<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
REGISTRATION NO. 333-12469
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2844 76-2665378
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1146 SOUTH CEDAR RIDGE, DUNCANVILLE, TEXAS 75137
(214) 296-2887
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SAM L. LEOPOLD, CHAIRMAN OF THE BOARD
1146 SOUTH CEDAR RIDGE, DUNCANVILLE, TEXAS 75137
(214) 296-2887
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT S. KANT, ESQ. JEFFREY M. KNETSCH, ESQ.
MICHELLE S. MONSEREZ, ESQ. BRENT T. SLOSKY, ESQ.
MICHAEL L. KAPLAN, ESQ. BROWNSTEIN HYATT FARBER
O'CONNOR, CAVANAGH, ANDERSON, & STRICKLAND, P.C.
KILLINGSWORTH & BESHEARS, P.A. TWENTY-SECOND FLOOR
ONE EAST CAMELBACK ROAD 410 SEVENTEENTH STREET
PHOENIX, ARIZONA 85012-1656 DENVER, COLORADO 80202-4437
(602) 263-2400 (303) 534-6335
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1996
PROSPECTUS
LOGO
2,800,000 SHARES OF COMMON STOCK
------------------------
All of the shares of common stock (the "Common Stock") offered hereby (the
"Offering") are being issued and sold by Styling Technology Corporation (the
"Company"). Prior to the Offering, there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $10.00 and $12.00 per share. For a discussion of the factors
considered in determining the initial public offering price, see "Underwriting."
The Common Stock has been approved for quotation on the Nasdaq National Market,
under the symbol "STYL." The Company's Chief Executive Officer will purchase
$500,000 of Common Stock in the Offering at the Price to Public set forth below.
See "Certain Transactions."
SEE "RISK FACTORS" COMMENCING ON PAGE 9 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNTS
AND COMMISSIONS(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include the Representatives' non-accountable expense allowance
equal to the greater of 1 1/2% of the gross proceeds of the Offering or
$350,000 and warrants to purchase 196,000 shares of Common Stock issuable
to the Representatives (the "Representatives' Warrants"). The Company has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses, estimated at $1,355,000, including the
Representatives' non-accountable expense allowance of $462,000, or
$1,424,300 if the Underwriters' Overallotment Option (as defined below) is
exercised in full, payable by the Company.
(3) The Company has granted the Underwriters an option (the "Overallotment
Option"), exercisable within 30 days of the date of this Prospectus, to
purchase up to an aggregate of 420,000 additional shares of Common Stock,
on the same terms as set forth above, solely to cover overallotments, if
any. If this option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$ , $ , and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale and acceptance by the Underwriters and subject to their right to
withdraw, cancel, modify, or reject any order in whole or in part. It is
expected that delivery of the Common Stock will be made at the office of
Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia, or through the
facilities of The Depository Trust Company, on or about , 1996.
------------------------
<TABLE>
<S> <C>
FRIEDMAN, BILLINGS, RAMSEY PRIME CHARTER
& CO., INC. LTD.
</TABLE>
The date of this Prospectus is , 1996.
<PAGE> 3
[Photo of tanning products, moisturizing lotions and skin care products.]
Body Drench(R), Tan FX(TM), and Capacity products include indoor and outdoor
tanning products and moisturizing lotions and skin care products.
[Photo of skin care, natural nail care products and manicure and pedicure
products.]
Gena(R) product lines include Warm-O-Lotion(TM) and Healthy Hoof(TM) for skin
care and natural nail care as well as a full line of manicure and pedicure
products.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited summary financial information for the first three fiscal
quarters of each fiscal year.
2
<PAGE> 4
PROSPECTUS SUMMARY
SIMULTANEOUSLY WITH THE CONSUMMATION OF THE OFFERING, STYLING TECHNOLOGY
CORPORATION WILL ACQUIRE IN SEPARATE TRANSACTIONS FOUR BUSINESSES THAT DEVELOP,
PRODUCE, AND MARKET PROFESSIONAL SALON PRODUCTS (COLLECTIVELY, THE "ACQUIRED
BUSINESSES"). UNLESS THE CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED
IN THIS PROSPECTUS GIVES EFFECT TO THE ACQUISITIONS OF THE ACQUIRED BUSINESSES
(THE "ACQUISITIONS"); ALL REFERENCES HEREIN TO THE "COMPANY" INCLUDE THE
ACQUIRED BUSINESSES; AND ALL REFERENCES HEREIN TO "STYLING" MEAN "STYLING
TECHNOLOGY CORPORATION" PRIOR TO THE COMPLETION OF THE ACQUISITIONS. UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE OVERALLOTMENT OPTION, THE REPRESENTATIVES' WARRANTS, OR OTHER
OUTSTANDING OPTIONS OR WARRANTS, NO ISSUANCE OF SHARES CONTINGENTLY ISSUABLE IN
CONNECTION WITH ONE OF THE ACQUISITIONS, AND GIVES EFFECT TO THE COMPANY'S
REVERSE 0.808-FOR-1 STOCK SPLIT EFFECTED ON SEPTEMBER 19, 1996 AND THE
REPURCHASE OF 807,851 SHARES FROM A STOCKHOLDER. THE FOLLOWING SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
The Company develops, produces, and markets high-end professional salon
products, including hair care, nail care, and skin and body care products as
well as salon appliances and salonwear. The Company sells its products primarily
to beauty and tanning supply distributors and, to a lesser extent, directly to
spas, resorts, health and country clubs, beauty salon chains, and hair, nail,
and tanning salons throughout the United States as well as internationally. On a
pro forma basis, total revenue of the Company would have exceeded $25 million
and its net income would have exceeded $1.5 million in 1995 assuming the
Acquisitions had taken place on January 1, 1995. Of the Acquired Businesses (as
described below), Gena's revenue for the fiscal year ended February 29, 1996 was
$8.4 million, and its net income was $317,000; Body Drench's revenue for the
fiscal year ended December 31, 1995 was $11.9 million, and its net income was
$294,000; JDS' revenue for the fiscal year ended September 30, 1995 was $3.4
million, and its net income was $9,000; and KII's revenue for the fiscal year
ended December 31, 1995 was $1.6 million, and its net loss was $135,000.
Styling was founded in June 1995. Although Styling itself has conducted no
operations to date, it will acquire, simultaneously with the consummation of the
Offering, four professional salon product businesses that, on a combined basis,
have a diversified line of well-established, brand-name professional salon
products. The Company's product lines have been popular in the professional
salon industry for more than 10 years. Based on the industry experience of its
management, the input of the operators of the Acquired Businesses, and available
industry information, the Company believes that its Body Drench(R) product line
is one of the leaders in the professional skin care and tanning products market;
its Gena(R) Warm-O-Lotion(TM) product line is a leading line in professional
natural nail care; its line of acrylic nail enhancement products is well-
recognized in the professional nail enhancement market; and SRC(TM) is regarded
by salon professionals as a premier line of salon appliance products. The
Acquisitions also will provide the Company with an extensive combined network of
strong distribution relationships, experienced sales forces, established
marketing and salon industry education programs, significant production and
sourcing capabilities, and experienced management personnel with extensive
relationships in the professional salon products industry. Styling's business
activities to date have related to developing a business plan, engaging
personnel, negotiating the terms of the Acquisitions, and preparing for the
Offering.
The Company's Chief Executive Officer and President have more than 10 and
20 years, respectively, of experience in the professional salon products
industry. The Chief Executive Officer's experience includes serving as the
executive vice president of a mall-based retail chain of beauty supply salons;
the president of a developer of a line of hair care products; the owner of
retail salons; and a joint venturer with Regis Corporation in a mall-based
retail salon chain. The President's experience includes serving as the chief
operating officer of one of the Acquired Businesses; a member of the senior
management team of a corporation that conducted the acquisition of personal care
brands, assets, and trademarks from companies in the professional salon and
mass-market industries; a marketing executive for a large beauty supply
distributor; and the national sales manager for a personal care products
company.
The professional salon products industry is highly fragmented. According to
Modern Salon Magazine, a leading professional salon trade publication, more than
700 firms produce professional salon products. The
3
<PAGE> 5
Company believes most of these firms are small, closely held businesses, in most
cases offering professional salon products in a single product category.
Professional salon products are sold primarily to beauty supply distributors
that resell these products to beauty salon chains and hair, nail, and tanning
salons. According to industry sources, professional salon industry revenue
(including revenue from salon services and from sales of salon products) for
1995 was $36 billion domestically (a 6% increase over the prior year) and $70
billion internationally. Industry growth has resulted from an increased demand
for professional salon products because of the more frequent use of salon
services and the growth and aging of the United States population.
The Company's objective is to become a dominant developer, producer, and
marketer of professional salon products in the United States and
internationally. Key aspects of the Company's strategy to achieve its objective
include (i) pursuing acquisitions to capitalize on the substantial fragmentation
and growth potential in the professional salon products market; (ii) enhancing
the operating efficiencies of acquired businesses; (iii) leveraging its
well-established domestic and international distribution channels; (iv)
expanding the distribution of its products in international markets; and (v)
capitalizing on the brand-name recognition of its existing product lines by
introducing new products and formulations under these brand names.
The four professional salon product businesses that Styling will acquire
simultaneously with the consummation of the Offering are (i) Gena Laboratories,
Inc. ("Gena"), a leading producer and marketer of professional natural nail care
products, pedicure products, skin care products including paraffin therapy
products and, to a lesser extent, hair care products; (ii) the Body Drench
division ("Body Drench") of Designs by Norvell, Inc. ("DBN"), a leading producer
and marketer of high-end professional tanning and moisturizing products and
resort, spa, and health and country club personal care products; (iii) JDS
Manufacturing Co., Inc. ("JDS"), a producer and marketer of acrylic and
fiberglass nail enhancement products; and (iv) Kotchammer Investments, Inc. (dba
Styling Research Company) ("KII"), a marketer of high-end salon appliances (such
as curling irons and blow dryers) and salonwear (such as capes and aprons) that
owns proprietary formulas and marketing rights to several hair care lines
previously formulated and manufactured by Redken Laboratories, Inc. Styling has
entered into separate acquisition agreements for each of the Acquired
Businesses, which include customary representations and warranties, covenants,
closing conditions, and post-closing price adjustments. The total purchase price
for the Acquired Businesses is approximately $23.23 million, of which $20.65
million is payable in cash (not including $2.0 million in cash payable in two
years), $530,000 is payable in notes, and $50,000 is payable in shares of the
Company's Common Stock, subject to adjustment under certain circumstances. In
addition, in connection with the Acquisitions, the Company will assume certain
existing liabilities of the Acquired Businesses, consisting of approximately
$300,000 of long-term debt in connection with the Gena Acquisition; up to $3.3
million of trade accounts payable, up to $40,000 of bank debt, and up to
$560,000 of payroll liabilities in connection with the Body Drench Acquisition;
and other miscellaneous accrued liabilities which the Company expects to be less
than $1.0 million. The Company will record an aggregate of $18.1 million of
goodwill in the Acquisitions to be amortized over a 25-year period. See
"Description of the Acquisitions" for a further description of the Acquisitions,
the purchase price being paid in each of the Acquisitions, the material terms of
the acquisition agreement related to each Acquisition, and the amount of
goodwill being recorded in connection with each Acquisition.
The Company has financed some of the costs associated with the Acquisitions
through the private issuance of a $400,000 promissory note (the "Bridge Note")
to a single foreign investor, Holden Holdings Limited. The Bridge Note bears
interest at 10% per annum and is due on the earlier of January 31, 1997 or the
consummation of the Offering. In connection with the issuance of the Bridge
Note, the Company agreed to issue to the holder of the Bridge Note, for no
additional consideration, 18,182 shares of Common Stock (assuming an initial
public offering price of $11.00 per share) (the "Bridge Note Shares") and
redeemable Common Stock Purchase Warrants (the "Bridge Warrants") to purchase
18,182 shares (assuming an initial public offering price of $11.00 per share) at
an exercise price equal to 125% of the initial public offering price (the
"Bridge Warrant Shares"). Assuming repayment of the Bridge Note occurs on
November 26, 1996, the holder of the Bridge Note will receive $8,658 of
interest, which when taken together with the issuance of the Bridge Note Shares
and Bridge Warrants to such holder upon the consummation of the Offering, will
result in an effective interest rate on the Bridge Note as of the consummation
of the Offering of 325.0% per
4
<PAGE> 6
annum (assuming an initial public offering price of $11.00 per share). The
holder of the Bridge Note Shares and the Bridge Warrant Shares has registration
rights with respect to these shares. See "Use of Proceeds," "Description of
Capital Stock -- Bridge Warrants," and "Description of Capital Stock -- Shares
Eligible for Future Sale."
The Company is a Delaware corporation. The Company maintains its principal
executive office at 1146 South Cedar Ridge, Duncanville, Texas, and its
telephone number is (214) 296-2887. This Prospectus refers to certain trademarks
and service marks, including registered marks, of the Acquired Businesses and of
companies other than the Company.
THE PUBLIC OFFERING
Common Stock offered by the
Company......................... 2,800,000 shares
Common Stock to be outstanding
after the Offering.............. 3,792,149 shares(1)
Use of Proceeds................. To pay the cash portion of the purchase price
for the Acquired Businesses, to repurchase
Common Stock, to repay principal and interest
on the Bridge Note, to repay a portion of the
short-term obligations of the Acquired
Businesses assumed by the Company in the
Acquisitions, to repay funds advanced to pay
earnest money deposits required in connection
with certain of the Acquisitions, and to
provide funds for working capital, general
corporate purposes, and potential
acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbol... STYL
Risk Factors.................... Prospective purchasers should carefully
consider the factors discussed under "Risk
Factors."
- ---------------
(1) Does not include Common Stock reserved for issuance upon exercise of the
Overallotment Option or the Representatives' Warrants, shares contingently
issuable in connection with the Body Drench Acquisition, options with an
exercise price equal to or above the assumed initial public offering price,
or the Bridge Warrants. Includes 4,545 shares to be issued in the
acquisition of KII, options with an exercise price less than the assumed
initial public offering price, and the Bridge Note Shares.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Simultaneously with the consummation of the Offering, Styling will acquire
the Acquired Businesses in separate transactions in exchange for cash, notes,
and shares of Common Stock. In addition, the Company will assume certain
existing liabilities of the Acquired Businesses, consisting of approximately
$300,000 of long-term debt in connection with the Gena Acquisition; up to $3.3
million of trade accounts payable, up to $40,000 of bank debt, and up to
$560,000 of payroll liabilities in connection with the Body Drench Acquisition;
and other miscellaneous accrued liabilities which the Company expects to be less
than $1.0 million.
Summary historical financial data has been derived from the separate
Financial Statements and is presented for each of the Acquired Businesses. The
pro forma statement of operations data set forth on the following pages assumes
that Styling had completed the Acquisitions on January 1, 1995, and such
information as of and for the six months ended June 30, 1996 and for the year
ended December 31, 1995 was derived from the Pro Forma Combined Financial
Statements and the Notes related thereto appearing elsewhere in this Prospectus.
The following summary financial data is qualified in its entirety by the more
detailed information appearing in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
including the Notes related thereto, appearing elsewhere in this Prospectus.
5
<PAGE> 7
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ -------------------
1995 1995 1996
------------ ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-COMPANY PRO FORMA(2):
Net sales................................................ $ 25,181 $15,102 $13,692
Gross profit............................................. 11,875 7,049 6,663
Selling, general, and administrative expenses............ 8,716 4,940 4,040
Income from operations................................... 3,159 2,109 2,623
Net income............................................... 1,599 1,103 1,450
Adjusted pro forma earnings per share.................... .42 .29 .38
Adjusted pro forma shares outstanding.................... 3,791 3,791 3,791
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED FEBRUARY 28, AUGUST 31,
---------------------------- -----------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-GENA:
Net sales................................... $6,426 $7,524 $8,384 $4,336 $4,705
Gross profit................................ 3,146 3,360 3,565 2,039 2,160
Selling, general, and administrative
expenses................................. 2,744 2,964 3,033 1,573 1,454
Income from operations...................... 402 396 532 466 706
Net income.................................. 278 232 317 279 442
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-BODY DRENCH(3):
Net sales................................. $6,653 $11,138 $11,871 $8,250 $6,586
Gross profit.............................. 2,614 4,796 5,444 3,686 3,121
Selling, general, and administrative
expenses............................... 2,055 4,076 4,883 2,971 2,402
Income from operations.................... 559 720 561 714 719
Net income................................ 328 446 294 416 440
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-JDS:
Net sales................................. $3,799 $ 3,578 $ 3,368 $2,592 $2,339
Gross profit.............................. 2,054 2,114 2,019 1,561 1,389
Selling, general, and administrative
expenses............................... 2,092 2,170 2,046 1,549 1,393
Income (loss) from operations............. (38) (56) (26) 12 (4)
Net income (loss)......................... (29) (16) 9 23 (3)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA-KII:
Net sales................................. $ 102 $ 1,999 $ 1,558 $ 777 $ 736
Gross profit.............................. 60 1,014 846 405 393
Selling, general, and administrative
expenses............................... 87 1,040 891 476 329
Income (loss) from operations............. (27) (26) (45) (71) 64
Net income (loss)......................... (32) (104) (135) (117) 25
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
STYLING GENA BODY DRENCH JDS KII
AS OF AS OF AS OF AS OF AS OF
JUNE 30, 1996 AUGUST 31, 1996 JUNE 30, 1996(4) JUNE 30, 1996 JUNE 30, 1996
------------- --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $ 0 $ 2,315 $ 329 $ 333 $ 345
Total assets................ 300 3,975 4,221 728 622
Long-term debt, less current
portion.................. -- 291 -- 432 610
Total stockholders'
equity................... 1 3,065 582 27 (200)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF JUNE 30, ADJUSTED PRO FORMA
1996(5) AS OF JUNE 30, 1996(6)
------------------- ----------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ (17,153) $ 8,335
Total assets....................... 7,000 32,489
Long-term debt, less current
portion......................... 2,291 2,291
Total stockholders' equity......... 50 25,539
</TABLE>
- ---------------
(1) Summary historical financial data is provided for each of the Acquired
Businesses. For accounting purposes, the Acquisitions are to be treated as
business combinations accounted for by the purchase method of accounting as
prescribed by Accounting Principles Board Opinion No. 16. The Acquired
Businesses are to be valued at the fair value of consideration given,
principally cash from the completion of the Offering. The excess of
consideration given over the fair value of net assets received will be
amortized on a straight-line basis over 25 years. Gena and Body Drench
comprise a substantial majority of the combined assets, net sales, and
operating income, and therefore are deemed to be the predecessors of
Styling.
(2) Reflects adjustments for the Acquisitions and the Offering. The pro forma
combined statement of operations data for the year ended December 31, 1995
and the six months ended June 30, 1995 and 1996 assumes that Styling had
completed the Acquisitions on January 1, 1995. The pro forma combined
statement of operations data may not be indicative of actual results that
would have been achieved if the transactions had occurred on the dates
indicated or the results which may be realized in the future. The pro forma
combined statement of operations data contain adjustments which are directly
attributable to the transaction. See the Pro Forma Combined Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus.
(3) Body Drench has historically operated as a division of DBN.
(4) Body Drench has historically operated as a division of DBN. Total
stockholders' equity data represents DBN's owners' net investment in the
Division to be acquired by Styling.
(5) Reflects adjustments for the Acquisitions. See the Pro Forma Combined
Financial Statements, including the Notes thereto, appearing elsewhere in
this Prospectus for a discussion of the assumptions made and adjustments
applied in the preparation of this data.
(6) The adjusted pro forma combined balance sheet data as of June 30, 1996 gives
effect to the Acquisitions, the repurchase of Common Stock, the Offering,
and the use of proceeds therefrom, as if such transactions had occurred on
June 30, 1996.
7
<PAGE> 9
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
PURCHASERS SHOULD CONSIDER THE FOLLOWING FACTORS IN EVALUATING A PURCHASE OF
SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY
Styling was founded in June 1995 to acquire businesses that develop,
produce, and market professional salon products, but Styling itself has
conducted no operations to date. Styling has entered into separate agreements to
purchase the Acquired Businesses simultaneously with the consummation of the
Offering. The Acquired Businesses have been operating independently, and neither
the historical results of their separate operations nor the Company's pro forma
results of operations are necessarily indicative of the results that would have
been achieved if the Acquired Businesses had been operated on an integrated
basis or the results that may be realized on a combined basis in the future.
OPERATIONS OF ACQUIRED BUSINESSES
The financial performance of several of the Acquired Businesses has shown
declining trends in revenue over the last full fiscal years and in the
comparable periods to date in the current fiscal year relative to the prior
year. JDS and KII experienced revenue decreases of $200,000 and $400,000,
respectively, in fiscal 1995 compared to fiscal 1994, and $253,000 and $41,000,
respectively, in the nine- and six-month periods of the current fiscal year
compared to the same periods of the prior year. Body Drench experienced a $1.6
million decrease in revenue in the first six months of its current fiscal year
compared to the comparable period of the prior year. In addition, several of the
Acquired Businesses have shown declining trends in net income or have shown net
losses. Body Drench's net income decreased to $300,000 in its 1995 fiscal year
from $400,000 in its 1994 fiscal year; JDS incurred a net loss of $16,000 in its
1994 fiscal year and of $3,000 in the first nine months of its 1996 fiscal year;
and KII incurred net losses of $104,000 and $135,000 in its 1994 and 1995 fiscal
years, respectively. See "Selected Historical and Pro Forma Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The report of Body Drench's independent public accountants dated June 28,
1996 expressed "substantial doubts" about Body Drench's ability to continue as a
going concern in the absence of its acquisition by the Company. The auditors
have informed the Company that, upon the closing of the Offering and the
simultaneous acquisition of Body Drench by the Company, their report with
respect to the audited financial statements of Body Drench would no longer
contain a going concern paragraph.
INTEGRATION OF BUSINESS OPERATIONS
Although certain members of the management of the Company have extensive
experience in the professional salon products industry, there can be no
assurance that the Company will be able to manage effectively the combined
operations of the Acquired Businesses or achieve the Company's operating and
growth strategies. The integration of the management, operations, and facilities
of the Acquired Businesses and other businesses the Company may acquire could
involve unforeseen difficulties, which could have a material adverse effect on
the Company's business, financial condition, and operating results.
The Company has conducted due diligence reviews of each of the Acquired
Businesses, has received representations and warranties regarding each of the
Acquired Businesses, and has negotiated certain purchase price adjustments and
set-off rights with respect to each of the Acquisitions. See "Description of the
Acquisitions." The Company intends to pursue future acquisitions on a similar
basis. There can be no assurance, however, that unforeseen liabilities will not
arise in connection with the operation of the Acquired Businesses or future
acquired businesses or that any contractual purchase price adjustments, rights
of set-off, or other remedies available to the Company will be sufficient to
compensate the Company in the event unforeseen liabilities arise.
The Company anticipates using the opportunities created by the combination
of the Acquired Businesses to effect what the Company believes will be
substantial cost savings, including a reduction in operating
8
<PAGE> 10
expenses as a result of the internalization of substantial amounts of previously
outsourced manufacturing as well as the elimination of duplicative
administrative, warehouse, and distribution facilities, functions, and
personnel. Significant uncertainties, however, accompany any business
combination, and there can be no assurance that the Company will be able to
achieve its anticipated integration of facilities, functions, and personnel in
order to achieve operating efficiencies or otherwise realize cost savings as a
result of the Acquisitions or future acquisitions. The inability to achieve the
anticipated cost savings could have a material adverse effect on the Company's
business, financial condition, and operating results. See "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations -- Effects of Combination" and the Pro Forma Combined Financial
Statements.
ACQUISITION STRATEGY
The success of the Company's acquisition strategy will depend in large part
on its ability to acquire and operate successfully additional professional salon
product businesses. There can be no assurance that any suitable additional
acquisitions can be identified or consummated or that the operations of any
businesses that are acquired will be successfully integrated into the Company's
operations. In addition, increased competition for acquisition candidates may
increase purchase prices for acquisitions to levels beyond the Company's
financial capability. As of the date of this Prospectus, the Company has no
binding agreements to effect any acquisitions other than the Acquisitions and is
not engaged in any active negotiations to acquire any other businesses. The
Company expects to use cash and its securities, including Common Stock, as the
primary consideration for future acquisitions. See "Risk Factors -- Future
Capital Needs; Debt Service Requirements." The size, timing, and integration of
any future acquisitions may cause substantial fluctuations in operating results
from quarter to quarter. Consequently, operating results for any quarter may not
be indicative of the results that may be achieved for any subsequent fiscal
quarter or for a full fiscal year. These fluctuations could adversely affect the
market price of the Common Stock.
FUTURE CAPITAL NEEDS; DEBT SERVICE REQUIREMENTS
A substantial portion of the proceeds of the Offering will be applied to
pay the cash portion of the purchase price for the Acquisitions, to discharge
certain liabilities assumed in the Acquisitions, to repurchase Common Stock, and
to repay the Bridge Note. As a result, the Company will rely primarily on cash
flow from operations for its working capital and general corporate needs. The
Company's future capital requirements will depend upon the size and timing of
future acquisitions and the availability of additional financing. To the extent
that the Company finances future acquisitions in whole or in part through the
issuance of Common Stock or securities convertible into or exercisable for
Common Stock, existing stockholders will experience a dilution in the voting
power of their Common Stock and may suffer a dilutive effect on earnings per
share. In the event that potential acquisition candidates are unwilling to
accept Common Stock as consideration or the market price of the Common Stock
declines in value, the Company will be required to use more cash from
operations. The inability of the Company to generate cash from operations for
future acquisitions could materially and adversely affect the Company's
acquisition program unless the Company is able to obtain additional capital
through external financings, including additional equity offerings. Any
borrowings made to finance future acquisitions or for operations could make the
Company more vulnerable to a downturn in its operating results, a downturn in
economic conditions, or increases in interest rates on borrowings that are
subject to interest rate fluctuations. If the Company's cash flow from
operations is insufficient to meet its debt service requirements, the Company
could be required to sell additional equity securities, refinance its
obligations, or dispose of assets in order to meet its debt service
requirements. In addition, it is likely any future financial arrangements will
contain financial and operational covenants and other restrictions with which
the Company must comply, including limitations on capital expenditures, the
payment of dividends, and the incurrence of additional indebtedness. There can
be no assurance that such financing will be available if and when needed or will
be available on terms acceptable to the Company. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Strategy."
9
<PAGE> 11
CONSUMER PREFERENCES AND NEW PRODUCT INTRODUCTIONS
Consumer preferences in the professional salon product industry depend to a
significant extent on the prescriptive role of salon professionals. Relatively
few products achieve wide acceptance in the professional salon market. The
Company believes that its success in the professional salon product industry
will depend, in part, on its ability to introduce new and attractive products on
a regular basis. There can be no assurance that any new products introduced by
the Company will achieve any significant degree of market acceptance or that any
acceptance that is achieved will be sustained for any significant amount of
time. The failure of new product lines or product innovations to achieve or
sustain market acceptance could have a material adverse effect on the Company's
business, financial condition, and operating results.
MANAGEMENT OF GROWTH
The Company's growth and expanding operations may place a significant
strain on the Company's management, administrative, operational, and financial
resources as well as increased demands on its systems and controls. The
Company's ability to manage its growth will require it to continue to integrate
and enhance its operational, financial, and management information systems and
its marketing programs; to motivate, manage, and retain its current employees;
and to identify, hire, and retain additional employees. The failure of the
Company to manage its growth on an effective basis could have a material adverse
effect on the Company's business, financial condition, and operating results.
COMPETITION
The professional salon products industry is highly competitive. The
Company's products compete directly against professional salon and other
functionally similar products sold through distributors of professional salon
products and professional salons. In addition, the Company's professional salon
products compete indirectly against hair care, nail care, and body and skin care
products sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores and, to a lesser extent, mass
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," and catalogs. Current and potential competitors include a number
of companies that have substantially greater resources than the Company,
including better brand-name recognition, broader product lines, and wider
distribution channels. The professional salon products industry is characterized
by a lack of significant barriers to entry with respect to the development and
production of professional salon products, which may result in new competition,
including possible imitators of one or more of the Company's recognized product
lines. In addition, it is common in the professional salon products industry for
companies to market products that are similar to products being successfully
marketed by competitors. Increased competition and any reductions in
competitors' prices, which requires the Company to implement price reductions in
order to remain competitive, could have a material adverse effect on the
Company's business, financial condition, and operating results. See
"Business -- Competition."
DEPENDENCE ON MAJOR CUSTOMERS
The Company depends upon professional beauty and tanning supply
distributors, spas, health and country clubs, chain salons and, to a lesser
extent, hair, nail, and tanning salons to distribute its products. The
distribution channels for professional salon products are highly fragmented. The
Company estimates that there are more than 3,500 domestic wholesale
distributors, 4,000 beauty supply chains, and more than 200,000 salons,
including salon chains. Other than Sally Beauty Company, Inc. ("Sally"), a
division of Alberto-Culver Company, and Regis Corporation ("Regis"), no other
beauty supply chain or beauty salon chain accounts for a significant portion of
the purchases of the Company's professional salon products.
During 1995, the Company's largest customer, Sally, accounted for
approximately 10% of the Company's net sales. The Company currently maintains
more than 5,000 active customer accounts, and no customer other than Sally
accounted for more than 10% of the Company's sales in any of the last three
years. The Company does not have long-term contracts with any of its customers.
An adverse change in, or termination of, the Company's relationship with, or an
adverse change in the financial viability of, one or more of its major
10
<PAGE> 12
customers, including Sally or Regis, could have a material adverse effect on the
Company's business, financial condition, and operating results.
DEPENDENCE ON TRADEMARKS
The market for the Company's products depends to a significant extent upon
the goodwill associated with its trademarks and trade names. Therefore,
trademark protection is important to the Company's business. Although a number
of the Company's trademarks and trade names are registered in the United States,
there can be no assurance that the Company will be successful in asserting
trademark or trade name protection for its trademarks and trade names in the
United States or other markets, and the costs to the Company of such efforts may
be substantial. See "Business -- Patents and Trademarks."
RELIANCE ON PRODUCTION FACILITY
The Company will produce a significant portion of its products at its
facility in Duncanville, Texas. The production operations at this facility use
certain custom-designed equipment which, if damaged or otherwise rendered
inoperable or unavailable, could result in the disruption of the Company's
production operations. Any extended interruption of operations at the Company's
production facility would have a material adverse effect on its business. The
Company seeks to protect against this risk by maintaining substantial spare
parts and an internal maintenance shop capable of servicing and rebuilding
in-house all manufacturing equipment. The Company also believes that there are
several readily available external sources to repair or replace any of this
equipment should that be necessary. To date, no significant disruptions have
been experienced at the facility. See "Business -- Production."
The Company plans to take advantage of combined operations by utilizing its
Duncanville, Texas facility to produce products previously outsourced to third
parties and to internally house warehouse and distribution activities rather
than utilizing leased facilities. The Company has the ability to increase the
size of the facility by building an additional facility on a vacant lot it owns
adjacent to the existing facility. The facility currently is operating at
approximately 40% of its capacity, and the Company has no immediate plans to
commence construction of such an addition. The inability of the Company to
utilize the current facility to the full extent of its capacity could have an
adverse effect on the Company's operating results.
DEPENDENCE ON KEY SUPPLIERS
Substantially all of the Company's salon appliance products currently are
manufactured on a contract basis by Windmere Corporation. Belson Products (a
division of Windmere Corporation) competes with the Company in the professional
salon appliance market, although it concentrates primarily in the mass-market
retail segment of the industry. The Company does not have a long-term
manufacturing contract with Windmere Corporation, and there can be no assurance
that Windmere Corporation will continue to manufacture salon appliance products
for the Company. Because the Company owns the tooling and molds used to
manufacture such appliance products, however, it believes it could substitute
another manufacturer on a timely basis and at reasonable prices if the need
arises. However, there can be no assurance that the Company could secure another
manufacturer of comparable quality, at reasonable prices, or in a timely
fashion. Amole, Inc. ("Amole") manufactures products for the Company's Body
Drench Division on a contract basis and represented approximately 18% of the
Company's total materials costs on a combined basis in 1995. The Company does
not have a long-term supply contract with Amole. There can be no assurance that
Amole will continue to supply products to the Company. No other supplier
furnishes more than 10% of the Company's products, raw materials, or other
supplies.
GENERAL ECONOMIC CONDITIONS
The success of the Company's operations depends to an extent upon a number
of factors relating to discretionary consumer spending. These factors include
economic conditions, such as employment, business conditions, interest rates,
and tax rates as well as the continued growth of the professional salon products
industry. There can be no assurance that consumer spending will not be adversely
affected by general social trends and economic conditions, thereby impacting the
Company's growth, net sales, and profitability. If the
11
<PAGE> 13
demand for professional salon products and related merchandise were to decline,
the Company's business, financial condition, and operating results could be
adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the skills of
its current key employees and its ability to identify, hire, and retain
additional sales, marketing, and financial personnel. There can be no assurance
that the Company will be successful in retaining its existing key personnel or
in attracting and retaining additional key personnel. The loss of services of
key personnel, including particularly Messrs. Leopold or Clifford, or the
inability to attract and retain additional qualified personnel could have a
material adverse effect upon the Company's business and operating results. The
Company has employment agreements with Messrs. Leopold and Clifford with terms
through September 2001. See "Management -- Employment Agreements." The Company
plans to obtain key person life insurance on each of Messrs. Leopold and
Clifford in the amount of $1.0 million, but does not expect to have key person
life insurance covering any other employee. See "Management."
REGULATION AND POTENTIAL CLAIMS
Certain of the Company's advertising and product labeling practices are
subject to regulation by the Federal Trade Commission (the "FTC"), and certain
of its professional salon product production practices are subject to regulation
by the Food and Drug Administration (the "FDA") as well as by various other
federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
the Company to date. Nonetheless, federal, state, and local regulations in the
United States that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product claims, production methods,
product content, labeling, and packaging. In addition, any expansion by the
Company of its operations to produce professional salon products that include
over-the-counter drug ingredients (such as certain sun screen ingredients) would
result in the Company becoming subject to additional FDA regulation as well as a
higher degree of inspection and greater burden of regulatory compliance than
currently exist. The nature and use of professional salon products could give
rise to product liability claims if one or more users of the Company's products
were to suffer adverse reactions following their use of the products. Such
reactions could be caused by various factors, many of which are beyond the
Company's control, including hypoallergenic sensitivity and the possibility of
malicious tampering with the Company's products. In the event of such an
occurrence, the Company could incur substantial litigation expense, receive
adverse publicity, and suffer a loss of sales.
The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals. The amount of hazardous waste produced by the Company may
increase in the future when the Company increases production at the Duncanville
facility. The failure by the Company to comply with current or future
environmental regulations could result in the imposition of fines on the
Company, suspension of production, or a cessation of operations. Compliance with
such regulations could require the Company to acquire costly equipment or to
incur other significant expenses. Any failure by the Company to control the use,
or adequately restrict the discharge, of hazardous substances could subject it
to future liabilities. The Company believes that it is in substantial compliance
with applicable federal, state, and local rules and regulations governing the
discharge of hazardous materials into the environment. There are no significant
capital expenditures for environmental control matters anticipated in the
current year or expected in the near future. See "Business -- Government
Regulation."
CONTROL BY MANAGEMENT
Upon the sale of the shares of Common Stock offered hereby, Sam L. Leopold,
the Chairman of the Board and Chief Executive Officer of the Company, will own a
total of approximately 22.5% of the outstanding shares of Common Stock
(consisting of 807,851 shares acquired for a total of $100 upon the formation of
the Company and 45,454 shares to be purchased by Mr. Leopold in the Offering
assuming an initial public offering price of $11.00 per share), and Thomas M.
Clifford, President of the Company, has an option to purchase 161,571 shares at
an exercise price of $0.10 per share. See "Principal Stockholders",
"Management -- Founders of the Company," and "Certain Transactions."
Consequently, Mr. Leopold will have the ability to influence the election of all
of the directors of the Company and thereby control the
12
<PAGE> 14
business, affairs, and management of the Company. In addition, Mr. Leopold will
have the ability to influence most matters requiring stockholder approval
including significant corporate matters, such as the amendment of the Company's
Certificate of Incorporation and any merger, consolidation, or sale of all or
substantially all of the assets of the Company. Such a high level of ownership
may have the effect of delaying, deterring, or preventing a change in the
control of the Company, even when such a change would be in the best interests
of the other stockholders, and may adversely affect the voting and other rights
of the other holders of Common Stock. Mr. Leopold acquired his shares of the
Company's Common Stock for nominal cash consideration. Since the formation of
the Company, however, Mr. Leopold has expended considerable time and effort,
without compensation, in developing the Company's business plan, engaging
personnel, negotiating the terms of the Acquisitions, and preparing for the
Offering.
ABSENCE OF PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no public market for the Common Stock of the Company prior
to the Offering. Although the Common Stock has been approved for quotation on
the Nasdaq National Market System, there can be no assurance that an active
trading market for the Common Stock will develop or be sustained after the
Offering or that the market price of the Common Stock will not decline below the
initial public offering price. The initial public offering price of the Common
Stock offered hereby was determined by negotiations between the Company and the
Representatives and may not be indicative of the market price of the Common
Stock in the future. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The trading price
of the Common Stock in the future could be subject to wide fluctuations in
response to quarterly variations in operating results of the Company or its
competitors, actual or anticipated announcements of product developments by the
Company or its competitors, changes in analysts' estimates of the Company's
financial performance, developments or disputes concerning proprietary rights,
regulatory developments, general industry conditions, worldwide economic and
financial conditions, and other events and factors. During certain periods, the
stock markets have experienced extreme price and volume fluctuations. In
particular, prices of stocks of rapidly expanding companies often fluctuate
widely, frequently for reasons unrelated to the operating performance of such
companies. In addition, securities sold in initial public offerings have been
especially susceptible to price volatility. These broad market fluctuations and
other factors may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect prevailing market prices. Of the 3,792,149
shares of Common Stock to be outstanding immediately after the completion of the
Acquisitions and the Offering (including options with exercise prices less than
the initial public offering price, 18,182 Bridge Note Shares, and 4,545 shares
issued in connection with the KII Acquisition, in each case calculating such
shares assuming an initial offering price of $11.00 per share), 2,800,000 shares
will be eligible for resale in the public market without any restrictions unless
held by "affiliates" of the Company as that term is defined in Rule 144 under
the Securities Act. The 807,851 shares of Common Stock owned by Mr. Leopold that
were acquired in June 1995, the 4,545 shares to be issued in connection with the
KII Acquisition, and the 18,182 Bridge Note Shares will be "restricted
securities" as that term is defined under Rule 144 ("Restricted Shares"). The
Restricted Shares may be subject to the volume and other resale limitations
described under "Description of Capital Stock -- Shares Eligible for Future
Sale." In June 1997 and November 1998, respectively, 807,851 and 22,727
Restricted Shares will be eligible for sale in the public market, subject to
compliance with the volume limitations and other requirements of Rule 144 under
the Securities Act.
The directors and executive officers of the Company, including Mr. Leopold,
have agreed not to sell or otherwise dispose of 1,014,876 shares of Common Stock
owned by them on or prior to the consummation of the Offering or which may be
acquired by them under outstanding stock options for a period of 270 days after
the consummation of the Offering without the prior written consent of the
Representatives. See "Certain Transactions" and "Underwriting." None of the
other Restricted Shares (consisting of the Bridge Note Shares and the shares
issued in connection with the KII Acquisition) will be subject to any agreement
with the Representatives respecting the resale of their shares. Holders of the
4,545 shares issued in connection with
13
<PAGE> 15
the KII Acquisition will have the right to require the Company to register such
shares of Common Stock for sale under the Securities Act pursuant to "piggyback"
registration rights granted by the Company with respect to such shares. The
holder of the Bridge Note Shares and the Bridge Warrant Shares may exercise
one-time demand registration rights and require the Company to register the
Bridge Note Shares and Bridge Warrant Shares at any time during the six-month
period commencing 120 days after the completion of the Offering. The holder of
the Bridge Note Shares and the Bridge Warrant Shares also have "piggyback"
registration rights with respect to such shares.
The Company also has the authority to issue additional shares of Common
Stock and shares of one or more series of preferred stock. After completion of
the Offering, the Company may issue shares of Common Stock or preferred stock
for use as a portion of the consideration in future acquisitions. These shares
may be registered under the Securities Act, in which case they generally will be
freely tradeable upon their issuance. In addition, the Company expects that it
will issue shares of Common Stock that are "restricted securities" under the
Securities Act in connection with future acquisitions. The issuance of such
shares would result in the dilution of the voting power of the shares of Common
Stock purchased in the Offering and could have a dilutive effect on earnings per
share. See "Description of the Acquisitions," "Description of Capital Stock --
Shares Eligible for Future Sale," and "Underwriting."
RIGHTS TO ACQUIRE SHARES
A total of 400,000 shares of Common Stock have been reserved for issuance
upon exercise of options granted or which may be granted under the Company's
Stock Option Plan. See "Management -- Stock Option Plan." Options to acquire
234,278 shares of Common Stock currently are outstanding, including options to
purchase 72,707 shares granted under the Company's Stock Option Plan. In
addition, there are outstanding Bridge Warrants to acquire 18,182 shares of
Common Stock (assuming an initial public offering price of $11.00 per share) at
an exercise price of 125% of the initial public offering price per share and
Representatives' Warrants to acquire 196,000 shares of Common Stock at an
exercise price of 120% of the initial public offering price per share, in each
case subject to adjustment in accordance with the anti-dilution and other
provisions set forth in the warrants. During the terms of such options and
warrants, the holders will have the opportunity to profit from an increase in
the market price of the Common Stock. The existence of such stock options and
warrants may adversely affect the terms on which the Company can obtain
additional financing, and the holders of such options and warrants can be
expected to exercise or convert such options and warrants at a time when the
Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such options and warrants. See
"Management -- Stock Option Plan," "Description of Capital Stock -- Bridge
Warrants," and "Description of Capital Stock -- Shares Eligible for Future
Sale."
CHANGE IN CONTROL PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law (the "Delaware GCL") contain provisions that may have
the effect of making more difficult or delaying attempts by others to obtain
control of the Company, even when these attempts may be in the best interests of
stockholders.
Upon the completion of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware GCL. In general, this statute
prohibits a publicly held Delaware corporation from engaging, under certain
circumstances, in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless either (i) prior to the date at which
the stockholder becomes an interested stockholder, the Board of Directors
approved either the business combination or the transaction in which the person
becomes an interested stockholder, (ii) upon consummation of the transaction in
which the stockholder becomes an interested stockholder, the stockholder owned
at least 85% of the outstanding voting stock of the corporation (excluding
shares held by directors who are officers or held in certain employee stock
plans), or (iii) the business combination is approved by the Board of Directors
and by two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders (and not
by written consent) held on or subsequent to the date of the business
combination. An "interested stockholder" is a
14
<PAGE> 16
person who, together with affiliates and associates, owns (or at any time within
the prior three years did own) 15% or more of the corporation's voting stock.
Section 203 defines a "business combination" to include, without limitation,
mergers, consolidations, stock sales and asset based transactions, and other
transactions resulting in a financial benefit to the interested stockholder.
NO CASH DIVIDENDS
The Company has never paid any dividends on its capital stock and does not
anticipate that it will pay dividends in the foreseeable future. Instead, the
Company intends to apply any earnings to the expansion and development of its
business. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of $9.37 per share from the
assumed initial public offering price of $11.00 per share. See "Dilution."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Prospectus contains various forward-looking statements that are based
on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this Prospectus, the words
"believe," "expect," "anticipate," "estimate," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties, and assumptions, including those identified under
"Risk Factors." Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected. In addition to the
other risk factors set forth above, among the key factors that may have a direct
bearing on the Company's results are competitive practices in the professional
salon products industries (generally and particularly in the Company's principal
product markets), the ability of the Company to meet existing financial
obligations in the event of adverse industry or economic conditions or to obtain
additional capital to fund future commitments and expansion, the Company's
relationship with employees, the ability to consolidate its operations to the
Duncanville facility, the ability to reduce production costs of certain of the
Acquired Businesses by utilizing the Duncanville facility, and the impact of
current and future laws and governmental regulations affecting the professional
salon products industry and the Company's operations.
15
<PAGE> 17
THE COMPANY
Although Styling has conducted no operations to date, it has entered into
definitive agreements to acquire the Acquired Businesses simultaneously with the
consummation of the Offering. The Acquired Businesses are described below.
Gena Laboratories, Inc., a Texas corporation founded in 1930, produces and
markets professional natural nail care and pedicure products and accessories,
skin care products and, to a lesser extent, hair care products. Gena's line of
natural nail care and pedicure products include Warm-O-Lotion and Healthy
Hoof(TM), both well-recognized treatment lines for nails and skin. Gena's skin
care products include Paraffin Springs(TM), the leading paraffin therapy
products as well as thermo-therapy products and Tea Tree Oil products. Gena's
customers include Sally, a division of Alberto-Culver Company and the largest
wholesale supplier of professional supply products with more than 1,600 beauty
supply stores worldwide, and Regis, which has more than 1,700 salons located
primarily in shopping malls in all 50 states and several foreign countries,
principally the United Kingdom. The Company intends to use Gena's Duncanville,
Texas facility as its primary production and distribution center following the
Offering. Gena's revenue for the year ended February 29, 1996 was $8.4 million.
Body Drench, a division of Designs by Norvell, Inc. founded in 1985,
produces and markets high-end professional indoor and outdoor tanning and
moisturizing products and other lotions as well as resort, spa, and health and
country club personal care products under the brand names Body Drench, UTF(R)
Ultra Tanning Formula, and New Basics. Body Drench tanning products, which
include the Carboplex(TM) Tan FX(TM) line, are carried in more than 20,000
domestic and European tanning salons. Its personal care products include a
leading moisturizing lotion and body and bath products that are carried in
domestic and European resorts, spas, and health and country clubs. Body Drench's
products are sold in all 50 states. Body Drench's revenue for the year ended
December 31, 1995 was $11.9 million.
JDS Manufacturing Co., Inc., a California corporation founded in 1982,
produces and markets acrylic and fiberglass nail enhancement products for use in
professional nail services under the brand names Alpha 9, Omni P.O.
Professionals Only(R), Triumph(R) Fiberbond System, and Special Effects Nail
Art. JDS's nail enhancement products are sold in all 50 states through beauty
supply distributors, including Sally. JDS's revenue for the year ended September
30, 1995 was $3.4 million.
Kotchammer Investments, Inc. (dba Styling Research Company), a California
corporation formed in 1993 to acquire a division of Redken Laboratories, Inc.
("Redken"), distributes and markets high-end professional salon appliances (such
as curling irons and blow dryers) and salonwear (such as capes and aprons) under
the trade name Maiko(TM) exclusively to the professional salon industry. KII's
products are sold in all 50 states. KII also owns proprietary formulas and
marketing rights to several hair care lines previously formulated and produced
by Redken, but not currently produced by KII. KII's revenue for the year ended
December 31, 1995 was $1.6 million.
The total purchase price for the Acquired Businesses will be approximately
$23.23 million plus the assumption of existing liabilities of the Acquired
Businesses, consisting of approximately $300,000 of long-term debt in connection
with the Gena Acquisition; up to $3.3 million of trade accounts payable, up to
$40,000 of bank debt, and up to $560,000 of payroll liabilities in connection
with the Body Drench Acquisition; and
16
<PAGE> 18
other miscellaneous accrued liabilities, which the Company expects to be less
than $1.0 million. The following table sets forth the consideration being paid
for each Acquired Business as well as the total consideration:
<TABLE>
<CAPTION>
DEFERRED COMMON TOTAL
CASH PAYMENT(1) NOTES STOCK CONSIDERATION
----------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Gena........................... $ 8,000,000 $2,000,000 $ -- $ -- $ 10,000,000
Body Drench.................... 8,100,000 -- -- -- 8,100,000
JDS............................ 4,100,000 -- 333,000 -- 4,433,000
KII............................ 450,000 -- 200,000 50,000 700,000
----------- ---------- -------- ------- -----------
Total................ $20,650,000 $2,000,000 $533,000 $ 50,000 $ 23,233,000
=========== ========== ======== ======= ===========
</TABLE>
- ---------------
(1) Represents the cash value of the shares of Common Stock to be issued as
consideration and held in escrow. As described in "Description of the
Acquisitions -- Gena Acquisition", these shares are not included in share
calculations and the present value of the amount of the obligation has been
accounted for as long-term debt.
DESCRIPTION OF THE ACQUISITIONS
Simultaneously with the consummation of the Offering, Styling will acquire
the Acquired Businesses in four separate transactions, in exchange for cash,
notes, repayment or assumption of indebtedness, and shares of Common Stock,
pursuant to acquisition agreements with respect to each of the Acquired
Businesses as described below. Styling has entered into definitive agreements
with each of the Acquired Businesses, which provide for an aggregate purchase
price for the four Acquired Businesses of approximately $23.23 million, subject
to certain adjustments, of which (i) approximately $20.65 million is payable in
cash (not including $2.0 million payable in cash two years from the date of
acquisition), (ii) approximately $533,000 to be paid through the issuance of
notes bearing interest at a rate per annum between 8% and 10% (as described
below under "-- JDS Acquisition" and "-- KII Acquisition"), and (iii) 4,545
shares of Common Stock (assuming an initial public offering price of $11.00 per
share). In addition, the Company will assume certain existing liabilities of the
Acquired Businesses, consisting of approximately $300,000 of long-term debt in
connection with the Gena Acquisition; up to $3.3 million of trade accounts
payable, up to $40,000 of bank debt, and up to $560,000 of payroll liabilities
in connection with the Body Drench Acquisition; and other miscellaneous accrued
liabilities which the Company expects to be less than $1.0 million. The Company
will record approximately $7.0 million, $6.9 million, and $4.0 million of
goodwill in connection with the acquisitions of Body Drench, Gena, and JDS,
respectively.
The Company has received representations and warranties regarding each of
the Acquired Businesses and has negotiated certain price adjustments and set-off
rights with respect to each of the Acquisitions. There can be no assurances,
however, that unforeseen liabilities will not occur in connection with the
operation of the Acquired Businesses or that any contractual purchase price
adjustments, right of set-off, or other remedies available to the Company will
be sufficient to compensate the Company in the event unforeseen liabilities
arise.
BODY DRENCH ACQUISITION
Under an Asset Purchase Agreement among DBN, Joy Norvell Martin (the holder
of approximately 98% of the issued and outstanding capital stock of DBN), and
Styling, the Company will purchase substantially all of the assets of the Body
Drench division of DBN related to its health and personal care products,
accessories, and equipment business. The consideration to be paid by the Company
will be (i) $8.1 million in cash, subject to a commensurate reduction in the
event inventory, accounts receivable, or total asset levels on the closing date
are less than specified levels; and (ii) the assumption of up to $3.3 million of
trade accounts payable, $40,000 of bank debt, and up to $560,000 of payroll
payables of the Body Drench division. In addition, to the extent that the sum at
the closing date of the payroll payables and the bank debt assumed by Styling
totals less than $600,000, then Styling will grant DBN the right to receive a
number of shares of Common Stock determined by dividing the amount by which
$600,000 exceeds the sum of the payroll payables and the bank debt on the
closing date by 120% of the initial public offering price. DBN will have the
right to receive such number of shares of Common Stock at any time during the
three-month period following the date of the
17
<PAGE> 19
completion of the Offering. The Asset Purchase Agreement with DBN contains
provisions respecting confidentiality, noncompetition, and nonsolicitation of
customers, suppliers, and employees for a five-year period from the closing
date. In connection with the acquisition, Styling will enter into an employment
agreement with each of Richard Norvell and Greg Norvell. See
"Management -- Employment Agreements" for a description of Richard Norvell's
employment agreement. The employment agreement with Greg Norvell is
substantially the same as that of Richard Norvell.
GENA ACQUISITION
Under a Stock Purchase Agreement among Donald N. Black, Howard Black,
Barbara Black, Don Cottam, Jim Cottam, the Cottam Family Partnership
(collectively, the "Gena Shareholders"), and Styling, the Company will purchase
from the Gena Shareholders all of the issued and outstanding shares of capital
stock of Gena. The consideration to be paid by the Company will be (i) $8.0
million in cash, (ii) $2.0 million in cash payable on the second anniversary of
the consummation of the acquisition, secured by an escrow of 181,818 shares of
the Common Stock (assuming an initial public offering price of $11.00 per
share), subject to a commensurate reduction in the event that the total assets
as of the closing date are less than $2.3 million, and (iii) the assumption of
up to $300,000 of long-term debt. The Stock Purchase Agreement contains
provisions respecting confidentiality, noncompetition, and nonsolicitation of
customers, suppliers, and employees for a five-year period after the closing. In
connection with the acquisition, Styling has entered into an employment
agreement with Donald L. Black. See "Management -- Employment Agreements."
JDS ACQUISITION
Under a Stock Purchase Agreement among Jack Sperling and Gary Sperling, the
sole shareholders of JDS (the "JDS Shareholders"), and Styling, the Company will
purchase all of the issued and outstanding shares of JDS's capital stock and
notes payable by JDS to Jack Sperling and Gary Sperling in the amounts of
$214,054 and $217,446 at June 30, 1996, respectively, each bearing interest at a
rate of 8% per annum (the "JDS Notes"). The consideration to be paid by the
Company will be (i) approximately $4.1 million in cash, subject to a
commensurate reduction in the event the cash surrender value of the life
insurance policies on the closing date exceeds approximately $83,000; (ii) the
assignment to each of the JDS Shareholders of life insurance policies owned by
JDS on the lives of such shareholders; and (iii) a promissory note bearing
simple interest at a per annum rate equal to the prime rate (but in no event at
a rate greater than 10% or less than 8% per annum) in the amount of
approximately $333,000, which will be due and payable in a single balloon
payment two years after the closing date. The Stock Purchase Agreement contains
provisions respecting confidentiality, noncompetition, and nonsolicitation of
customers, suppliers, and employees for a five-year period after the closing
date. In connection with the acquisition, Styling has entered into an employment
agreement with Thomas M. Clifford. See "Management -- Employment Agreements."
KII ACQUISITION
Under an Asset Purchase Agreement among KII and the John and Sonja Hammer
Family Trust, the Wally and Betty Jones Family Trust, and Gerald Kotch
(collectively, the "KII Stockholders") and Styling, the Company will purchase
certain assets of KII. The consideration to be paid by the Company will be (i)
$450,000 in cash, (ii) a 30-month promissory note in the amount of $200,000
(subject to commensurate reduction in the event the total asset level is less
than a specified level) bearing interest at a per annum rate of 10%, which will
require quarterly payments of principal and interest and mandatory prepayment in
the event of a public offering of Common Stock subsequent to the Offering; (iii)
4,545 shares of Common Stock (assuming an initial public offering price of
$11.00 per share); and (iv) the assumption of KII's obligations to fill open
purchase orders from inventory acquired in the Acquisition and to assume KII's
obligations under the Redken Agreement that consist of continuing to maintain
insurance coverage insuring Redken against product liability claims until
December 31, 1997 and indemnifying Redken against any claims arising from the
conduct of the SRC business. The Asset Purchase Agreement contains provisions
respecting confidentiality and prohibitions against use of trade secrets for the
five-year period following the closing. In connection with the acquisition,
Styling will enter into an employment agreement with Gerald Kotch. See
"Management -- Employment Agreements."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered hereby are estimated to be $27.3 million ($31.5 million if
the Overallotment Option is exercised in full), at an assumed initial public
offering price of $11.00 per share, after deducting estimated underwriting
discounts and expenses. The Company expects to use approximately $20.65 million
of the net proceeds to pay the cash portion of the purchase price for the
Acquired Businesses (other than the $2.0 million deferred cash portion); $1.8
million to repurchase 807,851 shares of Common Stock upon the consummation of
the Offering at a price of $2.23 per share from Kenneth S. Bernstein, a founder
of the Company, which Mr. Bernstein acquired upon the formation of the Company
in June 1995 for a total of $100; approximately $409,000 to pay accrued interest
and principal on the Bridge Note; to repay up to $2.0 million of short-term
obligations of the Acquired Businesses assumed by the Company in the
Acquisitions; approximately $100,000 to repay funds advanced by the Company's
founders to pay earnest money deposits required in connection with certain of
the Acquisitions; and approximately $2.0 million for general corporate purposes,
including working capital and potential acquisitions of currently unidentified
businesses in the professional salon products industry. See "Description of the
Acquisitions" and "Certain Transactions."The Bridge Note bears simple interest
at a rate of 10% per annum. It has a stated maturity date of January 31, 1997,
but requires prepayment upon consummation of the Offering. The issuance of the
Bridge Note Shares and Bridge Warrants to the holder of the Bridge Note upon the
consummation of the Offering will result in an effective interest rate on the
Bridge Note as of the consummation of the Offering of 325.0% per annum (assuming
an initial public offering price of $11.00 per share).
The foregoing allocation is based on the Company's current estimates and
may be modified to the extent attractive business expansion opportunities,
including acquisitions, arise or other circumstances change. Pending such uses,
the Company intends to invest the net proceeds in short-term, interest bearing
investment grade securities.
DIVIDEND POLICY
The Company currently intends to retain its earnings to support the growth
and development of its business and has no present intention of paying any
dividends on its Common Stock in the foreseeable future. Any future declaration
of dividends will be subject to the discretion of the Board of Directors of the
Company and will depend on the Company's financial condition, operating results,
capital requirements, and such other factors as the Board of Directors deems
relevant.
19
<PAGE> 21
DILUTION
The pro forma combined net tangible book value of the Company at June 30,
1996 was ($18.0 million) or ($10.13) per share. "Pro forma net tangible book
value per share" is the pro forma tangible net worth (total tangible assets less
total liabilities) of the Company, not including the effect of the Bridge Note
and the repurchase of 807,851 shares of the Company's Common Stock, divided by
the number of shares of Common Stock outstanding without giving effect to the
sale of shares of Common Stock sold in connection with the Offering. After
giving effect to the sale of the shares of Common Stock offered hereby, at an
assumed initial offering price of $11.00 per share, and deducting underwriting
discounts and estimated offering expenses, the combined net tangible book value
of the Company at June 30, 1996 would have been $9.3 million or $1.63 per share,
representing an immediate increase in net tangible book value of $11.77 per
share to existing stockholders and an immediate dilution of $9.37 per share to
the investors purchasing the shares in the Offering ("New Investors"). The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $11.00
Pro forma net tangible book value per share as of June 30,
1996......................................................... ($10.13)
Increase per share attributable to shares sold to New
Investors.................................................... 11.77
Net tangible book value per share after the Offering.............. 1.63
-------
Dilution in net tangible book value per share to New Investors.... $ 9.37
=======
</TABLE>
The following table summarizes, as of the consummation of the Offering, the
differences between the amounts paid by the existing stockholders of the Company
and the New Investors with respect to the number of shares purchased from the
Company, the total consideration paid, and the average price paid per share.
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE PUBLIC
OFFERING TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)....... 987,604 26.1% $ 16,257 0.1% $ 0.00
New Investors(3)(4)............... 2,800,000 73.9% $30,800,000 99.9% $ 11.00
--------- ----- ----------- -----
Total................... 3,787,604 100.0% $30,816,257 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Does not include 72,707 shares of Common Stock issuable upon the exercise of
outstanding options with an exercise price equal to or greater than the
assumed initial public offering price, 18,182 shares of Common Stock
(assuming an initial public offering price of $11.00 per share) issuable to
the holders of the Bridge Warrants upon their exercise at an exercise price
of 125% of the initial public offering price, or 4,545 shares of Common
Stock (assuming an initial public offering price of $11.00 per share)
issuable in connection with the acquisition of KII. Assuming the issuance of
such shares, the existing stockholders would own 1,083,038 shares, or 27.9%
of the total shares, would have paid $1,066,037 for such shares, or 3.3% of
the total consideration paid, and the average price paid per share would
have been $0.99. Assuming the issuance of 72,707 shares upon the exercise of
outstanding options, the issuance of 18,182 shares to the holders of the
Bridge Warrants, the issuance of 18,182 Bridge Shares in connection with the
repayment of the Bridge Note, and the issuance of 4,545 shares in connection
with the acquisition of KII, the increase in net tangible book value per
share attributable to shares sold to New Investors would be $11.12, rather
than $11.77; the net tangible book value per share after the Offering would
be $1.59, rather than $1.63; and the dilution in net tangible book value per
share to New Investors would be $9.41, rather than $9.37.
(2) Does not include 807,851 shares of the Company's Common Stock to be
repurchased from a founder of the Company upon the consummation of the
Offering for an aggregate of $1.8 million. Assuming the repurchase of
807,851 shares of the Company's Common Stock from such founder, the increase
in net tangible value per share attributable to shares to New Investors
would be $20.56 rather than $11.77; the net tangible book value per share
after the Offering would be $1.98, rather than $1.63; and the dilution in
net tangible book value per share to New Investors would be $9.02, rather
than $9.37. Assuming the repurchase of 807,851 shares of the Company's
Common Stock from a founder and the issuance of the shares referenced in (1)
above, the increase in net tangible book value per share attributable to
shares sold to New Investors would be $20.22, rather than $11.77, the net
tangible book value per share after the Offering would be $1.93, rather than
$1.63, and the dilution in net tangible book value per share to New
Investors would be $9.07, rather than $9.37.
(3) Assumes the sale of 2,800,000 shares of Common Stock at an assumed initial
public offering price of $11.00 per share.
(4) Includes 45,455 shares to be purchased by Mr. Leopold, the Company's Chief
Executive Officer, in the Offering at an assumed initial public offering
price of $11.00 per share.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of June 30, 1996, pro forma combined capitalization (assuming the
Acquisitions had been consummated as of that date, but without giving effect to
the Offering) and as adjusted to reflect the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per share
as of that date and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds." This table should be read in conjunction with
the Financial Statements, including the Notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------------------------------
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash payable to sellers to complete the Acquisitions
and current portion of long-term debt............... $-- $(19,680) $ --
=== ======== =======
Long-term debt, excluding current portion(1).......... $-- $ 2,291 $ 2,291
Stockholders' equity:
Preferred Stock, $.0001 par value, 1,000,000 shares
authorized; none outstanding..................... -- -- --
Common Stock, $.0001 par value, 10,000,000 shares
authorized; 812,396 pro forma shares issued and
outstanding; 3,630,578 shares issued and
outstanding as adjusted.......................... 1 1 1
Additional paid-in capital.......................... -- 49 27,338
Retained earnings................................... -- -- --
Treasury stock...................................... (1,800)
--- -------- -------
Total stockholders' equity.......................... 1 50 25,539
--- -------- -------
Total capitalization.................................. $1 $ 2,341 $ 27,830
=== ======== =======
</TABLE>
- ---------------
(1) Reflects pro forma adjustments to effect the Acquisitions, excluding the
Bridge Note and the Offering.
(2) Reflects pro forma adjustments giving effect to the Acquisitions, the Bridge
Note, the Offering, and the use of proceeds related thereto. See "Use of
Proceeds."
21
<PAGE> 23
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Styling, founded in 1995, has conducted no operations to date.
Simultaneously with the consummation of the Offering, Styling will acquire the
Acquired Businesses in separate transactions in exchange for cash, notes,
assumption of existing indebtedness, and shares of Common Stock. See
"Description of the Acquisitions." For accounting purposes, the Acquisitions are
to be treated as business combinations accounted for by the purchase method of
accounting as prescribed by Accounting Principles Board Opinion No. 16. The
Acquired Businesses are to be valued at the fair value of consideration given,
principally cash from the completion of the Offering. The excess of
consideration given over the fair value of net assets received will be amortized
on a straight-line basis over 25 years.
Selected historical financial data is provided for Gena, Body Drench, JDS,
and KII. Gena and Body Drench comprise a substantial majority of the combined
assets, net sales, and operating income and therefore, are deemed to be the
predecessors of Styling. The historical financial information for Gena and Body
Drench for each of the three years in the periods ending February 29, 1996 and
December 31, 1995, respectively, was derived from their financial statements,
which have been audited by Arthur Andersen LLP and appear elsewhere in this
Prospectus. The historical financial information for JDS for each of the two
years in the period ended September 30, 1995 was derived from its financial
statements which have been audited by Arthur Andersen LLP and appear elsewhere
in this Prospectus. The historical financial information for KII for the year
ended December 31, 1995 was derived from their financial statements, which have
been audited by Arthur Andersen LLP and appear elsewhere in this Prospectus. The
historical financial information for Gena, Body Drench, JDS, and KII as of and
for the six- and nine-month periods ended August 31, 1996, June 30, 1996, June
30, 1996 and June 30, 1996, respectively, and for the six- and nine-month
periods ended August 31, 1995, June 30, 1995, June 30, 1995 and June 30, 1995,
respectively, was derived from their unaudited financial statements appearing
elsewhere in this Prospectus. The historical balance sheet for Styling as of
June 30, 1996 was derived from Styling's unaudited financial statements
appearing elsewhere in this Prospectus. The historical financial information for
earlier periods for Gena, Body Drench, JDS, and KII not specifically referenced
above, was derived from each Acquisition's unaudited financial statements not
included in this Prospectus. The pro forma combined statement of operations data
set forth on the following page assumes that Styling had completed the
Acquisitions on January 1, 1995, and such information for the six months ended
June 30, 1996 and for the year ended December 31, 1995 was derived from the pro
forma combined financial statements appearing elsewhere in this Prospectus. The
pro forma combined financial information for the six months ended June 30, 1995
does not appear elsewhere in this Prospectus. The pro forma combined balance
sheet data as of June 30, 1996 give effect to the Acquisitions and the Offering
as if such transactions had occurred on June 30, 1996. The pro forma combined
statement of operations data may not be indicative of actual results that would
have been achieved if the transactions had occurred on the dates indicated or
the results that may be realized in the future. The pro forma combined statement
of operations data contain adjustments which are directly attributable to the
Acquisitions.
The following selected financial data is qualified in its entirety by the
more detailed information appearing in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus.
22
<PAGE> 24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR SIX MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- COMPANY PRO FORMA(2):
Net sales................................................ $ 25,181 $15,102 $13,692
Gross profit............................................. 11,875 7,049 6,663
Selling, general, and administrative expenses............ 8,716 4,940 4,040
Income from operations................................... 3,159 2,109 2,623
Net income............................................... 1,599 1,103 1,450
Adjusted pro forma earnings per share.................... .42 .29 .38
Adjusted pro forma shares outstanding.................... 3,791 3,791 3,791
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED FEBRUARY 28, AUGUST 31,
-------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA-GENA:
Net sales................ $5,906 $6,537 $6,426 $7,524 $8,384 $4,336 $4,705
Gross profit............. 2,642 2,868 3,146 3,360 3,565 2,039 2,160
Selling, general, and
administrative
expenses.............. 2,416 2,570 2,744 2,964 3,033 1,573 1,454
Income from operations... 226 298 402 396 532 466 706
Net income............... 180 204 278 232 317 279 442
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA -- BODY DRENCH(3):
Net sales.............. $5,111 $6,234 $6,653 $11,138 $11,871 $8,250 $6,586
Gross profit........... 2,567 2,667 2,614 4,796 5,444 3,686 3,121
Selling, general, and
administrative
expenses............ 1,827 2,285 2,055 4,076 4,883 2,971 2,402
Income from
operations.......... 740 382 559 720 561 714 719
Net income............. 740 382 328 446 294 416 440
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA -- JDS:
Net sales................ $3,843 $3,819 $3,799 $3,578 $3,368 $2,592 $2,339
Gross profit............. 2,172 2,149 2,054 2,114 2,019 1,561 1,389
Selling, general, and
administrative
expenses.............. 2,071 2,191 2,092 2,170 2,046 1,549 1,393
Income (loss) from
operations............ 101 (42) (38) (56) (26) 12 (4)
Net income (loss)........ 16 (20) (29) (16) 9 23 (3)
</TABLE>
23
<PAGE> 25
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ------ ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA --
KII:
Net sales...................... -- -- $102 $1,999 $1,558 $ 777 $736
Gross profit................... -- -- 60 1,014 846 405 393
Selling, general, and
administrative expenses..... -- -- 87 1,040 891 476 329
Income (loss) from
operations.................. -- -- (27) (26) (45) (71) 64
Net income (loss).............. -- -- (32) (104) (135) (117) 25
</TABLE>
<TABLE>
<CAPTION>
STYLING GENA BODY DRENCH JDS KII
AS OF AS OF AS OF AS OF AS OF
JUNE 30, 1996 AUGUST 31, 1996 JUNE 30, 1996(4) JUNE 30, 1996 JUNE 30, 1996
------------- --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. 0 $ 2,315 $ 329 $ 333 $ 345
Total assets................ 300 3,975 4,221 728 622
Long-term debt, less current
portion.................. -- 291 -- 432 610
Total stockholders'
equity................... 1 3,065 582 27 (200)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA
AS OF JUNE 30, 1996(5) AS OF JUNE 30, 1996(6)
---------------------- ----------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $(17,153) $ 8,335
Total assets........................................ 7,000 32,489
Long-term debt, less current portion................ 2,291 2,291
Total stockholders' equity.......................... 50 25,539
</TABLE>
- ---------------
(1) Selected historical financial data is provided for each of the Acquired
Businesses. For accounting purposes, the Acquisitions are to be treated as
business combinations accounted for by the purchase method of accounting as
prescribed by Accounting Principles Board Opinion No. 16. The Acquired
Businesses are to be valued at the fair value of consideration given,
principally cash from the completion of the Offering. The excess of
consideration given over the fair value of net assets received will be
amortized on a straight-line basis over 25 years. Gena and Body Drench
comprise a substantial majority of the combined assets, net sales, and
operating income, and therefore are deemed to be the predecessors of
Styling.
(2) Reflects adjustments for the Acquisitions and the Offering. The pro forma
combined statement of operations data for the year ended December 31, 1995
and the six months ended June 30, 1995 and 1996 assumes that Styling had
completed the Acquisitions on January 1, 1995. The pro forma combined
statement of operations data may not be indicative of actual results that
would have been achieved if the transactions had occurred on the dates
indicated or the results which may be realized in the future. The pro forma
combined statement of operations data contain adjustments which are
directly attributable to the transaction. See the Pro Forma Combined
Financial Statements, including the Notes thereto, appearing elsewhere in
this Prospectus.
(3) Body Drench has historically operated as a division of DBN.
(4) Body Drench has historically operated as a division of DBN. Total
stockholders' equity data represents DBN's owners' net investment in the
Division to be acquired by Styling.
(5) Reflects adjustments for the Acquisitions. See the Pro Forma Combined
Financial Statements, including the Notes thereto, appearing elsewhere in
this Prospectus for a discussion of the assumptions made and adjustments
applied in the preparation of this data.
(6) The adjusted pro forma combined balance sheet data as of June 30, 1996 gives
effect to the Acquisitions and the Offering as if such transactions had
occurred on June 30, 1996.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion has been divided into six sections: the first
section presents the pro forma combined financial statements for the Acquired
Businesses, after giving effect to the Acquisitions and the Offering. The next
four sections contain a discussion of the historical results of operations for
each of the Acquired Businesses, and the last section contains a discussion on
the Company's liquidity and capital resources. The information presented for the
Acquired Businesses is based on each company's fiscal year-end. The entirety of
the following discussion of the results of operations and financial position
should be read in conjunction with "Selected Historical and Pro Forma Financial
Data" and the Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus.
Except for the historical information contained herein, the discussion in
this Prospectus contains or may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein, as well as
those factors discussed under "Risk Factors" and elsewhere in this Prospectus.
Historical results are not necessarily indicative of trends in operating results
for any future periods.
The Company was founded in June 1995 and has conducted no operations to
date; however, simultaneous with the consummation of the Offering, the Company
will acquire four professional salon product businesses that, on a combined
basis, have a diversified line of well-established, brand name salon products.
The Acquisitions will be accounted for under the purchase method of accounting.
PRO FORMA RESULTS OF OPERATIONS -- COMBINED COMPANIES
OVERVIEW OF THE COMPANY (AFTER GIVING PRO FORMA EFFECT TO THE ACQUISITIONS)
The following table sets forth certain financial data for the Acquired
Businesses after giving effect to the pro forma adjustments. The pro forma
information may not be indicative of actual results that would have been
achieved if the Acquisitions had occurred at the beginning of the periods. The
pro forma combined statement of operations data contain adjustments, which are
directly attributable to the transaction. See "Selected Historical and Pro Forma
Financial Data" and Pro Forma Combined Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus.
PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................. $ 25,181 $15,102 $13,692
Cost of sales.............................................. 13,306 8,054 7,029
Gross profit............................................... 11,875 7,049 6,663
Selling, general, and administrative
expenses................................................. 8,716 4,940 4,040
Income from operations..................................... 3,159 2,109 2,623
Income tax expense......................................... 1,230 814 979
Net income................................................. 1,599 1,103 1,450
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Pro forma net sales decreased 9.3% to $13.7 million in the six months ended
June 30, 1996 from $15.1 million in the six months ended June 30, 1995 resulting
primarily from the difficulty in obtaining inventory from third-party
manufacturers due to cash flow difficulties experienced by Body Drench's parent
in the six
25
<PAGE> 27
months ended June 30, 1996. Body Drench's difficulty in obtaining inventory
prevented delivery of product to customers in time for the Spring 1996 tanning
season and had a negative impact on sales. During the six months ended June 30,
1996, Gena recognized a slight increase in net sales primarily as a result of
increased promotional efforts and increased paraffin spa product sales.
Cost of Sales
Pro forma cost of sales, as a percentage of net sales, decreased to 51.3%
in the six months ended June 30, 1996 as compared with 53.3% in the six months
ended June 30, 1995. The decrease was due primarily to a greater percentage of
net sales at Body Drench in the 1996 period relating to the Tan FX and Tan EX
products, which carried lower production and packaging costs as compared to Body
Drench's other product lines. The Company's decrease in cost of sales as a
percentage of net sales was partially offset by a slight increase in costs at
Gena related to certain raw materials required for the increased production of
the paraffin spa product.
Gross Profit
As a result of the foregoing, pro forma gross profit decreased 5.5% to $6.7
million in the six months ended June 30, 1996 from $7.0 million in the six
months ended June 30, 1995.
Selling, General, and Administrative Expenses
Pro forma selling, general, and administrative expenses decreased 18.2% to
$4.0 million in the six months ended June 30, 1996 from $4.9 million in the six
months ended June 30, 1995. The decrease in selling, general, and administrative
expenses was attributable primarily to a decrease at Body Drench and Gena in
advertising related expenses and a decrease at Body Drench in salaries and
commissions.
Income Tax Expense
Income tax expense increased 20.3% to $1.0 million in the six months ended
June 30, 1996 from $0.8 million in the six months ended June 30, 1995. The pro
forma tax rates of 40.3% and 40.1% for the periods ended June 30, 1996 and 1995,
respectively, differ from the expected statutory rate of 37.0% based on a
portion of the amortization of goodwill, resulting from the Gena and Body Drench
acquisitions, which is not deductible for tax purposes.
Net Income
Pro forma net income increased 31.5% to $1.4 million in the six months
ended June 30, 1996 from $1.1 million in the six months ended June 30, 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995
Net Sales
Pro forma net sales amounted to $25.2 million in the 12 months ended
December 31, 1995 and were positively effected by the release of Body Drench's
Contemporary product line in December 1994. During 1995, Body Drench realized
the effect of 12 months of the Contemporary product line sales as compared to
only a partial year's sales in 1994. Net sales was also positively impacted by
Body Drench's release of the Tan FX and Tan EX products and the Body Bath lotion
products in the fourth quarter of 1995. In addition, growth in net sales
occurred relating to existing products at Gena, primarily the paraffin spa and
newly acquired MRX(R) product lines.
Cost of Sales
Pro forma cost of sales, as a percentage of net sales, were 52.8% in the 12
months ended December 31, 1995. Gross margins were positively effected by the
introduction of Body Drench's Contemporary product line in December 1994 which
carried a lower raw material cost in relation to net sales as compared to
products sold
26
<PAGE> 28
during 1994, partially offset by an increase in costs to produce Gena's paraffin
spa and MRX products which have a higher costs of sales, as a percentage of net
sales, than its other products.
Gross Profit
As a result of the foregoing, pro forma gross profit amounted to $11.9
million in the 12 months ended December 31, 1995.
Selling, General, and Administrative Expenses
Pro forma selling, general, and administrative expenses were $8.7 million
in the 12 months ended December 31, 1995. Factors effecting selling, general,
and administrative expenses were related primarily to an increase in freight
charges in proportion to sales levels at Body Drench due to the growing number
of backorders from the Contemporary product line. Additionally, advertising
expense increased as a result of Body Drench's substantial promotional efforts
in various magazines, catalogs and brochures from the release of the new
Contemporary product line. Body Drench also incurred higher personnel costs for
the 12 months ended December 31, 1995.
Income Tax Expense
Income tax expense amounted to $1.2 million in the 12 months ended December
31, 1995. The pro forma effective tax rate of 43.5% for the period ended
December 31, 1995, differs from the expected statutory rate of 37.0% based on a
portion of the amortization of goodwill, resulting from the Gena and Body Drench
acquisitions, which is not deductible for tax purposes.
Net Income
Pro forma net income for the Company was $1.6 million in the 12 months
ended December 31, 1995.
RESULTS OF OPERATIONS -- GENA
SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO SIX MONTHS ENDED AUGUST 31, 1995
Net Sales
Net sales increased 8.5% to $4.7 million in the six months ended August 31,
1996 from $4.3 million in the six months ended August 31, 1995. The increase in
net sales was attributable to an increase in sales volume generated by
promotional efforts, primarily through price discounts. The increase in sales
was also attributable to the increased sales of the paraffin spa equipment and
products.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 54.1% in the six
months ended August 31, 1996 as compared with 53.0% in the six months ended
August 31, 1995. The increase was primarily attributable to increased costs for
certain raw materials associated with production of the paraffin spa equipment.
Gross Profit
Gross profit increased 5.9% to $2.2 million in the six months ended August
31, 1996 from $2.0 million for the six months ended August 31, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 7.6% to $1.5
million in the six months ended August 31, 1996 from $1.6 million in the six
months ended August 31, 1995. The decrease was primarily attributable to a
reduction of the Gena's advertising costs related to trade publications and
other promotional services. In addition, Gena's expenses associated with
education and trade show efforts decreased in the six months ended August 31,
1996.
27
<PAGE> 29
Net Income
Net income increased 58.4% to $0.4 million in the six months ended August
31, 1996 from $0.3 million in the six months ended August 31, 1995.
TWELVE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1995
Net Sales
Net sales increased 11.4% to $8.4 million in the 12 months ended February
29, 1996 from $7.5 million in the 12 months ended February 28, 1995. The
increase in net sales was attributable to growth in sales of existing products,
which consisted primarily of increased acceptance of the paraffin spa product
line that was introduced in February 1993 and the continued sales growth for the
MRX product line that was acquired in September 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 57.5% in the 12
months ended February 29, 1996 as compared with 55.3% in the 12 months ended
February 28, 1995. The increase was attributable to additional costs incurred to
produce the new paraffin spa equipment, which has a higher cost of sales, as a
percentage of net sales, at approximately 64.0%. Additionally, cost of sales, as
a percentage of net sales, on the new MRX product line, introduced in September
1994, was approximately 60.0%, which was also higher than Gena's other product
lines.
Gross Profit
As a result of the foregoing, gross profit increased 6.1% to $3.6 million
in the 12 months ended February 29, 1996 from $3.4 million in the 12 months
ended February 28, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses remained relatively constant
at $3.0 million in the 12 months ended February 29, 1996 and 1995. The slight
increase in selling, general, and administrative expenses was attributable to an
increase in selling and promotional costs primarily related to increased sales
of the paraffin spa product. Additionally, Gena was offering greater promotional
incentives to generate additional sales resulting in increased selling costs.
The above increases were partially offset by reduced travel expenses and smaller
management bonuses than had been paid in the previous period.
Net Income
Net income increased 36.6% to $0.3 million in the 12 months ended February
29, 1996 from $0.2 million in the 12 months ended February 28, 1995.
TWELVE MONTHS ENDED FEBRUARY 28, 1995 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1994
Net Sales
Net sales increased 17.1% to $7.5 million in the 12 months ended February
28, 1995 from $6.4 million in the 12 months ended February 28, 1994. The
increase was primarily a result of increased sales of Gena's paraffin spa
product line which had been introduced in February 1993, and the acquisition of
Design Classic(TM) in February 1994, a manufacturer of fiberglass nail products.
Gena also acquired the MRX product line, an all-purpose antiseptic and hydrating
lotion, in September 1994 and began to ship substantial quantities in fiscal
1995. Total sales related to the Design Classic and MRX product lines were
approximately $1.0 million in 1995.
28
<PAGE> 30
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 55.3% in the 12
months ended February 28, 1995 as compared with 51.0% in the 12 months ended
February 28, 1994 as a result of additional labor, machine retooling and
material costs incurred to produce the new paraffin spa product, which has lower
gross margins than the Gena's other products. In addition, Gena incurred certain
one-time packaging and other costs to integrate their newly acquired Design
Classic product line. Gena also experienced an increase in certain raw materials
costs.
Gross Profit
As a result of the foregoing, gross profit increased 6.8% to $3.4 million
in the 12 months ended February 28, 1995 from $3.1 in the 12 months ended
February 28, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 8.0% to $3.0
million in the 12 months ended February 28, 1995 from $2.7 million in the 12
months ended February 28, 1994 as a result of the increase in selling and
promotional costs related to the introduction and promotion of the paraffin spa
product line. In addition, Gena incurred an increase in costs related to the
acquisition of Design Classic, which includes amortization of intangible assets,
and increased personnel costs required to support the new product.
Net Income
Net income decreased 16.5% to $0.2 million in the 12 months ended February
28, 1995 from $0.3 million in the 12 months ended February 28, 1994.
RESULTS OF OPERATIONS -- BODY DRENCH
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales for the six months ended June 30, 1996 decreased 20.2% to $6.6
million compared to $8.2 million for the six months ended June 30, 1995. The
decrease in net sales during the first six months of 1995 was primarily related
to difficulty in obtaining inventory from third party manufacturers in the six
months ended June 30, 1996 due to cash flow difficulties experienced by Body
Drench's parent. This caused Body Drench to forego potential sales due to its
inability to deliver product to customers in time for the Spring 1996 tanning
season. The Contemporary product line is comprised of various lotions and creams
to be used in conjunction with the indoor tanning process. Sales of the
Contemporary product line, which was introduced in October 1994, declined in the
first six months of 1996, and was partially offset by the increased sales of its
new product releases Tan FX and Tan EX and the Body Bath lotion product. Upon
completion of the Acquisitions and implementation of the Company's strategy (see
"Business -- Strategy"), management believes that the decline in sales will not
represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 52.6% for the six
months ended June 30, 1996 as compared with 55.3% for the six months ended June
30, 1995. This decrease was due primarily to a greater percentage of net sales
in the 1996 period relating to the Tan FX and Tan EX products, which carried
lower production and packaging costs as compared to the Contemporary product
line.
Gross Profit
As a result of the foregoing, gross profit decreased 15.3% to $3.1 million
in the six months ended June 30, 1996 from $3.7 million in the six months ended
June 30, 1995.
29
<PAGE> 31
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 19.2% to $2.4
million for the six months ended June 30, 1996 compared to $3.0 million for the
six months ended June 30, 1995. The decrease was attributable primarily to a
decrease in advertising related expenses in salaries and commissions, as Body
Drench did not introduce as many new products in 1996 and eliminated several
sales and administrative positions.
Net Income
Net income remained relatively constant at $0.4 million in the six months
ended June 30, 1996 and 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Net Sales
Net sales in 1995 increased 6.6% to $11.9 million compared to $11.1 million
in 1994. The increase in net sales was due to the release of the new
Contemporary product line introduced in October 1994. During 1995, Body Drench
realized a full year of Contemporary sales as compared to only a partial year in
1994. The increase in net sales was also impacted by the release of the Tan FX
and Tan EX products, and the Contemporary products introduced in the fourth
quarter of 1995.
Costs of Sales
Cost of sales, as a percentage of net sales, decreased to 54.1% for the 12
months ended December 31, 1995 as compared with 56.9% for the 12 months ended
December 31, 1994. This decrease was due primarily to the introduction of the
Contemporary product line during late 1994 which carried a lower raw material
cost in relation to net sales as compared to products sold during 1995.
Gross Profit
As a result of the foregoing, gross profit increased 13.5% to $5.4 million
in the 12 months ended December 31, 1995 from $4.8 million in the 12 months
ended December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 19.8% to $4.9
million in 1995 compared to $4.1 million in 1994. The increase was attributable
to the continued increase of shipping costs in proportion to sales levels due to
the growing number of backorders from the Contemporary product line. Backorders
resulted primarily from the Body Drench's inability to produce sufficient
product to meet customer orders due to cash flow shortages at DBN and Body
Drench. Additionally, advertising expense increased by approximately 1.0% of net
sales as a result of the heavy promotional efforts in various magazines,
catalogs and brochures with the release of the new Contemporary product line.
Body Drench also incurred higher personnel costs through the addition of several
marketing and sales professionals.
Net Income
Net income decreased 34.1% to $0.3 million in the 12 months ended December
31, 1995 compared to $0.4 million in the 12 months ended December 31, 1994.
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
Net Sales
Net sales increased 67.4% to $11.1 million in the 12 months ended December
31, 1994 compared to $6.7 million in the 12 months ended December 31, 1993. The
increase in net sales was attributable to management's decision to expand the
distribution network to include several beauty supply distributors. This
expansion of distribution channels included establishing a dedicated sales force
to promote Body Drench's
30
<PAGE> 32
products to the tanning and beauty industry. In addition, Body Drench introduced
the Contemporary product line in October 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 56.9% for the 12
months ended December 31, 1994 as compared with 60.7% for the 12 months ended
December 31, 1993. This decrease was due primarily to lower purchasing costs as
a result of the higher volume of purchases during 1994. In addition Body Drench
incurred lower overhead and labor costs as a percentage of revenues, as a result
of increased production efficiencies due to higher utilization of pre-packaged,
ready to ship products.
Gross Profit
As a result of the foregoing, gross profit increased 83.5% to $4.8 million
in the 12 months ended December 31, 1994 from $2.6 million in the 12 months
ended December 31, 1993.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 98.3% to $4.1
million in 1994 compared to $2.1 million in 1993. The increase in selling,
general, and administrative expenses related to additional sales and
administrative positions to support the corresponding increase in sales. In
addition, Body Drench incurred significant up front costs of promotional
literature, including new catalogs, brochures and price sheets, related to the
introduction of the Contemporary product line introduced in October 1994. Body
Drench also incurred a higher level of freight charges in proportion to sales
levels due to significant number of backorders, resulting from inventory
shortages, which caused additional shipment costs to customers.
Net Income
Net income increased 36.0% to $0.4 million in 1994 compared to $0.3 million
in 1993.
RESULTS OF OPERATIONS -- JDS
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales decreased 9.8% to $2.3 million for the nine months ended June 30,
1996 compared to $2.6 million for the nine months ended June 30, 1995. The
decrease was caused by a decline in its customer base as a result of the
acquisition of several JDS' customers by a large beauty supply company that is
not a customer of JDS. Upon completion of the Acquisitions and implementation of
the Company's strategy (see "Business -- Strategy"), management believes that
the decline in sales will not represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, increased slightly to 40.6% in
the nine months ended June 30, 1996 as compared with 39.8% in the nine months
ended June 30, 1995. This increase was due to significant costs incurred for raw
materials as a result of the introduction of a new product.
Gross Profit
As a result of the foregoing, gross profit decreased 11.0% to $1.4 million
in the nine months ended June 30, 1996 from $1.6 million in the nine months
ended June 30, 1995.
31
<PAGE> 33
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 10.1% to $1.4
million in the nine months ended June 30, 1996 from $1.5 million in the nine
months ended June 30, 1995. The decrease related primarily to the elimination of
warehouse personnel, as a result of JDS' effort to reduce overhead costs.
Net Income (Loss)
Net loss was ($3,094) in the nine months ended June 30, 1996 compared to
net income of $23,275 in the nine months ended June 30, 1995.
TWELVE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO TWELVE MONTHS ENDED
SEPTEMBER 30, 1994
Net Sales
Net sales decreased 5.9% to $3.4 million for the 12 months ended September
30, 1995 compared to $3.6 million for the 12 months ended September 30, 1994.
The decrease was primarily a result of increased competition from several new
products in the market that impacted JDS' market share. Upon completion of the
Acquisitions and implementation of the Company's strategy (see
"Business -- Strategy"), management believes that the decline in sales will not
represent a continuing material trend.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 40.1% in the 12
months ended September 30, 1995 as compared with 40.9% in the 12 months ended
September 30, 1994. The increase was a result of obtaining more favorable
freight terms with its shipping contractors.
Gross Profit
As a result of the foregoing, gross profit decreased 4.5% to $2.0 million
in the 12 months ended September 30, 1995 from $2.1 million in the 12 months
ended September 30, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 5.7% to $2.0
million for the 12 months ended September 30, 1995 compared to $2.2 million for
the 12 months ended September 30, 1994. The decrease was primarily a result of a
decrease in promotional costs, as no new products were introduced during 1995,
and a decrease in management salaries resulting from an effort to reduce
overhead costs.
Net Income (Loss)
Net income was $8,574 in the 12 months ended September 30, 1995 compared to
a net loss of ($16,494) in the 12 months ended September 30, 1994.
TWELVE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO TWELVE MONTHS ENDED
SEPTEMBER 30, 1993
Net Sales
Net sales decreased 5.8% to $3.6 million for the 12 months ended September
30, 1994 compared to $3.8 million for the 12 months ended September 30, 1993.
The decrease was primarily a result of a decrease in JDS' customer base as a
result of several of their customers ceasing operations. The largest of these
companies comprised approximately $100,000 of JDS' sales in 1993.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 40.9% in the 12
months ended September 30, 1994 as compared with 45.9% in the 12 months ended
September 30, 1993. The decrease was primarily a result of more favorable
purchasing terms achieved due to a change in its raw materials source.
32
<PAGE> 34
Gross Profit
Gross profit increased 2.9% from $2.0 million for the 12 months ended
September 30, 1993 to $2.1 million for the twelve months ended September 30,
1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 3.7% to $2.2
million in the 12 months ended September 30, 1994 compared to $2.1 million in
the 12 months ended September 30, 1993. The increase was partly a result of an
increase in promotional costs associated with the introduction of a new brand of
nail enhancement products. The remaining increase resulted primarily from the
addition of a new regional manager and a new sales incentive program.
Net Loss
Net loss decreased 43.1% to $16,494 in the 12 months ended September 30,
1994 compared to $29,000 in the 12 months ended September 30, 1993.
RESULTS OF OPERATIONS -- KII
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales
Net sales decreased 5.3% to $0.7 million in the six months ended June 30,
1996 compared to $0.8 million in the six months ended June 30, 1995. The
decrease in net sales was primarily attributable to a reduction in the customer
base and decreased promotional efforts.
Costs of Sales
Cost of sales, as a percentage of net sales, decreased to 46.6% in the six
months ended June 30, 1996 as compared with 47.9% in the six months ended June
30, 1995. This decrease was due primarily to a continued increase in purchasing
costs related to KII's international freight costs.
Gross Profit
Gross profits remained relatively constant at $0.4 million for the six
months ended June 30, 1995 and 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 30.9% to $0.3
million in the six months ended June 30, 1996 compared to $0.5 million in the
six months ended June 30, 1995. The decrease in selling, general, and
administrative expenses was primarily attributable to a reduction in commission
expenses related to the decrease in sales as well as lower promotional costs.
Net Income (Loss)
Net income was $24,765 in the six months ended June 30, 1996 compared to a
net loss of ($116,610) in the six months ended June 30, 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Net Sales
Net sales in the 12 months ended December 31, 1995 decreased 22.1% to $1.6
million compared to $2.0 million in the 12 months ended December 31, 1994. As
part of its overall strategy, KII acquired a division of Redken in December
1993. During 1994, Redken reduced its customer base by 17 distributors, which
had a direct impact on sales for KII. Upon completion of the Acquisitions and
implementation of the Company's
33
<PAGE> 35
strategy (see "Business -- Strategy"), management believes that the decline in
sales will not represent a continuing material trend.
Costs of Sales
Cost of sales, as a percentage of net sales, increased to 45.7% in the 12
months ended December 31, 1995 as compared with 49.3% in the 12 months ended
December 31, 1994. The increase was primarily attributable to increased freight
and duty costs associated with international purchases.
Gross Profit
As a result of the foregoing, gross profit decreased 16.6% to $0.8 million
in the 12 months ended December 31, 1995 from $1.0 million in the 12 months
ended December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 14.3% to $0.9
million in the 12 months ended December 31, 1995 compared to $1.0 million in the
12 months ended December 31, 1994. The decrease in selling, general, and
administrative expenses was attributable to a decrease in salaries and
commissions through the elimination of several sales positions.
Net Loss
Net loss increased to $134,919 in the 12 months ended December 31, 1995
from $72,000 in the 12 months ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The pro forma working capital as of June 30, 1996 after giving adjusted pro
forma effect to the consummation of the Acquisitions and the application of the
net proceeds from the Offering (see "Use of Proceeds"), was $8.3 million. The
pro forma indebtedness as of such date consisted of approximately $2.8 million,
of which approximately $2.5 million represents debt associated with seller
carryback financing, bearing interest rates of approximately 10% due in
approximately two years (includes the $2.0 million deferred cash payment
described under "Description of the Acquisitions -- Gena Acquisition").
In September 1996, the Company used the net proceeds of a $0.4 million
Bridge Note to fund a portion of the Offering expenses and acquisition costs.
The Bridge Note bears interest at an annual rate of 10% and is to be repaid on
the earlier of January 31, 1997 or the consummation of the Offering. The holder
of the Bridge Note will be issued 18,182 shares of Common Stock (assuming an
initial public offering price of $11.00 per share) and Warrants to acquire
18,182 shares of Common Stock (assuming an initial public offering price of
$11.00 per share) at an exercise price of 125% of the initial public offering
price, subject to certain adjustments, upon repayment of the Bridge Note.
The Company has conducted no operations to date and has no substantial
working capital. A substantial portion of the proceeds of the Offering will be
applied to pay the cash purchase price of the Acquisitions, to discharge certain
liabilities assumed in the Acquisitions, to repurchase Common Stock, and to
repay the Bridge Note. As a result, the Company will rely primarily on cash flow
from operations, approximately $4.4 million of remaining proceeds from the
Offering, and proposed bank financing for its working capital and general
corporate needs and for potential acquisitions.
The report of Body Drench's independent public accountants dated June 28,
1996 expressed "substantial doubts" about Body Drench's ability to continue as a
going concern in the absence of its acquisition by the Company. The auditors
have informed the Company that, upon the closing of the Offering and the
simultaneous acquisition of Body Drench by the Company, their report with
respect to the audited financial statements of Body Drench would no longer
contain a going concern paragraph.
34
<PAGE> 36
The Company currently plans to consolidate the operations of Body Drench,
JDS, and KII into Gena's facilities in Duncanville, Texas. As a result of the
foregoing, the Company believes it will incur costs of approximately $70,000 to
consolidate and move the operations of the Acquired Businesses, and to fund
capital expenditures related to computer equipment, software and other
improvements in order to enable the Company to fully integrate the Acquisitions.
The Company believes that its planned consolidation and capital expenditures and
operating requirements through the end of 1996 and 1997 will be funded by
operations, proceeds from the Offering, and proposed bank financing. The Company
has obtained letters of intent, subject to completion of customary due
diligence, from several financial institutions to provide a working capital line
of credit and an acquisition line of credit which, when combined with the
Company's cash resources, will be used for anticipated future acquisitions of
professional salon product companies and for working capital. There can be no
assurance that the Company will be able to generate sufficient cash flow from
operations to meet its working capital requirements or to obtain additional
financing on terms favorable to the Company, or, at all. The Company may revise
its plans in response to future changes in the beauty industry in general, the
demand for its products, its results of operations, other capital requirements
and other relevant factors.
The Company believes the net proceeds of the Offering, together with cash
flow from operations, will be sufficient to meet its liquidity needs for the
combined operations of the Acquired Businesses for 18 months following the date
of this Prospectus. The Company, however, will seek to complete its proposed
bank financing and may seek other funds for potential acquisitions. The Company
is not currently engaged in any active negotiations to acquire any businesses
other than the Acquired Businesses, and there can be no assurance that the
Company will be able to acquire any additional businesses. See "Risk Factors --
Acquisition Strategy."
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets To
Be Disposed Of," to measure certain long-lived assets for impairment based on
discounted cash flows. The Company's adoption of SFAS No. 121 as of January 1,
1996 had no material effect on the Company's financial position.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which allows, but does not require, a Company to
record stock based compensation on the fair value basis. If the Company elects
not to recognize compensation expense under this method, disclosure of the pro
forma effect of SFAS No. 123 is required. The Company has adopted SFAS No. 123
using the disclosure method as of January 1, 1996.
35
<PAGE> 37
BUSINESS
GENERAL
The Company develops, produces, and markets high-end professional salon
products, including hair care, nail care, and skin and body care products as
well as salon appliances and salonwear. The Company sells its products primarily
to beauty and tanning supply distributors and, to a lesser extent, directly to
spas, resorts, health and country clubs, beauty salon chains, and hair, nail,
and tanning salons throughout the United States as well as in Canada, Europe,
Argentina, Australia, and New Zealand. On a pro forma basis, total revenue of
the Company would have exceeded $25 million and its net income would have
exceeded $1.5 million in 1995 assuming the Acquisitions had taken place on
January 1, 1995.
Styling was founded in June 1995. Although Styling itself has conducted no
operations to date, it has entered into definitive agreements to acquire,
simultaneously with the consummation of the Offering, four professional salon
product businesses that, on a combined basis, have a diversified line of
well-established, brand-name professional salon products that have been popular
in the professional salon products industry for more than 10 years. The
Acquisitions will provide the Company with an extensive network of strong
distribution relationships, experienced sales forces, established marketing and
salon industry education programs, significant production and sourcing
capabilities, and experienced management personnel with extensive relationships
in the professional salon products industry.
The Company's Chief Executive Officer and President have more than 10 and
20 years, respectively, of experience in the professional salon products
industry. The Chief Executive Officer's experience includes serving as the
executive vice president of a mall-based retail chain of beauty supply salons;
the president of a developer of a line of hair care products; the owner of
retail salons; and a joint venturer with Regis in a mall-based retail salon
chain. The President's experience includes serving as the chief operating
officer of one of the Acquired Businesses; a member of the senior management
team of a corporation that conducted the acquisition of personal care brands,
assets, and trademarks from companies in the professional salon and mass-market
industries; a marketing executive for a large beauty supply distributor; and the
national sales manager for a personal care products company.
INDUSTRY OVERVIEW
Professional salon products consist of hair care, nail care, and skin and
body care products as well as salon appliances and sundries that are used by
salon professionals in rendering salon services to their clients. Many
professional salon products also are retailed to clients and other customers of
salons, resorts, spas, health and country clubs, and beauty supply outlets,
typically upon the advice of a salon professional who recommends products to
address a client's individual needs.
Professional hair care products include shampoo, conditioner, styling gel,
glazes, mousse, hair spray, permanent, hair relaxer, and hair color products.
Professional nail care products include fiberglass and acrylic nail enhancement
solutions applied by the salon professional in rendering the nail service and
the accessories used by the professional to apply solutions, natural nail care
and pedicure solutions and accessories, and polishes. Skin and body care
products include body lotions, tanning products, cosmetics, skin moisturizers,
and other personal care products (such as shaving creams and antiperspirants)
used by salon professionals in rendering salon services (such as facials,
manicures, pedicures, paraffin therapy, aroma-therapy, and thermo-therapy) or
available for use by patrons of tanning salons, spas, resorts, and health and
country clubs. Professional salon appliances and sundries include hair dryers,
curling irons, brushes, furniture, and salonwear (such as capes), substantially
all of which are used by salon professionals only.
Salon professionals, as the users and "prescribers" of professional salon
products, typically select professional salon products on the basis of the
benefits and performance rather than price, which is passed on to the salon
client as part of the price of the salon service or is paid directly by the
salon client if the product is retailed. In addition, fashion trends
significantly impact the professional salon industry. As a result of
performance-based or fashion-trend purchase decisions, suppliers of professional
salon products market their products primarily by educating wholesale
distributors and salon professionals as to the uses and benefits of
36
<PAGE> 38
their products as well as fashion industry trends. The prescriptive nature of
the professional salon industry typically fosters greater brand loyalty, and
professional sales products typically have higher profit margins, than the
mass-marketed beauty products as a result of relative price insensitivity.
The professional salon products industry has grown significantly during the
last several years, which the Company believes has resulted from more frequent
use of salon services by each salon client and the growth and aging of the
United States population. According to industry sources, professional salon
industry revenue (including revenue from salon services and from sales of salon
products) for 1995 was $36 billion domestically (a 6% increase over the prior
year) and $70 billion internationally. The Company believes that between 10% and
30% of salon revenue results from the resale of professional salon products by
salons. Industry sources estimate that there currently are more than 200,000
licensed beauty salons and 1.8 million licensed cosmetologists in the United
States. Approximately 127 million clients visit salons each month.
The professional salon products industry is highly fragmented, with
approximately 700 firms selling such products domestically. Many companies
serving the professional salon products market are small and often are either
owner-operated or are operated ancillary to another business. According to Vi
Nelson & Associates, Inc., a consulting firm specializing in the professional
salon industry, most of the salon product companies generate less than $10
million in sales, with many of such companies generating less than $3 million in
sales. Most of these companies serve only a single product segment of the
professional salon products market. For example, most companies offering
professional salon hair care products do not also offer nail and skin care
products. The Company believes that there are many attractive acquisition
candidates in the professional salon industry because of the highly fragmented
nature of the industry, the need of industry participants for capital, and their
owners' desire for liquidity. Based on the industry experience of its
management, the Company believes it is the only company taking advantage of this
fragmentation by targeting the acquisition of professional salon product
companies.
STRATEGY
The Company's objective is to become a dominant developer, producer, and
marketer of professional salon products in the United States and
internationally. Key aspects of the Company's strategy to achieve this objective
are as follows:
Pursuing Strategic Acquisitions
The Company plans to pursue strategic acquisitions to capitalize on the
substantial fragmentation and growth potential existing in the professional
salon products market by acquiring professional salon product companies
possessing complementary high-end professional products with well-recognized
brand names. Acquisition candidates will be selected based on their potential to
broaden the Company's product lines, expand the geographical scope of its
distribution network into new markets, or achieve increased value from the
Company's marketing, distribution, and product development capabilities as well
as from its capital and management resources.
The Company's acquisition strategy will offer each candidate (i) the
opportunity to be a part of a diversified professional salon product company,
thereby enhancing its ability to compete in its particular product segment
through an expansion of distribution channels and improved production and
distribution capacities; (ii) the potential for increased profitability as a
result of centralization of certain administrative functions (such as risk
management, accounting, information systems, and purchasing), greater purchasing
power of raw materials and other supplies and services, and other economies of
scale; (iii) enhanced financial strength and visibility as part of a public
company; (iv) the opportunity for its management to remain involved in
operations; and (v) an opportunity for liquidity through the receipt of cash or
securities of the Company.
Most of the Company's directors and the key managers of the Acquired
Businesses have been visible participants in the professional salon product
industry, including as officers and directors of the American Beauty Association
(a leading trade organization), which has allowed them to become personally
acquainted with principals of professional salon product businesses across the
country. The Company believes that the
37
<PAGE> 39
industry's awareness of the Company, its management, and its strategies, will
attract interest from the principals of salon product businesses who may be
seeking liquidity or an exit alternative.
Enhancing Operational Efficiencies of Acquired Businesses
The Company plans to enhance the operating efficiencies of the Acquired
Businesses as well as any business it acquires in the future by eliminating
duplicative facilities, personnel, and functions. The Company plans to take
advantage of combined operations by utilizing its Duncanville, Texas facility to
produce products previously produced by third parties and to house warehouse and
distribution activities rather than utilizing leased facilities. The Company
also will integrate its sourcing and distribution capabilities to enable the
Company to utilize its increased purchasing power to maximize cost savings,
ensure the quality of its raw material and components, and achieve efficiencies
in distribution. In addition, the Company will upgrade its management
information systems to provide an integrated system for forecasting, production,
inventory management, distribution, procurement, and accounting.
Based upon management's extensive review of the operations of each of the
Acquired Businesses and discussions with the operating management of each of the
Acquired Businesses, the Company believes that it can reduce the selling,
general, and administrative expenses of the Acquired Businesses by approximately
$2.1 million in fiscal 1997, which represents an 18.6% reduction of such
expenses over the fiscal 1996 selling, general, and administrative expenses by
(i) eliminating excess compensation and related perquisites paid to
owner-employees of the Acquired Businesses; (ii) eliminating duplicative
administrative functions (such as risk management, accounting, information
systems, and purchasing); and (iii) closing the corporate offices of JDS and
KII. The Company also believes that it can reduce the cost of sales of the
Acquired Businesses to 47% of sales in fiscal 1997 from 54% of sales in fiscal
1996 by (a) relocating substantially all production of the Body Drench products
and all production of the JDS fiberglass nail enhancement products to the
Duncanville facility; (b) outsourcing the production of the JDS acrylic
enhancement products with a new production source; and (c) eliminating the
warehousing and distribution facility and the labor and shipping costs with
respect to JDS and KII. Additional warehouse facility costs will be reduced in
the third quarter of 1997 when the Body Drench warehousing function is
consolidated in the Duncanville facility. The Company's ability to achieve such
savings could be adversely affected by any delays that the Company encounters in
effecting such changes and any unanticipated difficulties it encounters in
integrating its business operations. In addition, the cost savings will be
mitigated, particularly if the Company does not increase its revenue, by the
expenses of operating the Company as a public company and the expansion of its
marketing efforts, including the costs associated with preparing marketing
materials, such as educational videos and pamphlets for distribution to
customers, increased media advertising, attendance at trade shows, and
conducting in-field demonstrations of its products.
Leveraging Well-Established Distribution Channels
The Company plans to coordinate the marketing efforts for its expanding
product lines, while maintaining their brand-name recognition, and to leverage
the well-established domestic and international distribution channels for
certain product lines to distribute other product lines. Historically, separate
distribution channels have been utilized for each of the Company's product
lines. Taking advantage of the Company's extensive but uncoordinated
distribution network and its existing relationships with its wholesale
distributors and professional supply outlets, the Company will offer its
distributors and outlets the opportunity to market additional product lines to
their customers. The Company also plans to expand its marketing efforts through
increased advertising programs and educational efforts directed to salon product
distributors and salon professionals. The Company plans to increase its
marketing expenditures from approximately $0.4 million during 1996 to
approximately $0.6 million during 1997 and to fund such amount from working
capital. Based on management's knowledge of the industry, the Company believes
it is the only professional salon supplier that can provide (i) hair care
products, (ii) natural nail care and nail enhancement products, (iii) body care
products, including indoor and outdoor tanning products, moisturizers, and
lotions, and (iv) salon appliances and salonwear.
38
<PAGE> 40
Expanding International Presence
The Company believes that international markets for hair, nail, and skin
care products represent a significant growth opportunity. The Company plans to
leverage its relationships with salon professionals and distributors for its
core products and its existing international presence to gain further
international penetration, particularly in the European Economic Community,
Latin America, and the Far East.
Capitalizing on Brand Name Recognition
The Company intends to leverage the significant brand-name recognition of
its existing product lines by introducing new products and formulations under
these brand names. The Company believes its combined operations will provide it
with greater capacity and know-how to develop, test, and market new products
within each of its product lines, including the cross-utilization of proprietary
technologies, product development resources, and knowledge regarding trends in
the professional salon industry.
The Company believes that its brand names are widely recognized among salon
professionals and distributors of beauty, tanning, health care, and personal
care products. The Company intends to continue to strengthen and broaden its
portfolio of core brands, including Gena, Body Drench, SRC, and Alpha 9 by,
among other things, continuing to globalize its marketing and product
development to provide a uniform image and product throughout the world. Each
core brand is marketed with a distinct and uniform global image, which includes
packaging and advertising.
PRODUCTS
The Company offers more than 500 professional salon hair care, natural nail
care and nail enhancement products, skin and body care products, and salon
accessories and salonwear under its Body Drench, Gena, SRC, and Alpha 9 brand
names. Based on the industry experience of its management, the input of the
operators of the Acquired Businesses, and available industry information, the
Company believes these brand names are widely recognized by salon distributors
and professionals and their clients as superior in quality to mass-marketed
product alternatives and other professional salon products.
The Gena line of natural nail care products features Warm-O-Lotion, a
collagen enriched lotion that is prominently featured in salons throughout the
United States. The Gena line also includes leading professional pedicure
products such as Pedi Soft, a collagen enriched conditioning lotion, Pedi Care
dry skin lotion, and Pedi Soak foot bath. The Gena product line also includes
the industry's most extensive line of paraffin therapy products, such as
Paraffin Springs Therapy Spa, a paraffin bath for conditioning heat therapy
treatments. In addition, the Gena product line also includes the Tea Tree Oil
lines of lotions and shampoos, which have anesthetic qualities to relieve dry,
itching skin and scalp, the Healthy Hoof nail and skin treatment line to
strengthen, moisturize, and condition nails and cuticles, and the MRX
antiseptics and lotions for use by salon professionals.
Body Drench is a leading brand name for professional skin care and tanning
products. Body Drench professional skin care products include moisturizing
lotions and body baths supplemented with Vitamins A and E and botanical extracts
for moisture retention and skin rejuvenation, alpha hydroxy acids for natural
skin exfoliation, and Unitrienol T-27 for skin elasticity. The Body Drench brand
name includes leading indoor tanning products that utilize the Carboplex(TM)
delivery system, which replaces moisture lost during tanning and produces
faster, darker tanning results. The Company also offers outdoor tan care and sun
protection products under the Body Drench name, which are available exclusively
at resorts, spas, and health and country clubs.
The Alpha 9 and Omni P.O. Professionals Only acrylic professional nail
enhancement product lines provide a complete line of liquids, powders, tips,
files, and other implements and treatments necessary for the professional nail
technician to complete the acrylic nail enhancement process. The Company's
Triumph Fiberbond nail enhancement system includes fiberglass, linen, and silk
nail enhancement treatment products for application by nail technicians for
their clients.
The SRC line of professional curling irons and blow dryers are recognized
within the salon industry as the finest quality in salon appliances. The
appliances are designed for high usage and durability and feature quick start up
and recovery capabilities. All SRC professional curling irons are backed by the
industry's only three
39
<PAGE> 41
year warranty. The Company's Maiko salonwear line features an extensive array of
salonwear for the stylist and the stylist's clientele.
The table below sets forth a description of the Company's principal
products; the brand name under which such products are sold; the approximate
percentage of such products sold for professional salon use and the approximate
percentage retailed to clients and customers; and the distribution channels for
such products.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT PRODUCT BRAND SALON RETAIL SALES
CATEGORY DESCRIPTION NAMES USE(1) BY SALONS(1)
- ----------------- -------------------------------- ----------------- -------- ------------
<S> <C> <C> <C> <C>
Hair Care Shampoo, conditioner, and Body Drench; Gena 20% 80%
hairspray
Nail Care Natural nail care products, Alpha 9; Omni 90% 10%
acrylic and fiberglass nail P.O.; Triumph;
enhancement products, and Gena; Design
manicure and pedicure solutions Classic; Adios
and accessories
Skin and Body Moisturizing lotion, indoor and Body Drench; Gena 40% 60%
Care outdoor tanning products,
personal care products, paraffin
waxes, and thermo-therapy
treatments
Salon Appliances Hairdryers, curling irons, and SRC; 100% 0%
and Sundries salonwear (capes and aprons) Maiko
<CAPTION>
PRODUCT DISTRIBUTION
CATEGORY CHANNEL
- ----------------- ---------------------------------
<S> <C>
Hair Care Beauty and tanning supply
distributors and outlets, beauty
salon chains, health and country
clubs, resorts and spas
Nail Care Beauty supply distributors and
outlets and beauty salon chains
Skin and Body Beauty and tanning supply
Care distributors and outlets, beauty
salon chains, health and country
clubs, resorts and spas
Salon Appliances Beauty supply distributors
and Sundries
</TABLE>
- ---------------
(1) Company estimates.
- --------------------------------------------------------------------------------
During each of the three years ended December 31, 1993, 1994, and 1995, sales of
hair care products represented approximately 24%, 27%, and 28%, respectively, of
the Company's total revenue; nail care products represented approximately 47%,
35%, and 35%, respectively, of the Company's total revenue; skin and body care
products represented approximately 28%, 30%, and 31%, respectively, of the
Company's total revenue; and sales of salon appliances and sundries products
represented approximately 1%, 8%, and 6%, respectively, of the Company's total
revenue.
PRODUCT DEVELOPMENT
The Company intends to leverage the significant brand-name recognition of
its existing product lines by introducing new products and formulations under
its brand names. The Company believes that its combined operations will provide
it with greater capacity and know-how to develop, test, and market new products
in each of its product lines, including the expanded applications of proprietary
technologies. The Company's managers, working together with its marketing and
product development personnel, continuously monitor shifts in the fashion
industry generally and the salon industry in particular to identify new product
opportunities. The Company believes the experience of its key managers and their
combined relationships within the industry as well as the Company's product line
orientation will enable it to quickly recognize and respond to salon innovations
and fashion industry trends.
SALES AND MARKETING
The Company sells its professional salon products and appliances
exclusively through professional salon industry distribution channels to beauty
and tanning supply distributors and, to a lesser extent, to spas, resorts and
health and country clubs (both directly and to distributors), and directly to
beauty salon chains, and hair, nail, and tanning salons throughout the United
States and in Canada, Europe, Argentina, Australia, and New Zealand. The Company
believes that its strategy of marketing its products exclusively for use in or
resale by
40
<PAGE> 42
the professional salon industry channels complements the quality image of the
Company's products and fosters a high degree of loyalty to its products by
distributors of professional salon products.
The marketing programs and sales forces for each of the Company's product
lines focus on educating salon professionals and salon distributors regarding
the high quality and the specific benefits of the Company's products as well as
the latest trends and developments in the fashion and beauty industries. An
important element of the Company's marketing is its participation at salon
industry trade shows, at which salon product manufacturers exhibit and sell
their products to wholesale salon product distributors, and several annual
domestic and international salon professionals trade shows and numerous
professional salon distributor-sponsored shows, at which products, styles, and
techniques are demonstrated to salon professionals. Another key element of the
Company's education-focused marketing is in-the-field demonstrations of its
products for a group of salon professionals in a certain locale, usually at the
request of a beauty supply distributor. In addition, the Company advertises its
products in trade and distributor publications as well as in national
advertising through such magazines as Glamour, Mirabella, Redbook, and Self. The
Company also will produce educational videos and pamphlets for distribution to
beauty supply distributors and salon professionals.
The Company plans to increase its marketing expenditures from approximately
$0.4 million in 1996 to approximately $0.6 million in 1997, all of which will be
funded from working capital. These expenditures will include the costs
associated with preparing marketing materials, such as educational videos and
pamphlets for distribution to customers, increased media advertising, attendance
at trade shows, and conducting in-field demonstrations of its products.
The Company believes that its combined marketing and distribution
capabilities provide it with strong distribution relationships in each of the
professional salon distribution channels. The Body Drench product lines are sold
domestically in all 50 states and in Europe to approximately 85 beauty supply
distributors, to approximately 75 tanning supply distributors, and to
approximately 3,000 spas, resorts, health and country clubs, beauty salon chains
as well as, to a lesser extent, directly to hair, nail, and tanning salons by a
sales force of approximately 16 marketing representatives, telemarketers, and
field sales personnel as well as by approximately 30 independent manufacturers'
representatives. The Gena product lines are sold nationally to approximately 700
beauty supply distributors, including Sally, as well as to approximately 4,000
beauty supply chains by a sales force of three marketing representatives and
approximately 40 independent manufacturers' representatives. The JDS product
lines are sold nationally to more than 1,200 beauty supply distributors and
outlets, including Sally, by a sales force of three employees. The KII salon
appliances and salonwear lines are sold nationally to more than 50 beauty supply
distributors, 14 beauty schools, and six beauty salon chains by a sales force of
two employees.
Other than Sally and Regis, no other beauty supply chain or other customer
accounts for a significant portion of the purchases of the Company's
professional salon products. During 1995, Sally accounted for approximately 10%
of the Company's net sales. The Company has supplied products to Sally and Regis
on a purchase order basis for more than five years. The Company, however, does
not have any contractual agreements with Sally or Regis relating to the supply
of products.
Upon the consummation of the Acquisitions, the Company intends to
capitalize on each product lines's marketing programs and distribution network
to introduce other of the Company's product lines. The Company believes this
enhanced utilization of its existing marketing and distribution capacities will
result in increased sales in some of its product lines with little or no
increase in selling cost.
PRODUCTION
The principal production, assembly, packaging, and warehouse operations of
the Company are conducted through a 30,000 square foot complex located in
Duncanville, Texas. The Company will lease a production and warehouse facility
located in Alexandria, Tennessee for a period of six months with an option to
renew for another six-month period. See "Business -- Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
41
<PAGE> 43
The production area in the Duncanville facility consists of approximately
6,000 square feet of space and includes formula compounding areas, multiple
manual and fully automated liquid filling lines, and packaging facilities. The
compounding or mixing department utilizes a combination of manual and fully
automated batch processing systems. The Company maintains an internal control
system to monitor the quality of its products. The Company also maintains
product liability insurance at levels it believes to be adequate. The Company
maintains an inventory of raw materials and packaging materials as well as
certain finished goods in its on-site warehouses that comprise a total of
approximately 20,000 square feet. Finished inventory generally is warehoused for
distribution throughout the world at the Duncanville facility.
The Company expects the machinery and equipment at its Duncanville facility
to have a relatively high level of capacity utilization when the production
requirements of the Acquired Businesses are fully integrated at the Duncanville
facility. The Company believes these steps will yield additional production
efficiencies and cost savings. However, no assurance can be given as to the
Company's ability to achieve any level of utilization or increased productivity.
The Duncanville facility has a significant amount of available space for the
installation of additional machinery and equipment and warehousing if additional
capacity is needed. The Company also has the ability to increase the size of its
Duncanville facility by building an additional 20,000 square foot facility on a
vacant lot it owns adjacent to the existing facility. The Company, however, has
no immediate plans to install additional machinery and equipment or to increase
the warehousing space in the existing facility or to commence construction of an
additional facility.
Raw materials used to produce the Company's professional salon products
(other than salon appliances and salonwear) include water, alcohol, mineral and
natural oils, fragrances, other chemicals, and a wide variety of packaging
materials and compounds including containers, such as cardboard boxes and
plastic containers, container caps, tops, valves and labels, all of which it
purchases from outside sources. The Company's principal raw materials and
packaging components are available from several domestic suppliers, and it does
not depend on the availability of supplies from any single source. The Company
does not anticipate any difficulty in obtaining adequate supplies of raw
materials to meet its needs as a result of the long-established supplier
relationships and alternative raw material substitutes it has developed.
Similarly, while the industry from time to time has experienced raw material
cost increases, the Company believes it will be able to purchase its
requirements at competitive prices. To date, increases in raw material costs
have not had a material effect on the Company's operating results. Substantially
all of the Company's salon appliance products currently are manufactured on a
contract basis by Windmere Corporation, a Florida manufacturer with overseas
production facilities. The Company does not have a long-term manufacturing
contract with Windmere Corporation, which competes with the Company in the
professional salon appliances market, and there can be no assurance that
Windmere Corporation will continue to manufacture professional salon appliances
for the Company in the future. Because the Company owns the tooling and molds
used to manufacture such appliance products, it believes it could substitute
another manufacturer on a timely basis and at reasonable prices. Amole
manufactures products for the Company's Body Drench Division on a contract basis
and represented approximately 18% of the Company's total materials costs on a
combined basis in 1995. The Company does not have a long-term supply contract
with Amole. There can be no assurance that Amole will continue to supply
products to the Company. No other supplier furnishes more than 10% of the
Company's products, raw materials or other supplies. See "Risk
Factors -- Dependence on Key Suppliers."
COMPETITION
The professional salon products industry is highly competitive. The
Company's products compete directly against professional salon and other similar
products sold through distributors of professional salon products and
professional salons. The Company's principal competitors in the professional
salon hair care products market include Bristol-Myers Squibb Company (under the
trademarks Clairol and Matrix), Nexxus Products Co., Paul Mitchell Systems and
Redken. The Company's competitors in the professional salon nail care market
include Creative Nail Design, Inc., Star Nail Products, Inc., OPI Products Inc.
and Backscratchers, Inc. The Company's largest competitors in the professional
salon skin and body care products market include California Suncare, Inc., Supre
Inc., Swedish Beauty Manufacturing, Inc., and Australian Gold, Inc. The
Company's largest competitors in the professional salon appliances and sundries
market are Helen of Troy
42
<PAGE> 44
Limited, Belson Products (a division of Windmere Corporation), Conair
Corporation, Cricket Brush Company (a division of West Coast Beauty Supply Co.),
Andre (a division of Fromm International, Inc.), and Betty Dain Creations, Inc.
In addition, the Company's professional salon products compete indirectly
against hair care, nail care, and skin and body care products and salon
accessories sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores and, to a lesser extent, mass
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," and catalogs. See "Risk Factors -- Competition."
PATENTS AND TRADEMARKS
The Company markets its products under a number of trademarks and trade
names that are registered in the United States and several foreign countries.
Principal trademarks of the Company include Body Drench, Alpha 9, and Gena, and
the names of most of the products sold under each of these brands. The Company
believes its position in the marketplace depends to a significant extent upon
the goodwill engendered by its trademarks and trade names and, therefore,
considers trademark protection to be important to its business. The Company's
trademarks and trade names have unlimited life. The Company will seek to
register significant trademarks and trade names in other foreign countries as it
enters these markets.
A number of the Company's products incorporate patented or patent-pending
formulations pursuant to nonexclusive licenses from third parties. The Company
does not consider any single patent to be material to the conduct of its
business.
GOVERNMENT REGULATION
Certain of the Company's advertising and product labeling practices are
subject to regulation by the FTC, and certain of its professional salon product
production practices are subject to regulation by the FDA as well as by various
other federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
the Company to date. Nonetheless, federal, state, and local regulations in the
United States that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product claims, production methods,
product content, labeling, and packaging. In addition, any expansion by the
Company of its operations to produce professional salon products that include
over-the-counter drug ingredients (such as certain sun screen ingredients) would
result in the Company becoming subject to additional FDA regulations as well as
a higher degree of inspection and greater burden of regulatory compliance than
currently exist.
The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals, The amount of hazardous waste produced by the Company may
increase in the future when the Company increases production at the Duncanville
facility. The failure by the Company to comply with current or future
environmental regulations could result in the imposition of fines on the
Company, suspension of production, or a cessation of operations. Compliance with
such regulations could require the Company to acquire costly equipment or to
incur other significant expenses. Any failure by the Company to control the use,
or adequately restrict the discharge, of hazardous substances could subject it
to future liabilities. The Company believes that it is in substantial compliance
with applicable federal, state, and local rules and regulations governing the
discharge of hazardous materials into the environment. There are no significant
capital expenditures for environmental control matters anticipated in the
current year or expected in the near future. The Company believes that it is in
substantial compliance with such regulations, as well as applicable federal,
state, local, and foreign rules and regulations governing the discharge of
materials hazardous to the environment. There are no significant capital
expenditures for environmental control matters either estimated in the current
year or expected in the near future. See "Risk Factors -- Regulation and
Potential Claims."
EMPLOYEES
At August 30, 1996, the Company employed approximately 116 persons,
consisting of approximately 41 administrative employees; 53 warehouse and
production employees; and 19 sales and marketing employees.
43
<PAGE> 45
None of the Company's employees are covered by collective bargaining agreements
with the Company, and the Company believes that its relations with its employees
are good.
PROPERTIES
The Company owns its facility in Duncanville, Texas, near Dallas. This
facility contains administrative, production, and warehousing areas. The 20,000
square foot facility includes an approximately 4,000 square foot administrative
area, a 6,000 square foot production area, and a 10,000 square foot warehousing
area. The Company believes the facility is well maintained and adequate for its
needs. The Company also leases approximately 10,000 square feet of warehousing
space in Duncanville pursuant to a lease that expires on December 31, 2006. In
addition, the Company leases approximately 6,000 square feet of warehouse space
in Duncanville pursuant to a lease that expires in March 1997. The Company also
leases a manufacturing and warehouse facility located in Alexandria, Tennessee
for a period of one year with options to renew. Pursuant to short-term and
month-to-month leases, the Company leases additional warehouse and
administrative space in Duncanville, Texas; Alexandria, Tennessee; and Woodland
Hills, California. The Company expects to terminate such leases upon completing
the integration of the operations of the Acquired Businesses. See
"Business -- Production."
LEGAL PROCEEDINGS
The Company is, and may in the future be, party to litigation arising in
the ordinary course of its business. The Company does not consider any current
claims to be material to its business, financial condition, or operating
results. There can be no assurance that the Company's insurance coverage will be
adequate to cover all liabilities occurring out of any claims that may be
instituted in the future or that any future claims that are not covered by
insurance will not have an adverse effect on the Company's business, financial
condition, or operating results.
44
<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning each of the executive
officers, directors, and proposed director of the Company as well as the key
officers of each of the Company's divisions:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------
<S> <C> <C>
Sam L. Leopold................ 42 Chairman of the Board and Chief Executive
Officer
Thomas M. Clifford............ 43 President and Director
David E. Ziegler(1)........... 52 Chief Financial Officer, Treasurer, and
Secretary
Gerald L. Kotch(2)............ 61 Vice President -- SRC Division
Richard E. Norvell(2)......... 44 Vice President -- Body Drench Division
Donald N. Black(2)............ 44 Vice President/Production -- Gena Division
Thomas H. Adcock.............. 56 Director of Manufacturing
Sunny Stinchcombe............. 41 Vice President/Sales and Marketing -- Gena
Division
James A. Brooks............... 63 Director
Daniel Howell................. 45 Director
Sylvan Schefler(3)............ 58 Proposed Director
</TABLE>
- ---------------
(1) Effective October 14, 1996.
(2) Upon consummation of the Acquisitions.
(3) Upon consummation of the Offering.
Sam L. Leopold, a founder of the Company, has served as its Chairman of the
Board and Chief Executive Officer of the Company since the Company's
incorporation in June 1995. Mr. Leopold is a party to a joint venture agreement
with Regis, a publicly held, mall-based retail chain of beauty supply salons,
pursuant to which he operates four mall-based Trade Secret retail salons in
California. Mr. Leopold also owns and previously served as President and
Chairman of Beauty Boutique International, which was founded in 1990 and
operates three retail salons in Arizona. Mr. Leopold is not involved with the
day-to-day operations of the joint venture with Regis or Beauty Boutique
International, although both purchase products from the Company in the ordinary
course of business. See "Certain Transactions." From 1986 to 1991, Mr. Leopold
served as Executive Vice President of Consumer Beauty Supply, Inc. (dba Beauty
Express), a mall-based retail chain of beauty supply salons. During that time,
Mr. Leopold was responsible for day-to-day operations and oversaw the growth and
development of Beauty Express from less than 20 retail salons to more than 50
retail salons and from approximately $8 million in annual revenue to
approximately $25 million in annual revenue. From 1989 to 1991, Mr. Leopold
served as president of Avanti International, Inc. developing a line of hair care
products. Mr. Leopold served as in-house counsel to MDC Holdings, Inc., a
publicly held national home builder, from 1982 to 1984. Mr. Leopold expects to
devote substantially all of his business time to the Company.
Thomas M. Clifford, a founder of the Company, has served as its President
and as a director since the Company's incorporation. Mr. Clifford also has
served as Chief Operating Officer of JDS since October 1991. Mr. Clifford served
as Senior Vice President of Sales of American International Industries ("AII"),
a national multi-brand marketer of salon-quality products from September 1986 to
October 1991. During that time, Mr. Clifford was a member of the management team
that conducted AII's acquisition of brands, assets, and trademarks from
approximately 10 companies in the professional salon and mass-market industries.
While with AII, Mr. Clifford was responsible for management of multiple brand
names and product lines in both the professional salon and mass-market
industries. From August 1986 to September 1987, Mr. Clifford served as Vice
President of Marketing of Sterling Beauty Supplies, a large beauty supply
distributor in the western United States. Mr. Clifford served as National Sales
Manager of Helen of Troy Limited, a publicly held personal care products
company, from August 1985 to August 1986 and was responsible for executing its
45
<PAGE> 47
national sales strategy. From April 1983 to August 1985, Mr. Clifford served
first as National Sales Manager and subsequently as Vice President of Sales and
Marketing of Illinois Razor Strops, a manufacturer of cutlery and sundries for
the barber and beauty supply industry. During his tenure with that company, Mr.
Clifford successfully repositioned the company into the professional salon
market. Additionally, Mr. Clifford has served as a director of the American
Beauty Association since 1991 and is the treasurer-elect of that organization.
David E. Ziegler has served as Chief Financial Officer, Treasurer, and
Secretary of the Company commencing October 14, 1996. Mr. Ziegler served as
Chief Financial Officer of Cellular World Corporation ("CWC"), a retail chain of
wireless communications products stores, from February 1994 to October 1996. Mr.
Ziegler joined F&C International, Inc. ("F&C"), an international developer and
manufacturer of flavors and fragrances used by consumer product producers in the
food, beverage, and personal care industries, as Vice President and Chief
Financial Officer in January 1993 to strengthen senior management and
restructure F&C. Mr. Ziegler served F&C in such capacity until October 1993. F&C
filed for protection under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") in April 1993. Mr. Ziegler joined Zaks Stores, Inc. ("Zaks"), a
retail chain of arts and crafts stores, as Chief Financial Officer in 1991 after
Zaks had defaulted on a significant bank loan which resulted in a filing under
Chapter 11. Prior to Mr. Ziegler leaving Zaks in 1992, it reorganized and
emerged from Chapter 11. Mr. Ziegler is a certified public accountant and was a
partner at Arthur Andersen LLP from 1978 to 1986.
Gerald L. Kotch will serve as Vice President -- SRC Division upon
completion of the Acquisitions. Mr. Kotch has served as President of KII since
December 1993. Prior to that time, Mr. Kotch served as Vice President and
General Manager of the Styling Research Division of Redken Laboratories, Inc.
from November 1992 to December 1993. Mr. Kotch served as President of Marketing
Options Consulting Co., a management consulting firm for manufacturers within
the professional salon industry, from founding the company in January 1991 until
November 1992. From April 1991 to November 1992, Mr. Kotch served as General
Manager of the Beauty Division of DeMert and Dougherty, a Chicago-based aerosol
and liquid goods manufacturer. Mr. Kotch has served as President of the American
Beauty Association since November 1994.
Richard E. Norvell will serve as Vice President -- Body Drench Division
upon completion of the Acquisitions. Mr. Norvell has served as Secretary and
Treasurer of Designs by Norvell, Inc. since November 1977 and President of the
Body Drench Division since July 1985. Mr. Norvell is a founder of and served as
an original member of the Board of Directors of Suntan Association for
Education, the primary trade association for the indoor tanning industry, from
1989 to 1992.
Donald N. Black will serve as Vice President -- Gena Division upon
completion of the Acquisitions. Mr. Black has served as President of Gena since
June 1989, as Vice President of Gena from December 1984 to June 1989 and as
General Manager of Gena from December 1979 to December 1989.
Thomas H. Adcock will serve as Director of Manufacturing of the Company
upon completion of the Acquisitions. Mr. Adcock served as Vice President of
Commercial Development of Virbac, Inc., a manufacturer and distributor of
veterinary products, including pet shampoo and conditioner products ("Virbac"),
from September 1995 to July 1996. Mr. Adcock served as Vice
President -- Manufacturing of Virbac from January 1994 to September 1995. Mr.
Adcock founded and served as President of A & I Laboratories, Inc., a developer
and contract manufacturer of dermatological products, including shampoos,
lotions, and creams for humans and pets, since founding the company in March
1985 until January 1994 when he sold the company to Virbac. Mr. Adcock served as
Director of Planning, Warehousing, and Distribution of Maybelline Co. from June
1981 to March 1985.
Sunny Stinchcombe will serve as Vice President/Sales and Marketing -- Gena
Division upon completion of the Acquisitions. Ms. Stinchcombe has served as Vice
President/Sales and Marketing of Gena since 1989. Previously, Ms. Stinchcombe
was National Sales Manager at Gena from 1984 to 1989. Ms. Stinchcombe has over
14 years experience in the professional salon products industry.
James A. Brooks has served as a director of the Company since September
1996. Mr. Brooks has served as President of Signe Inc., a management consulting
firm for major consumer product companies and a variety of salon industry
companies, since founding the company in December 1984. Mr. Brooks served as
Senior Vice President of Sales and Marketing of Lamaur, Inc. from 1983 to 1984,
at that time a publicly traded
46
<PAGE> 48
company listed on the New York Stock Exchange and a leading domestic producer
and marketer of a broad range of hair care products and as Senior Vice President
of Sales and Marketing of Redken Laboratories, Inc. from 1977 to 1983. Mr.
Brooks is a director of Malibu 2000, a hair care products company.
Daniel Howell has served as a director of the Company since September 1996.
Mr. Howell has served as President of Nouvelle Methode, Inc., a business
consulting firm since founding it in March 1993. Mr. Howell founded and served
as President and Chief Executive Officer of Beauty Biz, Inc., an upscale
retailer of professional beauty supplies, from its inception in March 1986 to
March 1993. Mr. Howell has served as a director of Classic Restaurants
International, Inc., a publicly traded restaurant company, since February 1996.
In addition, Mr. Howell was a member of the board of directors of Helen of Troy
Limited, a publicly held professional hair care products company, from March
1988 to June 1993.
Sylvan Schefler will be appointed to the Board of Directors upon
consummation of the Offering. Mr. Schefler is Vice Chairman of Prime Charter
Ltd., an investment banking firm and one of the Representatives of the
Underwriters of the Offering. Mr. Schefler has served as Chairman of the
Investment Banking Division and as a member of the Executive Committee of Prime
Charter Ltd. since September 1994. Mr. Schefler has been a partner of Crystal
Asset Management Group, Ltd., a merchant banking firm since 1990. Previously,
Mr. Schefler was Chief Executive Officer of Hampshire Securities Corporation, an
investment banking firm, from 1992 to 1994 and Co-Chairman of Dabney/Resnick and
Wagner, Inc., an investment banking firm, from 1990 to 1992. Mr. Schefler
previously served in various capacities with Drexel Burnham Lambert Incorporated
for over 30 years, including as a member of its Executive Committee and Board of
Directors. Mr. Schefler has served as a director of GSE Systems, Inc., a
supplier of software systems for manufacturing industries, since August 1995.
Directors hold office until the next annual meeting of stockholders or
until their successors have been elected. Officers serve at the pleasure of the
Board of Directors. There are no family relationships among any of the directors
or officers of the Company. Messrs. Brooks, Howell, and Schefler will serve as
the members of the Audit and Compensation Committees of the Board of Directors.
FOUNDERS OF THE COMPANY
Sam L. Leopold, Kenneth S. Bernstein, and Thomas M. Clifford founded the
Company in June 1995, at which time each of Messrs. Leopold and Bernstein
acquired 807,851 shares of Common Stock for $100 and Mr. Clifford obtained
options to acquire 161,571 shares of Common Stock at an exercise price of $0.10
per share. Since the formation of the Company, Messrs. Leopold, Bernstein, and
Clifford have expended considerable time and efforts in developing the Company's
business plan, engaging personnel, negotiating the terms of the Acquisitions,
and preparing for the Offering, although Mr. Bernstein's efforts have decreased
and Mr. Clifford's have increased as the Company has completed preparing for the
Offering and negotiating the Acquisitions.
In 1993 and 1994, Mr. Bernstein entered into consent agreements with the
SEC, the National Association of Securities Dealers, Inc. and the Colorado state
securities commission with respect to allegations that Mr. Bernstein and others
failed to supervise adequately the activities of employees of a broker-dealer.
Mr. Bernstein agreed to fines, censure, and a suspension from supervising sales
representatives of a broker-dealer for two years. In the course of preparing for
the Offering, including the listing of the Common Stock, the Company determined
that it was in the Company's best interest to purchase all of Mr. Bernstein's
Common Stock. Consequently, in October 1996, the Company entered into a Stock
Repurchase Agreement providing for the Company to repurchase all of Mr.
Bernstein's shares of Common Stock for $1.8 million. Upon consummation of the
Offering, Mr. Bernstein will no longer be a stockholder of the Company and will
have no other relationship with the Company. See "Certain Transactions."
EXECUTIVE COMPENSATION
The Company was incorporated in June 1995 and has conducted no operations
to date. As a result, no salaries have been paid or accrued by the Company.
Compensation to be paid to the Company's Chief Executive Officer and the four
other most highly compensated executive officers following the Offering is
47
<PAGE> 49
disclosed below. See "Management -- Employment Agreements" and
"Management -- 1996 Stock Option Plan." Since the formation of the Company,
Messrs. Leopold and Clifford have expended considerable time and efforts,
without consideration, in developing the Company's business plan, engaging
personnel, negotiating the terms of the Acquisitions, and preparing for the
Offering. See "Management -- Founders of the Company."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Leopold,
Clifford, and Ziegler, and with certain of the key managers of the Acquired
Businesses, effective upon the completion of the Acquisitions. The terms of
these agreements are described below.
The Company has entered into employment agreements with Messrs. Leopold and
Clifford providing for Mr. Leopold to serve as Chairman of the Board and Chief
Executive Officers of the Company and for Mr. Clifford to serve as President of
the Company, in each case through September 2001. Upon completion of the
Offering, each of Messrs. Leopold and Clifford will receive an initial base
salary of $150,000 for the first year, $200,000 for the second year, and
$250,000 per annum for the remainder of the term of his employment agreement.
The Company entered into an employment agreement with Mr. Ziegler providing for
Mr. Ziegler to serve as Chief Financial Officer of the Company through September
2000. Mr. Ziegler will receive a base salary of $140,000 for the first year,
$165,000 for the second year, and $190,000 for the third year and will receive a
one-time bonus of $20,000 upon the completion of the Offering. Messrs. Leopold,
Clifford, and Ziegler are eligible to receive an annual bonus out of the bonus
pool, if any, established at the discretion of the Board of Directors. The
Company also granted Mr. Ziegler options under the Company's 1996 Stock Option
Plan to acquire 72,707 shares of Common Stock at an exercise price equal to the
initial public offering price per share. One-fourth of Mr. Ziegler's options are
exercisable upon the consummation of the Offering, and his remaining options
vest ratably over the following three years.
In connection with the acquisition of Body Drench, the Company will enter
into an employment agreement with Richard Norvell, who will be responsible for
the day-to-day activities, positioning, strategies, and execution of the sales
and marketing plans with respect to Body Drench. Mr. Norvell will devote at
least 80% of his business time to the performance of his duties under the
agreement. Mr. Norvell will receive an annual salary of $125,000 for the
three-year term of the employment agreement. In the event Mr. Norvell's brother,
Greg Norvell, is no longer employed by the Company, Mr. Norvell's annual salary
will increase to $200,000 for the remainder of the term of his employment
agreement. The employment agreement also provides that Mr. Norvell may
participate, at the sole discretion of the Company's Board, in any stock option
program adopted by the Company. The employment agreement will continue only if
the Body Drench Division revenue and earnings from continuing operations for
1997, 1998, and 1999 increase by at least 12% over the prior year's revenue and
earnings from continuing operations. The employment agreement contains a
covenant not to compete after the expiration or termination of such employment
agreement.
In connection with the acquisition of KII, the Company will enter into an
employment agreement with Gerald L. Kotch providing for Mr. Kotch to serve as
Vice President of the SRC Division of the Company until December 31, 2000,
subject to termination by either party at any time. Mr. Kotch will be
responsible for the day-to-day operations of the SRC Division. Pursuant to the
employment agreement, Mr. Kotch will receive an initial salary of $114,000 a
year, subject to periodic review by the Company, and will be eligible to receive
an annual bonus to be determined by the Company's Board based upon such
performance standards as are established by the Board. Mr. Kotch will be
eligible to participate in the Company's 1996 Stock Option Plan at the sole
discretion of the Board. In the event the Company terminates Mr. Kotch's
employment prior to December 31, 2000 for reasons other than a breach of the
employment agreement or an act involving a crime, moral turpitude, fraud, or
dishonesty, the Company must continue to pay Mr. Kotch's salary for the
six-month period following such termination. The employment agreement with Mr.
Kotch contains a covenant not to compete following Mr. Kotch's employment with
the Company for a period of the same length as Mr. Kotch's employment with the
Company but in no event less than six months nor greater than 36 months.
In connection with the acquisition of Gena, the Company entered into a
one-year employment agreement with Donald N. Black providing for Mr. Black to
serve the Company as Vice President -- Gena Division and
48
<PAGE> 50
to supervise operations at the Duncanville facility. The employment agreement
provides that the Company will pay Mr. Black $76,998 for the first six months of
the term of the employment agreement and $38,496 for the remaining six months.
DIRECTOR COMPENSATION
The Company pays each independent director an annual retainer of $5,000 and
$1,500 for each meeting of the Board of Directors attended. Directors also
receive $500 for each meeting of a committee of the Board of Directors attended.
In addition, independent directors receive stock options under the Company's
1996 Stock Option Plan. See "Management -- 1996 Stock Option Plan." Under the
Company's 1996 Stock Option Plan, Messrs. Brooks, Howell, and Schefler each will
receive options to purchase 5,000 shares of Common Stock at the initial public
offering price upon the completion of the Offering. Officers of the Company
receive no additional compensation for serving on the Board of Directors.
1996 STOCK OPTION PLAN
In September 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan"), which provides for the grant of incentive and nonqualified stock
options to acquire Common Stock of the Company, the direct grant of Common
Stock, the grant of stock appreciation rights ("SARs"), and the grant of other
cash awards to key personnel, directors, consultants, independent contractors,
and others providing valuable services to the Company and its subsidiaries. The
Company believes that the Plan represents an important factor in attracting and
retaining executive officers and other key employees and constitutes a
significant part of its compensation program, providing such individuals with an
opportunity to acquire a proprietary interest in the Company, and thereby align
their interests with the interests of the Company's other stockholders, and
giving them an additional incentive to use their best efforts for the long-term
success of the Company. The Plan also provides for the automatic grant of
options to independent members of the Company's Board of Directors, which the
Company believes promotes the interests of the Company by providing such
directors the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Company and thereby align their
interests with the interests of the Company's other stockholders in the
Company's success and progress.
A maximum of 400,000 shares of Common Stock of the Company may be issued
under the Plan. As of the date of this Prospectus, there were outstanding
options to acquire 72,707 shares of the Common Stock under the Plan at an
exercise price equal to the initial public offering price. The maximum number of
shares of stock with respect to which options or SARs may be granted to any
employee (including officers) during the term of the Plan may not exceed 50% of
the shares of Common Stock covered by the Plan.
The power to administer the Plan with respect to executive officers and
directors of the Company and all persons who own 10% or more of the Company's
issued and outstanding stock rests exclusively with the Board of Directors or a
committee consisting of two or more non-employee directors who are appointed by
the Board of Directors. The power to administer the Plan with respect to other
persons is vested with the Board of Directors.
The Plan terminates in August 2006, and options may be granted at any time
during the life of the Plan for terms of up to 10 years. Options become
exercisable at such time as may be determined by the Board of Directors or the
Plan administrator upon the grant of the options. However, the Board of
Directors or the Plan administrator has the discretion to provide for the
automatic acceleration of the vesting of any options or awards (except for the
automatic option grants described below) in the event of a "Change in Control,"
which includes the following events: (i) the acquisition of beneficial ownership
by certain persons, acting alone or in concert with others, of 30% or more of
the combined voting power of the Company's then outstanding voting securities;
(ii) during any two-year period, members of the Company's Board at the beginning
of such period cease to constitute at least a majority thereof (except that any
new director approved by at least two-thirds of the Board then still in office,
who were directors at the beginning of such period, is considered to be a member
of the current Board); or (iii) approval by the Company's stockholders of
certain reorganizations, mergers, consolidations, liquidations, or sales of all
or substantially all of the Company's assets.
49
<PAGE> 51
The exercise prices of options will be determined by the Board of Directors
or the Plan administrator, but if an option is intended to be an incentive stock
option, the exercise price may not be less than 100% (110% if the option is
granted to a stockholder who at the time of the grant of the option owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company) of the fair market value of the Common Stock at the time
of the grant.
AUTOMATIC OPTION GRANTS TO DIRECTORS
Each year at the meeting of the Board held immediately after the Company's
annual meeting of stockholders, each independent Board member automatically will
be granted an option to acquire 2,500 shares of Common Stock ("Annual Automatic
Option"). New independent members of the Board automatically will receive an
option to acquire 5,000 shares of Common Stock ("Initial Automatic Option") on
the date of their first appointment or election to the Board. Each automatic
Option will become exercisable and vest on the first anniversary of the
applicable grant date. An independent member of the Board is not eligible to
receive an Annual Automatic Option if the grant date is within 90 days of such
independent member receiving an Initial Automatic Option. The exercise price per
share of Common Stock subject to each Annual and Initial Automatic Option is
equal to 100% of the fair market value per share on the date of the grant of the
Annual or Initial Automatic Option, as the case may be. Cessation of service on
the Board terminates any Annual or Initial Automatic Options for shares that
were not vested at the time of such cessation.
The Plan is not intended to be the exclusive means by which the Company may
issue options or warrants to acquire its Common Stock, stock awards, or any
other type of award. To the extent permitted by applicable law and Nasdaq
requirements, the Company may issue any other options, warrants, or awards other
than pursuant to the Plan without stockholder approval.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or its stockholders for
monetary damages for breach of a fiduciary duty as a director, except to the
extent such exemption or limitation of liability is not permitted under the
Delaware GCL. The effect of this provision in the Certificate of Incorporation
is to eliminate the rights of the Company and its stockholders, either directly
or through stockholders' derivative suits brought on behalf of the Company, to
recover monetary damages from a director for breach of the fiduciary duty of
care as a director except in those instances described under the Delaware GCL.
In addition, the Company has adopted provisions in its Bylaws that require the
Company to indemnify its directors, officers, and certain other representatives
of the Company against expenses and certain other liabilities arising out of
their conduct on behalf of the Company to the maximum extent and under all
circumstances permitted by law.
CERTAIN TRANSACTIONS
In October 1996, the Company entered into a Stock Repurchase Agreement with
Kenneth S. Bernstein, a co-founder of the Company with Mr. Leopold, pursuant to
which Mr. Bernstein agreed to sell all of his 807,851 shares of Common Stock to
the Company for $1.8 million payable upon consummation of the Offering. In 1993
and 1994, Mr. Bernstein entered into consent agreements with the SEC, the
National Association of Securities Dealers, Inc., and the Colorado state
securities commission with respect to allegations that Mr. Bernstein and others
failed to supervise adequately the activities of employees of a broker-dealer.
Mr. Bernstein agreed to fines, censure, and a suspension from supervising sales
representatives of a broker-dealer for two years. In the course of preparing for
the Offering, including the listing of the Common Stock, the Company determined
that it was in the Company's best interest to purchase all of Mr. Bernstein's
Common Stock. Upon consummation of the Offering, Mr. Bernstein will no longer be
a stockholder of the Company and will have no other relationship with the
Company. Absent acquiescence of applicable listing authorities, the resumption
of any relationship between the Company and Mr. Bernstein could adversely affect
the listing and trading of the Common Stock.
Sam L. Leopold, Chairman of the Board and Chief Executive Officer of the
Company, is a party to a joint venture agreement with Regis, a publicly held,
mall-based retail chain of beauty supply salons, pursuant to which the joint
venture operates four mall-based Trade Secret retail salons in California. Mr.
Leopold also
50
<PAGE> 52
owns and previously served as the President and Chairman of Beauty Boutique
International, which operates three retail salons in Arizona. Mr. Leopold is not
involved with the day-to-day operations of the joint venture with Regis or
Beauty Boutique International and has agreed to devote substantially all of his
business time to the Company. Both the joint venture with Regis and Beauty
Boutique International have purchased products from the Acquired Businesses in
the ordinary course of their business and can be expected to continue to
purchase products from the Company in the future. All such purchases will be on
terms and conditions no more favorable than those available to other customers
of the Company.
Sam L. Leopold, Kenneth S. Bernstein, and Thomas M. Clifford have advanced
an aggregate of approximately $100,000 to fund certain expenses of the Company,
relating primarily to the earnest money deposits required in connection with the
Acquisitions. The Company plans to repay such advances from the net proceeds of
the Offering.
At the closing of the Offering, Mr. Leopold will purchase from the
Underwriters $500,000 of Common Stock at the price to public set forth on the
cover page hereof. Mr. Leopold has agreed not to sell or otherwise dispose of
these shares of Common Stock for a period of 270 days after the consummation of
the Offering without the prior written consent of the Representatives.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of the Company's Common Stock as of the date of this Prospectus, and as adjusted
to reflect the sale of shares offered hereby, for (i) all directors, proposed
directors, the Chief Executive Officer, and the four other most highly
compensated executive officers, (ii) all directors, the proposed director, and
executive officers as a group, and (iii) each person known by the Company to own
beneficially 5% or more of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO PUBLIC AFTER PUBLIC
OFFERING OFFERING(1)
--------------------- ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Sam L. Leopold(2).................................. 807,851 76.2% 853,306 22.5%
Thomas M. Clifford(3).............................. 161,571 15.2 161,571 4.3
David E. Ziegler(4)................................ 72,707 6.9 72,707 1.9
James A. Brooks(5)................................. 0 0.0 0 0.0
Daniel Howell(5)................................... 0 0.0 0 0.0
Sylvan Schefler(5)................................. 0 0.0 0 0.0
All directors and executive officers as a group
(six persons).................................... 1,042,129 98.3% 1,087,584 28.7%
</TABLE>
- ---------------
(1) Assumes that the Overallotment Option is not exercised.
(2) Assumes the purchase of $500,000 of Common Stock in the Offering.
(3) Mr. Clifford has options to acquire 161,571 shares at an exercise price of
$0.10 per share. The options are exercisable at any time commencing June 29,
1999, except that the Board of Directors may elect to accelerate such
options if the Company's earnings per share equal or exceed $2.30 on a
combined basis for fiscal years 1997 and 1998.
(4) On October 14, 1996, Mr. Ziegler received in connection with the
commencement of his employment options to acquire 72,707 shares. See
"Management -- Employment Agreements."
(5) Messrs. Brooks, Howell, and Schefler each will receive options to purchase
5,000 shares of Common Stock upon their election as directors, and each will
each receive options to purchase 2,500 shares of Common Stock following each
annual meeting of stockholders for as long as he remains a member of the
Board. See "Management -- 1996 Stock Option Plan."
51
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, par value $0.0001 per share, and 1,000,000 shares of serial
preferred stock ("Serial Preferred Stock"), par value $0.0001 per share. As of
October 31, 1996, there were issued and outstanding 807,851 shares of Common
Stock and no shares of Serial Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of the stock entitled to vote in
any election of directors may elect all of the directors standing for election.
Subject to the preferences that may be applicable to any then outstanding
preferred stock, the holders of Common Stock will be entitled to receive such
dividends, if any, as may be declared by the Board from time to time out of
legally available funds. Upon the liquidation, dissolution, or winding up of the
Company, the holders of Common Stock will be entitled to share ratably in all
assets of the Company that are legally available for distribution, after payment
of all debts and other liabilities and subject to the prior rights of holders of
any preferred stock then outstanding. The holders of Common Stock have no
preemptive, subscription, redemption, or conversion rights.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the laws of the state of Delaware, but without further action by the
Company's stockholders, to provide for the issuance of Serial Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in such series, to fix the designations, powers, preferences, and
rights of the shares of each such series and any qualifications, limitations, or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders. The Board may authorize
and issue Serial Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. In addition, the issuance of Serial Preferred Stock may have the effect
of delaying, deterring, or preventing a change in control of the Company. The
Company has no current plan to issue any shares of Serial Preferred Stock.
BRIDGE WARRANTS
Upon the completion of the Offering, Styling will issue 18,182 Bridge
Warrants to the holder of the Bridge Note (assuming an initial public offering
price of $11.00 per share). Each Bridge Warrant entitles the holder thereof to
purchase, at any time during the two-year period commencing on the date of
issuance of the warrant, one share of Common Stock at a price of 125% of the
initial public offering price per share, subject to adjustment in accordance
with the anti-dilution and other provisions referred to below. The shares of the
Company's Common Stock underlying the Bridge Warrants (the "Bridge Warrant
Shares"), when issued upon the exercise thereof and payment of the purchase
price, will be fully paid and nonassessable. The holders of the Bridge Warrants
do not have the rights or privileges of holders of Common Stock.
The Bridge Warrants are subject to redemption by the Company, at any time,
commencing on the date of issuance, at a price of $.01 per share of Common Stock
purchasable upon exercise of the Bridge Warrants if the closing bid price of the
Common Stock equals or exceeds 250% of the initial public offering price.
Redemption of the Bridge Warrants can be made only after 30 days' notice, during
which period the holders may exercise the Bridge Warrants.
The exercise price and the terms of the Bridge Warrants bear no relation to
any objective criteria of value and should not be regarded as an indication of
any future market price of the Common Stock offered hereby. The exercise price
and the number of shares of Common Stock purchasable upon the exercise of the
Bridge
52
<PAGE> 54
Warrants are subject to adjustment upon the occurrence of certain events,
including cash dividends, stock dividends, stock splits, and combinations or
reclassification on or of the Common Stock. Additionally, an adjustment would be
made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation, or sale
of all or substantially all of the assets of the Company in order to enable
holders of Bridge Warrants to acquire the kind and number of shares of stock or
other securities or property receivable in such event by a holder of the number
of shares that might otherwise have been purchased upon the exercise of the
Bridge Warrants. No adjustments will be made unless such adjustment would
require an increase or decrease of at least 5% in the number of securities then
purchasable under the Bridge Warrants.
The Company has granted certain "piggy-back" registration rights with
respect to the shares of Common Stock purchasable pursuant to the exercise of
the Bridge Warrants. Pursuant to such registration rights, each holder of Common
Stock acquired pursuant to the exercise of Bridge Warrants may request the
Company to register such stock if the Company proposes to file a registration
statement at any time after the consummation of the Offering. The Company has
agreed to pay all expenses associated with any registration of the Common Stock
acquired pursuant to the exercise of the Bridge Warrants, except that any fees
of legal counsel of the holders and underwriter's fees, discounts, or
commissions relating to the Common Stock registered by such holders will be the
responsibility of the selling stockholder. In the event that the Company's
registration of Common Stock is for a public offering involving an underwriting,
the "piggy-back" registration rights described above will be conditioned on the
underwriter's approval and on the holder's participation in such underwriting.
The "piggy-back" registration rights of the Bridge Warrantholders expire two
years after the receipt of the shares of Common Stock underlying the Bridge
Warrants.
The Company also has granted certain "demand" registration rights with
respect to the shares of Common Stock purchasable pursuant to the exercise of
the Bridge Warrants. Pursuant to such registration rights, during the six-month
period commencing 120 days after the consummation of the Offering, the holders
of 50% or more of the Common Stock acquired pursuant to the terms of the Bridge
Note and pursuant to the exercise of the Bridge Warrants may request the Company
to register such stock. The Company is obligated to effect only one "demand"
registration. The Company, however, is not obligated to prepare and file a
registration statement registering such shares of Common Stock at any time that
the Company has given notice of its proposal to register its securities and is
undertaking to cause such registration to become effective, or for a period of
120 days following the effective date of any such registration. During such
period, the holders of the Bridge Note Shares and Bridge Warrant Shares would
have the right to exercise their "piggyback" registration rights as described in
the paragraph above.
DELAWARE GENERAL CORPORATION LAW AND CERTAIN CHARTER PROVISIONS
The provisions of the Company's Certificate of Incorporation and Bylaws and
the Delaware GCL summarized below may have the effect of discouraging, delaying,
or preventing hostile takeovers, including those that might result in a premium
over the market price, or discouraging, delaying, or preventing changes in
control or management of the Company.
Upon the completion of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware GCL. In general, this statute
prohibits a publicly held Delaware corporation from engaging, under certain
circumstances, in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless (i) prior to the date at which the
stockholder became an interested stockholder, the Board of Directors approved
either the business combination or the transaction in which the stockholder
becomes an interested stockholder; (ii) upon consummation of the transaction in
which the stockholder becomes an interested stockholder, the stockholder owned
at least 85% of the outstanding voting stock of the corporation (excluding
shares held by directors who are officers or held in certain employee stock
plans); or (iii) the business combination is approved by the Board of Directors
and by two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders (and not
by written consent) held on or subsequent to the date of the business
combination. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or at any time within the prior three years did
own) 15% or more of the corporation's voting stock. Section 203 defines a
"business combination" to include mergers, consolidations,
53
<PAGE> 55
stock sales and asset based transactions, and other transactions resulting in a
financial benefit to the interested stockholder.
The Company's Certificate of Incorporation and Bylaws contain a number of
other provisions relating to corporate governance and to the rights of
stockholders. These provisions include (a) the authority of the Board to fill
vacancies on the Board, and (b) the authority of the Board to issue preferred
stock in series with such voting rights and other powers as the Board may
determine.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer, Inc., Denver, Colorado.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "STYL."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
3,792,149 shares of Common Stock (including options with an exercise price less
than the initial public offering price, 18,182 Bridge Note Shares, and 4,545
shares issued in connection with the KII Acquisition, in each case calculating
such shares assuming an initial public offering price of $11.00 per share). All
of the 2,800,000 shares to be sold in the Offering will be freely tradeable
without restriction or further registration under the Securities Act unless held
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The 807,851 shares owned by Mr. Leopold that were acquired in
June 1995, the 4,545 shares to be issued in connection with the consummation of
the KII Acquisition, and the 18,182 Bridge Note Shares will be "restricted
securities" as that term is defined under Rule 144 (the "Restricted Shares").
The Restricted Shares may be subject to the volume and other resale limitations
described below. Subject to compliance with the volume and other limitations of
Rule 144 described below, in June 1997 and November 1998, 807,851 and 22,727
Restricted Shares, respectively, will be eligible for sale in the public market.
The directors and executive officers of the Company have agreed, at the
request of the Representatives, not to sell or otherwise dispose of any shares
of Common Stock currently owned by them or which may be acquired by them under
outstanding stock options in the public market for a period of 270 days after
the date of this Prospectus without the prior written consent of the
Representatives. There currently are outstanding options to acquire 234,278
shares of Common Stock. See "Management -- Founders of the Company" and
"Management -- 1996 Stock Option Plan." Mr. Leopold has agreed not to sell or
otherwise dispose of the 45,454 shares of Common Stock (assuming an initial
public offering price of $11.00 per share) that he will purchase in the Offering
in the public market for a period of 270 days after the date of this Prospectus
without the prior written consent of the Representatives. See "Underwriting."
The directors and executive officers will own approximately 98.6% of the
Restricted Shares upon completion of the Offering. None of the other Restricted
Shares (consisting of the Bridge Note Shares and the shares issued in connection
with the KII Acquisition) will be subject to any agreement with the
Representatives respecting the resale of these shares. The Company will make a
public announcement of any consent by the Representatives to the sale of any
shares of Common Stock in the public market during the 270-day period after the
date of this Prospectus.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
restricted securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock of the Company (approximately 380,000 shares immediately after the
Offering) or (ii) the average weekly trading volume in Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 also are subject
to certain manner-of-sale provisions and notice requirements and to the
availability of current public information about the Company. A person who is
not an affiliate, who has not been an affiliate within three months prior to
sale, and who beneficially owns restricted securities with respect to which at
least three years have elapsed since the later of the date the shares were
acquired from the
54
<PAGE> 56
Company or from an affiliate of the Company, is entitled to sell such shares
under Rule 144(k) without regard to any of the volume limitations or other
requirements described above.
The holders of 4,545 shares of Common Stock issued in connection with the
Acquisitions will be entitled to certain "piggyback" registration rights with
respect to the shares of Common Stock. Subject to certain conditions and
limitations, if at any time after the 180 day period following the date of
completion of the Offering, the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders, the Company will be required to include the
shares of Common Stock held by such persons in such registration. The Company's
obligation to register the shares of Common Stock held by such person expires
after two years from the issuance of such shares. See "Description of the
Acquisitions."
The holders of the Bridge Note Shares and the Bridge Warrant Shares may
exercise one-time demand registration rights and require the Company to register
the Bridge Note Shares and the Bridge Warrant Shares at any time during the
six-month period commencing 120 days after the completion of the Offering. The
holder of the Bridge Note Shares and the Bridge Warrant Shares also has
"piggyback" registration rights with respect to such shares as well. See
"Description of Capital Stock -- Bridge Warrants."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), represented by Friedman,
Billings, Ramsey & Co., Inc. and Prime Charter Ltd. (the "Representatives"),
have severally agreed to purchase from the Company the following respective
number of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.............................
Prime Charter Ltd.................................................
---------
Total........................................................ 2,800,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose initially to offer the shares of Common Stock
offered hereby to the public at the price to public set forth on the cover page
of this Prospectus. The Underwriters may allow a concession to selected dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
not in excess of $ per share, and the Underwriters may allow, and such
dealers may reallow, to members of the NASD a concession not in excess of
$ per share. After the initial public offering, the price to public,
the concession, and the reallowance may be changed by the Underwriters.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance equal to the greater of 1 1/2% of the gross proceeds of the
Offering or $350,000, $67,000 of which has been paid, to cover some of the due
diligence expenses related to the Offering.
55
<PAGE> 57
The Company has granted an option to the Underwriters, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
420,000 shares of Common Stock at the initial public offering price, less
underwriting discounts and commissions and the non-accountable expense
allowance. The Underwriters may exercise the option solely to cover
overallotments, if any, made on the sale of the Common Stock offered hereby.
The Company, its executive officers and directors have agreed that, for a
period of 270 days after the date of closing of the Offering, they will not,
directly or indirectly, offer, sell, contract to sell, grant any option to sell
or otherwise dispose of, directly or indirectly, any shares of Common Stock (or
securities convertible into or exchangeable for, or any rights to purchase or
acquire, Common Stock, other than Options under the Plan and upon exercise of
Options granted under the Plan) without the prior written consent of the
Representatives.
Prior to the Offering, there has been no market for the Common Stock, and
there can be no assurance that a regular trading market will develop upon the
completion of the Offering. The initial public offering price was determined by
negotiations between the Company and the Representatives. The primary factors
considered in determining the initial public offering price included the history
of and prospects for the industry in which the Company competes, market
valuations of comparable companies, market conditions for public offerings, the
history of and prospects for the Company's business, the Acquired Businesses'
past and present operations and earnings and the trend of such earnings, the
prospects for future earnings of the Company, the Company's current financial
position, an assessment of the Company's management, the general condition of
the securities markets, the demand for similar securities of comparable
companies, and other relevant factors.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company has agreed to sell to the Representatives or their designees,
for nominal consideration, the Representatives' Warrants to purchase an
aggregate of 196,000 shares of Common Stock. The shares of Common Stock subject
to the Representatives' Warrants will be in all respects identical to the shares
of Common Stock offered to the public hereby. The Representatives' Warrants will
be exercisable for a five-year period commencing one year after the closing date
of the Offering at a per share exercise price equal to 120% of the initial
public offering price. Neither the Representatives' Warrants nor the underlying
shares of Common Stock may be transferred, assigned, or hypothecated for a
period of one year from the closing of the Offering, except to the extent
permitted by applicable rules of the NASD. During the period beginning one year
from the closing of the Offering and ending five years after such effective
date, the Company has agreed at its expense to register under the Securities Act
the shares of Common Stock issued or issuable upon exercise of the
Representatives' Warrants and, for the period beginning one year from the date
of this Prospectus of which this Prospectus is a part and ending seven years
after such effective date, to include such shares of Common Stock in any
appropriate registration statement which is filed by the Company. The
Representatives' Warrants will contain anti-dilution provisions providing for
appropriate adjustment of the exercise price and number of shares that may be
purchased upon the occurrence of certain events. The Representatives' Warrants
may be exercised by paying the exercise price in cash, through the surrender of
shares of Common Stock, through a reduction in the number of shares covered
thereby, or by using a combination of such methods.
The Company has agreed that, for a period of three years from the date of
this Prospectus, the Representatives will have the right to send a
representative to observe each meeting of the Company's Board of Directors, or
in lieu of such observer, the Representatives may elect to require the Company
to use its best efforts to elect Sylvan Schefler, Vice Chairman of Prime Charter
Ltd., or another mutually acceptable designee, to the Company's Board of
Directors for such three-year period. The Company has agreed to elect Mr.
Schefler as a member of its Board of Directors.
56
<PAGE> 58
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Connor, Cavanagh, Anderson, Killingsworth & Beshears,
a professional association, Phoenix, Arizona, and for the Underwriters by
Brownstein Hyatt Farber & Strickland, P.C., Denver, Colorado. Brownstein Hyatt
Farber & Strickland, P.C. has provided legal services to the Company in the past
and may do so in the future.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered by this Prospectus.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. For further information with
respect to the Company and the Common Stock offered by this Prospectus,
reference is made to the Registration Statement, including the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, together with
exhibits thereto, may be inspected at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, without
charge and copies of the material contained therein may be obtained at
prescribed rates from the Commission's public reference facilities in
Washington, D.C. The Commission also maintains a Web site that contains reports,
proxy and information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This Web
site can be accessed at http://www.sec.gov.
57
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STYLING TECHNOLOGY CORPORATION PRO FORMA COMBINED
Introduction to Unaudited Pro Forma Combined Financial Statements................... F-2
Unaudited Pro Forma Combined Balance Sheet -- June 30, 1996......................... F-3
Notes to Unaudited Pro Forma Combined Balance Sheet................................. F-4
Unaudited Pro Forma Combined Statement of Operations for the Six Months
Ended June 30, 1996.............................................................. F-5
Unaudited Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1995................................................................ F-6
Notes to Unaudited Pro Forma Combined Statements of Operations...................... F-7
BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
Report of Independent Public Accountants............................................ F-8
Balance Sheets...................................................................... F-9
Statements of Operations............................................................ F-10
Statements of Changes in Owner's Investment......................................... F-11
Statements of Cash Flows............................................................ F-12
Notes to Financial Statements....................................................... F-13
GENA LABORATORIES, INC.
Report of Independent Public Accountants............................................ F-16
Balance Sheets...................................................................... F-17
Statements of Operations............................................................ F-18
Statements of Stockholders' Equity.................................................. F-19
Statements of Cash Flows............................................................ F-20
Notes to Financial Statements....................................................... F-21
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants............................................ F-27
Balance Sheets...................................................................... F-28
Statements of Operations............................................................ F-29
Statements of Stockholders' Equity.................................................. F-30
Statements of Cash Flows............................................................ F-31
Notes to Financial Statements....................................................... F-32
KOTCHAMMER INVESTMENTS, INC.
Report of Independent Public Accountants............................................ F-35
Balance Sheets...................................................................... F-36
Statements of Operations............................................................ F-37
Statements of Stockholders' Deficit................................................. F-38
Statements of Cash Flows............................................................ F-39
Notes to Financial Statements....................................................... F-40
STYLING TECHNOLOGY CORPORATION
Report of Independent Public Accountants............................................ F-43
Balance Sheets...................................................................... F-44
Notes to Balance Sheets............................................................. F-45
</TABLE>
F-1
<PAGE> 60
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma combined financial statements include the pro forma
combined balance sheet of the Company as of June 30, 1996, and the pro forma
combined statement of operations for the year ended December 31, 1995 and the
six months ended June 30, 1996.
The pro forma financial statements have been prepared as if (a) the
acquisition of the Acquired Businesses, and (b) the planned initial public
offering (the "Offering") had been completed.
Simultaneously with the consummation of the Offering, the Company will
acquire the Acquired Businesses in four separate transactions, in exchange for
cash, notes, repayment or assumption of indebtedness, and shares of Common
Stock, pursuant to acquisition agreements with each of the Acquired Businesses
as described in "Description of the Acquisitions." The agreements provide for an
aggregate purchase price for the Acquired Businesses of approximately $23.23
million, subject to certain adjustments, consisting of (i) approximately $20.65
million to be paid in cash, (ii) approximately $2.53 million to be paid through
the issuance of debt, and (iii) approximately $50,000 in aggregate market value
of Common Stock, based on the initial public offering price. In addition, the
Company will assume approximately $0.3 million of existing debt of the related
Acquired Businesses. The acquisition of all of the Acquired Businesses by the
Company is a condition to the consummation of this Offering.
The pro forma combined balance sheet as of June 30, 1996 gives effect to
the Acquisitions and the Offering as if such transactions had occurred on June
30, 1996. The pro forma combined statement of operations for the year ended
December 31, 1995 and the six months ended June 30, 1996 assumes the Company had
completed the transactions on January 1, 1995.
The pro forma combined financial statements of the Acquired Businesses have
been derived from: (i) the audited historical financial statements of Gena for
the year ended February 29, 1996 and JDS for the year ended September 30, 1995,
and Body Drench for the year ended December 31, 1995; (ii) the unaudited
financial statements of KII as of and for the year ended December 31, 1995;
(iii) and the unaudited interim financial statements as of and for the six
months ended June 30, 1996 of the Acquired Businesses, except for Gena which is
as of May 31, 1996 and for the six months ended August 31, 1996. The fiscal year
end for each of the Acquired Businesses is within 93 days of the Company's
December 31 fiscal year end and no adjustments to conform fiscal year ends are
required. The pro forma combined statements of operations may not be indicative
of actual results that would have been achieved if the transactions had occurred
on the dates indicated or the results which may be realized in the future. The
pro forma combined statement of operations data contain adjustments which are
directly attributable to the transaction.
F-2
<PAGE> 61
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
STYLING BODY TOTAL
TECHNOLOGY GENA DRENCH JDS KII COMBINED
---------- ---------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..................... $ 100 $ 447,141 $ -- $ 66,368 $ 177,321 $ 690,930
Accounts receivable, net...................... -- 978,297 1,877,549 284,175 94,332 3,234,353
Inventory..................................... -- 1,065,889 2,081,187 242,072 258,197 3,647,345
Other......................................... 300,018 127,692 9,831 10,004 26,642 474,187
-------- ---------- ---------- -------- --------- ----------
Total current assets......................... 300,118 2,619,019 3,968,567 602,619 556,492 8,046,815
PP&E, net..................................... -- 826,822 252,766 22,571 64,824 1,166,983
Goodwill...................................... -- -- -- -- -- --
Other......................................... -- 261,294 -- 102,934 468 364,696
-------- ---------- ---------- -------- --------- ----------
Total assets................................. $300,118 $3,707,135 $4,221,333 $728,124 $ 621,784 $9,578,494
======== ========== ========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.............................. $ -- $ 293,729 $3,377,620 $161,943 $ 21,777 $3,855,069
Accrued liabilities........................... 300,018 241,963 261,618 107,228 80,078 990,905
Current portion of debt....................... -- 102,340 -- -- 110,000 212,340
Other......................................... -- -- -- -- -- --
-------- ---------- ---------- -------- --------- ----------
Total current liabilities.................... 300,018 638,032 3,639,238 269,171 211,855 5,058,314
Long term debt................................ -- 309,687 -- 431,500 610,000 1,351,187
Other......................................... -- -- -- -- -- --
Stockholder's equity:
Common stock.................................. 100 10,000 -- 10,000 50,000 70,100
Additional paid in capital.................... -- 88,303 -- -- -- 88,303
Retained earnings (deficit)................... -- 2,661,113 582,095 17,453 (250,071) 3,010,590
Treasury stock................................
-------- ---------- ---------- -------- --------- ----------
Total liabilities and
stockholders' equity....................... $300,118 $3,707,135 $4,221,333 $728,124 $ 621,784 $9,578,494
======== ========== ========== ======== ========= ==========
<CAPTION>
ADJUSTED
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED OFFERING COMBINED
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..................... $(20,371,333)(A) $(19,680,403) $25,489,000(C)(D) $ 5,808,597
Accounts receivable, net...................... -- 3,234,353 -- 3,234,353
Inventory..................................... -- 3,647,345 -- 3,647,345
Other......................................... (170,000) 304,187 -- 304,187
------------ ------------ ----------- -----------
Total current assets......................... (20,541,333) (12,494,518) 25,489,000 12,994,482
PP&E, net..................................... -- 1,166,983 -- 1,166,983
Goodwill...................................... 18,060,091(A) 18,060,091 -- 18,060,091
Other......................................... (97,000)(A) 267,696 -- 267,696
------------ ------------ ----------- -----------
Total assets................................. $ (2,578,242) $ 7,000,252 $25,489,000 $32,489,252
============ ============ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.............................. $ (77,620)(A) $ 3,777,449 $ -- $ 3,777,449
Accrued liabilities........................... (211,618)(A) 779,287 -- 779,287
Current portion of debt....................... (110,000)(A) 102,340 -- 102,340
Other......................................... -- -- -- --
------------ ------------ ----------- -----------
Total current liabilities.................... (399,238) 4,659,076 -- 4,659,076
Long term debt................................ (1,051,620)(A) 299,567 -- 299,567
1,991,509(A) 1,991,509 1,991,509
-- --
-- --
Other......................................... -- -- -- --
Stockholder's equity:
Common stock.................................. (70,000)(B) 100 100
Additional paid in capital.................... (38,303)(B) 50,000 27,289,000(C) 27,339,000
Retained earnings (deficit)................... (3,010,590)(B) -- -- --
Treasury stock................................ (1,800,000)(D) (1,800,000)
------------ ------------ ----------- -----------
Total liabilities and
stockholders' equity....................... $ (2,578,242) $ 7,000,252 $25,489,000 $32,489,252
============ ============ =========== ===========
</TABLE>
F-3
<PAGE> 62
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOTE 1. PRO FORMA BALANCE SHEET ADJUSTMENTS
The accompanying pro forma combined balance sheet as of June 30, 1996,
gives effect to the purchase of the Acquired Businesses and the Offering as if
such transactions had occurred on June 30, 1996.
(A) Adjustments to reflect the excess of the purchase price plus the liabilities
assumed less the fair value of the tangible net assets acquired.
<TABLE>
<CAPTION>
BODY STYLING
GENA DRENCH JDS KII TECHNOLOGY TOTAL
----------- ----------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Purchase Price:
Cash portion....... $ 8,000,000 $ 7,821,333(1) $4,100,000 $450,000 $20,371,333
Seller carryback
financing....... 1,652,893(3) -- 318,687(1) 19,929(1) 1,991,509
Issuance of
equity.......... -- -- -- 50,000 50,000
Other.............. -- -- 97,000(4) -- 97,000
----------- ----------- ---------- -------- -------- -----------
Purchase price....... $ 9,652,893 $ 7,821,333 $4,515,687 $519,929 $22,509,842
Plus Liabilities of
Acquired
Businesses......... 947,719 3,639,238 700,671 821,855 6,109,483
Less liabilities not
assumed............ 10,119 289,238 431,500 720,000 1,450,857(1)
----------- ----------- ---------- -------- -------- -----------
10,590,493 11,171,333 4,784,858 621,784 27,168,468
Fair value of
assets(5).......... 3,707,135 4,221,333 728,124 621,784 9,278,376
Acquisition costs.... 170,000 170,000(2)
----------- ----------- ---------- -------- -------- -----------
Goodwill acquired.... $ 6,883,358 $ 6,950,000 $4,056,734 $ -- $170,000 $18,060,092
=========== =========== ========== ======== ======== ===========
</TABLE>
- ---------------
(1) Amount differs from what is stated in the purchase agreement, due to
contractual purchase price adjustments expected based upon the financial
position of the Acquired Businesses at June 30, 1996.
(2) Reflects consulting costs incurred related to the acquisition of the four
companies, estimated costs required to fund severance liabilities that will
arise as a result of the elimination of specific employees at each of the
four companies, and estimated relocation costs to be incurred as part of the
consolidation of Body Drench and JDS into Gena.
(3) Amount represents fair value of a $2,000,000 non-interest bearing note to
sellers of Gena, secured by 181,818 escrowed shares of Styling to be issued
at closing.
(4) Represents a portion of the purchase price to be satisfied by assignment of
the cash surrender value of a life insurance policy.
(5) Management estimates that the historical book value of assets to be acquired
approximate fair value. Therefore no step-up in the value of the assets of
the Acquired Businesses has been reflected.
(B) Reflects the elimination of the equity of the Acquired Businesses.
(C) Reflects the net proceeds from the Offering of 2,800,000 shares of $.0001
par value Common Stock at an assumed initial public offering price of $11.00
per share.
(D) Reflects the payment of cash in connection with the repurchase of Common
Stock.
F-4
<PAGE> 63
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(SIX MONTHS ENDED JUNE 30, 1996)
<TABLE>
<CAPTION>
ADJUSTED
BODY TOTAL PRO FORMA PRO FORMA
GENA(1) DRENCH JDS KII COMBINED ADJUSTMENTS COMBINED
---------- ---------- ---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $4,704,984 $6,586,455 $1,664,932 $735,538 $13,691,909 $13,691,909
Cost of sales................... 2,545,241 3,465,259 675,132 343,014 7,028,646 7,028,646
---------- ---------- ---------- -------- ----------- ----------- -----------
Gross profit................ 2,159,743 3,121,196 989,800 392,524 6,663,263 6,663,263
Selling, general, and 1,432,336 2,402,064 928,214 328,925 5,091,539 (1,051,157 )(AA) 4,040,382
administrative.................. (BB)
(CC)
(DD)
---------- ---------- ---------- -------- ----------- ----------- -----------
Income from operations........ 727,407 719,132 61,586 63,599 1,571,724 1,051,157 2,622,881
Interest expense................ 21,226 8,783 19,961 38,675 88,645 99,796 (FF) 188,441
Other income (expense), net..... (6,073) -- 932 (160) (5,301) -- (5,301)
---------- ---------- ---------- -------- ----------- ----------- -----------
Income before income taxes...... 700,108 710,349 42,557 24,764 1,477,778 951,361 2,429,139
Provision for income taxes...... 258,015 269,933 16,600 -- 544,548 434,856 (EE) 979,404
---------- ---------- ---------- -------- ----------- ----------- -----------
Net income.................... $ 442,093 $ 440,416 $ 25,957 $ 24,764 $ 933,230 $ 516,505 $ 1,449,735
========== ========== ========== ======== =========== =========== ===========
Pro forma earnings per share.... $ 0.38
===========
Weighted average common and
common equivalent shares
outstanding................... $ 3,790,680(GG)
===========
</TABLE>
- ---------------
(1) Results for Gena are for six months ended August 31, 1996.
F-5
<PAGE> 64
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(YEAR ENDED DECEMBER 31, 1995)
<TABLE>
<CAPTION>
ADJUSTED
BODY TOTAL PRO FORMA PRO FORMA
GENA DRENCH JDS KII COMBINED ADJUSTMENTS COMBINED
---------- ----------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> C>
Net sales.................... $8,384,092 $11,871,171 $3,367,599 $1,557,709 $25,180,571 25,180,571
Cost of sales................ 4,818,786 6,426,775 1,348,295 711,925 13,305,781 13,305,781
---------- ----------- ---------- ---------- ----------- ----------- ----------
Gross profit............. 3,565,306 5,444,396 2,019,304 845,784 11,874,790 -- 11,874,790
(AA)
(DD)
(CC)
Selling, general, and
administrative ............ 3,033,409 4,883,265 2,010,142 891,146 10,817,962 (2,102,313 )(BB) 8,715,649
---------- ----------- ---------- ---------- ----------- ----------- ----------
Income from operations..... 531,897 561,131 9,162 (45,362) 1,056,828 2,102,313 3,159,141
Interest expense............. 43,289 87,585 35,589 89,557 256,020 129,573 (FF) 385,593
Other income (expense),
net........................ 12,809 -- 41,951 -- 54,760 -- 54,760
---------- ----------- ---------- ---------- ----------- ----------- ----------
Income (loss) before income
taxes...................... 501,417 473,546 15,524 (134,919) 855,568 1,972,740 2,828,308
Provision (benefit) for
income taxes............... 184,790 179,947 6,950 -- 371,687 858,093 (EE) 1,229,780
---------- ----------- ---------- ---------- ----------- ----------- -----------
Net income (loss)........ $ 316,627 $ 293,599 $ 8,574 $ (134,919) $ 483,881 $1,114,647 $ 1,598,528
========== =========== ========== ========== =========== =========== ===========
Pro forma earnings (loss) per
share...................... $ 0.42
===========
Weighted average common and
common equivalent shares
outstanding................ 3,790,680(GG)
===========
</TABLE>
F-6
<PAGE> 65
STYLING TECHNOLOGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NOTE 2. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying pro forma combined statement of operations for the year
ended December 31, 1995 and six months ended June 30, 1996 assumes that Styling
had completed the Acquisitions and the Offering on January 1, 1995.
(AA) Reflects the elimination of salaries and benefits of specific
shareholders not continuing with the combined companies, totalling $944,835 and
$472,418 for the year ended December 31, 1995 and the six months ended June 30,
1996.
(BB) Reflects $1,790,942 and $895,471 for the year ended December 31, 1995
and the six momths ended June 30, 1996 for the reduction of salary costs related
to the elimination of specific positions within each of the four companies, net
of the additional costs and expenses of new officers, and the elimination of
expenses related to facility closures at Body Drench and JDS and the
consolidation of operations at Gena.
(CC) Reflects the reduction for goodwill amortization from Gena which
related to prior acquisitions, totalling $88,940 and $44,470 for the year ended
1995 and the six months ended June 30, 1996.
(DD) Reflects the amortization of goodwill over 25 years, totalling
$722,404 and $361,202 for the year ended 1995 and the six months ended June 30,
1996.
(EE) Reflects the additional income tax provision based on applying the
statutory income tax rates of each company, adjusted for goodwill amortization
from the JDS and Gena acquisitions which is not deductible for income tax
reporting purposes.
(FF) Reflects the interest cost from the seller carryback financing, net of
interest expense eliminated from Body Drench.
(GG) Pro forma per share amounts are based on the weighted average shares
outstanding, including stock options granted to management and shares issued to
the holder of the Bridge Note, for each period.
F-7
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of BODY DRENCH (a Division
of Designs by Norvell, Inc., a Tennessee corporation) as of December 31, 1994
and 1995, and the related statements of operations, changes in owners investment
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Division's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Body Drench as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Division will continue as a going concern. As discussed in Note 6 to the
financial statements, the Division's parent company has suffered recurring cash
flow difficulties that raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 7. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
June 28, 1996.
F-8
<PAGE> 67
BODY DRENCH
(A DIVISION OF DESIGNS BY NOVELL, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $89,841, $58,242 and $115,733,
respectively...................................... $1,396,048 $1,234,966 $1,877,549
Inventories.......................................... 3,052,783 3,078,656 2,081,187
Other current assets................................. 5,152 150,713 9,831
---------- ---------- ----------
Total current assets......................... 4,453,983 4,464,335 3,968,567
---------- ---------- ----------
Equipment, net of accumulated depreciation of $245,424,
$297,176 and $363,611, respectively.................. 167,697 316,443 252,766
---------- ---------- ----------
Total assets................................. $4,621,680 $4,780,778 $4,221,333
========== ========== ==========
LIABILITIES AND OWNER'S INVESTMENT
Current liabilities:
Accounts payable..................................... $2,550,654 $3,221,337 $2,975,855
Bank overdraft....................................... 651,953 274,810 401,765
Accrued expenses and other........................... 296,546 257,813 261,618
---------- ---------- ----------
Total current liabilities.................... 3,499,153 3,753,960 3,639,238
---------- ---------- ----------
Commitments and contingencies (Note 4)
Owner's investment:.................................... 1,122,527 1,026,818 582,095
---------- ---------- ----------
Liabilities and owner's investment..................... $4,621,680 $4,780,778 $4,221,333
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 68
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES........................... $6,653,488 $11,138,369 $11,871,171 $8,249,771 $6,586,455
COST OF SALES....................... 4,039,843 6,342,770 6,426,775 4,564,260 3,465,259
---------- ----------- ----------- ---------- ----------
GROSS PROFIT........................ 2,613,645 4,795,599 5,444,396 3,685,511 3,121,196
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 2,054,919 4,075,756 4,883,265 2,971,173 2,402,064
---------- ----------- ----------- ---------- ----------
INCOME FROM OPERATIONS.............. 558,726 719,843 561,131 714,338 719,132
---------- ----------- ----------- ---------- ----------
INTEREST EXPENSE.................... 30,159 -- 87,585 43,792 8,783
---------- ----------- ----------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................. 528,567 719,843 473,546 670,546 710,349
PROVISION FOR INCOME TAXES.......... 200,855 273,540 179,947 254,807 269,933
---------- ----------- ----------- ---------- ----------
NET INCOME.......................... $ 327,712 $ 446,303 $ 293,599 $ 415,739 $ 440,416
========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 69
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CHANGES IN OWNER'S INVESTMENT
<TABLE>
<S> <C>
BALANCE, December 31, 1992...................................................... $ (127,491)
Net income.................................................................... 327,712
Net payments to parent........................................................ (748,153)
----------
BALANCE, December 31, 1993...................................................... $ (547,932)
Net income.................................................................... 446,303
Net receipts from parent...................................................... 1,224,156
----------
BALANCE, December 31, 1994...................................................... $ 1,122,527
Net income.................................................................... 293,599
Net payments to parent........................................................ (389,308)
----------
BALANCE, December 31, 1995...................................................... $ 1,026,818
Net income (unaudited)........................................................ 440,416
Net payments to parent (unaudited)............................................ (885,139)
----------
BALANCE, June 30, 1996 (unaudited).............................................. $ 582,095
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 70
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ----------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 327,712 $ 446,303 $ 293,599 $ 415,739 $ 440,416
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation..................... 67,244 36,619 51,752 48,016 66,435
Changes in operating assets and
liabilities
Accounts receivable, net...... (49,548) (1,099,273) 161,082 (999,045) (642,583)
Inventories................... (224,184) (2,024,887) (25,873) (154,770) 997,469
Other, net.................... (5,127) 2,084 (145,561) (103,022) 140,882
Accounts payable.............. 516,725 783,427 670,683 448,985 (245,482)
Accrued expenses.............. 177,767 33,284 (38,733) (195,598) 3,805
--------- ---------- --------- --------- ---------
Net cash provided by (used in)
operating activities.......... 810,589 (1,822,443) 966,949 (539,695) 760,942
--------- ---------- --------- --------- ---------
CASH FLOW FROM INVESTING
ACTIVITIES:
Purchases of PP&E................ (62,436) (53,666) (200,498) (97,975) (2,758)
CASH FLOW FROM FINANCING
ACTIVITIES:
Bank overdraft................... -- 651,953 (377,143) -- 126,955
Net payments to/receipts from
parent........................ (748,153) 1,224,156 (389,308) 637,670 (885,139)
--------- ---------- --------- --------- ---------
Net cash provided by (used in)
financing activities.......... (748,153) 1,876,109 (766,451) 637,670 (758,184)
--------- ---------- --------- --------- ---------
Net change in cash............... -- -- -- -- --
--------- ---------- --------- --------- ---------
CASH, beginning of period.......... -- -- -- -- --
CASH, end of period................ $ -- $ -- $ -- $ -- $ --
========= ========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 71
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement and Basis of Presentation
In accordance with the terms of an Asset Purchase Agreement dated April 5,
1996, between Styling Technology Corporation (STC) and Designs by Norvell, Inc.
(Norvell), STC agreed to acquire the assets of Body Drench (a Division of
Designs by Norvell, Inc.), primarily consisting of trade receivables,
inventories, equipment and the assumption of certain liabilities. The terms also
include a purchase price of $8,100,000 in cash and the potential issuance of
stock rights to Norvell based on the amount of liabilities assumed on the
closing date of the transaction. Consummation of the transaction is subject to
several conditions, including the completion of a successful public securities
offering by STC.
The accompanying financial statements represent the accounts of the
Division pursuant to the terms of the Asset Purchase Agreement between STC and
Norvell. In addition, interest expense included in the statements of operations
represents allocations of parent company interest, as calculated by Norvell.
Nature and Seasonality of Operations
The Division is engaged in the manufacture and distribution of skin care,
sun care and body care products. Their products are sold to professional hair
and tanning salons, health clubs, beauty supply outlets and retail product based
salons, both domestic and international.
The Division's revenues are seasonal in nature, with the first six months
of the year having the majority of the volume.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
The carrying values of receivables, accounts payable and accrued expenses
approximate fair values due to the short-term maturities of these instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Division to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the number of customers comprising the Division's customer base. The Division
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the six-month periods
ended June 30, 1995 and 1996 include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Division's financial
position and results of operations as of and for the period then ended. The
Division's revenues are seasonal in nature, with the first six months of the
year having the majority of the volume.
F-13
<PAGE> 72
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Operating results for the six-month period ending June 30, 1996, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1996.
Revenue Recognition
The Division recognizes revenue from sales at the time product is shipped.
Equipment
Equipment is recorded at cost and depreciation on equipment is provided on
the straight-line method over the estimated useful lives of the related assets.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1995, and for the six months ended June 30, 1996 and 1995,
maintenance and repair expenses charged to cost of operations were approximately
$25,978, $26,117, $30,498, $18,052 (unaudited) and $23,296 (unaudited),
respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
The components of inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996
1994 1995 -----------
---------- ---------- (UNAUDITED)
<S> <C> <C> <C>
Finished goods................................. $1,377,182 $1,495,284 $ 1,010,819
Raw materials and promotional.................. 1,675,601 1,583,372 1,070,368
---------- ---------- ----------
$3,052,783 $3,078,656 $ 2,081,187
========== ========== ==========
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
1994 1995 -----------
--------- --------- (UNAUDITED)
<S> <C> <C> <C>
Factory equipment............................... $ 134,880 $ 178,405 $ 178,405
Computer equipment.............................. 243,647 394,026 396,784
Furniture and fixtures.......................... 34,594 41,188 41,188
--------- --------- ---------
413,121 613,619 616,377
Less -- Accumulated depreciation................ (245,424) (297,176) (363,611)
--------- --------- ---------
$ 167,697 $ 316,443 $ 252,766
========= ========= =========
</TABLE>
NOTE 4. INCOME TAXES
The Division accounts for income taxes using Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires the recording of deferred tax assets and liabilities based on
differences between the financial statement and tax bases of assets and
liabilities and the
F-14
<PAGE> 73
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tax rates in effect when these differences are expected to reverse. In
accordance with SFAS 109, the Division has recorded a provision for income taxes
separately from Norvell.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Leases
The Division leases certain facilities and equipment under operating lease
agreements.
Future minimum payments under noncancelable operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
<S> <C>
1996....................................... $ 79,455
1997....................................... 50,423
1998....................................... 41,067
1999....................................... 2,333
</TABLE>
Rental expense under such operating leases was $52,163, $101,217, $238,746,
$106,999 (unaudited) and $95,353 (unaudited), for the three years ended December
31, 1995, and the six months ended June 30, 1995 and 1996, respectively.
The Division is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Division's potential
exposure under the pending proceedings is adequately provided for in the
accompanying consolidated financial statements.
NOTE 6. SIGNIFICANT VENDORS
Two vendors accounted for 69.3%, 67.4%, 53.0%, 60.7%, and 48.6% of the
Division's total raw materials purchases from vendors for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996, respectively. Management does not believe that the loss of these vendors
would significantly impact the Division's operations.
NOTE 7. SUBSEQUENT EVENTS
On April 5, 1996, Norvell entered into an asset purchase agreement to sell
certain assets and liabilities of the Division for consideration aggregating
approximately $8.1 million. In addition, an employee of the Division has entered
into an employment agreement with STC as a result of the acquisition (see Note
1).
NOTE 8. FINANCIAL CONDITION OF NORVELL
The Division's financial statements for the year ended December 31, 1995,
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities in the normal course of business.
Certain assets of the Division are pledged as collateral for Norvell's
outstanding debt. Norvell has experienced recurring cash flow difficulties and
is unable to meet its debt repayment requirements and has negative working
capital. Management recognizes that Norvell must generate additional recourses
or consider modifications to its current operations. Certain proceeds of the
sale of the Division are to be used to pay down this debt and to free the
collateral for transfer to STC. Management's plans include the sale of the
Division to STC (see Note 1). Should the acquisition of the Division by STC not
occur, the Division may be unable to continue as a going concern.
F-15
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of GENA LABORATORIES, INC.
(a Texas corporation) as of February 28, 1995 and February 29, 1996, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended February 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gena Laboratories, Inc. as
of February 28, 1995 and February 29, 1996, and the results of its operations
and its cash flows for each of the three years in the period ended February 29,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
June 22, 1996.
F-16
<PAGE> 75
GENA LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
1996
FEBRUARY 28, FEBRUARY 29, -----------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 390,325 $ 250,644 $ 563,512
Investments.......................................... 14,999 46,500 --
Accounts receivable, net of allowance for doubtful
accounts of $120,347, $136,093 and $136,093,
repectively....................................... 863,208 965,615 1,028,487
Inventory............................................ 965,335 1,213,688 1,099,463
Deferred tax asset................................... 99,055 131,790 131,790
Other current assets................................. -- -- 110,630
---------- ---------- ----------
Total current assets......................... 2,332,922 2,608,237 2,933,882
---------- ---------- ----------
Property and equipment, net of accumulated depreciation
of $392,026 $471,771, and $497,063, repectively...... 884,638 830,093 814,486
---------- ---------- ----------
Deferred tax asset, net of current portion............. -- 19,870 19,870
---------- ---------- ----------
Other assets........................................... 346,866 256,770 207,150
---------- ---------- ----------
$ 3,564,426 $ 3,714,970 $ 3,975,388
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 391,381 $ 382,926 $ 371,988
Accrued expenses..................................... 302,808 259,903 195,462
Current portion of note payable to related parties... 32,571 34,929 34,324
Current portion of long-term debt.................... 96,056 95,248 17,647
---------- ---------- ----------
Total current liabilities.................... 822,816 773,006 619,421
---------- ---------- ----------
Note payable to related parties, less current
portion.............................................. 342,464 307,358 290,786
---------- ---------- ----------
Long-term debt, net of current portion................. 124,186 11,518 --
---------- ---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $5 par value, 2,000 shares authorized,
issued and outstanding............................ 10,000 10,000 10,000
Additional paid-in capital........................... 88,303 88,303 88,303
Unrealized holding loss on investment................ (35,303) (3,802) (3,802)
Retained earnings.................................... 2,211,960 2,528,587 2,970,680
---------- ---------- ----------
Total stockholders' equity................... 2,274,960 2,623,088 3,065,181
---------- ---------- ----------
Total liabilities and stockholders' equity... $ 3,564,426 $ 3,714,970 $ 3,975,388
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-17
<PAGE> 76
GENA LABORATORIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------------ -----------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, AUGUST 31, AUGUST 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $ 6,426,416 $ 7,523,751 $ 8,384,092 $4,335,552 $4,704,984
COST OF SALES................................. 3,280,046 4,163,395 4,818,786 2,296,406 2,545,241
---------- ---------- ---------- ---------- ----------
GROSS PROFIT.................................. 3,146,370 3,360,356 3,565,306 2,039,146 2,159,743
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................... 2,744,363 2,963,926 3,033,409 1,573,135 1,453,562
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS........................ 402,007 396,430 531,897 466,011 706,181
OTHER INCOME AND (EXPENSE), net............... 35,092 (35,282) (30,480) (2,357) (6,073)
---------- ---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES...... 437,099 361,148 501,417 463,654 700,108
PROVISION FOR INCOME TAXES.................... 158,613 129,606 184,790 185,091 258,015
---------- ---------- ---------- ---------- ----------
NET INCOME.................................... $ 278,486 $ 231,542 $ 316,627 $ 278,563 $ 442,093
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 77
GENA LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 28, 1993..................... 2,000 $10,000 $ 88,303 $1,687,828 $ 1,786,131
Net income................................... -- -- -- 278,486 278,486
Net change in unrealized holding loss........ -- -- -- 1,006 1,006
----- ------- ------- ---------- ----------
BALANCE, February 28, 1994..................... 2,000 10,000 88,303 1,967,320 2,065,623
Net income................................... -- -- -- 231,542 231,542
Net change in unrealized holding loss........ -- -- -- (22,205) (22,205)
----- ------- ------- ---------- ----------
BALANCE, February 28, 1995..................... 2000 10,000 88,303 2,176,657 2,274,960
Net income................................... -- -- -- 316,627 316,627
Net change in unrealized holding loss........ -- -- -- 31,501 31,501
----- ------- ------- ---------- ----------
BALANCE, February 29, 1996..................... 2,000 10,000 88,303 2,524,785 2,623,088
Net income for the six-month period ended
August 31, 1996 (unaudited)............. -- -- -- 442,093 442,093
----- ------- ------- ---------- ----------
BALANCE, August 31, 1996 (unaudited)........... 2,000 $10,000 $ 88,303 $2,970,680 $ 3,065,181
===== ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 78
GENA LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED -----------------------
---------------------------------------------- AUGUST AUGUST
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, 31, 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 278,486 $ 231,542 $ 316,627 $ 247,953 $ 442,093
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities --
Depreciation and amortization...... 114,021 155,185 168,685 84,343 69,492
Loss on sale of investments........ -- 32,513 -- --
Decrease (increase) in accounts
receivable....................... 38,647 (157,714) (102,407) (225,000) (62,872)
Decrease (increase) in inventory... (14,638) (118,638) (248,353) (256,414) 114,225
Decrease (increase) in prepaid and
other assets..................... 80,863 (30,814) (51,449) (147,478) (58,710)
(Decrease) increase in accounts
payable and accrued
liabilities...................... (122,813) 210,426 (51,360) 129,082 (75,379)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities........ 374,566 322,500 31,743 (167,514) 428,849
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (331,996) (23,648) (25,200) (34,123) (9,684)
Cost incurred to acquire new
businesses......................... (180,213) (140,000) -- -- --
Proceeds from sale of investments..... -- -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities........ (512,209) (163,648) (25,200) (34,123) (9,684)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of)
long-term debt, net.............. 178,585 (136,668) (146,224) (72,767) (106,296)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities........ 178,585 (136,668) (146,224) (72,767) (106,296)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH......... 40,942 22,184 (139,681) (274,404) 312,869
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 327,199 368,141 390,325 390,325 250,644
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 368,141 $ 390,325 $ 250,644 $ 115,921 $ 563,513
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid...................... $ 8,325 $ 54,401 $ 43,259 $ 22,412 $ 21,226
========= ========= ========= ========= =========
Income taxes paid.................. $ 137,580 $ 127,609 $ 232,417 $ 116,208 $ 200,088
========= ========= ========= ========= =========
FIXED ASSETS AND NEW BUSINESSES ACQUIRED
THROUGH FINANCING TRANSACTIONS........ $ 528,449 $ 24,911 $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 79
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement
In accordance with the terms of an Acquisition Agreement between Styling
Technology Corporation, (STC) and Gena Laboratories, Inc. (the Company) dated
May 8, 1996, STC agreed to acquire all of the stock of the Company. The terms
include a purchase price of $10,000,000, which will be paid with $8,000,000 in
cash and the remainder with issuance of stock rights to be issued to the
stockholders of the Company. Consummation of the transaction is subject to
several conditions, including the completion of a successful public securities
offering by STC.
Organization and Nature of Operations
The Company was incorporated in 1930 to manufacture nail care and personal
care products. In 1979, the current owners purchased the Company and focused the
operation on professional salon care with an emphasis on nail products. The
Company is now a recognized quality manufacturer and distributor of professional
beauty products worldwide, and offers an extensive line of nail, skin and hair
care products as well as pedicure and other specialty beauty products and
accessories. Principally, its products are sold through wholesale distributors
of professional beauty products, hair and nail salons and professional beauty
supply outlets worldwide.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Investments
The Company considers all its investments as available for sale and
accordingly, recognizes any unrealized holding gains and losses as a separate
component of stockholders' equity, in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventories for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials and work-in-process.............. $675,735 $ 849,582 $ 769,625
Finished goods................................. 289,600 364,106 329,839
-------- ---------- ----------
$965,335 $ 1,213,688 $1,099,464
======== ========== ==========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over the estimated useful
lives of the assets.
F-21
<PAGE> 80
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the years ended
February 28, 1994 and 1995, February 29, 1996, and the six-month unaudited
period ended May 31, 1995 and 1996, maintenance and repair expenses charged to
cost of operations were approximately $26,000, $47,000, $23,000, $8,600 and
$22,100.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
credit quality institutions. Concentrations of credit risk with respect to trade
receivables are described in Note 6. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments. The carrying amount on the long-term debt is
estimated to approximate fair value as the actual interest rates are consistent
with rates estimated to be currently available for debt with similar terms and
remaining maturities.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the six-month periods
ended August 31, 1995 and 1996, include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations as of and for the periods then ended. Operating
results for the six-month period ending August 31, 1996, are not necessarily
indicative of the results that may be expected for the fiscal year ending
February 28, 1997.
NOTE 3. OTHER ASSETS
Other assets consist primarily of goodwill, which represents the excess of
consideration paid over the fair market values of identifiable net assets
acquired. The goodwill is being amortized on a straight-line basis over 25
years. The Company has also recorded other intangible assets, which include
noncompete, consulting and trademark agreements, related to acquisitions of
various beauty companies. Such assets are being amortized on a straight-line
basis, over a period of 3 to 25 years. Accumulated amortization on such
intangibles was $349,423, $433,070 and $479,940 (unaudited) as of February 28,
1995, February 29, 1996 and August 31, 1996, respectively.
F-22
<PAGE> 81
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Land............................................... $ 150,000 $ 150,000 $ 150,000
Factory equipment.................................. 407,427 431,832 441,517
Computers.......................................... 43,030 43,825 43,825
Furniture, fixtures and autos...................... 108,875 108,875 108,875
Building and leasehold improvements................ 567,332 567,332 567,332
---------- ---------- ----------
1,276,664 1,301,864 1,311,549
Less -- Accumulated depreciation................... (392,026) (471,771) (497,063)
---------- ---------- ----------
$ 884,638 $ 830,093 $ 814,486
========== ========== ==========
</TABLE>
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
-----------
Unsecured note payable, bearing interest at
prime (8.25% at February 29, 1996), unpaid
balance due by November 1996.................. $123,529 $ 52,942 $ 17,647
Various notes payable, bearing interest from
7.5% to 8.0%, maturing through 1998........... 96,713 53,824 --
-------- -------- --------
220,242 106,766 17,647
Less: Current maturities........................ (96,056) (95,248) (17,647)
-------- -------- --------
$124,186 $ 11,518 $ --
======== ======== ========
</TABLE>
In 1993, the Company entered into a $250,000 unsecured revolving line of
credit, which bears interest at prime and matures July 1997. As of February 28,
1995, February 29, 1996 and August 31, 1996, the Company had not drawn on this
facility.
Aggregate principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------------------------------------
<S> <C>
1997......................................... $ 95,248
1998......................................... 11,518
--------
$106,766
========
</TABLE>
NOTE 6. MAJOR CUSTOMERS
The Company's strategy includes providing production and distribution
services to a major U.S. beauty distribution company. Sales to this customer as
a percentage of total sales approximated 31%, 28% and 28% for the years ended
February 28, 1994, 1995 and February 29, 1996, respectively.
F-23
<PAGE> 82
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences result principally from the recognition of revenues and expenses
using the cash basis of accounting and the use of different depreciation and
amortization methods for income tax reporting.
The components of the income tax provision consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------------ AUGUST 31,
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, -----------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Current:
Federal........................ $134,927 $139,468 $208,499 $139,462 $229,313
State.......................... 18,699 19,329 28,896 19,327 31,778
-------- -------- -------- -------- --------
153,626 158,797 237,395 158,789 261,091
Deferred provision (benefit)..... 4,987 (29,191) (52,605) (26,302) --
-------- -------- -------- -------- --------
Provision for income taxes..... $158,613 $129,606 $184,790 $185,091 $261,091
======== ======== ======== ======== ========
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, AUGUST 31,
1995 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
-----------
Deferred tax assets:
Inventory reserve............................. $ 6,707 $ 8,376 $ 8,376
Uniform inventory cost capitalization......... 50,233 62,739 62,739
Capital losses in excess of capital gains..... 1,544 10,362 10,362
Allowance for doubtful accounts............... 44,492 50,314 50,314
Amortization.................................. 15,773 38,586 38,586
-------- -------- --------
Total gross deferred tax assets............ 118,749 170,377 170,377
-------- -------- --------
Deferred tax liabilities:
Depreciation.................................. (19,694) (18,717) (18,717)
-------- -------- --------
Total gross deferred tax liabilities....... (19,694) (18,717) (18,717)
-------- -------- --------
Net deferred tax asset..................... $ 99,055 $151,660 $ 151,660
======== ======== ========
</TABLE>
F-24
<PAGE> 83
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
------------------------------------------ ENDED AUGUST 31,
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, ---------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax provision at statutory rate...... 148,614 122,790 170,482 157,642 226,050
Expense (benefit) of permanent
differences resulting from the
recognition of interest income and
travel and entertainment expenses,
and the effect of state taxes...... 9,999 6,816 14,308 27,449 35,041
-------- -------- -------- ------- -------
Income tax provision....... $158,613 $129,606 $184,790 $185,091 $261,091
======== ======== ======== ======= =======
</TABLE>
NOTE 8. RELATED PARTY TRANSACTIONS
In the fiscal year ended February 28, 1994, the Company purchased land and
building amounting to $650,000, from a partnership (the Partnership) of which
three of the four partners are shareholders of the Company. The sales price
approximated the book value as recorded by the Partnership. Prior to the
transaction the Company leased this real estate from the Partnership. The
Company acquired the land and building using cash, and financed the remaining
portion with a note due the Partnership. Interest and principal of $5,105 are
payable monthly. The loan bears interest at 7%, and fully matures in 2003.
The total of the related party note payable is as follows:
<TABLE>
<CAPTION>
AUGUST 31,
1996
FEBRUARY 28, FEBRUARY 29, -----------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
Total shareholder note payable.................. $375,035 $342,287 $ 325,110
Less: Current maturities...................... (32,571) (34,929) (34,324)
-------- -------- --------
Shareholder note payable, net of current
portion....................................... $342,464 $307,358 $ 290,786
======== ======== ========
</TABLE>
Principal maturities related to this loan are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28, TOTAL
-------------------------------------------------- --------
<S> <C>
1997......................................... $ 34,929
1998......................................... 37,454
1999......................................... 40,162
2000......................................... 43,065
2001......................................... 46,178
Thereafter................................... 140,499
--------
$342,287
========
</TABLE>
The Company also entered into a lease with the Partnership in 1991, for
approximately 10,000 square feet for storage and production purposes. Lease
expense related to this space totaled approximately $83,049, $44,346, $51,346,
$25,778, and $44,518 for the years ended February 28, 1994 and 1995, February
29, 1996, and the six-month unaudited periods ended August 31, 1995 and 1996,
respectively.
F-25
<PAGE> 84
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Lease commitments related primarily to a warehouse space lease are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
FEBRUARY 28, TOTAL
-------------------------------------------------- --------
<S> <C>
1997............................................ $ 41,100
1998............................................ 41,100
1999............................................ 41,100
2000............................................ 41,100
2001............................................ 41,100
Thereafter...................................... 202,500
--------
$408,000
========
</TABLE>
NOTE 10. SUBSEQUENT EVENT
The Company entered into an asset purchase agreement with STC dated May 8,
1996 (see Note 1). In addition, an employee of the Company has entered into an
employment agreement with STC as a result of the proposed acquisition.
F-26
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of JDS MANUFACTURING CO.,
INC. (a California corporation) as of September 30, 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JDS Manufacturing Co., Inc.
as of September 30, 1995, and the results of its operations and its cash flows
for each of the two years in the period ended September 30, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
July 10, 1996.
F-27
<PAGE> 86
JDS MANUFACTURING CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
------------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $ 57,397 $ 66,368
Accounts receivable, net of allowance for doubtful accounts
of $10,000 and $10,000, respectively..................... 329,965 284,175
Inventory................................................... 264,347 242,072
Prepaid expenses............................................ 11,861 10,004
------- -------
Total current assets................................ 663,570 602,619
------- -------
Property and equipment, net of accumulated depreciation of
$100,031 and $111,808, respectively......................... 30,292 22,571
------- -------
Other assets.................................................. 102,934 102,934
------- -------
$ 796,796 $ 728,124
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 196,309 $ 161,943
Accrued expenses............................................ 53,740 107,228
------- -------
Total current liabilities........................... 250,049 269,171
------- -------
Notes payable to related parties.............................. 516,200 431,500
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value, 10,000 shares authorized, 1,000
shares issued and outstanding............................ 10,000 10,000
Retained earnings........................................... 20,547 17,453
------- -------
Total stockholders' equity.......................... 30,547 27,453
------- -------
Total liabilities and stockholders' equity.......... $ 796,796 $ 728,124
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-28
<PAGE> 87
JDS MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------------------- -------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
SALES..................................... $3,577,779 $3,367,599 $2,591,653 $2,339,344
COST OF SALES............................. 1,463,622 1,348,295 1,030,235 949,991
-------- -------- -------- --------
Gross profit............................ 2,114,157 2,019,304 1,561,418 1,389,353
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES................................ 2,170,271 2,045,731 1,548,930 1,393,109
-------- -------- -------- --------
Income (loss) from operations........... (56,114) (26,427) 12,488 (3,756)
OTHER INCOME, net......................... 44,191 41,951 29,831 1,462
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES................................... (11,923) 15,524 42,319 (2,294)
PROVISION FOR INCOME TAXES................ 4,571 6,950 19,044 800
-------- -------- -------- --------
NET INCOME (LOSS)......................... $ (16,494) $ 8,574 $ 23,275 $ (3,094)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 88
JDS MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1993........................ 1,000 $10,000 $ 28,467 $ 38,467
Net loss......................................... -- -- (16,494) (16,494)
---- ------ ------ ------
BALANCE, September 30, 1994........................ 1,000 10,000 11,973 21,973
Net income....................................... -- -- 8,574 8,574
---- ------ ------ ------
BALANCE, September 30, 1995........................ 1,000 10,000 20,547 30,547
Net loss, for the nine-month period ending June
30, 1996 (unaudited).......................... -- -- (3,094) (3,094)
---- ------ ------ ------
BALANCE, June 30, 1996 (unaudited)................. 1,000 $10,000 $ 17,453 $ 27,453
==== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 89
JDS MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
--------------------- ----------------------
1994 1995 1995 1996
-------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $(16,494) $ 8,574 $ 37,437 $ (3,094)
Adjustments to reconcile net income (loss) to
net cash used in operating activities --
Depreciation.............................. 18,735 15,661 10,581 11,777
Decrease (increase) in accounts
receivable.............................. (4,438) 89,139 101,297 45,790
Decrease (increase) in inventory.......... 14,441 (34,089) (41,036) 22,275
Decrease (increase) in other assets....... (33,786) (35,112) (7,208) 1,857
Increase (decrease) in accounts payable
and accrued liabilities................. 4,263 (47,256) (16,456) 18,723
-------- -------- --------- --------
Net cash provided by (used in)
operating activities............... (17,279) (3,083) 84,615 97,328
-------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................... (10,582) (8,203) (3,968) (3,657)
-------- -------- --------- --------
Net cash used in investing
activities......................... (10,582) (8,203) (3,968) (3,657)
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes
payable, net.............................. 24,012 (5,692) (106,174) (84,700)
-------- -------- --------- --------
Net cash (used in) provided by
financing activities............... 24,012 (5,692) (106,174) (84,700)
-------- -------- --------- --------
NET INCREASE (DECREASE) IN CASH................ (3,849) (16,978) (25,527) 8,971
CASH, beginning of period...................... 78,224 74,375 74,375 57,397
-------- -------- --------- --------
CASH, end of period............................ $ 74,375 $ 57,397 $ 48,848 $ 66,368
======== ======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid................................ $ 36,134 $ 35,589 $ 27,255 $ 30,432
======== ======== ========= ========
Income taxes paid............................ $ 4,090 $ 4,571 $ 3,371 $ 7,400
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 90
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement and Basis of Presentation
In accordance with the terms of an Acquisition Agreement dated October
1995, between Styling Technology Corporation, (STC) and JDS Manufacturing Co.,
Inc., STC agreed to acquire all of the stock of the Company. The terms include a
purchase price of $4,516,000, which will be paid primarily with cash and the
remainder to be funded with a promissory note. Consummation of the transaction
is subject to several conditions, including the completion of a successful
public securities offering by STC.
Organization and Nature of Operations
The Company was incorporated in 1987. Since 1989, the Company has been a
manufacturer and distributor of several extensive lines of high quality,
brand-recognized nail enhancement application products and nail accessories. Its
products are sold throughout the United States, principally to professional
supply outlets, beauty distributors, professional nail salons and professional
manicurists.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.
Inventories
Inventories approximate the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventories for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
SEPTEMBER 30, ---------
1995
------------- (UNAUDITED)
<S> <C> <C>
Raw material and work-in process........................ $ 31,722 $ 29,049
Finished goods.......................................... 232,625 213,023
------- -------
$ 264,347 $242,072
======= =======
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over their estimated
useful lives.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the years ended
September 30, 1994, and 1995, and the nine month unaudited periods ending June
30, 1995 and
F-32
<PAGE> 91
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996, maintenance and repair expenses charged to cost of operations were $5,452,
$4,507, $3,765 and $2,004, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the nine-month
periods ended June 30, 1995 and 1996, include all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial position and results of operations as of and for the period then
ended. Operating results for the nine-month period ending June 30, 1996, are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1996.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
SEPTEMBER 30, -----------
1995
------------- (UNAUDITED)
<S> <C> <C>
Furniture and equipment.................................... $ 98,490 $ 102,546
Automobiles................................................ 13,976 13,976
Leaseholds and other....................................... 17,857 17,857
-------- --------
130,323 134,379
Less: accumulated depreciation............................. 100,031 111,808
-------- --------
$ 30,292 $ 22,571
======== ========
</TABLE>
NOTE 4. NOTES PAYABLE TO RELATED PARTIES
As of September 30, 1995 and June 30, 1996 (unaudited), the Company had
notes payable due to its two principal shareholders of $516,200 and $431,500,
respectively. These notes originated in October 1994, and bear interest at 8%.
Loan advances and repayments are made at the shareholders' discretion, with the
entire balance becoming due on September 30, 1997. As such, the entire balance
is classified as long-term.
F-33
<PAGE> 92
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these difference are expected to reverse. These
differences, resulting principally from use of accelerated depreciation methods
for income tax reporting, were not material at the balance sheet dates.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Total future commitments for operating leases are $15,596 through September
30, 1997.
NOTE 7. SUBSEQUENT EVENT
The Company entered into an acquisition agreement with STC during October
1995 (See Note 1). In addition, an employee of the Company has entered into an
employment agreement with STC as a result of the acquisition.
F-34
<PAGE> 93
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation, Inc.:
We have audited the accompanying balance sheet of KOTCHAMMER INVESTMENTS,
INC. (a California corporation) as of December 31, 1995, and the related
statement of operations, stockholders' deficit, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kotchammer Investments, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
August 13, 1996.
F-35
<PAGE> 94
KOTCHAMMER INVESTMENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 96,364 $ 177,321
Accounts receivable............................................... 136,971 94,332
Inventory, net.................................................... 403,730 258,197
Prepaid expenses & other.......................................... 21,799 26,642
------- -------
Total current assets...................................... 658,864 556,492
------- -------
Property and equipment.............................................. 75,472 64,824
------- -------
Other assets........................................................ 1,026 468
------- -------
$ 735,362 $ 621,784
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................. $ 14,015 $ 21,777
Accrued expenses.................................................. 121,183 80,078
Line of credit.................................................... 215,000 110,000
Current portion of notes payable to shareholders.................. 270,000 270,000
------- -------
Total current liabilities................................. 620,198 481,855
------- -------
Notes payable to shareholders, net of current portion............... 340,000 340,000
------- -------
Commitments and contingencies
Stockholders' deficit:
Common stock, $20 par value, 2,500 shares authorized, 2,500 shares
issued and outstanding......................................... 50,000 50,000
Retained deficit.................................................. (274,836) (250,071)
------- -------
Total stockholders' deficit............................... (224,836) (200,071)
Total liabilities and stockholders' deficit............... $ 735,362 $ 621,784
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 95
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1995 1995 1996
------------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES............................................. $ 1,557,709 $ 777,460 $735,538
COST OF SALES......................................... 711,925 372,192 343,013
-------- -------- --------
Gross profit........................................ 845,784 405,268 392,525
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES......... 891,146 476,481 328,925
-------- -------- --------
Income (loss) from operations....................... (45,362) (71,213) 63,600
Interest expense and other, net....................... (89,557) (45,397) (38,835)
-------- -------- --------
NET INCOME (LOSS)..................................... $ (134,919) $(116,610) $ 24,765
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 96
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- --------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994....................... 2,500 $50,000 $(139,917) $ (89,917)
Net loss....................................... -- -- (134,919) (134,919)
----- ------- --------- ---------
BALANCE, December 31, 1995....................... 2,500 50,000 (274,836) (224,836)
Net income..................................... -- -- 24,765 24,765
----- ------- --------- ---------
BALANCE, June 30, 1996 (unaudited)............... 2,500 $50,000 $(250,071) $ (200,071)
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 97
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ -----------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (134,919) $(116,610) $ 24,765
Adjustments to reconcile net income (loss) to net
cash used in operating activities --
Depreciation...................................... 23,436 10,011 10,648
Decrease (increase) in accounts receivable........ 43,004 27,496 42,639
Decrease (increase) in inventory.................. (45,278) (74,554) 145,533
Decrease (increase) in prepaids and other
assets.......................................... 63,372 34,426 (4,285)
Increase (decrease) in accounts payable and
accrued liabilities............................. (43,234) (24,042) (33,343)
-------- -------- ---------
Net cash provided by (used in) operating
activities................................. (93,619) (143,273) 185,957
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................. (17,215) (8,000) --
-------- -------- ---------
Net cash used in investing activities........ (17,215) (8,000) --
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes
payable, net...................................... 100,000 100,000 --
Proceeds from (payments to) line of credit, net...... (5,000) 24,060 (105,000)
-------- -------- ---------
Net cash (used in) provided by financing
activities................................. 95,000 124,060 (105,000)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH........................ (15,834) (27,213) 80,957
CASH, beginning of period.............................. 112,198 112,198 96,364
-------- -------- ---------
CASH, end of period.................................... $ 96,364 $ 84,985 $ 177,321
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................ $ 72,916 $ 64,866 $ 7,257
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 98
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Acquisition Agreement and Basis of Presentation
In accordance with the terms of an Acquisition Agreement dated October 1996
between Styling Technology Corporation, Inc. (STC) and Kotchammer Investments,
Inc. (the Company), STC agreed to acquire all of the stock of the Company. The
terms include a purchase price of $700,000, which will be paid primarily with
cash and the remainder to be funded with a promissory note and common stock.
Consummation of the transaction is subject to several conditions, including the
completion of a successful public securities offering by STC.
Organization and Nature of Operations
The Company was incorporated in December 1993 to acquire a division of
Redken Laboratories, Inc. The Company distributes and markets professional salon
appliances and salonwear. Its products are sold throughout the United States,
principally to professional supply outlets, beauty distributors and professional
hair stylists.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.
Inventories
Inventories consist of finished goods and are stated at the lower of cost
(first-in, first-out) or net realizable value. Reserves are established against
inventories for excess, slow-moving and obsolete items and for items where the
net realizable value is less than cost.
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over their estimated
useful lives.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
F-40
<PAGE> 99
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the six-month periods
ended June 30, 1995 and 1996, include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the Company's financial
position and results of operations as of and for the period then ended.
Operating results for the six-month period ending June 30, 1996, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1996.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE 1995
----------- ------------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery & equipment.......................... 5 years $ 76,803 $ 76,700
Furniture & fixtures........................... 7 years 22,458 22,458
Computer equipment............................. 5 years 16,652 16,652
--------
115,913 115,810
Less - Accumulated depreciation................ (40,441) (50,986)
--------
$ 75,472 $ 64,824
========
</TABLE>
NOTE 4. LINE OF CREDIT
At December 31, 1995, the Company had a $220,000 line of credit facility
with a bank which expired in August of 1996 and carried an interest rate of
9.75%. Subsequent to June 30, 1996, the line of credit was repaid.
F-41
<PAGE> 100
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
Note payable dated December 8, 1993 interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing Jan. 15, 2004.................................... $120 $ 120
Note payable dated December 8, 1993 interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing Jan. 15, 2004.................................... 120 120
Note payable dated December 8, 1993 interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing Jan. 15, 2004.................................... 270 270
Note payable dated May 3, 1995, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004................................. 70 70
Note payable dated June 5, 1995, interest at a bank's
reference rate, plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004................................. 30 30
------ -----------
$610 $ 610
========== =========
</TABLE>
As of December 31, 1995 and June 30, 1996, one of the notes payable to
shareholders was classified as current as a result of the Company incurring a
technical default with a certain financial covenant.
NOTE 6. INCOME TAXES
The Company has elected S Corporation status under Subchapter S of the
Internal Revenue Code. This election results in substantially all U.S. federal
taxable income being taxed to the stockholders. Accordingly, there is no
provision for income taxes reflected in these financial statements for the year
ended December 31, 1995 and the six-month periods ended June 30, 1995 and 1996.
NOTE 7. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Total future commitments for operating leases are $45,851 through July
1997. Rent expense incurred under operating leases was $35,363, $20,914 and
$14,276 for the year ended December 31, 1995 and for the six months ended June
30, 1995 and 1996, respectively.
NOTE 8. SUBSEQUENT EVENT
The Company entered into an acquisition agreement with STC dated October
1996 (See Note 1). In addition, an employee of the Company has entered into an
employment agreement with STC as a result of the acquisition.
F-42
<PAGE> 101
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of STYLING TECHNOLOGY
CORPORATION (a Delaware corporation), as of December 31, 1995. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Styling Technology
Corporation, as of December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Notes 1 and 3 to the
financial statements, the Company's future operations are dependent upon the
Company's ability to finance acquisitions through an initial public offering of
stock, which as a result, raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
October 29, 1996.
F-43
<PAGE> 102
STYLING TECHNOLOGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 200 $ 200
Deferred offering and acquisition costs.......................... 66,202 300,018
------ -------
Total assets............................................. $ 66,402 $ 300,218
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......................... $ 66,202 $ 300,018
------ -------
Total liabilities
Stockholders' equity:
Preferred stock, $.0001 par value, 1,000,000 shares authorized,
no shares issued and outstanding.............................. -- --
Common stock, $.0001 par value, 10,000,000 shares authorized,
1,616,000 shares issued and outstanding....................... 200 200
------ -------
Total stockholders' equity............................... 200 200
------ -------
Total liabilities and stockholders' equity............... $ 66,402 $ 300,218
====== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-44
<PAGE> 103
STYLING TECHNOLOGY CORPORATION
NOTES TO BALANCE SHEETS
NOTE 1. BUSINESS AND ORGANIZATION
Styling Technology Corporation (the Company) is a newly organized
corporation, formed in June 1995. The Company intends to complete an initial
public offering (IPO) of its common stock, while simultaneously acquiring four
companies involved in the professional beauty industry (see below for a
description of the industry). Subsequent to the IPO, the Company intends to make
similar acquisitions of companies that manufacture and distribute high-quality
professional hair, nail, skin and body care products, and beauty accessories
(i.e., curling irons, hairdryers) to salons, spas, health clubs and beauty and
barber distributors.
The Company's sole assets at December 31, 1995 and June 30, 1996, are cash
and deferred offering and acquisition costs. The Company has not conducted any
operations and all activities to date have related to the acquisitions and the
IPO. There is no assurance that the pending acquisitions discussed below will be
completed and that the Company will be able to generate future operating
revenues. The Company has negotiated definitive agreements to acquire four
businesses (Acquired Business) to be effective with the completion of the IPO.
The four companies to be acquired are Body Drench, Gena Laboratories, JDS
Manufacturing and Kotchammer Investments. The aggregate consideration that will
be paid by the Company to acquire these companies is approximately $23.2
million, consisting of cash, common stock, debt and assumption of certain
existing liabilities of these companies consisting of long-term liabilities of
approximately $300,000 in connection with the Gena acquisition; up to $3.3
million in trade accounts payable, up to $40,000 of bank debt, and up to
$560,000 of payroll liabilities in connection with the Body Drench acquisition;
and up to approximately $1.0 million of other miscellaneous liabilities. The
Company is dependent upon the IPO to fund the cash portion of the purchase price
for these pending acquisitions and additional working capital purposes.
NOTE 2. STOCKHOLDERS' EQUITY
In connection with the organization and initial capitalization of the
Company in June 1995, the Company issued 1,616,000 shares of common stock for
par value, a portion of which were repurchased subsequent to June 1995. In
addition, in June 1995 the Company issued 161,571 options with an exercise price
of $.10 per share to an officer of the Company, which approximated fair value at
the time of issuance. The options become exercisable on June 29, 1999, but
vesting may accelerate based on the Company meeting certain minimum earnings per
share requirements in future periods.
NOTE 3. SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Company obtained bridge loan financing
(Bridge Note) to fund approximately $400,000 of deferred issuance and
acquisition costs, including reimbursements of amounts advanced by the
stockholders on behalf of the Company. The Bridge Note bears interest at an
annual rate of 10% and is to be repaid on the earlier of January 31, 1997, or
upon consummation of the IPO. In connection with the Bridge Note, the Company
will issue shares amounting to $200,000 worth of common stock to the holders
upon the consummation of the IPO. The Company will also issue warrants to
purchase an equal amount of shares at an exercise price of 125% of the offering
price in the IPO, subject to certain adjustments.
Subsequent to June 30, 1996, the Company adopted the 1996 Stock Option Plan
(the Plan), which provides for the grant of incentive and nonqualified stock
options to acquire common stock of the Company to key personnel, directors,
consultants, and independent contractors. The Company also hired a chief
financial officer under an employment agreement. The agreement included the
issuance of options for 72,707 shares of common stock under the Plan, at an
exercise price equal to the offering price of the IPO.
F-45
<PAGE> 104
STYLING TECHNOLOGY CORPORATION
NOTES TO BALANCE SHEETS -- (CONTINUED)
As a result of the four anticipated acquisitions and the IPO, the Company
has incurred significant liabilities. The Company currently has no operations,
and as a result, must generate additional resources to fund these liabilities.
Management's plans to repay these amounts consist solely of the funds expected
to be received from the IPO. Should the IPO not occur, the Company may be unable
to continue as a going concern. See "Description of the Acquisitions" in the
Company's Registration Statement on Form S-1 for further discussion of the terms
of the anticipated acquisitions.
Subsequent to June 30, 1996, the Company affected a 0.808-for-1 reverse
stock split on all its outstanding common stock. As a result, all share amounts
have been adjusted to give effect to the split, including the option terms as
discussed herein.
In October 1996, the Company entered into a Stock Repurchase Agreement with
Kenneth S. Bernstein, pursuant to which Mr. Bernstein agreed to sell 807,851
shares of the Company's Common Stock to the Company for $1.8 million, payable
upon consummation of the Offering. Accordingly, upon consummation of the
Offering, Mr. Bernstein will no longer be a stockholder of the Company.
The Company has obtained letters of intent, subject to completion of
customary due diligence, from several financial institutions to provide a
working capital line of credit and an acquisition line of credit.
F-46
<PAGE> 105
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Financial Data................ 5
Risk Factors.......................... 8
The Company........................... 15
Description of the Acquisitions....... 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Historical and Pro Forma
Financial Data...................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 34
Management............................ 42
Certain Transactions.................. 47
Principal Stockholders................ 47
Description of Capital Stock.......... 48
Underwriting.......................... 51
Legal Opinions........................ 52
Experts............................... 52
Additional Information................ 53
Index to Combined Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,800,000 SHARES
LOGO
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
PRIME CHARTER LTD.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation and Bylaws of the Registrant provide that
the Registrant will indemnify and advance expenses, to the fullest extent
permitted by the Delaware General Corporation Law, to each person who is or was
a director or officer of the Registrant, or who serves or served any other
enterprise or organization at the request of the Registrant (an "Indemnitee").
Under Delaware law, to the extent that an Indemnitee is successful on the
merits in defense of a suit or proceeding brought against him or her by reason
of the fact that he or she is or was a director, officer or agent of the
Registrant, or serves or served any other enterprise or organization at the
request of the Registrant, the Registrant shall indemnify him or her against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with such action.
If unsuccessful in defense of a third-party civil suit or a criminal suit,
or if such a suit is settled, an Indemnitee may be indemnified under Delaware
law against both (i) expenses, including attorney's fees, and (ii) judgments,
fines and amounts paid in settlement if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company, and, with respect to any criminal action, had no
reasonable cause to believe his or her conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Registrant, where the suit is settled, an Indemnitee may be indemnified under
Delaware law only against expenses (including attorneys' fees) actually and
reasonably incurred in the defense or settlement of the suit if he or she acted
in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Registrant except that if the Indemnitee
is adjudged to be liable for negligence or misconduct in the performance of his
or her duty to the Registrant, he or she cannot be made whole even for expenses
unless a court determines that he or she is fully and reasonably entitled to
indemnification for such expenses.
Also under Delaware law, expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding may be paid by the
Registrant in advance of the final disposition of the suit, action or proceeding
upon receipt of an undertaking by or on behalf of the officer or director to
repay such amount if it is ultimately determined that he or she is not entitled
to be indemnified by the Registrant. The Registrant may also advance expenses
incurred by other employees and agents of the Registrant upon such terms and
conditions, if any, that the Board of Directors of the Registrant deems
appropriate.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in the Registration Statement.
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 14,320
NASD filing fee........................................................... 4,653
Nasdaq fees............................................................... 23,646
Transfer agent and registrar fees......................................... 2,000
Accountants' fees and expenses............................................ 400,000
Legal fees and expenses................................................... 300,000
Printing and engraving expenses........................................... 100,000
Miscellaneous fees........................................................ 48,381
--------
Total........................................................... $893,000
========
</TABLE>
II-1
<PAGE> 107
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities which were not registered under the Securities Act of 1933,
as amended, have been sold by the Registrant within the past three years except
for the following:
In June 1995, the Registrant issued 807,851 shares of Common Stock to
Messrs. Leopold and Bernstein, respectively, for an aggregate of $200 and issued
to Mr. Clifford for no consideration options to purchase 161,571 shares of
Common Stock at an exercise price of $0.10 per share in connection with the
incorporation of the Registrant. The shares were issued in reliance upon an
exemption from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended, as a transaction not involving a public offering.
In September 1996, the Registrant sold to a single foreign investor a
promissory note (the "Bridge Note") in the principal amount of $400,000 that
bears interest at the rate of 10% per annum with a maturity date of January 31,
1997, subject to a prepayment obligation upon the completion of the Offering.
Upon the completion of the Offering, the Company will issue (i) shares of Common
Stock having a market value of $200,000 (assuming an initial public offering
price of $11.00 per share), (ii) warrants to purchase a like number of shares of
Common Stock at an exercise price of equal to 125% of the initial public
offering price, and (iii) options to purchase 5,000 shares of Common Stock at an
exercise price equal to the fair market value per share on the date of grant to
Mr. Schefler upon his election as a director of the Company. The Bridge Note was
issued in reliance upon an exemption from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended, as a transaction not involving a
public offering.
ITEM 27. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ ------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement++
3.1 Certificate of Incorporation of the Registrant++
3.2 Certificate of Amendment of Certificate of Incorporation++
3.3 Bylaws of the Registrant++
4.1 Specimen of Stock Certificate++
4.2 Specimen of Redeemable Common Stock Warrant++
5.1 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a professional
association+
10.1 Stock Purchase Agreement by and among Registrant and Donald N. Black, Howard Black,
Barbara Black, Robert Black, Don Cottam, Jim Cottam and the Cottam Family
Partnership, L.P. (Shareholders) with respect to Gena Laboratories, Inc.++
10.2 Stock Purchase Agreement by and among Registrant and Jack Sperling and Gary Sperling
(Shareholders) with respect to JDS Manufacturing Co., Inc.++
10.3 Asset Purchase Agreement by and among Registrant, Designs by Norvell, Inc. and Joy
Norvell Martin (Stockholder) with respect to the Body Drench division of Designs by
Norvell, Inc.++
10.4 Asset Purchase Agreement by and among Registrant, Kotchammer Investments, Inc. and
The Hammer Family Living Trust, The Jones Family Trust and Gerald Kotch
(Stockholders)++
10.5 Employment Agreement between Registrant and Sam L. Leopold++
10.6 Employment Agreement between Registrant and Thomas M. Clifford++
10.7 Employment Agreement between Registrant and David E. Ziegler++
10.8 Form of Employment Agreement between Registrant and Richard E. Norvell++
10.9 Form of Employment Agreement between Registrant and Gerald L. Kotch++
10.10 Employment Agreement between Registrant and Donald L. Black++
</TABLE>
II-2
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.11 1996 Stock Option Plan++
10.12 Stock Repurchase Agreement, as amended, between Registrant and Kenneth S.
Bernstein++
10.13 Bridge Note++
10.14 Proposed Letters of Intent between Registrant and various financial institutions+
11 Statement regarding computation of per share earnings++
23.1 Consent of Counsel (included in Exhibit 5.1)+
23.2 Consent of Arthur Andersen LLP+
23.3 Consent of Sylvan Schefler++
24.1 Power of Attorney of Directors and Executive Officers (included on the Signature
Page of the Registration Statement)++
27 Financial Data Schedule++
</TABLE>
- ---------------
+ Filed herewith
++ Previously filed
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1), or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time the Commission declared it effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on November 11, 1996.
STYLING TECHNOLOGY CORPORATION
By: /s/ SAM L. LEOPOLD
------------------------------------
Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement was signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- -------------------
<S> <C> <C>
/s/ SAM L. LEOPOLD Chairman of the Board and Chief November 11, 1996
- ------------------------------------- Executive Officer
Sam L. Leopold
THOMAS M. CLIFFORD* President and Director November 11, 1996
- -------------------------------------
Thomas M. Clifford
DAVID E. ZEIGLER* Chief Financial Officer, November 11, 1996
- ------------------------------------- Treasurer, and Secretary
David E. Zeigler (Principal Financial and
Accounting Officer)
JAMES A. BROOKS* Director November 11, 1996
- -------------------------------------
James A. Brooks
DANIEL HOWELL* Director November 11, 1996
- -------------------------------------
Daniel Howell
</TABLE>
*By: /s/ SAM L. LEOPOLD
-----------------------------------------------
Sam L. Leopold
(Attorney-in-fact)
II-4
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S> <C>
1 Form of Underwriting Agreement++
3.1 Certificate of Incorporation of the Registrant++
3.2 Certificate of Amendment of Certificate of Incorporation++
3.3 Bylaws of the Registrant++
4.1 Specimen of Stock Certificate++
4.2 Specimen of Redeemable Common Stock Warrant++
5.1 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, a
professional association+
10.1 Stock Purchase Agreement by and among Registrant and Donald N. Black,
Howard Black, Barbara Black, Robert Black, Don Cottam, Jim Cottam and the
Cottam Family Partnership, L.P. (Shareholders) with respect to Gena
Laboratories, Inc.++
10.2 Stock Purchase Agreement by and among Registrant and Jack Sperling and
Gary Sperling (Shareholders) with respect to JDS Manufacturing Co., Inc.++
10.3 Asset Purchase Agreement by and among Registrant, Designs by Norvell, Inc.
and Joy Norvell Martin (Stockholder) with respect to the Body Drench
division of Designs by Norvell, Inc.++
10.4 Asset Purchase Agreement by and among Registrant, Kotchammer Investments,
Inc. and The Hammer Family Living Trust, The Jones Family Trust and Gerald
Kotch (Stockholders)++
10.5 Employment Agreement between Registrant and Sam L. Leopold++
10.6 Employment Agreement between Registrant and Thomas M. Clifford++
10.7 Employment Agreement between Registrant and David E. Ziegler++
10.8 Form of Employment Agreement between Registrant and Richard E. Norvell++
10.9 Form of Employment Agreement between Registrant and Gerald L. Kotch++
10.10 Employment Agreement between Registrant and Donald L. Black++
10.11 1996 Stock Option Plan++
10.12 Stock Repurchase Agreement, as amended, between Registrant and Kenneth S.
Bernstein++
10.13 Bridge Note++
10.14 Proposed Letters of Intent between Registrant and various financial
institutions+
11 Statement regarding computation of per share earnings++
23.1 Consent of Counsel (included in Exhibit 5.1)+
23.2 Consent of Arthur Andersen LLP+
23.3 Consent of Sylvan Schefler++
24.1 Power of Attorney of Directors and Executive Officers (included on the
Signature Page of the Registration Statement)++
27 Financial Data Schedule++
</TABLE>
- ---------------
+ Filed herewith
++ Previously filed
<PAGE> 1
Robert S. Kant
602-263-2606
File No.: 31114-14
November 12, 1996
Styling Technology Corporation
One East Camelback Road
Suite 1100
Phoenix, Arizona 85012
RE: REGISTRATION STATEMENT ON FORM S-1
STYLING TECHNOLOGY CORPORATION
Ladies and Gentlemen:
As legal counsel to Styling Technology Corporation, a Delaware
corporation (the "Company"), we have assisted in the preparation of the
Company's Registration Statement on Form S-1, Registration No. 333-12469 (the
"Registration Statement"), filed with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of the shares of common stock of the Company covered by the Registration
Statement (the "Shares"). The facts, as we understand them, are set forth in the
Registration Statement.
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The Certificate of Incorporation of the Company, as amended
to date;
B. The Bylaws of the Company;
C. The Registration Statement; and
D. The Resolutions of the Board of Directors of the Company
relating to the organization of the Company and the approval of the filing of
the Registration Statement and the transactions in connection therewith.
<PAGE> 2
Styling Technology Corporation
November 12, 1996
Page 2
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to the further limitations and qualifications set forth
below, it is our opinion that, when (a) the Registration Statement as then
amended shall have been declared effective by the Commission, (b) the
Underwriting Agreement shall have been duly executed and delivered, and (c) the
Shares have been duly issued, executed, authenticated, delivered, paid for and
sold by the Company as described in the Registration Statement and in accordance
with the provisions of the Underwriting Agreement, the Shares will be validly
issued, fully paid and nonassessable.
We hereby expressly consent to any reference to our firm in
the Registration Statement, the inclusion of this Opinion as an exhibit to the
Registration Statement, and to the filing of this Opinion with any other
appropriate governmental agency.
Very truly yours,
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
<PAGE> 1
EXHIBIT-10.14
TERMS SHEET
FOR
STYLING RESEARCH CORPORATION, INC.
SEPTEMBER 19, 1996
(FOR DISCUSSION PURPOSES ONLY)
Borrower: Styling Research Corporation, Inc.
Lender: Bank One, Texas, N.A.
Facility: Revolving Working Capital Line of Credit
Amount: $5,000,000
Maturity: 2 years from date of closing
Interest Rate: Bank One, Texas Base Rate -- 25 bp or Reserve Adjusted
LIBOR + 225 b.p.
Fees: Upfront fee of 1/2%; Unused fee of 1/4%
Repayment
Schedule: Interest due monthly with all outstanding principal due
at maturity
Collateral: A first perfected security interest in all assets
currently or hereafter owned by Borrower.
Borrowing Base: Actual advance rates to be determined following a
pre-approval field examination. It is presently
contemplated that advances under the working capital
facility will be restricted to no more than 70% of
eligible accounts receivable and 40% of eligible
inventories. Total advances against inventories will
be capped at a level to be determined.
Reporting
Requirements: 1) Borrower will supply Lender with financial
information as requested, including annual audited
financial statements within 90 days of fiscal year
end;
2) Borrower will supply Lender with monthly statements
certifying compliance with all applicable covenants
along with balance sheets (including a listing of
any contingent liabilities), statements of income,
cash flow and retained earnings within 30 days of
month end;
3) Lender has the right to inspect the books, records
and procedures of the Borrower at any reasonable
time.
<PAGE> 2
Styling Research Corporation, Inc.
Terms Sheet - Page 2
Covenants: 1) Borrower will agree to not merge or consolidate with any
other entity;
2) Borrower will agree to not change ownership, management
or their basic business;
3) Financial covenants to be tested monthly based on prior 12
months where appropriate and will include:
a) Borrower will maintain a maximum ratio of Funded Debt
divided by EBIDA of 3:1.
b) Borrower will maintain a minimum Fixed Charge Coverage
ratio defined as (Net Income after Distributions plus
Depreciation and Amortization plus Interest Expense
minus Capital Expenditures not Externally Financed)
divided by (Current Portion of Long-Term Debt and
Capitalized Leases plus Interest Expense) of 1.50:1.
c) Borrower will maintain a minimum ratio of Current Assets
divided by Current Liabilities of 1.25:1.
d) Borrower will maintain a minimum Tangible Net Worth
of $7,000,000. This covenant will increase annually
by 50% of net income for the most recent fiscal year.
4) Borrower agrees to pay for all reasonable out-of-pocket
costs and expenses incurred in connection with the
preparation, execution, consummation and amendment or
modification of appropriate documentation including
reasonable fees and expenses incurred by Lender's legal
counsel subject to a cap to be agreed on in advance.
Conditions
Precedent: 1) Formal approval by Bank One, Texas, N.A. and completion of
a pre-approval field examination at Borrower's expense.
2) Completion and execution by Borrower of such documentation
as Lender may request in form and substance satisfactory to
Lender and its counsel.
3) Successful completion of public securities offering
yielding net proceeds to the company of not less than
$24,000,000.
4) No material change in financial condition of Borrower.
THIS TERMS SHEET MAY NOT BE RELIED UPON BY ANY THIRD PARTY AND IS BEING
DELIVERED TO STYLING RESEARCH CORPORATION, INC. WITH THE UNDERSTANDING THAT
NEITHER IT, NOR ITS SUBSTANCE, SHALL BE DISCLOSED TO ANY THIRD PARTY. THIS
TERMS SHEET IS NOT INTENDED TO CONSTITUTE AN EXHAUSTIVE STATEMENT OF ALL TERMS
AND CONDITIONS WHICH MAY ULTIMATELY BE INCLUDED IN A LOAN AGREEMENT BETWEEN
LENDER AND BORROWER.
<PAGE> 3
STYLING TECHNOLOGY CORPORATION
PRELIMINARY TERM SHEET
OCTOBER 15, 1996
This preliminary term sheet is for discussion purposes only and does not
constitute a commitment of NationsBank or an agreement to deliver such a
commitment. This proposal for which NationsBank has not obtained final credit
approval is to be used as a vehicle for continued discussions. This term sheet
does not include many of the details of such terms and conditions as well as
other terms and conditions that may be included in the loan documents.
BORROWER: Styling Technology Corporation
LENDER: NationsBank of Texas, N.A.
FACILITIES: A) $ 3,000,000 Working Capital Facility
B) $12,000,000 Revolver/Term Loan
PURPOSE: A) General short term working capital
B) Acquisition Financing
MATURITY: A) Two years from closing
B) Two years from closing for revolver maturity, followed by a
three term year note
PAYMENT TERMS: A) Interest only payable quarterly, principal due at maturity
B) Interest only payable quarterly. At revolver maturity,
outstandings will covert to a term loan with principal
reduction base on a five year straight line amortization.
Remaining principal due at maturity.
INTEREST RATE: Pricing on the facility will be based on performance pricing
as shown below and at the Borrower's option:
<TABLE>
<CAPTION>
Revolver Revolver/Term Loan
--------------------- ------------------
Senior Funded Debt/EBITDA LIBOR* PRIME LIBOR* PRIME
- ------------------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Less than 2.0 2.00% 0% 2.25% 0%
Less than 2.25 but greater
than 2.0 2.25% 0% 2.50% 0%
Greater than 2.25 2.50% 0% 2.75% 0%
</TABLE>
"The Borrower may select interest rate periods of 1, 3, or 6
month periods for LIBOR.
ORIGINATION FEE: A) 1/2% Origination Fee. One-half of the origination fee
($7,500) will be due upon acceptance of a formal Commitment
Letter with the remaining portion ($7,500) due upon closing
of facilities.
B) 1/2% Origination Fee. One-third of the origination fee
($20,000) will be due upon acceptance of a formal Commitment
Letter, one-third ($20,000) due upon closing of the
facilities, and the remaining portion due when advanced.
UNUSED FEE: A) 1/4% on the unused portion payable quarterly in arrears.
B) 1/4% on the unused portion payable quarterly in arrears
beginning July 1, 1997.
<PAGE> 4
GUARANTORS: Any existing or newly acquired or formed subsidiary of
Borrower.
COLLATERAL: First perfected security interest in all assets of the
Borrower including accounts receivable, inventory,
equipment, real estate and intangibles.
BORROWING BASE: Availability under the Working Capital Facility will be
subject to a borrowing base equal to 75% of Eligible
Accounts Receivable (excluding receivables greater than
90 days from date of invoice and other standard
exclusions) plus 40% of Eligible Inventory (Finished
Goods only). Advance rates, eligible inventory and an
inventory cap will be determined based upon additional
due diligence. Due diligence to include a field audit
with acceptable results to lender which will be required
prior to closing. The field audit will include an
examination of the company's accounting, controls,
accounts receivable, accounts payable and inventory.
ACQUISITION
LIMITATION: A) No acquisition permitted earlier than two fiscal
quarters after IPO.
B) Total borrowings under facility B will be subject to
a borrowing base equal to 2.0x EBITDA measured quarterly
on a trailing 4 quarter basis. Until there are four
trailing quarters, interim results will be annualized.
Acquisition EBITDA will be included on a trailing 4
quarter basis if cash flow is verifiable with reviewed
or audited statements. Post closing, the first full
quarter of acquisition EBITDA will be annualized and
added to existing EBITDA for covenant compliance.
C) All acquisitions must show proforma compliance with
loan agreement.
D) All advances for acquisitions subject to Lender
approval with additional due diligence as appropriate.
FINANCING
DOCUMENTS: Financing documents will include: loan agreement
(containing conditions to lending, representations,
covenants, events of default), security agreement,
financing statements, corporate authority documents,
promissory notes, evidence of insurance and other
documents customary in similar transactions.
COVENANTS: Customary in credit agreements of this nature,
including, but not limited to:
A. Annual audited financial statements, 10-K and
compliance certificate within 90 days of fiscal
year end.
B. Quarterly financial statements, 10-Q and compliance
certificate within 45 days of quarter-end.
C. Monthly borrowing base calculation, including
accounts receivable aging and inventory listing.
Monthly financial statements. Due with 30 days
of month-end.
D. Maximum senior funded debt to cash flow ratio of
2.5. Cash flow = EBITDA - Net Nonfinanced Capex -
Cash Taxes.
<PAGE> 5
E. Minimum debt service coverage ratio of 2.0x. Defined as Cash
Flow (as defined above) divided by debt service. Proforma
debt service on outstandings under Facility B to be included
in the calculation.
F. Minimum Tangible Net Worth Covenant to be set based on the
Borrowers actual tangible net worth as of the first day after
the completion of the IPO. Covenant will increase by 70% of
net income at the end of each fiscal quarter plus 100% of
equity offerings.
F. Minimum Current Ratio of 1.75x.
H. No additional debt with the exception of purchase money debt
not to exceed $200,000.
I. No pledge or mortgage of assets.
J. No sale of assets, except in the ordinary course of business
and in conjunction with the liquidation of assets related to
the initial consolidation of the Borrower.
K. Maintain acceptable levels of general liability, hazard, and
worker's compensation insurance.
L. No merger, acquisition, consolidation or purchase of stock of
another company without consent of Lender.
M. Restriction on engaging in any other business other than
those in which Borrower is presently engaged, or to
discontinue any of its material existing lines of business.
N. Limitation on dividend payout and repurchase of stock.
O. No change in key senior management without bank consent.
EXPENSES All legal and professional expenses incurred by the Lender shall
be paid for by the Borrower, including costs relating to the
field audit.
CONDITION
PRECEDENT: Subject to: 1) Successful completion and funding of an initial
public offering of at least $21,000,000, 2) Successful due
diligence regarding accounts receivable, inventory and
equipment, 3) Successful completion of reference investigation,
4) Continued discussions regarding proformas and expense
eliminations, 5) Final credit approval by NationsBank.
<PAGE> 6
STYLING TECHNOLOGY CORPORATION
UNION BANK OF CALIFORNIA, N.A.
TERM SHEET
OCTOBER 8, 1996
BORROWER: Styling Technology Corporation
BANK: Union Bank of California, N.A.
FACILITY: $10,000,000 revolving line of credit subject to a borrowing base
of up to an 80% advance against eligible accounts receivable,
and an appropriate advance against eligible inventory.
Financings supported by inventory will be capped at $4,000,000.
Final advance rates to be determined at completion of Bank's due
diligence and field audit. The Facility will consist of the
following Sublimits:
Sublimit A: $5,000,000 for working capital purposes
Sublimit B: $5,000,000 for support of acquisitions *
* All acquisitions will be reviewed by Bank for approval on a
case-by-case basis. Alternative bank financing structures will
be considered upon review of each acquisition at Bank's sole
discretion.
TERMS: Sublimit A: 24 months. Interest only all due at maturity.
Sublimit B: Available for 24 months. Advances will be interest
only for 12 months or to the maturity date,
whichever is less, at which time any outstanding
balance will convert to a 48 month, fully
amortizing term loan with equal monthly payments of
principal plus interest.
PRICING: Pricing will be based on a funded debt/EBITDA ratio as follows:
---------------------------------------
Sublimit A Sublimit B
---------------------------------------------------------------
Funded Debt/EBITDA LIBOR 1 LIBOR *
---------------------------------------------------------------
3.0:1.0 2.25% 2.75%
---------------------------------------------------------------
2.5:1.0 2.00% 2.50%
---------------------------------------------------------------
2.0:1.0 1.75% 2.25%
---------------------------------------------------------------
Borrower will also have the option with either sublimit of
Bank's Reference Rate.
<PAGE> 7
Styling Technology Corporation
Term Sheet - Dated 10/8/96
Page 2
FEES: Sublimit A: Up front commitment fee of .50% plus .25%
unused fee payable quarterly in arrears
Sublimit B: .50% commitment fee when funded
COLLATERAL: UCC-1 Broadform
GUARANTORS: All subsidiaries of Borrower
AUDITS: Initial audit plus quarterly audits for at least the first 12
months and at Bank's discretion thereafter at Borrower's
expense.
REPORTING &
FINANCIAL
REQUIREMENTS: 1. Annual CPA prepared audited consolidated and consolidating
financial statements within 90 days of fiscal year end
2. Company prepared, monthly consolidated and consolidating
financial statements within 30 days of month-end.
3. Monthly accounts receivable and accounts payable agings and
inventory reports.
4. Financial covenants to include, but not be limited to:
Minimum Debt Service Coverage Ratio (if Sublimit B is
funded)
Maximum Funded Debt to EBITDA of 3.0:1
Minimum Current Ratio of 1.50:1
Minimum Tangible Net Worth of $7,000,000 plus 50% of net
income for each fiscal year.
Acquisitions subject to Bank approval and compliance with
all financial covenants.
Please understand that the above credit facility is not a commitment, and any
forthcoming commitment, if presented, would be subject to Borrower's public
stock offering raising not less than $24,000,000 in equity capital and Union
Bank of California, N.A.'s completion of due diligence, to include but not be
limited to:
- - Completion of field audit of books, records, and systems.
- - Final credit approval by Union Bank of California, N.A.
- - Documentation satisfactory to and deemed necessary by Union Bank and
its counsel.
- - Interviews with key management.
- - Inspection of Duncanville, Texas facility.
- - Satisfactory results from Bank's field audit.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made part of this
Registration Statement.
Arthur Andersen LLP
Phoenix, Arizona
November 11, 1996.
