F O R M 10 - K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended January 1, 2000.
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ---------------------
Commission file number 33-83734
-----------------------
J.B. WILLIAMS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1387159
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
65 Harristown Road
Glen Rock, New Jersey 07452
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 251-8100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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.
Yes No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 28, 2000: $0.00
Number of shares of the registrant's Common Stock, par value $0.01 per share,
outstanding as of March 28, 2000: 10,000
PART I
ITEM 1. BUSINESS
J.B. Williams Holdings, Inc. (the "Company" or the "Registrant"), was
incorporated in 1993 to create a holding company for J.B. Williams Company, Inc.
("J.B. Williams"), and for its other subsidiaries (collectively, the
"Subsidiaries"). The Company, through its Subsidiaries, distributes and sells
personal and health care products in the United States, Canada and Puerto Rico.
During August 1997 the Company added to its personal care products business with
the acquisition of the San Francisco Soap Company brand from Avalon Natural
Cosmetics, Inc. It also added to its health care products business with the
August 1997 acquisition of the Viractin brand from Virotex Corp. and the October
1997 acquisition of the Cepacol business in Canada from Hoechst Marion Roussel
Canada, Inc.
The Company and its subsidiaries are engaged in the marketing, sales and
distribution of personal and health care products. The Company's personal care
products are Aqua Velva(R) men's grooming products, Brylcreem(R) hair care
preparations, Total Hair Fitness men's shampoos and conditioners, Lectric
Shave(R) pre-shave lotions, Williams(R) Mug Shaving Soap and San Francisco Soap
Company specialty bath items. The Company's health care products are Cepacol(R)
mouthwash, Cepacol(R) throat liquids, Cepacol(R) throat lozenges and Cepacol(R)
Viractin(R) cold sore and fever blister medication. The Company's products are
distributed through a network of independent brokers, consisting of
approximately 60 brokers, covering all fifty states. The Company's brokers are
compensated for their services by the Company on a commission basis, and either
the Company or the broker may terminate their relationship upon 30 days' notice.
The primary market for the Company's products is the general public throughout
the United States, Canada and Puerto Rico. The products are distributed through
retail accounts, with the Company's largest account, Wal*Mart, accounting for
17% of the Company's U.S. net sales in 1999. Wal*Mart makes its purchasing
decisions on a centralized basis. Although the Company believes its relationship
with Wal*Mart to be very good, should Wal*Mart significantly reduce its volume
of purchases from the Company, cash flow and net income would be adversely
affected and replacing such sales would be difficult.
The Company does not have formal arrangements for the purchase and sale of its
products with its major customers, except for pricing arrangements pursuant to
which the Company has set predetermined prices for its products. The Company's
net sales fluctuate from month to month due to the timing of purchases as well
as to price discounts offered to certain of the Company's customers. Prior to
1997, the Company's net sales had not demonstrated significant seasonal
variation, however sales in 1997, 1998 and 1999 were strongly impacted by
shipments during the September/December holiday period of San Francisco Soap
Company gift set products.
The Company's products are sold in highly competitive markets, with the
Company's principal competitors being Procter & Gamble (personal care products
and health care products), Colgate-Palmolive Company (personal care products),
SmithKline Beecham Consumer Healthcare (health care products) and Warner-Lambert
Co. (health care products). Many of the Company's major competitors are
significantly larger than the Company in terms of sales force, sales volume,
product selection and product support resources. These competitors also have
significantly greater access to capital, marketing and advertising resources
than the Company. In addition, the leverage that some of these competitors
-1-
derive from the significance of their other products with key retailers may
allow their competing products to obtain shelf space at the expense of the
Company's products. Management believes that, although the industry is highly
competitive, competition among brand name products has traditionally been based
on factors other than price, such as brand recognition and loyalty, retail
distribution and product features.
All of the Company's products are manufactured by outside third parties.
Management believes that there are many third party contract manufacturers who
could readily manufacture the Company's products on comparable terms. Raw
materials used in the Company's products are readily available from a number of
sources.
The health care products business and certain elements of the personal care
products business are subject to regulation by the Federal Food and Drug
Administration, the Bureau of Alcohol, Tobacco and Firearms and the Health
Protection Branch-Canada, as are other manufacturers of similar products, as
well as regulations relating to marketing and content (including alcohol
content), labeling and packaging of consumer products.
The Company's trademarks "Aqua Velva", "Lectric Shave", "Brylcreem", "Williams
Mug Shaving Soap", "Cepacol", "Viractin" and "San Francisco Soap Company" have
been registered with the United States Patent and Trademark Office and under the
Canadian Trademark Act. The Company considers these trademarks to be the most
important assets of the business.
As of January 1, 2000, the Company had 49 employees, all of which are non-union.
The Company considers its relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains its executive offices in Glen Rock, New Jersey, in leased
office space of approximately 15,000 square feet. The lease on the property
expires in July, 2001. The Company also uses public warehouse and distribution
facilities in Plainfield, Indiana and Sparks, Nevada.
ITEM 3. LEGAL PROCEEDINGS
During 1998 the Company terminated a manufacturing and sales agreement to
distribute a cold remedy product composed of zinc acetate lozenges called
Cepacol ColdCare. The other party to the agreement referred the matter to
binding arbitration, and was ultimately awarded a judgment against the Company
in the amount of approximately $2.5 million, all of which has been paid.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
-2-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the equity securities of the
Company or of its Subsidiaries. The Company's equity securities are held by
twelve owners of record. The Company has not declared any cash dividends on its
common equity for the two most recent fiscal years, and does not currently
intend to declare any such cash dividends for the foreseeable future. In
addition, the Indenture under which the Company's $55,000,000 12% Senior Notes
due 2004 were issued contains restrictions on the payment of dividends which may
limit materially the future payments of dividends on the common equity.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS)
The financial and operating data set forth on the following page as of January
1, 2000, December 31, 1998, 1997, 1996 and 1995 and for the fifty two weeks
ended January 1, 2000 and the years ended December 31, 1998, December 31, 1997,
December 31, 1996 and December 31, 1995, are derived from, and should be read in
conjunction with the consolidated financial statements of the Company and
related notes thereto.
In August 1997, the Company purchased certain assets associated with the
Viractin and San Francisco Soap Company brands from Virotex Corp. and Avalon
Natural Cosmetics, Inc., respectively. Additionally, in October 1997 the Company
acquired certain assets associated with the Cepacol business in Canada from
Hoechst Marion Roussel Canada, Inc. These acquisitions consisted primarily of
the trademarks, patents, inventories, formulas, marketing materials and customer
lists associated with each of these businesses. Each of these businesses did not
comprise a separate business unit of the prior owner. Accordingly, other than
net sales, there is no financial or operating data available for these
businesses.
The cost of the Viractin business was approximately $4,692,000 of which $550,000
was allocated to the fair value of the tangible assets acquired and $4,142,000
was allocated to intangibles. The cost of the San Francisco Soap Company
business was approximately $11,704,000 of which $7,740,000 was allocated to the
fair value of tangible assets acquired and $3,964,000 was allocated to
intangibles. (In both of these transactions there are additional contingent
payments tied to annual net sales during the five year period following each
respective closing date.) The cost of the Cepacol (Canada) business was
approximately $1,490,000, all of which was allocated to intangibles.
The acquisitions were accounted for by the purchase method. Net sales for the
year ended December 31, 1997 were approximately $650,000 for the Viractin
business, $7,900,000 for the San Francisco Soap Company business and $200,000
for the Cepacol (Canada) business. Had these acquisitions been made as of
January 1, 1997 net sales would have increased by approximately $2,300,000 due
to the Viractin business, approximately $14,900,000 due to the San Francisco
Soap Company business and approximately $1,600,000 due to the Cepacol (Canada)
business.
-3-
Selected Financial Data
(In Thousands)
J.B. Williams Holdings, Inc.
----------------------------
Fiscal Years Ended
------------------
December 31, January 1,
------------ ----------
1995 1996 1997 1998 2000(2)
---- ---- ---- ---- -------
Income Statement Data:
- ----------------------
Net Sales ......................... $ 46,899 48,283 $ 63,868 $ 76,106 $ 72,925
Cost of Goods Sold ................ 13,111 14,206 23,555(1) 31,294 28,259
-------- -------- -------- -------- --------
Gross Profit ...................... 33,788 34,077 40,313 44,812 44,666
Advertising ....................... 2,436 3,241 4,134 3,933 2,203
Promotion ......................... 6,740 7,412 10,555 13,351 12,885
Distribution and Cash Discounts ... 4,273 3,683 5,100 5,884 4,985
-------- -------- -------- -------- --------
Brand Contribution ................ 20,339 19,741 20,524 21,644 24,593
Selling, General and Administrative
Expenses ....................... 7,060 7,452 10,248 10,520 11,400
Depreciation and Amortization ..... 4,543 4,580 4,887 4,176 4,207
Other (Income)/Expense(3) ......... -- -- (750) -- 2,760
Interest Expense, Net ............. 5,685 5,231 5,200 5,957 5,827
-------- -------- -------- -------- --------
Income Before Income Taxes ........ 3,051 2,478 939 991 399
Provision for Income Taxes ........ 1,251 1,015 366 410 164
-------- -------- -------- -------- --------
Net Income ........................ $ 1,800 $ 1,463 $ 573 $ 581 $ 235
======== ======== ======== ======== ========
Balance Sheet Data:
- -------------------
Cash .............................. $ 19,478 $ 21,201 $ 7,375 $ 6,263 $ 11,113
Working Capital ................... 22,925 23,555 18,404 22,241 22,901
Intangible Assets, Net ............ 43,145 39,222 45,692 42,638 39,744
Total Assets ...................... 78,198 76,795 81,471 80,162 79,222
Total Debt ........................ 55,000 50,345 50,345 50,345 50,345
Shareholders' Equity .............. 15,052 16,515 17,088 17,669 17,904
- --------------------------------
Notes to Selected Financial Data
- --------------------------------
(1) Includes an inventory purchase accounting adjustment associated with the
acquisitions of the Viractin and San Francisco Soap Company businesses
which increased cost of goods sold by $2.2 million for 1997.
(2) Commencing January 1, 1999, the Company changed its annual fiscal year to a
fifty-two week period consisting of four thirteen week interim periods with
the fiscal year ending on January 1, 2000. The change did not materially
impact reported results of operations through the fifty-two week period of
fiscal 1999.
(3) For the fiscal year ended January 1, 2000, the expense reflects the legal
settlement and related costs associated with an arbitration judgment
against the Company related to Cepacol ColdCare lozenges. For the fiscal
year ended December 31, 1997, the income reflects a payment the Company
received that represented a break-up fee in connection with a potential
transaction.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements included elsewhere in
this report.
-4-
General
- -------
J.B. Williams Holdings, Inc. (the "Company"), through its subsidiaries,
distributes and sells personal care and health care products in the United
States, Canada and Puerto Rico.
On March 16, 1994, the Company offered and sold $55.0 million 12% Senior Notes
due 2004 pursuant to an indenture (the "Senior Notes"). The Company applied a
portion of such net proceeds to the repayment in full of approximately $33
million of indebtedness to SmithKline Beecham Corporation ("SKB") incurred in
connection with the 1993 acquisition of the mens personal care products
business. The Company also used approximately $16.3 million of such net
proceeds, together with a $2 million cash equity contribution by its sole
shareholder, to pay the purchase price for the 1994 acquisition of the Cepacol
health care products business. The Senior Notes originally carried a 12 1/2%
interest rate, which was permanently reduced to 12% on December 1, 1994, as a
result of the consummation of an Exchange Offer by the Company (the "Exchange
Offer").
Commencing January 1, 1999, the Company changed its annual fiscal year to a
fifty-two week period consisting of four thirteen week interim periods with the
fiscal year ending on January 1, 2000. The change did not materially impact
reported results of operations through the fifty-two week period of fiscal 1999.
Results of Operations
- ---------------------
The following table sets forth certain financial data for the Company for the
fifty two week period ending January 1, 2000 and for each of the two calendar
years ended December 31, 1997 and 1998.
Fiscal Years Ended
------------------------------------------------------------------
December 31, January 1,
-------------------------------------------- -------------------
1997 1998 2000
----------------- ------------------- -------------------
(Dollars in thousands)
(Percentages represent percent of net sales)
Net Sales ...................... $ 63,868 100% $ 76,106 100% $ 72,925 100%
Cost of Goods Sold ............. 23,555 37 31,294 41 28,259 39
-------- -------- -------- -------- -------- --------
Gross Profit ................... 40,313 63 44,812 59 44,666 61
Advertising Promotion ......... 14,689 23 17,284 23 15,088 20
Distribution and Cash Discounts 5,100 8 5,884 8 4,985 7
-------- -------- -------- -------- -------- --------
Brand Contribution ............. 20,524 32 21,644 28 24,593 34
Selling, General Administrative 10,248 16 10,520 14 11,400 15
Depreciation Amortization ..... 4,887 8 4,176 5 4,207 5
Other (Income)/Expense ......... (750) (1) -- -- 2,760 4
Interest Expense, Net .......... 5,200 8 5,957 8 5,827 8
Provision for Income Taxes ..... 366 1 410 1 164 2
-------- -------- -------- -------- -------- --------
Net Income ..................... $ 573 1% $ 581 1% 235 --
======== ======== ======== ======== ======== ========
1999 Compared to 1998
- ---------------------
Net sales decreased 4.2% to $72.9 million in 1999 from $76.1 million in 1998.
This decrease is primarily due to lower sales on the Total Hair Fitness line of
shampoos and conditioners for men that were introduced during 1998. Excluding
this product line, sales of all other personal and oral care products
-5-
were down approximately .8% versus 1998, with most of this decrease related to
lower sales of San Francisco Soap gift sets. During 1999 the Company established
certain financial criteria that limited the volume potential associated with the
holiday gift set business.
Cost of goods sold decreased 9.7% to $28.3 million in 1999 from $31.3 million in
1998. This decrease in manufacturing costs is caused by a combination of the
lower sales volumes and to savings associated with improved manufacturing
systems implemented for the assembly of the 1999 San Francisco Soap holiday gift
sets. These new systems, combined with the selection of a new supplier who
specializes in the assembly of promotional items and gift sets, generated
significant savings versus the costs associated with this operation during 1998.
Advertising and promotion expenses decreased 12.7% to $15.1 million in 1999 from
$17.3 million in 1998. All of this decrease can be traced to lower overall
marketing expenses on the Total Hair Fitness line of shampoos and conditioners.
Distribution and cash discounts decreased 15.3% to $5.0 million in 1999 from
$5.9 million in 1998. This decrease is related to a combination of the lower
sales volumes, improved systems for handling the manufacturing and distribution
of the San Francisco Soap gift items and reduced storage costs related to
generally lower levels of inventory.
Selling, general and administrative expenses increased 8.4% to $11.4 million in
1999 from $10.5 million in 1998. This increase reflects generally higher levels
of staffing and related expenses during the course of 1999 versus 1998.
Depreciation and amortization remained essentially unchanged from 1998 amounts
at $4.2 million in 1999.
Other expenses of $2.8 million were realized in 1998. In November 1999 the
Company received notice that it had lost its arbitration related to a contract
dispute concerning the Cepacol ColdCare lozenges. The legal settlement and
related costs aggregated approximately $2.8 million, all of which has been paid.
Interest expense, net of interest income, decreased 2.2% to $5.8 million in 1999
from $6.0 million in 1998.
Provision for income taxes was $.2 million in 1999 versus a provision of $.4
million in 1998. The effective rate was 41% for both 1999 and 1998.
As a result of the foregoing factors, net income for 1999 was $.2 million.
1998 Compared to 1997
- ---------------------
Net sales increased 19.2% to $76.1 million in 1998 from $63.9 million in 1997.
This increase is primarily related to the full year impact of the San Francisco
Soap, Cepacol (Canada) and Viractin businesses acquired during 1997 and the
sales resulting from the 1998 introduction of Total Hair Fitness, a line of
shampoos and conditioners for men. Aside from these products, 1998 sales of the
base business items decreased approximately 8.0% versus 1997. This decrease was
primarily related to a reduction in sales on the Cepacol cough/cold products,
due to a weak cough/cold season, and lower sales on both Aqua Velva and Cepacol
mouthwash due to increased levels of competitive activity as marketing support
funds previously used to support these businesses were diverted to support the
San Francisco Soap and Total Hair Fitness brands.
-6-
Cost of goods sold increased 32.9% to $31.3 million in 1998 from $23.6 million
in 1997. Cost of goods sold were adversely affected in 1997 by a $2.2 million
charge relating to a purchase accounting adjustment to the value of the San
Francisco Soap Company and Viractin products inventory purchased during 1997.
Excluding this charge, cost of goods sold would have increased 46.3% to $31.3
million in 1998 from $21.4 million in 1997. This increase in cost of goods sold
reflects a combination of the increased sales volumes, higher manufacturing
costs caused by price increases from the Company's contract manufacturers and
component suppliers as well as generally higher manufacturing costs related to
the San Francisco Soap Company products, particularly the holiday gift items.
In addition to these factors, the Company also incurred certain one-time costs
as it transitioned the manufacturing and distribution operations for the San
Francisco Soap business to new suppliers. It also experienced significant cost
penalties related to labor and logistical problems while setting up an in-house
operation to assemble the San Francisco Soap holiday gift sets. This experience
caused the Company to re-evaluate its approach to managing this process. As a
result, a new supplier who specializes in the assembly of promotional items and
gift sets has been selected to handle this activity going forward.
Advertising and promotion expenses increased 17.7% to $17.3 million in 1998 from
$14.7 million in 1997. This increase is entirely related to marketing support
programs associated with the newly acquired businesses and with introductory
expenses related to the Total Hair Fitness brand.
Distribution and cash discounts increased 15.7% to $5.9 million in 1998 from
$5.1 million in 1997. This increase is primarily related to the increased sales
volume along with additional storage and handling expenses associated with
significantly higher levels of inventory.
Selling, general and administrative expenses increased 2.7% to $10.5 million in
1998 from $10.2 million in 1997. This increase is primarily attributable to the
increased staffing and related expenses. Total full time staffing as of December
31, 1998 was 49 versus 45 as of December 31, 1997.
Depreciation and amortization decreased 14.5% to $4.2 million in 1998 from $4.9
million in 1997. This decrease reflects that certain intangible assets
associated with the acquisition of the men's personal care business are now
fully amortized.
Other income of $.8 million was realized in 1997. In January 1997, the Company
received a one time payment that represented a break-up fee payable to the
Company pursuant to the terms of a Letter of Intent entered into by the Company
in connection with a potential transaction.
Interest expense, net of interest income, increased 14.6% to $6.0 million in
1998 from $5.2 million in 1997. As a result of the acquisitions made during the
second half of 1997, cash and cash equivalents decreased significantly from
previous year balances. This decrease in cash has resulted in a corresponding
decrease in interest income, thereby resulting in an overall increase in net
interest expense.
Provision for income taxes was $.4 million in both 1998 and 1997. The effective
rate was 41% for 1998 and 39% for 1997.
As a result of the foregoing factors, net income for 1998 was $.6 million or 1%
of net sales.
-7-
Liquidity and Capital Resources
- -------------------------------
The following chart summarizes the net funds provided by and/or used in
operating, financing and investing activities for the fifty two week period
ended January 1, 2000 and the calendar year ended December 31, 1998 (in
thousands).
Fiscal Years Ended
------------------
January 1, December 31,
--------- -----------
2000 1998
---- ----
Net cash provided by/used in operating activities ... $ 6,725 ($59)
Net cash used in investing activities ............... (1,673) (884)
Net cash used in financing activities ............... (202) (169)
------- -------
Increase (decrease) in cash and cash equivalents .... $ 4,850 ($1,112)
======= =======
The principal adjustments to reconcile net income of $.2 million for 1999 to net
cash provided by operating activities of $6.7 million are depreciation and
amortization of $4.2 million combined with a net decrease in working capital
requirements of $2.3 million.
The principal adjustments to reconcile net income of $.6 million for 1998 to net
cash used in operating activities of $.1 million are depreciation and
amortization of $4.2 million offset by a net increase in working capital
requirements of $4.9 million.
Capital expenditures, which were $1.3 million in 1999 and $.9 million in 1998,
are generally not significant in the Company's business. Aside from
approximately $.3 million that the Company has budgeted for the upgrade of its
computer operating systems, the Company currently has no material commitments
for future capital expenditures.
Management believes that inflation does not presently have a significant impact
on the Company's results of operations.
As a result of the Senior Notes, the Company had $50.3 million of total debt
outstanding of January 1, 2000. Management expects that cash on hand and
internally generated funds will provide sufficient capital resources to finance
the Company's operations and meet interest requirements on the Senior Notes,
both in respect of the short term as well as during the long term. Since there
can be no guarantee that the Company will generate internal funds sufficient to
finance its operations and debt requirements, the Company has extended a secured
line of credit with the Bank of New York through August 31, 2000 to provide
funds, should they be required, in order for the Company to meet its liquidity
requirements. The line of credit is in the maximum amount of $5.0 million, with
the amount available being subject to reduction based on certain criteria
relative to the Company's accounts receivable and inventory.
Impact of The Year 2000
- -----------------------
The Year 2000 issue related to most computer software programs using two digits,
rather than four, to define the applicable year for dates. Any of the company's
information technology (IT) and non-information technology (non-IT) systems and
products might have recognized a date using "00" as the year 1900, rather than
the year 2000. This could have resulted in system failures or miscalculations,
-8-
causing disruptions in operations, including the inability to process
transactions and engage in similar normal business activities within the company
and with third parties.
In 1997, the Company initiated a program to address the Company's Year 2000
exposure. The program was substantially completed on schedule in 1999 and the
Company experienced no material adverse effects related to the arrival of 2000.
The Company believes that modifications and conversions of its software and
hardware systems were successful. However, there remains the possibility of
latent Year 2000 problems in systems that could cause a failure in the Company's
systems. Such failure could result in an interruption in, or failure of, certain
normal business activities or operations, which could have a material adverse
effect on the company's results of operations, liquidity or financial condition.
The Company believes that such an occurrence is unlikely.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related Reports of
Independent Auditors appear on pages F2 to F16. See Index to Financial
Statements, page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-9-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables list the directors and executive officers of the Company
and J.B. Williams Company, Inc., the wholly owned subsidiary through which the
Company's operations are conducted ("J.B. Williams").
J.B. WILLIAMS HOLDINGS, INC.
- ----------------------------
Name Age Office(s) Held
- ---- --- --------------
Hendrik J. Hartong, Jr. 60 Director, Chairman
Richard T. Niner 60 Director, Vice President
Dario U. Margve 43 Director, President and CEO
Kevin C. Hartnett 49 Vice President Finance and
Administration and
Secretary
C. Alan MacDonald 67 Director
Carl G. Anderson, Jr. 55 Director
John T. Gray 64 Director
J. B. WILLIAMS COMPANY, INC.
- ----------------------------
Hendrik J. Hartong, Jr. 60 Director, Chairman
Richard T. Niner 60 Director
Dario U. Margve 43 President and CEO
Kevin C. Hartnett 49 Vice President Finance and
Administration and
Secretary
Robert G. Sheasby 48 Vice President Marketing
Jeffrey L. Bower 48 Vice President Operations
D. John Dowers 40 Vice President Sales
All directors and executive officers of the Company and J.B. Williams are
elected annually and serve as such until their successors have been elected and
qualified.
HENDRIK J. HARTONG, JR. - Mr. Hartong has been a member of the Board of
Directors of each of the Company and J.B. Williams since the organization of
these companies in December, 1993 and December,
-10-
1992, respectively. He has also served as the Chairman of the Company since
March, 1994, and Chairman of J.B. Williams since its organization. Since 1988,
Mr. Hartong has been a General Partner of Brynwood Partners II L.P. and since
mid-1996, a General Partner of Brynwood Partners III L.P., and Brynwood Partners
IV L.P., investment management partnerships based in Greenwich, Connecticut. Mr.
Hartong is a director of Hurco Companies, Inc. and a director of Lincoln Snacks
Company. Mr. Hartong graduated from the Harvard Graduate School of Business
Administration in 1964, and the University of Cincinnati in 1962.
RICHARD T. NINER - Mr. Niner has been a member of the Board of Directors of each
of the Company and J.B. Williams since their organization and has served as Vice
President of the Company since that date. Since 1988, Mr. Niner has been a
General Partner of Brynwood Partners II L.P., an investment management firm
based in Greenwich, Connecticut, and since January 1999 Mr. Niner has been a
Partner at Wind River Associates, L.P., a private investment firm in Stamford,
Connecticut. Mr. Niner is also a director of Arrow International, Inc., Case,
Pomeroy & Company, Inc. and Hurco Companies, Inc. Mr. Niner graduated from the
Harvard Graduate School of Business Administration in 1964, and Princeton
University in 1961.
C. ALAN MACDONALD - Mr. MacDonald has been a member of the Company's Board of
Directors since March, 1994. Mr. MacDonald is President of The Club Management
Co., LLC, consultants in golf club mangement. Prior to assuming this position,
Mr. MacDonald was Managing Director of The Directorship Group, Inc., consultants
in corporate governance and executive search; and was General Partner of The
Marketing Partnership, Inc. He was associated with the Noel Group and Lincoln
Snacks Co. Mr. MacDonald was formerly President and CEO of Nestle Foods Corp. in
Purchase, New York, a position he held from 1983 to 1991. Prior to that he had
been President of The Stouffer Frozen Foods Co. Mr. MacDonald is also director
of Lord, Abbett & Co., a manager of mutual funds, Fountainhead Water Company, a
producer of bottled water, CARESIDE, Inc., designer, manufacturer and marketer
of diagnostic test products, and Lincoln Snacks Company. He is a former director
and past chairman of the executive committee of American Maize Products Co. Mr.
MacDonald graduated from Cornell University in 1955 with a B.S. in Hotel
Administration.
CARL G. ANDERSON, JR. - Mr. Anderson has been a member of the Company's Board of
Directors since March, 1994. Mr. Anderson is President and CEO of ABC School
Supply, Inc., a manufacturer and marketer of educational products based in
Atlanta, Georgia. Prior to joining ABC School Supply in May, 1997, Mr. Anderson
served as Vice President - General Manager of the Retail Consumer Products
Division of James River Corporation since August, 1994. He was a marketing
executive at Procter & Gamble from 1972 to 1984 and Vice President and General
Manager at Nestle Foods Corporation in Purchase, New York from 1984 to 1992. Mr.
Anderson is also a director of Arrow International, Inc. and ABC School Supply,
Inc. Mr. Anderson graduated from Lehigh Graduate School of Business
Administration in 1972 and Lafayette College in 1967 and served as a First
Lieutenant in the U.S. Army.
JOHN T. GRAY - Mr. Gray is a General Partner of Brynwood Partners III L.P., and
Brynwood Partners, IV, L.P., investment management partnerships based in
Greenwich, Connecticut. During the period 1984 through mid-1995, Mr. Gray served
as President and Chief Executive Officer of The Genie Company, a manufacturer of
garage door openers and wet/dry vacuum cleaners. He first became associated with
Genie as Executive Vice President in 1982. Mr. Gray joined the Norelco Division
of North American Philips Corporation in 1968 where he served in various
marketing positions and rose to become Vice President and General Manager in
1974. Mr. Gray is also director of Associated Materials Inc., a Dallas based
manufacturer of building materials and Lincoln Snacks Company, a manufacturer
and marketer of snack food products. Mr. Gray graduated from the University of
Illinois and served as a First Lieutenant in the U.S. Air Force.
-11-
DARIO U. MARGVE - Mr. Margve has been a member of the Board of Directors of the
Company, and the President and CEO of the Company, and the President and CEO of
J.B. Williams since March 9, 1995. Mr. Margve began his employment with J.B.
Williams in May, 1993 as the Vice President Sales and served in this position
until his election as President and CEO. Prior to joining J.B. Williams, Mr.
Margve was the Vice President Division Manager of the Stouffer Foods Division of
Nestle Company, Inc., which company Mr. Margve joined in March, 1991. Mr. Margve
previously held other positions with Nestle, including Regional Manager of the
Nestle Foods Division, and was Vice President, Regional Manager of Wine World,
Inc. Mr. Margve received a B.S. in Engineering from the United States Military
Academy at West Point, New York, in 1978.
KEVIN C. HARTNETT - Mr. Hartnett began his employment with J.B. Williams in
March, 1993 as Vice President Finance and Administration. He has also served as
Vice President Finance and Administration of the Company and Secretary of J.B.
Williams since March, 1994 and as Secretary of the Company since December, 1994.
He is responsible for financial matters related to J.B. Williams, including its
existing operations and development. Previously, Mr. Hartnett was the Director
of Finance and Accounting for the Bottled Water Division of The Clorox Company
from September, 1989 to March, 1993. Mr. Hartnett also held various positions
with Nestle Foods Corporation from April, 1973 to September, 1989 including the
Division Controller of the Coffee/Tea Division, and the Marketing Controller of
the Beverage Division. He graduated from the University of Dayton with a B.S. in
Accounting, and from Iona College with an M.B.A. in Finance.
JEFFREY L. BOWER - Mr. Bower began his employment with J.B. Williams in August,
1994. Previously, Mr. Bower was employed by Reckitt & Colman Inc., a consumer
products company, from 1987 to August, 1994 where he served as the Director of
External and Special Manufacturing and prior thereto as the Director of
Engineering, Durkee-French Foods Inc. Mr. Bower also served as a Manager of
Engineering for Pepsi-Cola USA from 1984 to 1987 and as Senior Project Engineer
for Mobil Chemical Company from 1978 to 1984. Mr. Bower was the Company
Commander, A Co. Of the 9th Engr. Bn. from 1973 to 1978. He received his B.S. in
Aerospace Engineering from the University of Virginia in 1973.
ROBERT G. SHEASBY - Mr. Sheasby began his employment with J.B. Williams in
October, 1993. Mr. Sheasby was a partner of and marketing consultant to Creative
Options, a marketing, new products and communications consultant, from 1993
until he joined J.B. Williams, and Vice President of Marketing for
Tulip/Polymerics, Inc. from 1991 to 1993. Mr. Sheasby was Vice President,
Marketing for Cheesebrough-Pond?s USA from 1989-1991. Mr. Sheasby also held
various positions with Bristol-Myers Co. and Lever Brothers Co. He received his
B.S. in Marketing and his B.S. in Advertising from Syracuse University in 1973.
D. JOHN DOWERS - Mr. Dowers began his employment with J.B. Williams in June,
1995. Prior to joining J.B. Williams, Mr. Dowers was Vice President of Marketing
for the Nestle Ice Cream Company from August, 1993. Mr. Dowers also held other
positions within the Nestle U.S.A. organization, including Vice President of
Trade Marketing and Vice President of Sales Administration for Stouffer Foods.
He received his B.A. in Economics from Bucknell University in 1981 and an M.B.A.
in Marketing from the University of Chicago in 1987.
-12-
Employment Contracts and Termination of Employment and Change-in-Control
- --------------------------------------------------------------------------------
Arrangements
- ------------
Each of the named executive officers of J.B. Williams has an employment letter
setting forth the general terms of his respective employment. Each such
employment letter provides for employment for an initial period of one year,
with automatic renewals for additional one-year periods, and entitles each
executive officer to participation in benefit plans and perquisites available
generally to executive employees. Each employment letter specifies a base
salary, and provides for annual reviews for possible merit increases. Each
employment letter specifies that the executive may be eligible for a
discretionary bonus based partially upon attaining planned performance
objectives and partially upon subjective performance factors.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth the compensation paid by the Company and J.B.
Williams to their chief executive officer and each of the other four most highly
compensated executive officers of such companies whose total cash compensation
exceed $100,000 for the fifty-two week period ended January 1, 2000 and for the
calendar years ended December 31, 1998 and 1997. The dollar value of perquisites
and other personal benefits for each of the named individuals was less than
established reporting thresholds.
Shares
Underlying All Other
Annual Compensation Options Compensation(2)
------------------------------- ---------- ---------------
Name and Principal Position Year Salary Bonus(1)
--------------------------- ---- ------ --------
Dario U. Margve, President and CEO ...... 1999 $230,000 $143,000 -- $ 6,900
of the Company and J.B. Williams Co. .. 1998 220,000 50,000 -- 6,600
1997 210,000 165,000 -- 6,300
Kevin C. Hartnett, Vice President- ...... 1999 $152,900 $ 95,000 -- $ 4,587
Finance and Administration of the ..... 1998 146,300 35,000 -- 4,389
Company and J.B. Williams Co. ......... 1997 140,000 120,000 -- 4,200
Robert G. Sheasby, Vice President- ...... 1999 $166,100 $ 85,000 -- $ 4,983
Marketing of J.B. Williams Co. ........ 1998 158,900 30,000 -- 4,767
1997 152,000 107,500 -- 4,560
Jeffrey L. Bower, Vice President ........ 1999 $120,500 $ 65,000 -- $ 3,615
Operations of J.B. Williams Co. ....... 1998 120,500 -- -- 3,615
1997 115,250 82,500 50 3,458
D. John Dowers, Vice President - Sales of 1999 $169,300 $ 95,000 -- $ 5,079
J.B. Wiliams Co. ...................... 1998 162,000 35,000 -- 4,860
1997 1555,000 107,500 -- 4,650
(1) Bonuses reflected for 1999 were paid in 2000.
(2) Represents contributions made by J.B. Williams pursuant to a 401(k) plan.
-13-
Stock Option Grants for Year Ended January 1, 2000
- --------------------------------------------------
There were no option grants during 1999 to any of the officers named in the
Summary Compensation Table.
Board of Directors Interlocks And Insider Participation in Compensation
Decisions
- --------------------------------------------------------------------------------
Neither the Company nor J.B. Williams has a compensation committee. No
compensation is paid to any executive officer of the Company. Decisions with
respect to executive compensation for officers of J.B. Williams are made by the
Board of Directors of J.B. Williams. None of the members of the Board of
Directors of J.B. Williams received any compensation in 1999 or previously as an
officer or employee of J.B. Williams. Mr. Margve, who serves as a director of
the Company, receives compensation as an officer of J.B. Williams. See Item 11,
Summary Compensation Table.
Report of Board of Directors on Executive Compensation
- ------------------------------------------------------
The Board of Directors of J.B. Williams reviews and approves the annual
compensation of J.B. Williams' executive officers, as well as the Company's
policies and practices with respect to compensation of other management
personnel.
Compensation of executive officers consists primarily of base salary and
discretionary bonus awards. The base salary of executive officers is specified
in their employment letters, summarized above. The base salary is subject to a
merit review for possible increase at the end of each fiscal year during the
executive's employment. The bonus awards are made at the sole discretion of the
Board of Directors based primarily upon attaining planned performance objectives
and partially upon subjective performance factors.
In reviewing the compensation of J.B. Williams' executive officers for possible
increases in base salary and for bonus awards, the Board of Directors considers
(i) the levels of executive compensation paid in the industry, (ii) the
company's earnings and profit margin (operating income as a percentage of
revenues), both in absolute terms as well as in relation to budget forecasts,
and compared to results for prior years, and (iii) the extent to which the
company has achieved or exceeded its goals for the year. No specific weight is
accorded to any single factor and the different factors may be accorded greater
or lesser weight in particular years or for particular officers.
The base compensation of J.B. Williams' chief executive officer for 1999 was
determined at the beginning of that year in light of all of the foregoing
factors as applied to the CEO's performance in 1998. His bonus for 1999 was
determined in 2000 in light of these same factors as applied to his performance
in 1999.
By the Board of Directors of J.B. Williams
Hendrik J. Hartong, Jr.
Richard T. Niner
-14-
Compensation Of Directors
- -------------------------
A director who is not an employee or officer of the Company or any of its
subsidiaries is paid an annual fee of $2,000 per calendar quarter for serving as
a director of the Company, and $1,000 for attendance per meeting. Directors of
the Company and any of its subsidiaries are reimbursed for their out-of-pocket
expenses incurred in connection with their service as directors, including
travel expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 7, 2000, the beneficial security
ownership, if any, of (a) any person who is known to the registrant to be the
beneficial owner of more than five percent of the Company's voting securities,
together with any such person's address, (b) the directors of the Company, (c)
each of the executive officers named in the Summary Compensation Table, and (d)
the directors and executive officers of the Company as a group.
Amount and Nature Percent of
Title of Class Beneficial Owner of Beneficial Ownership Class(1)
- -------------- ---------------- ----------------------- --------
Common Stock Brynwood Partners II L.P.
Two Soundview Drive
Greenwich, CT 06830 9,000 shares((1)) 90%
Common Stock Hendrik J. Hartong, Jr. 9,000 shares(2) 90%
Common Stock Richard T. Niner 9,000 shares(3) 90%
Common Stock Dario U. Margve 350 shares 3.50%
Common Stock Kevin C. Hartnett 175 shares 1.75%
Common Stock Robert G. Sheasby 175 shares 1.75%
Common Stock D. John Dowers 150 shares 1.50%
Common Stock Jeffrey L. Bower 100 shares 1.00%
Common Stock All directors and executive
officers as a group (10 persons) 950 shares(4) *
- -----------------------------
(1) 90% of the Company's issued and outstanding common stock is owned
beneficially and of record by Brynwood Partners II L.P. ("Brynwood").
Pursuant to the terms of its Amended and Restated Agreement of Limited
Partnership, Brynwood must be dissolved by December 31, 2000 and all assets
of the partnership (including the capital stock of the Company) must be
distributed to the partners by such time. (*Represents less than 1%.)
-15-
(2) Consists of 9,000 shares owned by Brynwood Partners II L.P. Mr. Hartong is
a general partner of Brynwood Management II L.P., which serves as general
partner of Brynwood Partners II L.P. Together with Mr. Niner, Mr. Hartong
has voting and investment power over these shares. Mr. Hartong's address is
c/o Brynwood Partners, Two Soundview Drive, Greenwich, CT 06830.
(3) Consists of 9,000 shares owned by Brynwood Partners II L.P. Mr. Niner is a
general partner of Brynwood Management II L.P., which serves as general
partner of Brynwood Partners II L.P. Together with Mr. Hartong, Mr. Niner
has voting and investment power over these shares. Mr. Niner's address is
c/o Brynwood Partners, Two Soundview Drive, Greenwich, CT 06830.
(4) Does not include for Mr. Hartong or Mr. Niner the 9,000 shares owned by
Brynwood Partners II L.P. which is reflected as being beneficially owned by
such directors in the chart.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company pays a monthly fee of $25,000 to Brynwood Management II L.P. for
management and consulting services. Such payments aggregated $300,000 in 1999.
Messrs. Hartong and Niner, who are directors of the Company, are the General
Partners of Brynwood Management II L.P.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-K
1. Financial Statements
The financial statements and notes thereto listed on page F-1 are
filed herewith as part of this report.
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not
required, are inapplicable or have been disclosed in the Notes to
Consolidated Financial Statements and therefore have been omitted.
3. Exhibits
Exhibit
Number Description
- -------- -----------
(2)(i) Agreement dated as of February 24, 1994, between SmithKline
Beecham Consumer Healthcare, L.P. and CEP Holdings, Inc.
("CEP") (incorporated by reference to Exhibit (2)(i) to the
Registration Statement on Form S-4 (No. 33-83734) of J.B.
Williams Holdings, Inc. (the "Company"), J.B. Williams Company,
Inc. ("J.B. Williams"), After Shave Products, Inc. ("ASP"),
Pre-Shave Products, Inc. ("PSP"), Hair Care Products, Inc.
("HCP") and CEP (the "Registration Statement")).
-16-
(2)(ii) Intellectual Property Agreement dated as of February 24, 1994,
between Merrell Dow Pharmaceuticals Inc. And CEP (incorporated
by reference to Exhibit (2)(ii) to the Registration Statement).
(2)(iii) Agreement dated as of December 16, 1992, between SmithKline
Beecham Corporation, SmithKline Beecham Consumer Brands Inc.,
and Beecham (NJ) Inc. and J.B. Williams (incorporated by
reference to Exhibit (2)(iii) to the Registration Statement).
(2)(iv) Asset Purchase Agreement dated as of August 6, 1997, by and
between J.B. Williams and Avalon Natural Cosmetics, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's
Report on Form 8-K filed on October 31, 1997).
(2)(v) Asset Purchase Agreement between CEP and Virotex Corporation
dated as of July 10, 1997 (incorporated by referred to Exhibit
2(v) of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
(2)(vi) Asset Purchase Agreement between J.B. Williams & Hoechst Marion
Roussel Canada, Inc. (incorporated by referred to Exhibit 2(vi)
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
(3)(i) Certificate of Incorporation of the Company, as amended to
March 11, 1994 (incorporated by reference to Exhibit (3)(I)(l)
to the Registration Statement).
(3)(ii) By-Laws of the Company (incorporated by reference to Exhibit
3(ii) to the Registration Statement).
(4)(i) Specimen of the Company's 12% Senior Notes due 2004
(incorporated by reference to Exhibit (4)(I)(l) to the
Registration Statement).
(4)(ii) Indenture dated as of March 16, 1994 among the Company, J.B.
Williams, ASP, PSP, HCP, CEP and The Bank of New York, as
Trustee (incorporated by reference to Exhibit (4)(iv) to the
Registration Statement).
(4)(iii) $5,000,000 Credit Facility dated as of August 29, 1997, between
the Company and The Bank of New York, including the Master
Promissory Note as of the same date (incorporated by referred
to Exhibit 4(iii) of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
(10)(i)(l) Manufacturing Agreement dated as of February 24, 1994, between
J.B. Williams and Marion Merrell Dow Inc. (incorporated by
reference to Exhibit (10)(I)(3) to the Registration Statement).
(10)(i)(2) License Agreements between J.B. Williams and CEP dated as of
February 20, 1994 and between J.B. Williams and each of PSP,
HCP and ASP dated as of January 1, 1993 (incorporated by
reference to Exhibit (10)(I)(4) to the Registration Statement).
(10)(i)(3) Manufacturing and Sales Agreement between J.B. Williams and
Summa Rx Laboratories, Inc. (incorporated by reference to
Exhibit (10)(ii)(D) to the Registration Statement).
-17-
(10)(ii)(D) Sublease, dated August 11, 1993, between E.I. Du Pont De
Nemours and Company and J.B. Williams (incorporated by
reference to Exhibit (10)(ii)(D) to the Registration
Statement).
(10)(iii)(A)(1) The Company's 1994 Stock Option Plan dated March 4, 1994
(incorporated by reference to Exhibit (10)(iii)(A)(l) to the
Registration Statement).
(10)(iii)(A)(2) Employment Agreement dated as of May 3, 1993 between J.B.
Williams and Dario U. Margve (incorporated by reference to
Exhibit (10)(iii)(A)(2) to the Registration Statement).
(10)(iii)(A)(3) Employment Agreement dated as of February 11, 1993 between J.B.
Williams and Kevin C. Hartnett (incorporated by reference to
Exhibit (10)(iii)(A)(2) to the Registration Statement).
(10)(iii)(A)(4) Employment Agreement dated as of August 4, 1994 between J.B.
Williams and Jeffrey L. Bower (incorporated by reference to
Exhibit (10)(iii)(A)(2) to the Registration Statement).
(10)(iii)(A)(5) Employment Agreement dated as of October 19, 1994 between J.B.
Williams and Robert G. Sheasby (incorporated by reference to
Exhibit (10)(iii)(A)(6) to the Registrant?s 1994 Annual Report
on Form 10-K).
(21) Subsidiaries of the Company (incorporated by reference to
Exhibit (21) to the Registration Statement).
(24) Powers of Attorney for directors and certain officers of the
Company.
(27) Financial Data Schedule
(b) Reports on Form 8-K
- On May 15, 1999, the registrant filed one report on Form 8-K reflecting a
change in its annual fiscal year to a fifty-two week period consisting of
four thirteen week interim periods, with the fiscal year ending on January
1, 2000.
-18-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
J.B. WILLIAMS HOLDINGS, INC.
----------------------------
(Registrant)
By: /s/DARIO U. MARGVE
----------------------------
Dario U. Margve,
President and CEO
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE
- --------- -----
/s/ DARIO U. MARGVE President, CEO and Director March 28, 2000
- ------------------- (principal executive officer)
DARIO U. MARGVE
/s/ KEVIN C. HARTNETT Vice President, Finance and March 28, 2000
- --------------------- Administration (principal
KEVIN C. HARTNETT financial and accounting officer)
NAME TITLE
- ---- -----
HENDRIK J. HARTONG, JR. Director : By /s/KEVIN C. HARTNETT
: -----------------------
: Kevin C. Hartnett
RICHARD T. NINER Director : As Attorney-in-Fact
: Date: March 28, 2000
:
C. ALAN MACDONALD Director :and
:
CARL G. ANDERSON, JR. Director : By /s/ DARIO U. MARGVE
: ----------------------
: Dario U. Margve
JOHN T. GRAY Director : As Attorney-in-Fact
: Date: March 28, 2000
-19-
- --------------------------------------------------------------------------------
J.B. WILLIAMS
HOLDINGS, INC.
Consolidated Financial Statements as of
January 1, 2000 and December 31, 1998, for the
Fifty-Two Weeks Ended January 1, 2000 and the
Years Ended December 31, 1998 and 1997, and
Independent Auditors' Report
- --------------------------------------------------------------------------------
J.B. WILLIAMS HOLDINGS, INC.
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS AS OF JANUARY 1, 2000 AND DECEMBER 31,
1998 AND FOR THE FIFTY-TWO WEEKS ENDED JANUARY 1, 2000
AND THE YEARS ENDED DECEMBER 31, 1998 AND 1997:
Consolidated Balance Sheets as of January 1, 2000 and
December 31, 1998 2
Consolidated Statements of Income and Retained Earnings for
the Fifty-Two Weeks Ended January 1, 2000 and the Years
Ended December 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the Fifty-Two
Weeks Ended January 1, 2000 and the Years Ended December
31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-15
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholder
J. B. Williams Holdings, Inc.
We have audited the accompanying consolidated balance sheets of J. B. Williams
Holdings, Inc. and subsidiaries (the "Company") as of January 1, 2000 and
December 31, 1998, and the related consolidated statements of income and
retained earnings and cash flows for the fifty-two weeks ended January 1, 2000
and the years ended December 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements present fairly, in all
material respects, the consolidated financial position of J. B. Williams
Holdings, Inc. and subsidiaries as of January 1, 2000 and December 31, 1998, and
the consolidated results of their operations and their cash flows for the
fifty-two weeks ended January 1, 2000 and the years ended December 31, 1998 and
1997 in conformity with generally accepted accounting principles.
February 16, 2000
F-2
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 2000 AND DECEMBER 31, 1998
(In Thousands)
- ------------------------------------------------------------------------------------------
2000 1998
---- ----
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ....................................... $11,113 $ 6,263
Accounts receivable, net of allowance for doubtful accounts
and sales returns of $688 and $881 at January 1, 2000 and
December 31, 1998, respectively ............................... 13,741 14,738
Inventories ..................................................... 6,404 10,809
Other current assets (Note 4) ................................... 2,153 1,905
------- -------
Total ..................................................... 33,411 33,715
------- -------
PROPERTY AND EQUIPMENT:
Machinery and equipment ......................................... 4,083 2,851
Furniture and fixtures .......................................... 378 334
Leasehold improvements .......................................... 41 41
------- -------
Total ..................................................... 4,502 3,226
Less accumulated depreciation ................................... 2,497 1,876
------- -------
Net ....................................................... 2,005 1,350
------- -------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $25,913 and
$22,623 at January 1, 2000 and December 31, 1998, respectively 39,744 42,638
Other assets .................................................... 4,062 2,459
------- -------
Total ..................................................... 43,806 45,097
------- -------
TOTAL ASSETS ...................................................... $79,222 $80,162
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................................ $ 2,995 $ 3,294
Due to sellers of acquired businesses ........................... 224 215
Accrued expenses (Note 5) ....................................... 7,230 7,755
Income taxes payable ............................................ 61 210
------- -------
Total ...................................................... 10,510 11,474
------- -------
DUE TO SELLERS OF ACQUIRED BUSINESSES (Note 10) ................... 463 674
------- -------
SENIOR NOTES (Note 6) ............................................. 50,345 50,345
------- -------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (Note 7):
Common stock and paid-in capital ................................ 10,804 10,800
Retained earnings ............................................... 8,304 8,069
Less notes receivable from shareholders ......................... 1,204 1,200
------- -------
Total ...................................................... 17,904 17,669
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $79,222 $80,162
======= =======
See notes to consolidated financial statements.
F-3
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FIFTY-TWO WEEKS ENDED JANUARY 1, 2000 (FISCAL 1999) AND THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands Except Share Data)
- -----------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1999 1998 1997
------- ------- -------
NET SALES ....................................................... $72,925 $76,106 $63,868
------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of goods sold ............................................ 28,259 31,294 23,555
Advertising ................................................... 2,203 3,933 4,134
Promotion ..................................................... 12,885 13,351 10,555
Cash discounts ................................................ 1,286 1,297 1,238
Distribution .................................................. 3,699 4,587 3,862
Selling ....................................................... 2,673 2,895 2,667
General and administrative .................................... 8,727 7,625 6,831
Depreciation and amortization ................................. 4,207 4,176 4,887
Special item - Litigation settlement and related costs (Note 3) 2,760 -- --
------- ------- -------
Total operating expenses ................................ 66,699 69,158 57,729
------- ------- -------
OPERATING PROFIT
6,226 6,948 6,139
INTEREST EXPENSE - Net of interest income of $329,
$262 and $852 for fiscal 1999, 1998 and 1997, respectively ... 5,827 5,957 5,200
------- ------- -------
INCOME BEFORE INCOME TAXES ...................................... 399 991 939
PROVISION FOR INCOME TAXES (Note 8) ............................. 164 410 366
------- ------- -------
NET INCOME ...................................................... 235 581 573
RETAINED EARNINGS, BEGINNING OF YEAR ............................ 8,069 7,488 6,915
------- ------- -------
RETAINED EARNINGS, END OF YEAR .................................. $ 8,304 $ 8,069 $ 7,488
======= ======= =======
INCOME PER COMMON SHARE:
Basic ......................................................... $ 23.50 $ 59.10 $ 63.66
======= ======= =======
Diluted ....................................................... $ 23.50 $ 58.76 $ 61.18
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC .................................... 10,000 9,830 9,000
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED .................................. 10,000 9,888 9,366
======= ======= =======
See notes to consolidated financial statements.
F-4
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIFTY-TWO WEEKS ENDED JANUARY 1, 2000 (FISCAL 1999) AND THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1999 1998 1997
-------- -------- --------
OPERATING ACTIVITIES:
Net income ................................................. $ 235 $ 581 $ 573
Adjustments to reconcile net income to net cash (used in)
provided by operating activities (net of acquisitions):
Amortization of intangibles ............................. 3,578 3,648 4,472
Loss on disposal and impairment of property and equipment -- 55 --
Depreciation of property and equipment .................. 629 528 415
Deferred income tax provision (benefit) - net ........... 59 257 (647)
Changes in operating assets and liabilities:
Accounts receivable ................................... 997 (1,503) (5,416)
Inventories ........................................... 1,996 (1,609) 2,270
Other current assets .................................. (155) (153) (354)
Other assets .......................................... 359 (142) --
Accounts payable ...................................... (299) (24) (44)
Accrued expenses ...................................... (525) (1,126) 2,525
Income taxes payable .................................. (149) (571) 564
-------- -------- --------
Net cash provided by (used in) operating activities 6,725 (59) 4,358
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions ............................................... (397) -- (17,886)
Equipment purchases and leasehold improvements ............. (1,276) (884) (298)
-------- -------- --------
Net cash used in investing activities ............. (1,673) (884) (18,184)
-------- -------- --------
FINANCING ACTIVITY - Payments to sellers
of acquired businesses ..................................... (202) (169) --
-------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................................... 4,850 (1,112) (13,826)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR .......................................... 6,263 7,375 21,201
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ....................... $ 11,113 $ 6,263 $ 7,375
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid .......................................... $ 253 $ 656 $ 478
======== ======== ========
Interest paid .............................................. $ 6,041 $ 6,219 $ 6,062
======== ======== ========
SUPPLEMENTAL NONCASH INVESTING ACTIVITIES:
Notes receivable from shareholders for common stock ........ $ 1,204 $ 1,200 $ --
======== ======== ========
See notes to consolidated financial statements.
F-5
J. B. WILLIAMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF ACCOUNTING AND ORGANIZATION
The consolidated financial statements include J. B. Williams Holdings, Inc.
and its subsidiaries: J.B. Williams Company, Inc., After Shave Products
Co., Pre-Shave Products Co., Hair Care Products Co. and CEP Holdings
(collectively, the "Company"). Brynwood Partners II L.P., a private
partnership formed under Delaware law, is the owner of all of the issued
and outstanding capital stock of the Company. Brynwood partnerships,
including affiliates of Brynwood Partners II L.P., have invested in and
managed several companies since 1984 and their investors include major
insurance companies, financial institutions, corporations and pension
funds.
Commencing January 1, 1999, the Company changed its annual fiscal year to a
fifty-two week period consisting of four thirteen-week interim periods with
the fiscal year ending on January 1, 2000. The change did not materially
impact reported results of operations through the fifty-two week period of
fiscal 1999.
The Company, which was organized on December 3, 1992, made an initial
acquisition of certain assets ("Personal Care Products Acquisition") from
SmithKline Beecham Corporation, Beecham (NJ) Inc. and SmithKline Beecham
Consumer Products, Inc. (collectively, "SKB") for $45,000,000 on December
16, 1992. The Personal Care Products Acquisition was financed through the
issuance of a promissory note for $40 million to SKB and an equity
contribution of $5.6 million from Brynwood Partners II L.P. Operating
activity commenced on January 1, 1993. Additionally, the Company acquired
certain assets ("Oral Care Products Acquisition") in February 1994 from SKB
for $18,323,000. The Oral Care Products Acquisition and repayment of the
note payable to SKB relating to the Personal Care Products Acquisition were
financed through the private placement issuance of $55,000,000 of senior
notes and an equity contribution of $4 million from the Company's
shareholder.
The Company's products are marketed under the trademarks "Aqua Velva" after
shave, "Lectric Shave" preshave, "Brylcreem" hair care preparations,
"Williams Mug Shave Soap," "San Francisco Soap" specialty bath products,
and "Cepacol," sore throat products and mouthwash, Cepacol Viractin cold
sore and fever blister medication and Cepacol ColdCare dietary supplements.
Each of the trademarks is owned by a subsidiary of the Company and is
licensed to J. B. Williams Company, Inc. The Company generally purchases
finished goods from contract manufacturers and sells products under the
above brand names in the United States, Canada and Puerto Rico.
In August 1997, the Company purchased certain assets associated with the
Viractin and San Francisco Soap Company brands from Virotex Corp. and
Avalon Natural Cosmetics, Inc., respectively. Additionally, in October 1997
the Company acquired certain assets associated with the Cepacol business in
Canada from Hoechst Marion Roussel Canada, Inc. The assets purchased
consist primarily of trademarks, patents, inventories, formulas, marketing
materials and customer lists associated with each of these brands. Each of
these brands did
F-6
not comprise a separate business unit of the prior owner. Accordingly,
other than net sales, there is no financial or operating data available
for these brands.
The Viractin brand was acquired by the Company for approximately $4.7
million, of which $0.6 million was allocated to the fair value of the
tangible assets acquired and $4.1 million was allocated to the
intangibles. The cost of the San Francisco Soap Company brand acquired was
approximately $11.7 million, of which $7.7 million was allocated to the
fair value of tangible assets acquired and $4.0 million was allocated to
intangibles. In both of these transactions, there are additional
contingent payments associated with annual net sales during the five-year
period following each respective closing date (see Note 10). The cost of
the Cepacol Canada business was approximately $1.5 million, all of which
was allocated to intangibles.
The acquisitions were accounted for utilizing the purchase method of
accounting in accordance with APB No. 16, "Business Combinations." Net
sales for the period from the acquisition date to December 31, 1997 and
the pro forma increase in sales as if the acquisitions took place on
January 1, 1997 are as follows:
Pro Forma
Net Sales Increase in
Since Net Sales
Acquisition (Unaudited)
----------- -----------
Viractin ............................... $ 650,000 $ 2,300,000
San Francisco Soap Company ............. 7,900,000 14,900,000
Cepacol Canada ......................... 200,000 1,000,000
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Revenue is recognized upon the shipment of products
to customers.
Net Sales - Net sales include the sales price less an estimate of returns,
unsaleables and other allowances.
Advertising Costs - Such costs are comprised of various television, radio
and newspaper advertisements and are charged to expense as incurred.
Promotion Costs - Such costs are comprised of coupons, trade promotion
incentives, market research expenditures and package design costs and are
charged to expense as incurred.
Cash Discounts - Such discounts are estimated at 2% of sales and are
charged to expense as sales are recorded.
Distribution Costs - Such costs are comprised of outbound freight and
warehouse administrative charges and are charged to expense as incurred.
Selling Costs - Such costs are comprised principally of incentives and
commissions to selling brokers and are charged to expense as sales are
recorded.
Cash and Cash Equivalents - Cash and cash equivalents include investments
with a one-day availability.
F-7
Inventories - Inventories consist principally of finished goods and are
stated at the lower of cost (using the first-in, first-out method) or
market value. Inventory acquired in the San Francisco Soap and Viractin
Products Acquisitions included a purchase accounting adjustment of
approximately $2.3 million relating to the acquired gross profit assigned
to the value of inventory. Approximately $2.2 million of the assigned value
was charged to cost of goods sold during the year ended December 31, 1997.
Property and Equipment - Leasehold improvements, furniture and fixtures and
machinery and equipment are recorded at cost. Depreciation of machinery and
equipment and furniture and fixtures is computed by the straight-line
method over the estimated useful lives which range from 3 to 7 years and 5
years, respectively. Leasehold improvements are amortized over the lives of
the related leases or the estimated useful lives of the assets, whichever
is shorter, using the straight-line method. The cost of improvements is
capitalized; expenditures for maintenance and repairs are charged to
expense.
Intangible Assets - Intangible assets arose from the SKB acquisitions in
1993 and 1994 and the San Francisco Soap, Viractin and Cepacol business in
Canada acquisitions made during 1997. The costs of the non-compete
agreements are being amortized on the straight-line method over the 5-year
terms of the agreements. Trademarks and formulas and other identified
intangibles are being amortized on the straight-line method over their
estimated remaining useful lives of 25 years and 5 years, respectively.
Goodwill represents the excess of the purchase price over the fair value of
the assets acquired and is being amortized using the straight-line method
over 25 years. The Company evaluates the recoverability of goodwill and
other intangible assets on an annual basis by assessing whether the
unamortized intangible assets can be recovered over their remaining lives
through operating results and undiscounted cash flows.
Other Assets - Other assets consist primarily of barter credits and debt
issuance costs associated with the senior notes which are being amortized
over the term of the debt.
In 1999, the Company exchanged inventory with a carrying value of
approximately $2.8 million for barter credits that will be used to purchase
advertising. The barter credits were recorded at the carrying value of the
inventory exchanged which is less than the estimated fair value of such
inventory. As of January 1, 2000, the barter credits have been reduced to
approximately $2.0 million. The barter credits expire in 2007.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities.
Principles of Consolidation - The consolidated financial statements include
all subsidiaries. All significant intercompany items have been eliminated.
Certain prior year amounts have been reclassified to conform with the
presentation for the current year.
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 amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-8
Stock Options - Financial Accounting Statement No. 123, Accounting for
Stock Based Compensation, ("SFAS 123") requires expanded disclosures of
employee stock based compensation arrangements and encourages, but does not
require, employers to adopt a fair value based method of accounting for
employee stock based compensation. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the
option and is recognized over the service period, which is usually the
vesting period. As provided by SFAS 123, the Company follows Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), for employee stock compensation measurement, which does not
require compensation expense recognition when the exercise price of stock
options is greater than or equal to current market value at the date of the
stock option grant.
Income per Common Share - Basic earnings per share is computed by dividing
net income by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding and dilutive common
equivalent shares (common stock options) outstanding.
Financial Instruments - The estimated fair value of financial instruments,
which includes cash and cash equivalents, senior notes and accounts
receivable, approximates their carrying value.
Reclassifications - Certain reclassifications have been made to the
Company's prior year's consolidated financial statements to conform with
the current year's consolidated financial statements.
3. SPECIAL ITEM
As explained further in Note 10, in November 1999 the Company received
notice that it had lost its arbitration related to the contract dispute
related to Cepacol ColdCare lozenges. The legal settlement and related
costs aggregated approximately $2.76 million, all of which has been paid.
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
January 1, December 31,
2000 1998
------ ------
(In Thousands)
Deferred tax asset ....................... $ 894 $ 794
Prepaid expenses ......................... 831 662
Other .................................... 428 449
------ ------
Total .................................... $2,153 $1,905
====== ======
F-9
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
January 1, December 31,
2000 1998
------ ------
(In Thousands)
Marketing ........................... $2,400 $2,937
Interest ............................ 2,014 2,084
Compensation ........................ 876 365
Manufacturing costs ................. -- 353
Other ............................... 1,940 2,016
------ ------
Total ............................... $7,230 $7,755
====== ======
6. SENIOR NOTES
The Company financed the Oral Care Products Acquisition and the payment of
the note payable to SKB from the proceeds of the private placement of
$55,000,000 of senior notes (the "Notes") and an equity contribution from
its shareholder. The Notes were registered under the Securities Act of 1933
effective December 1, 1994.
Commencing with the year ended December 31, 1995, provided certain
conditions are met, the Company must, not later than April 15 immediately
following such year, offer to purchase from the holders of the Notes, on a
pro rata basis, an aggregate principal amount of Notes, equal to a
specified calculation at a purchase price equal to 100% of the principal
amount of the Notes plus accrued interest. During 1996, the Company
repurchased $4.1 million of the Notes pursuant to the terms of the note
agreement and $.6 million from the bond market. Notes outstanding at
January 1, 2000 and December 31, 1998 were $50,345,000.
Interest on the Notes is payable semiannually in cash on March 1 and
September 1 of each year at an annual interest rate of 12%. The Notes are
redeemable at the option of the Company, in whole or in part, at any time
on or after March 1, 1999, at 106% of their principal amount, plus accrued
interest, declining to 100% of their principal amount on and after March 1,
2001, plus accrued interest.
The Notes are guaranteed by each of the Company's wholly-owned
subsidiaries, which constitute all of the Company's direct or indirect
subsidiaries (the "Subsidiary Guarantors"). The Subsidiary Guarantors have
fully and unconditionally guaranteed the Notes on a joint and several
basis; and the aggregate assets, liabilities, earnings and equity of the
Subsidiary Guarantors are substantially equivalent to the assets,
liabilities, earnings and equity of the Company on a consolidated basis.
There are no restrictions on the ability of the Subsidiary Guarantors to
make distributions to the Company. Accordingly, separate financial
statements and other disclosures concerning the Subsidiary Guarantors are
not included herein.
The Notes contain certain restrictive covenants. The Company is in
compliance with all covenants at January 1, 2000.
F-10
During 1999, the Company extended its $5,000,000 maximum secured line of
credit with the Bank of New York, for an additional year which now expires
on August 31, 2000. The amount available under the line of credit is
subject to reduction based on certain criteria relative to the Company's
accounts receivable and inventory. No amount was outstanding under the line
of credit as of January 1, 2000.
7. SHAREHOLDERS' EQUITY
Common stock consists of 20,000 authorized shares at $.01 par value of
which 10,000 shares were issued and outstanding at both January 1, 2000 and
December 31, 1998.
During 1999, the Company repurchased 10 shares from a former employee and
granted 10 options at $1,767 per share which were then exercised. During
1998, the Company issued 1,010 shares of common stock for an aggregate
purchase price of approximately $1,200,000 and repurchased 10 shares of
common stock for an aggregate purchase price of $17,000. Shares were issued
primarily to certain employees of the Company as a result of the exercise
of options issued to the employees under the Company's 1994 Stock Option
Plan (the "Plan"). The shares were in each case paid for by a recourse
promissory note in favor of the Company.
The Plan which provides for the granting of options on shares of the
Company's common stock to its directors and certain key employees. The Plan
permits a maximum of 1,000 shares of common stock to be issued at the fair
value per share at the date the option is granted. If the option is granted
to a person, who at the time of the grant owns more than 10% of the
combined voting power of all classes of stock, the purchase price shall not
be less than 110% of the fair value per share at the date the option is
granted. Stock option transactions during fiscal 1999, 1998 and 1997 were
as follows:
Fiscal Fiscal Fiscal
1999 1998 1997
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding,
beginning of year ................... 0 $ -- 1,000 $ 1,196 950 $ 1,172
Granted during the year 10 1,767 10 1,709 50 1,652
Exercised during the year (10) 1,767 (1,010) 1,201 -- --
------- ------- -------
Outstanding, end of year .............. -- -- -- -- 1,000 1,196
======= ======= =======
Exercisable, end of year .............. -- -- -- -- 1,000 1,196
======= ======= =======
The Company applies APB 25 and related interpretations in accounting for
the stock option plan. No compensation cost was required to be recognized.
Had compensation cost for the stock option plan
F-11
been determined based on the fair value of the option at date of grant
consistent with the requirements of SFAS 123, the Company's fiscal 1999,
1998 and 1997 net income and income per share would have been reduced to
the pro forma amounts indicated below:
Fiscal Fiscal Fiscal
1999 1998 1997
---- ---- ----
Net income......................... As reported $ 235 $ 581 $ 573
Pro forma 223 550 545
Diluted income per share........... As reported 23.50 58.76 61.18
Pro forma 22.30 55.63 59.19
The fair value of stock options granted during 1999, 1998 and 1997 have
been estimated at the date of grant using the Black-Scholes option pricing
model with the following assumptions:
Fiscal Fiscal Fiscal
1999 1998 1997
---- ---- ----
Risk free interest rate .................. 5.00% 4.95% 5.50%
Expected life ............................ 4 4 4
Expected dividend yield .................. -- -- --
Expected volatility ...................... -- -- --
8. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Fiscal Fiscal Fiscal
1999 1998 1997
---- ---- ----
(in Thousands)
Current:
Federal ............. $ (14) $ (4) $ 825
State ............... 119 157 188
------- ------- -------
105 153 1,013
Deferred
Federal ............. 165 349 (489)
State ............... (106) (92) (158)
------- ------- -------
59 257 (647)
------- ------- -------
Total ................. $ 164 $ 410 $ 366
======= ======= =======
F-12
A reconciliation of the provision for income taxes based on the applicable
statutory Federal income tax rate to the income tax provision as set forth
in the consolidated statements of income is as follows:
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------------- ------------------ -----------------
Amount Rate Amount Rate Amount Rate
(Dollar Amounts in Thousands)
Provision for taxes at
statutory Federal rate ... $ 136 34.0 % $ 337 34.0 % $ 319 34.0 %
State taxes - net of Federal
income tax benefit ....... 33 8.3 76 7.4 32 3.4
Other - net ................ (5) (1.3) (3) (0.1) 15 1.6
----- ------ ----- ------ ----- -----
Total ...................... $ 164 41.0 % $ 410 41.3 % $ 366 39.0 %
===== ====== ===== ====== ===== =====
Deferred taxes result from temporary differences in the recognition of
revenue and expense for tax and financial statement purposes. The principal
sources of the differences are the use for income tax purposes of a 15-year
amortization period for intangible assets, the use of accelerated methods
of computing depreciation and the capitalization of certain inventory
related costs.
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities are as follows:
January 1, December 31,
2000 1998
---- ----
(In Thousands)
Assets:
Inventories ........................... $ 894 $ 794
Intangible assets ..................... 366 599
Other ................................. 468 436
------ ------
Gross deferred tax assets ............... 1,728 1,829
Liabilities - Other ..................... 23 65
------ ------
Net deferred tax asset .................. 1,705 $1,764
====== ======
9. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan covering substantially all employees
which permits employees to defer up to 20% of their salary. Matching
contributions are at the discretion of the Company; additional
contributions of 2% of compensation are made for each employee at the end
of each pay period. Annual discretionary contributions may also be made by
the Company. The Company matches 25% of employee contributions up to the
maximum of 4% of each employee's salary. Company contributions for the
fiscal 1999, 1998 and 1997 were approximately $98,000, $85,000 and $67,000,
respectively.
F-13
10. COMMITMENTS AND CONTINGENCIES
The Company leases equipment and its facilities under operating lease
agreements which require payment of property taxes, insurance and normal
maintenance costs. Certain leases contain renewal options. Rental expense
was approximately $254,000, $233,000 and $200,000 for fiscal 1999, 1998 and
1997, respectively.
Future minimum annual rentals under the above leases are as follows:
Fiscal Year (In Thousands)
----------- --------------
2000 $273
2001 154
2002 15
2003 6
----
$448
====
The Company has entered into employment contracts with each of its
executive officers. Each contract provides for employment for an initial
period of one year, with automatic renewals for additional one-year
periods. Terms of the contracts include details regarding participation in
benefit plans, base salary, merit increases and discretionary bonuses.
Concurrently with the Oral Care Products Acquisition, the Company entered
into a Purchasing and Manufacturing Agreement with Hoechst Marion Roussel
("HMR") (formerly Marion Merrell Dow, Inc. ("MMD")), which was subsequently
amended, whereby the Company agreed to purchase existing oral care products
exclusively from HMR and in connection therewith pay overhead costs of
$1,412,000 and $1,482,000 as of December 31, 1998 and January 1, 2000,
respectively.
During 1997, the Company entered into a manufacturing and sales agreement
(the "agreement") to distribute a cold remedy product composed of zinc
acetate lozenges called Cepacol ColdCare. The Company agreed to acquire
certain minimum quantities of ColdCare products for five years. The related
minimum payments were $2.4 million during the first two years and $4.0
million during the third through fifth years of the agreement. If the
agreed-upon minimum quantities are not purchased, the agreement provides
for payments of up to $400,000 in the first two years and $650,000 in the
third through fifth years of the agreement. During 1998, the Company
terminated the agreement due to an investigation, by the Company, into the
validity of the patent. The Company was sued by the other party to the
agreement and in November 1999 the Company received notice that it had lost
the arbitration. The legal settlement and related costs, aggregated
approximately $2.76 million, all of which has been paid as of January 1,
2000.
In connection with the San Francisco Soap acquisition, the Company entered
into a consulting agreement with the former owners of San Francisco Soap
and agreed to pay $300,000 per year during the consulting period (September
1, 1997 through August 29, 2000). The $300,000 per year is to be paid in
advance in quarterly installments of $75,000 beginning September 1, 1997.
Also, in connection with the San Francisco Soap Company acquisition, the
Company entered into a contingent payment agreement with the sellers equal
to 2.5% of San Francisco Soap Company products net sales for a period of
five years
F-14
from the acquisition date. The minimum annual payment is $250,000 and the
Company recorded a liability for the present value of the minimum annual
payments owed to the sellers as part of the cost of the acquisition. The
total amounts due related to this agreement were $687,000 and $889,000 at
January 1, 2000 and December 31, 1998, respectively. The Company will treat
additional amounts paid as part of the cost of the acquisition which will
result in additional goodwill.
In conjunction with the Viractin acquisition, the Company entered into a
contingent payment arrangement with the sellers of Viractin which provides
the sellers with additional amounts equal to the sum of 10% of net sales of
the Company's Viractin products for a period of five years from the
acquisition date. The additional consideration payments are to be made to
the seller on a quarterly basis beginning September 30, 1997. During fiscal
1999 and 1998, amounts due related to this agreement were approximately
$217,000 and $198,000, respectively. The Company will record the payments
to the sellers as part of the cost of the acquisition.
11. SIGNIFICANT CUSTOMER
One of the Company's customers accounted for approximately 17%, 16% and 18%
of net sales in the United States for the fiscal 1999, 1998 and 1997,
respectively.
12. SEGMENT DATA
The Company operates in two industry segments, the distribution and sale of
personal and oral care products. Data by geographic area and industry
segment is as follows:
Fiscal 1999 Fiscal 1998 Fiscal 1997
(In Thousands)
Personal Oral Personal Oral Personal Oral
Care Care Total Care Care Total Care Care Total
------- ------- ------- ------- ------- ------- ------- ------- -------
Net sales to unaffiliated customers:
United States (including Puerto Rico) $45,164 $20,716 $65,880 $49,067 $20,341 $69,408 $37,397 $21,875 $59,272
Canada .............................. 3,975 3,070 7,045 3,875 2,823 6,698 4,398 198 4,596
------- ------- ------- ------- ------- ------- ------- ------- -------
Total ............................... 49,139 23,786 72,925 52,942 23,164 76,106 41,795 $22,073 $63,868
======= ======= ======= ======= ======= ======= ======= ======= =======
Product contribution:
United States (including Puerto Rico) 15,872 3,883 19,755 9,904 7,174 17,078 10,807 6,227 $17,034
Canada .............................. 1,432 733 2,165 1,272 399 1,671 817 6 823
------- ------- ------- ------- ------- ------- ------- ------- -------
Total ............................... 17,304 4,616 21,920 11,176 7,573 18,749 11,624 6,233 17,857
======= ======= ======= ======= ======= =======
General and administrative 8,727 7,625 6,831
Depreciation and amortization 4,207 4,176 4,887
Special item 2,760 -- --
------- ------- -------
Operating profit 6,226 6,948 6,139
======= ======= =======
General and operating profit, administrative expenses, and depreciation and
amortization are not allocated to each industry segment. Assets are
primarily located in the United States.
F-15
13. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
Balance, Charged to Balance,
Beginning Profit Recoveries/ End
of Year and Loss Deductions of Year
------- -------- ---------- -------
(In Thousands)
Allowance for doubtful accounts
and sales and returns:
Fiscal 1999 ............... $ 881 $ 606 $(799) $ 688
Fiscal 1998 ............... 972 453 (544) 881
Fiscal 1997 ............... 320 658 (6) 972
******
F-15