===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-28174
ELECTRONIC HAIR STYLING, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0301547
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Lovell Avenue, Mill Valley CA 94941
(Address of principal executive offices) (Zip Code)
(415) 380-8200
(Registrant's telephone number, including area code)
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 [ X ] No [ ]
At October 31, 1996, there were 5,570,395 shares of the Registrant's $.01 par
value Common Stock outstanding.
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<PAGE>
This quarterly report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provision of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause the Company's actual results in future periods
to be materially different from any future performance suggested herein.
Further, the Company operates in an industry sector where securities values may
be volatile and may be influenced by economic and other factors beyond the
Company's control. In the context of the forward-looking information provided
in this Form 10-Q and in other reports, please refer to the discussions of risk
factors detailed in, as well as the other information contained in, the
Company's filings with the Securities and Exchange Commission during the past
12 months.
<PAGE>
ELECTRONIC HAIR STYLING, INC.
INDEX TO FORM 10-Q
September 30, 1996
Page No.
--------
Part I - Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheets as of September 30, 1996 and
December 31, 1995 4
Statements of Operations for the three months and
nine months ended September 30, 1996 and 1995 5
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information 13
Signature 14
<PAGE>
Part I.
Item 1. Financial Statements
ELECTRONIC HAIR STYLING, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 12,599 $ 2,338
Receivables from Dow 2,620 2,374
Accounts Receivable, net 14,947 10,307
Inventories 8,542 11,140
Prepaid expenses and other current assets 406 210
----------- ---------
Total current assets 39,114 26,369
Property, Plant and Equipment, Net 17,554 16,283
Other Assets 244 315
----------- ----------
Total Assets $ 56,912 $ 42,967
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,847 $ 6,469
Accrued expenses 3,760 4,024
Accrued salaries, wages and employee related expenses 2,024 2,605
Current portion of long-term debt 1,200 1,200
Payables to related parties 1,500 1,725
---------- ---------
Total current liabilities 15,331 16,023
Long-Term Debt 9,909 12,850
Related Party Obligations 1,375 7,500
Stockholders' Equity :
Preferred stock series A, $0.01par value, 4,000,000 shares authorized,
1,000,000 shares issued and outstanding at September 30, 1996 and
December 31, 1995.
($10,000,000 liquidation preference) 8,500 8,500
Preferred stock series B, 763,500 shares authorized, 763,500
shares issued and outstanding at September 30, 1996.
($5,000,000 liquidation preference) 5,000 -
Common stock, $0.01 par value, 12,000,000 shares authorized,
5,570,395 and 2,944,920 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively. 56 29
Additional paid-in capital 19,850 1,718
Stock subscription receivable (50) (50)
Accumulated deficit (3,059) (3,603)
---------- --------
Total stockholders' equity 30,297 6,594
---------- --------
Total Liabilities and Stockholders' Equity $ 56,912 $ 42,967
========== =========
See notes to financial statements
</TABLE>
4
<PAGE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales to Dow $ 5,279 $ - $ 18,775 $ -
Net Sales to Others 23,970 - 70,636 -
-------- ------------- -------- ------
Total Net Sales 29,249 - 89,411 -
Cost of Goods Sold 17,538 - 55,275 -
-------- ------------- -------- ------
Gross Margin 11,711 - 34,136 -
Selling, General and Administrative Expenses 11,218 267 32,949 461
-------- ------------- -------- ------
Operating Income (Loss) 493 (267) 1,187 (461)
Interest Expense (251) (20) (1,083) (57)
Other Income 397 - 469 -
-------- ------------- -------- ------
Net Income (Loss) before Income Taxes 639 (287) 573 $ (518)
Income Taxes 29 - 29 -
-------- ------------- -------- ------
Net Income (Loss) $ 610 $ (287) $ 544 $ (518)
========= ============= ======== =======
Dividends on Series B Preferred Stock (100) - (133) -
--------- ------------- -------- -------
Net Income (Loss) Available to Common
Shareholders $ 510 $ (287) $ 411 $ (518)
============= ============ ============ =============
Net Income (Loss) per Common Share $ .08 $ (.07) $ .08 $(.13)
============= ============ ============ =============
Weighted Average Common and Common
Equivalent Shares Outstanding 6,526 4,086 5,291 4,086
============= ============ ============ =============
See notes to financial statements
5
</TABLE>
ELECTRONIC HAIR STYLING, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------------------------------
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 544 $ (518)
Adjustments to reconcile net income (loss)
to net cash used in operating
activities:
Noncash credits for services 155 -
Issuance of common stock for services 108 -
Gain on disposal of assets (214) -
Depreciation and amortization 1,017 2
Changes in:
Accounts receivable (5,786) -
Inventories 2,598 -
Other assets (168) (540)
Payables 245 94
Accrued expenses (845) 197
------ ----
Net cash used in operating activities (2,346) (765)
------ ----
CASH FLOWS USED IN INVESTING
ACTIVITIES - Additions to property, plant
and equipment (2,256) (1)
------ ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) , net (3,166) 67
Proceeds from issuance of common stock, net 18,029 878
------ ----
Net cash provided by financing activities 14,863 945
------ ---
NET CHANGE IN CASH 10,261 179
CASH AT BEGINNING OF PERIOD 2,338 2
----- -
CASH AT END OF PERIOD $ 12,599 $ 181
============= ==================
</TABLE>
See notes to financial statements
6
<PAGE>
ELECTRONIC HAIR STYLING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
(Unaudited)
1. ACCOUNTING POLICIES
The accompanying condensed financial statements are unaudited and include
all adjustments, which consist of only normal recurring accruals, that
management considered necessary to fairly present the results for such
periods. These financial statements should be read in conjunction with
the financial statements and the notes contained in Electronic Hair
Styling, Inc.'s ("Company") Registration Statement effective May 22,
1996. Results for interim periods are not necessarily indicative of
results for the full year.
Net Income (Loss) per Share was computed by dividing net income (loss)
available to common shareholders by the weighted average number of shares
of common stock and common stock equivalents, which consist of series A
convertible preferred stock, warrants and options. In accordance with the
rules of the Securities and Exchange Commission, the common stock
equivalents issued within one year of the Company's initial public
offering have been considered as outstanding since the inception of the
Company and have been included in the calculation of weighted average
common and common equivalent shares outstanding for all periods presented
using the treasury stock method, even though they are anti-dilutive in
loss periods.
2. INVENTORIES
Inventories include the following:
September 30, December 31,
1996 1995
Finished goods $ 4,549,000 $ 6,393,000
Work in process 480,000 480,000
Raw materials 3,513,000 4,267,000
--------- ---------
$ 8,542,000 $ 11,140,000
============== =======================
3. STOCKHOLDERS' EQUITY
On May 22, 1996, the Company completed its initial public offering of
2,600,000 shares of its common stock (the "Initial Public Offering"). Net
proceeds to the Company aggregated approximately $18.0 million. As of the
closing date of the offering, the $5.0 million convertible note with
DowBrands Inc. ("Dow") converted into 763,500 shares of Series B
convertible preferred stock, the holders of which are entitled to
dividends ($400,000 annually), which will accrue whether or not declared,
will be cumulative to the extent not paid.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pro Forma and Historical Results of Operations
The following table sets forth pro forma statements of operations
information in dollars and as a percentage of total net sales for the three
months and nine months ended September 30, 1995, and historical statements of
operations information in dollars and as a percentage of total net sales for
the three months and nine months ended September 30, 1996. The pro forma
information gives effect to the acquisition of Lamaur as if it had occurred
January 1, 1995 and includes adjustments for depreciation to reflect the
Company's basis in property, plant and equipment, a reduction in employee
benefits as a result of the elimination of post-retirement benefits and 401(k)
matching contributions and a reduction in the Company's vacation benefits . The
pro forma information is not necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRO PRO
HISTORICAL FORMA HISTORICAL FORMA
1966 % 1995 % 1996 % 1995 %
---------- ------ ------- ------ ---------- ------ ------- ------
Total Net Sales $29,249 100.0% $29,832 100.0% $89,411 100.0% $91,688 100.0%
Cost of goods sold 17,538 60.0 17,462 58.5 55,275 61.8 54,984 60.0
-------- ----- ------- ------ ------- ------ ------ ------
Gross margin 11,711 40.0 12,370 41.5 34,136 38.2 36,704 40.0
Operating expenses 11,218 38.3 11,679 39.2 32,949 36.9 34,234 37.3
Write-down of assets 0 0.0 0 0.0 0 0.0 11,000 12.0
-------- ------ ------- ----- ------ ------ ------- ------
Operating income (loss) 493 1.7 691 2.3 1,187 1.3 (8,530) (9.3)
Other income (expense)
Interest expense (251) (0.9) (399) (1.3) (1,083) 1.2) (1,187) (1.3)
Other income 397 1.4 20 0.0 469 0.5 93 0.1
------- ------ ------- ----- ------ ------ ------- ------
Net income (loss) before taxes $639 2.2% $312 1.0% $573 0.6% ($9,624) 10.5%
======= ====== ======= ===== ====== ====== ======= ======
</TABLE>
Three Months Ended September 30, 1996 (Historical) Compared to
Three Months Ended September 30, 1995 (Pro Forma)
Total net sales for the three months ended September 30, 1996 were
$29.2 million, compared with pro forma net sales of $29.8 million for the same
period in the prior year, a decrease of 2.0%.
The company experienced sales increases from its contract and salon
divisions as well as its Style(R) product line, these increases were offset by
continued decreases in Permasoft(R) and Salon Style(R) during the three months
ended September 30,1996 compared to the same period last year.
8
<PAGE>
Gross margin for the three months ended September 30, 1996
decreased by $0.7 million, or 5.3%, as compared with pro forma gross margin for
the same period in 1995. Gross margin as a percentage of net sales was 40.0%
for the three months ended September 30, 1996 compared with pro forma margin of
41.5%. The decrease in gross margin percentage was due to the change in product
mix to lower margin products as a result of increased sales in contracting
manufacturing and the Style(R) product line.
Operating expenses of $11.2 million for the three months ended
September 30, 1996 decreased by $0.5 million, or 3.9%, as compared with pro
forma operating expenses for the same period in 1995. This decrease is
principally attributable to a reduction in marketing due to timing, reduced
brokerage as a result of a change in product sales mix and lower sales in 1996,
and the savings realized in 1996 as a result of the organizational
restructuring implemented in the second quarter of 1995 and the first quarter
of 1996.
Interest expense was $0.3 million for the three months ended
September 30, 1996 and $0.4 million for the same period in 1995. This decrease
was due to a pay-down of $8.0 million by the Company on its revolver with
Norwest from the proceeds of its Initial Public Offering in the second quarter
of 1996.
Other income for the three months ended September 30, 1996 was $0.4
million as compared with $0.02 million for the same period in 1995. This
increase is attributable to the increase in interest income from the investment
of the additional cash available as a result of the Company's Initial Public
Offering in the second quarter of 1996, and a gain on the sale of equipment.
As a result of the foregoing factors, the net income for the three
months ended September 30, 1996 was $0.6 million, compared to pro forma net
income of $0.3 million for the three months ended September 30, 1995.
Nine Months Ended September 30, 1996 (Historical) Compared
to Nine Months Ended September 30, 1995 (Pro Forma)
Total net sales for the nine months ended September 30, 1996 were
$89.4 million, compared with pro forma net sales of $91.7 million for the same
period in the prior year, a decline of 2.5%. Although the Company experienced
sales increases from the Style(R) line of products and contract manufacturing
during the nine months ended September 30, 1996, the Company experienced sales
decreases in both Permasoft(R) and Salon Style(R). Lamaur's new management
implemented a strategy that includes increased advertising that began in the
quarter ended June 30, 1996 intended to reverse the decline in Permasoft(R)
sales. Salon Style(R) was introduced in 1994 and was supported by a heavily
funded marketing campaign through the first four months of 1995. In April 1995,
Dow discontinued advertising of Salon Style(R) in conjunction with the decision
to sell the Lamaur Division. During the next ten months, Salon Style(R) was not
supported with any advertising funds until the new Lamaur management team
reinstituted an aggressive marketing campaign in the first
9
<PAGE>
quarter of 1996. Management believes that over time, its new campaign can
reverse the decline in Permasoft(R) and Salon Style(R) sales.
Gross margin for the nine months ended September 30, 1996 decreased
by $2.6 million, or 7.0%, as compared with pro forma gross margin for the same
period in 1995. Gross margin as a percentage of net sales was 38.2% for the
nine months ended September 30, 1996, as compared with pro forma gross margin
of 40.0% during the same period in 1995. The decrease in gross margin
percentage in 1996 was due to a change in product mix to lower-margin products
as a result of an increase in sales of the lower-margin Style(R) line of
products and contract manufacturing, and a decrease in consumer retail
purchases of the higher margin Permasoft(R) and Salon Style(R) product line.
Operating expenses of $33.0 million for the nine months ended
September 30, 1996 decreased by $1.3 million, or 3.8%, as compared with pro
forma operating expenses for the same period in 1995. This decrease is
principally attributable to a reduction in marketing due to timing, reduced
brokerage as a result of a change in product sales mix and lower sales in 1996,
a charge in 1995 related to the write-off of a mold for discontinued product
packaging, and the savings realized in 1996 as a result of the organizational
restructuring implemented in the second quarter of 1995 and the first quarter
of 1996.
The $11.0 million write-down of assets by Dow in the first quarter
of 1995 reflected a further adjustment in the carrying value of Lamaur to its
net realizable value in connection with Dow's decision to sell Lamaur. Future
significant changes are not expected as all assets and liabilities were
recorded at their estimated fair value at the date of the Company's acquisition
of Lamaur.
As a result of the foregoing factors, the operating income for the
nine months ended September 30, 1996 was $1.2 million, as compared with a pro
forma operating loss of $8.5 million in the same period in 1995. Excluding the
write-down of assets, the pro forma operating income for the nine months ended
September 30, 1995 would have been $2.5 million.
Interest expense remained relatively unchanged for the nine months
ended September 30,1996 and 1995 at $1.1 million and $1.2 million respectively.
Other income for the nine months ended September 30, 1996 was $0.5
million as compared with $0.1 million for the same period in 1995. This increase
is attributable to the increase in interest income from the investment of the
additional cash available as a result of the Company's Initial Public Offering
in the second quarter of 1996, and a gain on the sale of equipment.
10
<PAGE>
As a result of the foregoing factors, net income for the nine months
ended September 30, 1996 was $0.5 million, as compared with a pro forma net
loss of $9.6 million for the same period in 1995.
Historical Results of Operations
Three Months Ended September 30, 1996 and 1995,
and Nine Months Ended September 30, 1996 and 1995
The Company was in a development stage and had no revenues until it
completed the acquisition of Lamaur in November 1995. Operating expenses of
$11.2 million were incurred in the three months ended September 30, 1996, as
compared with $0.3 million in the three months ended September 30, 1995, and
operating expenses of $33.0 million were incurred in the nine months ended
September 30, 1996, as compared with $0.5 million in the nine months ended
September 30, 1995. The higher operating expenses for 1996 primarily reflect
the inclusion of Lamaur's operating expenses. Prior to the Lamaur acquisition,
the Company's operating expenses were comprised of marketing, administrative,
and other operating expenses incurred to support the Company's technology
development and research activities. As a result of the foregoing factors, the
Company generated net income of $0.6 million in the three months ended
September 30, 1996, as compared with a net loss of $0.3 million for the same
period in 1995, and net income of $0.5 million in the nine months ended
September 30, 1996, as compared with a net loss of $0.5 million in the same
period in 1995.
Liquidity and Capital Resources
The Company has primarily financed its working and other capital
requirements from equity infusions and borrowings from certain of its
shareholders.
At September 30, 1996, the Company had $12.6 million in cash and
cash equivalents. In May 1996, the Company completed its Initial Public
Offering for the sale of 2,600,000 shares of common stock at $8 per share. Net
proceeds to the Company were approximately $18.0 million.
In June 1996, the Company used $8.0 million of the net proceeds
from its Initial Public Offering to pay down a portion of its revolver with
Norwest Business Credit, Inc. As of September 30, 1996, the Company had
approximately $6.0 million of debt outstanding under its revolver agreement
with Norwest. The revolver currently bears interest at the annual rate of 8.75%
which is 0.50% over Norwest's current base rate. The Company may, from time to
time, increase its borrowings under its revolving line of credit up to $14.0
million, as needed for its working capital and general corporate requirements.
11
<PAGE>
Upon the completion of the Initial Public Offering, the $5.0 million
convertible note with Dow converted into 763,500 shares of Series B convertible
preferred stock, the holders of which are entitled to dividends ($400,000
annually), which will accrue whether or not declared, and will be cumulative to
the extent not paid.
As a result of the above, the Company's long and short-term debt
has been reduced to $14.0 million from $23.0 million at December 31, 1995.
Accounts Receivable at September 30, 1996 increased $4.9 million and
Inventories decreased $2.6 million from December 31, 1995, principally due to
higher sales in September 1996 compared to December 1995.
Management believes that the Company's cash on hand, anticipated
cash flow from operations, and the amounts available to the Company under the
Norwest Credit Agreement will be sufficient for its working capital, capital
expenditures, and debt service and preferred stock requirements for at least
the next 18 months.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote. None.
Item 5. Other Information. None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits. The following exhibits are filed as part of this
Quarterly Report on Form 10-Q:
11.1 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. None.
13
SIGNATURE
Pursuant to the requirements 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.
ELECTRONIC HAIR STYLING, INC.
(Registrant)
DATE: November 11, 1996 /s/ John D. Hellmann
Vice President-Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
14
<PAGE>
<TABLE>
Exhibit 11.1
ELECTRONIC HAIR STYLING, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $ 610 $ (287) $ 544 $ (518)
Dividends on Series B Preferred Stock (100) - (133) -
---- ----
Net Income (Loss) Available to
Common Shareholders $ 510 $ (287) $ 411 $ (518)
======== ======== ========= =======
Weighted Average Shares Outstanding 5,570 2,961 4,208 2,961
Incremental Shares from the Exercise
of Warrants and Options (1) 296 465 423 465
Shares Issued Upon the Conversion of
Series A Preferred Stock 660 660 660 660
--- --- --- ---
Total Weighted Average Common and Common
Equivalent Shares Outstanding 6,526 4,086 5,291 4,086
----- ----- ----- -----
Net Income (Loss) per Share $ .08 $ (.07) $ .08 $ (.13)
======= ======= ======== =========
</TABLE>
(1) In accordance with the rules of the Securities and Exchange Commission,
common stock and common stock equivalents issued within one year of an initial
public offering are to be included in the calculation of weighted average
common and common stock equivalent shares outstanding for all periods presented
using the treasury stock method, even though they are anti-dilutive in loss
periods.
(2) Fully diluted earnings per share is not presented since it is
anti-dilutive.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONDENSED FINANCIAL STATEMENTS OF ELECTRONIC HAIR
STYLING, INC. FOR THE QUARTER ENDED SEPTEMBER 30, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12599
<SECURITIES> 0
<RECEIVABLES> 17567
<ALLOWANCES> 0
<INVENTORY> 8542
<CURRENT-ASSETS> 39114
<PP&E> 17554
<DEPRECIATION> 0
<TOTAL-ASSETS> 56912
<CURRENT-LIABILITIES> 15331
<BONDS> 11284
0
13500
<COMMON> 56
<OTHER-SE> 16741
<TOTAL-LIABILITY-AND-EQUITY> 56912
<SALES> 89411
<TOTAL-REVENUES> 89411
<CGS> 55275
<TOTAL-COSTS> 55275
<OTHER-EXPENSES> 32949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1083
<INCOME-PRETAX> 573
<INCOME-TAX> 29
<INCOME-CONTINUING> 544
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 544
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
