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, 1998
[ ] 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 33-83734
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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 27, 1998: $0.00
Number of shares of the registrant's Common Stock, par value $0.01 per share,
outstanding as of March 7, 1998: 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 lotion, 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 spray, 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 1998. 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 and 1998 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
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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 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" and "Viractin" 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, 1998, 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 executives 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, Sparks, Nevada and Honolulu, Hawaii.
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 has claimed that the
Company's termination was a breach of the agreement, and has referred the matter
to arbitration as required by the agreement. The matter is still under
arbitration and the outcome is not determinable at this time. However,
management does not believe that an adverse outcome would have a material affect
on the Company.
Other than the matter discussed above, neither the Company nor any of its
subsidiaries is party to any material pending legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
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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 12 owners. 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, 1998, 1997, 1996, 1995 and 1994 and for the years ended December 31, 1998,
December 31, 1997, December 31, 1996, December 31, 1995 and December 31, 1994,
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.
Additionally, there is only limited financial and operating data presented with
respect to the Cepacol health care products for the period from January 1, 1994
through February 19, 1994, because during such period the Cepacol health care
products were owned and operated as part of the consumer brand business of
SmithKline Beecham Consumer Healthcare, Inc. (ASKB@), and not as a separate
business unit.
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Selected Financial Data
(In Thousands)
Health Care Products J.B. Williams Holdings, Inc.
-------------------- -------------------------------------------------------------
January 1,
Through Fiscal Years Ended
February 19 December 31
------------- -------------------------------------------------------------
1994 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Income Statement Data:
Net Sales................................... $2,454 $44,060 $46,899 $48,283 $63,868 $76,106
Cost of Goods Sold.......................... 879 13,605(1) 13,111 14,206 23,555(1) 31,294
------- --------- -------- -------- -------- --------
Gross Profits............................... 1,575 30,455 33,788 34,077 40,313 44,812
Advertising................................. - 1,825 2,436 3,241 4,134 3,933
Promotion................................... 386 5,994 6,740 7,412 10,555 13,351
Distribution and Cash Discounts............. 114 4,202 4,273 3,683 5,100 5,884
------- -------- -------- -------- -------- --------
Brand Contribution.......................... $1,075 $18,434 $20,339 $19,741 $20,524 $21,644
====== ======= ======= ======= ======= =======
Selling, General and Administrative Expenses 6,096 7,060 7,452 10,248 10,520
Depreciation and Amortization............... 4,250 4,543 4,580 4,887 4,176
Other Income................................ - - - (750) -
Interest Expense, Net....................... 5,578 5,685 5,231 5,200 5,957
------- ------ ----- -------- --------
Income Before Income Taxes.................. 2,510 3,051 2,478 939 991
Provision for Income Taxes.................. 976 1,251 1,015 366 410
-------- ------- ----- --------- ---------
Net Income.................................. $ 1,534 $ 1,800 $ 1,463 $ 573 $ 581
======= ======== ======= ======== ========
Balance Sheet Data:
Cash........................................ $14,072 $ 19,478 $21,201 $ 7,375 $ 6,263
Working Capital............................. 17,202 22,925 23,555 18,404 22,249
Intangible Assets, Net...................... 47,128 43,145 39,222 45,692 42,638
Total Assets................................ 76,625 78,198 76,795 81,471 80,162
Total Debt.................................. 55,000 55,000 50,345 50,345 50,345
Shareholder's Equity........................ 13,252 15,052 16,515 17,088 17,669
(footnotes on following page)
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NOTES TO SELECTED FINANCIAL DATA
- --------------------------------
(1) Includes 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 $55.0 million 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
$33.0 million of indebtedness to SmithKline Beecham Corporation (ASKB@) 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 122%
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 mens 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 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, 1996, 1997 and 1998.
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Fiscal Years Ended December 31
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1996 1997 1998
---------------- ------------- -------------
(Dollars in thousands)
(Percentages represent percent of net sales)
Net Sales $48,283 100% $63,868 100% $76,106 100%
Cost of Goods Sold 14,206 29 23,555 37 31,294 41
-------- -- ------- ---- ------- ----
Gross Profit 34,077 71% 40,313 63% 44,812 59%
Advertising & Promotion 10,653 22 14,689 23 17,284 23
Distribution and Cash Discounts 3,683 8 5,100 8 5,884 8
-------- --- ------- ---- ------- ----
Brand Contribution 19,741 41% 20,524 32% 21,644 28%
Selling, General & Administrative $7,452 15 10,248 16 10,520 14
Depreciation & Amortization 4,580 9 4,887 8 4,176 5
Other Income -- -- (750) (1) -- --
Interest Expense, Net 5,231 11 5,200 8 5,957 8
Provision for Income Taxes 1,015 2 366 1 410 1
------ - ------- - ------- ----
Net Income $1,463 3% $ 573 1% $ 581 1%
====== == ====== ==== ======= =====
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.
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
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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.
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 shares in the United States and the
re-launch of the brand, including several new products, in Canada. The Cepacol
business also reflected a strong gain (+18%) in sales during 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 elixir for
children. In addition to the strong performance on the base business, the
Company also realized $9.4 million in additional revenues related to
businesses/licenses acquired during 1997 - San Francisco Soap Company, Viractin,
Cepacol(Canada) and Cepacol ColdCare. These product lines enabled the Company to
diversify its product offerings by moving into several new product categories
specialty bath products, cold sore and fever blister products and zinc lozenges.
-8-
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 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 some one time expenses associated with the warehouse transfers
of the San Francisco Soap Company and Viractin products.
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 the Total Hair
Fitness 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 products. 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, Viractin
and Cepacol(Canada) acquisitions.
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, 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.
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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, 1998 and
1997 (in thousands).
Fiscal Years Ended December 31,
-------------------------------
1998 1997
------ ------
Net cash provided by/used in operating activities ($59) $4,358
Net cash used in investing activities (884) (18,184)
Net cash used in financing activities (169) ---
------ -------
Increase/(decrease) in cash and cash equivalents ($1,112) ($13,826)
======= ========
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.
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
amortization of $4.9 million partially offset by a net increase 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 several acquisitions that were made by the
Company in 1997 (in millions).
Brand Amount Seller
- ----- ------ ------
Viractin $4.7 Virotex Corporation
San Francisco Soap Company $11.7 Avalon Natural Cosmetics, Inc.
Cepacol $1.5 Hoechst Marion Roussel Canada, Inc.
-----
$17.9
-----
Capital expenditures, which were $.9 million in 1998 and $.3 million in 1997,
are generally not significant in the Company's business. Aside from
approximately $.4 million that the Company has budgeted for the replacement of
its financial operating system, 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 December 31, 1998. 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, Cepacol (Canada) and Viractin businesses,
cash and cash equivalents decreased from $21.2 million on December 31, 1996, to
$7.4 million 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 extended a secured line of credit with the
Bank of New York through August 31, 1999 to provide funds, should they be
required, in order for the Company to meet its liquidity requirements.
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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.
YEAR 2000 READINESS DISCLOSURE
As part of a plan to improve its overall system capabilities, the Company
initiated a Year 2000 program in 1997 to upgrade its internal use software and
hardware to address possible issues that may arise from using two digits rather
than four to define the applicable year for dates. As part of this effort the
Company is reviewing the compliance of material third parties (significant
vendors and customers) on the operations of the business in order to determine
the risks to the Company for a third party's failure to remediate its own Year
2000 issues. While this information will be used to mitigate these risks, due to
the complexity of the problem, there can be no assurance that any third party
systems will be Year 2000 compliant on a timely basis or that non-compliance
will not have an adverse material impact on the company.
The Company believes that the planned modifications and conversions of internal
systems and hardware will allow it to meet its Year 2000 compliance schedule and
prevent any material adverse impact on its results of operations, liquidity and
financial condition. However, due to the inherent uncertainty of the Year 2000
problem, the Company cannot determine whether its overall program, including
third party compliance, or any future contingency plans will, in fact, prevent a
material adverse impact on its results of operations, liquidity and financial
condition. It is believed that the most likely worst case scenario would involve
the temporary disruption of fulfilling and billing customer orders, which would
require manual resolution. No material adverse impact on the Company's financial
condition is expected from this specific scenario.
Estimated costs for the complete system upgrade, including any specific Year
2000 requirements, are projected to be approximately $1,000,000 of which
$600,000 have been incurred through December 31, 1998 and $400,000 are estimated
for 1999. The funds for these costs have and will continue to come from normal
operating cash flows of the business. It is expected that all internal systems
will be implemented, tested and validated by July 1999.
The contingency planning process is ongoing and, as additional information
becomes available, the Company will consider the results of the systems
conversion and the status of third party Year 2000 readiness.
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 F4. See Index to Financial
Statements, page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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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. 59 Director, Chairman
Richard T. Niner 59 Director, Vice President
Dario U. Margve 42 Director, President and CEO
Kevin C. Hartnett 48 Vice President Finance and
Administration and Secretary
C. Alan MacDonald 66 Director
Carl G. Anderson, Jr. 54 Director
John T. Gray 63 Director
J. B. Williams Company, Inc.
- ----------------------------
Hendrik J. Hartong, Jr. 59 Director, Chairman
Richard T. Niner 59 Director
Dario U. Margve 42 President and CEO
Kevin C. Hartnett 48 Vice President Finance an
Administration and Secretary
Robert G. Sheasby 47 Vice President Marketing
Jeffrey L. Bower 47 Vice President Operations
D. John Dowers 39 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.
-12-
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 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., 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 Lincoln Snacks Company and 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 1988, Mr. Niner has been a
General Partner of Brynwood Partners II L.P., an investment management firm
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 Director of The
Directorship Group, Inc., consultants in corporate governance and executive
search. Prior to assuming this position, Mr. MacDonald was General Partner of
The Marketing Partnership, Inc. 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., 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. He
is a former director of DenAmerica Corp. 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 is also director of Associated
Materials Inc., a Dallas based
-13-
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.
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.
-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 four most highly
compensated executive officers of such companies whose total cash compensation
exceeded $100,000 for the fiscal years ended December 31, 1998, 1997 and 1996.
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 1998 $220,000 $ 50,000 ---- $6,600
CEO of the Company and J.B. 1997 210,000 165,000 ---- 6,300
Williams Co. 1996 200,000 120,000 ---- 6,000
Kevin C. Hartnett, Vice 1998 $146,300 $35,000 ---- $4,389
President - Finance and 1997 140,000 120,000 ---- 4,200
Administration of the Company 1996 128,000 77,000 ---- 3,840
and J.B. Williams Co.
Robert G. Sheasby, Vice 1998 $158,900 $ 30,000 ---- $4,767
President - Marketing of J.B. 1997 152,000 107,500 ---- 4,560
Williams Co. 1996 145,000 87,000 ---- 4,350
Jeffrey L. Bower, Vice 1998 $120,500 ---- ---- $3,615
President - Operations of J.B. 1997 115,250 82,500 50 3,458
Williams Co. 1996 110,000 66,000 ---- 3,300
D. John Dowers, Vice President 1998 $162,000 $35,000 ---- $4,860
- - Sales of J.B. Williams Co. 1997 155,000 107,500 ---- 4,650
1996 148,000 89,000 ---- 4,440
- --------------------------------
(1) Bonuses reflected for 1998 were paid in 1997.
(2) Represents contributions made by J.B. Williams pursuant to a 401(k) plan.
STOCK OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 1998
There were no option grants during 1998 to any of the officers named in the
Summary Compensation Table.
OPTION TABLE FOR YEAR ENDED DECEMBER 31, 1998
The following table contains information concerning options exercised during 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
Company's Stock Option Plan.
-15-
Shares Acquired
on Exercise Value Realized
----------- --------------
Dario U. Margve 350 370,000
Kevin C. Hartnett 175 203,000
D. John Dowers 150 127,000
Robert G. Sheasby 175 158,000
Jeffrey L. Bower 100 72,000
- --------------------------------------------------------------------------------
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. 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 1998 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
-16-
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 1998 was
determined at the beginning of that year in light of all of the foregoing
factors as applied to the CEOs performance in 1997. His bonus for 1998 was
determined in 1999 in light of these same factors as applied to his performance
in 1998.
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 March 25, 1998, 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 (2) 9,000 shares 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 *
Common Stock Kevin C. Hartnett 175 shares *
Common Stock Robert G. Sheasby 175 shares *
Common Stock D. John Dowers 150 shares *
Common Stock Jeffrey L. Bower 100 shares *
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%.)
-18-
(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 1998.
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,
-19-
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 (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
-20-
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 referred to Exhibit
10(i)(3) of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
(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.
No reports on Form 8-K were filed during 1998.
-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 26, 1999
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 26, 1999
- ----------------------- (principal executive officer)
DARIO U. MARGVE
/s/ KEVIN C. HARTNETT Vice President, Finance and March 26, 1999
- ----------------------- 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 26, 1999
:
:
C. ALAN MACDONALD Director : and
:
: By /s/ DARIO U. MARGVE
CARL G. ANDERSON, JR. Director : ------------------------
: Dario U. Margve
: As Attorney-in-Fact
JOHN T. GRAY Director : Date: March 26, 1999
-22-
- --------------------------------------------------------------------------------
J.B. WILLIAMS
HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998 AND 1997, AND FOR
EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1998, AND
INDEPENDENT AUDITORS' REPORT
J.B. WILLIAMS HOLDINGS, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND
1997 AND FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1998:
Consolidated Balance Sheets as of December 31, 1998 and 1997 2
Consolidated Statements of Income and Retained Earnings for the
Three Years Ended December 31, 1998, 1997 and 1996 3
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1998, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-14
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, 1998 and
1997, 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,
1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
February 19, 1999
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 6,263 $ 7,375
Accounts receivable, net of allowance for doubtful accounts
of $550 at December 31, 1998 and 1997 14,738 13,235
Inventories 10,809 9,200
Other current assets (Note 3) 1,913 1,760
------ ------
Total 33,723 31,570
------ -------
PROPERTY AND EQUIPMENT:
Machinery and equipment 2,879 2,109
Furniture and fixtures 334 206
Leasehold improvements 41 39
------ -------
Total 3,254 2,354
Less accumulated depreciation 1,904 1,411
------ -------
Net 1,350 943
------ -------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$22,623 and $19,262 at December 31, 1998 and 1997,
respectively 42,638 45,692
Deferred charges and other assets 2,451 3,266
------- -------
TOTAL ASSETS $80,162 $81,471
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,294 $ 3,318
Due to sellers of acquired businesses 215 186
Accrued expenses (Note 4) 7,755 8,881
Income taxes payable 210 781
------- -------
Total 11,474 13,166
------- -------
DUE TO SELLERS OF ACQUIRED BUSINESSES (Note 9) 674 872
------- -------
SENIOR NOTES (Note 5) 50,345 50,345
- --------------------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDER'S EQUITY (Note 6):
Common stock and paid-in capital 10,800 9,600
Retained earnings 8,069 7,488
Less notes receivable from shareholders 1,200 -
------ -------
Total 17,669 17,088
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $80,162 $81,471
======= =======
See notes to consolidated financial statements.
-2-
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
NET SALES $76,106 $63,868 $48,283
------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of goods sold 31,294 23,555 14,206
Advertising 3,933 4,134 3,241
Promotion 13,351 10,555 7,412
Cash discounts 1,297 1,238 929
Distribution 4,587 3,862 2,754
Selling 2,895 2,667 1,844
General and administrative 7,625 6,831 5,608
Depreciation and amortization 4,176 4,887 4,580
------ ------ ------
Total operating expenses 69,158 57,729 40,574
------ ------- -------
OPERATING PROFIT 6,948 6,139 7,709
INTEREST EXPENSE - Net of interest income of $262, $852 and
$984 for 1998, 1997 and 1996, respectively 5,957 5,200 5,231
------ ------ ------
INCOME BEFORE INCOME TAXES 991 939 2,478
PROVISION FOR INCOME TAXES (Note 7) 410 366 1,015
------ ------ -------
NET INCOME 581 573 1,463
RETAINED EARNINGS, BEGINNING OF YEAR 7,488 6,915 5,452
------ ------ -------
RETAINED EARNINGS, END OF YEAR $8,069 $ 7,488 $ 6,915
====== ======= =======
INCOME PER COMMON SHARE:
Basic $59.10 $ 63.66 $162.55
====== ======= =======
Diluted $58.76 $ 61.18 $157.01
====== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC $9,830 $ 9,000 $ 9,000
====== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED $9,888 $ 9,366 $ 9,343
====== ======= =======
See notes to consolidated financial statements.
-3-
J. B. WILLIAMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 581 $ 573 $ 1,463
Adjustments to reconcile net income to net cash (used in)
provided by operating activities (net of acquisitions):
Amortization of intangibles 3,648 4,472 4,210
Loss on disposal and impairment of property and
equipment 55 - -
Depreciation of property and equipment 528 415 370
Deferred income tax provision (benefit) - net 257 (647) (259)
Changes in operating assets and liabilities:
Accounts receivable (1,503) (5,416) (610)
Inventories (1,609) 2,270 32
Other current assets (153) (354) (114)
Deferred charges and other assets (142) - -
Accounts payable (24) (44) 2,268
Accrued expenses (1,126) 2,525 (190)
Income taxes payable (571) 564 289
------ ------- -------
Net cash (used in) provided by operating activities (59) 4,358 6,881
------ ------- -------
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 (884) (298) (503)
------ ------- -------
Net cash used in investing activities (884) (18,184) (503)
------ ------- -------
FINANCING ACTIVITIES:
Repayment of senior notes - - (4,655)
Repayment of due to sellers of acquired businesses (169) - -
------ ------- ------
Net cash used in financing activities (169) - (4,655)
------ ------- ------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,112) (13,826) 1,723
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,375 21,201 19,478
------ ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $6,263 $ 7,375 $21,201
====== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 656 $ 478 $ 1,678
====== ======= =======
Interest paid $6,219 $ 6,062 $ 6,401
====== ======= =======
SUPPLEMENTAL NONCASH INVESTING ACTIVITIES:
Notes receivable from shareholders for common stock $1,200 $ - $ -
====== ======= =======
See notes to consolidated financial statements.
-4-
J. B. WILLIAMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND
1997 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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
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 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
-5-
payments associated with annual net sales during the five-year period
following each respective closing date (see 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 1,000,000
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
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
-6-
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.
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.
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 - 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.
-7-
FINANCIAL INSTRUMENTS - The estimated fair value of financial instruments,
which includes cash and cash equivalents, senior notes and accounts
receivable, approximates their carrying value.
3. OTHER CURRENT ASSETS
Other current assets consist of the following:
DECEMBER 31,
1998 1997
(IN THOUSANDS)
Deferred tax asset $ 802 $ 600
Prepaid expenses 662 636
Other 449 524
----- -----
Total $1,913 $1,760
====== ======
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
1998 1997
(IN THOUSANDS)
Marketing $2,937 $2,927
Interest 2,084 2,014
Compensation 365 988
Manufacturing costs 353 382
Other 2,016 2,570
----- -----
Total $7,755 $8,881
====== ======
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, 1998 and 1997 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
-8-
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 December 31, 1998.
During 1998, 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, 1999. 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, 1998.
6. SHAREHOLDER'S EQUITY
Common stock consists of 20,000 authorized shares at $.01 par value of
which 10,000 and 9,000 shares were issued and outstanding at December 31,
1998 and 1997, respectively.
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. These
shares were issued 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 shares were in each case paid for by a recourse promissory
note in favor of the Company.
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
-9-
value per share at the date the option is granted. Stock option
transactions during 1998, 1997 and 1996 were as follows:
1998 1997 1996
-------------- ------------- --------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding,
beginning of year 1,000 $1,196 950 $1,172 950 $1,172
Granted during the year 10 1,709 50 1,652 - -
Exercised during the year (1,010) 1,201 - - - -
------- ----- ---- ------
Outstanding, end of year - - 1,000 1,196 950 1,172
======= ===== ==== ======
Exercisable, end of year - - 776 1,146 576 1,086
======= ===== ==== ======
-10-
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 grantee's initial
date of employment. 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 were fully exercisable.
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 been determined based on
the fair value of the option at date of grant consistent with the
requirements of SFAS 123, the Company's 1998 and 1997 net income and income
per share would have been reduced to the pro forma amounts indicated below.
1998 1997
---- ----
Net income As reported $ 581 $ 573
Pro forma 550 545
Diluted income per share As reported 58.76 61.18
Pro forma 55.63 58.19
The fair value of stock options granted during 1998 have been estimated at
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1998 1997
---- ----
Risk free interest rate 4.95% 5.5%
Expected life 4 4
Expected dividend yield - -
Expected volatility - -
7. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
1988 1987 1986
---- ---- ----
(IN THOUSANDS)
Current:
Federal $ (4) $ 825 $ 858
State 157 188 330
----- ----- -----
153 1,013 1,188
----- ----- -----
Deferred:
Federal 349 (489) (75)
State (92) (158) (98)
----- ------ ------
257 (647) (173)
----- ------ ------
Total $ 410 $ 366 $1,015
====== ======= =======
-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:
1998 1997 1996
---- ---- ----
AMOUNT RATE AMOUNT RATE AMOUNT RATE
(DOLLAR AMOUNTS IN THOUSANDS)
Provision for taxes at
statutory Federal rate $337 34.0% $319 34.0% $ 842 34.0%
State taxes - net of Federal
income tax benefit 76 7.4 32 3.4 75 3.0
Other - net (3) (0.1) 15 1.6 98 4.0
---- ----- --- ---- --- ----
Total $410 41.3% $366 39.0% $1,015 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,
1998 1997
(IN THOUSANDS)
Assets:
Inventories $ 802 $ 600
Intangible assets 3,831 3,327
Other 440 547
----- -----
Gross deferred tax assets 5,073 4,474
-----
Liabilities:
Intangible assets 3,243 2,316
Other 66 62
----- -----
Gross deferred tax liabilities 3,309 2,378
----- -----
Net deferred tax asset $1,764 $2,096
====== ======
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
-12-
25% of employee contributions up to the maximum of 4% of each employee's
salary. Company contributions for the years ended December 31, 1998, 1997
and 1996 were approximately $85,000, $67,000 and $56,000, 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 $233,000, $200,000 and $145,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Future minimum annual rentals under the above leases are as follows:
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
1999 $238,000
2000 244,000
2001 137,000
2002 8,000
--------
$627,000
========
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. The Company is negotiating to
extend the agreement with HMR through December 31, 2004.
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 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. During 1998, the Company
terminated the agreement due to an investigation, by the Company, into the
validity of the patent. The Company is being sued by the other party in the
agreement due to the termination of the agreement. The case is currently
under arbitration and the outcome is not determinable at this time.
Other than the ColdCare proceedings described above, the Company is not a
party to any material pending legal proceedings.
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
-13-
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. The total amounts due related to this
agreement were $889,000 and $1,058,000 at December 31, 1998 and 1997,
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 1998
and 1997, amounts due related to this agreement were approximately $198,000
and $65,000, respectively. The Company will record the payments to the
sellers as part of the cost of the acquisition.
10. SIGNIFICANT CUSTOMER
One of the Company's customers accounted for approximately 16%, 18% and 22%
of net sales in the United States for the years ended December 31, 1998,
1997 and 1996, respectively.
11. SEGMENT DATA
During 1998, the Company adopted the disclosure requirements of SFAS 131
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. 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:
1998 1997 1996
(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 $49,067 $20,341 $69,408 $37,397 $21,875 $59,272 $27,250 $17,286 $44,536
Rico)
Canada 3,875 2,823 6,698 4,398 198 4,596 3,747 - 3,747
------- ------- ------- ------- ------- ------- ------- ------- -------
Total $52,942 $23,164 $76,106 $41,795 $22,073 $63,868 $30,997 $17,286 $48,283
======= ======= ======= ======= ======= ======= ======= ======= =======
Product contribution:
United States (including Puerto $ 9,904 $ 7,174 $17,078 $10,807 $ 6,227 $17,034 $12,051 $ 4,634 $16,685
Rico)
Canada 1,272 399 1,671 817 6 823 1,212 - 1,212
------- -------- ------ ------- ------- ------- ------- ------- -------
Total $11,176 $ 7,573 18,749 $11,624 $ 6,233 17,857 $13,263 $ 4,634 17,897
======= ======= ======= ======= ======= =======
General and administrative 7,625 6,831 5,608
Depreciation and amortization 4,176 4,887 4,580
------- ------- -------
Operating profit $ 6,948 $ 6,139 $ 7,709
======= ======= =======
-14-
General and administrative expenses and depreciation and amortization are
not allocated to each industry segment. 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:
1998 $550 $ 122 $(122) $550
1997 320 236 (6) 550
1996 322 65 (67) 320
******
-15-