.0 % $121,277 100.0 % - - ------------------------------ Cost of goods sold 70,215 60.0 71,395 60.6 69,764 57.5 - - ------------------------------ ---------- ------- -------- ----- -------- ------- Gross margin 46,868 40.0 46,371 39.4 51,513 42.5 - - ------------------------------ Operating expenses 45,641 39.0 45,130 38.3 54,600 45.0 - - ------------------------------ Write-down of assets - - 11,000 9.4 120,100 99.0 - - ------------------------------ ---------- ------- -------- ----- -------- ------- Operating income (loss) 1,227 1.0 (9,759) (8.3) (123,187) (101.5) Other income (expense) Interest expense (1,386) (1.1) (1,554) (1.3) (2,374) (2.0) Other income 712 .6 101 .1 705 .6 - - ------------------------------ ---------- ------- ------- ----- -------- ------- Net income (loss) $ 553 .5 % $(11,212) (9.5)% $(124,856) (102.9) % ========== ======= ========= ===== ========== =========
Year Ended December 31, 1996 (Historical) Compared to Year Ended December 31, 1995 (Pro Forma) Total net sales of $117.1 million for the year ended December 31, 1996 declined 0.6% compared to pro forma net sales of $117.8 million in 1995. During 1996, the Company experienced sales growth from its new product line Willow Lake(TM), contract manufacturing and its Style(R) product line. These increases were offset by sales decreases in the Perma Soft(R) and Salon Style(R) product lines. The Company's management implemented a new marketing strategy that included increasing advertising that began in the quarter ended June 30, 1996, intended to stem the decline in Perma Soft(R) sales. In addition to supporting the brand with advertising, the Company is testing new line extensions designed to reverse the decline in sales. In April 1995, DowBrands discontinued advertising of Salon Style(R) in conjunction with the decision to sell the Personal Care Division. During the next ten months, Salon Style(R) was not supported with any advertising funds. Although the Company reinstituted a marketing campaign which included advertising in the first quarter of 1996, Salon Style(R) continued to lose market share. The Company is developing and expects to implement a new marketing strategy for the Salon Style(R) brand in 1997. In November 1995, the Company entered into a two-year contract in which DowBrands has agreed to purchase all of its future requirements for certain products. Contract manufacturing sales for 1996 were $30.8 million which included sales to DowBrands of $22.2 million or 18.9% of total net sales. Gross margin as a percentage of sales was 40.0% for the year ended December 31, 1996, as compared with a pro forma gross margin of 39.4% for the same period in 1995. The increase in gross margin percentage is attributable to the product cost savings which were realized through operating efficiencies and the high gross margin generated from the Willow Lake(TM) product line that began shipping in the fourth quarter of 1996. The gross margin percentage improvements were partially offset by an increase in sales of the lower-margin Style(R) line of products and contract manufacturing, and a decrease in consumer retail purchases of the higher margin Perma Soft(R) and Salon Style(R) product line. Although investment was necessary in 1996 resulting from the takeover of operations from DowBrands and from the implementation of the Company's turnaround strategy, operating expenses of $45.6 million for the year ended December 31, 1996, were relatively unchanged as compared with pro forma operating expenses of $45.1 million for the same period in 1995. The $11.0 million write-down of assets by DowBrands in the first quarter of 1995 reflected a further adjustment in the carrying value of the Personal Care Division to its net realizable value in connection with DowBrands decision to sell the Personal Care Division. Future significant charges are not expected as all assets and liabilities were recorded at their estimated fair value at the date of the Company's acquisition of the Personal Care Division. As a result of the foregoing factors, the operating income for the year ended December 31, 1996, was $1.2 million, as compared with a pro forma operating loss of $9.8 million in the same period in 1995. Excluding the write-down of assets, the pro forma operating income for the year ended December 31, 1995, would have been $1.2 million. Interest Expense of $1.4 million for the year ended December 31, 1996, declined 10.8% compared to pro forma Interest Expense of $1.6 million in 1995. The decrease was due to the additional cash available for working capital in 1996 as a result of the Company's initial public offering in May 1996. Other income for the year ended December 31, 1996, was $0.7 million as compared with $0.1 million for the same period in 1995. This increase is attributable to the increase in interest income from the investment of the additional cash available as a result of the Company's initial public offering in the second quarter of 1996, and gain on the sale of equipment. As a result of the foregoing factors, net income for the year ended December 31, 1996, was $0.6 million, as compared with a pro forma net loss of $11.2 million for the same period in 1995. Year Ended December 31, 1995 (Pro Forma) Compared to Year Ended December 31, 1994 (Pro Forma) Total net sales on a pro forma basis of $117.8 million for 1995 declined 2.9% compared to $121.3 million in 1994. Although the Salon Style(R) product line and contract manufacturing experienced sales growth, these increases were more than offset by decreases in the Perma Soft(R) and Style(R) product lines. The decrease in Perma Soft(R) sales in 1995 followed moderate sales increases in 1994 after a heavily funded marketing campaign. As part of that 1994 marketing effort, the Perma Soft(R) product line was reformulated and repackaged which together with the substantial reduction in advertising support in 1995 and a reduction in perm incidence, caused the decline in Perma Soft(R) sales in 1995. Contract manufacturing increased $3.9 million and sales to DowBrands represented 18.2% of pro forma total net sales for 1995 compared to 15.9% in 1994. Pro forma gross margin for 1995 decreased by $5.1 million as compared with 1994, or 10.0%. Gross margin as a percentage of pro forma total net sales was 39.4% in 1995, as compared with 42.5% in 1994. The decrease in gross margin percentage was due to a change in product sales mix to lower-margin products, as a result of a decrease in consumer retail purchases of the higher margin Perma Soft(R) product line, and increases in lower margin contract manufacturing, as well as a greater emphasis on promotional activities, which resulted in higher product costs. The decrease in gross margins was partially offset by the higher margins provided by Salon Style(R), and a reduction of employee benefit expenses in 1995; of which $874,000 was reflected in pro forma adjustments related to the elimination of postretirement benefits and 401(k) matching contributions, and $160,000 related to a reduction in the Company's vacation benefits. Comparable reductions were not included in the 1994 pro forma gross margins. Operating expenses on a pro forma basis for 1995 decreased to $45.1 million, or 38.3% of pro forma total net sales, as compared to $54.6 million or 45.0% of pro forma total net sales in 1994. The decrease was principally due to a reduction in marketing expenses in 1995 from 1994 levels, which had been increased in 1994 for the Perma Soft(R) marketing campaign and the introduction of a new product line, Salon Style(R). Operating expenses on a pro forma basis also decreased because of the reduction in 1995 employee benefit expenses as a result of pro forma adjustments made by the Company in the amount of $570,000 related to the elimination of postretirement benefits and 401(k) matching contributions, and $105,000 related to the reduction in the Company's vacation benefits. The pro forma adjustments were made to reflect the Company's decision to eliminate or reduce those benefits. Comparable adjustments are not included in the 1994 pro forma operating expenses. The $120.1 million write-down of assets by Dow in 1994 was required to adjust the carrying value of the Personal Care Division to its net realizable value in connection with Dow's decision to sell the Personal Care Division. An additional write-down of $11.0 million was recorded in 1995. Future significant charges are not expected as all assets and liabilities were recorded at their estimated fair values at the date of the Company's acquisition of the Personal Care Division. As a result of the foregoing factors, the pro forma operating loss for 1995 was $9.8 million, compared with the 1994 pro forma operating loss of $123.2 million. Excluding the asset write-downs, pro forma operating income would have been $1.2 million in 1995 and pro forma operating loss would have been $3.1 million in 1994. Pro forma interest expense, which was $1.6 million for 1995, compared with $2.4 million in 1994, represents interest on the indebtedness incurred in connection with the Company's acquisition of the Personal Care Division and expected average borrowings during the periods. As a result of the foregoing factors, the pro forma net loss for 1995 was $11.2 million, compared with the 1994 pro forma net loss of $124.9 million. Historical Results of Operations Years Ended December 31, 1996, 1995 and 1994 The Company was in a development stage and had no revenues until it completed the acquisition of the Personal Care Division in November 1995. Operating expenses of $45.6 million were incurred in the year ended December 31, 1996, compared with $3.5 million in the year ended December 31, 1995, and $0.6 million in the year ended December 31, 1994. The higher operating expenses for 1996 reflect the inclusion of the Personal Care Division's operating expenses after its acquisition in late 1995. Prior to the acquisition, the Company's operating expenses were comprised of marketing, administrative and other operating expenses incurred to support the Company's technology development and research activities. The Company's net income for the year ended December 31, 1996 was $0.6 million as compared with a loss of $1.4 million and $0.6 million for the years ended December 31, 1995 and 1994 respectively. Liquidity and Capital Resources In 1996, the Company primarily financed its working and other capital requirements from operations, the initial public offering and borrowing under its term loan and revolving credit line with Norwest Business Credit. (See Note 6 to the Financial Statements.) At December 31, 1996, the Company had $12.1 million in cash and cash equivalents. In May 1996, the Company completed its initial public offering for the sale of 2,600,000 shares of common stock at $8 per share. Net proceeds to the Company from the offering were approximately $18.0 million. In November 1995, the Company entered into a loan agreement with Norwest Business Credit. The Norwest Credit Agreement is for three years, and provides for a working capital line up to $14.0 million and a term loan of $6.0 million which is amortized over five years with annual principal payments of $1.2 million. The working capital balances and term loan are payable in full in November 1998. The interest rates on these loans are variable and are tied to Norwest Bank's base rate which at December 31, 1996, was 8.5%. The interest rates on the revolver and the term loan are currently 8.75% and 9.0%, respectively. The working capital line and term loan with Norwest are secured by all of the assets of the Company and impose certain operating and financial restrictions such as minimum income requirements, minimum net worth and debt service and leverage ratios. In June 1996, the Company used $8.0 million of the net proceeds from its initial public offering to pay down a portion of its revolving credit line with Norwest Business Credit, Inc. As of December 31, 1996, the Company had approximately $9.8 million of debt outstanding under its revolving credit line agreement with Norwest. Upon completion of the Company's initial public offering, its $5.0 million convertible note with DowBrands converted into 763,500 shares of Series B convertible preferred stock, the holders of which are entitled to dividends ($400,000 annually), which will accrue whether or not declared, and will be cumulative to the extent not paid. Accounts receivable at December 31, 1996, increased $6.0 million from December 31, 1995, principally due to higher sales in December 1996 as compared with December 1995. Inventory increased at December 31, 1996, as compared to 1995 as the Company began building its inventory for the launch of its new Willow Lake(TM) product line. The Company's launch of Willow Lake(TM) as well as the introduction of other new products in 1997 will be supported by a major marketing campaign including advertising and consumer promotions. The funds required for this marketing campaign are expected to come primarily from working capital and the Company's line of credit facility. The Company also intends to increase this facility during 1997 but no assurance can be made that Norwest will agree to an increase. Capital expenditures for 1996 were approximately $3.5 million and are anticipated to be $2.9 million for 1997. At December 31, 1996, the Company had a net operating loss carry forward for federal income tax purposes of approximately $2.8 million which expires at various dates between 2008 and 2111. Management believes that the Company's cash on hand, anticipated cash flow from operations and the amounts available to the Company under the Norwest Credit Agreement will be sufficient for its working capital, capital expenditures and debt service and preferred stock requirements for at least the next 12 months. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements THE LAMAUR CORPORATION Page Independent Auditors' Report................................................................ F-1 Balance Sheets for the Years Ended December 31, 1996 and 1995............................... F-2 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994............... F-3 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-4 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............... F-5 Notes to Financial Statements for the Years Ended December 31, 1996, 1995 and 1994.......... F-6 PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P. Independent Auditors' Report................................................................ F-16 Statements of Operations for the Period from January 1, 1995 to November 30, 1995 and for the Year Ended December 31, 1994.................................................................. F-17 Statements of Net Invested Capital for the Period from January 1, 1995 to November 30, 1995 and for the Year Ended December 31, 1994......................................................... F-18 Statements of Cash Flows for the Period from January 1, 1995 to November 30, 1995 and for the Year Ended December 31, 1994.................................................................. F-19 Notes to Financial Statements for the Period from January 1, 1995 to November 30, 1995 and for the Year Ended December 31, 1994............................................................. F-20
PART III Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT Incorporated by reference from the Company's 1997 Proxy Statement in the material captioned "Election of Directors." Information with respect to Executive Officers of the registrant is presented at the end of Part I hereof. Item 11. EXECUTIVE COMPENSATION Incorporated by reference from the Company's 1997 Proxy Statement in the material captioned `Compensation of Executive Officers" and "Additional Information Relating to Directors and Officers of the Company." Item 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANGEMENT Incorporated by reference from the Company's 1997 Proxy Statement in the material captioned "Security Ownership of Certain Beneficial Owners and Management." Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Company's 1997 Proxy Statement in the material captioned "Certain Transactions." PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules - See index in Item 8. (b) Reports on Form 8-K. Form 8-K dated October 30, 1996 reporting an Item 5 event. No financial statements were filed with the Report. (c) List of Exhibits. Exhibit Number Description *2.1 Asset Purchase Agreement, dated as of November 15, 1995, between DowBrands, Inc. and Registrant. *2.2 Plan of Merger, dated March 15, 1996. *3.1 Restated Certificate of Incorporation of the Registrant. *3.2 By-Laws of the Registrant. 3.3 Certificate of Amendment of Restated Certificate of Incorporation. *4.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibits 3.1 and 3.3 hereof). *4.2 Specimen Copy of Stock Certificate for shares of Common Stock. *4.3 Form of Warrant issued to the Representatives. *4.4 Form of Common Stock Purchase Warrant, dated as of November 1995, issued to certain investors. *4.5 Registration Rights Agreement, dated as of November 15, 1995, between Dow and Registrant. *4.6 Form of Registration Rights Agreement between Registrant and certain holders of Registrant Common Stock. *10.1 License Agreement by and between Registrant and Intertec Ltd., dated May 5, 1993. *10.2 Credit and Security Agreement, dated as of November 16, 1995, between Registrant and Norwest Business Credit, Inc. 10.3 First Amendment to Credit Agreement, Second Amendment to Credit Agreement, Amendment Agreement and Third Amendment to Credit Agreement between Registrant and Norwest Business Credit, Inc. *10.4 Manufacturing Agreement between DowBrands L.P. and Registrant, dated November 16, 1995. *10.5 1996 Stock Incentive Plan of the Registrant. *10.6 1996 Stock Incentive Plan for Non-Employee Directors and Advisory Board Members of the Registrant. *10.7 Employment Agreement between Registrant and Don G. Hoff, made as of June 1, 1994, and modified as of November 6, 1995. 10.8 1996 Non-Qualified Stock Option Plan of the Registrant. 10.9 Sublease dated October 1, 1996 between Registrant and Intertec, Ltd. 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).
1. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 1997 THE LAMAUR CORPORATION (Registrant) By: /s/ DON G. HOFF Don G. Hoff, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ DON G. HOFF - - ---------------------------- Chairman of the Board and Chief March 27, 1997 Don G. Hoff Executive Officer - - ---------------------------- (Principal Executive Officer) /s/ JOHN D. HELLMANN - - ------------------------------ Vice President, Chief Financial March 27, 1997 John D. Hellmann Officer - - ------------------------------ (Principal Financial and Accounting Officer) /s/ DOMINIC J. LaROSA - - --------------------------- President and CEO - Lamaur Division March 27, 1997 Dominic J. LaRosa and Director - - --------------------------- /s/ HAROLD M. COPPERMAN - - --------------------------- Director March 27, 1997 Harold M. Copperman - - --------------------------- /s/ GERALD A. EPPNER - - --------------------------- Director March 27, 1997 Gerald A. Eppner - - ---------------------------- /s/ PAUL E. DEAN - - ---------------------------- Director March 27, 1997 Paul E. Dean - - ---------------------------- /s/ PERRY D. HOFF - - ---------------------------- Director March 27, 1997 Perry D. Hoff - - ---------------------------- /s/JOSEPH F. STILEY, III - - ---------------------------- Director March 27, 1997 Joseph F. Stiley, III F-1 INDEPENDENT AUDITORS' REPORT The Lamaur Corporation: We have audited the accompanying balance sheets of The Lamaur Corporation, formerly Electronic Hair Styling, Inc., (the "Company"), as of December 31, 1996, and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the three years ended December 31, 1996, 1995 and 1994. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Francisco, California March 26, 1997 F-2
THE LAMAUR CORPORATION BALANCE SHEETS (In thousands, except share and per share data) December 31, 1996 1995 - - -------------------------------------------------------------------- ASSETS - - -------------------------------------------------------------------- Current Assets: - - -------------------------------------------------------------------- Cash and cash equivalents................................. $ 12,081 $ 2,338 - - -------------------------------------------------------------------- Receivables from DowBrands................................ 1,450 2,374 - - -------------------------------------------------------------------- Accounts receivable, net.................................. 17,214 10,305 - - -------------------------------------------------------------------- Inventories (Note 4)...................................... 11,699 11,140 - - -------------------------------------------------------------------- Prepaid expenses and other current assets................. 523 212 - - -------------------------------------------------------------------- Total current assets.................................. 42,967 26,369 - - -------------------------------------------------------------------- Property, Plant and Equipment, Net (Note 5).................... 18,475 16,283 - - -------------------------------------------------------------------- Other Assets................................................... 124 315 - - -------------------------------------------------------------------- Total Assets.......................................... $ 61,566 $ 42,967 - - -------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 6,724 $ 5,525 Accrued expenses.......................................... 4,637 4,849 Accrued salaries, wages and employee-related expenses 2,458 2,724 Current portion of long-term debt (Note 6)................ 1,272 1,200 Payables to related parties (Note 10)..................... 1,500 1,725 Total current liabilities............................. 16,591 16,023 Long-Term Debt (Note 6)........................................ 13,723 12,850 Related Party Obligations (Note 10)............................ 1,000 7,500 Commitments and Contingencies (Note 11)........................ Stockholders' Equity (Note 7): Preferred stock, $.01 par value, 4,000,000 shares authorized: - - ------------------------------------------------------------------- Series A Preferred stock, $.01 par value, 1,000,000 shares issued and outstanding at December 31, 1996 and 1995.($10.0 million liquidation preference)........... 8,500 8,500 Series B Preferred stock, $.01 par value, 763,500 shares issued and outstanding at December 31,1996. ($5.0 million liquidation preference)..................... 5,000 - Common stock, $.01 par value, 12,000,000 shares authorized, 5,603,395 and 2,944,920 shares, issued and outstanding at December 31, 1996 and 1995, respectivley.................. 56 29 Additional paid-in capital................................ 19,796 1,718 Stock subscriptions receivable............................ (50) (50) Accumulated deficit....................................... (3,050) (3,603) Total stockholders' equity............................ 30,252 6,594 Total Liabilities and Stockholders' Equity..................... $ 61,566 $ 42,967 - - --------------------------------------------------------------------
See notes to financial statements F-3
THE LAMAUR CORPORATION STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Years Ended December 31, 1996 1995 1994 - - -------------------------------------------------------------- - - -------------------------------------------------------------- Net Sales.................................................. $ 94,912 $ 6,426 $ - - - -------------------------------------------------------------- Net Sales to DowBrands (Note 10)............................ 22,171 1,644 - - - -------------------------------------------------------------- Total Net Sales (Note 1).................................... 117,083 8,070 - - - -------------------------------------------------------------- Cost of Goods Sold.......................................... 70,215 5,656 - - - -------------------------------------------------------------- Gross Margin................................................ 46,868 2,414 - - - -------------------------------------------------------------- Selling, General and Administrative Expenses................ 45,641 3,496 557 - - -------------------------------------------------------------- Operating Income (Loss)..................................... 1,227 (1,082) (557) - - -------------------------------------------------------------- Interest Expense............................................ (1,386) (300) (59) - - -------------------------------------------------------------- Interest and Other Income.................................. 712 - - - - -------------------------------------------------------------- Net Income (Loss).......................................... 553 (1,382) (616) - - -------------------------------------------------------------- Dividends on Series B Preferred Stock....................... (233) - - - - -------------------------------------------------------------- Net Income (Loss) Available to Common Shareholders........ $ 320 $ (1,382) $ (616) - - -------------------------------------------------------------- Net Income (Loss) per Common Share........................ $ .06 $ (.34) $ (.15) - - -------------------------------------------------------------- Weighted Average Common and Common Equivalent Shares Outstanding................................................ 5,609 4,086 4,086 ==============================================================
See notes to financial statements F-4
THE LAMAUR CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996, 1995 and 1994 (In thousands) Stock Series A Series B ------------ Subscriptions Accumulated Preferred Stock ------------------- Common Stock Additional Receivable Deficit Total Preferred Stock Paid-in Capital Shares Amount Shares Amount Shares Amount - - ------------------ - - ------------------ Balance, December 31, 1993 - - - - 2,498 $ 25 $ 523 - $ (1,605) $ (1,057) - - ------------------ Grants of non-cash stock option credits - - - - - - 211 - - 211 - - ------------------ Net loss - - - - - - - - (616) (616) - - ------------------ Balance, December 31, 1994 - - - - 2,498 25 734 - (2,221) $(1,462) ------------------ Issuance of Series A preferred stock 1,000 $ 8,500 - - - - - - - 8,500 - - ------------------ Issuance of common stock for cash - - - - 135 1 214 - - 215 - - ------------------ Issuance of common stock for services - - - - 156 1 236 - - 237 - - ------------------ Issuance of common stock for stock subscriptions - - - - 73 1 99 $ (100) - - - - ------------------ Grants of non-cash stock option credits - - - - - - 311 - - 311 - - ------------------ Conversion of notes payable to common stock - - - - 83 1 124 - - 125 - - ------------------ Reduction of stock subscriptions receivable - - - - - - - 50 - 50 - - ------------------ Net loss - - - - - - - - (1,382) (1,382) - - ------------------ Balance, December 31, 1995 1,000 8,500 - - 2,945 29 1,718 (50) (3,603) 6,594 ---------------- Issuance of Series B preferred stock - - 764 $ 5,000 - - - - - 5,000 - - ------------------ Issuance of common stock - - - - 2,643 26 18,086 - - 18,112 - - ------------------ Grants of non-cash stock option credits - - - - - - 132 - - 132 - - ------------------ Stock grants to employees - - - - 15 1 93 - - 94 - - ------------------ Dividends on preferred stock - - - - - - (233) - - (233) - - ------------------ Net income - - - - - - - - 553 553 - - ------------------ Balance, December 31, 1996 1,000 $8,500 764 $5,000 5,603 $ 56 $19,796 $ (50) $(3,050) $30,252 ======= ======= ===== ======== ====== ==== ======= ======== ======== =======
See notes to financial statements F-5
THE LAMAUR CORPORATION STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, --------------------------------------------------- 1996 1995 1994 Cash Flows From Operating Activities: Net income (loss)..................................... $ 553 $ (1,382) $ (616) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Noncash credits for services....................... 132 213 211 Issuance of common stock for services.............. 94 52 - Utilization of DowBrands credits................... (1,500) - - Gain on disposal of assets......................... (214) - - Depreciation and amortization...................... 1,365 144 2 Effect of changes in: Receivables..................................... (5,985) 3,779 - Inventories..................................... (559) 528 - Other assets.................................... (177) (94) - Payables........................................ 999 (2,643) 38 Accrued expenses................................ (478) 1,273 55 Net cash provided by (used in) operating activities (5,770) 1,870 (310) Cash Flows From Investing Activities: Additions to property, plant and equipment............ (3,110) (128) (2) Proceeds from sale of assets.......................... 225 - - Acquisition of PCD.................................... - (13,689) - Net cash used in financing activitiees............. (2,885) (13,817) (2) Cash Flows From Financing Activities: Revolving credit agreement, net....................... 1,764 8,050 - Borrowings of long-term debt.......................... - 6,465 185 Repayments of long-term debt.......................... (1,445) (300) - Proceeds from sales of common stock, net.............. 18,112 68 - Payment of preferred dividends........................ (33) - - Net cash provided by financing activities.......... 18,398 14,283 185 Net Increase (Decrease) in Cash and Cash Equivalents...... 9,743 2,336 (127) Cash and Cash Equivalents at Beginning of Period.......... 2,338 2 129 Cash and Cash Equivalents at End of Period................ $ 12,081 $ 2,338 $ 2 Supplemental Disclosures of Cash Flow Information: Cash paid during period for interest.................. $ 1,186 $ - $ 5 Noncash investing and financing activities: Capital lease obligations entered into ............ 401 - - Dividends payable preferred stock.................. 200 - - Common stock issued for subscriptions receivable... - 100 - Conversion of notes payable to common stock........ - 125 - Conversion of convertible subordinated note into preferred stock 5,000 - - Acquisition of PCD (see Note 1): Issuance of preferred stock........................ - 8,500 - Issuance of convertible subordinated note......... - 5,000 - Issuance of DowBrands credits..................... - 3,000 - Common stock issued for acquisition-related services - 185 - Reduction of subscription receivable through services - 50 - performed.. ==============================================================
See notes to financial statements F-6 THE LAMAUR CORPORATION - - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- 1. ORGANIZATION AND OPERATIONS Effective March 26, 1997, Electronic Hair Styling, Inc. changed its name to The Lamaur Corporation (the "Company"). The Company, a Delaware corporation, is the successor to Electronic Hair Styling, Inc., which was incorporated in the State of Washington on April 1, 1993 (the "Predecessor"). Effective March 18, 1996, Predecessor merged with and into its wholly-owned subsidiary, the Company. In connection with the merger, the Company issued .660 shares of common stock in exchange for each issued and outstanding share of Predecessor common stock. The accompanying Company financial statements, which are substantially identical to Predecessor's financial statements for periods prior to the merger, give retroactive effect to the merger. The Company develops, formulates, manufactures and markets personal hair care products, consisting of shampoos, conditioners, hair sprays, permanent wave products and other styling aids, for both consumer and professional hair care markets. The Company is also engaged in the early stages of research and development with respect to a new hair styling concept which is intended to combine electronics and chemicals to create new products designed to color, style and condition hair quickly, without the damaging side effects often experienced with most chemical-based hair styling products. The Company licensed the technology from Intertec Ltd., which is the sole limited partner of Intertec Holdings, L.P., the principal stockholder of the Company (see Note 10). Prior to the acquisition discussed below , the Company was a development stage company. Effective November 15, 1995, the Company acquired certain assets and liabilities of PCD, the Personal Care Division of DowBrands L.P. ("PCD"). DowBrands L.P. is a limited partnership whose managing partner is DowBrands Inc., a wholly owned subsidiary of The Dow Chemical Company (collectively "DowBrands"). PCD, which was renamed Lamaur after the acquisition, develops, manufactures, and markets hair care products. The acquisition was accounted for as a purchase and did not result in any goodwill. The total purchase price, including related acquisition costs, was $30.2 million consisting of $13.7 million in cash (funded with revolving and term credit facilities, see Note 6), $8.5 million (one million shares) of the Company's Series A convertible preferred stock (see Note 7),a $5.0 million convertible subordinated note (the "DowBrands's Convertible Note," Note 10) and $3.0 million of credits to be issued to DowBrands for future purchases. After giving effect to the conversion of Series A and Series B Preferred Stock (Note 7), DowBrands owns approximately 17% of the Company. The acquisition was accounted for as if it occurred on November 30, 1995, and the Company's financial statements include the results of PCD effective December 1, 1995. The purchase price was allocated to acquired assets and liabilities based on their estimated fair values as follows: (In thousands) Accounts receivable.................................. $ 16,458 Inventories.......................................... 11,668 Property, plant and equipment........................ 16,805 Other assets......................................... 35 Accounts payable and accrued expenses................ (14,268) Estimated fair value of assets and liabilities....... 30,698 Total purchase price................................. (30,187) Excess of estimated fair value of assets and liabilities over the purchase price.............................. $ 511 ----------------------------------------------------------- ================================================================================ The excess of the estimated fair value of assets and liabilities over the purchase price was recorded as a reduction of property, plant and equipment. F-7 The following unaudited pro forma summary results of operations for each of the years ended December 31, 1995 and 1994, gives effect to the acquisition of PCD as if it had occurred at the beginning of each period presented. The pro forma results have been prepared for comparative purposes only and do not purport to reflect the results of operations which would have actually occurred had the combination been effective on the dates indicated or which may occur in the future. December 31, 1995 1994 (In thousands, except per share amounts) - - ------------------ Total net sales $ 117,766 $ 121,277 Net loss $ (11,212) $ (124,856) Net loss per share $ (2.74) $ (30.56) 2. 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 reported period. Actual results could differ from those estimates. Cash and Cash Equivalent - Certain balances are held in a collateral account with the Company's lender (Note 6). After residing in the account for one day, such balances are applied against the Company's revolving debt. The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. These investments consist of A1+/P1 rated commercial paper which at December 31, 1996 were $11,496,000. Accounts Receivable, net includes an allowance for doubtful accounts. Receivables from DowBrands represent amounts due under a contract manufacturing agreement with DowBrands (see Note 10) and at December 31, 1995 included a $665,000 refund resulting from an adjustment to the initial purchase price paid to DowBrands, which was received in the first quarter of 1996. Inventories are stated at the lower of weighted average cost or market. Property, Plant, and Equipment is recorded at cost and is being depreciated using the straight-line method over the estimated useful lives of the related assets which range from 20 to 50 years for buildings and improvements and 3 to 10 years for machinery and equipment. In 1996, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 establishes recognition of impairment losses when a company no longer expects to recover the carrying value of a long-lived asset. The effect of adopting SFAS No. 121 was not material. Income Tax amounts in the financial statements related to income taxes are calculated using the principles of SFAS No. 109, "Accounting for Income Taxes." Under SFAS 109, prepaid and deferred taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax assets as future profits are not yet predictable and utilization of deferred tax assets are not determinable. Stock Based Compensation - The Company accounts for stock based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its plans. Net Income (Loss) Per Share was computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents, which consist of Series A preferred stock, warrants and options. In accordance with the rules of the Securities and Exchange Commission, common stock equivalents issued within one year of the Company's initial public offering, have been considered as outstanding since the inception of the Company and have been included in the calculation of weighted average common and common equivalent shares outstanding for all periods presented using the treasury stock method, even though they are antidilutive in loss periods. Fully diluted earnings per share has not been presented since the computation would not be dilutive. F-8 Concentration of Credit Risk - The Company sells the majority of its products to large U.S. retailers. Excluding sales to DowBrands, sales to the Company's largest customer was $19.1 million and $1.6 million, in 1996 and 1995, respectively. No other customer accounted for more than 10% of total net sales in 1996. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses, which have been insignificant. Fair Value of Financial Instruments - Generally accepted accounting principles require the disclosure of the fair value of certain financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. The Company estimated the fair values presented below using appropriate valuation methodologies and market information available as of year end. Considerable judgment is required to develop estimates of fair value, and the estimates presented aren't necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, these fair values were estimated at year-end, and current estimates of fair value may differ significantly from the amounts presented. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Accounts Receivable, Accounts Payable and Short-Term Borrowings - The carrying amount of these items approximates fair value. Debt - To estimate the fair value of debt the Company uses those interest rates that are currently available to it for issuance of debt with similar terms and remaining maturities. At December 31, 1996 and 1995, the carrying value of debt approximated fair value. Reclassification - Certain reclassifications have been made in the accompanying financial statements in order to conform with the 1996 presentation. 3. ACCOUNTS RECEIVABLE Accounts Receivable include the following: December 31, -------------------------------- 1996 1995 -------------------------------- (In thousands) - - ---------------------------------------- Accounts receivable trade.............. $ 17,380 $ 10,030 Non-trade accounts receivable......... 391 767 Allowance for doubtful accounts and returns (557) (492) Total................................... $ 17,214 $ 10,305 - - ------------------------------------------ ================================================================================ Write-offs to accounts receivable were $55,000 and $3,000 for the years ended December 31, 1996, and 1995, respectively. There were no write-offs to accounts receivable for the year ended December 31, 1994. F-9 4. INVENTORIES Inventories include the following: December 31, --------------------------------------------- 1996 1995 (In thousands) --------------------------------- Finished goods................... $ 7,324 $ 6,393 Work in process.................. 118 480 Raw materials.................... 4,257 4,267 Total............................ $ 11,699 $ 11,140 ---------------------------------- ================================================================================ 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, --------------------------------------------- 1996 1995 (In thousands) --------------------------------- Land and land improvements........ $ 1,662 $ 1,662 Buildings and improvements........ 5,253 4,981 Machinery and equipment........... 12,120 9,599 Construction in progress.......... 883 185 Total............................. 19,918 16,427 Less accumulated depreciation..... (1,443) (144) Total............................. $ 18,475 $ 16,283 ---------------------------------- ================================================================================ 6. LONG-TERM DEBT Long-term debt includes the following: December 31, --------------------------------------------- 1996 1995 (In thousands) ---------------------------------- Revolving loan.................... $ 9,814 $ 8,050 Term loan......................... 4,800 6,000 Obligations under capital leases... 381 - Total............................... 14,995 14,050 Less current portion................ (1,272) (1,200) Long-term portion...................$ 13,723 $ 12,850 ---------------------------------- ================================================================================ F-10 In November 1995, the Company obtained from Norwest Business Credit (Norwest) a $20.0 million credit facility. The facility consists of a $14.0 million revolving line of credit and a $6.0 million term loan. Under the terms of the revolving facility, the Company can borrow up to $14.0 million or a lesser amount as determined by the borrowing base (as defined in the loan agreement, comprising a percentage of eligible receivables and inventory). Interest is payable monthly on the revolving line of credit at 8.75% and 9.75% at December 31, 1996 and 1995, respectively. These rates are .5% and 1.25% above Norwest Bank's base rate. The term loan provided for a single advance of $6.0 million and is payable in monthly installments beginning January 1, 1996, of $100,000, plus interest.. Interest is payable monthly on the term loan at 9.0% and 10.0% at December 31, 1996 and 1995, respectively. These rates are .75 % and 1.50% above Norwest Bank's base rate . Both credit facilities mature on November 15, 1998. The credit facilities are secured by virtually all assets of the Company. Additionally, the credit facilities prohibit the payment of dividends, restrict the Company's ability to incur additional indebtedness and require the Company to comply with certain financial covenants regarding profitability, minimum net worth, leverage, capital expenditures and cash flow. The obligations under capital leases are at fixed interest rates ranging from 4.8% to 10.0% and are collateralized by equipment and a letter of credit for $319,000. Machinery and equipment under capital leases were $395,000 (net of $6,000 of accumulated depreciation) as of December 31, 1996. Minimum payments on operating leases obligations are for buildings, autos and office equipment. Future minimum principal payments on long term debt, capital lease and operating lease obligations are as follows:
Principal Payments on Minimum Payments on Long-Term Debt and Operating Lease Capital Lease Obligations Year Ending Obligations --------------------------------------------- ------------------------ ----------------------- (In thousands) 1997 $ 1,272 $ 270 1998 13,491 254 1999 81 188 2000 86 20 2001 65 4 2002 and thereafter - - Total minimum principal payments $ 14,995 $ 736 --------------------------------------------- ==============================================================================================================================
The fair value of the Company's long-term debt approximates the carrying amount based on the current rates offered to the Company on similar debt. 7. STOCKHOLDERS' EQUITY Effective May 22, 1996, the Company completed its initial public offering of 2,600,000 shares of its common stock. Net proceeds to the Company aggregated approximately $18.1 million. As of the closing date of the offering, the $5.0 million convertible note with DowBrands converted into 763,500 shares of Series B preferred stock (see below). Preferred Stock - The Company has authorized 4,000,000 shares of $.01 par value preferred stock, the terms of which are established at the time of issuance by the Board of Directors. In connection with the acquisition described in Note 1, the Company issued one million shares of Series A convertible preferred stock ("Series A Preferred"). The Series A Preferred has a liquidation preference of $10.00 per share or $10.0 million in the aggregate and has dividend and voting rights equal to common stock on an as-converted basis. Each share of Series A Preferred is convertible into .660 shares of common stock at the option of the holder; however, if the trading price of the common equals or exceeds $21.21 per share for a 30-day trading period, the Company may force conversion. F-11 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 the $5.0 million DowBrands Convertible Note (Note 1 and Note 10). 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. Equity Incentive Plans - The Company maintains three equity incentive plans for employees, consultants, directors and advisory board members. These plans are the 1996 Stock Incentive Plan, the 1996 Nonqualified Stock Option Plan and the Stock Option Plan for Non-Employee Directors and Advisory Board Members. In connection with Predecessor's merger with the Company (Note 1), all of Predecessor's outstanding stock options were assumed by the Company under the 1996 Stock Incentive Plan or The Stock Option Plan for Non-Employee Directors and Advisory Board Members. Stock options under these plans are issued at an option price not less than market value on date of grant. Total shares authorized under these three plans are 1,250,000, 250,000 and 150,000, respectively. Total shares available for grant under these plans were 18,650, 215,000 and 60,900, respectively, at December 31, 1996. 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, 1996. A summary of changes in common stock options during 1994, 1995, and 1996 is as follows:
Weighted Average Number of Shares Share Price Outstanding at December 31, 1993.......... 79,200 $ 1.52 Granted................................... 42,900 1.52 Outstanding at December 31,1994........... 122,100 1.52 Granted (average fair value of $1.04)..... 623,700 3.08 Canceled.................................. (9,900) 1.52 Outstanding at December 31,1995 735,900 2.84 Granted (average fair value of $2.33)..... 1,036,050 4.61 Canceled.................................. (416,500) 5.77 Exercised................................. (42,900) 1.64 Outstanding at December 31, 1996 1,312,550 $ 3.35
During 1996, 340,350 options were canceled at exercise prices ranging from $6.06 to $8.00 per share and reissued at $4.25 per share. The reissued shares are included in the above table. Options exercisable at December 31, 1996 and 1995, were 526,300 and 476,850, respectively. F-12 The following table summarizes information about the three equity incentive plans at December 31, 1996: Options Outstanding Options Excercisable - - -------------------------------------------------------- ------------------ Weighted-Average Weighted Remaining Average Weighted Range of Contractual Life Exercise Average Exercise (in years) Price Excercise Prices Number Number Price - - -------------------------------------------------------------------------------- $ 1.52 323,532 8.33 $1.52 316,932 $ 1.52 3.03 234,168 8.55 3.03 159,918 3.03 4.00 - 4.38 754,850 9.08 4.23 49,450 4.25 --------- ----------- 1,312,550 526,300 ========== =========== The Company applies APB No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock-based compensation plans. Had compensation cost been determined based on the fair value of the 1996 and 1995 stock option grants consistent with the requirements of SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 ---------------- --------------- (In thousands, except per share amounts) Net income (loss) As reported $ 553 $ (1,382) Pro forma $ (142) $ (1,479) Net income (loss) per share As reported $ .06 $ (.34) Pro forma $ (.03) $ (.36) ============================================ ================================================================================ In determining the above pro forma amounts under SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: expected volatility of 65% and 0%, risk-free interest rates of 6.4% and 6.4 %, expected lives of 6.5 years and 6.5 years and no expected dividends. The effects of applying SFAS123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards are anticipated. Employee Stock Plan - In November 1995, the Company adopted the Employee Stock Plan for the purpose of issuing up to an aggregate of 16,500 shares to former DowBrands employees at no cost to the employee. As of December 31, 1996, 15,575 shares were issued pursuant to this plan. Noncash Credits- Certain of the Company's employees and consultants have received a portion of their salary or fees, respectively, in the form of non-cash credits which may be applied to 80% of the exercise price of options granted to them. Such credits, $132,000 and $651,000 at December 31, 1996 and 1995, respectively, have been recorded as expense or cost of acquisition and additional paid-in capital as the related salary or consulting fees were earned. The Company ceased issuing any additional noncash credits at December 31, 1996. Stock Subscription Receivable - In 1995, the Company issued 66,000 shares of common stock for two 6% notes receivable of $50,000 each, due August 1996 and July 2001, respectively, or 30 days after the sale of such common stock, whichever is earlier. Warrants - In November 1995, the Company borrowed $225,000 from employees and stockholders. The borrowings were repaid in February 1996 with interest at 12% (Note 10). In addition, the lenders received warrants to purchase 74,250 shares of common stock at $3.03 per share. The warrants became exercisable in May 1996 and expire in November 1998. 8. EMPLOYEE BENEFIT PLANS The Company established an Employee Savings Plan (401K) during 1996 covering substantially all employees. Contributions to this plan are at the discretion of the Board of Directors, subject to certain limitations. No contributions were made by the Company to the plan during the year ending December 31, 1996. F-13 The Company does not provide other post-retirement benefits to its employees. 9. INCOME TAXES The provision (benefit) for income taxes has been offset by the change in the valuation allowance for the years ended December 31, 1996, 1995 and 1994, because the Company's net operating losses could not be carried back and future profits are not yet predictable and utilization of deferred tax assets are not determinable. The actual income tax provision (benefit) attributable to earnings from continuing operations for the years ended December 31, 1996, 1995, and 1994 differed from the amounts computed by applying the U.S. federal tax rate of 34 % to pretax earnings from continuing operations as a result of the following;
1996 1995 1994 (In thousands) ----------------------------------------------- Computed "expected" tax provision (benefit).. $ 188 $ (470) $ (209) State income taxes, net of federal income tax provision (benefit)........................... 37 (37) (16) Other items................................... 26 56 (16) Change in valuation allowance................. (251) 451 241 Provision for income tax...................... $ - $ - $ - -----------------------------------------------
The significant components of deferred income taxes as of December 31 are as follows (prior year amounts have been adjusted to reflect changes in current and deferred tax assets and liabilities): ================================================================================ 1996 1995 Tax effects of: (In thousands) - - ---------------------------- Current deferred tax assets and liabilities: Accounts Receivable, principally due to reserves. $ 212 $ 187 Inventories, partially due to additional costs inventoried for tax purposes 336 470 Employee benefits 316 29 Other (includes contingencies, other assets and other accruals) (86) 45 ----------- ---------- 778 731 Long-term deferred tax assets and liabilities: License fee 380 380 Noncash credits 297 254 Federal and state operating loss 1,089 758 Property, plant and equipment (768) (96) ----------- ---------- 998 1,296 ----------- ---------- Gross deferred tax assets 1,776 2,027 Valuation allowance (1,776) (2,027) Net deferred taxes $ - $ - - - ------------------------------------------- Due to the Company's net operating losses, the Company has not paid any income taxes. The Company has accumulated approximately $2.8 million of federal and state operating loss carryforwards (NOLs) at December 31, 1996. These NOLs expire as follows: ================================================================================ (In thousands) 2008.................................................... $ 340 2009.................................................... $ 598 2010.................................................... $ 1,006 2011.................................................... $ 877 F-14 10. RELATED PARTY TRANSACTIONS Related party obligations includes the following: December 31, 1996 1995 (In thousands) Promissory note for license rights.... $ 1,000 $ 1,000 DowBrands Convertible Note 8%......... - 5,000 DowBrands purchase credits............ 1,500 3,000 Short-term borrowings................. - 225 ------------ ------------ Total................................. 2,500 9,225 Less current portion.................. (1,500) (1,725) ------------ ------------ Long-term portion..................... $ 1,000 $ 7,500 - - -------------------------------------- ================================================================================ Promissory Note - In May 1993, the Company licensed its proprietary technology from Intertec Ltd., a limited partnership controlled by the Company's Chairman of the Board, pursuant to an exclusive 30-year, nonassignable, license agreement (the "License Agreement"). According to the terms of the License Agreement, the Company is required to pay a $1.0 million license fee, plus royalties, to Intertec Holdings, L.P. as agent for Intertec Ltd. Due to uncertainty regarding recoverability from future operations, the license fee was expensed in 1993. A note for the license fee ("Intertec Note") is payable in four equal annual installments of $250,000 commencing in May 1997. Interest , at 5.5% , is payable in arrears on the date each installment of principal is due. The Company will pay a royalty to Intertec Ltd. equal to (i) 1.0% of the Company's proceeds from any direct sales made by the Company of products, instruments or components using, or derived from, the technology, and (ii) 1.0% of the "revenue base" of the Company's sublicensees. The "revenue base" is the proceeds received by the 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 Company's technology reach $10.0 billion. No royalty fees have been paid to date. Stock Purchase Agreement - In March 1996, the Company and Intertec Holdings, L.P. entered into a stock purchase agreement pursuant to which Intertec Holdings, L.P. agreed to purchase from the Company, and the Company agreed to sell to Intertec Holdings, L.P. shares of common stock at $8.00 per share. The aggregate number of shares of common stock which Intertec Holdings, L.P. is required to purchase is 146,125 shares. Intertec Holdings, L.P. is obligated, subject to there being no event of default under the Company's loan agreements and certain other conditions, to purchase and pay for the shares in four equal installments commencing in May 1997. The deferred purchase price under the stock purchase agreement accrues interest from and after May 1996 at 5.5% per annum, payable with each installment. Intertec Holdings, L.P. may elect to accelerate one or more purchases under the stock purchase agreement on 30 days' prior notice to the Company. The Company may, at any time or from time to time, terminate Intertec Holding, L.P.'s purchase rights with respect to one or more of the installments, on 10 days' prior notice to Intertec Holdings, L.P.. DowBrands Convertible Note 8% - The $5.0 million DowBrands Convertible Note had an interest rate of 8.0% per annum, due quarterly, and was subordinated to any bank borrowings. Upon the completion of the Company's initial public offering, the $5.0 million DowBrands Convertible Note was converted into 763,500 shares of Series B preferred stock (Note 7). DowBrands Purchase Credits - In connection with the acquisition described in Note 1, DowBrands has agreed to purchase 100% of its requirements for certain DowBrands products from the Company for a period of two years beginning November 16, 1995. In connection with this requirements agreement, DowBrands agreed to accept, as part of the purchase price, $3 million of credits to be applied against future purchases. These credits will be issued to DowBrands through credit memos each quarter in the amount of $375,000 until the credits are fully used. At December 31, 1996 and 1995, $1.5 million of such credits were classified as a current liability. Revenues from this arrangement totaled $22.2 million and $1.6 million for the years ended December 31, 1996 and 1995. Services are priced based on direct material and labor costs incurred plus an agreed-upon profit margin. F-15 Short-term Borrowings - In November 1995, the Company borrowed $225,000 from employees and stockholders. The borrowings were repaid in February 1996 with interest at 12%. The lenders received warrants to purchase 74,250 shares of common stock (Note 7). Leases - The Company leases its offices and certain office equipment in Mill Valley, California, from Innovative Capital Management, Inc., (ICM) a related party, under a noncancellable lease expiring in September 1999 with monthly rentals of $10,786. The Company's Chairman of the Board and Chief Executive Officer, and his family own 100% of the outstanding stock of ICM. Rental expense was $99,975, $90,156, and $89,428 for 1996, 1995 and 1994, respectively. Legal Fees - During 1996 and 1995, the Company paid legal fees of approximately $676,000 and $150,000, respectively, to a law firm in which a Director of the Company is a partner. The legal fees related to general services, the acquisition of PCD, and the Company's initial public offering. 11. COMMITMENTS AND CONTINGENCIES The Company has various purchase and sales commitments and obligations entered into in the ordinary course of business which management does not believe will have a material adverse effect on its financial position or results of operations. F-16 INDEPENDENT AUDITORS' REPORT The Dow Chemical Company: We have audited the accompanying statements of operations of PCD, the Personal Care Division of DowBrands L.P., ("PCD"), a limited partnership whose managing partner is DowBrands Inc., a wholly owned subsidiary of The Dow Chemical Company, for the period from January 1, 1995 to November 30, 1995 and for the year ended December 31, 1994, and the related statements of net invested capital and cash flows for the periods then ended. These financial statements are the responsibility of PCD's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of operations of PCD for the period from January 1, 1995 to November 30, 1995, and for the year ended December 31, 1994, and the changes in its net invested capital, and its cash flows for the periods then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared from the separate records maintained by PCD and may not be indicative of the conditions that would have existed or the results of operations if PCD had been operated as an unaffiliated company. As discussed in Note 1, Statement of Financial Accounting Standards No. 109 requires that the consolidated amount of current and deferred tax expenses for a group that files a consolidated tax return be allocated among members of the group when those members issue separate financial statements. On the basis that PCD is a division and not a separate subsidiary, current and deferred income taxes have not been provided for in the accompanying financial statements. DELOITTE & TOUCHE LLP San Francisco, California January 26, 1996 F-17
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P. STATEMENTS OF OPERATIONS Period From January 1, 1995 to November 30, 1995 and the Year Ended December 31, 1994 Period from January 1, 1995 Year Ended December to November 30, 1995 31, 1994 ----------------------------------------------- (In thousands) Net Sales to DowBrands...................... $ 19,783 $ 19,253 Net Sales to Others......................... 89,913 102,024 Total Net Sales............................. 109,696 121,277 Cost of Goods Sold.......................... 67,088 71,735 Gross Margin................................ 42,608 49,542 Operating Expenses.......................... 42,344 57,830 Write-down of Assets........................ 11,000 120,100 Operating Loss.............................. (10,736) (128,388) Other: Interest expense from Dow................ (1,603) (5,805) Other income, net........................ 101 705 Total other........................... (1,502) (5,100) Net Loss.................................... $ (12,238) $ (133,488) ----------------------------------------------- ==============================================================================================================================
See notes to financial statements. F-18 PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P. STATEMENTS OF NET INVESTED CAPITAL Period From January 1, 1995 to November 30, 1995 and the Year Ended December 31, 1994 Period From January 1, 1995 to November 30, Year Ended December 31, 1995 1994 ------------------------------------ (In thousands) Net invested capital, beginning of period...................... $ 47,493 $ 169,058 Net loss for the period........ (12,238) (133,488) Net capital invested by (returned to) Dow..................... (3,489) 11,923 ---------- ------------- Net invested capital, end of period $ 31,766 $ 47,493 - - ------------------------------------ ================================================================================ See notes to financial statements. F-19
PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P. STATEMENTS OF CASH FLOWS Period From January 1, 1995 to November 30, 1995 and the Year Ended December 31, 1994 Period From January 1, 1995 to November 30, 1995 Year Ended December 31, 1994 (In thousands) Cash Flows From Operating Activities: Net loss............................................. $ (12,238) $ (133,488) Adjustments to reconcile net loss to net cash provided by (used in) by operating activities:............. Write-down of assets.............................. 11,000 120,100 Depreciation...................................... 2,010 3,956 Goodwill amortization............................. - 3,568 Changes in: Accounts receivable............................ 2,009 (3,299) Inventories.................................... 792 (1,342) Prepaid expenses and other..................... 215 101 Accounts payable and accrued expenses.......... 268 (790) Net cash provided by (used in) operating activities 4,056 (11,194) Cash Flows Used In Investing Activities:............. Additions to property, plant, and equipment....... (1,011) (902) Other............................................. 444 173 Net cash used in investing activities........ (567) (729) Cash Flows From Financing Activities: Net capital invested by (returned to) Dow......... (3,489) 11,923 Net Change in Cash................................... Cash at Beginning of Period.......................... 1 1 Cash at End of Period................................ $ 1 $ 1 ----------------------------------------------------------
See notes to financial statements F-20 PCD, THE PERSONAL CARE DIVISION OF DOWBRANDS L.P. NOTES TO FINANCIAL STATEMENTS Period From January 1, 1995 to November 30, 1995 and the Year Ended December 31, 1994 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Business - PCD, the Personal Care Division of DowBrands L.P., ("PCD") a limited partnership whose managing partner is DowBrands Inc., a wholly owned subsidiary of The Dow Chemical Company (collectively "Dow"), develops, manufactures and markets hair care products. Effective November 15, 1995, pursuant to an Asset Purchase Agreement, Dow sold substantially all of the assets and liabilities of PCD to Electronic Hair Styling, Inc. (the "Company") for $28.8 million comprised of $12.3 million in cash, a $5.0 million 8.0% subordinated note (convertible into Series B preferred stock), $8.5 million in Series A convertible preferred stock and $3.0 million in credits to be issued to Dow for future purchases. Through its Series A convertible preferred stock holdings, Dow will maintain an approximate 18% ownership interest in the voting equity of the Company. The sale was accounted for as if it occurred on November 30, 1995. Basis of Presentation - The accompanying financial statements present operations, net invested capital and cash flows of PCD on a historical basis. In 1987, DowBrands L.P. acquired PCD's predecessor for approximately $183 million. As a result of this acquisition, Dow's new accounting basis, determined in accordance with the purchase method of accounting, was "pushed-down" to PCD and, accordingly, the assets and liabilities of PCD were adjusted to reflect their fair values. The excess of Dow's cost of PCD over the estimated fair value of net assets acquired was recorded as goodwill and was being amortized over 40 years. During 1994, in contemplation of Dow's sale of PCD, Dow wrote down its investment in PCD by approximately $120 million. This write-down was applied to PCD's unamortized goodwill of $117 million and to property, plant and equipment of $3 million. In 1995 the proposed buyer withdrew its offer. During 1995, Dow further wrote down its investment in PCD by an additional $11 million, which was recorded as a reduction of property, plant and equipment. Relationship with Dow - PCD uses certain resources and administrative staff of Dow, including accounting, legal, tax, treasury, data processing, risk management, human resources and corporate relations. PCD is charged a fee for these services at an amount that Dow estimates to be based on actual time or costs incurred. These charges were $1,465,000 in 1994 and $733,500 for the period from January 1, 1995 to November 30, 1995 and are included in operating expenses. In addition, PCD is charged interest by Dow on an imputed amount of debt required to fund Dow's total capital investment in PCD. Such interest charges were $5,805,000 in 1994 and $1,603,000 for the period from January 1, 1995 to November 30, 1995. Income Taxes - Statement of Financial Accounting Standards No. 109 requires that the consolidated amount of current and deferred tax expense for a group that files a consolidated tax return be allocated among the members of the group when those members issue separate financial statements. However, management of PCD believes that such requirement applies only to separate financial statements of subsidiaries and since PCD is a division of Dow and not a separate subsidiary, current and deferred income taxes have not been provided for in the accompanying financial statements. Concentration of Credit Risk - PCD sells the majority of its products to large U.S. retailers. Excluding sales to Dow, sales to PCD's largest customer were $22.3 million in 1994 and $19.7 million for the period from January 1, 1995 to November 30, 1995. No other customer accounted for more than 10% of net sales in any period. PCD performs ongoing credit evaluations of its customers and generally does not require collateral. PCD maintains reserves for potential credit losses, which have been insignificant. 2. RELATED PARTY TRANSACTIONS PCD provides contract packaging and manufacturing services for Dow. Revenues from this arrangement totaled $19,253,000 in 1994 and $19,783,000 for the period from January 1, 1995 to November 30, 1995. Services are priced based on direct material and labor costs incurred plus an agreed upon profit margin. F-21 3. EMPLOYEE BENEFIT PLANS Through November 15, 1995, PCD's employees were eligible to participate in Dow's retirement, 401(k) and postretirement health and welfare benefit plans. Contributions to the plans by PCD on behalf of PCD's employees were approximately $1,657,000 in 1994 and $1,432,000 for the period from January 1, 1995 to November 30, 1995. 4. COMMITMENTS AND CONTINGENCIES PCD has various purchase and sales commitments and obligations entered into in the ordinary course of business which management does not believe will have a material adverse effect on PCD's financial statements. EX-3.3 2 EX-3.3 EXHIBIT-3.3 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF ELECTRONIC HAIR STYLING, INC. Electronic Hair Styling, Inc., a corporation duly organized and existing under the General Corporation of Law of the State of Delaware (the "Corporation"), does hereby certify that: I. The amendment to the Corporation's Certificate of Incorporation set forth below was duly adopted in accordance with the provisions of Section 242 and has been consented to in writing by the stockholders, in accordance with Section 228 of the General Corporation Law of the State of Delaware. II. Article FIRST of the Corporation's Restated Certificate of Incorporation is amended to read in its entirety as follows: FIRST: The name of the corporation is The Lamaur Corporation (hereinafter called the "Corporation"). IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed by Don G. Hoff, its authorized officer, on this 26th day of March, 1997. _/s/ Don G. Hoff_______ Title: Chairman and Chief Executive Officer EX-10 3 EX-10.3 FIRST AMENDMENT TO CREDIT AGREEMENT This Amendment is made as of the 15th day of March, 1996 by and between Electronic Hair Styling, Inc., a Washington corporation (the "Borrower"), and Norwest Business Credit, Inc., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into the Credit and Security Agreement dated as of November 16, 1995 (the "Credit Agreement"). The Lender has agreed to make a term loan, a real estate loan and certain loan advances to the Borrower pursuant to the terms and conditions set forth in the Credit Agreement. The term loan is evidenced by the Borrower's term note dated November 16, 1995 in the original principal amount of $2,300,000, the real estate loan is evidenced by the Borrower's real estate note dated November 16, 1995 in the original principal amount of $3,700,000 and the loan advances under the Credit Agreement are evidenced by the Borrower's revolving note dated as of November 16, 1995, in the maximum principal amount of $14,000,000, each of which notes are payable to the order of the Lender (collectively, the "Note"). All indebtedness of the Borrower to the Lender is secured pursuant to the terms of the Credit Agreement and all other Security Documents as defined therein (collectively, the "Security Documents"). The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. The Credit Agreement is hereby amended as follows: (a) Section 6.13 of the Credit Agreement is hereby amended by deleting the portion of said Section set forth in table form and replacing the same with the following: Book Net Worth For the Month Ending Plus Subordinated Indebtedness December 31, 1995 $10,050,000 January 31, 1996 $8,550,000 February 29,1996 $8,550,000 March 31, 1996 $8,250,000 April 30, 1996 $8,250,000 May 31, 1996 $8,250,000 June 30, 1996 $8,250,000 July 31, 1996 $8,550,000 August 31, 1996 $8,850,000 September 30,1996 $8,850,000 October 31, 1996 $9,250,000 November 30, 1996 $9,750,000 December 31, 1996 $10,050,000 (b) Section 6.14 of the Credit Agreement is hereby amended by deleting the portion of said Section set forth in table form and replacing the same with the following: For the Month Ending Leverage Ratio -------------------- -------------- January 31, 1996 4.06 to 1.0 February 29, 1996 4.35 to 1.0 March 31, 1996 4.39 to 1.0 April 30, 1996 4.45 to 1.0 May 31, 1996 4.26 to 1.0 June 30, 1996 4.36 to 1.0 July 31, 1996 4.52 to 1.0 August 31, 1996 4.49 to 1.0 September 30, 1996 4.14 to 1.0 October 31, 1996 3.86 to 1.0 November 30, 1996 3.59 to 1.0 December 31, 1996 3.58 to 1.0 (c) Section 6.15 of the Credit Agreement is hereby amended by deleting the portion of said Section set forth in table form and replacing the same with the following: For the Month Ending Net Income -------------------- ---------- January 31, 1996 ($1,500,000) February 29, 1996 ($1,500,000) March 31, 1996 ($1,500,000) April 30, 1996 ($1,800,000) May 31, 1996 ($1,800,000) June 30, 1996 ($1,800,000) July 31, 1996 ($1,500,000) August 31, 1996 ($1,200,000) September 30, 1996 ($1,200,000) October 31, 1996 ($800,000) November 30, 1996 ($300,000) December 31, 1996 -0- (d) Section 6.16 of the Credit Agreement is hereby amended by adding to said Section the following proviso: "; provided, however, that the Borrower may reduce the outstanding principal balance of the Subordinated Indebtedness by up to $5,000,000, solely out of the proceeds of the Borrower's initial public offering of its common stock, if and only if the net proceeds from any such initial public offering are equal to or in excess of $15,000,000." (e) Section 6.17 of the Credit Agreement is hereby amended by adding to said Section a new sentence, reading as follows: "In addition to the foregoing, the Lender shall have the right to modify (i) any or all of such covenants in its discretion, within 60 days after the close of the Borrower's initial public offering of its common stock, and (ii) Leverage Ratio and Book Net Worth Plus Subordinated Indebtedness covenants if at any time the value of the Borrower's Class A preferred stock is determined to be greater than $7,000,000." (f) Section 7.5 of the Credit Agreement is hereby amended by adding to the end of said Section the following proviso: "provided, further, however, that the Borrower may redeem up to $5,000,000 of its Class B preferred stock, solely out of the proceeds of the Borrower's initial public offering of the its common stock, if and only if the net proceeds from any such initial public offering are equal to or in excess of $15,000,000." (g) Section 8.1(q) of the Credit Agreement is hereby amended by adding to the end of said Section the following proviso: "; provided, however, that such minimum ownership percentage requirement shall be reduced to 24% of the voting stock of the Borrower if the Borrower raises at least $15,000,000 of net proceeds from the Borrower's initial public offering of its common stock." 3. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any loan or advance thereunder. 4. This Amendment shall be effective upon receipt by the Lender of an executed facsimile copy hereof, to be supplemented with an executed original hereof within two (2) business days, together with the following, in substance and form acceptable to the Lender in its sole discretion: (a) Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of the Borrower's Secretary dated as of November 16, 1995 in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of the Borrower's Secretary dated as of November 16, 1995, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. 5. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 6. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 7. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 8. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 9. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 10. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. ELECTRONIC HAIR STYLING, INC. By: _________/s/ DON G. HOFF_____ Its: _________________________________ NORWEST BUSINESS CREDIT, INC. By: ___________________________________ Its: _________________________________ 69493_4 SECOND AMENDMENT TO CREDIT AGREEMENT This Amendment is made as of the 30th day of August, 1996 by and between Electronic Hair Styling, Inc., a Delaware corporation (the "Borrower"), and Norwest Business Credit, Inc., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into the Credit and Security Agreement dated as of November 16, 1995, as amended by the First Amendment To Credit Agreement dated as of March 15, 1996 (the "Credit Agreement"). The Lender has agreed to make a term loan, a real estate loan and certain loan advances to the Borrower pursuant to the terms and conditions set forth in the Credit Agreement. The term loan is evidenced by the Borrower's term note dated November 16, 1995 in the original principal amount of $2,300,000, the real estate loan is evidenced by the Borrower's real estate note dated November 16, 1995 in the original principal amount of $3,700,000 and the loan advances under the Credit Agreement are evidenced by the Borrower's revolving note dated as of November 16, 1995, in the maximum principal amount of $14,000,000, each of which notes are payable to the order of the Lender (collectively, the "Note"). All indebtedness of the Borrower to the Lender is secured pursuant to the terms of the Credit Agreement and all other Security Documents as defined therein (collectively, the "Security Documents"). The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. The Credit Agreement is hereby amended as follows: (a) The definition of "Revolving Loan Floating Rate" set forth in Section 1.1 of the Credit Agreement is hereby amended, effective as of July 1, 1996, by deleting the phrase "one and one-quarter percent (1.25%)" therefrom and replacing the same with the phrase "one-half of one percent (0.50%)". (b) The definition of "Term Loan Floating Rate" set forth in Section 1.1 of the Credit Agreement is hereby amended, effective as of July 1, 1996, by deleting the phrase "one and one-half percent (1.50%)" therefrom and replacing the same with the phrase "three-fourths of one percent (0.75%)". (c) Section 1.1 of the Credit Agreement is hereby further amended by adding to said Section new definitions of "Availability", "L/C Amount", "Letter of Credit", "Obligation of Reimbursement", "Special Account" and "L/C Application", reading as follows: "Availability" means the Borrowing Base minus the outstanding balance under the Revolving Note, minus the L/C Amount. "L/C Amount" means the sum of (i) the face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. "L/C Application" means an application and agreement for letters of credit in Lender's then-current standard form. "Letter of Credit" has the meaning specified in Section 2.15 hereof. "Obligation of Reimbursement" has the meaning specified in Section 2.16 hereof. "Special Account" means a specified cash collateral account maintained by the Lender in connection with Letters of Credit, as contemplated by Sections 2.17 and 3.1a. hereof. (d) Section 2.1 of the Credit Agreement is hereby amended by deleting the first paragraph, as well as sub-paragraph (a) thereof in their entirety and replacing the same with the following: "Section 2.1 Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make Advances to the Borrower from time to time during the period from the date hereof to and including the Termination Date, or the earlier date of termination in whole of the Credit Facility pursuant to Sections 2.6 or 8.2 hereof, in an aggregate amount at any time outstanding not to exceed the Borrowing Base less the L/C Amount, which advances shall be secured by the Collateral as provided in Article III hereof. The Credit Facility should be a revolving facility and it is contemplated that the Borrower will request advances, make prepayments and request additional Advances. The Borrower agrees to comply with the following procedures in requesting Advances under this Section 2.1: (a) Borrower will not request any Advance under this Section 2.1, if, after giving effect to such requested Advance, the sum of the outstanding and unpaid Advances under this Section 2.1 or otherwise would exceed the Borrowing Base less the L/C Amount." (e) Section 2.5 of the Credit Agreement is hereby amended by adding thereto a new sub-section (e), reading as follows: "(e) Notwithstanding the interest payable pursuant to Sections 2.5(a), (b) and (c) hereof, the Borrower shall be liable to the Lender for interest hereunder of not less than $600,000 for each calendar year during the term of the Agreement other than any calendar year in which this Agreement is terminated prior to the Termination Date (such amount, the "Minimum Interest Charge"), and the Borrower shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under Sections 2.5(a), (b), and (c) hereof for each such calendar year on the day immediately succeeding the last day of each such calendar year." (f) Section 2.6(d) of the Credit Agreement is hereby amended by deleting clauses (c) and (d) thereof in their entirety, and by inserting the word "and" immediately before clause (b) thereof. (g) Section 2.8 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "Section 2.8 Payment. All payments of principal and interest on the Advances, the Term Loan, the Real Estate Loan, the Obligation of Reimbursement, the Commissions and Fees hereunder and amounts required to be paid to the Lender for deposit in the Special Account shall be made to the Lender in immediately available funds. The Borrower hereby authorizes the Lender to charge against the Borrower's account with the Lender an amount equal to the Obligation of Reimbursement, principal, accrued interest, commissions and fees from time to time due and payable to the Lender hereunder and amounts required to be paid to the Lender for deposit in the Special Account and further authorizes the Lender, in its discretion, and without request by Borrower to make an Advance under the Credit Facility to the extent necessary to pay any such amounts and any fees, costs or expenses hereunder or under the Loan Documents." (h) Section 2.11 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "Section 2.11 Liability Records. Lender may maintain from time to time, at its discretion, liability records as to any and all Advances, the Term Loan, the Real Estate Loan and the Obligation of Reimbursement made or repaid in interest accrued or paid under this Agreement. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. On demand by the Lender, the Borrower will admit and certify in writing the exact principal balance that the Borrower then asserts to be outstanding to the Lender for Advances, the Term Loan, the Real Estate Loan, and all Obligations of Reimbursement under this Agreement. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless specific written notice of exception is given to the Lender by the Borrower within thirty days after its receipt by the Borrower." (i) Section 2.12 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "Section 2.12 Setoff. The Borrower agrees that the Lender may at any time or from time to time, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to Borrower by the Lender, whether or not due, against any indebtedness owed to the Lender by the Borrower (for Advances, the Term Loan, the Real Estate Loan, any Obligations of Reimbursement or for any other transaction or event), whether or not due. In addition, each other Person holding a participating interest in any Advances, the Term Loan, the Real Estate Loan and/or any Letters of Credit made to or issued for the benefit of the Borrower by the Lender shall have the right to appropriate or setoff a deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest." (j) Section 2.13 of the Credit Agreement is hereby amended by deleting sub-section (b) thereof in its entirety and replacing the same with the following: "(b) Intentionally omitted." (k) Section 2.13 of the Credit Agreement is hereby further amended by deleting the number "four (4)" contained in subsection (c) thereof and replacing the same with the number "three (3)". (l) Section 2.13 of the Credit Agreement is hereby further amended by adding to said Section a new sub-section (d) reading as follows: "(d) The Borrower hereby agrees to pay the Lender a commission with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of one and one-half percent (1.5%) of the available amount of such Letter of Credit (as it may be changed from time to time) from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms, payable monthly in arrears, and prorated for any part of a full calendar month in which such Letter of Credit remains outstanding. The Borrower further agrees to pay the Lender, on written demand, the administrative fees charged by the Lender in the ordinary course of business in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Lender for services rendered on behalf of customers of the Lender generally." (m) The Credit Agreement is hereby amended by adding thereto the following new Sections 2.15, 2.16, 2.17 and 2.18, reading as follows: Section 2.15. Issuance of Letters of Credit. (a) The Lender may, in its sole discretion, issue one or more letters of credit for the account of the Borrower (each a "Letter of Credit") from time to time during the period from the date hereof until the Termination Date or until the Credit Facility is terminated pursuant to Section 8.2(a), whichever first occurs, in an aggregate amount at any time outstanding not to exceed the Borrowing Base less the sum of (i) all outstanding and unpaid Advances hereunder and (ii) the unpaid amount of the Obligation of Reimbursement. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into between the Borrower and the Lender, completed in a manner satisfactory to the Lender. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but in the event of inconsistency between the terms of any such L/C Application and the terms hereof, the terms hereof shall control. (b) The Borrower will not request the issuance of any Letter of Credit under this Section 2.15 if, after the issuance of such requested Letter of Credit, the sum of the face amounts of all issued and outstanding Letters of Credit would exceed the Borrowing Base less the sum of (i) all outstanding and unpaid Advances hereunder and (ii) the unpaid amount of the Obligation of Reimbursement. (c) No Letter of Credit shall be issued with an expiry date later than the Termination Date in effect as of the date of issuance. (d) Any request for the issuance of a Letter of Credit under this Section 2.15 shall be deemed to be a representation by the Borrower that (i) the condition set forth in Section 2.15(b), hereof has been met, and (ii) the statements set forth in Article V hereof are correct as of the time of the request. Section 2.16. Payment of Amounts Drawn Under Letters of Credit. Draws under any Letter of Credit shall be reimbursed to the Lender in accordance with the applicable L/C Application and as follows: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Lender may pay or incur relative to such draw, plus interest on all such amounts, accruing from the date such draft is honored through and including the date of payment by the Borrower at the interest rate then applicable to Advances hereunder, charges and expenses as set forth below (all such amounts are hereinafter referred to, collectively, as the "Obligation of Reimbursement"). (b) The Borrower hereby agrees to pay the Lender on demand interest on all amounts, charges and expenses payable by the Borrower to the Lender under this Section 2.16, accrued from the date any such draft, charge or expense is paid by the Lender until payment in full by the Borrower at the Default Rate. If the Borrower fails to pay to the Lender promptly the amount of its Obligation of Reimbursement in accordance with the terms hereof and the L/C Application pursuant to which such Letter of Credit was issued, the Lender is hereby irrevocably authorized and directed, in its sole discretion, to make an Advance in an amount sufficient to discharge the Obligation of Reimbursement, including all interest accrued thereon but unpaid at the time of such Advance, and such Advance shall be evidenced by the Revolving Note and shall bear interest as provided therein. Section 2.17 Special Account. If the Credit Facility is terminated pursuant to Section 8.2(a), or the Credit Facility is otherwise terminated for any reason whatsoever, while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the maximum aggregate amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder. Amounts in the Special Account may be invested as Lender shall determine, including in certificates of deposit issued by Lender. Any interest and earnings on such amounts shall be credited to the Special Account. The Borrower shall not be responsible for any losses from the investment or use of funds in the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to the Borrower's Obligation of Reimbursement, and shall not be subject to withdrawal by the Borrower so long as the Lender maintains a security interest therein; provided, however, that, upon the occurrence of any Event of Default, the Lender may apply such amounts to any of the Obligations in its sole discretion. The Lender agrees to transfer any balance in the Special Account to the Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law. Section 2.18 Obligations Absolute. The obligations of the Borrower arising under this Agreement shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by or on behalf of the Lender under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing." (n) Section 3.1 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "Section 3.1 Grant of Security Interest. The Borrower hereby assigns and grants to the Lender a security interest (collectively referred to as the "Security Interests") in the Collateral, as security for the payment and performance of each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender (whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, the Obligation of Reimbursement and all indebtedness of the Borrower arising under this Agreement, any L/C Application completed by the Borrower or any other loan or credit agreement or guaranty between Borrower and Lender, whether now in effect or hereafter entered into; all such debts, liabilities and obligations are herein collectively referred to as the "Obligations")." (o) The Credit Agreement is hereby amended by adding thereto a new Section 3.1a., reading as follows: "3.1a. Security Interest in Special Account. The Borrower hereby pledges and grants to the Lender a security interest in all funds held in the Special Account from time to time and all proceeds thereof, as security for the payment of all present and future Obligations of Reimbursement and all other amounts due hereunder or under the Loan Documents." (p) Section 3.2 of the Credit Agreement is hereby amended by deleting the parenthetical phrase contained in the first sentence of said Section and replacing the same with the following: "(but only after the occurrence of an Event of Default)". (q) Section 6.1(d) of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "(d) within 15 days of the end of each month, a schedule of assigned receivables, a collection report and such other documents regarding the Borrower's accounts receivable and collections as the Lender may request, on forms provided by the Lender; provided, however, that if the Borrower's Availability becomes less than $5,000,000, such reports and schedules shall be provided to the Lender on a weekly basis; provided, further, that if the Borrower's Availability becomes less than $5,000,000 during any weekly reporting period, such reports and schedules shall thereafter be provided to the Lender on a daily basis. (r) Section 6.1(j) of the Credit Agreement is hereby amended by adding the following phrase to the end of clause (i) thereof: "which seek a monetary recovery against the Borrower in excess of $50,000", and by adding the following phrase to the end of clause (ii) thereof: "with an aggregate invoice price in excess of $50,000". (s) Section 6.13 of the Credit Agreement is hereby amended by deleting the portion of said Section set forth in table form and replacing the same with the following: Book Net Worth For the Month Ending Plus Subordinated Indebtedness July 31, 1996 $28,310,000 August 31, 1996 $28,610,000 September 30,1996 $28,610,000 October 31, 1996 $29,010,000 November 30, 1996 $29,510,000 December 31, 1996 $29,810,000 January 31, 1997 $28,310,000 February 28, 1997 $28,310,000 March 31, 1997 $28,310,000 April 30, 1997 $28,310,000 (t) Section 6.14 of the Credit Agreement is hereby amended by deleting the portion of said Section set forth in table form and replacing the same with the following: For the Month Ending Leverage Ratio July 31, 1996 1.2 to 1.0 August 31, 1996 1.2 to 1.0 September 30, 1996 1.2 to 1.0 October 31, 1996 1.2 to 1.0 November 30, 1996 1.2 to 1.0 December 31, 1996 1.2 to 1.0 January 31, 1997 1.2 to 1.0 February 29, 1997 1.2 to 1.0 March 31, 1997 1.2 to 1.0 April 30, 1997 1.2 to 1.0 (u) Section 6.15 of the Credit Agreement is hereby amended by deleting the portion of said Section set forth in table form and replacing the same with the following: For the Month Ending Net Income July 31, 1996 ($1,500,000) August 31, 1996 ($1,200,000) September 30, 1996 ($1,200,000) October 31, 1996 ($800,000) November 30, 1996 ($300,000) December 31, 1996 -0- January 31, 1997 ($1,500,000) February 29, 1997 ($1,500,000) March 31, 1997 ($1,500,000) April 30, 1997 ($1,500,000) (v) Section 7.4(a) of the Credit Agreement is hereby amended by deleting the introductory paragraph thereof in its entirety and replacing the same with the following: "(a) The Borrower will not purchase or hold beneficially any stock or other securities or evidence of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except:". (w) Section 7.4(a) of the Credit Agreement is hereby further amended by deleting subparagraph (4) thereof in its entirety and re-numbering subparagraph (5) as subparagraph (4). (x) Section 7.10 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "Section 7.10 Capital Expenditures. The Borrower will not expend or contract to expend Capital Expenditures more than $3,400,000 in the aggregate during the Borrower's fiscal year ending December 31, 1996, or more than $2,000,000 in the aggregate during any fiscal year thereafter or more than $500,000 in any one transaction (except that the Borrower may expend up to $1,700,000 in 1996 in a single transaction for the purchase of a new computer system)." (y) Section 7.12 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "Section 7.12 Discounts, etc.. The Borrower will not, after notice from the Lender, grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold or modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower." (z) Section 7.17 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "Section 7.17 Salaries. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation." (aa) Section 8.1(a) of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "(a) Default in the payment of any interest on or principal of the Note, or failure to pay any amount specified in Section 2.16 hereof relating to the Borrower's Obligation of Reimbursement or shall fail to pay any amounts required to be paid for deposit in the Special Account under Section 2.17 hereof, in each case when the same becomes due and payable hereunder; or". (bb) Section 8.1(c) of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "(c) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement; provided, however, that if and as long as the Borrower maintains availability in excess of $4,000,000, the Borrower's non-compliance with the covenants set forth in Sections 6.12, 6.13, 6.14, 6.15 and/or 7.10 of this Agreement shall constitute a Event of Default or an Event of Default only if such non-compliance continues for in excess of 31 consecutive days; or". (cc) Section 8.2 of the Credit Agreement is hereby amended by deleting said Section in its entirety and replacing the same with the following: "(a) The Lender may, by notice, to the Borrower, declare the Credit Facility to be terminated, where upon the same shall forthwith terminate, and/or may refuse to issue or cause to be issued any Letter of Credit;". (dd) Section 8.2 of the Credit Agreement is hereby further amended by adding to said Section a new sub-section (g), reading as follows: "(g) The Lender may make demand upon the Borrower and, forthwith upon such demand, the Borrower will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to Section 2.17 hereof an amount equal to the maximum aggregate amount available to be drawn under Letters of Credit then outstanding assuming compliance with all conditions for drawing thereunder." (ee) Section 9.7 of the Credit Agreement is hereby amended by adding to said Section a new second sentence reading as follows: "Without limiting the foregoing in any way, the Borrower agrees to pay on demand all costs and expenses, including without limitation reasonable attorney's fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letters of Credit and any other document or Agreement related hereto or thereto, and the transactions contemplated hereby." 3. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any loan or advance thereunder. 4. The Borrower hereby acknowledges that, on July 6, 1996, the Borrower prepaid the Revolving Note in part in the amount of $8,000,000, out of the proceeds of the Borrower's initial public offering (the "Prepayment"). The Borrower further acknowledges and agrees that, pursuant to Section 2.6(d) of the Credit Agreement, the Borrower was obligated to pay to the Lender a prepayment premium in the amount of $160,000, in connection with the Prepayment and that the Borrower has not paid such prepayment premium. The Lender hereby waives the prepayment premium which would otherwise have been payable with respect to the Prepayment. The Borrower shall pay a fee in the amount of $80,000 if, but only if, and when the Revolving Note is prepaid in whole, and the Credit Facility is terminated, before November 15, 1998, except for any prepayment from the proceeds of a refinancing with the Lender or an affiliate of Lender. If the Borrower prepays the Revolving Note in full from the proceeds of a refinancing with the Lender or an affiliate of the Lender and subsequently prepays the loan(s) relating to such refinancing in whole before November 15, 1998, the $80,000 fee described in the immediately preceding sentence shall be due and payable in full to the Lender at the time of such prepayment. The provisions of this Section 4 are in addition to, and not in replacement or substitution of, the prepayment provisions set forth in the Credit Agreement, which shall remain in full force and effect, as otherwise amended in this Amendment. 5. This Amendment shall be effective upon receipt by the Lender of (a) an executed original hereof within two (2) business days, and (b) a Certificate of the Secretary of the Borrower in a form acceptable to the Lender. The Borrower shall pay to the Lender an amendment fee in the amount of $80,000 on or before February 28, 1997. 6. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 7. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 8. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 9. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 10. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 11. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. ELECTRONIC HAIR STYLING, INC. By: __/s/ JOHN D. HELLMANN ______ Its: _Vice President Finance__________ NORWEST BUSINESS CREDIT, INC. By: _/s/ MICHELLE GUETTER__________ Its: _/s/ AVP________________________ STATE OF MINNESOTA ) ) ss COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 30th day of August, 1996, by John Hellmann, the VP of Finance of Electronic Hair Styling, Inc., a California corporation, for and on behalf of said corporation. /s/ J.D. GRAHAM Notary Public STATE OF MINNESOTA ) ) ss COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 30th day of August, 1996, by Michelle Guetter, the AVP of Norwest Business Credit, Inc., a Minnesota corporation, for and on behalf of said corporation. /s/ J.D. GRAHAM Notary Public 89128_4 AMENDMENT AGREEMENT October 18, 1996 Reference is hereby made to (a) that certain Credit and Security Agreement dated November 16, 1995 by and between Electronic Hair Styling, Inc., a Delaware corporation (the "Company") and Norwest Business Credit, Inc., a Minnesota corporation ("NBCI"), as amended (the "Credit Agreement") and (b) that certain Collateral Account Agreement dated November 16, 1995 by and among the Company, NBCI and Norwest Bank Minnesota, National Association, a national banking association (the "Bank"), as the same may have been amended (the "Collateral Account Agreement"). 1. Section 4 of the Collateral Account Agreement is hereby amended by replacing the number "2" set forth therein and replacing the same with the number "1". 2. Section 6.10 of the Credit Agreement is hereby amended by deleting the number "2" set forth in the seventh sentence of said section and replacing the same with the number "1". 3. In consideration of the Bank's agreement to the amendments set forth above, NBCI agrees to indemnify and reimburse the Bank, within ten (10) days after demand, for any item which constitutes cash receipts of NBCI's "Collateral" (as defined in the Credit Agreement) deposited in the "Collateral Account" (as defined in the Collateral Account Agreement) which is returned unpaid and for which the Company does not reimburse the Bank, provided that the Bank shall notify NBCI within five business days of the day the Bank learns that any such item shall be or has been returned unpaid (whichever occurs first). This Agreement shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. Each party consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement, waives any argument that venue in any such forum is not convenient, and agrees that any litigation initiated by any of them in connection with this Agreement shall be venued in either the District Court of Hennepin County, Minnesota, or the United States District Court, District of Minnesota, Fourth Division. The parties waive any right to trial by jury in any action or proceeding based on or pertaining to this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. COMPANY: ELECTRONIC HAIR STYLING, INC. By: __/s/ JOHN D. HELLMANN_____________ Its: _Vice President______________________ BANK: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: __/s/ LYNN S. HULSTRAND__________ Its: _Vice President____________ NBCI: NORWEST BUSINESS CREDIT, INC. By: _/s/ MICHELLE GUETTER_____________ Its: __AVP________________________ THIRD AMENDMENT TO CREDIT AGREEMENT This Amendment is made as of the 30th day of January, 1997 by and between Electronic Hair Styling, Inc., a Delaware corporation (the "Borrower"), and Norwest Business Credit, Inc., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into the Credit and Security Agreement dated as of November 16, 1995, as amended by the First Amendment To Credit Agreement dated as of March 15, 1996 and by the Second Amendment to Credit Agreement dated as of August 30, 1996 (the "Credit Agreement"). The Lender has agreed to make a term loan, a real estate loan and certain loan advances to the Borrower pursuant to the terms and conditions set forth in the Credit Agreement. The term loan is evidenced by the Borrower's term note dated November 16, 1995 in the original principal amount of $2,300,000, the real estate loan is evidenced by the Borrower's real estate note dated November 16, 1995 in the original principal amount of $3,700,000 and the loan advances under the Credit Agreement are evidenced by the Borrower's revolving note dated as of November 16, 1995, in the maximum principal amount of $14,000,000, each of which notes are payable to the order of the Lender (collectively, the "Note"). All indebtedness of the Borrower to the Lender is secured pursuant to the terms of the Credit Agreement and all other Security Documents as defined therein (collectively, the "Security Documents"). The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. The Credit Agreement is hereby amended as follows: (a) Section 6.12 of the Credit Agreement is hereby amended by deleting the number "1.2" therefrom and replacing the same with the number "1.0". (b) Section 6.13 of the Credit Agreement is hereby amended by (i) deleting the number "$29,510,000" (the minimum figure applicable to November 30, 1996) therefrom and replacing the same with the number "$29,310,000", and (ii) deleting the number "$29,810,000" (the minimum figure applicable to December 31, 1996) therefrom and replacing the same with the number "$29,577,000". (c) Section 8.2 of the Credit Agreement is hereby amended by adding thereto sub-sections (b) through (f), together with the paragraph immediately following sub-section (f), in each case in form and substance identical to that which existed prior to the Second Amendment to Credit Agreement dated as of August 30, 1996, by and between the Borrower and the Lender. 3. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any loan or advance thereunder. 4. This Amendment shall be effective upon receipt by the Lender of (a) an executed original hereof within two (2) business days after the date hereof, and (b) a Certificate of the Secretary of the Borrower in a form acceptable to the Lender. 5. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 6. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 7. The Borrower has indicated to the Lender that the Borrower intends to redeem certain of its presently issued and outstanding common stock. Pursuant to Section 7.5 of the Credit Agreement, the Borrower is prohibited from making any payment on account of the purchase, redemption or any other retirement of any shares of its stock, without the Lender's prior written consent. The Lender hereby consents to the Borrowers's payment of up to $1,500,000 on account of the Borrower's redemption of its $.01 par value common stock, provided that such redemption is consummated, and such payment is made, on or before July 31, 1997. Except as set forth in the immediately preceding sentence, the execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a consent to or waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 8. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 9. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 10. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. ELECTRONIC HAIR STYLING, INC. By: _/s/ JOHN D. HELLMANN____________ Its: __Vice President________________ NORWEST BUSINESS CREDIT, INC. By: __/s/ MICHELLE GUETTER_____________ Its: ___AVP_________________________ STATE OF MINNESOTA ) ) ss COUNTY OF ANOKA ) The foregoing instrument was acknowledged before me this 30th day of January, 1997, by John D. Hellmann, the Vice President Finance of Electronic Hair Styling, Inc., a California corporation, for and on behalf of said corporation. /s/ KATHLEEN M. KELLY Notary Public STATE OF MINNESOTA ) ) ss COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 30th day of January, 1997, by Michell Guetter, the AVP of Norwest Business Credit, Inc., a Minnesota corporation, for and on behalf of said corporation. /s/ CONSTANCE NESBITT Notary Public 106098-3 Electronic Hair Styling, Inc. Certificate of Secretary I, John D. Hellmann, Secretary of Electronic Hair Styling, Inc., a Delaware corporation (the "Company"), hereby certify that: (a) attached hereto as Exhibit A is a true and complete copy of resolutions duly adopted by the Board of Directors of the Company, and such resolutions have not been amended, modified or rescinded, and remain in full force and effect; (b) the Certificate of Incorporation of the Company (the "Certificate"), and the By-Laws of the Company (the "By-Laws"), in the forms delivered to Norwest on August 30, 1996 pursuant to a Secretary's Certificate dated August 30, 1996, delivered in connection with the execution and delivery of that certain Second Amendment to the Credit Agreement (the "Amendment"), between the Company and Norwest, are true and correct copies of the same, including all amendments thereto, and said Certificate and By-Laws have not been further amended except as set forth in any amendments attached hereto, and no action has been taken by the Company or its shareholders, directors or officers in contemplation of any such amendment, and are in full force and effect on the date hereof; and (c) each person who, as an officer of the Company, signed the Amendment was duly elected or appointed, qualified and acting as such officer at the time of signing and delivery, and the signature of such person appearing on the Amendment is a genuine signature. In witness whereof, I have hereunto signed this Certificate as of this 30 day of January, 1997. _/s/ JOHN D. HELLMANN__________________ John D. Hellmann, Secretary Exhibit A to Certificate of Secretary RESOLVED, that the Chairman of the Board and Chief Executive Officer, and the Vice President, Finance and Chief Financial Officer, acting alone or together, be, and each of them hereby is authorized to execute, deliver and perform a certain Third Amendment to Credit Agreement (the "Amendment") by and between the Company and Norwest Business Credit, Inc. ("Norwest"), and any and all other documents and agreements required by Norwest in connection with the Amendment, the approval and acceptability of the Amendment and all such other documents and agreements to the Company to be conclusively evidenced by the execution thereof by either of the above referenced officers. EX-10 4 EX-10.8 EXHIBIT-10.8 Electronic Hair Styling, Inc. 1996 NONQUALIFIED STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Plan are: to attract and retain the best available personnel for positions of responsibility, to provide additional incentive to Employees, Directors and Consultants, and to promote the success of the Company's business. Nonqualified Stock Options may be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock option plans and issuance of stock and stock options under U. S. state corporate laws, U.S. federal and state securities laws, the Code and the applicable laws of any foreign country or jurisdiction where Options will be or are being granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a Committee appointed by the Board in accordance with Section 4 of the --------- Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means Electronic Hair Styling, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company to render services. The term "Consultant" shall not include any person who is also an Officer or Director of the Company. (i) "Director" means a member of the Board. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the ---------- Code. (k) "Employee" means any person, except for Officers and Directors, employed by the Company. (l) "Fair Market Value" means the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable. (m) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (n) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (o) "Option" means a stock option granted pursuant to the Plan. Options granted under the Plan are nonstatutory stock options. (p) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (q) "Optioned Stock" means the Common Stock subject to an Option. (r) "Optionee" means an Employee, Director or Consultant who holds an outstanding Option. (s) "Plan" means this Nonstatutory Stock Option Plan. (t) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the ----- Plan. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 250,000 Shares; provided that no more than 20,000 Shares may be optioned and sold to Directors. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated or the Shares have been allocated to another plan of the Company) 4. Administration of the Plan. (a) Administration. The Plan shall be administered by (i) the Board or (ii) a Committee designated by the Board, which Committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(l) of the Plan; (ii) to select the Consultants, Directors and Employees to whom Options may be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (ix) to modify or amend each Option (subject to Section 14(b) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xi) to determine the terms and restrictions applicable to Options; (xii) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld; and (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Stock Options may be granted to Employees, Directors and Consultants. 6. Limitations. Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship or as a Director with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting or director relationship at any time, with or without cause. 7. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect until terminated under Section 14 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Notice of Grant. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until either the completion of a service period or the achievement of performance criteria with respect to the Company or the Optionee. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting or Director Relationship. In the event an Optionee ceases to be an Employee or Consultant or Director, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Notice of Grant to the extent that he or she is entitled to exercise it on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the absence of a specified time in the Notice of Grant, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the above, in the event of an Optionee's change in status as a Consultant, Employee or Director, the Optionee's status as an Employee, Consultant or Director shall not automatically terminate solely as a result of such change in status. (c) Disability of Optionee. In the event an Optionee ceases to be an Employee or Consultant or Director as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within twelve (12) months (or such other period of time as is determined by the Administrator) from the date of termination, but only to the extent that the Optionee is entitled to exercise it on the date of termination (and in no event later than the expiration of the term of the Option as set forth in the Notice of Grant). If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee, the Option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable and may be exercised at any time within twelve (12) months (or such other period of time as is determined by the Administrator) following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 11. Non-Transferability of Options. Unless otherwise specified by the Administrator in the Option Agreement, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of Shares of stock of any class, or securities convertible into Shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for all Options to vest and for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be vested and exercisable. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation, or in the event that the successor corporation refuses to assume or substitute for the Option, the Option shall fully vest and the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested and exercisable. If an Option is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Date of Grant. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. The Plan shall terminate upon the approval by stockholders of a new plan which provides that Shares under this Plan, including unissued Shares and Shares which become available as a result of termination of Options, shall be reserved under the new plan. (b) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with all Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Liability of Company. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. EX-10 5 EX-10.9 EXHIBIT-10.9 SUBLEASE made as of the 1st day of October, 1996, by and between INTERTEC, A DIVISION OF INNOVATIVE CAPITAL MANAGEMENT, INC., a California corporation, having an office at 25 Corte Madera Avenue, Mill Valley, California 94941 (hereinafter called "Sublandlord"), and ELECTRONIC HAIR STYLING, INC., a Delaware corporation, having an office at One Lovell Avenue, Mill Valley, California 94941 (hereinafter called "Subtenant"). W I T N E S S E T H: WHEREAS: A. By lease (hereinafter called the "Overlease") dated as of October 1, 1996, RAINIER CONCEPTS, LTD. (hereinafter called "Overlandlord") leased to Sublandlord the building known as One Lovell Avenue, Mill Valley, California (hereinafter called the "Building") in accordance with the terms of the Overlease. A copy of the Overlease (from which certain terms which do not relate to Subtenant's obligations hereunder have been deleted) has been previously delivered by Sublandlord to Subtenant; and B. Sublandlord and Subtenant desire to consummate a subleasing of a portion of the Building on terms and conditions contained in this agreement (hereinafter called the "Sublease"). NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, it is hereby agreed as follows: 1. 1.1. Sublandlord hereby leases to Subtenant and Subtenant hereby hires from Sublandlord the portion of the Building (approximately 6,008 square feet) shown on Exhibit A annexed hereto and made a part hereof (hereinafter called the "Premises") for a term (hereinafter called the "Sublease Term") to commence on the date hereof (hereinafter called the "Sublease Commencement Date") and to end on the day preceding the expiration of the Overlease, as same may be extended in accordance with the provisions thereof (hereinafter called the "Sublease Expiration Date"), at an annual fixed rent (hereinafter called "fixed annual rent") of $108,144 per annum, to be paid by Subtenant to Sublandlord at Sublandlord's office (or such other location as Sublandlord shall designate) in equal monthly installments of $9,012 in advance, on the first day of each month during the Sublease Term without any setoff, offset, abatement or reduction whatsoever. Sublandlord shall not, without the consent of Subtenant (which, so long as Subtenant is fully performing hereunder, may be withheld in Subtenant's sole discretion), modify the Overlease or exercise any option granted to Sublandlord so as to provide for the termination of the Overlease prior to the Sublease Expiration Date. 1.2. Subtenant shall also be permitted to use the fixtures and equipment listed on Exhibit B annexed hereto and made a part here during the term of this Sublease for an additional monthly charge of $1,774.00 per month. 2. 2.1. Subtenant shall not (a) assign this Sublease, nor (b) permit this Sublease to be assigned by operation of law or otherwise, nor (c) underlet all or any part of the Premises nor (d) permit the Premises or any desk space therein to be occupied by any person(s) other than employees or consultants of Subtenant, without first obtaining: (i) Overlandlord's consent and all other required consents and requirements with respect to such assignment or subletting as set forth in and pursuant to the Overlease, and (ii) Sublandlord's consent which, so long as Overlandlord's consent is obtained, shall not be unreasonably withheld or delayed and shall be given or withheld within the time periods provided therefor under the Overlease. 2.2. Sublandlord shall cooperate with Subtenant and, after notice, shall, at Subtenant's expense, use reasonable good faith efforts in seeking to obtain Overlandlord's consent and/or performance under the Overlease. 2.3. If Overlandlord shall default in any of its obligations with respect to the Premises, or there shall exist a bona fide dispute with Overlandlord under the terms, covenants, conditions, provisions and agreements of this Sublease and/or the Overlease and Subtenant notifies Sublandlord in writing that Subtenant has previously notified Overlandlord of such dispute and that such default or notice has been disregarded or not reasonably satisfactorily acted upon, then Sublandlord shall notify Overlandlord of such default or dispute in its name on Subtenant's behalf. Subtenant shall be entitled to participate with Sublandlord in the enforcement of Sublandlord's rights against Overlandlord, but Sublandlord shall have no obligation to bring any action or proceeding nor to take any steps to enforce Sublandlord's rights against Overlandlord. If, after written request from Subtenant, Sublandlord shall fail or refuse to take appropriate action for the enforcement of Sublandlord's rights against Overlandlord with respect to the Premises, Subtenant shall have the right to take such action in its own name, and for such purpose and only to such extent, all of the rights of Sublandlord under the Overlease are hereby conferred upon and assigned to Subtenant and Subtenant hereby is subrogated to such rights to the extent that the same shall apply to the Premises. If any such action against Overlandlord, in Subtenant's name, shall be barred by reason of lack of privity, non-assignability or otherwise, Subtenant may take such action in Sublandlord's name provided Subtenant has obtained the prior written consent of Sublandlord (in each instance), which consent shall not be unreasonably withheld or delayed (and if it is apparent that Subtenant must act promptly in order to preserve its rights, any failure on Sublandlord's part to respond to Subtenant's request to take action in Sublandlord's name within ten (10) days after Subtenant's request shall be automatically deemed Sublandlord's consent thereto), and in connection therewith, Subtenant does hereby agree to indemnify and hold Sublandlord harmless from and against all liability, loss or damage including, without limitation, reasonable attorneys' fees and disbursements, which Sublandlord shall suffer by reason of such action. In any event, Subtenant shall not be allowed any abatement or diminution of fixed rent or additional rent under this Sublease because of Overlandlord's failure to perform any of its obligations under the Overlease. 2.4. If Sublandlord elects to pursue any remedy provided for in the Overlease in addition to or in cooperation with Subtenant, Subtenant shall not be required to reimburse Sublandlord for its expenses in connection therewith if such reimbursement would be in addition to its own expenses, so that Subtenant shall only be required to pay legal fees and expenses one time (per occasion) in connection with the pursuit of its remedies under the Overlease. 3. 3.1. Except as herein otherwise expressly provided and except for the obligation to pay rent and additional rent under the Overlease, all of the terms, covenants, conditions, benefits, enjoyments, privileges, services, and provisions set forth in the Overlease are hereby incorporated in, and made a part of this Sublease, and such rights and obligations as are contained in the Overlease are hereby imposed upon and granted to the respective parties hereto; the Sublandlord herein being substituted for the Landlord in the Overlease and the Subtenant herein being substituted for the Tenant named in the Overlease; provided, however, that Sublandlord herein shall not be liable for any defaults by Overlandlord other than those caused (i) solely as a result of the gross negligence or wilful misconduct of Sublandlord or (ii) by breach of the Underlying Lease not occasioned in whole or in part by any act, omission or breach hereunder by Subtenant; and, if Overlandlord is not the fee owner, the owner in fee of the land and Building of which the Premises are a part. If the Overlease shall be terminated for any reason during the term hereof, then and in that event this Sublease shall thereupon automatically terminate and Sublandlord shall have no liability to Subtenant by reason thereof. Upon the termination of this Sublease, whether by forfeiture, lapse of time or otherwise, or upon the termination of Subtenant's right to possession, Subtenant will at once surrender and deliver up the Premises in good condition and repairs, reasonable wear and tear excepted. 3.2. For the purposes of this Sublease, the Witnesseth clause, Articles 2, 15, 34, 39 and 43 of the Overlease shall not be deemed incorporated in or made a part hereof and shall be deemed deleted from the Overlease for purposes of this Sublease. 3.3. Notwithstanding anything to the contrary contained elsewhere herein, in the event that Sublandlord's rights under the Overlease are terminated or Sublandlord surrenders the Premises, for any reason whatsoever, Overlandlord shall have the right (but not the obligation) to recognize Subtenant as a direct tenant of the Premises, upon notice to Subtenant given on or before the date which is fifteen (15) days following the termination of Sublandlord's rights under the Overlease or the surrender of the Premises, in which event Subtenant shall attorn to and recognize Overlandlord as Landlord (with Subtenant as Tenant) under the Overlease upon all of the terms and conditions thereof; provided, however, that in such event, the financial terms (i.e. the rent, additional rent and other charges) under the Overlease shall be deemed automatically modified so that such financial terms shall in no event be more onerous than the financial terms contained in this Sublease. 4. 4.1. Subtenant has examined the Premises, is aware of the physical condition thereof, and agrees to take the same "as is," with the understanding that there shall be no obligation on the part of Sublandlord to incur any expense whatsoever in connection with the preparation of the Premises for Subtenant's occupancy thereof. 4.2. Notwithstanding anything to the contrary contained in Section 4.1 above, Sublandlord represents that, to the best of its knowledge, the cabling and phone switching presently existing in the Premises is in working order as of the date hereof. 5. 5.1. Subtenant agrees that the Premises shall be occupied only as executive, administrative and general offices for Subtenant's business. 6. 6.1. This Sublease is conditioned upon the consent thereto by Overlandlord which consent shall be evidenced by Overlandlord's signature appended hereto or a separate consent in the form utilized by Overlandlord for such purposes. 6.2. Except as otherwise specifically provided herein, wherever in this Sublease Subtenant is required to obtain Sublandlord's consent or approval, Subtenant understands that Sublandlord may be required to first obtain the consent or approval of Overlandlord. Sublandlord agrees to reasonably cooperate (without expenditure of funds or resort to or threat of litigation) with Subtenant in obtaining Overlandlord's consent or approval as provided in the Overlease. 7. 7.1. Subtenant acknowledges that the services to be rendered to the Premises are to be rendered by Overlandlord. Anything in this Sublease to the contrary notwithstanding, if there exists a breach by Sublandlord of any of its obligations under this Sublease and, concurrently, a corresponding breach by Overlandlord under the Overlease of its obligations under the Overlease exists, then and in such event, Subtenant's sole remedy against Sublandlord in the event of any breach of obligations under this Sublease shall be the right to pursue a claim in the name of Sublandlord against Overlandlord, and Sublandlord agrees that it will, at Subtenant's expense, cooperate with Subtenant in the pursuit of such claim. 7.2. Anything contained in any provisions of this Sublease to the contrary notwithstanding, Subtenant agrees, with respect to the Premises, to comply with and remedy any default claimed by Overlandlord and caused by Subtenant, within the period allowed to Sublandlord as tenant under the Overlease, even if such time period is shorter than the period otherwise allowed in the Overlease, due to the fact that notice of default from Sublandlord to Subtenant is given after the corresponding notice of default from Overlandlord. Provided that the corresponding payment has been made by Subtenant to Sublandlord hereunder, Sublandlord agrees to pay the then due installment(s) of rent and additional rent due under the Overlease. Sublandlord agrees to forward to Subtenant, upon receipt thereof by Sublandlord, a copy of each notice of default received by Sublandlord in its capacity as tenant under the Overlease. Subtenant agrees to forward to Sublandlord, upon receipt thereof, copies of any notices received by Subtenant with respect to the Premises from Overlandlord or from any governmental authorities. Sublandlord agrees that in the event Sublandlord receives any abatement under the Overlease as a result of Overlandlord's failure to provide services thereunder, Subtenant shall be entitled to a corresponding abatement hereunder. 8. 8.1. Sublandlord represents (a) that it is the holder of the interest of the tenant under the Overlease, (b) that the overlease is in full force and effect and (c) that the copy of the Overlease delivered to Subtenant, as referenced above, remains unamended and unmodified. 9. 9.1. This Sublease is subject to, and Subtenant accepts this Sublease subject to, any amendments and supplements to the Overlease hereafter made between Overlandlord and Sublandlord, provided that any such amendment or supplement to the overlease will not prevent or adversely affect the use by Subtenant of the Premises in accordance with the terms of this Sublease, increase the obligations of Subtenant or decrease its rights under the Sublease or in any other way materially adversely affect Subtenant. 9.2. This Sublease is subject and subordinate to the Overlease and to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which the Premises are a part and all renewals, modifications, replacements and extensions of any of the foregoing. This Section 9.2 shall be selfoperative and no further instrument of subordination shall be required. To confirm such subordination, Subtenant shall execute promptly any certificate that Sublandlord may request. 10. 10.1. Subtenant covenants, represents and warrants that Subtenant has had no dealings or communications with any broker or agent in connection with the consummation of this Sublease, and Subtenant covenants and agrees to pay, hold harmless and indemnify Sublandlord from and against any and all cost, expense (including reasonable attorneys' fees) or liability for any compensation, commissions or charges claimed by any broker or agent other than such brokers with respect to this Sublease or the negotiation thereof. 11. 11.1. Subtenant acknowledges that it is familiar with the provisions of the Overlease. In the event any payment of Additional Rent (as defined in the Overlease) is due and owing by Sublandlord to Overlandlord during the term of this Sublease, then Subtenant shall pay as additional rent pursuant to this Sublease an amount equal to 100% of such Additional Rent. At any time payment of any Additional Rent is due under the Overlease, Sublandlord may deliver to Subtenant a statement with respect to such payment, within ten (10) days after delivery of such statement, Subtenant shall pay to Sublandlord additional rent determined as aforesaid in this Section 11.1. 12. 12.1. Any notice, demand or communication which, under the terms of this Sublease or under any statute or municipal regulation must or may be given or made by the parties hereto, shall be in writing and given or made by either hand delivery, overnight delivery by a nationally recognized courier service or by mailing the same by certified mail, return receipt requested, addressed to the party for whom intended at its address set forth above. Either party, however, may designate such new or other address to which such notices, demands or communications thereafter shall be given, made or mailed by notice given in the manner prescribed herein. Any such notice, demand or communication shall be deemed given or served, as the case may be, on the date of first attempted delivery, if by hand or overnight delivery, or three (3) days after delivery to the Post Office, if delivery by certified mail, return receipt requested. 13. 13.1. Subtenant may make no changes, alterations, additions, improvements or decorations in, to or about the Premises without Sublandlord's prior written consent in each instance. 14. 14.1. So long as Subtenant pays all of the rent and additional rent due under this Sublease and performs all of Subtenant's other obligations hereunder, Subtenant shall peacefully and quietly have, hold and enjoy the Premises subject, however, to the terms, provisions and obligations of this Sublease and the Overlease. 14.2. Sublandlord agrees that, in the event Sublandlord defaults under the terms, covenants, conditions, provisions and agreements of the Overlease (provided same was not caused by Subtenant or was the result of Subtenant's actions or inactions with respect to Subtenant's obligations hereunder), then in such event, Sublandlord covenants and agrees to defend, indemnify and hold Subtenant harmless from any and all claims, causes of action against or damages to Subtenant resulting solely and directly therefrom. 15. 15.1. This Sublease may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 15.2. This Sublease shall not be binding upon Sublandlord unless and until it is signed by Sublandlord and delivered to Subtenant. This Section 15.2 shall not be deemed to modify the provisions of Article 6 hereof. 15.3. This Sublease constitutes the entire agreement between the parties and all representations and understandings have been merged herein. 15.4. This Sublease shall inure to the benefit of all of the parties hereto, their successors and (subject to the provisions hereof) their assigns. 15.5. This Sublease may be executed in one or more counterparts, all of which together shall constitute one and the same instrument. 15.6. Nothing herein contained shall be deemed to release Sublandlord from its obligations under the Overlease, which such obligations shall remain throughout the term of the Overlease. 15.7.This Sublease shall be governed by or construed in accordance with the laws of the State of California. 16. 16.1. "Change of Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board of directors of the Company as a result of which fewer than a majority of the directors are "Incumbent Directors." "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors with the affirmative votes (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for election as a director without objection to such nominations) of at least three-quarters of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors of the Company); or (iii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 16.2 Notwithstanding any other provision in this Sublease or the Overlease, in the event of a Change of Control Sublandlord may at any time thereafter terminate the term of this Sublease provided in Section 1.1 upon 30 days written notice to Subtenant. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. INTERTEC, A DIVISION OF INNOVATIVE CAPITAL MANAGEMENT, INC. Sublandlord By_____/s/ Sandra L. Hoff_____ Sandra L. Hoff, Vice President ELECTRONIC HAIR STYLING, INC., Subtenant By _/s/ John D. Hellmann_____________ John D. Hellmann, Vice President, Chief Financial Officer THE FOREGOING IS CONSENTED TO BY RAINIER CONCEPTS, LTD., Overlandlord By__/s/ Sandra L. Hoff______ Partner EX-11 6 EX-11.1 EXHIBIT-11.1 THE LAMAUR CORPORATION -------------------------------------------------- COMPUTATION OF PER SHARE EARNINGS $(000) -------------------------------------------------- Years Ended December 31, 1996 1995 1994 Net Income (loss) $ 553 $(1,382) $ (616) - - --------------------- Dividends on Series B Preferred Stock (233) - - ------------------------------ --------------- ------------ ------------ Net Income (Loss) Available to Common Shareholders $ 320 $(1,382) $ (616) Number of Shares: Weighted Average Shares Outstanding 4,541 2,667 2,498 Effect of Shares Issued within One Year of Public Offering 16 294 463 Incremental Shares from the Exercise of Warrants and Options (1) 392 465 465 Shares Issued Upon the Conversion of Series A Preferred Stock 660 660 660 Total Weighted Average Common and Common Equivalent Shares Outstanding 5,609 4,086 4,086 =========== ============= ============= Net Income (Loss) Per Share $ .06 $ (.34) $ (.15) =========== ============== ============ (1) In accordance with the rules of the Securities and Exchange Commission, common stock and common stock equivalents of the Company issued within one year of its initial public offering have been considered as outstanding since the inception of the Company using the treasury stock method, even though they are anti-dilutive in loss periods. Common stock equivalents issued prior to one year of the Company's initial public offering are excluded in loss periods as they are anti-dilutive. (2) Fully diluted earnings per share is not presented since it is anti-dilutive. EX-23 7 EX-23.1 EXHIBIT-23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement No. 333-12029 on Form S-8 of The Lamaur Corporation (formerly Electronic Hair Styling, Inc.) of our report dated March 26, 1997 on the financial statements of The Lamaur Corporation and of our report dated January 24, 1996 on the financial statements of PCD, the Personal Care division of DowBrands L.P. (which report expresses an unqualified opinion on such financial statements and includes an explanatory paragraph referring to PCD's basis of presentations), both appearing in this Annual Report on Form 10-K of The Lamaur Corporation for the year ended December 31, 1996. Deloitte & Touche LLP San Francisco, California March 26, 1997 EX-27 8 FDS --
5 This schedule contains summary financial information extracted from the audited financial statements of The Lamaur Corporation for the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 0001011154 The Lamaur Corporation YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 12,081 0 19,541 850 11,699 42,967 19,918 1,443 61,566 16,591 14,723 0 13,500 56 16,696 30,252 117,083 117,083 70,215 70,215 45,641 64 1,386 553 0 553 0 0 0 553 .06 .06 -----END PRIVACY-ENHANCED MESSAGE-----