SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 0-21703
STYLING TECHNOLOGY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2665378
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2390 East Camelback Road, Suite 435, Phoenix, Arizona 85016
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(602) 955-3353
---------------------------------------------------
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
None
Title of each Class
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 27, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the average sales
price of such stock as of such date on the Nasdaq National Market, was
$32,406,696. A total of approximately 1,140,000 shares of Common Stock held by
four institutional investors have been included. Shares of Common Stock held by
each officer and director have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily
conclusive.
As of March 27, 1997, there were 3,948,703 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the
registrant's 1997 Annual Meeting of Stockholders are incorporated by reference
in Part III hereof.
<PAGE>
TABLE OF CONTENTS
PART I..................................................................... 3
ITEM 1. BUSINESS..................................................... 3
ITEM 2. PROPERTIES................................................... 3
ITEM 3. LEGAL PROCEEDINGS............................................ 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 3
PART II.................................................................... 3
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 3
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................... 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 3
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 3
PART III................................................................... 3
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 3
ITEM 11. EXECUTIVE COMPENSATION...................................... 3
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 3
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 3
PART IV.................................................................... 3
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 3
SIGNATURES................................................................. 5
FINANCIAL STATEMENTS.......................................................F-1
2
<PAGE>
PART I
ITEMS 1 THROUGH 13.
Incorporated by reference to the Registrant's Annual Report on Form 10-K as
filed on April 10, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
- ------------ ----------------------
1 Form of Underwriting Agreement(1)
3.1 Certificate of Incorporation of the Registrant(1)
3.2 Certificate of Amendment of Certificate of Incorporation(1)
3.3 Bylaws of the Registrant(1)
4.1 Specimen of Stock Certificate(1)
4.2 Specimen of Redeemable Common Stock Warrant(1)
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.(1)
10.2 Stock Purchase Agreement by and among Registrant and Jack Sperling and
Gary Sperling (Shareholders) with respect to JDS Manufacturing Co.,Inc.(1)
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.(1)
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)(1)
10.5 Employment Agreement between Registrant and Sam L. Leopold(1) 10.6
Employment Agreement between Registrant and Thomas M. Clifford(1) 10.7
Employment Agreement between Registrant and David E. Ziegler(1) 10.8 Form
of Employment Agreement between Registrant and Richard E. Norvell(1)
10.9 Form of Employment Agreement between Registrant and Gerald L. Kotch( 1)
10.10 Employment Agreement between Registrant and Donald L. Black(1) 10.11 1996
Stock Option Plan(1) 10.12 Stock Repurchase Agreement, as amended, between
Registrant and Kenneth S. Bernstein(1)
10.13 Bridge Note(1)
10.15 Exclusive Manufacturing Agreement between the Registrant and Amole,
Incorporated (2)
11 Statement regarding computation of per share earnings (2)
21 Subsidiaries of Registrant (2)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (2)
- ----------
(1) Incorporated by reference to the Registration Statement on Form S-1
(Registration No. 333-12469) filed September 20, 1996 and declared
effective November 12, 1996.
(2) Incorporated by reference to the Company's Form 10-K filed April 10, 1997.
3
<PAGE>
(b) Financial Statements filed as part of this report:
Consolidated Financial Statements and Supplemental Schedules as
listed in the Index to Consolidated Financial Statements on page F-1
of this report.
(c) Reports on Form 8-K:
None.
(d) Financial Statement Schedules
None.
4
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STYLING TECHNOLOGY CORPORATION
By: /s/ Sam L. Leopold
---------------------------------------------
Sam L. Leopold, Chairman of the Board and
Chief Executive Officer
March 19, 1998
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
By /s/ Sam L. Leopold Chairman of the Board of Directors, March 19, 1998
------------------------- President and Chief Executive Officer
Sam L. Leopold (Principal Executive Officer)
By /s/ Richard R. Ross Vice President, Chief Financial
------------------------- Officer, Treasurer, and Secretary March 19, 1998
Richard R. Ross (Principal Financial Officer)
By Director
-------------------------
James A. Brooks
By /s/ Peter W. Burg Director March 19, 1998
-------------------------
Peter W. Burg
By Director
-------------------------
Michael H. Feinstein
By /s/ Sylvan Schefler Director March 19, 1998
-------------------------
Sylvan Schefler
</TABLE>
5
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
------
STYLING TECHNOLOGY CORPORATION
Report of Independent Public Accountants ................... F-3
Consolidated Balance Sheets ................................ F-4
Consolidated Statement of Operations ....................... F-5
Consolidated Statement of Stockholders' Equity ............. F-6
Consolidated Statement of Cash Flows ....................... F-7
Notes to Financial Statements .............................. F-8
GENA LABORATORIES, INC.
Report of Independent Public Accountants ................... F-20
Balance Sheets ............................................. F-21
Statements of Operations ................................... F-22
Statements of Stockholders' Equity ......................... F-23
Statements of Cash Flows ................................... F-24
Notes to Financial Statements .............................. F-25
BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
Report of Independent Public Accountants ................... F-32
Balance Sheets ............................................. F-33
Statements of Operations ................................... F-34
Statements of Changes in Owners' Investment ................ F-35
Statements of Cash Flows ................................... F-36
Notes to Financial Statements .............................. F-37
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants ................... F-41
Balance Sheets ............................................. F-42
Statements of Operations ................................... F-43
Statements of Stockholders' Equity ......................... F-44
Statements of Cash Flows ................................... F-45
Notes to Financial Statements .............................. F-46
KOTCHAMMER INVESTMENTS, INC.
Report of Independent Public Accountants ................... F-50
Balance Sheet .............................................. F-51
Statements of Operations ................................... F-52
Statements of Stockholders' Deficit ........................ F-53
Statements of Cash Flows ................................... F-54
Notes to Financial Statements .............................. F-55
F-1
<PAGE>
STYLING TECHNOLOGY CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 and 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Styling Technology Corporation:
We have audited the accompanying consolidated balance sheets of STYLING
TECHNOLOGY CORPORATION (a Delaware corporation) as of December 31, 1995 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for the period ended December 31, 1996, as discussed in Note 1. 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 statement referred to above present fairly, in all
material respects, the financial position of Styling Technology Corporation as
of December 31, 1995 and 1996 and the results of their operations and cash flows
for the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Phoenix, Arizona,
March 21, 1997.
F-3
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1995 1996
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 200 $ 4,491,302
Accounts receivable, net of allowance for doubtful
accounts of $427,426 at December 31, 1996 -- 1,640,049
Inventory -- 2,634,997
Prepaid expenses and other current assets 66,202 292,177
------- ------------
Total current assets 66,402 9,058,525
------- ------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $11,011 at December 31, 1996 -- 1,125,139
GOODWILL AND OTHER -- 22,050,720
------- ------------
Total assets $66,402 $ 32,234,384
======= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ -- $ 2,999,909
Accrued liabilities 66,202 1,518,363
Current portion of long-term debt -- 82,994
------- ------------
Total current liabilities 66,202 4,601,266
------- ------------
LONG-TERM DEBT, less current portion -- 2,316,004
------- ------------
COMMITMENTS AND CONTINGENCIES
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, 1,615,702 shares issued
and outstanding at December 31, 1995; 4,756,554
shares issued and 3,948,703 shares outstanding
at December 31, 1996 162 476
Additional paid-in capital 38 27,455,571
Retained deficit -- (338,933)
Treasury stock -- (1,800,000)
------- ------------
Total stockholders' equity 200 25,317,114
------- ------------
Total liabilities and stockholders' equity $66,402 $ 32,234,384
======= ============
The accompanying notes are an integral part of these
consolidated balance sheets.
F-4
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period
November 27,
1996
(commencement
of operations)
to
December 31,
1996
--------------
NET SALES $ 1,083,373
COST OF SALES 571,231
-----------
Gross profit 512,142
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 736,567
-----------
Loss from operations (224,425)
OTHER INCOME 22,619
INTEREST EXPENSE (21,409)
-----------
Loss before benefit from income taxes (223,215)
BENEFIT FROM INCOME TAXES (72,250)
-----------
Net loss $ (150,965)
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,769,854
===========
NET LOSS PER SHARE $ (.04)
===========
The accompanying notes are an integral part of this
consolidated financial statement.
F-5
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------- Additional Total
Shares Common Paid-in Retained Stockholders'
Issued Stock Capital Treasury Stock Deficit Equity
---------- ------ ----------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 (inception) $ -- $ -- $ -- $ -- $ --
Issuance of common stock 1,615,702 162 38 -- -- 200
---------- ---- ----------- ----------- --------- ------------
BALANCE, December 31, 1995 1,615,702 162 38 -- -- 200
Issuance of common stock and warrants
in Bridge financing 20,000 1 179,310 -- (187,968) (8,657)
Issuance of common stock and warrants
in initial public offering, net of
offering costs of $1,350,822 3,115,852 312 27,226,224 -- -- 27,226,536
Issuance of common stock in KII
acquisition 5,000 1 49,999 -- -- 50,000
Purchase of 807,851 shares of
treasury stock -- -- -- (1,800,000) -- (1,800,000)
Net loss for the period from
November 27, 1996 (commencement of
operations) to December 31, 1996 -- -- -- (150,965) (150,965)
---------- ---- ----------- ----------- --------- ------------
BALANCE, December 31, 1996 4,756,554 $476 $27,455,571 $(1,800,000) $(338,933) $ 25,317,114
========== ==== =========== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
STYLING TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period
November 27,
1996
(commencement
of operations)
to
December 31,
1996
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (150,965)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 96,712
Changes in assets and liabilities-
Decrease in accounts receivable, net 531,552
Increase in inventory (21,341)
Increase in prepaid expenses and other assets (33,785)
Decrease in accounts payable and accrued liabilities (788,124)
------------
Net cash used in operating activities (365,951)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Acquired Businesses, net of cash acquired (20,522,915)
Purchases of property and equipment (46,056)
------------
Net cash used in investing activities (20,568,971)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of offering and
acquisition costs 27,226,224
Purchase of treasury stock (1,800,000)
------------
Net cash provided by financing activities 25,426,224
------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,491,302
CASH AND CASH EQUIVALENTS, beginning of period -
------------
CASH AND CASH EQUIVALENTS, end of period $ 4,491,302
============
The accompanying notes are an integral part of this
consolidated financial statement.
F-7
<PAGE>
STYLING TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) FORMATION OF THE COMPANY:
ACQUISITIONS AND INITIAL PUBLIC OFFERING
Styling Technology Corporation (the Company) was formed in June 1995. From June
1995 through November 26, 1996, the Company conducted no operations and its only
activities related to negotiating acquisitions and related financing. During
November 1996, the Company completed an initial public offering (Offering) of
3,115,852 shares of its common stock. Simultaneously with the consummation of
the Offering, the Company acquired in separate transactions four businesses that
develop, produce, and market professional salon products (collectively, the
Acquired Businesses).
The Company acquired all of the outstanding stock of Gena Laboratories, Inc.
(Gena) and JDS Manufacturing Co., Inc. (JDS) and certain assets and liabilities
of the Body Drench Division of Designs by Norvell, Inc. (Body Drench) and
Kotchammer Investments, Inc. (KII). The cost of the Acquired Businesses,
including direct acquisition costs, was approximately $22,900,000. The combined
purchase price was funded with approximately $20,800,000 in cash from the net
proceeds of the Offering, and approximately $2,100,000 of seller carryback
financing and issuance of common stock. The acquisitions were accounted for
using the purchase method of accounting. The purchase price was allocated based
on the fair market value of the assets and liabilities acquired. Approximately
$5,200,000 was allocated to current assets, approximately $1,100,000 to property
and equipment, approximately $5,000,000 to current liabilities, and
approximately $300,000 to long-term debt. Approximately $21,900,000 of the
purchase price represents costs in excess of fair values acquired, and was
recorded as goodwill. The amounts of assets acquired and liabilities assumed
were based on the preliminary fair values as of the date of the acquisitions,
and may be revised at a later date.
Immediately following the purchase of the Acquired Businesses, the Company
commenced operations on November 27, 1996. After the purchase, the Company began
consolidating its operations, negotiated a new manufacturing agreement with a
major supplier, met with major customers to discuss its new marketing plans,
strengthened its distribution network, and established its infrastructure and
organization for the future growth of existing operations and for future
acquisitions.
F-8
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma summary includes the combined results of
operations of the Company and the Acquired Businesses as if the acquisitions had
occurred at the beginning of 1996 after giving effect to certain pro forma
adjustments permitted by the disclosure requirements of Accounting Principles
Board Opinion No. 16, Business Combinations. These adjustments include only the
effect of amortization of goodwill, interest expense that would have been
incurred to finance a portion of the purchase of the Acquired Businesses and the
estimated related income tax effects. The pro forma financial data is for
informational purposes only, and is not necessarily indicative of the results of
operations as they would have been had the transactions been effected on January
1, 1996, and is also not necessarily indicative of future operating results.
Year Ended
December 31,
1996
------------
(unaudited)
Net sales $ 22,982,000
Loss from operations (214,000)
Net loss (291,000)
Loss per share (.08)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Styling Technology Corporation (which includes the Body Drench and KII
divisions) and the Gena and JDS subsidiaries. The Company is engaged in the
business of developing, producing and marketing of high-end professional salon
products. The Company's consolidated statements of operations and cash flows for
the period November 27, 1996 to December 31, 1996, include the operations of the
Styling Technology Corporation and the Acquired Businesses from the date of
acquisition and commencement of operations. All material intercompany
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with original maturities of three months
or less are considered to be cash equivalents.
F-9
<PAGE>
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash and cash equivalents and trade receivables. The
Company places its cash and cash equivalents in high quality institutions. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
A component of 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 25% for the period November
27, 1996 to December 31, 1996. During 1996, this customer accounted for
approximately 16% of the combined net sales of the Company and the Acquired
Businesses. The significant amount of sales to a single customer results in
certain concentrations of credit risk for the Company. The Company's total
accounts receivable balance, including the accounts receivable of the Company's
largest customers, is comprised of a large number of customers, located
primarily in the United States and the United Kingdom.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable
value. Reserves are established against inventory for excess, slow-moving and
obsolete items and for items where the net realizable value is less than cost.
Inventory consist of the following:
December 31,
1996
------------
Raw materials and work-in-process $1,324,508
Finished goods 1,310,489
----------
$2,634,997
==========
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation on property and
equipment is provided using 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.
F-10
<PAGE>
GOODWILL
Goodwill is the cost in excess of fair value of net tangible assets of acquired
businesses and is amortized using the straight-line method over 25 years. At
December 31, 1996, goodwill amounted to $21,831,211, net of accumulated
amortization of $85,701. The Company continually evaluates whether events and
circumstances have occurred subsequent to its acquisition that indicate the
remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. In accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of, when factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the
undiscounted future cash flows over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial Instruments.
The Company's financial instruments as defined by SFAS No. 107 include cash,
accounts receivable, accounts payable and long-term debt. The estimated fair
value amounts have been determined by the Company at December 31, 1996, using
available market information and valuation methodologies described below.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts that could be realized in a current market exchange. The use of
different market assumptions or valuation methodologies could have a material
effect on the estimated fair value amounts. The carrying values of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short-term maturities of these instruments.
The carrying amount of 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.
OTHER INCOME
Other income consists primarily of interest earned from cash and cash
equivalents.
F-11
<PAGE>
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share is computed by dividing net earnings (loss) by the
weighted average number of common shares and common share equivalents assumed
outstanding during the year. For the period November 27,1996 to December 31,
1996, no common share equivalents were considered in the calculation of loss per
share as their effect was antidilutive.
ACCOUNTING PRONOUNCEMENTS NOT YET REQUIRED TO BE ADOPTED
In March 1997 the Financial Accounting Standards Board (FASB) issued SFAS No.
128, Earnings Per Share which modified the methods used to determine earnings
per share. The new statement is effective for fiscal years ending after December
15, 1997, and may require restatement of prior years' earnings per share. The
Company does not believe the adoption of the new statement will have a material
impact on its per share results of operations.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
December 31,
1996
------------
Land $ 150,000
Building and leasehold improvements 567,806
Machinery and equipment 273,577
Furniture and fixtures 64,533
Computers, vehicles and other 80,234
-----------
1,136,150
Less- Accumulated depreciation (11,011)
-----------
$ 1,125,139
===========
(4) LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1996:
Note payable related to the acquisition of Gena. Imputed
interest at 10%, secured by 200,000 shares of contingently
issuable common stock, maturing November 26, 1998 $ 1,667,353
Unsecured notes payable related to the acquisition of JDS,
bearing interest from 8% to 10%, due quarterly, maturing
November 26, 1998 283,313
Note payable related to the acquisition of KII, bearing
interest at 10%, maturing May 26, 1999, secured by
certain assets of the Company 139,140
Note payable, bearing interest at 7%, maturing in 2003,
secured by certain property 309,192
-----------
2,398,998
Less: current portion (82,994)
-----------
$ 2,316,004
===========
F-12
<PAGE>
Aggregate future maturities of long-term debt are as follows at December 31,
1996:
Maturity
--------
1997 $ 82,994
1998 2,044,667
1999 69,541
2000 45,976
2001 50,414
Thereafter 105,406
-----------
$ 2,398,998
===========
During 1996, the Company obtained bridge loan financing (Bridge Note) to fund
approximately $400,000 of deferred issuance and acquisition costs. The Bridge
Note bore interest at an annual rate of 10% and was repaid upon the consummation
of the Offering. In connection with the Bridge Note, the Company issued 20,000
shares of common stock to the holders upon the consummation of the Offering. The
Company also issued two year warrants to purchase an equal amount of shares at
an exercise price of $12.50. The Bridge Note was recorded based upon the
proportionate fair value of consideration received, with the related financing
cost recorded as a charge to accumulated deficit in the period prior to the
commencement of operations.
F-13
<PAGE>
(5) STOCKHOLDERS' EQUITY:
In connection with the organization and initial capitalization of the Company in
June 1995, the Company issued 1,615,702 shares of common stock for $200. 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, and Board of Directors' approval.
Prior to the Offering, the Company effected a 0.808-for-1 reverse stock split on
all its outstanding common stock. As a result, all share amounts were 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 a
founder, pursuant to which the founder agreed to sell 807,851 shares of
Company's common stock to the Company for $1.8 million, payable upon
consummation of the Offering. Accordingly, upon consummation of the Offering,
the founder was no longer a stockholder of the Company.
In November 1996, the Company completed the Offering of 3,115,852 shares of its
common stock with an issue price of $10.00 per share. During December the
Company's underwriters exercised an over allotment option, resulting in the
issuance of an additional 215,852 shares. Net proceeds from the Offering and
over allotment option amounted to $27,226,224. In connection with the Offering,
the Company issued 203,000 five year warrants to its underwriters with an
exercise price of $12.00 per share.
During 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. During 1996, the Company issued 87,707 shares of common
stock under the Plan, at an exercise price equal to the Offering price.
F-14
<PAGE>
The following pro forma disclosures of net loss are made assuming the Company
had accounted for the stock options pursuant to the provision of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation.
For the Period
November 27, 1996
(commencement of
operations) to
December 31, 1996
--------------
As Reported $(.04)
=====
Pro Forma $(.06)
=====
The fair value of each option is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants in 1996; risk-free interest rates of 5.85% and
expected lives of 3.8 years; and a volatility factor of 60%. The dividend yield
assumed is zero.
A summary of the status of the Company's stock options at December 31, 1995 and
1996, changes during the years ended is presented in the following table:
1995 1996
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
Outstanding at beginning of period
(June 30, 1995 and
January 1, 1996) -- $ -- 161,571 $ .10
Granted 161,571 .10 87,707 10.00
Exercised -- -- -- --
Canceled -- -- -- --
------- -------
Outstanding at end of year 161,571 249,278
======= =======
Exercisable at end of year -- 18,177
======= =======
Weighted average fair value
per share of options granted $ 1.77 $ 5.65
======= ======
(6) INCOME TAXES:
SFAS No. 109, Accounting for Income Taxes, 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.
F-15
<PAGE>
The provision for income taxes for the year ended December 31, 1996, consists of
the following:
Current benefit $ --
Deferred benefit (72,250)
--------
Net deferred benefit for income taxes $(72,250)
========
Deferred tax asset
Current:
Tax effect of net operating loss carry forward 86,094
Reserves and other accruals 84,331
Other 38,156
Non Current:
Reserves and accruals 251,199
--------
Total deferred tax assets 459,780
--------
Deferred tax liabilities
Accelerated tax depreciation 16,835
--------
Total deferred tax liabilities 16,835
--------
Net deferred tax asset 442,945
Valuation Allowance (251,199)
--------
Adjusted net deferred tax asset 191,746
========
F-16
<PAGE>
A reconciliation of the U.S. federal statutory rate to the Company's effective
tax rate is as follows:
Statutory federal rate (34)%
Effect of state taxes (6)
Nondeductible amortization of goodwill 8
Other (1)
---
33%
===
Net operating loss carryforwards for federal tax purposes totaled $86,094 at
December 31, 1996, which expire in the year 2011.
(7) RELATED PARTY INFORMATION
During 1996, certain founders advanced approximately $112,500 to the Company to
fund various Offering and acquisition costs, all of which was repaid during the
year.
A member of the Company's Board of Directors is an officer and shareholder of
one of the underwriting firms that managed the Offering.
(8) COMMITMENTS AND CONTINGENCIES:
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.
In connection with the acquisition note payable to the former shareholders of
Gena, the Company is required to maintain a $500,000 letter of credit with a
bank. As of December 31, 1996, the Company maintains a 90-day interest bearing
certificate of deposit at the bank as a condition to this letter of credit
arrangement. The certificate of deposit is included in cash and cash equivalents
in the accompanying consolidated balance sheet. This note is also secured by
200,000 shares of common stock, which would become issuable to the noteholders
in the event of default.
The Company leases certain equipment and office and warehouse space under
noncancelable operating leases. Rent expense related to these lease agreements
totaled approximately $12,000 for the period November 27, 1996 (commencement of
operations) to December 31, 1996.
F-17
<PAGE>
Future lease payments under noncancelable operating leases are as follows:
Years Ending
December 31,
------------
1997 $ 63,900
1998 57,300
1999 41,100
2000 41,100
2001 41,100
Thereafter 205,500
---------
$ 450,000
=========
(9) SUBSEQUENT EVENT:
During March 1996, the Company entered into an agreement to acquire the assets
of the Utopia line of high-end tanning products from Creative Laboratories for
approximately $350,000.
F-18
<PAGE>
GENA LABORATORIES, INC.
FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 1995 AND FEBRUARY 29, 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-19
<PAGE>
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. 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, and for the period March 1, 1996 to November
26, 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
and for the period March 1, 1996 to November 26, 1996, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Phoenix, Arizona,
March 21, 1997.
F-20
<PAGE>
GENA LABORATORIES, INC.
BALANCE SHEETS
February 28, February 29,
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 390,325 $ 250,644
Investments 14,999 46,500
Accounts receivable, net of allowance for doubtful
accounts of $120,347 and $136,093, respectively 863,208 965,615
Inventory 965,335 1,213,688
Deferred tax asset 99,055 131,790
---------- ----------
Total current assets 2,332,922 2,608,237
---------- ----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $392,026
and $471,771, respectively 884,638 830,093
DEFERRED TAX ASSET, net of current portion -- 19,870
OTHER ASSETS 346,866 256,770
---------- ----------
$3,564,426 $3,714,970
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 391,381 $ 382,926
Accrued expenses 302,808 259,903
Current portion of note payable to
related parties 32,571 34,929
Current portion of long-term debt 96,056 95,248
---------- ----------
Total current liabilities 822,816 773,006
---------- ----------
NOTE PAYABLE TO RELATED PARTIES, less current portion 342,464 307,358
---------- ----------
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
Additional paid-in capital 88,303 88,303
Unrealized holding loss on investment (35,303) (3,802)
Retained earnings 2,211,960 2,528,587
---------- ----------
Total stockholders' equity 2,274,960 2,623,088
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,564,426 $3,714,970
========== ==========
The accompanying notes to financial statements are an integral
part of these balance sheets.
F-21
<PAGE>
GENA LABORATORIES, INC.
STATEMENTS OF OPERATIONS
For the Period
For the Years Ended March 1, 1996
-------------------------------------- to
February 28, February 28, February 29, November 26,
1994 1995 1996 1996
----------- ----------- ----------- -----------
NET SALES $ 6,426,416 $ 7,523,751 $ 8,384,092 $ 6,707,727
COST OF SALES 3,280,046 4,163,395 4,818,786 3,900,347
----------- ----------- ----------- -----------
GROSS PROFIT 3,146,370 3,360,356 3,565,306 2,807,380
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,744,363 2,963,926 3,033,409 1,983,650
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 402,007 396,430 531,897 823,730
OTHER INCOME AND
(EXPENSE), net 35,092 (35,282) (30,480) 2,225
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 437,099 361,148 501,417 825,955
PROVISION FOR INCOME
TAXES 158,613 129,606 184,790 297,344
----------- ----------- ----------- -----------
NET INCOME $ 278,486 $ 231,542 $ 316,627 $ 528,611
=========== =========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
F-22
<PAGE>
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 AT 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 AT 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 AT 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 AT FEBRUARY 29, 1996 2,000 10,000 88,303 2,524,785 2,623,088
Net income for the period March 1, 1996
to November 26, 1996 -- -- -- 528,611 528,611
Distributions to stockholders -- -- -- (513,000) (513,000)
----- ------- ------- ---------- -----------
BALANCE AT NOVEMBER 26, 1996 2,000 $10,000 $88,303 $2,540,396 $2,638,699
===== ======= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-23
<PAGE>
GENA LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
For the Years Ended March 1, 1996
---------------------------------------- to
ebruary 28, February 28, February 29, November 26,
1994 1995 1996 1996
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 278,486 $ 231,542 $ 316,627 $ 528,611
Adjustments to reconcile net income to net
cash used in operating activities-
Depreciation and amortization 114,021 155,185 168,685 37,939
Loss on sale of securities on fixed assets -- 32,513 -- --
Decrease (increase) in accounts receivable 38,647 (157,714) (102,407) 90,671
Decrease (increase) in inventory (14,638) (118,638) (248,353) (24,975)
Decrease (increase) in other assets 80,863 (30,814) (51,449) (228,444)
(Decrease) increase in accounts payable and
accrued liabilities (122,813) 210,426 (51,360) 14,157
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 374,566 322,500 31,743 417,959
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (331,996) (23,648) (25,200) (11,886)
Cost incurred to acquire new businesses (180,213) (140,000) -- --
Proceeds from sale of investments -- -- -- 46,500
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (512,209) (163,648) (25,200) 34,614
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) long-term debt, net 178,585 (136,668) (146,224) (137,098)
Distributions to stockholders -- -- -- (513,000)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 178,585 (136,668) (146,224) (650,098)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 40,942 22,184 (139,681) (197,525)
CASH AND CASH EQUIVALENTS, beginning of period 327,199 368,141 390,325 250,644
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 368,141 $ 390,325 $ 250,644 $ 53,119
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 8,325 $ 54,401 $ 43,259 $ 23,871
========= ========= ========= =========
Income taxes paid $ 137,580 $ 127,609 $ 232,417 $ 195,860
========= ========= ========= =========
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-24
<PAGE>
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
ACQUISITION AND BASIS OF PRESENTATION
Effective November 26, 1996, shareholders of Gena Laboratories, Inc. (the
Company) sold all of its outstanding stock to Styling Technology Corporation for
consideration of approximately $9,700,000. These financial statements present
the historical financial position and results of operations of the acquired
business for periods prescribed by applicable rules of the Securities and
Exchange Commission.
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.
(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.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable
value. Reserves are established against inventory for excess, slow-moving and
obsolete items and for items where the net realizable value is less than cost.
F-25
<PAGE>
Inventories consist of the following:
February 28, February 29,
1995 1996
---------- ----------
Raw materials and work-in-process $ 675,735 $ 849,582
Finished goods 289,600 364,106
---------- ----------
$ 965,335 $1,213,688
========== ==========
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation on property and
equipment is provided using the straight-line method over the estimated useful
lives of the 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 years ended
February 28, 1994 and 1995, February 29, 1996, and for the period March 1, 1996
to November 26, 1996, maintenance and repair expenses charged to cost of
operations were approximately $26,000, $47,000, $23,000 and $32,245,
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 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.
F-26
<PAGE>
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.
(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 and $433,070 as of February 28, 1995 and February 29,
1996.
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
February 28, February 29,
1995 1996
----------- -----------
Land $ 150,000 $ 150,000
Factory equipment 407,427 431,832
Computers 43,030 43,825
Furniture, fixtures and autos 108,875 108,875
Building and leasehold improvements 567,332 567,332
----------- -----------
1,276,664 1,301,864
Less- Accumulated depreciation (392,026) (471,771)
----------- -----------
$ 884,638 $ 830,093
=========== ===========
(5) LONG-TERM DEBT:
Long-term debt consists of the following:
February 28, February 29,
1995 1996
--------- ---------
Unsecured note payable, bearing interest at prime
(8.25% at February 29, 1996), unpaid balance due by
November 1996 $ 123,529 $ 52,942
Various notes payable, bearing interest from 7.5%
to 8.0%, maturing through 1998 96,713 53,824
--------- ---------
220,242 106,766
Less: Current maturities (96,056) (95,248)
--------- ---------
$ 124,186 $ 11,518
========= =========
F-27
<PAGE>
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 and
February 29, 1996, the Company had not drawn on this facility.
Aggregate principal payments on long-term debt are as follows:
Year Ending
February 28,
- ------------
1997 $ 95,248
1998 11,518
--------
$106,766
========
(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, and 34% for the
period March 1, 1996 to November 26, 1996.
(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:
For the Period
March 1, 1996
For the Years to
February 28, Ended February 28, February 29, November 26,
1994 1995 1996 1996
----------- ----------------- ------------ -----------
Current:
Federal $ 134,927 $ 139,468 $208,499 $303,501
State 18,699 19,329 28,896 42,054
--------- --------- -------- --------
153,626 158,797 237,395 345,555
Deferred provision
(benefit) 4,987 (29,191) (52,605) (48,211)
--------- --------- -------- -------
Provision for
income taxes $ 158,613 $ 129,606 $184,790 $297,344
========= ========= ======== ========
F-28
<PAGE>
The components of deferred taxes are as follows:
February 28, February 29,
1995 1996
--------- ---------
Deferred tax assets:
Inventory reserve $ 6,707 $ 8,376
Uniform inventory cost capitalization 50,233 62,739
Capital losses in excess of capital gains 1,544 10,362
Allowance for doubtful accounts 44,492 50,314
Amortization 15,773 38,586
-------- --------
Total gross deferred tax assets 118,749 170,377
-------- --------
Deferred tax liabilities:
Depreciation (19,694) (18,717)
-------- --------
Total gross deferred tax liabilities (19,694) (18,717)
-------- --------
Net deferred tax asset $ 99,055 $151,660
======== ========
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
For the Period
For the Years Ended March 1, 1996
------------------------------------- to
February 28, February 28, February 29, November 26,
1994 1995 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Tax provision at statutory rate $148,614 $122,790 $170,482 $280,824
Expense 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 16,520
-------- -------- -------- --------
Income tax provision $158,613 $129,606 $184,790 $297,344
======== ======== ======== ========
</TABLE>
(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.
F-29
<PAGE>
The total of the related party note payable is as follows:
February 28, February 29,
1995 1996
--------- ---------
Total shareholder note payable $ 375,035 $ 342,287
Less: Current maturities (32,571) (34,929)
--------- ---------
Shareholder note payable, net of current
portion $ 342,464 $ 307,358
========= =========
Principal maturities related to this loan are as follows:
Year Ending
February 28, Total
- ------------ -----
1997 $ 34,929
1998 37,454
1999 40,162
2000 43,065
2001 46,178
Thereafter 140,499
--------
$342,287
========
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
and $ 58,993 for the years ended February 28, 1994 and 1995, February 29, 1996,
and the period March 1, 1996 to November 26, 1996, respectively.
(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:
Year Ending
February 28, Total
- ------------ --------
1997 $ 41,100
1998 41,100
1999 41,100
2000 41,100
2001 41,100
Thereafter 202,500
--------
$408,000
========
F-30
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-31
<PAGE>
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 owner's investment
and cash flows for each of the three years in the period ended December 31, 1995
and for the period January 1, 1996 to November 26, 1996. 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 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 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 then ended and for the period January 1, 1996 to November 26,
1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Phoenix, Arizona,
March 21, 1997.
F-32
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
BALANCE SHEETS
December 31,
-------------------------
1994 1995
---------- ----------
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance
for doubtful accounts of $89,841 and
$58,242, respectively $1,396,048 $1,234,966
Inventories 3,052,783 3,078,656
Other current assets 5,152 150,713
---------- ----------
Total current assets 4,453,983 4,464,335
---------- ----------
EQUIPMENT, net of accumulated
depreciation of $245,424 and $297,176,
respectively 167,697 316,443
---------- ----------
Total assets $4,621,680 $4,780,778
========== ==========
LIABILITIES AND OWNER'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable $2,550,654 $3,221,337
Bank overdraft 651,953 274,810
Accrued expenses and other 296,546 257,813
---------- ----------
Total current liabilities 3,499,153 3,753,960
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
OWNER'S INVESTMENT 1,122,527 1,026,818
---------- ----------
Total liabilities and owner's investment $4,621,680 $4,780,778
========== ==========
The accompanying notes to the financial statements are
an integral part of these balance sheets.
F-33
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF OPERATIONS
For the Period
January 1, 1996
Years ended December 31, to
-------------------------------------- November 26,
1993 1994 1995 1996
---------- ----------- ----------- ---------------
NET SALES $6,653,488 $11,138,369 $11,871,171 $ 9,642,980
COST OF SALES 4,039,843 6,342,770 6,426,775 5,867,104
---------- ----------- ----------- -----------
GROSS PROFIT 2,613,645 4,795,599 5,444,396 3,775,876
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 2,054,919 4,075,756 4,883,265 4,004,728
---------- ----------- ----------- -----------
INCOME FROM OPERATIONS 558,726 719,843 561,131 (228,852)
---------- ----------- ----------- -----------
INTEREST EXPENSE 30,159 -- 87,585 --
---------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 528,567 719,843 473,546 (228,852)
PROVISION (BENEFIT) FOR
INCOME TAXES 200,855 273,540 179,947 (91,541)
---------- ----------- ----------- -----------
NET INCOME (LOSS) $ 327,712 $ 446,303 $ 293,599 $ (137,311)
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CHANGES IN OWNERS' INVESTMENT
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 loss (137,311)
Net payments to parent (1,311,710)
-----------
BALANCE, November 26, 1996 $ (422,203)
===========
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
January 1,
For the Years Ended 1996
December 31, to
--------------------------------- November 26,
1993 1994 1995 1996
--------- ----------- --------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 327,712 $ 446,303 $ 293,599 $ (137,311)
Adjustments to reconcile net income to net
cash used in operating activities-
Depreciation 67,244 36,619 51,752 94,963
Changes in operating assets and liabilities:
Accounts receivable, net (49,548) (1,099,273) 161,082 274,164
Inventories (224,184) (2,024,887) (25,873)
Other, net (5,127) 2,084 (145,561) 1,167,937
Accounts payable 516,725 783,427 670,683 158,304
Accrued expenses 177,767 33,284 (38,733) (258,849)
--------- ----------- --------- -----------
Net cash provided by (used in)
operating activities 810,589 (1,822,443) 966,949 1,299,208
--------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (62,436) (53,666) (200,498) (12,502)
--------- ----------- --------- -----------
Net cash provided by (used in)
investing activities (62,436) (53,666) (200,498) (12,502)
--------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft -- 651,953 (377,143) 25,004
Net payments to/receipts from parent (748,153) 1,224,156 (389,308) (1,311,710)
--------- ----------- --------- -----------
Net cash provided by (used in)
financing activities (748,153) 1,876,109 (766,451) (1,286,706)
--------- ----------- --------- -----------
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-36
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
ACQUISITION AND BASIS OF PRESENTATION
Effective November 26, 1996, Designs by Norvell, Inc. (Norvell) sold the assets
of its Body Drench Division (the Division) to Styling Technology Corporation
(STC) for consideration of approximately $7,900,000. These financial statements
present the historical financial position and results of operations of the
acquired business for periods prescribed by applicable rules of the Securities
and Exchange Commission.
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.
(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.
F-37
<PAGE>
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.
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 using
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 period January 1, 1996 to November 26, 1996,
maintenance and repair expenses charged to cost of operations were approximately
$25,978, $26,117, $30,498 and $6,021, respectively.
INVENTORY
Inventory is valued 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:
1994 1995
---------- ----------
Raw materials and work-in-process $1,675,601 $1,583,372
Finished goods 1,377,182 1,495,284
---------- ----------
$3,052,783 $3,078,656
========== ==========
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
1994 1995
--------- ---------
Factory equipment $ 134,880 $ 178,405
Computer equipment 243,647 394,026
Furniture and fixtures 34,594 41,188
--------- ---------
413,121 613,619
Less- Accumulated depreciation (245,424) (297,176)
--------- ---------
$ 167,697 $ 316,443
========= =========
F-38
<PAGE>
(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 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.
(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:
December 31,
------------
1996 $ 79,455
1997 50,423
1998 41,067
1999 2,333
Rental expense under such operating leases was $52,163, $101,217, $238,746 and
$188,761, for the three years ended December 31, 1995, and for the period
January 1, 1996 to November 26, 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 financial statements.
(6) SIGNIFICANT VENDORS:
Two vendors accounted for 69.3%, 67.4%, 53.0% and 53.0% of the Division's total
raw materials purchases from vendors for the years ended December 31, 1993,
1994, 1995 and for the period January 1, 1996 to November 26, 1996,
respectively. Management does not believe that the loss of these vendors would
significantly impact the Division's operations.
F-39
<PAGE>
JDS MANUFACTURING CO., INC.
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995 AND 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of JDS MANUFACTURING CO., INC.
(a California corporation) as of September 30, 1995 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1996 and for the period October 1,
1996 to November 26, 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 JDS Manufacturing Co., Inc. as
of September 30, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996 and for
the period October 1, 1996 to November 26, 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Phoenix, Arizona,
March 21, 1997.
F-41
<PAGE>
JDS MANUFACTURING CO., INC.
BALANCE SHEETS
September 30, September 30,
1995 1996
------------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 57,397 $ 85,260
Accounts receivable, net of allowance for
doubtful accounts of $10,000, and $15,000,
respectively 329,965 313,405
Inventory 264,347 209,140
Prepaid expenses 11,861 4,716
-------- --------
Total current assets 663,570 612,521
-------- --------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $100,031, and
$114,660, respectively 30,292 19,157
OTHER ASSETS 102,934 136,404
-------- --------
$796,796 $768,082
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $196,309 $152,938
Accrued expenses 53,740 81,411
-------- --------
Total current liabilities 250,049 234,349
-------- --------
NOTES PAYABLE TO RELATED PARTIES 516,200 434,210
-------- --------
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 89,523
-------- --------
Total stockholders' equity 30,547 99,523
-------- --------
Total liabilities and stockholders' equity $796,796 $768,082
======== ========
The accompanying notes to financial statements are an integral
part of these balance sheets.
F-42
<PAGE>
JDS MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
October 1, 1996
For the Years Ended September 30, to
---------------------------------- November 26,
1994 1995 1996 1996
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
SALES $3,577,779 $3,367,599 $3,113,682 $613,142
COST OF SALES 1,651,965 1,550,155 1,407,128 275,513
---------- ---------- ---------- --------
Gross profit 1,925,814 1,817,444 1,706,554 337,629
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,981,928 1,843,871 1,614,505 257,784
---------- ---------- ---------- --------
Income (loss) from
operations (56,114) (26,427) 92,049 79,845
OTHER INCOME, net 44,191 41,951 35,272 1,263
---------- ---------- ---------- --------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (11,923) 15,524 127,321 81,108
PROVISION FOR INCOME TAXES 4,571 6,950 58,345 35,688
---------- ---------- ---------- --------
NET INCOME (LOSS) $ (16,494) $ 8,574 $ 68,976 $ 45,420
========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
JDS MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
--------------- Retained
Shares Amount Earnings Total
------ ------- --------- ---------
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 income -- -- 68,976 68,976
----- ------- --------- ---------
BALANCE, September 30, 1996 1,000 10,000 89,523 99,523
Net income, for the period
October 1, 1996 to
November 26, 1996 -- -- 45,420 45,420
----- ------- --------- ---------
BALANCE, November 26, 1996 1,000 $10,000 $ 134,943 $ 144,943
===== ======= ========= =========
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
JDS MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
October 1, 1996
For the Years Ended September 30, to
--------------------------------- November 26,
1994 1995 1996 1996
-------- -------- --------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(16,494) $ 8,574 $ 68,976 $ 45,420
Adjustments to reconcile net income (loss)
to net cash used in operating activities-
Depreciation 18,735 15,661 14,628 1,439
Decrease (increase) in accounts receivable (4,438) 89,139 16,560 (172,645)
Decrease (increase) in inventory 14,441 (34,089) 55,207 47,329
Decrease (increase) in other assets (33,786) (35,112) (26,325) (19,756)
Increase (decrease) in accounts payable and
accrued expenses 4,263 (47,256) (15,700) 57,480
-------- -------- --------- ---------
Net cash provided by (used in)
operating activities (17,279) (3,083) 113,346 (40,733)
-------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,582) (8,203) (3,493) (1,912)
-------- -------- --------- ---------
Net cash used in investing activities (10,582) (8,203) (3,493) (1,912)
-------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes
payable, net 24,012 (5,692) (81,990) (14,748)
-------- -------- --------- ---------
Net cash provided by (used in)
financing activities 24,012 (5,692) (81,990) (14,748)
-------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH (3,849) (16,978) 27,863 (57,393)
CASH, beginning of period 78,224 74,375 57,397 85,260
-------- -------- --------- ---------
CASH, end of period $ 74,375 $ 57,397 $ 85,260 $ 27,867
======== ======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $ 36,134 $ 35,589 $ 39,030 $ --
======== ======== ========= =========
Income taxes paid $ 4,090 $ 4,571 $ 7,000 $ 53,896
======== ======== ========= =========
EXCHANGE OF OTHER ASSET FOR REDUCTION IN
SHAREHOLDER NOTES PAYABLE $ -- $ -- $ -- $ 136,404
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
ACQUISITION AND BASIS OF PRESENTATION
Effective November 26, 1996, shareholders of JDS Manufacturing Co., Inc. (the
Company) sold all of its outstanding stock to Styling Technology Corporation for
consideration of approximately $4,400,000. These financial statements present
the historical financial position and results of operations of the acquired
business for periods prescribed by applicable rules of the Securities and
Exchange Commission.
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.
(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.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable
value. Reserves are established against inventory for excess, slow-moving and
obsolete items and for items where the net realizable value is less than cost.
F-46
<PAGE>
Inventories consist of the following:
September 30, September 30,
1995 1996
------------- -------------
Raw material and work-in process $ 31,722 $ 25,097
Finished goods 232,625 184,043
-------- --------
$264,347 $209,140
======== ========
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation on property and
equipment is provided using 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, 1995, 1996 and for the period October 1, 1996 to November
26, 1996, maintenance and repair expenses charged to cost of operations were
$5,452, $4,507, $2,509 and $598, 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
F-47
<PAGE>
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
September 30, September 30,
1995 1996
------------- -------------
Furniture and equipment $ 98,490 $ 101,984
Automobiles 13,976 13,976
Leaseholds and other 17,857 17,857
--------- ---------
130,323 133,817
Less: accumulated depreciation (100,031) (114,660)
--------- ---------
$ 30,292 $ 19,157
========= =========
(4) NOTES PAYABLE TO RELATED PARTIES:
As of September 30, 1995 and 1996, the Company had notes payable due to its two
principal shareholders of $516,200 and $434,210, 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.
(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 differences 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.
(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 $12,459 through September 30,
1997.
(7) SIGNIFICANT CUSTOMER:
The Company's strategy includes providing nail care and accessories to a major
U.S. beauty distribution company. Sales to this customer as a percentage of
total sales were approximately 11%, 14%, 26% and 26% for September 30, 1994,
1995, 1996 and for the period October 1, 1996 to November 26, 1996,
respectively.
F-48
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of KOTCHAMMER INVESTMENTS, INC.
(a California corporation) as of December 31, 1995, and the related statements
of operations, stockholders' equity, and cash flows for the year ended December
31, 1995, and for the period January 1, 1996 to November 26, 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 Kotchammer Investments, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year ended December 31, 1995, and for the period January 1, 1996 to November
26, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Phoenix, Arizona,
March 21, 1997.
F-50
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
BALANCE SHEET
December 31,
1995
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 96,364
Accounts receivable 136,971
Inventory, net 403,730
Prepaid expenses and other 21,799
---------
Total current assets 658,864
---------
PROPERTY AND EQUIPMENT, net 75,472
OTHER ASSETS 1,026
---------
$ 735,362
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 14,015
Accrued expenses 121,183
Line of credit 215,000
Current portion of notes payable to shareholders 270,000
--------
Total current liabilities 620,198
--------
NOTES PAYABLE TO SHAREHOLDERS, net of current
portion 340,000
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $20 par value, 2,500 shares authorized,
2,500 shares issued and outstanding 50,000
Retained deficit (274,836)
---------
Total stockholders' deficit (224,836)
---------
Total liabilities and stockholders' deficit $ 735,362
=========
The accompanying notes to financial statements are an
integral part of this balance sheet.
F-51
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
For the Period
For the January 1, 1996
Year Ended to
December 31, November 26,
1995 1996
------------ ---------------
NET SALES $ 1,557,709 $ 1,248,460
COST OF SALES 711,925 585,704
----------- -----------
Gross profit 845,784 662,756
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 891,146 590,800
----------- -----------
Income (loss) from operations (45,362) 71,956
INTEREST EXPENSE AND OTHER, net (89,557) (74,250)
----------- -----------
NET LOSS $ (134,919) $ (2,294)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock Total
----------------- Retained Stockholders'
Shares Amount Earnings Deficit
------ ------- --------- ------------
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 loss -- -- (2,294) (2,294)
----- ------- --------- ---------
BALANCE, November 26, 1996 2,500 $50,000 $(277,130) $(227,130)
===== ======= ========= =========
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
For the Period
For the January 1, 1996
Year Ended to
December 31, November 26,
1995 1996
----------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(134,919) $ (2,294)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation 23,436 19,203
Decrease (increase) in accounts receivable 43,004 (19,111)
Decrease (increase) in inventory (45,278) 51,566
Decrease in prepaids and other assets 63,372 6,502
Increase (decrease) in accounts payable and
accrued liabilities (43,234) 89,960
--------- ---------
Net cash provided by (used in)
operating activities (93,619) 145,826
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,215) --
--------- ---------
Net cash used in investing activities (17,215) --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes
payable, net 100,000 --
Proceeds from (payments to) line of credit, net (5,000) (215,000)
--------- ---------
Net cash (used in) provided by
financing activities 95,000 (215,000)
--------- ---------
NET DECREASE IN CASH (15,834) (69,174)
CASH, beginning of period 112,198 96,364
--------- ---------
CASH, end of period $ 96,364 $ 27,190
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 72,916 $ --
========= =========
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
ACQUISITION AND BASIS OF PRESENTATION
Effective November 26, 1996, shareholders of Kotchammer Investments, Inc. (the
Company) sold its assets to Styling Technology Corporation for consideration of
approximately $639,000. These financial statements present the historical
financial position and results of operations of the acquired business for
periods prescribed by applicable rules of the Securities and Exchange
Commission.
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.
(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.
INVENTORY
Inventory consists of finished goods and are valued at the lower of cost
(first-in, first-out) or net realizable value. Reserves are established against
inventory for excess, slow-moving and obsolete items and for items where the net
realizable value is less than cost.
F-55
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation on property and
equipment is provided using 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.
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.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Useful Life 1995
----------- ---------
Machinery and equipment 5 years $ 76,803
Furniture and fixtures 7 years 22,458
Computer equipment 5 years 16,652
---------
115,913
Less- Accumulated depreciation (40,441)
---------
$ 75,472
=========
(4) LINE OF CREDIT:
At December 31, 1995, the Company had a $220,000 line of credit with a bank
which expired in August of 1996 and carried an interest rate of 9.75%. During
1996, the line of credit was repaid.
F-56
<PAGE>
(5) NOTES PAYABLE TO SHAREHOLDERS:
Notes payable to shareholders consisted of the following:
December 31,
1995
------------
Note payable dated December 8, 1993, interest at a
bank's reference rate plus 1.25% (11% at December 31, 1995),
maturing January 15, 2004 $ 120,000
Note payable dated December 8, 1993, interest at a
bank's reference rate plus 1.25% (11% at December 31, 1995),
maturing January 15, 2004 120,000
Note payable dated December 8, 1993, interest at a
bank's reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004 270,000
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 70,000
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 30,000
---------
610,000
Less: current maturities (270,000)
---------
$ 340,000
=========
As of December 31, 1995, 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.
(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 for the period January 1, 1996 to November 26, 1996.
(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.
F-57
<PAGE>
Total future commitments for operating leases are $45,851 through July 1997.
Rent expense incurred under operating leases was $35,363, and $26,173 for the
year ended December 31, 1995 and for the period January 1, 1996 to November 26,
1996, respectively.
F-58
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Annual Report on Form 10-K/A of our reports dated March 21, 1997 (the
"Reports"), covering the financial statements of Styling Technology Corporation
(the "Company"), Gena Laboratories, Inc., Body Drench, JDS Manufacturing Co.,
Inc. and Kotchammer Investments, Inc. (collectively, the "Company and its
Predecessors"). In addition, as independent public accountants, we hereby
consent to the incorporation by reference of these Reports in the Company's
previously filed Registration Statements on Forms S-8 No. 333-43599 and No.
333-47131, filed December 31, 1997 and February 27, 1998, respectively.
/s/ Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Phoenix, Arizona,
February 19, 1998.
