<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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)
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 / /
The number of shares of the issuer's class of capital stock as of the latest
practicable date, is as follows: 4,052,703 shares of Common Stock, $.0001 par
value, as of August 14, 1998.
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STYLING TECHNOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1998 ...................... 3
Condensed Consolidated Statements of Operations -
Three Months ended June 30, 1997 and June 30, 1998 ....... 4
Condensed Consolidated Statements of Operations -
Six Months ended June 30, 1997 and June 30, 1998 ......... 5
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and June 30, 1998.......... 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
PART II. OTHER INFORMATION.................................................. 16
Item 1. Legal Proceedings................................................... 16
Item 2. Changes in Securities............................................... 16
Item 3. Defaults Upon Senior Securities..................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................. 16
Item 5. Other Information................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................... 17
2
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ITEM 1. FINANCIAL STATEMENTS
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,063,000 $ 11,657,000
Accounts receivable, net of allowance for doubtful
accounts of $1,032,000 at December 31, 1997 and
$1,922,000 at June 30, 1998 14,296,000 21,051,000
Inventories, net 10,951,000 16,267,000
Prepaid expenses and other current assets 2,120,000 1,416,000
------------- -------------
Total current assets 30,430,000 50,391,000
PROPERTY AND EQUIPMENT, net 2,640,000 4,003,000
GOODWILL AND OTHER, net 59,419,000 89,200,000
------------- -------------
Total assets $ 92,489,000 $ 143,594,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,065,000 $ 6,677,000
Accrued liabilities 3,832,000 3,063,000
Current portion of long-term debt and other 5,647,000 2,664,000
------------- -------------
Total current liabilities 16,544,000 12,404,000
------------- -------------
LONG-TERM DEBT AND OTHER, less current portion 47,377,000 100,512,000
------------- -------------
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,
4,756,554 shares issued and 3,948,703 shares outstanding at
December 31, 1997; and 4,856,554 shares issued and 4,048,703
shares outstanding at June 30, 1998 1,000 1,000
Additional paid-in capital 27,875,000 28,072,000
Retained earnings 2,492,000 4,405,000
Treasury stock (1,800,000) (1,800,000)
------------- -------------
Total stockholders' equity 28,568,000 30,678,000
------------- -------------
Total liabilities and stockholders' equity $ 92,489,000 $ 143,594,000
============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
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STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, June 30,
1997 1998
------------ ------------
<S> <C> <C>
NET SALES $ 7,437,000 $ 19,074,000
COST OF SALES 3,246,000 8,450,000
------------ ------------
Gross profit 4,191,000 10,624,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,333,000 6,514,000
------------ ------------
Income from operations 1,858,000 4,110,000
INTEREST EXPENSE AND OTHER, NET 114,000 1,364,000
------------ ------------
Income before extraordinary item
and income taxes 1,744,000 2,746,000
PROVISION FOR INCOME TAXES 713,000 1,181,000
------------ ------------
Income before extraordinary item 1,031,000 1,565,000
EXTRAORDINARY ITEM, net -- 1,091,000
------------ ------------
Net income $ 1,031,000 $ 474,000
============ ============
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 0.26 $ 0.39
Extraordinary item, net -- (0.27)
------------ ------------
Net income $ 0.26 $ 0.12
============ ============
Weighted average shares 3,949,000 4,040,000
============ ============
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.25 $ 0.36
Extraordinary item, net -- (0.25)
------------ ------------
Net income $ 0.25 $ 0.11
============ ============
Weighted average shares 4,117,000 4,404,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1998
------------ ------------
<S> <C> <C>
NET SALES $ 14,916,000 $ 35,299,000
COST OF SALES 6,480,000 15,492,000
------------ ------------
Gross profit 8,436,000 19,807,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,731,000 11,909,000
------------ ------------
Income from operations 3,705,000 7,898,000
INTEREST EXPENSE AND OTHER, NET 174,000 2,628,000
------------ ------------
Income before extraordinary item and
income taxes 3,531,000 5,270,000
PROVISION FOR INCOME TAXES 1,446,000 2,266,000
------------ ------------
Income before extraordinary item 2,085,000 3,004,000
EXTRAORDINARY ITEM, net -- 1,091,000
------------ ------------
Net income $ 2,085,000 $ 1,913,000
============ ============
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 0.53 $ 0.75
Extraordinary item, net -- (0.27)
------------ ------------
Net income $ 0.53 $ 0.48
============ ============
Weighted average shares 3,949,000 4,006,000
============ ============
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.51 $ 0.69
Extraordinary item, net -- (0.25)
------------ ------------
Net income $ 0.51 $ 0.44
============ ============
Weighted average shares 4,116,000 4,356,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,085,000 $ 1,913,000
Adjustments to reconcile net income to net cash used in
Operating activities
Depreciation and amortization 578,000 1,856,000
Interest accretion on note payable 85,000 87,000
Changes in certain assets and liabilities:
Accounts receivable (2,829,000) (3,665,000)
Inventory, net 40,000 (1,551,000)
Prepaids and other assets (161,000) (363,000)
Accounts payable and accrued liabilities (1,635,000) (2,796,000)
------------ ------------
Net cash used in operating activities (1,837,000) (4,519,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of acquired businesses, net of cash acquired (21,816,000) (31,469,000)
Purchase of property, plant & equipment (160,000) (668,000)
Change in investments, long-term receivables & other -- (957,000)
------------ ------------
Net cash used in investing activities (21,976,000) (33,094,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Credit Facility, net of financing costs 21,454,000 10,265,000
Proceeds from Bond Offering, net of financing costs -- 96,400,000
Exercise of stock options -- 197,000
Repayment of notes payable and Credit Facility (454,000) (60,655,000)
------------ ------------
Net cash provided by (used in) financing activities 21,000,000 46,207,000
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS (2,813,000) 8,594,000
CASH AND CASH EQUIVALENTS, beginning of period 4,492,000 3,063,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,679,000 $ 11,657,000
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
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STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The statements presented do not include all information and footnotes required
to be in conformity with generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Results of operations in interim periods are not necessarily
indicative of results for a full year. These consolidated financial statements
and notes thereto should be read in conjunction with Styling Technology
Corporation's (the Company) consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K as of and for the year
ended December 31, 1997. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities as well as disclosure of contingent assets and
liabilities at the date of the accompanying consolidated financial statements,
and the reported amounts of the revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations for the three and six months ended June
30, 1997 and June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997 Three Months Ended June 30, 1998
-------------------------------------------- -----------------------------------------
Effect of Effect of
Stock Stock
Options Options
Basic and Diluted Basic and Diluted
EPS Warrants EPS EPS Warrants EPS
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item (numerator) ............ $ 1,031,000 -- $ 1,031,000 $ 1,565,000 -- $ 1,565,000
Extraordinary item, net
(numerator) ................. -- -- -- 1,091,000 -- 1,091,000
----------- ----------- ----------- ----------- ----------- -----------
Net income (numerator) ...... $ 1,031,000 -- $ 1,031,000 $ 474,000 -- $ 474,000
=========== =========== =========== =========== =========== ===========
Shares (denominator) ........ 3,949,000 168,000 4,117,000 4,040,000 364,000 4,404,000
=========== =========== =========== =========== =========== ===========
Per share amount - income
before extraordinary item ... $ 0.26 $ 0.25 $ 0.39 $ 0.36
Per share amount -
extraordinary item, net ..... -- -- (0.27) (0.25)
----------- ----------- ----------- -----------
Per share amount - net income $ 0.26 $ 0.25 $ 0.12 $ 0.11
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997 Six Months Ended June 30, 1998
-------------------------------------------- -----------------------------------------
Effect of Effect of
Stock Stock
Options Options
Basic and Diluted Basic and Diluted
EPS Warrants EPS EPS Warrants EPS
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item (numerator) ................... $ 2,085,000 -- $ 2,085,000 $ 3,004,000 -- $ 3,004,000
Extraordinary item, net
(numerator) ........................ -- -- -- 1,091,000 -- 1,091,000
----------- ----------- ----------- ----------- ----------- -----------
Net income (numerator) ............. $ 2,085,000 -- $ 2,085,000 $ 1,913,000 -- $ 1,913,000
=========== =========== =========== =========== =========== ===========
Shares (denominator) ............... 3,949,000 167,000 4,116,000 4,006,000 350,000 4,356,000
=========== =========== =========== =========== =========== ===========
Per share amount - income
before extraordinary item .......... $ 0.53 $ 0.51 $ 0.75 $ 0.69
Per share amount -
extraordinary item, net ............ -- -- (0.27) (0.25)
----------- ----------- ----------- -----------
Per share amount - net income ...... $ 0.53 $ 0.51 $ 0.48 $ 0.44
=========== =========== =========== ===========
</TABLE>
For purposes of applying the treasury stock method, the Company has assumed that
it will fully utilize tax deductions arising from the assumed exercise of
non-qualified stock options.
NOTE 3. INVENTORY
Inventories, net, consist of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Raw materials & work-in-process $ 5,044,000 $ 2,594,000
Finished goods 11,223,000 8,357,000
------------- -------------
$ 16,267,000 $ 10,951,000
============= =============
</TABLE>
7
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NOTE 4. BUSINESS COMBINATIONS
In May 1998, the Company acquired substantially all of the assets and assumed
certain operating liabilities of Pro Finish USA, Ltd. (Pro Finish), a producer
of name-brand professional nail enhancement and nail care products. The Company
paid a purchase price of approximately $5.0 million in cash. Financing for the
acquisition was obtained from the credit facility negotiated in connection with
the acquisition of the Clean + Easy / One Touch product lines in December 1997
(the Previous Credit Facility). The acquisition was accounted for using the
purchase method of accounting.
In June 1998, the Company acquired European Touch Co. and two related companies
(collectively European Touch) and European Touch, Ltd. II (European Touch II and
together with European Touch, the European Touch Companies). European Touch is a
developer, producer, and marketer of professional nail enhancement and treatment
products and European Touch II is a develop, producer, and marketer of salon
pedicure equipment. These companies were purchased for a purchase price of
approximately $25.0 million in cash, using the purchase method of accounting
(See Note 5).
NOTE 5. LONG-TERM DEBT
In June 1998, the Company completed a $100.0 million senior subordinated debt
offering (the Offering). The senior subordinated notes due 2008 were priced at
10 7/8% and sold pursuant to Rule 144A. The proceeds of the Offering were used
to finance the purchase price and related costs of acquiring all of the issued
and outstanding capital stock of the European Touch Companies, to repay existing
indebtedness (including the Company's previous credit facility) and for working
capital purposes.
In connection with the Offering, the Company entered into a five-year, $50.0
million senior credit facility (the Credit Facility) with a group of banks for
whom NationsBank, N.A. and Bank of Boston, N.A. acted as co-agents. The Credit
Facility consists of two separate loans: a $25.0 million acquisition term loan
and a $25.0 million revolving line of credit. The interest on the Credit
Facility is paid quarterly and the interest rate is determined by the base rate
(the Base Rate) as defined in the credit agreement. The Base Rate is equal to
the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on such
day plus (iii) the Applicable Base Rate Margin or (b) the sum of (i) the Prime
Rate on such day plus (ii) the Applicable Base Rate Margin. Principal payments
on the acquisition term loan are paid quarterly beginning in March 2000.
Principal payments on the revolving line of credit are due on the maturity date.
The acquisition term loan and the revolving line of credit mature in June 2003.
The revolving line of credit will be used for working capital purposes. The
Company has the option to convert the interest rates relating to any of the
loans to LIBOR plus 150 to 250 basis points. As of June 30, 1998, there were no
amounts outstanding under the Credit Facility. In August 1998, the Company
borrowed $25.0 million under the acquisition term loan to fund the acquisition
of a controlling interest in Ft. Pitt Acquisition, Inc. and its 90% owned
subsidiary Ft. Pitt-Framesi Ltd. (together Framesi USA).
A portion of the proceeds from the Offering was used to repay the Previous
Credit Facility. The Company reported an extraordinary, non-cash charge of
approximately $1.1 million, net of taxes, or
8
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$0.25 per diluted share, related to unamortized financing costs associated with
the repayment of the Previous Credit Facility.
NOTE 6. INTEREST RATE PROTECTION
In connection with the Credit Facility, the Company maintains certain interest
rate protection instruments. As of June 30, 1998, the Company has entered into
interest rate swap and interest rate cap agreements (the Agreements) to reduce
the impact of changes in interest rates. The Company is exposed to a risk of
credit loss in the event of nonperformance by financial institutions that are
also party to the Agreements. However, management believes that, based on the
high creditworthiness of these counterparties, nonperformance is unlikely. The
following is a summary of the Company's Agreements as of June 30, 1998:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
Company's Notional Value
Instrument Effective Rate (dollars in thousands)
---------------- ------------------ ------------------------
<S> <C> <C>
Swap 8.50% $ 12,500
Cap 10.25% 12,500
---------
$ 25,000
========
</TABLE>
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. Statement 133 is effective for fiscal years
beginning after June 15, 1999. A company may also implement the Statement as of
the beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997 (and, at the
company's election, before January 1, 1998). The Company is currently evaluating
the impact of the new statement on its financial position and results of
operations.
NOTE 8. SUBSEQUENT EVENTS
In August 1998, the Company acquired a controlling interest in Framesi USA.
Framesi USA holds
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exclusive license rights for the sale in the United States and most of Latin
America of Framesi(R) hair color products along with its complementary
Biogenol(R) line of shampoos, conditioners, and styling products. The Company
paid approximately $30.0 million for the Ft. Pitt Acquisition, Inc. stock, in
the form of cash and seller carryback financing of approximately $5.0 million.
Approximately $25.0 million from the Credit Facility was used to finance the
$30.0 million purchase price. The acquisition will be accounted for using the
purchase method of accounting.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
Styling Technology Corporation (the Company) is a leading developer, producer,
and marketer of a wide array of professional salon products, addressing all
salon product categories, including hair care, nail care, and skin and body care
products, as well as salon appliances and sundries. Through strategic
acquisitions, the Company has acquired well-recognized brand names, a strong
distribution network, established marketing and salon industry education
programs, and significant production and sourcing capabilities.
The Company believes it is the only company that develops, produces, and markets
products in each category of the professional salon products industry and that
its ability to offer customers a "one-stop shop" for brand-name professional
salon products creates a competitive advantage. The Company currently sells more
than 600 products under 17 principal brand names, including ABBA Pure and
Natural Hair Care(R) products, Body Drench(R) skin and body care products, Clean
+ Easy(R) hair removal products, Gena(R) nail and pedicure products, Kizmit(TM)
acrylic nail enhancements, Revivanail(R) nail treatments, and Framesi(R),
Biogenol(R), and Roffler(R) hair care products. In the United States, the
Company markets its product lines through professional salon industry
distribution channels to more than 2,500 customers, consisting primarily of
salon product and tanning supply distributors (which resell to beauty and
tanning salons), beauty supply outlets, and salon chains. The Company also
markets its products directly to more than 3,000 spas, resorts, and health and
country clubs through its in-house sales force. Internationally, the Company
sells its products primarily through international salon product distributors.
Except for the historical information contained herein, the discussion in this
Quarterly Report contains or may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein, as well as
those factors discussed under "Special Considerations" contained in Item 1 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997. Historical results are not necessarily indicative of operating results for
any future period.
RESULTS OF OPERATIONS - THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 1998
The Company earned net income of $1.6 million, or $0.36 per diluted share, for
the three months ended June 30, 1998 before a non-cash extraordinary charge
related to the refinancing discussed below, as
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compared to net income of $1.0 million, or $0.25 per diluted share, for the
corresponding period during 1997. After the extraordinary item, net income for
the three months ended June 30, 1998 was $474,000, or $0.11 per diluted share.
For the six months ended June 30, 1998, the Company earned net income of $3.0
million, or $0.69 per diluted share, before the extraordinary item compared to
net income of $2.1 million, or $0.51 per diluted share, for the corresponding
period during 1997. After the extraordinary item, net income for the six months
ended June 30, 1998 was $1.9 million, or $0.44 per diluted share. The Company
attributes the improvement in net income during the three months ended June 30,
1998 primarily to the contributions of brands acquired subsequent to June 1,
1997 (ABBA, Clean + Easy / One Touch, Pro Finish and the European Touch
companies), as well as to growth in the Company's existing operations.
Net Sales
Net sales amounted to $19.1 million for the three months ended June 30, 1998,
compared to net sales of $7.4 million for the three months ended June 30, 1997.
Net sales amounted to $35.3 million for the six months ended June 30, 1998,
compared to net sales of $14.9 million for the six months ended June 30, 1998.
The $11.7 million, or 156%, increase in sales for the quarter ended June 30,
1998 compared to the quarter ended June 30, 1997 was due primarily to the
additions of ABBA and Clean + Easy / One Touch, acquired in June and December,
1997, respectively. Sales growth was also attributable to strong internal growth
in the Company's existing brands, which was in excess of 10% on a consolidated
basis during the quarter ended June 30, 1998 for brands managed by the Company
for more than one year. In particular, the Company's ABBA brand experienced
significant sales growth as compared to 1997 due to favorable changes in its
exclusive distribution network, which resulted in a shift to distributors with
stronger salon distribution capabilities. The Company's Gena brand experienced
strong sales growth as compared to the same period in 1997 primarily as a result
of new packaging introduced during 1998 for its line of pedicure products. In
addition, Styling Research experienced significant sales growth due primarily to
improvements in brand management personnel.
Cost of Sales
Cost of sales amounted to $8.4 million, or 44% as a percentage of net sales, for
the three months ended June 30, 1998, compared to $3.2 million, or 44% as a
percentage of net sales, for the three months ended March 31, 1997. Cost of
sales amounted to $15.5 million, or 44% as a percentage of net sales, for the
six months ended June 30, 1998, compared to $6.5 million, or 43% as a percentage
of net sales, for the six months ended June 30, 1997. As a result of the
foregoing, the Company realized gross profit for the three months ended June 30,
1998 of $10.6 million, or 56%, compared to $4.2 million, or 56%, realized by the
Company during the corresponding period in 1997. For the six months ended June
30, 1998, the Company realized gross profit of $19.8 million, or 56%, compared
to $8.4 million, or 57%, for the corresponding period in 1997. The Company's
ability to sustain this favorable gross margin percentage is attributable
primarily to maintaining the cost of goods levels negotiated with third-party
suppliers during 1997. In addition, gross margins associated with the ABBA and
Clean + Easy / One Touch brands, after renegotiation of pricing with third-party
manufacturers for ABBA and cost savings from the shift from domestic to offshore
manufacturing for the Clean + Easy / One Touch hair removal appliances, were
generally consistent with the consolidated gross margin of the Company's
existing brands.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $6.5 million for the three
months ended June 30, 1998
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compared to $2.3 million for the three months ended June 30, 1997. Selling,
general, and administrative expenses were $11.9 million for the six months ended
June 30, 1998 compared to $4.7 million for the six months ended June 30, 1997.
The increase in selling, general, and administrative expenses was due primarily
to expenses added as result of the ABBA and Clean + Easy / One Touch
acquisitions as well as increased selling, general, and administrative expenses
incurred to strengthen the Company's infrastructure to support its acquisition
and growth strategy. Selling, general, and administrative expenses, as a
percentage of net sales, increased to 34% of net sales for the three months
ended June 30, 1998 compared to 31% of net sales for the three months ended June
30, 1997 as the Company controlled increases in selling, general, and
administrative expenses at levels commensurate with increases in sales,
partially offset by planned increases in expenses to support growth, as
discussed above. Selling, general, and administrative expenses, as a percentage
of net sales, were 34% for the six months ended June 30, 1998 as compared with
32% for the six months ended June 30, 1997.
Extraordinary Item
A portion of the proceeds from the Offering discussed under "Liquidity and
Capital Resources" below was used to repay the Previous Credit Facility. The
Company reported an extraordinary, non-cash charge of approximately $1.1
million, net of taxes, or $0.25 per diluted share, related to unamortized
financing costs associated with the Previous Credit Facility.
Provision for Income Taxes
The provision for income taxes for the three months ended June 30, 1998 amounted
to $1.2 million, which represents an effective tax rate of approximately 43%,
compared with a provision of $713,000, which represents an effective tax rate of
approximately 41% for the three months ended June 30, 1997. The provision for
income taxes for the six months ended June 30, 1998 amounted to $2.3 million,
which represents an effective tax rate of approximately 43%, compared with a
provision of $1.4 million, which represents an effective tax rate of
approximately 41%, for the six months ended June 30, 1998. The higher effective
tax rate for the three and six months ended June 30, 1998 is attributable
primarily to the income tax effect of goodwill associated with the ABBA
acquisition, which is not deductible for income tax purposes.
Income from Operations and Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA)
Income from operations was $4.1 million for the three months ended June 30,
1998, compared to $1.9 million for the three months ended June 30, 1997. Income
from operation was $7.9 million for the six months ended June 30, 1998, compared
to $3.7 million for the six months ended June 30, 1997. Earnings before
interest, taxes, depreciation, and amortization (EBITDA) was $5.0 million for
the three months ended June 30, 1998, compared to $2.2 million for the three
months ended June 30, 1997. Earnings before interest, taxes, depreciation, and
amortization (EBITDA) was $10.0 million for the six months ended June 30, 1998,
compared to $4.3 million for the six months ended June 30, 1997. During the
quarter ended June 30, 1998, the Company completed the acquisitions of Pro
Finish and the European Touch companies. On a pro forma basis, if these
acquisitions had taken place on January 1, 1998, EBITDA would have been $6.5
million for the three months ended June 30, 1998 and $12.7 million for the six
months ended June 30, 1998. EBITDA is not intended to represent net cash
provided by operating activities as defined by generally accepted accounting
principles and should not be considered as an alternative to net income as an
indicator of operating performance or to net cash provided by operating
activities as a measure of liquidity. The Company believes EBITDA is a measure
commonly reported and widely used by analysts, investors, and other interested
parties who monitor business
12
<PAGE> 13
performance. Accordingly, this information has been disclosed herein to permit a
more complete comparative analysis of the Company's operating performance.
SEASONALITY
The Company has experienced moderate seasonality in quarterly operating results
due mainly to the effect of the seasonality of the indoor tanning season on the
operating result of the Body Drench and Suntopia product lines. The Company
expects the seasonal effect of Body Drench and Suntopia sales to lessen over
time as the Company continues to pursue its acquisition strategy.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, internal sales growth resulted in an
increase in the Company's investment in accounts receivable of $3.7 million. In
order to support continued sales growth, the Company increased its investment in
inventory by $1.6 million. The Company also used cash from operations to achieve
a net reduction in accounts payable and accrued liabilities of $2.8 million. The
reduction of accounts payable and accrued liabilities during the period relates
primarily to the payment of liabilities assumed in the Clean + Easy / One Touch
acquisition as well as related accrued acquisition and financing costs. As a
result of these factors, which offset net income of $1.9 million and noncash
expenditures of $1.9 million, the Company recorded net cash used in operations
of $4.5 million for the six months ended June 30, 1998.
The Company repaid $825,000 of term loan amortization under its Previous Credit
Facility and utilized net proceeds of $10.3 million from its line of credit to
finance acquisitions and working capital requirements during the six months
ended June 30, 1998. In June 1998, the Company completed the Offering. The
senior subordinated notes due 2008 were priced at 10 7/8% and were sold pursuant
to Rule 144A. The proceeds of the Offering were used to finance the purchase
price and related costs of acquiring all of the issued and outstanding capital
stock of the European Touch companies as well as to repay all amounts
outstanding under the Previous Credit Facility. As a result, net cash provided
by financing activities for the quarter amounted to $46.2 million and, along
with cash on hand, was utilized to fund net cash used in investing activities of
$33.1 million as well as operating cash requirements as discussed above.
As a result of the foregoing, the Company's working capital position increased
to $38.0 million at June 30, 1998 from $13.9 million at December 31, 1997.
In connection with the Offering, the Company entered into a five-year, $50.0
million senior credit facility (the Credit Facility) with a group of banks for
whom NationsBank, N.A. and Bank of Boston, N.A. acted as co-agents. The Credit
Facility consists of two separate loans: a $25.0 million acquisition term loan
and a $25.0 million revolving line of credit. The interest on the Credit
Facility is paid quarterly and the interest rate is determined by the base rate
(the Base Rate) as defined in the credit agreement. The Base Rate is equal to
the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on such
day plus (iii) the Applicable Base Rate Margin or (b) the sum of (i) the Prime
Rate on such day plus (ii) the Applicable Base Rate Margin. Principal payments
on the acquisition term loan are paid quarterly beginning in March 2000.
Principal payments on the revolving line of credit are due on the maturity date.
The acquisition term loan and the revolving line of credit mature in June 2003.
The revolving line of credit will be used for working capital purposes. The
Company has the option to convert the interest
13
<PAGE> 14
rates relating to any of the loans to LIBOR plus 150 to 250 basis points. As of
June 30, 1998, there were no amounts outstanding under the Credit Facility. In
August 1998, the Company borrowed $25.0 million under the acquisition term loan
to fund the acquisition of a controlling interest in Framesi USA.
In connection with the Credit Facility, the Company maintains certain interest
rate protection instruments. As of June 30, 1998, the Company has entered into
interest rate swap and interest rate cap agreements to reduce the impact of
changes in interest rates.
The Company's line of credit, current cash resources, and cash from operations
are expected to be sufficient to fund the Company's capital needs during the
next twelve months at its current level of operations, apart from capital needs
resulting from acquisitions. However, the Company may be required to obtain
additional capital to fund its planned growth. The Company plans to pursue
strategic acquisitions to capitalize on the substantial fragmentation and growth
potential existing in the professional salon products industry. The Company
intends to fund its future capital needs through a combination of current cash
resources, cash from operations, bank financing, seller notes payable, issuance
of common stock, and additional public or private debt or equity financing. The
availability of such capital resources cannot be assured and is dependent upon
prevailing market conditions, interest rates, and the financial condition of the
Company.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in fewer
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists concerning the potential effects associated with such
compliance. The Company has assessed and continues to assess the impact the Year
2000 issue will have on its reporting and operating systems. The Company is
addressing the Year 2000 issue by upgrading to a new release of its key
operating and financial software system, which will be Year 2000 compliant. The
Company will test the new system for Year 2000 compliance when the system is
upgraded. In addition, during 1998 the Company intends to assess the impact any
Year 2000 compliance problems suffered by its customers, third-party contract
manufacturers, and suppliers may have on the Company. Although the Company does
not anticipate that the Year 2000 issue will have a significant impact on its
business, any significant Year 2000 compliance problem of any of the Company,
its customers, or its third-party contract manufacturers or suppliers could have
a material adverse effect on the Company's business, financial condition, and
results of operations.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Pursuant to a private placement under Section 4(2) of the Securities
Act, in May 1998, the Registrant issued $100.0 million 10 7/8%
senior subordinated notes due 2008 to three initial purchasers in a
Rule 144A transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on May 4,
1998. The following nominees were elected to the Board of Directors, to
serve until their successors are elected or have been qualified, or
until their earlier resignation or removal.
NOMINEE VOTES IN FAVOR WITHHELD
------- -------------- --------
Sam L. Leopold 3,570,928 0
Richard R. Ross 3,570,928 0
James A. Brooks 3,570,928 0
Peter W. Burg 3,570,928 0
Michael H. Feinstein 3,570,928 0
Sylvan Schefler 3,570,928 0
The following items were voted upon by the Company's stockholders.
Proposal to amend the Company's Certificate of Incorporation to
classify the Board of Directors of the Company into three classes with
staggered terms of office.
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
-------------- ------- --------- ---------------
2,578,456 236,450 2,700 0
PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO ADD A
PROVISION ALLOWING THE BOARD OF DIRECTORS TO CONSIDER CERTAIN FACTORS WHEN
EVALUATING CERTAIN MATTERS SUCH AS TENDER OFFERS.
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
-------------- ------- --------- ---------------
2,578,456 236,450 2,700 0
15
<PAGE> 16
PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO
ELIMINATE ACTIONS BY WRITTEN CONSENT OF STOCKHOLDERS.
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
-------------- ------- --------- ---------------
2,417,006 397,900 2,700 0
PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO ADD
CERTAIN MINIMUM PRICE AND PROCEDURAL REQUIREMENTS IN CONNECTION WITH CERTAIN
TRANSACTIONS SUCH AS BUSINESS COMBINATIONS.
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
-------------- ------- --------- ---------------
2,452,521 364,135 950 0
PROPOSAL TO AMEND THE COMPANY'S 1996 STOCK OPTION PLAN TO INCREASE THE
NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK THAT MAY BE ISSUED PURSUANT TO
THE 1996 STOCK OPTION PLAN FROM 400,000 TO 750,000 SHARES.
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
-------------- ------- --------- ---------------
2,797,521 19,885 200 0
PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31,
1998.
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
-------------- ------- --------- ---------------
3,559,628 7,600 3,700 0
ITEM 5. OTHER INFORMATION
Pursuant to Rule 14a-4 under the Securities Exchange Act of 1934, as amended,
the Company intends to retain discretionary authority to vote proxies with
respect to stockholder proposals for which the proponent does not seek inclusion
of the proposed matter in the Company's proxy statement for the annual meeting
to be held during calendar 1999, except in circumstances where (i) the Company
receives notice of the proposed matter no later than March 16, 1999, and (ii)
the proponent complies with the other requirements set forth in Rule 14a-4.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27 Financial Data Schedule
(b) REPORT ON FORM 8-K.
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STYLING TECHNOLOGY CORPORATION
Dated: August 14, 1998 By: /s/ Richard R. Ross
---------------------------
Richard R. Ross
Executive Vice President and
Chief Financial Officer
(Duly authorized officer of
the registrant, principal
financial and accounting officer)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,657
<SECURITIES> 0
<RECEIVABLES> 21,051
<ALLOWANCES> 1,922
<INVENTORY> 16,267
<CURRENT-ASSETS> 50,391
<PP&E> 4,003
<DEPRECIATION> 0
<TOTAL-ASSETS> 143,594
<CURRENT-LIABILITIES> 12,404
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 30,677
<TOTAL-LIABILITY-AND-EQUITY> 143,594
<SALES> 35,299
<TOTAL-REVENUES> 35,299
<CGS> 15,492
<TOTAL-COSTS> 27,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,628
<INCOME-PRETAX> 5,270
<INCOME-TAX> 2,266
<INCOME-CONTINUING> 3,004
<DISCONTINUED> 0
<EXTRAORDINARY> 1,091
<CHANGES> 0
<NET-INCOME> 1,913
<EPS-PRIMARY> 0.48<F1>
<EPS-DILUTED> 0.44<F2>
<FN>
<F1>BASIC EPS BEFORE THE EXTRAORDINARY ITEM WAS $0.75. DILUTED EPS BEFORE THE
EXTRAORDINARY ITEM WAS $0.69.
<F2>EPS HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128 AND BASIC AND DILUTED EPS
HAVE BEEN ENTERED INTO THE PRIMARY AND FULLY DILUTED EPS LINE ITEMS ABOVE.
</FN>
</TABLE>
