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 December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number: 33-8373
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J.B. WILLIAMS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1387159
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
65 Harristown Road
Glen Rock, New Jersey 07452
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(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 27, 1997: $0.00
Number of shares of the registrant's Common Stock, par value $0.01 per share,
outstanding as of March 27, 1998: 9,000
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 [Trademark] brand from
Avalon Natural Cosmetics, Inc. It also added to its health care products
business with the August, 1997 acquisition of the Viractin[Registered Trademark]
brand from Virotex Corp. and the October, 1997 acquisition of the Cepacol
[Registered Trademark] business in Canada from Hoechst Marion Roussel Canada,
Inc., and the July 1997 agreement with Summa Rx Laboratories, Inc. for the
purchase of certain rights to sell zinc dietary supplements under the name
Cepacol ColdCare.
The Company and its subsidiaries are engaged primarily in the marketing, sale
and distribution of personal and health care products to the mass market. The
Company's personal care products are Aqua Velva [Registered Trademark] men's
grooming products, Brylcreem [Registered Trademark] hair care preparations,
Lectric Shave [Registered Trademark] pre-shave, Williams [Registered Trademark]
Mug Shaving Soap and San Francisco Soap Company [Trademark] specialty bath
items. The Company's health care products are Cepacol [Registered Trademark]
mouthwash, Cepacol [Registered Trademark] sore throat products, Cepacol
[Registered Trademark] ColdCare [Trademark] zinc dietary supplements and Cepacol
[Registered Trademark] Viractin [Registered Trademark] cold sore and fever
blister medication. The Company's products are distributed through a network of
approximately 50 independent 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 independent 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
18% of the Company's U.S. net sales in 1997. 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.
Historically, the Company's net sales have not demonstrated significant seasonal
variation, however sales in 1997 were strongly impacted by shipments during the
September/December holiday period of San Francisco Soap Company gift set
products and during the September/December cough and cold period of the Cepacol
health care products.
The Company's products are sold in highly competitive markets, with the
Company's principal competitors being Procter & Gamble (personal care products
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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
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, consumer 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 [Registered Trademark]", "Lectric Shave
[Registered Trademark]", "Brylcreem [Registered Trademark]", "Williams Mug
Shaving Soap [Registered Trademark]", "Cepacol [Registered Trademark]" and
"Viractin [Registered Trademark]" 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 December 31, 1997, the Company had 45 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 12,000 square feet. The lease on the property
expires in July, 2001. The Company also uses public warehouse and distribution
facilities in Plainfield, Indiana, Sparks, Nevada and Honolulu, Hawaii.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is party to any material pending
legal proceedings.
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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 1997.
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 of
record by one owner. 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 December
31, 1997, 1996, 1995, 1994 and 1993 and for the years ended December 31, 1997,
December 31, 1996, December 31, 1995, December 31, 1994 and the period December
3, 1992, the date of inception, through December 31, 1993, 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 purchase price for 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 purchase price for 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 purchase price for 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,
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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.
Additionally, there is only limited financial and operating data presented with
respect to the Cepacol health care products for the fiscal year ended December
31, 1993, and the period from January 1, 1994 through February 19, 1994, because
during such periods the Cepacol health care products were owned and operated as
part of the consumer brand business of SmithKline Beecham Consumer Healthcare,
Inc. ("SKB"), and not as a separate business unit.
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Selected Financial Data
(In Thousands)
Health Care Products J.B. Williams Holdings, Inc.
--------------------------------------------- -----------------------------
Fiscal Year January 1,
Ended Through Fiscal Years Ended
December 31, February 19 December 31,
------------------- -------------------- -----------------------------
1993 1994 1993(1) 1994 1995 1996 1997
-------- ------- ------- ------- -------- ------- -------
Income Statement Data:
Net Sales ......................... $ 18,345 $ 2,454 $28,380 $44,060 $ 46,899 $48,283 $63,868
Cost of Goods Sold ................ 5,732 879 8,269(2) 13,605(2) 13,111 14,206 23,555(2)
-------- ------- ------- ------- -------- ------- -------
Gross Profits ..................... 12,613 1,575 20,111 30,455 33,788 34,077 40,313
Advertising ....................... 2,149 629 1,825 2,436 3,241 4,134
Promotion ......................... 3,452 386 2,290 5,994 6,740 7,412 10,555
Distribution and Cash Discounts ... 1,119 114 1,788 4,202 4,273 3,683 5,100
-------- ------- ------- ------- -------- ------- -------
Brand Contribution ................ $ 5,893 $ 1,075 $15,404 $18,434 $ 20,339 $19,741 $20,524
======== ======= ======= ======= ======== ======= =======
Selling, General and Administrative
Expenses .......................... 5,780 6,096 7,060 7,452 10,248
Depreciation and Amortization ..... 3,478 4,250 4,543 4,580 4,887
Other Income ...................... -- -- -- -- (750)
Interest Expense, Net ............. 2,543 5,578 5,685 5,231 5,200
------- ------- -------- ------- -------
Income Before Income Taxes ........ 3,603 2,510 3,051 2,478 939
Provision for Income Taxes ........ 1,485 976 1,251 1,015 366
------- ------- -------- ------- -------
Net Income ........................ $ 2,118 $ 1,534 $ 1,800 $ 1,463 $ 573
======= ======= ======== ======= =======
Balance Sheet Data:
Cash .............................. $ 4,961 $14,072 $19,478 $21,201 $ 7,375
Working Capital (Deficiency) ...... (4,599) 17,202 22,925 23,555 18,404
Intangible Assets, Net ............ 37,176 47,128 43,145 39,222 45,692
Total Assets ...................... 49,343 76,625 78,198 76,795 81,471
Total Debt ........................ 37,000 55,000 55,000 50,345 50,345
Shareholder's Equity .............. 7,718 13,252 15,052 16,515 17,088
(footnotes on following page)
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Notes to Selected Financial Data
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(1) The fiscal year ended December 31, 1993 includes the period from
December 3, 1992, the date of inception. The Company's operations began
January 1, 1993 and, as such, no sales activity or operating expenses
were incurred prior to January 1, 1993.
(2) Includes an inventory purchase accounting adjustment associated with
the acquisition of the personal care products business which increased
cost of goods sold by $1.7 million in 1993, an inventory purchase
accounting adjustment associated with the acquisition of the health
care products business which increased cost of goods sold by $1.3
million for 1994, and 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.
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.
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 $55,000,000 12% Senior Notes due
2004 pursuant to an indenture of even date (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 men's 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").
The operations of the Company began on January 1, 1993, following the
acquisition of the men's personal care products business. During the nine-month
period thereafter, management was retained and an independent broker network was
established. During this period SKB conducted substantially all of the selling
and administrative functions associated with operating the personal care
products business on behalf of the Company pursuant to a Transitional Services
Agreement between the Company and SKB. In a similar arrangement, SKB continued
to provide certain selling and administrative functions for the two-month period
following the February, 1994 acquisition of the health care products business.
As a result, the financial data presented for these time periods may not reflect
the
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costs and expenses that would have resulted if the business had been operated
without the benefit of the services provided by SKB under the Transitional
Services Agreement.
Results of Operations
The following table sets forth certain financial data for the Company for each
of the three years ended December 31, 1995, 1996 and 1997.
Fiscal Years Ended December 31,
------------------------------------------------
1995 1996 1997
------------- -------------- --------------
(Dollars in thousands)
(Percentages represent percent of net sales)
Net Sales ....................... $46,899 100% $48,283 100% $ 63,868 100%
Cost of Goods Sold .............. 13,111 28 14,206 29 23,555 37
------- --- ------- --- -------- ----
Gross Profit .................... $33,788 72% $34,077 71% $ 40,313 63%
Advertising & Promotion ......... 9,176 20 10,653 22 14,689 23
Distribution and Cash Discounts . 4,273 9 3,683 8 5,100 8
------- --- ------- --- -------- ----
Brand Contribution .............. $20,339 43% $19,741 41% $ 20,524 32%
Selling, General & Administrative $ 7,060 15 7,452 15 10,248 16
Depreciation & Amortization ..... 4,543 10 4,580 9 4,887 8
Other Income .................... -- -- -- -- (750) (1)
Interest Expense, Net ........... 5,685 12 5,231 11 5,200 8
Provision for Income Taxes ...... 1,251 3 1,015 2 366 1
------- --- ------- --- -------- ----
Net Income ...................... $ 1,800 4% $ 1,463 3% $ 573 1%
======= === ======= === ======== ====
1997 Compared to 1996
Net sales increased 32.3% to $63.9 million in 1997 from $48.3 million in 1996.
This increase is related to a combination of different factors. The Aqua Velva
business reported a sales increase of 21% in 1997 versus 1996. This increase
reflects a strong improvement in market share in the United States and the
re-launch of the brand, including several new products, in Canada. The Cepacol
business also reflected a strong 18% increase in sales in 1997 versus 1996. This
improvement resulted from continued growth in both the lozenge and spray
business combined with the introduction of the Cepacol sore throat formula for
children. In addition to the strong performance on the base business, the
Company also realized $9.4 million in additional revenues related to product
lines acquired during 1997 - San Francisco Soap Company, Viractin, Cepacol
(Canada) and Cepacol ColdCare. These product lines enabled the Company to
diversify its product offering by moving into several new product categories -
specialty bath products, cold sore and fever blister products and zinc dietary
supplement lozenges.
Cost of goods sold increased 65.8% to $23.6 million in 1997 from $14.2 million
in 1996. 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
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this charge, cost of goods sold would have increased 50.4% to $21.4 million in
1997 from $14.2 million in 1996. 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.
Distribution and cash discounts increased 38.5% to $5.1 million in 1997 from
$3.7 million in 1996. This increase is primarily related to the increased sales
volume along with certain one time expenses associated with warehouse transfers
of the San Francisco Soap Company and Viractin inventory following the
acquisition of these product lines.
Advertising and promotion expenses increased 37.9% to $14.7 million in 1997 from
$10.7 million in 1996. Of this increase, $1.9 million is associated with
marketing programs supporting the new businesses acquired during 1997. The
balance, $2.1 million, is related to continued marketing investment behind the
Aqua Velva and Cepacol businesses and introductory support for a new Total Hair
Fitness(TM) line of shampoos and conditioners for men. This new line of products
began shipping to the Company's customers during the second half of December
1997.
Selling, general and administrative expenses increased 37.5% to $10.2 million in
1997 from $7.5 million in 1996. This increase is primarily attributable to the
increased staffing and related expenses associated with the acquisition of the
San Francisco Soap Company and Viractin product lines. Total full time staffing
as of December 31, 1997 was 45 versus 33 as of December 31, 1996.
Depreciation and amortization increased 6.7% to $4.9 million in 1997 from $4.6
million in 1996. All of this increase is associated with the amortization of
intangible assets acquired as part of the San Francisco Soap Company, Cepacol
(Canada) and Viractin acquisitions.
Other income of $.8 million was realized in 1997, representing the January 1997
receipt by the Company of a one time payment of a break-up fee 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, remained essentially unchanged at $5.2
million for both 1997 and 1996.
Provision for income taxes was $.4 million in 1997 versus $1.0 million in 1996.
The effective rate was 39% for 1997 and 41% for 1996.
As a result of the foregoing factors, net income for 1997 was $.6 million or 1%
of net sales.
1996 Compared to 1995
Net sales increased 3.0% to $48.3 million in 1996 from $46.9 million in 1995.
This increase is primarily attributable to the successful launch of a line of
deodorants and anti-perspirants under the Aqua Velva brand during the second
half of 1996, and strong 4th quarter shipments of the Cepacol cough/cold
products.
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Cost of goods sold increased 8.4% to $14.2 million in 1996 from $13.1 million in
1995. This increase reflects a combination of the increased sales volumes and
higher manufacturing costs caused by price increases from the Company's contract
manufacturers and component suppliers.
Distribution and cash discounts decreased 13.8% to $3.7 million in 1996 from
$4.3 million in 1995. This decrease is primarily due to a more efficient use of
the Company's distribution network related to the addition of a new distribution
facility in the Midwest during the summer of 1996.
Advertising and promotion expenses increased 16.1% to $10.7 million in 1996 from
$9.2 million in 1995. This increase is primarily due to the advertising and
promotional campaign supporting the introduction of the new Aqua Velva products.
Selling general and administrative expenses increased 5.6% to $7.5 million in
1996 from $7.1 million in 1995. This increase reflects increased staffing levels
and related expenses associated with the development and introduction of the new
Cepacol and Aqua Velva products.
Depreciation and amortization remained essentially unchanged at $4.6 million in
1996 versus $4.5 million in 1995.
Interest expense, net of interest income, decreased 8.0% to $5.2 million in 1996
from $5.7 million in 1995. This reduction is primarily due to lower interest
expense as a result of the reduction in the outstanding principal amount of the
Senior Notes as a result of the repurchase by the Company of $4,655,000 in
outstanding principal amount of its Senior Notes. See "Liquidity and Capital
Resources."
Provision for income taxes was $1.0 million in 1996 versus $1.3 million in 1995.
The effective tax rate was 41% for both years.
As a result of the foregoing factors, net income for 1996 was $1.5 million or
3.0% of net sales.
Liquidity and Capital Resources
The following chart summarizes the net funds provided and/or used in operating,
financing and investing activities for the years ended December 31, 1997
and 1996 (in thousands).
Fiscal Years Ended December 31,
-------------------------------
1997 1996
------ ------
Net cash provided by operating activities $ 4,358 $6,881
Net cash used in investing activities (18,184) (503)
Net cash used in financing activities -- (4,655)
-------- -------
Increase/(decrease) in cash and cash equivalents ($13,826) $1,723
======== =======
The principal adjustments to reconcile net income of $.6 million for 1997 to net
cash provided by operating activities of $4.4 million are depreciation and
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amortization of $4.9 million partially offset by a net increase in working
capital requirements of $1.1 million.
The principal adjustments to reconcile net income of $1.5 million for 1996 to
net cash provided by operating activities of $6.9 million are depreciation and
amortization of $4.6 million combined with a net decrease in working capital
requirements of $1.1 million.
Net cash used in investing activities during 1997 consists of the following
payments made in conjunction with these acquisitions made by the Company (in
millions).
Brand Amount Seller
- ----- ------ ------
Viractin $ 4.7 Virotex Corporation
San Francisco Soap Company $ 11.7 Avalon Natural Cosmetics, Inc.
Cepacol (Canada) $ 1.5 Hoechst Marion Roussel Canada, Inc.
------
$ 17.9
======
Capital expenditures, which were $.3 million in 1997 and $.5 million in 1996,
are generally not significant in the Company's business. The Company currently
has no material commitments for future capital expenditures except for
approximately $.6 million that the Company has budgeted for the replacement of
its financial operating system.
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 at December 31, 1997. 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. However, as a
result of the cash expenditures made in connection with the Company's
acquisition of the San Francisco Soap Company, Cepacol (Canada) and Viractin
businesses, cash and cash equivalents decreased from $21,201,000 on December 31,
1996, to $7,375,000 on December 31, 1997. Since there can be no guarantee that
the Company will generate internal funds sufficient to finance its operations
and debt requirements, the Company has arranged for a secured line of credit
with the Bank of New York through August 31, 1998 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 $5,000,000, with the amount available
being subject to reduction based on certain criteria relative to the Company's
accounts receivable and inventory.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
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being used to make the required modifications and test Year 2000 Compliance. The
modification process of all significant applications is underway. The Company
plans on completing the testing and conversion process of all significant
applications by December 31, 1998.
In addition, the Company will communicate with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities is
estimated at approximately $.4 million, which amount is included in the $.6
million estimate for replacing the Company's financial operating system. These
costs and the date on which the Company plans to complete the Year 2000
modification and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and the related Reports of
Independent Auditors appear on pages F-2 to F-5. See Index to Financial
Statements, page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
-11-
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. 58 Director, Chairman
Richard T. Niner 58 Director, Vice President
Dario U. Margve 41 Director, President and CEO
Kevin C. Hartnett 47 Vice President Finance and
Administration and Secretary
C. Alan MacDonald 65 Director
Carl G. Anderson, Jr. 53 Director
John T. Gray 62 Director
J. B. Williams Company, Inc.
- ----------------------------
Hendrik J. Hartong, Jr. 58 Director, Chairman
Richard T. Niner 58 Director
Dario U. Margve 41 President and CEO
Kevin C. Hartnett 47 Vice President Finance and
Administration and Secretary
Robert G. Sheasby 46 Vice President Marketing
Jeffrey L. Bower 46 Vice President Operations
D. John Dowers 38 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, 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 1984, Mr. Hartong has been a General
Partner of Brynwood Partners Limited Partnership and Brynwood Partners II L.P.
and since
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mid-1995, a General Partner of Brynwood Partners III L.P., investment management
firms based in Greenwich, Connecticut. Mr. Hartong is Chairman of the Board of
Directors of Air Express International Corporation and a director of Hurco
Companies, Inc. 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 1984, Mr. Niner has been a
General Partner of Brynwood Partners Limited Partnership and Brynwood Partners
II L.P., investment management firms based in Greenwich, Connecticut. Mr. Niner
is also a director of Air Express International Corporation, 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 Managing Partner of Directorship,
a full service board governance consulting firm. Prior to assuming this
position, Mr. MacDonald was General Partner of The Marketing Partnership and
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., manager
of mutual funds, Fountainhead Water Company, a producer of bottled water,
DenAmerica Corp., the largest franchisor of Denny's Restaurants, and Exigent
Diagnostics. 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., an
investment management firm 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 graduated from the University of
Illinois and served as a First Lieutenant in the U.S. Air Force.
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
-13-
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 the 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.
-14-
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 most highly
compensated executive officers of such companies whose total cash compensation
exceeded $100,000 for the fiscal years ended December 31, 1997, 1996 and 1995.
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(3)
--------------------------- ------------ -----------------
Name and Principal Position Year Salary(1) Bonus(2)
--------------------------- ---- --------- --------
Dario U. Margve, President and CEO 1997 $210,000 $165,000 -- $6,300
of the Company and J.B. Williams Co. 1996 200,000 120,000 -- 6,000
1995 176,500 93,000 150 5,295
Kevin C. Hartnett, Vice President - 1997 $140,000 $120,000 -- $4,200
Finance and Administration of the 1996 128,000 77,000 -- 3,840
Company and J.B. Williams Co. 1995 120,000 60,000 25 3,600
Robert G. Sheasby, Vice President - 1997 $152,000 $107,500 -- $4,560
Marketing of J.B. Williams Co. 1996 145,000 87,000 -- 4,350
1995 136,000 70,000 25 2,992
Jeffrey L. Bower, Vice President - 1997 $115,250 $ 82,500 50 $3,458
Operations of J.B. Williams Co. 1996 110,000 66,000 -- 3,300
1995 104,167 46,000 -- 3,125
D. John Dowers, Vice President - Sales 1997 $155,000 $107,500 -- $4,650
of J.B. Williams Co. 1996 148,000 89,000 -- 4,440
1995 143,000 36,000 150 715
- --------------------------------
(1) Salary for 1995 for Mr. Dower represents his annualized salary; actual
amount paid for 1995 was $83,417.
(2) Bonuses reflected for 1997 were paid in 1998, except that Mr. Margve was
paid $15,000 of the amount in 1997, Mr. Hartnett was paid $20,000 of the
amount in 1997 and Messrs. Bower, Dowers and Sheasby were each paid $7,500
of their respective amounts in 1997.
(3) Represents contributions made by J.B. Williams pursuant to a 401(k) plan.
-15-
Stock Option Grants For Year Ended December 31, 1997
The following table contains information concerning the grant of stock options
under the Stock Option Plan to an executive officer of J.B. Williams as of the
end of the last fiscal year who is named in the summary compensation table. Of
this grant, 20% was exercisable immediately, with an additional 20% becoming
exercisable on each subsequent anniversary of the date of grant.
% of Total Potential Realized Value
Number of Options at Assumed Annual Rates of
Securities Granted to Stock Price Appreciation
Underlying Employees in for Option Term
Options Fiscal Exercise or Expiration ----------------------------
Granted Year Base Price Date 5% 10%
- --------------------- ------------- -------------- -------------- -------------- ------------- --------------
Jeffrey L. Bower 50 100% $1,651.50 9/01 $17,795 $38,323
Option Table For Year Ended December 31, 1997
The following table contains information concerning options outstanding at the
end of the last fiscal year for the executive officers of J.B. Williams who are
named in the summary compensation table. All options were issued pursuant to the
Stock Option Plan which provides in general that each grant is exercisable
immediately as to 20% of the grant, with an additional 20% becoming exercisable
on each subsequent anniversary of the date of grant. No options were exercised
by these executives in 1997.
Effective as of March 1, 1998, pursuant to action by the Board of Directors of
the Company, the vesting of the options outstanding under the Stock Option Plan
was accelerated for all optionees, so that all outstanding options are now fully
exerciseable.
Number of Securities Underlying Value of Unexercised In-The-Money
Unexercised Options at Fiscal Year End Options at Fiscal Year End
-------------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------
Dario U. Margve 290 60 $295,905 $46,110
Kevin C. Hartnett 165 10 $181,583 $ 7,685
D. John Dowers 90 60 $ 69,165 $46,110
Robert G. Sheasby 135 40 $111,464 $32,669
Jeffrey L. Bower 50 50 $ 37,734 $26,016
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
-16-
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. Mr. Margve's employment letter also has a change
in control provision under which his options under the Stock Option Plan will
fully vest if there is a change in control prior to the fourth year following
the grant of such options and the executive officer continues to be employed by
J.B. Williams. Change in control is not defined in the employment letter.
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 1997 or previously as an
officer or employee of J.B. Williams.
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 1997 was
determined at the beginning of that year in light of all of the foregoing
factors as applied to the CEO's performance in 1996. His bonus for 1997 was
determined in 1998 in light of these same factors as applied to his performance
in 1997.
By the Board of Directors of J.B. Williams
Hendrik J. Hartong, Jr.
Richard T. Niner
-17-
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 February 28, 1997, 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
of Beneficial Percent of
Title of Class Beneficial Owner Ownership(1) Class(2)
- --------------------------------------------------------------------------------
Common Stock Brynwood Partners II L.P.
Two Soundview Drive
Greenwich, CT 06830 (3) 9,000 shares 100%
Common Stock Hendrik J. Hartong, Jr. 9,000 shares(4) 100%
Common Stock Richard T. Niner 9,000 shares(5) 100%
Common Stock Dario U. Margve 290 shares(6) 3.1%
Common Stock Kevin C. Hartnett 170 shares(6) 1.9%
Common Stock Robert G. Sheasby 135 shares(6) 1.5%
Common Stock D. John Dowers 90 shares(6) 1.0%
Common Stock Jeffrey L. Bower 50 shares(6) 0.6%
Common Stock All directors and
executive officers as
a group (10 persons) 735 shares(7) 7.6%
- -----------------------------
(1) Effective as of March 1, 1998, pursuant to action by the Board of
Directors of the Company, the vesting of the options outstanding under
the Stock Option Plan was accelerated for all optionees, so that all
outstanding options are now fully exerciseable.
(2) Securities as to which the named executive has the right to acquire
beneficial ownership as of February 28, 1998 or within sixty days
thereof are included for purposes of calculating the relative
percentage of the class owned by such executive, and for purposes of
calculating the relative percentage of the class owned by all directors
and executive officers as a
-18-
group, but are excluded for purposes of calculating the percentage
of the class owned by any other person.
(3) All 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, 1998 (which
date may be extended by up to three years) and all assets of the
partnership (including the capital stock of the Company) must be
distributed to the partners by such time (as it may be so extended).
(4) 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.
(5) 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.
(6) The shares reflected are shares covered by option as to which such
person has the present right to acquire beneficial ownership as of
February 28, 1998.
(7) Consists of 735 shares covered by option as to which such persons have
the present right to acquire beneficial ownership or will have the
right to acquire beneficial ownership within sixty days. 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 1997.
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
-19-
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")).
(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.
(2)(vi) Asset Purchase Agreement between J.B. Williams & Hoechst
Marion Roussel Canada, Inc.
(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).
-20-
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.
(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.
(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)(ii)(A)(5) 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.
The Company filed a Report on Form 8-K on October 31, 1997, covering the
acquisition by the Company of the San Francisco Soap Company(TM) business from
Avalon Natural Cosmetics, Inc.
-21-
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 31, 1998
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
- -----------------------
DARIO U. MARGVE President, CEO and Director Date: March 31, 1998
(principal executive officer)
/s/ KEVIN C. HARTNETT
- -----------------------
KEVIN C. HARTNETT Vice President, Finance Date: March 31, 1998
Administration (principal
financial and accounting officer)
NAME TITLE
HENDRIK J. HARTONG, JR. Director : By: /s/ KEVIN C. HARTNETT
: Kevin C. Hartnett
As Attorney-in-Fact
RICHARD T. NINER Director : Date: March 31, 1998
:
C. ALAN MACDONALD Director : and
:
CARL G. ANDERSON Director : By: /s/ DARIO U. MARGVE
: Dario U. Margve
JOHN T. GRAY Director As Attorney-In-Fact
: Date: March 31, 1998
-22-
- --------------------------------------------------------------------------------
J.B. WILLIAMS HOLDINGS, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND
1996 AND FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997:
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income and Retained Earnings for the
Three Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
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 December 31, 1997 and
1996, and the related consolidated statements of income and retained earnings
and cash flows for each of the three years in the period ended December 31,
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 December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
March 4, 1998
Stamford, Connecticut
F-2
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(In Thousands)
- -------------------------------------------------------------------------------
ASSETS 1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 7,375 $21,201
Accounts receivable, net of allowance
for doubtful accounts of $550 and $320
at December 31, 1997 and 1996, respectively 13,235 7,819
Inventories 9,200 3,235
Other current assets (Note 3) 1,760 1,235
------ ------
Total 31,570 33,490
PROPERTY AND EQUIPMENT:
Machinery and equipment 2,109 1,769
Furniture and fixtures 206 126
Leasehold improvements 39 30
------ ------
Total 2,354 1,925
Less accumulated depreciation 1,411 996
------ ------
Net 943 929
------ ------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $19,262 and $15,078 at
December 31, 1997 and 1996, respectively 45,692 39,222
Deferred charges and other assets 3,266 3,154
------ ------
TOTAL ASSETS $81,471 $76,795
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,318 $3,362
Due to Sellers of Acquired Businesses 186 -
Accrued expenses (Note 4) 8,881 6,356
Income taxes payable 781 217
------ ------
Total 13,166 9,935
------ ------
DUE TO SELLERS OF ACQUIRED BUSINESSES (Note 9) 872 -
SENIOR NOTES (Note 5) 50,345 50,345
------ ------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDER'S EQUITY (Note 6):
Common stock and paid-in capital 9,600 9,600
Retained earnings 7,488 6,915
------ ------
Total 17,088 16,515
------ ------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $81,471 $76,795
====== ======
See notes to consolidated financial statements.
F-3
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands Except Share Data)
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
NET SALES $ 63,868 $ 48,283 $ 46,899
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of goods sold 23,555 14,206 13,111
Advertising 4,134 3,241 2,436
Promotion 10,555 7,412 6,740
Cash discounts 1,238 929 896
Distribution 3,862 2,754 3,377
Selling 2,667 1,844 2,059
General and administrative 6,831 5,608 5,001
Depreciation and amortization 4,887 4,580 4,543
--------- --------- ---------
Total operating expenses 57,729 40,574 38,163
--------- --------- ---------
OPERATING PROFIT 6,139 7,709 8,736
INTEREST EXPENSE - Net of interest
income of $852, $984 and $915 for
1997, 1996 and 1995, respectively 5,200 5,231 5,685
--------- --------- ---------
INCOME BEFORE INCOME TAXES 939 2,478 3,051
PROVISION FOR INCOME TAXES (Note 7) 366 1,015 1,251
--------- --------- ---------
NET INCOME 573 1,463 1,800
RETAINED EARNINGS, BEGINNING OF YEAR 6,915 5,452 3,652
--------- --------- ---------
RETAINED EARNINGS, END OF YEAR $ 7,488 $ 6,915 $ 5,452
========= ========= =========
INCOME PER COMMON SHARE:
Basic $ 63.66 $ 162.55 $ 200.00
========= ========= =========
Diluted $ 61.18 $ 157.01 $ 193.55
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,000 9,000 9,000
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 9,366 9,343 9,305
========= ========= =========
See notes to consolidated financial statements.
F-4
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 573 $ 1,463 $ 1,800
Adjustments to reconcile net income
to net cash provided by operating
activities (net of acquisitions):
Amortization of intangibles 4,472 4,210 4,270
Depreciation of property and equi 415 370 273
Deferred income tax benefit - net (647) (259) (270)
Changes in operating assets and
liabilities:
Accounts receivable (5,416) (610) (763)
Inventories 2,270 32 923
Other current assets (354) (114) (453)
Accounts payable (44) 2,268 360
Accrued expenses 2,525 (190) (448)
Income taxes payable 564 (289) (139)
--------- --------- ---------
Net cash provided by
operating activities 4,358 6,881 5,553
--------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of San Francisco Soap
Products and related assets (11,704) - -
Acquisition of Viractin Products
and related assets (4,692) - -
Acquisition of Cepacol Canada
Products and related assets (1,490) - -
Equipment purchases and leasehold
improvements (298) (503) (147)
--------- --------- ---------
Net cash used in investing
activities (18,184) (503) (147)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayment of senior notes - (4,655) -
--------- --------- ---------
Net cash (used in) provided
by financing activities - (4,655) -
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (13,826) 1,723 5,406
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 21,201 19,478 14,072
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,375 $ 21,201 $ 19,478
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 478 $ 1,678 $ 1,593
========= ========= =========
Interest paid $ 6,062 $ 6,401 $ 6,668
========= ========= =========
See notes to consolidated financial statements.
F-5
J. B. WILLIAMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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.
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, and 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
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 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
F-6
Note 9.) 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 1,600,000
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
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 freight, handling and
warehousing 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 incurred.
Cash and Cash Equivalents - Cash and cash equivalents include investments
with a one-day availability.
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 are capitalized; expenditures for maintenance and repairs are
charged to expense.
F-7
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 cash flows.
Deferred Charges and Other Assets - Deferred charges and other assets
consist primarily of costs associated with the issuance of the senior
notes which are being amortized over the term of the debt.
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.
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 - During 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." SFAS 128
replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires dual
presentation of basic and diluted earnings per share on the face of the
income statement. 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.
F-8
3. OTHER CURRENT ASSETS
Other current assets consist of the following:
December 31,
1997 1996
(In Thousands)
Deferred tax asset $ 600 $ 429
Prepaid expenses 636 570
Other 524 236
---------- ----------
Total $ 1,760 $ 1,235
========== ==========
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
1997 1996
(In Thousands)
Marketing $ 2,927 $ 1,978
Interest 2,014 2,014
Compensation 988 724
Manufacturing costs 382 442
Other 2,570 1,198
----------- ----------
Total $ 8,881 $ 6,356
=========== ==========
5. 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
December 31, 1997 and 1996 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, as indicated in Note 1, 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;
F-9
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 December 31, 1997.
During 1997, the Company arranged for a $5,000,000 maximum secured line of
credit with the Bank of New York which expires August 31, 1998. 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
December 31, 1997.
6. SHAREHOLDER'S EQUITY
Common stock consists of 20,000 authorized shares at $.01 par value of
which 9,000 shares were issued and outstanding at December 31, 1997 and
1996, respectively.
The Company has a stock option plan (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 1997, 1996 and 1995 were as follows:
1997 1996 1995
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding,
beginning of year 950 $1,172 950 $1,172 980 $ 1,028
Repurchased,
during the year - - - - (400) -
Granted, during
the year 50 $1,652 - - 370 $ 1,325
------- ------- -------
Outstanding, end of year 1,000 $1,196 950 $1,172 950 $ 1,172
======= =======
Exercisable, end of year 776 1,146 576 1,086 391 $ 985
======= ======= =======
Each stock option is exercisable immediately as to 20% of the grant with
an additional 20% becoming exercisable on each subsequent anniversary from
the date of grant. Stock options expire five years from the grantees
initial date of employment.
F-10
The Company applies APB 25 and related Interpretations in accounting for
the stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the stock option plan
been determined based on the fair value of the option at date of grant
consistent with the requirements of SFAS 123, the Company's 1997 and 1996
net income and income per share would have been reduced to the pro forma
amounts indicated below.
1997 1996
---- ----
Net income As reported $ 573 $ 1,463
Pro forma 545 1,429
Net income per share As reported (Fully diluted) $ 61.18 $ 157.01
Pro forma (Fully diluted) 58.19 152.95
The fair value of stock options granted during 1997 have been estimated at
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1997 1996
Risk free interest rate 5.5% 6.1%
Expected life 4 4
Expected dividend yield - -
Expected volatility - -
7. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
1997 1996 1995
(In Thousands)
Current:
Federal $ 825 $ 858 $ 1,150
State 188 330 371
----- ----- -----
1,013 1,188 1,521
----- ----- -----
Deferred:
Federal (489) (75) (168)
State (158) (98) (102)
----- ----- -----
(647) (173) (270)
----- ----- -----
Total $ 366 $ 1,015 $ 1,251
======== ======= =====
F-11
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:
1997 1996 1995
------------------------ ----------------------- ------------------------
Amount Rate Amount Rate Amount Rate
(Dollar Amounts in Thousands)
Provision for taxes at
statutory Federal rate $ 319 34.0% $ 842 34.0% $1,037 34.0%
State taxes - net of Federal
income tax benefit 32 3.4 75 3.0 118 3.9
Other - net 15 1.6 98 4.0 96 3.1
---- ---- ---- ----- ---- ---
Total $ 366 39.0% $1,015 41.0% $1,251 41.0%
======= ====== ======== ====== ======== =====
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:
December 31,
1997 1996
(In Thousands)
Assets:
Inventories $ 600 $ 429
Intangible assets 3,327 2,579
Other 547 340
------- -------
Gross deferred tax assets 4,474 3,348
------- -------
Liabilities:
Intangible assets 2,316 1,707
Other 62 12
------- -------
Gross deferred tax liabilities 2,378 1,719
------- -------
Net deferred tax asset $ 2,096 $ 1,629
======= =======
8. 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
years
F-12
ended December 31, 1997, 1996 and 1995 were approximately $67,000, $56,000
and $47,000, respectively.
9. 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 $200,000, $145,000 and $126,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Future minimum annual rentals under the above leases are as follows:
(In Thousands)
1998 $193,000
1999 188,000
2000 192,000
2001 119,000
2002 and thereafter -
--------
$692,000
========
The Company is not a party to any material pending legal proceedings.
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 each year until December 31, 1998.
During 1997, the Company entered into a manufacturing and sales 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 are $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. As of December 31, 1997, the Company expects
to acquire the minimum quantities specified in the agreement.
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.
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 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.
F-13
The Company will treat additional amounts paid as part of the cost of the
acquisition which will result in additional goodwill. The additional
goodwill will be amortized over the remaining life of the assets.
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. The Company
will record the payments to the sellers as part of the cost of the
acquisition. The additional goodwill will be amortized over the remaining
life of the assets.
10. SIGNIFICANT CUSTOMER
One of the Company's customers accounted for approximately 18%, 22% and
19% of net sales in the United States for the years ended December 31,
1997, 1996 and 1995, respectively.
11. SEGMENT DATA
The Company operates in one industry segment, the distribution and sale of
personal and oral care products. Data by geographic area is as follows:
1997 1996 1995
(In Thousands)
Net sales to unaffiliated customers:
United States (including Puerto Rico) $ 59,272 $ 44,536 $ 43,186
Canada 4,596 3,747 3,713
------- ------- -----
Total $ 63,868 $ 48,283 $ 46,899
=========== =========== =========
Operating profit (loss):
United States (including Puerto Rico) $ 6,314 $ 7,316 $ 8,119
Canada (175) 393 617
----- ----- -----
Total $ 6,139 $ 7,709 $ 8,736
========== ========= =========
Assets are primarily located in the United States.
12. 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:
1997 $ 320 $ 236 $ (6) $ 550
1996 322 65 (67) 320
1995 253 110 (41) 322
F-14