<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-61035
SUPPLEMENT NO. 1 DATED
OCTOBER 20, 1998 TO PROSPECTUS
DATED SEPTEMBER 17, 1998
CHANGE OF EXPIRATION DATE
Styling Technology Corporation (the "Company") has changed the Expiration
Date for the Exchange Offer to 5:00 p.m., E.D.T., on Monday November 2, 1998.
The original Expiration Date was November 6, 1998. All references to the
Expiration Date in the Prospectus shall refer to the November 2 date.
ACQUISITION OF A CONTROLLING INTEREST IN FT. PITT ACQUISITION, INC.
On August 4, 1998, Styling Technology Corporation acquired a majority of
the issued and outstanding common stock of Ft. Pitt Acquisition, Inc., pursuant
to a Stock Purchase Agreement (the "Purchase Agreement") among the Company and
Kevin T. Weir, Carol M. Weir, and Dennis M. Katawczik (such individuals
collectively referred to as "Shareholders"). Ft. Pitt, through its 90% owned
subsidiary, holds exclusive license rights for the sale of hair color and hair
care products marketed under the Framesi(R) brand name in the majority of the
Western Hemisphere, including the United States and most of Latin America. Ft.
Pitt also markets a complementary line of professional shampoos, conditioners,
and styling products specifically formulated for color-treated hair under the
Biogenol(R) brand name. The Company paid approximately $30 million for the Ft.
Pitt stock in the form of cash and seller carryback financing. The acquisition
will be accounted for under the purchase method of accounting.
EXPERTS
The Ft. Pitt Acquisition, Inc. and subsidiary consolidated financial
statements as of and for the year ended December 31, 1997, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and elsewhere in the registration
statement (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to an agreement for the sale of a majority of Ft.
Pitt Acquisition, Inc.'s outstanding common stock), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
FINANCIAL STATEMENTS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Independent Auditors' Report
Consolidated Balance Sheets, as of June 30, 1998 (Unaudited) and
December 31, 1997
Consolidated Statements of Operations for the Six Months Ended June
30, 1998 (Unaudited) and 1997 (Unaudited) and the Year Ended
December 31, 1997
Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 1998 (Unaudited) and the Year Ended December 31, 1997
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1998 (Unaudited) and 1997 (Unaudited) and the Year Ended
December 31, 1997
Notes to Consolidated Financial Statements
2
<PAGE> 2
(b) PRO FORMA FINANCIAL INFORMATION.
Introduction
Unaudited Condensed Consolidated Pro Forma Balance Sheet as of June
30, 1998
Unaudited Condensed Consolidated Pro Forma Statement of Operations
For the Year Ended December 31, 1997
Unaudited Condensed Consolidated Pro Forma Statement of Operations
for the Six Months Ended June 30, 1998
3
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Ft. Pitt Acquisition, Inc.:
We have audited the accompanying consolidated balance sheet of Ft. Pitt
Acquisition, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Ft. Pitt Acquisition, Inc. and
subsidiary at December 31, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the consolidated financial statements, on August 3,
1998, the Company entered into a Stock Purchase Agreement with its majority
shareholders and Styling Technology Corporation, which provides for the purchase
of a majority of the issued and outstanding common stock of the Company by
Styling Technology Corporation.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 2, 1998 (August 3, 1998
as to Note 10)
<PAGE> 4
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance for
doubtful accounts of $58,389 (unaudited)
and $156,660 $ 5,218,020 $ 4,926,093
Inventories 2,237,324 2,087,677
Prepaid and other current assets 179,197 319,586
Deferred tax asset 250,000 250,000
------------ -----------
Total current assets 7,884,541 7,583,356
------------ -----------
PROPERTY AND EQUIPMENT:
Machinery and equipment 752,891 750,887
Office equipment 627,392 534,428
Automobiles and trucks 6,849 6,849
Leasehold improvements 66,752 66,752
------------ -----------
1,453,884 1,358,916
Less accumulated depreciation 1,294,753 1,225,652
------------ -----------
159,131 133,264
INTANGIBLES:
License agreement 1,524,942 1,652,142
Goodwill 489,235 427,253
----------- -----------
TOTAL ASSETS $ 10,057,849 $ 9,796,015
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $ 336,294 $ 429,472
Current maturities of long-term debt 881,294 848,201
Accounts payable 363,935 377,285
Accounts payable - related party 609,037 294,095
Accrued royalty - related party 372,348 284,183
Accrued bonuses 222,343 439,931
Accrued income taxes 13,992 329,934
Other accrued liabilities 903,126 400,570
------------ -----------
Total current liabilities 3,702,369 3,403,671
LONG-TERM AND SUBORDINATED DEBT 4,313,452 4,227,013
DEFERRED TAX LIABILITY 552,000 552,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock; no par value; 315,586 shares authorized;
254,639 shares outstanding, including
those held in treasury 1,077,114 1,077,114
Warrant 52,179 52,179
Retained earnings 660,735 784,038
Treasury stock - at cost (300,000) (300,000)
------------ -----------
1,490,028 1,613,331
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,057,849 $ 9,796,015
============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------- YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
NET SALES $ 14,166,121 $12,757,683 $26,097,739
COST OF SALES 5,242,145 4,653,792 9,757,863
------------ ----------- -----------
GROSS PROFIT 8,923,976 8,103,891 16,339,876
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,262,084 6,700,382 13,697,245
PROVISION FOR DOUBTFUL ACCOUNTS 26,033 24,835 140,003
ROYALTY EXPENSE - RELATED PARTY 372,348 323,055 674,709
DEPRECIATION 69,101 83,365 170,342
AMORTIZATION OF INTANGIBLE ASSETS 133,200 133,268 266,400
------------ ----------- -----------
INCOME FROM OPERATIONS BEFORE
INTEREST EXPENSE AND INCOME TAXES 61,210 838,986 1,391,177
INTEREST EXPENSE 267,513 259,494 539,327
------------ ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (206,303) 579,492 851,850
INCOME TAX (BENEFIT) PROVISION (83,000) 235,000 346,000
------------ ----------- -----------
NET (LOSS) INCOME $ (123,303) $ 344,492 $ 505,850
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER
OF RETAINED
COMMON COMMON TREASURY EARNINGS
SHARES STOCK STOCK WARRANT (DEFICIT) TOTAL
------- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 244,263 $1,076,078 $(300,000) $ 52,179 $ 278,188 $ 1,106,445
Common stock issued 10,376 1,036 -- -- -- 1,036
Net income -- -- -- -- 505,850 505,850
------- ---------- --------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1997 254,639 1,077,114 (300,000) 52,179 784,038 1,613,331
Net loss (unaudited) -- -- -- -- (123,303) (123,303)
------- ---------- --------- ----------- --------- -----------
BALANCE, JUNE 30, 1998 (Unaudited) 254,639 $1,077,114 $(300,000) $ 52,179 $ 660,735 $ 1,490,028
======= ========== ========= =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------- YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(123,303) $ 344,492 $ 505,850
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation and amortization 202,301 216,633 436,742
Changes in assets and liabilities:
Increase in accounts receivable (291,927) (478,555) (716,290)
Increase in inventories (149,647) (869,422) (206,204)
Decrease (increase) in prepaid and other current assets 140,389 48,633 (3,134)
(Decrease) increase in accounts payable (13,350) 355,273 (6,195)
Increase in accounts payable - related party 314,942 330,150 51,095
Increase in accrued royalty - related party 88,165 78,933 40,061
(Decrease) increase in accrued liabilities (30,974) (227,544) 70,506
--------- --------- ---------
Net cash provided by (used in) operating activities 136,596 (201,407) 172,431
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (94,968) (41,334) (83,031)
Additions to intangibles (67,982) (32,873) (80,140)
--------- --------- ---------
Cash used in investing activities (162,950) (74,207) (163,171)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit facility 535,565 515,644 368,543
(Decrease) increase in bank overdrafts (93,178) 146,046 407,922
Principal payments on long-term debt (416,033) (386,076) (786,761)
Proceeds from issuance of common stock -- -- 1,036
--------- --------- ---------
Net cash provided by (used in) financing activities 26,354 275,614 (9,260)
--------- --------- ---------
NET CHANGE IN CASH -- -- --
--------- --------- ---------
CASH, BEGINNING AND END OF PERIOD $ -- $ -- $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 544,937
=========
Cash paid for income taxes $ 196,843
=========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation - The consolidated financial statements
include the accounts of Ft. Pitt Acquisition, Inc. and its 90% owned
subsidiary, Ft. Pitt - Framesi, Ltd. (Framesi of USA, Inc.)
(collectively, the "Company"). All intercompany balances and
transactions have been eliminated.
b. Nature of Operations - The Company's primary business is the
distribution, in the Western Hemisphere, and limited production of
an Italian line of hair coloring and hair care products under the
"Framesi" brand name and the manufacture and distribution of hair
care products under the "Roffler" and "Color Plus" Company-owned
brand names. The Company performs periodic credit evaluations of its
distributors and maintains the right to rescind the distributor
agreements at any time.
c. Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
d. Unaudited Interim Financial Information - The interim condensed
consolidated financial statements as of June 30, 1998 and for the
six months ended June 30, 1998 and June 30, 1997, are unaudited. The
interim condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments that,
in the opinion of management, are necessary to present fairly the
financial position and results of operations of the Company for the
periods indicated. Results of operations for interim periods may not
be indicative of the operating results that may be expected for the
full year. The interim condensed consolidated financial statements
do not include all footnotes which would be required for complete
financial statements prepared in accordance with generally accepted
accounting principles.
e. Revenue Recognition - Sales are recognized when product is shipped.
f. Inventories - Inventories are stated at the lower of cost or market
using the first-in, first-out inventory method.
g. Property and Equipment - Property and equipment are recorded at
cost. Depreciation is provided for on the straight-line method over
the estimated useful lives for financial reporting and on
accelerated methods for tax reporting.
h. Intangibles - Intangible assets are amortized over their estimated
useful lives using the straight-line method.
<PAGE> 9
i. Income Taxes - The Company applies the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under the provisions of SFAS No. 109, deferred tax
assets and liabilities are provided for the effects of net operating
loss and inventory contribution carryforwards, and for temporary
differences between financial and tax reporting which are primarily
associated with amortization of intangibles, an allowance for
doubtful accounts and the difference between the book and tax basis
for property and equipment and inventories. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be
recovered or settled.
j. Bank Overdrafts - The Company utilizes a cash management system
under which a book balance cash overdraft exists for the Company's
primary disbursement accounts. This overdraft represents uncleared
checks in excess of cash balances in bank accounts. Drawdowns of the
Company's revolving credit facility are made as checks are presented
for clearing.
k. Financial Instruments - The Company's financial instruments include
long-term debt obligations. The carrying values of all instruments
at December 31, 1997 approximated their fair value. The fair value
of the instruments were based on the rate available to the Company
for instruments of the same maturities.
2. INTANGIBLES
The license agreement sets forth the rights and obligations governing the
exclusive manufacture, promotion and sale of the "Framesi" line of
products and the use of the "Framesi" name in most of the Western
Hemisphere. This agreement is with the minority stockholder of the
subsidiary. The license will expire in 2036 and for financial statement
purposes, six and one-half years remain on the life of the license at
December 31, 1997. Accumulated amortization as of December 31, 1997 was
$2,672,858.
Goodwill represents the excess purchase price over the estimated fair
market value of net assets acquired from the prior owner of the business
(the "Seller"). This amount is being amortized on a straight-line basis
over 40 years and is net of accumulated amortization of $61,373 as of
December 31, 1997. The Company's agreement with the Seller also provides
for contingent payments to the Seller based upon a defined formula, up to
a maximum of $500,000 over the agreement term, which expires in June 2000.
Payments made are considered an increase in the purchase price paid for
the business. During the year ended December 31, 1997, the Company made
payments under the terms of the agreement of $80,140, which were charged
to goodwill and are being amortized over the remaining life of goodwill.
<PAGE> 10
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
Raw materials and work-in-progress $ 383,863 $ 318,050
Packaging 435,551 480,025
Finished goods 1,430,087 1,329,602
----------- -----------
2,249,501 2,127,677
Reserve for obsolete inventory (12,177) (40,000)
----------- -----------
$ 2,237,324 $ 2,087,677
=========== ===========
</TABLE>
4. BORROWING ARRANGEMENTS
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Bank debt:
Revolving credit facility $2,872,272
Term loan 452,978
Promissory notes:
Promissory note (A) 1,261,378
Promissory note (B) 488,586
----------
Total debt 5,075,214
Less current maturities 848,201
----------
Long-term debt $4,227,013
==========
</TABLE>
The Company entered into a credit agreement in 1995 which included a
$1,000,000 term loan and a revolving credit facility. Under the terms of
the credit agreement, as amended in 1997, the revolving credit facility
expires July 31, 2001 and is limited to the lesser of $5,000,000 or an
amount equal to the sum of 80% of the eligible accounts receivable plus
the lesser of $1,700,000 or 60% of eligible finished goods inventories.
The available and unused portion of the credit facilities was $1,160,122
at December 31, 1997. Interest accrues on the outstanding balance at the
bank's prime rate plus 1%, and a fee of .25% is charged by the bank on the
unused portion of the revolving credit facility. The Company will incur a
prepayment penalty of 1% of the sum of $5,000,000 plus the then
outstanding principal balance of the term loan if the revolving credit
facility is terminated before July 31, 2001. The prime rate was 8.5% at
December 31, 1997.
<PAGE> 11
The term loan is a three year note payable in monthly installments of
$16,667, including interest at the bank's prime rate plus 1.5% through
April 2000.
The bank has a security interest in the accounts receivable, inventories,
machinery and equipment and related proceeds and all other tangible and
intangible assets of the Company. In addition, these obligations are
secured by the outstanding common stock of Framesi and personal guarantees
of certain officers of the Company. The agreements contain various
covenants, including maintenance of certain levels of net income, leverage
ratios, debt service ratios and restrictions on rentals, additional debt,
dividends and other distributions to stockholders.
The Company failed to meet the limit on rentals for the year ended
December 31, 1997 required under the credit agreement. The Company's bank
waived maintenance of this covenant requirement for the year ended
December 31, 1997 and modified the requirement for future periods.
Promissory note (A) is a ten-year note payable in monthly installments
ranging between $27,750 to $47,695, including interest at 10% through June
15, 2000. Promissory note (B) is a ten-year note payable in monthly
installments of $18,474, including interest at 10% through June 1, 2000.
Promissory notes (A) and (B) are subordinate to the outstanding debt with
the bank. Covenants on the promissory notes require that the Company
maintain compliance with the bank debt agreements. As a result of receipt
of the bank waiver, the Company remains in compliance with the promissory
notes covenants.
Scheduled maturities for principal payments on long-term and subordinated
debt for the years ending December 31, are:
<TABLE>
<S> <C>
1998 $ 848,201
1999 969,056
2000 385,685
2001 2,872,272
----------
$5,075,214
==========
</TABLE>
5. OPERATING LEASES
The Company has noncancelable operating leases for its operating
facilities and Company vehicles. Rental expense for such leases was
$298,940 for the year ended December 31, 1997. The leases do not provide
for contingent rentals, renewal or purchase options or escalation clauses,
and contain no restrictive covenants. Future minimum lease commitments
under operating leases are as follows:
<TABLE>
<S> <C>
1997 $ 244,920
1998 143,900
1999 126,055
2000 114,996
2001 114,996
Thereafter 114,996
------------
Total minimum lease commitment $ 859,863
============
</TABLE>
<PAGE> 12
6. STOCKHOLDERS' EQUITY
Stock Option Plan - The Company had a stock option plan that granted
directors, officers and key employees options to purchase shares of common
stock. No options have been granted since 1992. The options expired not
more than ten years after the date of grant and were exercisable only
while the holder was in the employment of the Company. During the year
ended December 31, 1997, 10,376 options were exercised at $.10 per option.
At December 31, 1997, there were no options outstanding and the plan was
canceled.
Warrant - The warrant entitles the holder to purchase 5% of the Company's
outstanding stock for $44,000 and is exercisable at any time before July
31, 2000. The warrant has certain antidilution rights, but no voting
rights.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
<S> <C>
Current:
Federal $336,000
State 10,000
--------
Total current expense $346,000
========
</TABLE>
Deferred income taxes in the accompanying consolidated balance sheets
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Deferred Tax Assets:
Allowance for doubtful accounts $ 60,000
Reserve for obsolete inventory 15,000
Section 263A costs 116,000
Inventory contribution carryforwards 120,000
Depreciation 14,000
---------
$ 325,000
=========
Deferred Tax Liability:
Intangibles $(627,000)
=========
Composition of amounts in the consolidated balance sheet:
Current deferred tax asset $ 250,000
=========
Non-current deferred tax liability $(627,000)
Non-current deferred tax assets 75,000
---------
Net non-current deferred tax liability $(552,000)
=========
</TABLE>
<PAGE> 13
The Company's effective tax rate differed from the statutory federal tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
<S> <C>
Percent of pre-tax earnings 34.0 %
Non-deductible expenses 5.4
State income taxes, net of federal benefit 1.2
----
Effective tax rate 40.6 %
====
</TABLE>
8. RETIREMENT PLAN
The Company has a 401(k) plan in which all full-time, nonunion employees
are eligible to participate. The plan provides for the Company to match
employee contributions at its discretion and to make other discretionary
contributions. Total related expense was $20,439 for the year ended
December 31, 1997.
The Company participates in a multiemployer pension plan on behalf of its
union employees. The Company contributes $.15 per hour to the plan for all
employees who have completed six months of service. Total related expense
incurred for the year ended December 31, 1997 was $29,260.
9. RELATED PARTIES
The Company has entered into consulting and employment agreements with
certain members of the Board of Directors. Payments totaling $200,000 were
made during the year ended December 31, 1997, under these agreements. One
agreement includes a noncompetition agreement for eight years starting on
January 1, 2000 which includes payments of $200,000 a year over the term.
Payments, if any, under the noncompetition agreement are contingent upon
the completion of employment through December 31, 1999.
Framesi's minority stockholder is the supplier of products for the
Company's primary business of distribution and limited production of an
Italian line of hair coloring and hair care products, cosmetics and
related products under the "Framesi" brand name. Total purchases from the
minority stockholder were $2,562,217 (unaudited) and $2,670,577
(unaudited) for the six months ended June 30, 1998 and 1997, respectively,
and $6,063,163 for the year ended December 31, 1997. In addition, a
royalty at various percentages on certain net sales of products acquired
from the minority stockholder is payable semiannually to the minority
stockholder.
10. SUBSEQUENT EVENTS
On August 3, 1998, the Company entered into a Stock Purchase Agreement
(the "Agreement") with its majority shareholders and Styling Technology
Corporation, which provides for the purchase of a majority of the issued
and outstanding common stock of the Company by Styling Technology
Corporation for approximately $30,000,000 in cash and a seller note.
As a result of the signing of the Agreement, the warrant described in Note
6 was exercised and the outstanding balance under the revolving credit
facility became due and payable.
<PAGE> 14
STYLING TECHNOLOGY CORPORATION AND ACQUIRED BUSINESS
INTRODUCTION TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS
The following unaudited pro forma financial statements include the unaudited
condensed consolidated pro forma balance sheet of the Styling Technology
Corporation (the "Company" or "STC"), as of June 30, 1998, and unaudited
condensed consolidated pro forma statements of operations for the six months
ended June 30, 1998 and the year ended December 31, 1997.
On August 4, 1998, STC acquired a controlling interest in Fort Pitt Acquisition,
Inc. and its 90% owned subsidiary, Ft. Pitt - Framesi, Ltd., (collectively with
its predecessors "Framesi USA"). STC paid a purchase price of approximately $32
million for the Fort Pitt Acquisition, Inc. stock in the form of $25 million
cash from the Company's acquisition line of credit, $5 million in seller
carryback financing and approximately $2 million in cash. The Framesi USA
acquisition and the related financing are herein referred to as the
Transactions.
The unaudited condensed consolidated pro forma balance sheet as of June 30,
1998, gives effect to the Transactions as if they had occurred on June 30, 1998.
The unaudited condensed consolidated pro forma statement of operations for the
six months ended June 30, 1998 and the unaudited condensed consolidated pro
forma statement of operations for the year ended December 31, 1997 assume the
Transactions occurred on January 1, 1997.
The unaudited condensed consolidated pro forma balance sheet as of June 30, 1998
of the Company has been derived from: (i) the unaudited historical financial
statements of the Company as of June 30, 1998, and the unaudited historical
financial statements of Ft. Pitt Acquisition, Inc. as of June 30, 1998. The
unaudited condensed consolidated pro forma statement of operations for the six
months ended June 30, 1998 of the Company has been derived from the unaudited
historical financial statements of the Company for the six months ended June 30,
1998, the unaudited historical financial statements of Pro Finish USA, Ltd. for
the period from January 1, 1998 to April 30, 1998, the unaudited historical
financial statements of European Touch Co., Incorporated, Beauty Products, Inc.,
and Cosmetics International (collectively, "European Touch") and European Touch,
Ltd. II, for the period from January 1, 1998 to May 31, 1998, and the unaudited
historical financial statements of Ft. Pitt Acquisition, Inc. and subsidiary for
the period from January 1, 1998 to June 30, 1998. The unaudited condensed
consolidated pro forma statement of operations for the year ended December 31,
1997 has been derived from: (i) the audited historical financial statements of
the Company from January 1, 1997 to December 31, 1997; (ii) the unaudited
historical financial statements of U.K. ABBA Products, Inc. (ABBA) for the
period from January 1, 1997 to June 25, 1997; (iii) the audited historical
financial statements of Inverness Corporation and Inverness (UK) limited
(collectively, "Inverness") for the period from January 1, 1997 to November 30,
1997, (iv) the audited historical financial statements of Pro Finish USA, Ltd.,
European Touch, European Touch, Ltd. II and Framesi USA for the year ended
December 31, 1997. The unaudited condensed consolidated pro forma statements of
operations referred to above 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 unaudited condensed
consolidated pro forma financial statements contain certain adjustments that are
directly attributable to the Transactions.
The unaudited condensed consolidated pro forma statements of operations above do
not include any adjustments related to potential selling, general and
administrative expense synergies as a result of the acquisitions of Pro Finish,
European Touch, European Touch, Ltd. II, and Framesi USA.
<PAGE> 15
Unaudited Condensed Consolidated Pro Forma Balance Sheet
As of June 30, 1998
<TABLE>
<CAPTION>
STC Framesi USA Pro Forma Pro Forma
June 30, 1998 June 30, 1998 Adjustments June 30, 1998
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 11,657 $ (336) $ (2,363)(3) $ 8,958
Accounts receivable, net 21,051 5,218 -- 26,269
Inventory 16,267 2,237 -- 18,504
Other 1,416 429 -- 1,845
--------- ------- -------- ---------
Total current assets 50,391 7,548 (2,363) 55,576
PP&E, net 4,003 159 -- 4,162
Goodwill, intangibles & other 89,200 2,014 31,873 (1) 123,087
--------- ------- -------- ---------
Total assets $ 143,594 $ 9,721 $ 29,510 $ 182,825
--------- ------- -------- ---------
LIABILITIES:
Accounts payable $ 6,677 $ 973 $ -- $ 7,650
Accrued liabilities 3,063 1,512 1,000 (1) 5,575
Current portion of long-term debt 2,586 881 (881)(2) 2,586
Other 78 -- -- 78
--------- ------- -------- ---------
Total current liabilities 12,404 3,366 119 15,889
Other non-current liabilities 512 552 -- 1,064
Long-term debt 100,000 4,313 30,881 (2)(3) 135,194
--------- ------- -------- ---------
Total liabilities 112,916 8,231 31,000 152,147
STOCKHOLDERS' EQUITY:
Common stock 1 1,077 (1,077)(1) 1
Additional paid-in capital 28,072 52 (52) 28,072
Retained earnings 4,405 661 (661)(1) 4,405
Investment in subsidiaries -- -- -- --
Treasury stock (1,800) (300) 300 (1,800)
--------- ------- -------- ---------
Total stockholders' equity 30,678 1,490 (1,490) 30,678
--------- ------- -------- ---------
Total liabilities & stockholders' equity $ 143,594 $ 9,721 $ 29,510 $ 182,825
--------- ------- -------- ---------
</TABLE>
(1) To record the purchase price of Framesi USA and the allocation of
this purchase price to the net assets of the business acquired.
(2) To reflect the repayment and subsequent refinancing of outstanding
notes payable in connection with the closing of the Framesi USA
acquisition.
(3) To reflect the payment of consideration for the Framesi USA
acquisition, including $25 million under a line of credit and $5
million of seller-carryback financing.
<PAGE> 16
Unaudited Condensed Consolidated Pro Forma Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
CLEAN+EASY/ EUROPEAN EUROPEAN
STC ABBA ONE TOUCH PRO FINISH TOUCH II TOUCH
-------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 38,108 $5,742 $18,902 $ 7,569 $8,628 $ 5,986
Cost of sales 16,756 2,780 11,212 4,189 3,713 1,828
-------- ------ ------- ------- ------ -------
Profit margin 21,352 2,962 7,690 3,380 4,915 4,158
Selling, general, and administrative
expenses 12,201 2,358 7,312 2,812 2,256 2,911
-------- ------ ------- ------- ------ -------
Income from operations 9,151 604 378 568 2,659 1,247
Interest (expense) income (1,847) 50 129 (124) 106 (10)
-------- ------ ------- ------- ------ -------
Income before income taxes and
extraordinary item 7,304 654 507 444 2,765 1,237
Provision for income taxes 3,097 185 -- 111 -- 230
-------- ------ ------- ------- ------ -------
Income before extraordinary item $ 4,207 $ 469 $ 507 $ 333 $2,765 $ 1,007
======== ====== ======= ======= ====== =======
Basic income before extraordinary
item per share $ 1.07
Diluted income before extraordinary
item per share $ 1.02
<CAPTION>
PRO FORMA FRAMESI PRO FORMA
ADJUSTMENTS PRO FORMA USA ADJUSTMENTS PRO FORMA
----------- --------- --- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 84,935 $ 26,098 $ -- $ 111,033
Cost of sales (3,400)(1) 37,078 9,758 -- 46,836
------- -------- -------- ------- ---------
Profit margin 3,400 47,857 16,340 -- 64,197
Selling, general, and administrative
expenses (433)(2) 29,417 14,949 (1,213)(5) 43,153
------- -------- -------- ------- ---------
Income from operations 3,833 18,440 1,391 1,213 21,044
Interest (expense) income (9,539)(3) (11,235) (539) (2,086)(6) (13,860)
------- -------- -------- ------- ---------
Income before income taxes and
extraordinary item (5,706) 7,205 852 (873) 7,184
Provision for income taxes (409)(4) 3,214 346 (55)(7) 3,505
------- -------- -------- ------- ---------
Income before extraordinary item $(5,297) $ 3,991 $ 506 $ (818) $ 3,679
======= ======== ======== ======= =========
Basic income before extraordinary
item per share $ 0.93
Diluted income before extraordinary
item per share $ 0.89
</TABLE>
(1) Reflects the adjustment to cost of sales related to the reduction
of third-party manufacturing costs negotiated in connection with the
acquisitions of ABBA and the Clean + Easy/One Touch product lines
and realized following the closing of such acquisition.
(2) Reflects the elimination of salaries and benefits of specific
individuals not continuing with the combined companies and the
amortization of additional goodwill over 25 years.
(3) Reflects interest expense @ 10 7/8% on $100 million and amortization
of $3.5 million in fees associated with the high yield offering.
Assumes that all items of non-operating nature would be eliminated
in all acquisitions
(4) Reflects the provision for income taxes based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the Gena, JDS, and ABBA acquisitions which is not
deductible for income tax purposes.
(5) Reflects the elimination of salaries and benefits of specific
individuals not continuing with the combined companies and the
amortization of goodwill and intangibles related to the Framesi USA
acquisition.
(6) Reflects interest expense @ 7.75% on $25 million, 6% on $5 million
seller-carryback financing, and 7.75% on $5 million to repay
existing debt associated with the Framesi USA acquisition.
(7) Reflects the provision for income taxes based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the Framesi USA acquisition which is not
deductible for income tax purposes.
<PAGE> 17
Unaudited Condensed Consolidated Pro Forma Statement of Operations
For the Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
EUROPEAN EUROPEAN PRO FORMA
STC (a) PRO FINISH TOUCH II TOUCH TOTAL ADJ.
-------- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 35,299 $2,723 $4,152 $2,420 $ 44,594 $ --
Cost of sales 15,492 1,388 1,615 776 19,271 --
-------- ------ ------ ------ -------- -------
Profit margin 19,807 1,335 2,537 1,644 25,323 --
Selling, general, and administrative (617)(1)
expenses 11,909 1,023 765 991 14,688 408 (2)
-------- ------ ------ ------ -------- -------
Income from operations 7,898 312 1,772 653 10,635 209
Interest (expense) income (2,628) -- 61 -- (2,567) (3,051)(3)
-------- ------ ------ ------ -------- -------
Income before income taxes
and extraordinary item 5,270 312 1,833 653 8,068 (2,842)
Provision for income taxes 2,266 86 -- -- 2,352 (128)(4)
-------- ------ ------ ------ -------- -------
Income before extraordinary item $ 3,004 $ 226 $1,833 $ 653 $ 5,716 $(2,714)
======== ====== ====== ====== ======== =======
Basic income before
extraordinary item per share $ 0.75
Diluted income before
extraordinary item per share $ 0.69
<CAPTION>
PRO FORMA
PRO FORMA FRAMESI ADJ. PRO FORMA
--------- ------- ---- ---------
<S> <C> <C> <C> <C>
Net sales $ 44,594 $ 14,166 $ -- $ 58,760
Cost of sales 19,271 5,242 -- 24,513
-------- -------- ------- --------
Profit margin 25,323 8,924 -- 34,247
Selling, general, and administrative
expenses 14,479 8,863 (606)(5) 22,736
-------- -------- ------- --------
Income from operations 10,844 61 606 11,511
Interest (expense) income (5,618) (268) (1,044)(6) (6,930)
-------- -------- ------- --------
Income before income taxes
and extraordinary item 5,226 (207) (438) 4,581
Provision for income taxes 2,224 (83) (13)(7) 2,128
-------- -------- ------- --------
Income before extraordinary item $ 3,002 $ (124) $ (425) $ 2,453
======== ======== ======= ========
Basic income before
extraordinary item per share $ 0.61
Diluted income before
extraordinary item per share $ 0.56
</TABLE>
(1) Reflects the elimination of salaries and benefits of specific
individuals not continuing with the combined companies.
(2) Reflects the amortization of additional goodwill over 25 years.
(3) Reflects interest expense @ 10 7/8% on $100 million and amortization
of $3.5 million in fees associated with the high yield offering.
Assumes that all items of non-operating nature would be eliminated
in all acquisitions
(4) Reflects the provision for income taxes based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the Gena, JDS, and ABBA acquisitions which is not
deductible for income tax purposes.
(5) Reflects the elimination of salaries and benefits of specific
individuals not continuing with the combined companies and the
amortization of goodwill and intangibles related to the Framesi USA
acquisition.
(6) Reflects interest expense @ 7.75% on $25 million, 6% on $5 million
seller-carryback financing, and 7.75% on $5 million to repay
existing debt associated with the Framesi USA acquisition.
(7) Reflects the provision for income taxes based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the Frames USA acquisition which is not
deductible for income tax purposes.
