<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1999
REGISTRATION NO. 333-85165
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2844 75-2665378
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
7400 E. TIERRA BUENA LANE
SCOTTSDALE, AZ 85260
(480) 609-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SAM L. LEOPOLD
CHIEF EXECUTIVE OFFICER
7400 E. TIERRA BUENA LANE
SCOTTSDALE, AZ 85260
(480) 609-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT S. KANT, ESQ. C. NEEL LEMON III, ESQ.
SCOTT K. WEISS, ESQ. J. HOLT FOSTER III, ESQ.
STEVEN G. FISHBACH, ESQ. THOMPSON & KNIGHT L.L.P.
GREENBERG TRAURIG, P.A. 1700 PACIFIC AVENUE
ONE EAST CAMELBACK, SUITE 1100 SUITE 3300
PHOENIX, ARIZONA 85012 DALLAS, TEXAS 75201
(602) 263-2300 (214) 969-1700
</TABLE>
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<PAGE> 2
We will amend and complete the information in this prospectus. Although we are
permitted by US federal securities law to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities has been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
SUBJECT TO COMPLETION -- SEPTEMBER 8, 1999
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PROSPECTUS
, 1999
[STYLING TECHNOLOGY CORPORATION LOGO]
4,000,000 SHARES OF COMMON STOCK
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THE COMPANY:
- We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon
distribution channels. Our products include hair care, skin and body
care, and nail care products, as well as salon appliances and sundries.
- Styling Technology Corporation
7400 E. Tierra Buena
Scottsdale, Arizona 85260
(480) 609-6000
- NASDAQ SYMBOL: STYL
THE OFFERING:
- We are offering 4,000,000 shares.
- The underwriters have an option to purchase an additional 600,000
shares from us to cover over-allotments.
- There is an existing trading market for our shares. The reported last
sales price on September 7, 1999 was $15.25 per share.
- We plan to use the proceeds from this offering to repay outstanding
indebtedness under our revolving credit facility. We will use the
resulting availability under our revolving credit facility for working
capital and general corporate purposes, including possible
acquisitions.
- Closing: , 1999
<TABLE>
<CAPTION>
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Per Share Total
<S> <C> <C>
- -------------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to Company:
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</TABLE>
This investment involves risk. See "Risk Factors," beginning on page 5.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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DONALDSON, LUFKIN & JENRETTE
ING BARINGS
U.S. BANCORP PIPER JAFFRAY
FIRST SECURITY VAN KASPER
DLJDIRECT INC.
<PAGE> 3
[INSIDE FRONT COVER]
This page will contain the logos of Styling Technology Corporation's principal
products. The inside front cover folds out to display ten representative photos
of our product lines, showing the variety of packaging and displays of our
products.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary............... 1
Risk Factors..................... 5
Forward-Looking Statements....... 12
Use of Proceeds.................. 13
Dividend Policy.................. 13
Capitalization................... 14
Price Range of Common Stock...... 15
Selected Consolidated Financial
Data........................... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 18
Business......................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management....................... 39
Certain Relationships and Related
Transactions................... 48
Principal Stockholders........... 49
Description of Securities........ 51
Underwriting..................... 55
Legal Matters.................... 57
Experts.......................... 57
Where You Can Obtain Additional
Information.................... 57
Index to Consolidated Financial
Statements..................... F-1
</TABLE>
----------------------
"ABBA," "ALPHA 9," "AQUATONIC," "BIOGENOL," "BODY DRENCH," "CLEAN + EASY,"
"COSMIC," "EUROPEAN TOUCH," "GENA," "KIZMIT," "MAIKO," "ONE TOUCH," "PRO
FINISH," "REVIVANAIL," "ROFFLER," "SRC," AND "SUNTOPIA" ARE OUR PRINCIPAL
TRADEMARKS. THIS PROSPECTUS ALSO REFERS TO OUR OTHER TRADEMARKS AS WELL AS
TRADEMARKS OF THIRD PARTIES.
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. Except as otherwise specified, all information in this
prospectus assumes no exercise of the underwriters' over-allotment option.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" contain a discussion of some of the factors that
could contribute to those differences.
STYLING TECHNOLOGY CORPORATION
We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon distribution
channels. Our products include hair care, skin and body care, and nail care
products, as well as salon appliances and sundries. We believe we are the only
company that develops, produces, and markets products in each category of the
estimated $40 billion U.S. market and substantially larger worldwide market for
professional salon products and services. We have well-recognized, long-lived
brand names, a strong distribution network, established marketing and salon
industry education programs, and significant production and sourcing
capabilities. We plan to leverage our well-established distribution channels by
providing customers with an increasingly comprehensive array of professional
salon brands and products. We also plan to take advantage of our consumer
products marketing expertise and our well-developed infrastructure to develop
and acquire new product lines to sell through additional consumer product
distribution channels. We sell our products in all 50 states, Canada, Australia,
Europe, Latin America, and Asia.
We currently sell more than 500 products under 19 principal brand names.
The table below sets forth a description of our principal products, the brand
names under which the products are sold, and the percentage of net sales for
each product category for the 12 months ended June 30, 1999 on a pro forma basis
for companies acquired as if we acquired those companies at the beginning of
that period.
<TABLE>
<CAPTION>
PERCENTAGE OF
PRO FORMA
PRODUCT CATEGORY NET SALES PRODUCT DESCRIPTION BRAND NAMES
<S> <C> <C> <C>
Hair Care 45.7% Shampoo, conditioner, hair color, and ABBA,
styling and finishing aids AquaTonic,
Biogenol, Body
Drench,
Framesi, Gena,
Roffler
Skin and Body Care 23.8% Moisturizing lotion, indoor and outdoor Body Drench,
tanning products, personal care products, Clean + Easy,
paraffin waxes, thermo-therapy treatments, Gena, One
and hair removal systems and depilatory Touch, Suntopia
products
Nail Care 17.6% Natural nail care products, acrylic and Alpha 9,
fiberglass nail enhancement products, nail Cosmic,
treatments, nail polish, light-bonded nail European Touch,
systems, and manicure and pedicure Gena, Kizmit,
solutions and accessories Pro Finish,
Revivanail
Salon Appliances and 12.9% Hairdryers, curling irons, salon pedicure European Touch
Sundries spas, salon furniture, and salonwear II, Maiko, SRC
(capes/aprons)
</TABLE>
Our net sales and earnings before interest, taxes, depreciation, and
amortization, or EBITDA, have grown rapidly since our inception. Our net sales
increased from $38.1 million in 1997 to $90.4 million in 1998, a growth rate of
137%. Our EBITDA increased from $11.0 million in 1997 to $23.1 million in 1998,
a growth
1
<PAGE> 6
rate of 110%. We have also enjoyed high profitability, with 56.6% gross margins
and 25.6% EBITDA margins for fiscal 1998. Our net sales increased from $35.3
million during the six months ended June 30, 1998 to $68.8 million during the
six months ended June 30, 1999. This increase in net sales represents a 95%
growth rate, including internal net sales growth of approximately 17%. Our
EBITDA, before centralization and reengineering costs and one-time charges,
increased from $9.6 million during the six months ended June 30, 1998 to $16.6
million during the six months ended June 30, 1999. This increase in EBITDA
represents a 73% growth rate, including internal EBITDA growth of 19%. We
attribute our rapid growth and high profitability to our focus on integrating
our acquired businesses, improving margins within our existing product lines,
developing new product lines and product line extensions, and acquiring
businesses and product lines that complement our portfolio of products.
THE PROFESSIONAL SALON PRODUCTS MARKET
The professional salon products industry has grown significantly during the
last several years. According to industry sources, annual professional salon
industry revenue, which includes revenue from salon services and the sale of
salon products, is approximately $40 billion in the United States and
substantially larger worldwide. Industry sources estimate that in 1996 there
were approximately 127 million client visits to salons each month and that there
were more than 200,000 beauty salons and 1.8 million licensed cosmetologists in
the United States. The professional salon products industry is highly
fragmented. In 1996, experts estimated that of the approximately 700 companies
selling professional salon products in the United States, most generated less
than $10 million in sales and focused on a single product category although a
number of larger companies existed in certain product categories.
Professional salon products have two end consumers: the salon professional
who uses them in the performance of salon services and the salon client who
purchases them for personal use. We believe salons typically generate between
10% and 30% of their revenue from retail sales of professional salon products.
As users and "prescribers" of professional salon products, salon professionals
typically select products on the basis of performance rather than price. As a
result, suppliers of professional salon products focus on educating distributors
and salon professionals on the uses and benefits of their products and on
industry trends. Because salon professionals prescribe these products and sell
them primarily in connection with the rendering of a service, professional salon
products typically foster strong brand loyalty and exhibit relative price
insensitivity. Consequently, professional salon products generally command
substantially higher prices and gross margins than mass-marketed beauty
products.
OUR COMPETITIVE STRENGTHS
We believe the following business strengths provide us with a competitive
advantage in the professional salon products market:
- We offer a variety of well-recognized, long-lived premium brands in
all professional salon product categories.
- Our breadth of product offerings distinguishes us as the only company
with product offerings across all salon product categories and enables
us to offer distributors and other customers a "one-stop shop" for
brand name professional salon products.
- Our strong distribution network enables us to sell our products into
highly fragmented distribution channels consisting of distributors,
beauty supply outlets, and salon chains in the United States and
internationally.
- Our experience gained from successfully acquiring and integrating 11
professional salon products businesses since our initial public
offering in November 1996 positions us to pursue additional
acquisitions.
- Our favorable operating margins result primarily from our purchasing
power; integrated sourcing and distribution capabilities; and
consolidated sales, marketing, and product development.
2
<PAGE> 7
- Our management team has extensive experience in the consumer and salon
products industry, particularly in the areas of sales, marketing, and
operations.
- We have centralized our operations and are implementing new
centralized management and information systems to enhance the
productivity of existing operations and future acquisitions.
OUR STRATEGY
Our objective is to be the leader in the professional salon products
industry. In order to achieve this objective, we are pursuing a strategy of
continued growth through internal business expansion and acquisitions. Key
elements of this strategy include the following:
INTERNAL GROWTH STRATEGY
We intend to increase revenue and improve margins within our existing
product lines and to develop new product lines. Elements of our internal growth
strategy include the following:
- leveraging our well-established distribution channels by providing
customers with an increasingly comprehensive array of products;
- selling directly to salon chains, which we believe are underserved by
distributors and other salon product companies;
- launching new, internally developed brands to leverage our strong
distribution network and leading industry position;
- introducing product line extensions under existing brands;
- introducing new generations of existing product lines with improved
formulations and packaging;
- implementing a new professional-only store marketing and distribution
program to service the growing number of stores operated by large
distributors that sell only to professional stylists;
- expanding distribution of existing products internationally; and
- enhancing the operational efficiencies of acquired businesses.
ACQUISITION STRATEGY
We maintain a disciplined approach to acquisitions and evaluate each
potential acquisition based on the following goals:
- acquiring leading brand names that complement our other brands and
command strong customer loyalty;
- acquiring companies and product lines that diversify and strengthen
our portfolio of brands;
- acquiring companies and product lines that strengthen our
relationships with domestic and international distributors; and
- expanding product offerings to include premium department store,
boutique, catalog, and e-commerce lines through the acquisition of
companies or brand names geared to these distribution channels.
Our future acquisitions increasingly will focus on companies that are
larger than those previously acquired and that enhance our position in the
professional salon products market or enable us to penetrate new consumer
product distribution channels.
OUR OFFICES
Our executive offices are located at 7400 E. Tierra Buena, Scottsdale,
Arizona 85260, and our telephone number is (480) 609-6000. All references to
"we," "our," "us," "Styling," or the "Company" refer to Styling Technology
Corporation and its subsidiaries. Our web site is located at
http://www.styl.com. Information contained on our web site does not constitute
part of this prospectus.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following consolidated financial information should be read in
conjunction with our consolidated financial statements and the notes thereto
contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
NOVEMBER 27, YEAR ENDED SIX MONTHS ENDED
1996 TO DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------------- -------------------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA AND OTHER
DATA:
Net sales............................. $ 1,083 $38,108 $90,373 $35,299 $68,770
Gross profit.......................... 512 21,352 51,151 19,807 38,913
Selling, general, and administrative
expenses........................... 737 12,201 32,715 11,909 25,775
Centralization and reengineering
costs(a)........................... -- -- 422 -- 1,363
Provision for cancelled
distributors(a).................... -- -- -- -- 5,067
Income (loss) from operations......... (225) 9,151 18,014 7,898 6,708
Interest (income) expense and other,
net................................ (2) 1,847 9,206 2,628 7,874
Income (loss) before extraordinary
item............................... (151) 4,207 5,173 5,270 (1,166)
Extraordinary item, net............... -- (1,377) (1,091) (1,091) (446)
Net income (loss)..................... (151) 2,830 4,082 1,913 (1,160)
Diluted earnings (loss):
Per share income (loss) before
extraordinary item(a)............ $ (0.04) $ 1.02 $ 1.20 $ 0.69 $ (0.18)
Per share extraordinary item,
net.............................. -- (0.33) (0.25) (0.25) (0.11)
Per share net income (loss)........ (0.04) 0.69 0.95 0.44 (0.29)
Weighted average shares............ 3,770 4,113 4,313 4,356 4,068
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------
ACTUAL As Adjusted(b)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 46,223 $ 50,411
Total assets.............................................. 239,125 $243,313
Long-term debt and other, less current portion............ 155,652 $103,352
Total stockholders' equity................................ 32,653 $ 89,141
</TABLE>
- ---------------
(a) The centralization and reengineering costs had a $0.06 impact on diluted
earnings per share during the year ended December 31, 1998, and a $0.20
impact on diluted earnings per share during the six months ended June 30,
1999, net of tax. During the second quarter of 1999, we also incurred a
provision for cancelled distributors of approximately $5.1 million, before
taxes, or $0.76 per diluted share, net of tax, related to the write-down of
certain tanning distributor receivables in connection with our strategic
realignment to exclusive distribution. These per share amounts are not
defined by generally accepted accounting principles and should not be
considered as an alternative to earnings per share.
(b) The "As Adjusted" balance sheet data reflects the completion of this
offering assuming a public offering price of $15.25 per share, and the
application of the net proceeds therefrom as of June 30, 1999.
4
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider carefully the following risk factors, in addition to the other
information contained in this prospectus, before purchasing any of our common
stock.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. These statements relate to our future plans, objectives,
expectations, and intentions. These statements may be identified by the use of
words such as "believes," "plans," "expects," "may," "will," "should," "seeks,"
"pro forma," or "anticipates," and similar expressions. Our actual results could
differ materially from those discussed in these statements. Factors that could
contribute to these differences include those discussed below and elsewhere in
this prospectus.
RISKS RELATING TO OUR BUSINESS
A VARIETY OF FACTORS COULD ADVERSELY AFFECT OUR OPERATING RESULTS
A wide variety of factors could adversely impact our net sales and
operating results. Many of these factors are beyond our control. These factors
include the following:
- our ability to identify trends in the professional salon products
industry;
- our ability to create and introduce new products on a timely basis that
take advantage of industry trends;
- the continued market acceptance of our products among salon professionals
and their clientele;
- our ability to arrange for timely production and delivery of our
products;
- the level and timing of orders placed by customers; and
- competition and competitive pressures on prices.
The success of our operations depends to an extent upon a number of factors
relating to discretionary consumer spending and continued demand for
professional salon products. These factors include economic conditions, such as
employment, business conditions, interest rates, and tax rates, as well as the
continued growth of the professional salon products industry. General social
trends and economic conditions could adversely affect consumer spending, which
would adversely affect our business, financial condition, and operating results.
WE FACE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
We completed four acquisitions in fiscal 1996, three acquisitions in fiscal
1997, and four acquisitions in fiscal 1998. Our ability to complete acquisitions
successfully will depend upon the availability of adequate cash reserves, our
ability to issue our common stock or other securities in acquisitions, and our
ability to raise additional cash through debt and equity financing. The amount
of securities that we may be required to issue and the terms on which we can
secure debt or equity financing will depend on our operating performance and
financial condition, the trading price of our common stock, and conditions in
the debt and equity markets. The size, timing, and integration of any future
acquisitions may cause substantial fluctuations in operating results from
quarter to quarter. Consequently, operating results for any quarter may not be
indicative of the results that may be achieved for any subsequent fiscal quarter
or full fiscal year.
In addition, we may issue shares of common stock in connection with future
acquisitions. The issuance of shares in acquisitions will result in the dilution
of the voting power of the currently outstanding shares and could have a
dilutive effect on earnings per share.
As a part of our acquisition strategy, we frequently engage in discussions
with various businesses respecting their potential acquisition. In connection
with these discussions, we and each potential acquired business exchange
confidential operational and financial information, conduct due diligence
inquiries, and
5
<PAGE> 10
consider the structure, terms, and conditions of the potential acquisition. In
certain cases, the prospective acquired business agrees not to discuss a
potential acquisition with any other party for a specific period of time, grants
us certain rights in the event the acquisition is not completed, and agrees to
take other actions designed to enhance the possibility of the acquisition.
Potential acquisition discussions frequently take place over a long period of
time, involve difficult business integration and other issues, and require
solutions for numerous family relationship, management succession, and related
matters. As a result of these and other factors, a number of potential
acquisitions that from time to time appear likely to occur do not result in
binding legal agreements and are not consummated.
Our acquisition agreements generally contain purchase price adjustments,
rights of set-off, and other remedies in the event that certain unforeseen
liabilities or issues arise in connection with an acquisition. These remedies,
however, may not be sufficient to compensate us in the event that any unforeseen
liabilities or other issues arise.
Our future acquisitions increasingly will focus on companies that are
larger than those previously acquired and that enhance our position in the
professional salon products market or enable us to penetrate new consumer
product distribution channels. Larger acquisitions may involve greater risks,
and operating in new consumer product distribution channels may result in our
pursuing businesses outside of our core experience.
WE MUST BE ABLE TO INTEGRATE OUR BUSINESS OPERATIONS
Integrating the management, operations, and facilities of acquired
businesses could involve unforeseen difficulties. These difficulties could have
a material adverse effect on our business, financial condition, and operating
results. We could encounter difficulties in
- integrating and managing effectively the operations of acquired
businesses with our operations;
- achieving our operating growth strategies with respect to acquired
businesses;
- obtaining increased revenue opportunities as a result of the anticipated
synergies created by expanded product offerings and additional
distribution channels; and
- reducing the overall selling, general, and administrative expenses
associated with acquired businesses.
Significant uncertainties accompany each business combination. If we
encounter difficulties in integrating an acquisition, we may not achieve the
operating efficiencies or otherwise realize cost savings. The inability to
achieve the anticipated cost savings could have a material adverse effect on our
business, financial condition, and operating results.
WE MUST EFFECTIVELY MANAGE OUR GROWTH
Our growth and expanding operations may place a significant strain on our
management, administrative, operational, and financial resources as well as
increased demands on our systems and controls. Our ability to manage our growth
will require us to
- integrate successfully the operations of acquired businesses with our
operations;
- enhance further our operational, financial, and management systems and
our marketing programs;
- motivate, manage, and retain our current employees; and
- identify, hire, and train additional employees.
The failure to manage effectively our growth could have a material adverse
effect on our business, financial condition, and operating results.
WE MUST RESPOND TO CONSUMER PREFERENCES
Consumer preferences in the professional salon products industry depend to
a significant extent on the prescriptive role of salon professionals. Relatively
few products achieve wide acceptance in the professional salon market. We
believe that our success depends, in part, on our continued ability to introduce
new and attractive products on a regular basis that anticipate and respond to
changing consumer demands and
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<PAGE> 11
preferences in a timely manner. New products introduced by us may not achieve
any significant degree of market acceptance. Any acceptance that is achieved may
not be sustained for any significant amount of time. The failure of new product
lines or product innovations to achieve or sustain market acceptance could have
a material adverse effect on our business, financial condition, and operating
results.
WE DEPEND ON OUR DISTRIBUTION CHANNELS TO SELL MANY OF OUR PRODUCTS
We sell many of our products to professional salon product distributors and
salon chains. Distributors and salon chains in the United States and in foreign
markets have periodically experienced consolidation and other ownership changes
and in the future may consolidate, restructure, or realign their ownership or
affiliations. Some distributors and salons may be thinly capitalized and unable
to withstand changes in business conditions. These circumstances could decrease
the number of distributors and salons that sell our products or increase the
ownership concentration within the professional salon products market.
If a significant distributor or salon chain discontinues selling or using
our products, performs poorly, does not pay for purchased products, or
reorganizes or liquidates and is unable to continue selling our products, our
business, financial condition, and operating results could be materially and
adversely affected. In addition, the laws and regulations of various states may
limit our ability to change distributors under certain circumstances, making it
difficult to terminate a distributor without good or just cause, as defined by
applicable statutes or regulations. The resulting difficulty or inability to
replace poorly performing distributors could have a material adverse effect on
our business, financial condition, and operating results.
WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS
We depend upon third parties to manufacture most of our products. Although
we own many of the formulations, tools, and molds used in the manufacturing
processes of our products, we have limited control over the manufacturing
processes themselves. As a result, any difficulties encountered by the
third-party manufacturers that result in product defects, production delays,
cost overruns, or the inability to fulfill orders on a timely basis could have a
material adverse effect on our business, financial condition, and operating
results.
We generally do not have long-term contracts with our third-party
manufacturers. Although we believe we would be able to secure other third-party
manufacturers to produce our products, particularly as a result of our ownership
of many of the formulations, tools, and molds used in the manufacturing process,
our operations would be adversely affected if we lost our relationship with any
of our current suppliers, including particularly two manufacturers of hair
removal appliances in China, or if the operations of our current suppliers or
sea or air transportation with our China-based manufacturers were disrupted or
terminated even for a relatively short period of time. See "Risk Factors -- We
face risks associated with our international operations." Our tools and molds
are located at the facilities of our domestic and offshore third-party
manufacturers. Accordingly, significant damage to these facilities could result
in the loss of or damage to a material portion of our key tools and molds, and
production delays could result while new facilities are being arranged and
replacement tools and molds are being produced.
We do not maintain an inventory of sufficient size to provide protection
for any significant period against an interruption of supply, particularly if we
were required to obtain alternative sources of supply. Although we do not
purchase directly the raw materials used to manufacture the majority of our
products, we are potentially subject to variations in the prices we pay our
third-party manufacturers for products depending on their cost for raw
materials.
WE DEPEND ON FRAMESI S.P.A.
We hold exclusive license rights to sell Framesi brand hair color and hair
care products in the majority of the Western Hemisphere, including the United
States and most of Latin America. We sell these products, which are some of our
most important product offerings, pursuant to an exclusive license with Framesi
S.p.A. that expires in 2036. In addition, we manufacture and sell hair care
products under the Framesi and Biogenol brand names pursuant to the license.
Under our agreement with Framesi S.p.A., we import hair color products
7
<PAGE> 12
manufactured by them. Any difficulties encountered by Framesi S.p.A. with
respect to product defects, production delays, cost overruns, or the inability
to fulfill orders on a timely basis or the termination or breach of the license
agreement could have a material adverse effect on our business, financial
conditions, and operating results.
WE DEPEND ON OUR MAJOR CUSTOMERS
We depend upon salon product and tanning supply distributors, beauty supply
outlets, and salon chains to distribute our products. We currently maintain more
than 5,300 active customer accounts, but do not have long-term contracts with
any of our customers. An adverse change in, or termination of, our relationship
with, or an adverse change in the financial viability of, one or more of our
major customers could have a material adverse effect on our business, financial
condition, and operating results.
WE HAVE SIGNIFICANT BORROWINGS
We have significant borrowings. On June 30, 1999, we had total indebtedness
of approximately $159.1 million and stockholders' equity of approximately $32.7
million. During June 1999, we entered into a new $90 million revolving credit
facility to replace our previous credit facility. At June 30, 1999, there was
approximately $52.3 million outstanding under the new facility. See "Use of
Proceeds." Subject to certain conditions, we will be permitted to incur
additional indebtedness in the future.
Our ability to service, repay, or refinance our indebtedness and to fund
planned capital expenditures and product development expenses will depend on our
future performance. To a certain extent, our performance will be subject to
general economic, financial, competitive, legislative, regulatory, and other
factors that are beyond our control. We may not be able to generate sufficient
cash flow from operations and borrowings may not be available under our credit
facility in an amount sufficient to enable us to service or repay our
indebtedness or to fund our other liquidity needs. In addition, we may not be
able to refinance our indebtedness on commercially reasonable terms or at all if
we desire to do so.
The degree to which we are leveraged could have important consequences. For
example, leverage could:
- make it more difficult for us to raise additional funds to finance
desired acquisitions;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain other funds to finance future working
capital, capital expenditures, product development, and other general
corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
- place us at a competitive disadvantage as compared with less leveraged
competitors.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS
International sales constituted approximately 15% of our pro forma
consolidated net sales during 1997 and approximately 12% of our pro forma
consolidated net sales during 1998. We intend to expand our international sales
through acquisitions and internal growth. In addition, some of our products are
manufactured in China. See "Risk Factors -- We depend on third parties to
manufacture our products."
Our international operations require us to maintain equipment and
inventories abroad, manufacture and sell products internationally, and purchase
raw materials and components from foreign suppliers. We also rely on third-party
manufacturers to provide personnel and facilities in China. Our international
operations expose us to certain economic and political risks, including the
following:
- compliance with local laws and regulatory requirements, as well as
changes in such laws and requirements;
- foreign currency rate fluctuations;
- restrictions on the repatriation of funds;
8
<PAGE> 13
- overlap of tax issues;
- political and economic conditions abroad; and
- the possibility of expropriation or nationalization of assets, supply
disruptions, currency controls, and changes in tax laws, tariffs, and
freight rates.
Our relationships with our third-party manufacturers in China are also
subject to risks associated with changes in U.S. legislation and regulations
relating to imports, including quotas, duties, taxes, and other charges or
restrictions on imports. Products that we import from China currently receive
preferential tariff treatment accorded goods from countries granted "most
favored nation" status. Under the Trade Act of 1974, the President of the United
States has the authority, upon making specified findings, to waive certain
restrictions that would otherwise render China ineligible for most favored
nation treatment. The President has waived these provisions each year since
1979. Most favored nation status was renewed in 1998 despite opposition by
certain members of Congress. In the future, Congress may encourage the President
to reconsider the renewal of most favored nation status for China. Raw materials
and finished products entering the United States from China without the benefit
of most favored nation treatment would be subject to significantly higher import
duties.
WE DEPEND ON KEY PERSONNEL
Our success depends to a significant degree upon the skills of our current
key employees and our ability to identify, hire, and retain additional sales,
marketing, and financial personnel. We cannot assure you that we will be able to
retain our existing key personnel or attract and retain additional key
personnel. The loss of services of key personnel, particularly Sam Leopold (our
Chairman of the Board, President, and Chief Executive Officer), or the inability
to attract and retain additional qualified personnel could have a material
adverse effect upon our business, financial condition, and operating results. We
have an employment agreement with Mr. Leopold that extends through September
2001.
WE FACE RISKS ASSOCIATED WITH OUR INTELLECTUAL PROPERTY
The market for our products depends to a significant extent upon the
goodwill associated with our trademarks and trade names. Therefore, trademark
protection is important to our business. Although most of our trademarks and
trade names are registered in the United States and in foreign countries, we may
not be successful in asserting trademark or trade name protection for our
trademarks and trade names in the United States or other markets. In addition,
the laws of certain foreign countries may not protect our intellectual property
rights to the same extent as the laws of the United States. The costs required
to protect our trademarks and trade names may be substantial.
While we currently hold several patents, we do not consider any single
patent to be material to the conduct of our business. We rely primarily on trade
secret protection for our proprietary information. We face risks associated with
our intellectual property, including the following:
- our intellectual property rights may be challenged, invalidated, or
circumvented;
- our intellectual property rights may not provide adequate protection;
- we may not have sufficient resources to prosecute infringements of our
intellectual property rights;
- we may not be able to protect our intellectual property; and
- third parties may assert intellectual property infringement claims
against us.
THE PROFESSIONAL SALON PRODUCTS INDUSTRY IS VERY COMPETITIVE
The professional salon products industry is very competitive. Our products
compete directly against professional salon and other similar products sold
through distributors of professional salon products and professional salons. In
addition, our professional salon products compete indirectly against hair care,
nail care, and skin and body care products as well as salon appliances and
sundries sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores and, to a lesser extent, mass
9
<PAGE> 14
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," the Internet, and catalogs. Current and potential competitors
include a number of companies that have substantially greater resources than us,
including better brand-name recognition, broader product lines, and wider
distribution channels.
The professional salon products industry is characterized by a lack of
significant barriers to entry with respect to the development and production of
professional salon products, which may result in new competition, including
possible imitators of one or more of our recognized product lines. In addition,
companies in the professional salon products industry commonly market products
that are similar to products being successfully marketed by competitors.
Increased competition and any reductions in competitors' prices that
require us to implement price reductions in order to remain competitive could
have a material adverse effect on our business, financial condition, and
operating results. See "Business -- Competition."
WE ARE SUBJECT TO GOVERNMENT REGULATION AND POTENTIAL CLAIMS BY OTHERS
Certain of our advertising and product labeling practices are subject to
regulation by the Federal Trade Commission, or FTC, and certain of its
professional salon product production practices are subject to regulation by the
Food and Drug Administration, or FDA, as well as by various other federal,
state, and local regulatory authorities. Compliance with federal, state, and
local laws and regulations has not had a material adverse effect on us to date.
Nonetheless, federal, state, and local regulations in the United States that are
designed to protect consumers have had, and can be expected to have, an
increasing influence on product claims, production methods, product content,
labeling, and packaging. In addition, if we expand our operations to produce
professional salon products that include over-the-counter drug ingredients (such
as certain sun screen ingredients) we would become subject to additional FDA
regulations as well as a higher degree of inspection and greater burden of
regulatory compliance than currently exist.
Our operations subject us to federal, state, and local governmental
regulations related to the use, storage, discharge, and disposal of hazardous
chemicals. Our failure to comply with current or future environmental
regulations could result in the imposition of fines, suspension of production,
or a cessation of operations. Compliance with such regulations could require us
to acquire costly equipment or to incur other significant expenses. Any failure
by us to control the use, or adequately restrict the discharge, of hazardous
substances could subject us to future liabilities.
The nature and use of professional salon products could give rise to
product liability claims if one or more users of our products were to suffer
adverse reactions following their use of the products. Such reactions could be
caused by various factors, many of which are beyond our control, including
hypoallergenic sensitivity and the possibility of malicious tampering with our
products. In the event of such an occurrence, we could incur substantial
litigation expense, receive adverse publicity, and suffer a loss of sales.
WE FACE RISKS ASSOCIATED WITH "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, 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 the impact the Year 2000 issue will have
on the reporting and operating systems maintained by us, our customers and
suppliers, and other service providers. Although we do not anticipate that the
Year 2000 issue will have a significant impact on our business, any significant
Year 2000 compliance problem of any of us, our customers, or our third-party
contract manufacturers or suppliers could have a material adverse effect on our
business, financial condition, and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
10
<PAGE> 15
RISKS RELATING TO SHARE OWNERSHIP
MANAGEMENT CONTROLS A LARGE PERCENTAGE OF THE OUTSTANDING SHARES
Sam Leopold, our Chairman of the Board, President, and Chief Executive
Officer, beneficially owns approximately 26% of our common stock before this
offering, and will beneficially own approximately 14% of our common stock after
this offering. Consequently, Mr. Leopold has the ability to influence the
election of all of our directors and thereby control our business, affairs, and
management. In addition, Mr. Leopold has the ability to influence most matters
requiring stockholder approval including significant corporate matters, such as
amendments to our certificate of incorporation and any merger, consolidation, or
sale of all or substantially all of our assets. Such a high level of ownership
may have the effect of delaying, deterring, or preventing a change in the
control of our company, even when such a change would be in the best interests
of the other stockholders, and may adversely affect the voting and other rights
of the other holders of our common stock.
CHANGE OF CONTROL PROVISIONS
Our certificate of incorporation, bylaws, and the shareholder rights plan
contain provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of our company, even when these attempts
may be in the best interests of stockholders. See "Description of Securities."
The shareholder rights plan will cause substantial dilution to a person or
group that attempts to acquire our company on terms not approved by our board of
directors, except pursuant to an offer conditioned on a substantial number of
rights being acquired. The rights should not interfere with any merger or other
business combination approved by our board of directors since we may redeem the
rights for $.01 per right at any time before certain events occur that cause the
rights to become exerciseable.
Upon a change of control, we will be required to offer to repurchase all
outstanding senior subordinated notes at 101% of their principal amount plus
accrued and unpaid interest to the date of repurchase. We may not have
sufficient funds available at the time of any change of control to repurchase
the notes tendered. In addition, restrictions in our $90 million revolving
credit facility may not allow us to make such required repurchases.
Upon a change of control of our company, we may be obligated to pay Mr.
Leopold significant benefits under his change of control agreement. See
"Management -- Employment Agreements."
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE
The market price of our common stock has fluctuated significantly since our
initial public offering in November 1996. The period was marked by generally
rising stock prices, extremely favorable industry conditions, and substantially
improved operating results by us. These favorable conditions may not continue.
The trading price of our common stock in the future could be subject to a
variety of factors, including the following:
- wide fluctuations in response to quarterly variations in our operating
results;
- wide fluctuations in response to the impact of acquisitions on our
operating results;
- actual or anticipated announcements of new products by us or our
competitors;
- changes in analysts' estimates of our financial performance;
- general conditions in the markets in which we compete; and
- worldwide economic and financial conditions.
The stock market also has experienced extreme price and volume fluctuations
that have particularly affected the market prices for many rapidly expanding
companies and that often have been unrelated to the operating performance of
such companies. These broad market fluctuations and other factors may adversely
affect the market price of our common stock. Any reduction in the trading price
of our common stock could adversely affect our ability to raise capital in the
public market and adversely affect our ability to complete
11
<PAGE> 16
acquisitions. The market price of our common stock may affect our willingness or
ability to use our common stock to acquire other companies. Declines in the
market price of our common stock may cause acquired companies to seek
adjustments to purchase prices or other remedies to offset any decline in value.
SALES OR ISSUANCES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK
Sales of substantial amounts of common stock by our stockholders, or even
the potential for such sales, are likely to adversely affect the market price of
our common stock and could impair our ability to raise capital by selling equity
securities. Of the 4,067,503 shares of common stock outstanding as of September
7, 1999, approximately 3,203,077 were freely tradeable without restriction or
further registration under the securities laws. Subject to the agreement by our
executive officers and directors and certain of our stockholders, warrant
holders, and option holders not to sell their shares of our common stock during
the 120-day period after the date of this prospectus, an aggregate of 864,426
shares held by certain officers and directors currently are available for sale.
Shares held by these affiliates are subject to the resale limitations of Rule
144 described below following the expiration of such 120-day period.
Generally, under Rule 144, an affiliate of our company or any person who
beneficially owns restricted securities with respect to which at least one year
has elapsed since the later of the date the shares were acquired from us may,
every three months, sell in ordinary brokerage transactions or to market makers
an amount of shares equal to the greater of 1% of our then-outstanding common
stock or our average weekly trading volume for the four weeks prior to the
proposed sale of such shares.
A total of 1,150,000 shares of common stock have been reserved for issuance
upon exercise of options, or which have been or may be granted under our stock
option plans. Options to acquire 849,982 shares of common stock currently are
outstanding, including options to purchase 840,982 shares granted under our
stock option plans. In addition, there are outstanding warrants to acquire
203,000 shares of common stock at an exercise price of $12.00 per share,
warrants to acquire 150,000 shares of common stock at an exercise price of
$10.18 per share, and warrants to acquire 10,000 shares of common stock at an
exercise price of $11.38 per share, in each case subject to adjustment in
accordance with the anti-dilution and other provisions set forth in the
warrants. During the terms of such options and warrants, the holders will have
the opportunity to profit from an increase in the market price of our common
stock. The existence of these stock options and warrants may adversely affect
the terms on which we can obtain additional financing, and the holders of these
options and warrants can be expected to exercise or convert these options and
warrants at a time when we, in all likelihood, would be able to obtain
additional capital by offering shares of our common stock on terms more
favorable to us than those provided by the exercise of these options and
warrants. We have granted registration rights to the holders of our warrants.
Those registration rights require us, at our expense, to register for resale the
shares of our common stock issuable upon the exercise of these warrants.
We also have authority to issue additional shares of common stock and
shares of one or more series of preferred stock. We may issue shares of common
stock or preferred stock for use as a portion of the consideration in future
acquisitions. These shares may be registered under the securities laws, in which
case they generally will be freely tradeable upon their issuance.
FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this prospectus under the
headings "Business," "Risk Factors," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" concerning our future,
proposed, and anticipated activities, certain trends with respect to our
revenue, operating results, capital resources, and liquidity or with respect to
the markets in which we compete or the beauty care industry in general, and
other statements contained in this prospectus regarding matters that are not
historical facts are forward-looking statements, as such term is defined under
the securities laws. Forward-looking statements, by their very nature, include
risks and uncertainties, many of which are beyond our control. Accordingly,
actual results may differ, perhaps materially, from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include those discussed elsewhere under "Risk
Factors."
12
<PAGE> 17
USE OF PROCEEDS
The net proceeds to us from the sale of the 4,000,000 shares of common
stock offered hereby, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, are estimated to be $56.5 million, at
an assumed public offering price of $15.25 per share.
We will use the net proceeds from this offering to repay $56.5 million of
the $64.2 million currently outstanding under our $90 million revolving credit
facility. The interest on the facility currently is LIBOR plus 325 basis points.
We will use the resulting availability under our revolving credit facility
for working capital and general corporate purposes, including possible
acquisitions. We have no specific agreements or plans with respect to any
acquisitions. We may not be successful in consummating any acquisitions.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
plan to retain earnings to finance the growth of our business rather than to pay
cash dividends. Payments of any cash dividends in the future will depend on our
financial condition, results of operations, and capital requirements as well as
other factors deemed relevant by the Board of Directors. Our $90 million
revolving credit facility and the agreement covering our senior subordinated
notes contain restrictions on our ability to pay cash dividends, and future
borrowing may contain similar restrictions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
13
<PAGE> 18
CAPITALIZATION
The following table sets forth our actual capitalization as of June 30,
1999, and as adjusted to reflect the sale of the 4,000,000 shares of common
stock offered hereby (at an assumed public offering price of $15.25 per share)
and the application of the estimated net proceeds therefrom, after deducting
estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------
ACTUAL(1) AS ADJUSTED
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash........................................................ $ 1,512 $ 5,700
======== ========
Current portion of long-term debt and other................. $ 3,474 $ 3,474
-------- --------
Long-term debt and other(2)................................. 155,652 103,352
-------- --------
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, 4,067,503 shares outstanding, actual,
8,067,503 shares outstanding, as adjusted............. 1 1
Additional paid-in capital............................. 29,038 85,525
Retained earnings...................................... 5,414 5,414
Treasury stock......................................... (1,800) (1,800)
-------- --------
Total stockholders' equity........................ 32,653 89,141
-------- --------
Total capitalization........................................ $191,779 $195,967
======== ========
</TABLE>
- -------------------------
(1) Excludes (a) 814,648 shares of common stock reserved for issuance upon
exercise of stock options outstanding as of June 30, 1999, and 363,000
shares reserved for issuance upon exercise of warrants outstanding as of
June 30, 1999, and (b) 344,352 shares reserved for issuance upon the
exercise of stock options that may be granted in the future under our stock
option plans. See "Management -- 1996 Stock Option Plan,"
"Management -- 1998 Employee Stock Option Plan," and "Description of
Securities."
(2) There was approximately $52.3 million and $64.2 million outstanding under
our $90 million revolving credit facility as of June 30, 1999 and September
7, 1999, respectively. See "Use of Proceeds."
14
<PAGE> 19
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "STYL" since our initial public offering on November 21, 1996 at $10.00
per share. The following table sets forth the high and low sale prices of the
common stock for the calendar quarters indicated as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Fourth quarter (from November 21, 1996)..................... $10 5/8 $ 9 1/4
YEAR ENDED DECEMBER 31, 1997:
First quarter............................................... $12 1/4 $10
Second quarter.............................................. 11 1/2 9
Third quarter............................................... 16 11 3/8
Fourth quarter.............................................. 17 1/2 14 3/4
YEAR ENDED DECEMBER 31, 1998:
First quarter............................................... $24 1/8 $15 3/4
Second quarter.............................................. 26 5/8 22
Third quarter............................................... 23 3/8 10 7/8
Fourth quarter.............................................. 18 7/8 8 3/8
YEAR ENDED DECEMBER 31, 1999:
First quarter............................................... $14 3/4 $ 9 5/8
Second quarter.............................................. 15 1/2 11 3/4
Third quarter (through September 7, 1999)................... 15 7/8 9 1/8
</TABLE>
On September 7, 1999, the last reported sale price of our common stock, as
quoted on the Nasdaq National Market, was $15.25 per share. As of September 7,
1999, there were approximately 17 holders of record and approximately 1,100
beneficial owners of our common stock.
15
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data as of
December 31, 1996 and the period from November 27, 1996 to December 31, 1996 and
as of and for the years ended December 31, 1997 and 1998 is derived from our
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected consolidated financial data as
of June 30, 1999 and for the six months ended June 30, 1998 and 1999 have been
derived from our unaudited financial statements which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, which management considers necessary for a fair presentation of the
selected historical financial data shown. The financial data shown for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year ending December 31, 1999. The selected
financial data provided below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes thereto appearing
elsewhere in this prospectus.
The combined selected financial data for Gena Laboratories, Inc. ("Gena")
and the Body Drench Division ("Body Drench") of Designs by Norvell, Inc. ("DBN")
for each of the two years in the periods ended February 29, 1996 and December
31, 1995, respectively, was derived from their financial statements, which have
been audited by Arthur Andersen LLP, independent public accountants. The
combined selected financial data for JDS Manufacturing Co., Inc. ("JDS") for the
two years in the period ended September 30, 1996 was derived from its financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The combined selected financial data for Kotchammer Investments,
Inc. (known as Styling Research Company) ("KII") for the year ended December 31,
1995 was derived from its financial statements, which have been audited by
Arthur Andersen LLP, independent public accountants. The combined selected
financial data for KII for the year ended December 31, 1994 was derived from its
unaudited financial statements. (Gena, Body Drench, JDS, and KII are referred to
as the "Initial Businesses.") In addition, the combined selected financial data
for Gena, Body Drench, JDS, and KII for the periods March 1, 1996 to November
26, 1996; January 1, 1996 to November 26, 1996; October 1, 1996 to November 26,
1996; and January 1, 1996 to November 26, 1996, respectively, was derived from
the financial statements of each of the Initial Businesses, which have been
audited by Arthur Andersen LLP, independent public accountants. See footnotes
(a), (b), (c) below for a description of the combined Predecessor 1, 2, and 3
periods.
16
<PAGE> 21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
November 27, Years Ended Six Months Ended
Predecessors 1996 to December 31, June 30,
--------------------------- December 31, ------------------ ------------------
1(a) 2(b) 3(c) 1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA AND OTHER
DATA:
Net sales.............................. $24,029 $24,927 $18,211 $ 1,083 $38,108 $ 90,373 $35,299 $ 68,770
Gross profit........................... 10,987 11,562 7,584 512 21,352 51,151 19,807 38,913
Selling, general, and administrative
expenses............................. 9,924 10,422 6,838 737 12,201 32,715 11,909 25,775
Centralization and reengineering
costs(d)............................. -- -- -- -- -- 422 -- 1,363
Provision for cancelled
distributors(d)...................... -- -- -- -- -- -- -- 5,067
Income (loss) from operations.......... 1,063 1,140 746 (225) 9,151 18,014 7,898 6,708
Interest expense (income) and other,
net.................................. 7 172 71 (2) 1,847 9,206 2,628 7,874
Income (loss) before extraordinary
item................................. -- -- -- (151) 4,207 5,173 5,270 (1,166)
Extraordinary item, net................ -- -- -- -- (1,377) (1,091) (1,091) (446)
Net income (loss)...................... 583 545 435 (151) 2,830 4,082 1,913 (1,160)
Diluted earnings (loss):
Per share income (loss) before
extraordinary item................. $ (0.04) $ 1.02 $ 1.20 $ 0.69 $ (0.18)
Extraordinary item, net.............. -- (0.33) (0.25) (0.25) (0.11)
Per share net income (loss).......... (0.04) 0.69 0.95 0.44 (0.29)
Weighted average shares.............. 3,770 4,113 4,313 4,356 4,068
AS OF DECEMBER 31, AS OF
--------------------------------- JUNE 30,
1996 1997 1998 1999
BALANCE SHEET DATA:
Working capital........................ $ 4,459 $14,048 $ 37,712 $ 46,223
Total assets........................... 32,234 92,489 219,198 239,125
Long-term debt and other, less current
portion.............................. 2,316 47,377 140,366 155,652
Total stockholders' equity............. 25,319 28,568 33,813 32,653
</TABLE>
- ---------------
(a) Includes combined financial information for Body Drench and KII for the year
ended December 31, 1994, Gena for the year ended February 28, 1995, and JDS
for the year ended September 30, 1995.
(b) Includes combined financial information for Body Drench and KII for the year
ended December 31, 1995, Gena for the year ended February 29, 1996, and JDS
for the year ended September 30, 1996.
(c) Includes combined financial information for Body Drench and KII for the
period from January 1, 1996 to November 26, 1996, for Gena for the period
from March 1, 1996 to November 26, 1996, and JDS for the period from October
1, 1996 to November 26, 1996.
(d) The centralization and reengineering costs had a $0.06 impact on diluted
earnings per share during the year ended December 31, 1998, and a $0.20
impact on diluted earnings per share during the six months ended June 30,
1999, net of tax. During the second quarter of 1999, we also incurred a
provision for cancelled distributors of approximately $5.1 million, before
taxes, or $0.76 per diluted share, net of tax, related to the write-down of
certain tanning distributor receivables in connection with our strategic
realignment to exclusive distribution. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These per share
amounts are not defined by generally accepted accounting principles and
should not be considered as an alternative to earnings per share.
17
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Selected Consolidated Financial Data and our consolidated financial statements
and notes thereto, which are contained elsewhere in this prospectus.
INTRODUCTION
We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon distribution
channels. Our products include hair care, skin and body care, and nail care
products, as well as salon appliances and sundries. We have well-recognized,
long-lived brand names, a strong distribution network, established marketing and
salon industry education programs, and significant production and sourcing
capabilities. We sell our products in all 50 states, Canada, Australia, Europe,
Latin America, and Asia.
We were founded in June 1995 and commenced operations on November 26, 1996.
On that date, we simultaneously completed our initial public offering and
acquired our four initial businesses. Since that time, we have completed seven
additional acquisitions.
The following table sets forth information regarding each of our
acquisitions:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION)
<S> <C> <C>
Gena Laboratories, Inc. November 1996 Gena (professional natural nail
care, pedicure, skin care, and hair
care products)
Body Drench (A Division of Designs November 1996 Body Drench (high-end professional
by Norvell, Inc.) tanning and moisturizing products
and resort, spa, and health and
country club personal care
products)
J.D.S Manufacturing Co., Inc. November 1996 Alpha 9 (acrylic and fiberglass
nail enhancement products)
Kotchammer Investments, Inc. (dba November 1996 SRC (high-end salon appliances and
Styling Research Company) salonwear)
Suntopia Division of Creative March 1997 Suntopia (high-end tanning
Laboratories, Inc. ("Suntopia") products)
U.K. ABBA Products, Inc. ("ABBA") June 1997 ABBA Pure and Natural Hair Care
(aromatherapy-based professional
hair care products)
One Touch and Clean + Easy Division December 1997 Clean + Easy and One Touch (salon
of Inverness Corporation and and retail hair removal products)
Inverness (UK) Limited (together,
"Inverness")
Pro Finish USA, Ltd. ("Pro Finish") May 1998 Pro Finish, Kizmit, and Cosmic
(nail care products)
European Touch Co., Incorporated, June 1998 European Touch (professional nail
and two related Companies enhancement and treatment products)
("European Touch")
European Touch, Ltd. II ("European June 1998 European Touch II (pedicure spa
Touch II") equipment)
Ft. Pitt Acquisition, Inc. and its August 1998 Framesi, Roffler, and Biogenol
90% owned subsidiary Ft. (professional hair care products)
Pitt -- Framesi, Ltd. (together,
"Framesi USA")
</TABLE>
18
<PAGE> 23
The combined purchase price of the acquisitions was approximately $45.0
million in 1997 and $63.0 million in 1998. On a pro forma basis, our total
revenue would have been approximately $111.0 million in 1997 and $115.6 million
in 1998, assuming the acquisitions described above had taken place on January 1.
We accounted for all of the acquisitions under the purchase method of
accounting.
Except for the historical information contained herein, the discussion in
this prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include those
discussed herein, as well as those factors discussed under "Risk Factors"
contained elsewhere in this prospectus. Historical results are not necessarily
indicative of trends in operating results for any future period.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
Net Sales
Net sales amounted to $68.8 million for the six months ended June 30, 1999,
compared to net sales of $35.3 million for the six months ended June 30, 1998.
The $33.5 million, or 95%, increase in sales for the six months ended June 30,
1999 compared to the six months ended June 30, 1998 was due primarily to the
contribution of brands acquired during and subsequent to June 30, 1998 in
addition to strong performance in our exclusive hair care lines, ABBA and
Framesi, and in the appliances and sundries category. On a pro forma basis,
assuming the 1998 acquisitions had taken place on January 1, 1998, net sales
increased by $10.0 million, or 17%, to $68.8 million in the first six months of
1999 from $58.8 million during the first six months of 1998.
Cost of Sales
Cost of sales amounted to $29.9 million, or 43% as a percentage of net
sales, for the six months ended June 30, 1999, compared to $15.5 million, or 44%
as a percentage of net sales, for the six months ended June 30, 1998. As a
result of the foregoing, we realized gross profit for the six months ended June
30, 1999 of $38.9 million, or 57% as a percentage of net sales, compared to
$19.8 million, or 56% as a percentage of net sales, during the corresponding
period in 1998. Our ability to sustain this favorable gross margin percentage is
attributable primarily to the acquisition of businesses that carry similarly
favorable gross margins and our continued efforts to leverage our substantial
purchasing power with third-party suppliers to obtain optimum pricing.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $25.8 million, or 37% of
net sales, for the six months ended June 30, 1999, before recording
centralization and reengineering costs and one-time charges totaling
approximately $6.4 million. Selling, general, and administrative expenses
including the centralization and reengineering costs and one-time charges
amounted to $32.2 million, or 47% of net sales, for the six months ended June
30, 1999 compared with $11.9 million, or 34% of net sales, for the six months
ended June 30, 1998. Selling, general, and administrative expenses exclusive of
centralization and reengineering costs and one-time charges discussed below,
increased on an absolute as well as a percentage basis due primarily to
acquisitions completed during and subsequent to the quarter ended June 30, 1998
and the operating characteristics of those businesses acquired. The
centralization and business process reengineering project, which began in the
fourth quarter of 1998, was substantially complete by June 30, 1999. The
project, which included the centralization of operations in Scottsdale, Arizona
and the outsourcing of segments of our production and warehousing functions,
resulted in total costs of $1.4 million during the six months ended June 30,
1999.
During the second quarter of 1999, we changed the method of distribution of
our products by eliminating a significant number of tanning supply distributors.
Distribution of Body Drench products to the tanning market will now be made
through a limited number of exclusive distributors. We believe that by focusing
on our core business of selling our portfolio of brands to the professional
salon distribution channels and limiting distribution in the tanning supply
channel, the stature of the Body Drench brand will be enhanced, which should
increase gross margins on tanning products, reduce expenses, and capitalize on
our core strategy of offering customers a "one-stop shop" for professional salon
products. This change in our business resulted in a write-off of receivables
from cancelled distributors of approximately $5.1 million for the quarter ended
June 30, 1999. We classified this charge as a provision for cancelled
distributors in the consolidated statement
19
<PAGE> 24
of operations as a separate component of income from operations. Any future
change to the realizability of these tanning supply distributor receivables will
be recorded as a component of the provision for cancelled distributors in the
statement of operations at that time. The normal recurring bad debt charges are
recorded as a component of selling, general and administrative expenses and
amounted to approximately $171,000 and $1,112,000 for the six months ended June
30, 1998 and 1999, respectively.
Interest Expense and Other
Interest expense and other amounted to $7.9 million for the six months
ended June 30, 1999, up 200% from $2.6 million for the six months ended June 30,
1998. The increase was primarily a result of an increase in debt associated with
the completion of the 1998 acquisitions and an increase in our effective
interest rate as a result of the issuance of the senior subordinated notes in
June 1998.
Extraordinary Item
A portion of the proceeds from our current revolving credit facility
discussed under "Liquidity and Capital Resources" below was used to repay our
previous credit facility. We reported an extraordinary, non-cash charge of
approximately $446,000, net of taxes, or $0.11 per diluted share, related to
unamortized financing costs associated with our previous credit facility.
Benefit from Income Taxes
The benefit from income taxes for the six months ended June 30, 1999
amounted to $452,000, which represents an effective tax rate of approximately
38.8%, compared with a provision of $2.3 million, which represents an effective
tax rate of approximately 43% for the six months ended June 30, 1998. Permanent
differences between book and tax amounts decreased over the twelve month period,
resulting in the lower effective tax rate for the three months ended March 31,
1999 and six months ended June 30, 1999.
Income from Operations and Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA)
Income from operations was $13.1 million before centralization and
reengineering costs and one-time charges for the six months ended June 30, 1999,
compared to $7.9 million for the six months ended June 30, 1998. After
centralization and reengineering costs and one-time charges, income from
operations was $6.7 million for the six months ended June 30, 1999. EBITDA was
$16.6 million before centralization and reengineering costs and one-time charges
for the six months ended June 30, 1999, an increase of $7.0 million, or 73%,
over EBITDA of $9.6 million for the six months ended June 30, 1998. EBITDA after
centralization and reengineering costs and one-time charges was $10.2 million
for the six months ended June 30, 1999. On a pro forma basis, assuming the 1998
acquisitions had taken place on January 1, 1998, EBITDA, before centralization
and reengineering costs and one-time charges, increased by $2.7 million, or 19%,
to $16.6 million in the first six months of 1999 from $13.9 million during the
first six months of 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. We believe EBITDA is a measure commonly reported and
widely used by analysts, investors, and other interested parties who monitor
business performance. Accordingly, we have disclosed this information to permit
a more complete comparative analysis of our operating performance.
Net Income
For the six months ended June 30, 1999, we reported a net loss of $714,000,
or $0.18 per diluted share, before the extraordinary item compared to net income
of $3.0 million, or $0.69 per diluted share, for the corresponding period during
1998. After the extraordinary item, the net loss for the six months ended June
30, 1999 was $1.2 million, or $0.29 per diluted share, compared to net income of
$1.9 million for the same period in 1998.
20
<PAGE> 25
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997
Net Sales
Net sales for the year ended December 31, 1998 amounted to $90.4 million
compared to net sales of $38.1 million for the year ended December 31, 1997. The
$52.3 million, or 137%, increase in net sales was due primarily to the addition
of the operating results of the brands acquired during 1998, which included the
results of Pro Finish from May 1, 1998 to December 31, 1998; the European Touch
Companies from June 1, 1998 to December 31, 1998; and Framesi USA from August 1,
1998 to December 31, 1998. The increase in sales also was due to growth in our
existing brands, particularly the ABBA hair care brand, which introduced new
packaging during the third quarter of 1998.
Cost of Sales
Cost of sales amounted to $39.2 million, or 43.4% of net sales, for the
year ended December 31, 1998, down slightly on a percentage basis from cost of
sales of $16.8 million, or 44.0% of net sales, during the year ended December
31, 1997.
Gross Profit
As a result of the foregoing, we realized gross profit of $51.2 million, or
56.6% of net sales, for the year ended December 31, 1998, marking a slight
improvement over gross profit of $21.4 million, or 56.0% of net sales, for the
year ended December 31, 1997.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $32.7 million, or 36.2%
of net sales, for the year ended December 31, 1998, before recording
centralization and reengineering costs of approximately $422,000. Selling,
general, and administrative expenses, including the centralization and
reengineering costs, amounted to $33.1 million, or 36.7% of net sales, for the
year ended December 31, 1998 compared to $12.2 million, or 32.0% of net sales,
for the year ended December 31, 1997. The increase in selling, general, and
administrative expenses resulted in part from the acquisitions completed during
1998 having, on average, a higher percentage of selling, general, and
administrative expenses than our existing business. The increase also was
attributable to the resulting increases in the amortization of goodwill of the
businesses acquired during 1998. In addition, expenses during 1998 included
planned increases in sales and marketing costs in the fourth quarter in
preparation for new products and distribution for 1999.
On November 5, 1998, we announced we would centralize our operations in
Scottsdale, Arizona and outsource segments of our production and warehousing
functions. These initiatives are part of the further integration and
consolidation of our acquired businesses with the goal of obtaining additional
operating efficiencies and positioning us for continued internal growth and
future acquisitions. We also announced that we would take advantage of new
capabilities in computer technologies by combining the reengineering of our
business processes with an enterprise resource planning information technology
transformation, which we expect will drive operating efficiencies and improved
customer service.
These initiatives commenced during the fourth quarter of 1998 and continued
during the first two quarters of 1999. In connection with the centralization and
business process reengineering activities, we incurred approximately $1.8
million, before income taxes, in non-recurring reengineering costs, which are
reflected in our income statement as incurred. Over the same period, we invested
approximately $3.4 million in capital expenditures related to our information
technology transformation. The costs of reengineering and information technology
are accounted for under recently issued accounting pronouncements, Emerging
Issues Task Force Issue No. 97-13, Accounting for Costs Incurred In Connection
With a Consulting Contract or an Internal Project that Combines Business Process
Reengineering and Information Technology Transformation, Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, and Statement of Position 95-3, Recognition of Liabilities In
Connection with a Purchase Business Combination.
21
<PAGE> 26
Interest Expense and Other
Interest expense and other amounted to $9.2 million for the year ended
December 31, 1998, up 411% from $1.8 million for the year ended December 31,
1997. The increase was a result of an increase in debt associated with the
completion of the 1998 acquisitions and an increase in our effective interest
rate as a result of the senior subordinated notes issuance in June 1998.
Extraordinary Item
In June 1998, we issued $100 million of senior subordinated notes. A
portion of the proceeds from the offering was used to repay our $75.0 million
credit facility (the "December 1997 Credit Facility"). We reported an
extraordinary, non-cash charge during the quarter ended June 30, 1998 of
approximately $1.1 million, net of taxes, or $0.25 per diluted share, related to
unamortized financing costs associated with the December 1997 Credit Facility.
Provision for Income Taxes
The provision for income taxes for the year ended December 31, 1998
amounted to $3.6 million, which represented an effective tax rate of
approximately 41%, compared with a provision of $3.1 million, which represented
an effective tax rate of approximately 42% for the year ended December 31, 1997.
Permanent differences between book and tax amounts decreased over the 12-month
period resulting in the lower effective tax rate for the year ended December 31,
1998.
Net Income
We had net income of $5.2 million, or $1.20 per diluted share, for the year
ended December 31, 1998 before the extraordinary item discussed above. After the
extraordinary item, net income for the year ended December 31, 1998 was $4.1
million, or $0.95 per diluted share. Net income for the year ended December 31,
1997 was $4.2 million, or $1.02 per diluted share, before the extraordinary item
discussed below. After the extraordinary item, net income for the year ended
December 31, 1997 was $2.8 million, or $0.69 per diluted share.
Income from Operations and EBITDA
Income from operations was $18.0 million for the year ended December 31,
1998, an increase of $8.8 million, or 96.9%, over income from operations of $9.2
million for the year ended December 31, 1997. EBITDA was $23.1 million for the
year ended December 31, 1998, an increase of $12.1 million, or 110.5%, over
EBITDA of $11.0 million for the year ended December 31, 1997.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE COMBINED
RESULTS OF THE INITIAL BUSINESSES FOR THE PERIOD ENDED
DECEMBER 31, 1996
Net Sales
Net sales amounted to $38.1 million for the year ended December 31, 1997
compared to combined net sales for our four initial businesses of $23.0 million
for the combined period ended December 31, 1996. The $15.1 million, or 65.7%,
increase in net sales was partly the result of increased sales of our Body
Drench and Gena product lines as compared to the sales achieved by the
individual initial businesses in the same period during 1996. In addition, net
sales for the year ended December 31, 1997 include the operating results of ABBA
from June 26, 1997 to December 31, 1997 and the operating results of
Clean + Easy and One Touch from December 1, 1997 to December 31, 1997.
Cost of Sales
Cost of sales amounted to $16.8 million, or 44.0% of net sales, for the
year ended December 31, 1997. Cost of sales as a percentage of net sales
substantially decreased from the 52.7% reported for the period from November 27,
1996 to December 31, 1996, a percentage which was consistent with the combined
cost of sales as a percentage of net sales incurred by the initial businesses
prior to their acquisition by us.
22
<PAGE> 27
Gross Profit
As a result of the foregoing, we realized gross profit for the year ended
December 31, 1997 of $21.4 million, or 56.0% of net sales. This improvement in
gross margin percentage over that reported by the individual initial businesses
prior to their acquisition was attributable primarily to the negotiation of
reduced product costs in December 1996 with the primary supplier of our Body
Drench product line and the consolidation of warehousing and production
functions of the Gena and Alpha 9/Omni product lines at our old facility in
Duncanville, Texas. We also achieved reductions in cost of goods through
negotiation with third party suppliers at ABBA, Clean + Easy, and One Touch.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $12.2 million, or 32.0%
of net sales, for the year ended December 31, 1997, which represented a
significant improvement over the comparable expenses incurred by the individual
initial businesses and other acquired companies prior to their acquisition by
us. This improvement in selling, general, and administrative expenses as a
percentage of net sales was primarily attributable to the elimination of
duplicative management and other personnel, duplicative selling and distribution
costs, the consolidation of certain accounting, human resources, and other
administrative functions of the initial businesses and the other acquired
companies. This improvement, however, was partially offset by non-cash goodwill
amortization resulting from acquisitions and increased costs of operating as a
public company.
Extraordinary Item
In connection with the December 1997 acquisition of the Clean + Easy and
One Touch product lines discussed above, we entered into the December 1997
Credit Facility, as discussed under "Liquidity and Capital Resources" below. The
December 1997 Credit Facility replaced the previous credit facility negotiated
in connection with the June 1997 acquisition of ABBA (the "June 1997 Credit
Facility"). We reported an extraordinary, non-cash charge of approximately $1.4
million, net of income taxes, or $0.33 per diluted share, related to the
write-off of unamortized financing costs associated with the June 1997 Credit
Facility.
Net Income
We had net income of $4.2 million, or $1.02 per diluted share, for the year
ended December 31, 1997 before the extraordinary item discussed above. After the
extraordinary item, net income for the year ended December 31, 1997 was $2.8
million, or $0.69 per diluted share. These results marked significant
improvement over the operating results of the initial businesses prior to their
acquisition. We attribute the improvement in net income during the year ended
December 31, 1997 primarily to the successful implementation of a key component
of our business strategy, the enhancement of operating efficiencies of the
initial businesses, and subsequent acquisitions.
Income from Operations and EBITDA
Income from operations was $9.2 million for the year ended December 31,
1997. EBITDA was $11.0 million for the year ended December 31, 1997.
23
<PAGE> 28
SEASONALITY AND QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited quarterly results of
operations for each of the ten quarters in the fiscal years ended December 31,
1997, 1998, and 1999. All quarterly information was obtained from unaudited
financial statements not otherwise contained herein. We believe that all
necessary adjustments have been made to present fairly the quarterly information
when read in conjunction with our consolidated financial statements and notes
thereto included elsewhere in this prospectus. The operating results for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.................................. $ 7,479 $ 7,437 $10,669 $12,523
Gross profit............................... 4,245 4,191 5,802 7,114
Selling, general, and administrative....... (2,398) (2,333) (3,574) (3,896)
Income from operations..................... 1,847 1,858 2,228 3,218
Interest expense and other, net............ 60 114 777 896
Income before extraordinary item........... 1,054 1,031 828 1,294
Extraordinary item, net.................... -- -- -- (1,377)
Net income (loss).......................... 1,054 1,031 828 (83)
Diluted EPS before extraordinary item...... 0.26 0.25 0.20 0.31
Diluted DPS after extraordinary item....... 0.26 0.25 0.20 (0.02)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1999
--------------------------------------------------- ---------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales................ $16,225 $19,074 $26,539 $28,535 34,252 $34,518
Gross profit............. 9,183 10,624 15,001 16,343 19,407 19,506
Selling, general, and
administrative......... 5,395 6,514 9,689 11,117 13,128 10,778
Centralization and
reengineering costs.... -- -- -- 422 660 703
Provision for cancelled
distributors........... -- -- -- -- -- 5,067
Income from operations... 3,788 4,110 5,312 4,804 5,619 1,089
Interest expense and
other, net............. 1,264 1,364 3,109 3,469 3,928 3,946
Income (loss) before
extraordinary item..... 1,439 2,746 1,243 926 1,691 (1,729)
Extraordinary item,
net.................... -- 1,091 -- -- 676 446
Net income (loss)........ 1,439 474 1,243 926 1,015 (2,175)
Diluted EPS before
extraordinary item..... 0.34 0.36 0.29 0.23 0.24 (0.42)
Diluted EPS after
extraordinary item..... 0.34 0.11 0.29 0.23 0.24 (0.53)
</TABLE>
We have experienced moderate seasonality in quarterly operating results due
mainly to the effect of the seasonality of the indoor tanning season on the
operating results of the Body Drench and Suntopia product lines. We expect the
seasonal effect of Body Drench and Suntopia sales to diminish in the future due
to the substantial acquisition and internal growth of non-tanning brands, which
are less affected by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our working capital position increased to $46.2 million at June 30, 1999
from $39.9 million at December 31, 1998. The increase of $6.3 million was due
primarily to an increased investment in accounts
24
<PAGE> 29
receivable, offset by an increase in accounts payable, as well as our results of
operations for the quarter ended June 30, 1999.
During the six months ended June 30, 1999, we used $8.9 million of cash in
operating activities, which was primarily the result of increased investment in
accounts receivable of $10.9 million, as a result of internal sales growth of
17% increases in prepaid expenses and other assets of $5.1 million, offset by an
increase in accounts payable of $6.3 million.
Our working capital position increased to $37.7 million at December 31,
1998 from $14.0 million at December 31, 1997. The increase of $23.7 million was
primarily due to increases in accounts receivable and inventories as a result of
the completion of the acquisitions during 1998, the issuance of the senior
subordinated notes, and our results of operations for the year ended December
31, 1998.
During the year ended December 31, 1998, we used $6.8 million of cash in
operating activities, which was primarily the result of the increased investment
in accounts receivable of $10.5 million and inventory of $8.4 million, offset by
the increase in accounts payable and accrued liabilities of $1.8 million. The
increased investment in accounts receivable and inventories at December 31, 1998
was primarily related to increased revenue and inventories as a result of the
acquisitions and sales growth in the existing businesses during the fiscal year
ended December 31, 1998. The increases in accounts payable and accrued
liabilities during the period related primarily to the liabilities assumed in
the acquisitions as well as internal growth of our business.
Investing and Financing Activities
Capital expenditures for the six months ended June 30, 1999 totaled
approximately $3.4 million, and for the year ended December 31, 1998 totaled
approximately $2.0 million, primarily related to computer hardware and software
costs which have been substantially completed in connection with our new
centralized management and information systems.
In June 1999, we finalized a five-year, $90 million senior secured
revolving credit facility for which General Electric Capital Corporation acted
as the agent. This credit facility is secured by a lien against substantially
all of our assets and intellectual property. We have the option of paying a
fixed interest rate on all loans under this credit facility equal to the
applicable LIBOR rate plus an applicable margin for periods of one, two, or
three months. Alternatively, we can elect to pay a floating interest rate equal
to the higher of the prime rate, or the overnight federal funds rate plus 50
basis points, plus an applicable margin. Initially, the respective applicable
margins for LIBOR loans and floating rate loans are 3.25% and 1.75%. The
applicable margins that we will pay throughout the term of this credit facility
will vary depending upon our financial performance and our ability to meet
certain financial ratios and targets, including leverage ratios. Interest is
payable at the end of each applicable LIBOR period for LIBOR loans, and monthly
for all floating rate loans. The outstanding principal balance is due in June
2004.
We used the proceeds from the revolving credit facility to repay amounts
outstanding under our previous $50.0 million senior credit facility. The
remaining availability will be used for future acquisitions and for working
capital purposes. We recorded an extraordinary, non-cash charge during the three
months ended June 30, 1999 of approximately $446,000, net of tax, related to the
write-off of unamortized financing costs associated with the previous credit
facility. At June 30, 1999, $52.3 million was outstanding under our current
revolving credit facility.
We plan to drive internal growth through the expansion of distribution, new
products, product line extensions, and brand introductions. We also plan to
pursue strategic acquisitions to capitalize on the substantial fragmentation and
growth potential existing in the professional salon and personal care products
industry. We intend to fund our future capital needs through a combination of
current cash resources, expected cash flows from operations, bank financing,
seller notes payable, issuance of our common stock, and additional public or
private debt or equity financing. These capital resources may not be available,
and the availability of such capital depends upon prevailing market conditions,
interest rates, and our financial condition.
25
<PAGE> 30
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 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. As a result, within the next five
months, 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.
Our State of Readiness
We have completed an assessment of our internal systems and processes with
respect to the "Year 2000" issue. Our sales, accounts receivable, inventory
management, accounts payable, general ledger and payroll systems comprise our
critical information technology ("IT") systems. We have assessed our "Year 2000"
readiness with regard to these critical IT systems. Based on internal
assessments and upon vendor representations, we believe that our critical IT
systems currently in place or being implemented as part of the centralization
and business process reengineering plan are or will be "Year 2000" compliant. We
believe that we will complete the implementation of our new processes and
systems associated with the critical IT systems by September 1, 1999. We intend
to assess the potential impact of "Year 2000" failures from vendors, customers,
and outside parties upon our business and are currently taking steps to assess
and minimize the risk of such "Year 2000" failures. Based upon our current state
of readiness and the steps currently being taken, we do not believe that the
"Year 2000" problem will have a material adverse effect on our business,
financial condition, or results of operations.
Software and hardware, such as security and telephone systems, that
facilitate the operations of our warehouses and operating locations that are not
affected by the centralization and reengineering plan comprise our primary
non-IT systems. We are in the process of assessing the "Year 2000" compliance of
these non-IT systems and expect to conclude this assessment by October 1, 1999.
We have not incurred, nor do we expect to incur, material costs in readying our
non-IT systems for the Year 2000. During this assessment period, as a
precautionary matter, we will continue to concurrently run our current systems.
Our Risks of "Year 2000" Issues
We procure a significant amount of raw materials and components from
external suppliers and rely upon third-party contract manufacturers to
manufacture most of our products. As a result, we may be at risk from suppliers
and manufacturers, foreign and domestic, that are not taking adequate measures
to ensure "Year 2000" compliance. The failure of these suppliers and
manufacturers to be "Year 2000" compliant may cause raw material and product
shortages that would adversely impact our operations. As a result, we may be at
risk with respect to suppliers and manufacturers that may not be "Year 2000"
compliant. We believe that the most likely negative effects, if any, could
include disruptions in both shipments and receipts of raw materials, components,
and products by us and our customers. In addition, our customers may experience
"Year 2000" failures, which could result in delays in our receipt of payments
from customers.
Contingency Plans
We are developing contingency plans with respect to significant "Year 2000"
issues. For example, we are in the process of assessing and verifying the "Year
2000" compliance of our international and domestic suppliers and contract
manufacturers. We have sent "Year 2000" readiness inquiries to key suppliers and
manufacturers to verify that these suppliers and manufacturers will be "Year
2000" compliant on a timely basis. We are investigating transferring supplier
and manufacturing relationships to alternate providers if current suppliers and
manufacturers are not "Year 2000" compliant.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
At June 30, 1999, we did not participate in any material derivative
financial instruments, or other financial and commodity instruments for which
fair value disclosure would be required under Statement of Financial Accounting
Standards No. 107. We hold no investment securities that would require
disclosure of market risk.
26
<PAGE> 31
Primary Market Risk Exposures
Our primary market risk exposures are in the areas of interest rate risk
and foreign currency exchange rate risk. We incur interest expense on loans made
under the senior subordinated notes at an interest rate, which is fixed, for a
maximum of ten years. At June 30, 1999, our outstanding borrowings on the senior
subordinated notes were $100 million, at an interest rate of 10.875%. We also
incur interest on loans made under our senior secured revolving credit facility
and other debt instruments at variable interest rates ranging from 6.0% to 9.0%.
At June 30, 1999, our total outstanding borrowings on the instruments was
approximately $57.3 million, including approximately $52.3 million outstanding
under a current credit facility and approximately $5.0 million of other debt
instruments. We entered into an interest rate swap agreement and an interest
rate cap agreement to limit the effect of increases in the interest rates on
floating rate debt. The notional amounts of interest rate agreements are used to
measure interest to be paid or received and do not represent the amount of
exposure to credit loss. The net cash amounts paid or received on the agreements
are accrued and recognized as an adjustment to interest expense.
The interest rate swap agreement is a contract to exchange floating rate
for fixed interest payments periodically over the life of the agreement. During
March 1998, we entered into an interest rate swap agreement, which effectively
fixed the interest rate on a $12.5 million notional principal amount under the
our current revolving credit facility at 5.75% plus a credit margin ranging from
150 to 250 basis points, for a period ending March 2000. During April 1998, we
entered into an interest rate cap agreement, which effectively limits our
interest rate exposure on a $12.5 million notional principal amount under our
revolving credit facility at 7.50% plus a credit margin ranging from 250 to 300
basis points, for a period ending in April 2000. The borrowings not subject to
interest rate swap or interest rate cap agreements at June 30, 1999 totaled
$27.2 million.
Substantially all of our business outside the United States is conducted in
U.S. dollar denominated transactions. We have a sales division located in the
United Kingdom. Some of the expenses of this foreign subsidiary are denominated
in the British pound sterling. These expenses include local salaries and wages,
utilities, and some operating supplies. However, we believe that the operating
expenses currently incurred in foreign currency are immaterial, and therefore
any associated market risk is unlikely to have a material adverse effect on our
business, financial condition, or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999 we adopted Statement of Position 98-1, Accounting
for the Costs of Computer Software, ("SOP 98-1"). SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The adoption of SOP 98-1 did not have a material effect on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities which was amended by the issuance of SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement
No. 133. in June 1999. These statements establish accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. These statements are presently
effective for our quarter ending March 31, 2001. We are currently evaluating the
impact that SFAS Nos. 133 and 137 will have on our future results of operations
and financial position.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 Reporting on the Costs of Start-Up Activities ("SOP
98-5"). SOP 98-5 requires costs of start-up activities and organization costs to
be expensed as incurred. The adoption of SOP 98-5 did not have a material effect
on our financial position or results of operations.
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BUSINESS
INTRODUCTION
We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon distribution
channels. Our products include hair care, skin and body care, and nail care
products, as well as salon appliances and sundries. We believe we are the only
company that develops, produces, and markets products in each category of the
estimated $40 billion U.S. market and substantially larger worldwide market for
professional salon products and services. We have well-recognized, long-lived
brand names, a strong distribution network, established marketing and salon
industry education programs, and significant production and sourcing
capabilities. We plan to leverage our well-established distribution channels by
providing customers with an increasingly comprehensive array of professional
salon brands and products. We also plan to take advantage of our consumer
products marketing expertise and our well developed infrastructure to develop
and acquire new product lines to sell through additional consumer product
distribution channels.
We currently sell more than 500 products under 19 principal brand names. In
the United States, we market our product lines through professional salon
industry distribution channels to more than 5,300 customers, consisting
primarily of salon product and tanning supply distributors (which resell to
beauty and tanning salons), beauty supply outlets, and salon chains. We also
market our products directly to more than 3,000 spas, resorts, and health and
country clubs through our in-house sales force. Internationally, we sell our
products primarily through international salon product distributors. We believe
our ability to offer customers a "one-stop shop" for brand-name professional
salon products creates a competitive advantage.
We commenced operations in November 1996, when we simultaneously completed
our initial public offering and acquired four professional salon products
businesses. Since that time, we acquired seven additional professional salon
product businesses. Our net sales and EBITDA have grown rapidly since our
inception. Our net sales increased from $38.1 million in 1997 to $90.4 million
in 1998, a growth rate of 137%. Our EBITDA increased from $11.0 million in 1997
to $23.1 million in 1998, a growth rate of 110%. We also have enjoyed high
profitability, with 56.6% gross margins and 25.6% EBITDA margins for fiscal
1998. Our net sales increased from $35.3 million during the six months ended
June 30, 1998 to $68.8 million during the six months ended June 30, 1999. This
increase in net sales represents a 95% growth rate, including internal net sales
growth of approximately 17%. Our EBITDA, before one-time charges and
centralization and reengineering costs, increased from $9.6 million during the
six months ended June 30, 1998 to $16.6 million during the six months ended June
30, 1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." This increase in EBITDA represents a 73% growth rate. We
attribute our rapid growth and high profitability to our focus on integrating
our acquired businesses, improving margins within our existing product lines,
developing new product lines and product line extensions, and acquiring
businesses and product lines that complement our portfolio of products.
OVERVIEW OF THE PROFESSIONAL SALON PRODUCTS MARKET
Professional salon products consist of hair care, skin and body care, and
nail care products as well as salon appliances and sundries that are used by
salon professionals in rendering salon services to their clients. Many
professional salon products also are retailed to clients and other customers of
salons, resorts, spas, health and country clubs, and beauty supply outlets,
typically upon the advice of a salon professional who recommends products to
address the client's individual needs.
Professional hair care products include shampoo, conditioner, styling gel,
glaze, mousse, hair spray, permanent, hair relaxer, and hair color products.
Skin and body care products include body lotions, tanning products, cosmetics,
skin moisturizers, hair removal and depilatory products, and other personal care
products (such as shaving creams and antiperspirants) used by salon
professionals in rendering salon services (such as facials, manicures,
pedicures, leg and body waxing, paraffin therapy, aromatherapy, and
thermo-therapy) or available for use by patrons of tanning salons, spas,
resorts, and health and country clubs. Professional nail care products include
fiberglass and acrylic nail enhancement solutions applied by the salon
professional when
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performing nail service and the accessories used by the professional to apply
the solutions; natural nail care and pedicure solutions and accessories; and
polishes. Professional salon appliances and sundries include hair dryers,
curling irons, brushes, pedicure spas, furniture, and salonwear such as capes
and aprons.
The professional salon products market has grown significantly during the
last several years. According to industry sources, annual professional salon
industry revenue, which includes revenue from salon services and the sale of
salon products, is approximately $40 billion in the United States and
substantially larger worldwide. Industry sources estimate that in 1996, there
were approximately 127 million client visits to salons each month and that there
were more than 200,000 beauty salons and 1.8 million licensed cosmetologists in
the United States. The professional salon products market is highly fragmented.
In 1996, experts estimated that of the approximately 700 companies selling
professional salon products in the United States, most generated less than $10
million in sales and focused on a single product category, although a number of
larger companies existed in certain product categories.
Professional salon products have two end consumers: the salon professional
who uses them in the performance of salon services and the salon client who
purchases them from salons for personal use. We believe salons typically
generate between 10% and 30% of their revenue from retail sales of professional
salon products. As the users and "prescribers" of professional salon products,
salon professionals typically select products on the basis of performance rather
than price. As a result, suppliers of professional salon products focus on
educating distributors and salon professionals on the uses and benefits of their
products and on industry trends. Because salon professionals prescribe these
products and sell them primarily in connection with rendering a salon service,
professional salon products typically foster strong brand loyalty and exhibit
relative price insensitivity. Consequently, professional salon products
generally command substantially higher prices and gross margins than
mass-marketed beauty products.
COMPETITIVE STRENGTHS
We believe that the following business strengths provide us with a
competitive advantage in the professional salon products market:
- Premier Brand Names. We offer a variety of well-recognized, long-lived
premium brands in all professional salon product categories, including
ABBA Pure and Natural Hair Care, Alpha 9, Body Drench, Clean + Easy,
Cosmic, European Touch, Gena, Kizmit, Omni P.O. Professionals Only, One
Touch, Pro Finish, Revivanail, SRC, and Suntopia. We believe that the
strength of our brand names is based on the reputation of our products
for quality among salon professionals, the performance of our products,
and our focused commitment to the needs of salon professionals and their
clientele. Because of the importance of proven product performance to
salon professionals, they remain extremely loyal to their favorite brands
resulting in long brand life. Our portfolio of well-recognized brands is
a significant driver of sales to distributors, beauty supply outlets, and
salon chains. In addition, our premium brands provide opportunities for
us to expand product lines within given product categories and to
reformulate or repackage existing product lines, both of which contribute
to our internal growth.
- Breadth of Product Offerings. We believe that we currently are the only
producer of professional salon products with offerings across all salon
product categories. As we have expanded our product offerings, we have
begun to provide distributors, beauty supply outlets, and salon chains
with an increasingly larger percentage of the products they require to
service the needs of salons and salon professionals. We believe the
breadth of our product offerings provides us with a significant
competitive advantage by allowing our distributors to purchase more
products from fewer vendors and by enabling us to cross-market our brands
and offer tailored lines of products to distributors, beauty supply
outlets, and salon chains. This "one-stop shop" approach also serves to
strengthen our relationships with customers.
- Strong Distribution Network. We have well-established relationships with
top salon product distributors, beauty supply outlets, and salon chains.
Unlike consumer products companies that sell a large percentage of their
products through a concentrated retailer base, we sell our products into
highly fragmented distribution channels to more than 2,500 distributors,
beauty supply outlets, and salon chains in the United States and
internationally and to more than 3,000 spas, resorts, and health and
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country clubs through our in-house sales force. Our extensive
distribution network creates a strong base from which we can pursue
additional business through cross-marketing of our current and future
brands and new product introductions. The breadth of our distribution
network also enables us to penetrate every major geographical market in
the United States and to expand our international business.
- Successful Acquisitions. Our experience gained from successfully
acquiring and integrating 11 professional salon products businesses since
our initial public offering in November 1996 positions us to pursue
additional acquisitions. We have integrated these acquired companies and
their respective distribution relationships into our existing operations;
integrated purchasing, production, and marketing efforts; and
consolidated accounting, human resources, and other back-office
functions. We are developing an operating infrastructure to allow us to
support an increasing range of professional salon products as we continue
to acquire additional companies and product lines.
- Favorable Operating Margins. Professional salon products typically
command higher margins and exhibit relative price insensitivity when
compared to their mass-market counterparts, and we believe that we have
been able to achieve operating margins that exceed industry averages. Our
favorable operating margins result primarily from our success in
utilizing our increased purchasing power to achieve cost savings;
integrating sourcing and distribution capabilities; eliminating
duplicative facilities, personnel, and administrative functions; and
consolidating sales and marketing and product development, when
appropriate. We also are taking advantage of the highly competitive
third-party manufacturing environment to reduce production costs.
- Experienced Management Team. We have an experienced management team with
significant industry experience. Sam Leopold, our Chief Executive
Officer, has more than 13 years of experience in the professional salon
products industry, including as the owner of a chain of mall-based retail
salons. Other members of our senior management team have, on average,
over 12 years of experience in the consumer and salon products industry,
particularly in the areas of sales, marketing, and operations. Mr.
Leopold will beneficially own approximately 14% of our common stock after
completion of this offering, and each other member of our senior
management team has an equity stake in our company.
- Operational Efficiency. Our new corporate headquarters and centralized
operations as well as the new centralized management and information
systems we are implementing are designed to enhance the productivity of
existing operations and future acquisitions.
STRATEGY
Our objective is to be the leading professional salon products company in
the United States and internationally. In order to achieve this objective, we
are pursuing a strategy of continued growth through internal business expansion
and acquisitions. Key elements of this strategy include the following:
Internal Growth Strategy
We intend to increase revenue and improve margins within our existing
product lines and to develop new product lines. Elements of our internal growth
strategy include the following:
- Leverage Well-Established Distribution Channels. We intend to leverage
our well-established distribution channels by providing customers with an
increasingly comprehensive array of products through acquisitions and
internal development of new brands. Through management's existing
relationships and those of acquired companies, we have developed and
integrated an increasingly extensive distribution network. We believe
that offering a growing array of well-known brands in all salon product
categories will further enhance our position as a key supplier to many of
our customers.
- Expand Distribution to Salon Chains. We are aggressively targeting sales
directly to salon chains, which we believe are underserved by
distributors and other salon product companies. We believe that our
increasingly diverse product offerings will enable us to enhance our
ability to offer salon chains the
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benefits of one-stop shopping, centralized single-source ordering,
tailored promotional programs, and dedicated customer service. We have
formed a sales and marketing team focused exclusively on further
penetrating this underserved segment of the salon products market.
- Introduction of New Products. We intend to introduce new product lines
under new brands and existing brands. We believe that our diverse product
offerings provide us with greater capacity and know-how to develop, test,
and market new products. Strong brand names also provide us the
opportunity to cross-market established and developing brands and
products. We plan to launch new, internally developed brands to leverage
our strong distribution network and leading industry position. In this
regard, we launched a new, internally developed hair care line under the
AquaTonic brand name. We also believe the strong brand name recognition
of our product lines lends itself to product line extensions under
existing brands. For example, ABBA, one of the top brands in the
aromatherapy segment of the hair care category, recently introduced its
Botanical High line of volume therapy hair care products. We believe that
the loyalty of salons and salon professionals to strong brands generally
makes them receptive to line extensions that capitalize on the
credibility of those brands. In addition, we intend to introduce new
generations of existing product lines with improved formulations and
packaging. For example, we achieved success in repackaging our ABBA hair
product lines in late 1998.
- Professional Only Store Marketing Program. We are implementing a new
professional only store marketing and distribution program to service the
growing market of stores operated by large distributors that sell
directly to professional stylists.
- Expand Distribution of Existing Products Internationally. We believe
significant opportunities exist to increase sales and profits through the
expansion of the international distribution of our products. According to
industry sources, the non-U.S. market for professional salon products is
substantially larger than the U.S. market. We, however, generated only
approximately 12% of our pro forma 1998 net sales outside of the United
States. We are expanding our international distribution, which currently
includes 37 countries. We will continue to focus on introducing our
products into our recently expanded international distribution channels,
which provide access to many international beauty markets.
- Enhance Operational Efficiencies. We focus on integrating acquired
businesses. Following each acquisition, we enhance operational efficiency
by (1) eliminating duplicative administrative functions, thereby lowering
overhead expenses, (2) expanding distribution channels, and (3) adding
and disseminating further market and product knowledge throughout our
operations. We plan to enhance operational efficiency further through our
new corporate headquarters and centralized operations center in
Scottsdale, Arizona. We believe that the continued realization of
operational efficiencies through our centralization and business process
reengineering efforts will enhance internal growth and profitability. We
also are implementing new centralized management and information systems,
which we believe will enhance the productivity of our existing operations
and future acquisitions. The systems will permit us to improve economies
of scale through centralized systems for accounting, purchasing,
inventory management, financial reporting, and customer service. We
believe that our investment in our management and information systems
will create a platform for long-term growth. The new systems will assist
us to access real-time information regarding customers, distributors,
purchase orders, inventory availability, and sales order history. The
systems will facilitate our integration of future acquired businesses and
improve operations by allowing us to
-- enhance customer service by providing sales representatives with
product information, promotions, and individual customer purchasing
patterns;
-- improve sales and marketing functions by tracking fast and slow
moving products and creating customized sales reports;
-- facilitate improved inventory management and purchase forecasting;
and
-- transition acquired businesses onto our centralized management and
information systems more efficiently by providing a more flexible
platform for data conversion.
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Acquisition Strategy
We seek to acquire professional salon product businesses possessing
complementary salon products with well-recognized brand names and strong
distribution networks and to capitalize on the substantial growth potential
existing in the professional salon products market. We believe that there are
many attractive acquisition candidates in the professional salon products
industry, primarily as a result of the highly fragmented nature of the industry.
We maintain a disciplined approach to acquisitions and evaluate each potential
acquisition based on the following goals:
- Continue to Acquire Leading Brands. We plan to continue our strategy of
acquiring leading brand names that complement our portfolio of brands and
command strong customer loyalty, solidify our position as a leading
supplier of professional salon products, and further enhance our
relationships with distributors. Additionally, well-known and
well-respected professional brands are able to command consistently
higher prices than mass-marketed retail brands and lesser known or
respected professional brands.
- Diversify and Strengthen Our Portfolio of Brands. We intend to acquire
companies and product lines that diversify and strengthen our portfolio
of brands. In this regard, we seek to acquire complementary products that
will enable us to offer multiple brands in each salon product category
and a broader range of products addressing the various niches within
these categories. We believe that this approach will enable us to offer
distributors and beauty supply outlets, which typically carry multiple
brands in each category, a more complete "one-stop shop" for the majority
of their salon products.
- Strengthen Distribution Network. We intend to acquire companies and
product lines that strengthen our relationships with domestic and
international distributors. Strong distribution networks of acquired
companies will enable us to increase sales by introducing our existing
products into new distribution channels and newly acquired or developed
products into existing distribution channels.
- Expand Product Offerings. We plan to expand our product offerings to
include premium department store, boutique, catalog, and e-commerce lines
through the acquisition of companies or brand names geared to these
distribution channels.
Our future acquisitions increasingly will focus on companies that are
larger than those previously acquired and that enhance our position in the
professional salon product market or enable us to penetrate new consumer product
distribution channels.
PRODUCTS
We offer products in all salon product categories. We sell more than 500
professional salon hair care, skin and body care, natural nail care and nail
enhancement products, and salon accessories and sundries, representing
approximately 1,500 stock keeping units, or SKUs. We believe that the strength
of our brand names is based on the reputation of our products for quality among
salon professionals, the performance of our products, and our focused commitment
to the needs of salon professionals and their clientele. We believe these brand
names are widely recognized by salon product distributors and salon
professionals and their clients as high-quality, effective products. In
addition, we believe that the strength of the brand names of our existing
products and our reputation within the industry will assist us to develop and
market product line extensions and new brands successfully.
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The table below sets forth a description of our principal products, the
brand names under which the products are sold, and our estimate of approximate
percentages of such products sold for professional salon use and retailed to
salon and customers.
<TABLE>
<CAPTION>
% % RETAIL
SALON SALES BY
PRODUCT CATEGORY PRODUCT DESCRIPTION BRAND NAMES USE SALONS
<S> <C> <C> <C> <C>
Hair Care Shampoo, conditioner, hair color, and ABBA, 40% 60%
styling and finishing aids AquaTonic,
Biogenol, Body
Drench,
Framesi, Gena,
Roffler
Skin and Body Care Moisturizing lotion, indoor and outdoor Body Drench, 35 65
tanning products, personal care Clean + Easy,
products, paraffin waxes, thermo-therapy Gena, One
treatments, and hair removal systems and Touch, Suntopia
depilatory products
Nail Care Natural nail care products, acrylic and Alpha 9, 70 30
fiberglass nail enhancement products, Cosmic,
nail treatments, nail polish, European Touch,
light-bonded nail systems, and manicure Gena, Kizmit,
and pedicure solutions and accessories Pro Finish,
Revivanail
Salon Appliances and Hairdryers, curling irons, salon European Touch 100 --
Sundries pedicure spas, salon furniture, and II, Maiko, SRC
salonwear (capes/aprons)
</TABLE>
Hair Care Products
We offer a variety of hair care products at various price points under the
ABBA, AquaTonic, Biogenol, Body Drench, Framesi, Gena, and Roffler brands. The
ABBA line, which is marketed under the ABBA Pure and Natural trademark, consists
of highly concentrated, high-quality products. The ABBA line consists of 100%
vegan, aromatherapy inspired, herbal hair care products using botanical
ingredients. The ABBA line includes shampoo, conditioner, gel, and hair spray
made using a blend of herbal therapy botanicals, tri-molecular proteins,
panthenol, and neutral henna designed to produce fuller, thicker, and shinier
hair. We recently introduced AquaTonic, our internally developed, pure and
natural hair care line, which is designed to protect hair against the negative
effects of hard and soft water and variances in humidity. Our Framesi product
line features premium quality hair color products marketed exclusively for use
in salons. We also market under the Biogenol brand name a complementary line of
shampoos, conditioners, and styling aids specifically formulated for
color-treated hair. The Roffler line includes high-quality, salon-distributed
shampoos, conditioners, and styling aids designed primarily for men between the
ages of 18 and 40. ABBA, Biogenol, Framesi, and Roffler products are used widely
throughout the hair care industry and generate significant salon retail sales.
See "Risk Factors -- We depend on Framesi S.p.A."
Under the Gena brand name, we offer a line of tea-tree oil hair care
products with anesthetic qualities designed to relieve dry, itching scalp. In
addition, we market hair care products as a part of our Body Drench line of
personal care products, primarily to spas, resorts, and health and country
clubs.
Skin and Body Care Products
We sell a broad range of professional skin and body care and tanning
products, including moisturizers, lotions, depilatories, and hair removal
products, under our Body Drench, Clean + Easy, One Touch, and Suntopia brands.
Body Drench professional skin care products include moisturizing lotions
and body baths supplemented with Vitamins A and E and botanical extracts for
moisture retention and skin rejuvenation and alpha hydroxy
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acids for natural skin exfoliation. Body Drench indoor tanning products replace
moisture lost during tanning and promote faster, darker tanning results. We also
offer outdoor tan care and sun protection products under the Body Drench name.
The Suntopia line of exclusively distributed professional tanning products
includes various tanning creams and lotions, enriched shower gels, a moisture
replenishing lotion, and a tan enhancing product. Suntopia products, which are
made using an exotic blend of botanicals and forested extracts, are designed to
promote and maintain a long-lasting tan. The Suntopia line complements the Body
Drench line by targeting a younger market.
Clean + Easy and One Touch brands include patented professional hair
removal products. The Clean + Easy brand serves the professional salon market
with an extensive line of hair removal products and related sundries used by
salon professionals. The Clean + Easy Roll-On Wax System is one of our top
selling hair removal products. The One Touch line serves the retail consumer in
the personal care market with products such as roll-on waxers, depilatories, and
electrolysis products.
Nail Care Products
We believe that we have the most complete and diverse line of branded
products for salon professionals in the nail care category. Our nail care
product offerings consist of products designed to support the various salon
services performed by nail technicians, including manicure, pedicure, acrylic
and fiberglass nail enhancement, natural nail treatments, and nail polishes.
Most nail care companies encourage distributors to purchase their entire product
line in order to buy any of their nail care products. We, however, offer a
number of top-selling products across all segments of the nail category,
permitting our customers to select and purchase individual SKUs from among
multiple brands, including Alpha 9, European Touch, Gena, Kizmit, Pro Finish,
and Revivanail. For example, we offer distributors and salon chains the ability
to purchase our Revivanail nail treatments and Alpha 9 acrylic nail enhancement
products without having to purchase the full line of other Revivanail or Alpha 9
products.
Our Alpha 9, European Touch, and Kizmit acrylic professional nail
enhancement products consist of complete lines of liquids, powders, tips, files,
and other implements and treatments necessary for the professional nail
technician to complete the acrylic nail enhancement process.
The Gena line of natural nail care products features Warm-O-Lotion, a
collagen-enriched manicure lotion that is prominently featured in salons
throughout the United States. The Gena line also includes professional pedicure
products, such as Pedi Soft, a collagen-enriched conditioning lotion; Pedi Care
dry skin lotion; and Pedi Soak foot bath. The Gena product line also includes
paraffin therapy products, such as Paraffin Springs Therapy Spa, a paraffin bath
for conditioning heat therapy treatments; the Healthy Hoof nail and skin
treatment line to strengthen, moisturize, and condition nails and cuticles; and
MRX antiseptics and lotions for use by salon professionals.
We offer base coats, top coats, nail glues, and cuticle lotions under our
European Touch and Pro Finish brands. The Pro Finish line of nail care products
also features a light bonded nail system that seals the nail enhancement under
ultraviolet lighting.
Our European Touch brand features nail treatment products, such as
Revivanail and Theracreme. We also offer Momentum, a three-step nail overlay
system that offers simplicity, speed, and strength.
Salon Equipment, Appliances, and Sundries
We sell salon equipment, appliances, and sundries, including pedicure spa
equipment, hairstyling appliances, and salonwear. We market under the European
Touch II name various salon equipment products, such as whirlpool footspas,
salon chairs designed for clients and technicians, manicure and pedicure tables
and footrests, and portable salon accessory carts. These products are intended
to capitalize on the growing trend among salons to offer services beyond the
basic salon services. The SRC product line of professional curling irons and
blow dryers are recognized within the salon industry as among the finest quality
in salon appliances. The appliances are designed for high usage and durability
and feature quick startup and recovery capabilities.
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All SRC professional curling irons are backed by the industry's only three-year
warranty. Our Maiko salonwear line features capes and aprons for the stylist and
the stylist's clientele.
PRODUCT DEVELOPMENT
We seek to leverage the significant brand-name recognition of our existing
product lines by introducing new products and formulations under our core brand
names as well as under newly developed brands. We believe that our diverse
product offerings provide us with greater capacity and know-how to develop,
test, and market new products in each of our product lines, including the
expanded application of proprietary technologies. We contract with third-party
manufacturers to develop new formulations that meet our specifications and
quality standards. We have not incurred and do not expect to incur significant
capital expenditures in connection with our product development efforts.
Our management, working together with our sales and marketing and product
development personnel, continuously monitors shifts in the salon industry to
identify new product opportunities. Feedback from salon professionals and our
educators also plays a significant role in product development. We believe the
experience of our key managers, their relationships within the industry, and our
product line orientation enable us to quickly recognize and respond to salon
innovations and industry trends.
MARKETING
We sell our professional salon products and appliances primarily through
professional salon industry distribution channels to salon product and tanning
supply distributors, salon chains, and beauty supply outlets, and, to a lesser
extent, directly to spas, resorts, and health and country clubs throughout the
United States and in Canada, Europe, Latin America, Australia, and Asia. We
believe that our strategy of marketing our salon products exclusively for use in
or resale by the salon industry complements the professional image of our
products and fosters a high degree of brand loyalty by distributors of
professional salon products.
Our sales and marketing efforts focus on educating salon professionals and
salon product distributors regarding the high quality and performance benefits
of our products as well as the latest trends and developments in the salon
industry. Our marketing program includes participation in salon industry trade
shows, at which salon product manufacturers exhibit and sell their products to
wholesale salon product distributors; several annual domestic and international
salon professionals trade shows; and numerous professional salon
distributor-sponsored shows, at which products, styles, and techniques are
demonstrated to salon professionals. Our marketing program emphasizes customer
education through regular in-the-field product demonstrations for salon
professionals, usually in conjunction with the distributors' sales and marketing
efforts. In addition, our products are advertised in trade and distributor
publications and promoted in national magazines, including Glamour, Good
Housekeeping, InStyle, Marie Claire, McCall's, Mirabella, and Self. We also
produce educational videos and literature for distribution to distributors and
salon professionals.
SALES AND DISTRIBUTION
We believe that we have strong relationships in each of the professional
salon distribution channels, including exclusive and open channels. We depend
upon salon product and tanning supply distributors, beauty supply outlets, and
salon chains to distribute our products. We currently maintain more than 5,300
active customer accounts. We do not, however, have long-term contracts with any
of our customers. Products sold through exclusive channels are available to a
limited number of distributors in each region, while those sold through open
channels are available to all distributors. See "Risk Factors -- We depend on
major customers."
Regional sales managers and a strong educational support team sell the ABBA
line of hair care products on an exclusive basis to approximately 50 salon
product distributors and salon chains throughout the United States, Canada, and
Australia. Regional sales managers and an in-house educational support team sell
our hair color and hair care products under the Framesi, Biogenol, and Roffler
brand names on an exclusive basis to 61 salon product distributors throughout
the United States and Latin America.
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<PAGE> 40
A professional outside sales force sells our nail care product lines
nationally and internationally to salon product distributors. This distribution
base includes Sally Beauty Company, Inc., the largest wholesale supplier of
professional supply products with more than 1,900 supply stores worldwide.
A sales force of marketing representatives, telemarketers, and field sales
personnel as well as independent manufacturer representatives sell Body Drench
products to salon product distributors, tanning supply distributors, and
directly to spas, resorts, and health and country clubs throughout the United
States and in Canada, Europe, Latin America, and Australia.
A sales force of employees and manufacturer representatives sell SRC salon
appliances and salonwear nationally on an exclusive basis to salon product
distributors, beauty schools, and salon chains. A sales manager and manufacturer
representatives sell Clean + Easy products to approximately 1,000 customers.
Sales managers and manufacturer representatives sell One Touch products to
approximately 400 customers. Together, Clean + Easy and One Touch products are
sold internationally to approximately 100 customers by a director of
international sales. An internal sales force of marketing representatives sells
our European Touch II pedicure spa products to salon product distributors and
salon chains.
PRODUCTION
We have developed relationships with third parties to manufacture most of
our products. Two manufacturers in China produce certain of our hair removal
appliances. Although we generally do not have long-term contracts with our
manufacturers, we own most of the formulations, tools, and molds utilized in the
manufacturing processes of our products and believe we could substitute other
manufacturers if necessary. See "Risk Factors -- We depend on third parties to
manufacture our products" and "Risk Factors -- We face risks associated with our
international operations."
We produce certain of our Clean + Easy and One Touch depilatory products at
our 32,000 square foot facility in Fair Lawn, New Jersey. The 8,600 square foot
manufacturing area in our Fair Lawn facility is devoted to the production of wax
and the packaging of a variety of hair removal appliances for domestic and
export markets. The wax production area consists of automatic and manual
batching and filling operations. We maintain raw materials and work-in-process
inventories in a 10,000 square foot warehouse and maintain finished goods in the
5,000 square foot shipping and receiving area.
We produce certain of our Biogenol and Roffler hair care products,
including shampoos, conditioners, and styling aids, in our approximately 47,000
square foot facility in Corapolis, Pennsylvania. In addition, we assemble and
upholster our European Touch II salon furniture and appliances in our 15,000
square foot manufacturing and warehousing facility in Butler, Wisconsin.
Raw materials used to produce our professional salon products, other than
salon appliances and sundries, include water, alcohol, mineral and natural oils,
fragrances, other chemicals, and a wide variety of packaging materials and
compounds including containers, such as cardboard boxes and plastic containers,
container caps, tops, valves, and labels. We purchase all of these raw materials
from outside sources. The principal raw materials and packaging components for
our products are available from numerous domestic and international suppliers.
Although we do not purchase ourselves the raw materials used to manufacture the
majority of our products, we are potentially subject to variations in the prices
we pay our third-party manufacturers for products depending on their costs for
raw materials. While the industry from time to time has experienced raw material
cost increases, we believe we will be able to purchase our requirements at
competitive prices. To date, increases in raw material costs have not had a
material effect on our operating results.
We continually monitor the quality of our products. We also carry product
liability insurance at levels we believe to be adequate.
COMPETITION
Our products compete directly against professional salon and other similar
products sold through distributors and professional salons. We compete on the
basis of brand recognition, quality, performance, distribution, and price.
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<PAGE> 41
Our principal competitors in the professional salon hair care products
market include Nexxus Products Co., Paul Mitchell Systems, Matrix, Redken, and
Sebastian International. Our largest competitors in the professional salon skin
and body care products market include California Suncare, Inc., Supre Inc.,
Swedish Beauty Manufacturing, Inc., Australian Gold, Inc., American
International, Inc., and Divi International. Our competitors in the professional
salon nail care market include Creative Nail Design, Inc., OPI Products Inc.,
Star Nail Products, Inc., and Backscratchers, Inc. Our largest competitors in
the professional salon appliances and sundries market are Helen of Troy Limited,
Belson Products (a division of Windmere Corporation), Conair Corporation,
Cricket Brush Company (a division of West Coast Beauty Supply Co.), Andre (a
division of Fromm International, Inc.), and Betty Dain Creations, Inc. In
addition, our professional salon products compete indirectly against hair care,
skin and body care, and nail care products as well as salon appliances and
sundries sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores and, to a lesser extent, mass
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," and catalogs. See "Risk Factors -- The professional salon
products industry is very competitive."
INTELLECTUAL PROPERTY
We have registered, or have pending applications for registration for, our
principal trademarks and brand names in the United States and in foreign
countries. Our principal trademarks and brand names include ABBA Pure and
Natural Hair Care, Alpha 9, AquaTonic, Biogenol, Body Drench, Clean + Easy,
Cosmic, European Touch, Gena, Kizmit, One Touch, Pro Finish, Revivanail,
Roffler, SRC, and Suntopia.
We believe our position in the marketplace depends to a significant extent
upon the goodwill engendered by our trademarks and brand names and, therefore,
consider trademark protection to be important to our business. We will seek to
register or otherwise protect all significant trademarks and brand names in all
active geographic markets.
While we currently hold certain patents, we do not consider any single
patent to be material to the conduct of our business. We rely on all facets of
intellectual property law to protect our proprietary information. See "Risk
Factors -- We face risks associated with our intellectual property."
GOVERNMENT REGULATION
Certain of our advertising and product labeling practices are subject to
regulation by the FTC, and certain of our professional salon product production
practices are subject to regulation by the FDA as well as by various other
federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
us to date. Nonetheless, federal, state, and local regulations in the United
States that are designed to protect consumers have had, and can be expected to
have, an increasing influence on product liability claims, production methods,
product content, labeling, and packaging. In addition, any expansion of our
operations to produce professional salon products that include over-the-counter
drug ingredients, such as certain sun screen ingredients, would result in us
becoming subject to additional FDA regulations as well as a higher degree of
inspection and greater burden of regulatory compliance than currently exist.
Our operations subject us to federal, state, and local governmental
regulations related to the use, storage, discharge, and disposal of hazardous
chemicals. Our failure to comply with current or future environmental
regulations could result in the imposition of fines, suspension of production,
or a cessation of operations. Compliance with such regulations could require us
to acquire costly equipment or to incur other significant expenses. Any failure
by us to control the use, or adequately restrict the discharge, of hazardous
substances could subject us to future liabilities.
The nature and use of professional salon products could give rise to
product liability claims if one or more users of our products were to suffer
adverse reactions following their use of the products. Such reactions could be
caused by various factors, many of which are beyond our control, including
hypoallergenic sensitivity and the possibility of malicious tampering with our
products. In the event of such an occurrence, we could incur substantial
litigation expense, receive adverse publicity, and suffer a loss of sales.
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<PAGE> 42
EMPLOYEES
As of August 11, 1999, we employed 352 persons, consisting of 132
administrative employees, 136 warehouse and production employees, and 84 sales
and marketing employees. Framesi USA, one of our subsidiaries, is a party to a
collective bargaining agreement relating to certain production employees. We
believe that our relations with our employees are good.
PROPERTIES
We lease our corporate headquarters and operations center located in a
66,000 square-foot facility in Scottsdale, Arizona. The facility includes
approximately 43,000 square feet of executive and administrative offices;
approximately 20,000 square feet utilized for warehousing; and approximately
3,000 square feet utilized for a test salon and a retail store. We believe the
facility will be adequate for our needs for the foreseeable future. We also
lease production, administrative, and warehouse space in Fair Lawn, New Jersey;
Butler, Wisconsin; Corapolis, Pennsylvania; and the United Kingdom; as well as
administrative space in Lebanon, Tennessee, and Costa Mesa, California.
LITIGATION
We are, and may in the future be, party to litigation arising in the
ordinary course of our business. We do not consider any current claims to be
material to our business, financial condition, or operating results. Our
insurance coverage may not be adequate to cover all liabilities arising out of
any claims that may be instituted in the future. A lack of insurance coverage
may have an adverse effect on our business, financial condition, and operating
results.
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<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Sam L. Leopold....................... 45 Chairman of the Board, President, and Chief
Executive Officer
Richard R. Ross...................... 32 Executive Vice President, Chief Financial Officer,
Treasurer, and Director
N. Bruce Cowgill..................... 52 Executive Vice President -- Operations
Michael L. Kaplan.................... 30 Executive Vice President, General Counsel, and
Secretary
J. Timothy Montrose.................. 32 Chief Accounting Officer
James A. Brooks...................... 69 Director
Peter W. Burg........................ 44 Director
Michael H. Feinstein................. 64 Director
Sylvan Schefler...................... 61 Director
</TABLE>
SAM L. LEOPOLD, a founder of our company, has served as our Chairman of the
Board and Chief Executive Officer since our incorporation in June 1995 and as
our President since February 1998. Mr. Leopold previously owned and served as
President and Chairman of Beauty Boutique International, which was founded in
1990 and operated three retail beauty salons in Arizona. From 1986 to 1991, Mr.
Leopold served as Executive Vice President of Consumer Beauty Supply, Inc. (dba
Beauty Express), a mall-based retail chain of beauty supply salons. During that
time, Mr. Leopold was responsible for day-to-day operations and oversaw the
growth and development of Beauty Express from fewer than 20 retail salons to
more than 50 retail salons. From 1989 to 1991, Mr. Leopold served as President
of Avanti International, Inc. and developed a line of hair care products.
RICHARD R. ROSS has served as our Chief Financial Officer and Treasurer
since April 1997 and as our Executive Vice President and a director since May
1998. Mr. Ross served in the audit and business advisory group of Arthur
Andersen LLP from June 1989 to April 1997, most recently in the position of
Manager. In his capacity at Arthur Andersen LLP, Mr. Ross worked with us from
our inception in June 1995, as well as with other acquisition-oriented public
companies, until joining us in April 1997. Mr. Ross is a certified public
accountant.
N. BRUCE COWGILL has served as our Executive Vice President -- Operations
since July 1998. Mr. Cowgill served as Vice President, North American Sales of
Sebastian International, a professional hair care company, from August 1995 to
July 1998. In 1989, Mr. Cowgill founded Environmental Solutions Labs, a
consulting firm serving health and beauty aid manufacturers and served as
President until 1995. Mr. Cowgill served as President and Chief Executive
Officer of State Supply Warehouse Co., the largest beauty supply distributor in
North America, from December 1986 to April 1989. In addition, he served as Vice
President of Global Marketing, Advertising and Education, and International
Sales of Redken Laboratories from July 1978 to August 1983. Mr. Cowgill held
marketing management positions at Proctor and Gamble, Warner Lambert, and R.J.
Reynolds from 1972 to 1978.
MICHAEL L. KAPLAN has served as our Executive Vice President, General
Counsel, and Secretary since July 1998. Mr. Kaplan was an attorney with the
Phoenix-based law firm of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A. from September 1995 to June 1998, where he specialized in
mergers, acquisitions, and corporate finance and represented
acquisition-oriented public companies, including us. Mr. Kaplan also was an
attorney with Fennemore Craig, P.C. from September 1993 to August 1995.
J. TIMOTHY MONTROSE has served as our Chief Accounting Officer since May
1997 and has been employed by us since December 1996. From November 1995 to
December 1996, Mr. Montrose served as the
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<PAGE> 44
Accounting Manager for Cellular World Corporation, a retail chain of wireless
communication products stores. From April 1993 to November 1995, Mr. Montrose
served as Senior Accountant with the Dallas Stars Hockey Club of the National
Hockey League and was actively involved in the club's transition from
Minneapolis to Dallas.
JAMES A. BROOKS has served as a director of our company since September
1996. Mr. Brooks has been President of Signe Inc., a management consulting firm
for major consumer product companies and a variety of salon industry companies,
since founding that company in December 1984. Mr. Brooks served as Senior Vice
President of Sales and Marketing of Lamaur, Inc. from 1983 to 1984, at that time
a publicly traded company listed on the New York Stock Exchange and a leading
domestic producer and marketer of a broad range of hair care products. Mr.
Brooks served as Senior Vice President of Sales and Marketing of Redken
Laboratories, Inc. from 1977 to 1983.
PETER W. BURG has served as a director of our company since February 1997.
Mr. Burg has been a director and shareholder in the law firm of Burg Simpson
Eldredge Hersh & Houliston, P.C. (and its predecessor Burg & Aspinwall, P.C.)
since October 1984.
MICHAEL H. FEINSTEIN has served as a director of our company since June
1997. Mr. Feinstein has served as President and Chief Executive Officer of
Automated Solutions, Inc., a privately held Arizona company, since July 1998.
Mr. Feinstein also serves as a director of Automated Solutions, Inc. Mr.
Feinstein served as a consultant to Samoth Capital Corporation, a publicly owned
real estate company, from April 1998 to July 1998. Mr. Feinstein served as
Senior Vice President and Chief Financial Officer of Monaco Finance, Inc., a
publicly held specialty finance company, from July 1995 to April 1998. From
September 1993 to July 1995, Mr. Feinstein served initially as Executive Vice
President and subsequently as acting President and Chief Executive Officer of
American Southwest Financial Corporation, which engages in the securitization
and administration of mortgage-backed bonds and certificates. From January 1983
through September 1993, Mr. Feinstein served in various senior management
positions, including, at different times, Chief Financial Officer, Treasurer,
Chief Operating Officer, and Executive and Senior Vice President of Asset
Investors Corporation, a New York Stock Exchange-listed REIT, and MDC Holdings
Inc., a New York Stock Exchange-listed national homebuilder. Prior to 1983, Mr.
Feinstein was a partner in the public accounting firm now known as Deloitte &
Touche.
SYLVAN SCHEFLER has served as a director of our company since November
1996. Mr. Schefler has been Chairman of Maxima Group, LLC, a merchant banking
firm, since September 1997, and a partner of Crystal Asset Management Group,
Ltd., a merchant banking firm, since 1990. Mr. Schefler served as Vice Chairman
of Prime Charter Ltd., an investment banking firm and one of the representatives
of the underwriters of our initial public offering, from 1995 to April 1997. Mr.
Schefler served as Chairman of the Investment Banking Division and as a member
of the Executive Committee of Prime Charter Ltd. from September 1994 to April
1997. Mr. Schefler previously served in various capacities with Drexel Burnham
Lambert Incorporated for over 30 years, including as a member of its Executive
Committee and Board of Directors. Mr. Schefler has served as a director of GSE
Systems, Inc., a supplier of software systems for manufacturing industries,
since August 1995.
We have agreed that, for a period of three years from our initial public
offering in November 1996, the representatives of the underwriters of our
initial public offering will have the right to send an observer to each meeting
of our Board of Directors, or in lieu of such observer, the representatives may
elect to require us to use our best efforts to elect Sylvan Schefler, formerly
Vice Chairman of Prime Charter Ltd., or another mutually acceptable designee, to
our Board of Directors for that three-year period. As a result of this
agreement, Mr. Schefler serves as a member of our Board of Directors.
Directors hold office until their successors have been elected and
qualified. Officers serve at the pleasure of the Board of Directors. There are
no family relationships among any of our directors or officers.
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<PAGE> 45
KEY EMPLOYEES
The following table sets forth certain information regarding certain of our
key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Allen J. Smith..................... 59 Executive Vice President -- Sales
Charles R. Miller.................. 62 Senior Vice President -- Operations
Paula Malloy....................... 41 Executive Vice President -- Marketing
</TABLE>
ALLEN J. SMITH was named Executive Vice President -- Sales during August
1999. Prior to that, Mr. Smith served as our Senior Vice President -- Operations
from November 1998 to August 1999. Mr. Smith served as Vice President of Company
Owned Distribution at Sebastian International from September 1996 to November
1998, and as General Manager, Northern California of that company during
September 1993 to September 1996.
CHARLES R. MILLER has served as our Senior Vice President -- Operations
since January 1999. Prior to that Mr. Miller served as Vice
President -- Operations of U.K. ABBA Products, Inc. from August 1997 to December
1998 and served as a consultant to executive staff of that company from March
1996 to August 1997. Mr. Miller also served in various positions with JOICO
Laboratories, Inc., including Chief Financial Officer and Chief Operating
Officer from September 1989 to February 1994, and as an independent consultant
to that company from February 1994 to March 1996. Prior to that time, Mr. Miller
served as Chief Financial Officer for Matrix Essentials, and as a consultant to
management of Creative Nail Design Systems.
PAULA MALLOY was named Executive Vice President -- Marketing during August
1999. Prior to that, Ms. Malloy served as our Vice President -- Education and
New Product Development from November 1998 to August 1999. Ms. Malloy has also
served as Senior Director -- Education and Research & Development of Sebastian
International from November 1997 to November 1998, and as Director of Education
of that company from April 1995 to November 1997.
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<PAGE> 46
EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered in all capacities to us for the fiscal years ended December 31, 1996,
1997, and 1998 by our Chief Executive Officer and our other most highly
compensated officer whose aggregate cash compensation exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
AWARDS
ANNUAL COMPENSATION --------------------- ALL OTHER
------------------------------- SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($)(2) BONUS($) OPTIONS(#)(3) ($)(4)
<S> <C> <C> <C> <C> <C>
Sam L. Leopold....................... 1998 $200,000 $280,000 325,000(5) $3,750
Chairman of the Board, Chief 1997 $150,000 -- 200,000 --
Executive Officer, and President 1996 $ 16,538(6) -- -- --
Richard R. Ross...................... 1998 $150,000 $122,500 125,000(7) $1,563
Executive Vice President, Chief 1997 $ 86,667 -- 79,530 --
Financial Officer, Treasurer, and
Director
</TABLE>
- ---------------
(1) We consider Sam L. Leopold, Richard R. Ross, N. Bruce Cowgill, Michael L.
Kaplan, and J. Timothy Montrose to be our executive officers. Messrs.
Cowgill and Kaplan began their employment with us during fiscal 1998. The
cash compensation for Messrs. Cowgill, Kaplan, and Montrose did not exceed
$100,000 during fiscal 1998.
(2) Other annual compensation did not exceed 10% of the total salary and bonus
for any of the Named Executive Officers.
(3) The exercise prices of all stock options granted were equal to the fair
market value of our common stock on the date of grant.
(4) Amounts shown for fiscal 1998 represent matching contributions made by us to
our 401(k) Plan.
(5) Includes 125,000 options that were cancelled in December 1998.
(6) Includes $16,538 in salary earned by Mr. Leopold in fiscal 1996 but deferred
to fiscal 1997.
(7) Includes 50,000 options that were cancelled in December 1998.
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<PAGE> 47
OPTION GRANTS
The following table sets forth certain information regarding options
granted to the Named Executive Officers during the fiscal year ended December
31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
% VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------
GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Sam L. Leopold......... 125,000(3) 18.1% $15.875 1/29/08(3) $1,247,963 $3,162,583
75,000 10.9% $12.375 9/4/08 $585,693 $1,479,192
125,000 18.1% $ 9.750 1/29/08 $766,465 $1,942,374
Richard R. Ross........ 50,000(3) 7.3% $15.875 1/29/08(3) $499,185 $1,265,033
25,000 3.6% $12.375 9/4/08 $194,564 $493,064
50,000 7.3% $ 9.750 1/29/08 $306,586 $776,949
</TABLE>
- ---------------
(1) The options were granted at the fair market value of the shares on the date
of grant and have 10-year terms. One-third of the options vest and become
exercisable on each of the first, second, and third anniversaries of the
date of grant.
(2) Calculated from a base price equal to the exercise price of each option,
which was the fair market value of the common stock on the date of grant.
Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the SEC and do not represent our estimate or
projection of the future price of our common stock. Actual gains, if any, on
stock option exercises will depend upon the future market prices of our
common stock.
(3) These options were cancelled in December 1998.
OPTION EXERCISES AND HOLDINGS
The following table represents information on options exercised in the last
fiscal year by the Named Executive Officers and the value of each such officer's
unexercised options at December 31, 1998.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2)
EXERCISE REALIZED ------------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Sam L. Leopold............. -- -- 233,334 166,666 $-- $--
Richard R. Ross............ 5,000 $66,250 69,386 80,144 $-- $--
</TABLE>
- ---------------
(1) Calculated based on the market price at exercise multiplied by the number of
options exercised less the total exercise price of the options exercised.
(2) The exercise prices of all options held by the Named Executive Officers are
greater than or equal to the closing sales price of the common stock as
quoted on the Nasdaq National Market on December 31, 1998 of $9.25 per
share.
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<PAGE> 48
EMPLOYMENT AGREEMENTS
Our employment agreement with Mr. Leopold provides for Mr. Leopold to serve
as our Chairman of the Board, President, and Chief Executive Officer through May
2004. Mr. Leopold will receive a base salary of $375,000 per annum, subject to
annual review by the Compensation Committee beginning July 1, 2001. The
employment agreement will be automatically renewed for successive five-year
terms.
Should Mr. Leopold's employment with us be terminated by an occurrence
other than by death, disability, or cause, including a change of control, Mr.
Leopold will receive an amount equal to five times his then-current salary plus
an amount equal to five times any incentive compensation paid to him for the
prior fiscal year, both payable in a single sum on the date of his termination.
Mr. Leopold will continue to participate in all employee benefit plans,
programs, or arrangements available to our other executives in which he was
participating on the date of termination until the date the employment agreement
would have expired but for such occurrence or, if earlier, until he receives
equivalent benefits and coverage by another employer.
In the event of Mr. Leopold's death, at any time and from time to time
during the 12-month period thereafter, his beneficiary will have the right to
sell to us any or all of our common stock owned by Mr. Leopold at the time of
his death at their aggregate closing market price as of the date of the election
to sell. We will not, however, be obligated to purchase any shares to the extent
that the aggregate purchase price of all of the shares exceeds $5.0 million, or
if any such purchase would cause us to become insolvent or would result in an
event of default under any of our loan or credit agreements. In the event that
we cannot purchase all of such shares, Mr. Leopold's beneficiary may request us
to register such stock to enable the beneficiary to sell the shares to the
public.
Mr. Leopold may not
- compete with us during the term of the employment agreement and for a
five-year period after its termination,
- take actions intended to solicit our employees to terminate their
employment relationship with us during the term of the employment
agreement and for a two-year period after its termination, and
- at any time make unauthorized use or disclosure of our confidential
information.
Immediately prior to a change of control of our company, Mr. Leopold will
receive an amount equal to five times his then-current salary plus an amount
equal to five times any incentive compensation paid to him for the prior fiscal
year, both payable in a single sum. In addition, Mr. Leopold will receive
- continuation of all of his benefits that he received from us, unless he
becomes eligible for any equivalent benefits provided by another
employer, and
- outplacement services selected by him with a value of up to 12 months'
salary.
Mr. Leopold may expressly waive any of the payments above as a precondition
to a change of control of our company. If his employment is terminated within
the three-year period immediately after such change of control, however, he will
be entitled to receive such benefits as of the date of his termination. Any
payments made under the change of control agreement will be reduced on a
dollar-for-dollar basis to the extent that we are required to make any payments
under the severance provisions of the employment agreement. Mr. Leopold's change
of control agreement also provides for a gross-up for the excise tax on any
amounts that are treated as excess parachute payments under the Internal Revenue
Code.
In the event of a change of control, Mr. Leopold will have the right to
exercise any outstanding option to purchase our common stock, whether or not
such option is vested. If Mr. Leopold is not able to sell all of his shares of
our common stock at the same price as other stockholders, Mr. Leopold may
request us to register such stock to enable him to sell the shares to the
public. In the event that the net proceeds received by Mr. Leopold in connection
with such sale to the public is less than the highest per share consideration
received by any other stockholder for his or her shares of our common stock in
connection with the change of control,
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<PAGE> 49
we will pay Mr. Leopold an amount per share equal to the difference between the
maximum per share consideration received by any stockholder, and the average per
share price received by Mr. Leopold.
The Internal Revenue Code currently limits the deductibility for federal
income tax purposes of compensation paid to our five most highly compensated
executive officers. We may deduct certain types of compensation paid to any of
these individuals only to the extent that such compensation during any fiscal
year does not exceed $1.0 million. Certain provisions of the employment and
change of control agreements, if triggered, could limit our ability to deduct
compensation paid to Mr. Leopold and our other executive officers.
Our employment agreement with Mr. Ross provides for Mr. Ross to serve as
our Chief Financial Officer for an initial term of two years ending in June
2001. Mr. Ross will receive a base salary at an annual rate of $175,000 through
December 31, 1999 and $200,000 for the remainder of the term of his employment
agreement. The employment agreement also provides for incentive compensation
based on the performance of Mr. Ross as determined by a committee of our board
of directors. In the event of any "change of control" of our company as defined
in the employment agreement, we will pay Mr. Ross a lump sum of three times his
salary, plus any unpaid fringe benefits through the remaining term of the
employment agreement, and any bonus earned prior to the change of control. The
employment agreement also contains a covenant not to compete with us during the
term of the employment agreement and one year following the termination of Mr.
Ross's employment.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan, as amended, (the "1996 Plan") provides for the
grant of options to purchase shares of our common stock. The 1996 Plan is
intended to promote our interests by providing key employees, members of our
board of directors, consultants, and independent contractors who provide
valuable services to us with the opportunity to acquire, or otherwise increase,
their proprietary interest in our company as an incentive to remain in service
to us.
The 1996 Plan is divided into the discretionary grant program and the
automatic option program. The discretionary grant program provides for the
granting of options to acquire our common stock, the direct granting of our
common stock, the granting of stock appreciation rights, or the granting of
other cash awards. Options and awards under the 1996 Plan may be issued to
executives, key employees, and others providing valuable services to us or our
subsidiaries. Options issued under the 1996 Plan may be incentive stock options
or nonqualified stock options. The automatic option program provides for the
automatic grant of options to acquire our common stock granted to members of our
board of directors who are not employed by us.
An aggregate of 1,000,000 shares of our common stock may be issued under
the 1996 Plan. If any change is made in the stock subject to the 1996 Plan, or
subject to any option or award granted under the 1996 Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, split-up,
combination of shares, exchange of shares, change in corporate structure, or
otherwise), the 1996 Plan provides that appropriate adjustments will be made as
to the maximum number of shares subject to the 1996 Plan and the number of
shares and exercise price per share of stock subject to outstanding options and
awards. As of September 7, 1999, an aggregate of 17,800 shares of common stock
had been issued upon exercise of options granted under the 1996 Plan and there
were 726,732 options outstanding under the 1996 Plan. The 1996 Plan will remain
in force until September 2006.
To the extent that granted options are incentive stock options, the terms
and conditions of those options must be consistent with the qualification
requirements set forth in the Internal Revenue Code of 1986. options that are
incentive stock options may be granted only to our key personnel (and our
subsidiaries) who are also our employees (or our subsidiaries). The maximum
number of shares of stock with respect to which options or stock appreciation
rights may be granted to any employee during the term of the 1996 Plan may not
exceed 50% of the shares of stock covered by the 1996 Plan.
To exercise an option, the optionholder will be required to provide us
written notice of his or her election to exercise the option and deliver to us
full payment of the exercise price for the number of shares as to which
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<PAGE> 50
the option is being exercised. Generally, options can be exercised by delivery
of cash, check, or shares of our common stock.
Awards granted in the form of stock appreciation rights entitle the
recipient to receive a payment equal to the appreciation in market value of a
stated number of shares of common stock from the price stated in the award
agreement to the market value of the common stock on the date first exercised or
surrendered. Awards granted in the form of stock awards entitle the recipient to
receive common stock directly. Cash awards entitle the recipient to receive
direct payments of cash depending on the market value or the appreciation of our
common stock or other securities.
Under the automatic option program, each new independent member of our
board of directors automatically will receive an option to acquire 5,000 shares
of common stock on the date of his or her first appointment or election to our
board of directors. In addition, each year at the meeting of our board of
directors held immediately after our annual meeting of stockholders, each
independent member of our board of directors automatically will be granted an
option to acquire an additional 2,500 shares of common stock. Each automatic
option will become exercisable and vest on the first anniversary of the
applicable grant date. An independent member of the board of directors is not
eligible to receive an annual automatic option if the grant date is within 90
days of such independent member receiving an initial automatic option. The
exercise price per share of common stock subject to each automatic option is
equal to 100% of the fair market value per share on the date of the grant. If an
independent director ceases to serve as a director, all automatic options that
are not vested as of the date of cessation will immediately terminate.
1998 EMPLOYEE STOCK OPTION PLAN
The purpose of the 1998 Employee Stock Option Plan (the "1998 Plan") is to
further our interests and our stockholders by encouraging employees associated
with us to acquire shares of our common stock, thereby acquiring a proprietary
interest in its business and an increased personal interest in its continued
success and progress. The 1998 Plan provides for the grant of nonqualified
options to acquire our common stock.
A maximum of 150,000 shares of common stock may be issued under the 1998
Plan. If any option expires or terminates without having been exercised in full,
stock not issued under such option will again be available for the purposes of
the 1998 Plan. If shares of stock are used to pay for the exercise price, those
shares will be added to the shares available under the 1998 Plan. If any change
is made in the stock subject to the 1998 Plan or subject to any option granted
under the 1998 Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, split-up, combination of shares, exchange of
shares, change in corporate structure, or otherwise), the 1998 Plan provides
that appropriate adjustments will be made as to the maximum number of shares
subject to the 1998 Plan and the number of shares and exercise price per share
of stock subject to outstanding options. As of September 7, 1999, no shares of
common stock have been issued upon exercise of options granted under the 1998
Plan and there were 114,250 options outstanding under the 1998 Plan. The 1998
Plan will remain in effect until May 4, 2008.
Options may be granted under the 1998 Plan only to persons who at the time
of grant are our employees or consultants. Any executive officer (as that term
is defined in Rule 16a-1(f) under the Exchange Act) or director, and all persons
who own 10% or more of our issued and outstanding stock are not eligible to
receive options under the 1998 Plan.
To exercise an option, the optionholder will be required to provide us
written notice of his or her election to exercise the option and deliver to us
full payment of the exercise price for the number of shares as to which the
option is being exercised. Generally, options can be exercised by delivery of
cash, check, or shares of our common stock.
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<PAGE> 51
401(k) PROFIT SHARING PLAN
In April 1998, we established a defined contribution plan that qualifies as
a cash or deferred profit sharing plan under Sections 401(a) and 401(k) of the
Internal Revenue Code. Under the 401(k) plan, participating employees may defer
from 1% to 20% of their pre-tax compensation, subject to the maximum allowed
under the Internal Revenue Code. We will contribute $.50 for each dollar
contributed by the employee, up to a maximum contribution of 5% of the
employee's contribution. In addition, the 401(k) plan provides that we may make
an employer profit sharing contribution in such amounts as may be determined by
our board of directors. Our matching contribution vest 25% each year the
employee remains in service, and employees will be fully vested after four years
of service. If the employee terminates service to us, any unvested portion of
our matching contribution will remain in the 401(k) plan.
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<PAGE> 52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sam L. Leopold, our Chairman of the Board, President, and Chief Executive
Officer, previously owned three Beauty Boutique International stores in Arizona,
which he sold during fiscal 1998. Our sales to these Beauty Boutique
International stores approximated $171,000 during 1997 and 1998 during the
period which Mr. Leopold owned the stores. The sales to these Beauty Boutique
International stores were made in the ordinary course of business and on terms
no more favorable than terms extended to our other customers.
We paid James A. Brooks, a member of our Board of Directors, a $150,000 fee
in connection with the acquisition of U.K. ABBA Products, Inc. and the related
financing.
Sylvan Schefler, a member of our Board of Directors, is the Chairman of
Crystal Asset Management, and Chairman of Maxima Group, LLC. We paid Crystal a
$560,000 fee in connection with the acquisitions of ABBA and paid Maxima a
$560,000 fee in connection with the acquisition of certain product lines of
Inverness Corporation and the related financings.
Our initial public offering in November 1996 was co-managed by Friedman,
Billings, Ramsey & Co., Inc., and Prime Charter Ltd. Mr. Schefler was the Vice
Chairman of Prime Charter at the time of the initial public offering, but was
not a director of our company at that time. In connection with the public
offering, Friedman Billings and Prime Charter each received warrants to purchase
101,500 shares of our common stock. Prime Charter subsequently distributed to
Mr. Schefler warrants to purchase 16,240 of these shares. See "Principal
Stockholders."
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<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock on August 11, 1999 by (1) each
director; (2) each executive officer; (3) all our directors and executive
officers as a group; and (4) each person known by us to be the beneficial owner
of more than 5% of our common stock.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER(1) OWNED(1)(2) OFFERING OFFERING
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Sam L. Leopold............................................ 1,141,185(3) 26.2% 13.7%
Richard R. Ross........................................... 86,053(4) 2.1% 1.1%
N. Bruce Cowgill.......................................... 10,000(4) * *
Michael L. Kaplan......................................... 4,667(5) * *
J. Timothy Montrose....................................... 5,835(4) * *
James A. Brooks........................................... 2,500(4) * *
Peter W. Burg............................................. 16,075(6) * *
Michael H. Feinstein...................................... 7,500(4) * *
Sylvan Schefler........................................... 26,240(7) * *
Directors and executive officers as a group (nine
persons)................................................ 1,300,055(8) 28.9% 15.3%
5% STOCKHOLDERS:
Lance Laifer.............................................. 722,800(9) 17.8% 9.0%
Hilltop Partners, L.P..................................... 363,100(9) 8.9% 4.5%
Putnam Investments, Inc................................... 248,963(10) 6.1% 3.1%
Jon D. Gruber............................................. 248,000(11) 6.1% 3.1%
J. Patterson McBaine...................................... 229,300(11) 5.6% 2.8%
Geoffrey Nixon............................................ 206,500(12) 5.1% 2.6%
</TABLE>
- -------------------------
* Less than one percent
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. Except as otherwise indicated, each of such
persons may be reached through our offices at 7400 East Tierra Buena Lane,
Scottsdale, Arizona 85260.
(2) The percentages shown are calculated based upon 4,067,503 shares of common
stock outstanding on August 11, 1999. The numbers and percentages shown
include the shares of common stock actually owned as of August 11, 1999 and
the shares of common stock that the person or group had the right to
acquire within 60 days of August 11, 1999. In calculating the percentage of
ownership, all shares of common stock that the identified person or group
had the right to acquire within 60 days of August 11, 1999 upon the
exercise of options and warrants are deemed to be outstanding for the
purpose of computing the percentage of the shares of common stock owned by
such person or group, but are not deemed to be outstanding for the purpose
of computing the percentage of the shares of common stock owned by any
other person.
(3) Includes 283,334 shares of common stock issuable upon the exercise of stock
options.
(4) Represents shares of common stock issuable upon the exercise of stock
options.
(5) Includes 4,167 shares of common stock issuable upon the exercise of stock
options.
(6) Includes 10,000 shares of common stock issuable upon the exercise of stock
options.
(7) Includes 10,000 shares of common stock issuable upon the exercise of stock
options, and 16,240 shares of common stock issuable upon the exercise of
warrants issued to Mr. Schefler.
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<PAGE> 54
(8) Includes 419,389 shares of common stock issuable upon the exercise of stock
options and 16,240 shares of common stock issuable upon the exercise of
warrants.
(9) Mr. Laifer, as the President, sole director, and principal stockholder of
Laifer Capital Management, Inc., may be deemed to be the beneficial owner
of 363,100 shares of common stock beneficially owned by Laifer Capital
Management, Inc. in its capacity as General Partner and Investment Advisor
to Hilltop Partners, L.P., and 359,700 shares of common stock beneficially
owned by Laifer Capital Management, Inc. in its capacity as Investment
Advisor to various other clients. These clients include (i) various Wolfson
family entities, and (ii) Hilltop Offshore Limited. Laifer Capital
Management, Inc. has sole voting and dispositive power with respect to the
363,100 shares of common stock beneficially owned by Hilltop Partners, L.P.
Laifer Capital Management, Inc. also has sole voting and dispositive power
with respect to 49,200 shares of common stock owned by Hilltop Offshore
Limited and shared voting and dispositive power with respect to 310,500
shares of common stock beneficially owned by the various Wolfson family
entities. The address of Mr. Laifer and Hilltop Partners, L.P. is 45 West
45th Street, New York, NY 10036. Beneficial ownership information is based
upon a Schedule 13D/A filed with the SEC dated as of January 8, 1999.
(10) Represents shares of common stock beneficially owned by Putnam Investments,
Inc. ("PI"), a wholly owned subsidiary of Marsh & McLennan Companies, Inc.
("M&MC"), each of which is a registered investment adviser. All of such
shares are beneficially owned by subsidiaries of PI that are registered
investment advisers. PI has shared dispositive power with respect to all of
such shares, and shared voting power with respect to 10,263 of such shares.
PI and M&MC disclaim beneficial ownership of such shares, and disclaim any
power to vote or dispose of such shares. PI's principal address is One Post
Office Square, Boston, Massachusetts, 02109. Beneficial ownership
information is based upon a Schedule 13G filed with the SEC dated as of
February 11, 1999.
(11) Represents shares of common stock beneficially owned by Jon D. Gruber and
J. Patterson McBaine in their capacities as the sole directors and
executive officers of Gruber and McBaine Capital Management and various
other entities controlled by Messrs. Gruber and McBaine. Mr. Gruber has
shared voting power and shared dispositive power with respect to 217,300 of
such shares, and sole voting power and sole dispositive power with respect
to 30,700 of such shares. Mr. McBaine has shared voting power and shared
dispositive power with respect to 217,300 of such shares, and sole voting
power and sole dispositive power with respect to 12,000 of such shares. The
principal address of Messrs. Gruber and McBaine is 50 Osgood Place,
Penthouse, San Francisco, California, 94133. Beneficial ownership
information is based upon a Schedule 13G filed with the SEC dated as of
December 9, 1997.
(12) Represents 206,500 shares of common stock beneficially owned by Geoffery
Nixon and various entities over which MCM Associates, Ltd. ("MCM") has sole
investment discretion. Mr. Nixon is the sole shareholder, director, and
officer of MCM. Mr. Nixon, through joint ownership with his wife, and MCM,
as sole investment manager, have sole voting power and sole dispositive
power over the shares indicated. Mr. Nixon's principal business address is
11 West 42nd Street, 19th Floor, New York, New York 10036. Beneficial
ownership information is based upon a Schedule 13G filed with the SEC dated
as of January 29, 1999.
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DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 10,000,000 shares of common stock,
par value $0.0001 per share, and 1,000,000 shares of serial preferred stock, par
value $0.0001 per share. As of September 7, 1999, there were issued and
outstanding 4,067,503 shares of common stock and no shares of serial preferred
stock. We have also reserved 1,000,000 shares of common stock for issuance under
the 1996 Plan and 150,000 shares of common stock for issuance under the 1998
Plan.
COMMON STOCK
The holders of common stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of the stock entitled to vote in
any election of directors may elect all of the directors standing for election.
Subject to the preferences that may be applicable to any then outstanding
preferred stock, the holders of common stock will be entitled to receive such
dividends, if any, as may be declared by our board of directors from time to
time out of legally available funds. Upon our liquidation, dissolution, or
winding up, the holders of common stock will be entitled to share ratably in all
our assets that are legally available for distribution, after payment of all
debts and other liabilities and subject to the prior rights of holders of any
preferred stock then outstanding. The holders of common stock have no
preemptive, subscription, redemption, or conversion rights.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by Delaware law, but without further action by our stockholders, to provide for
the issuance of serial preferred stock in one or more series, to establish from
time to time the number of shares to be included in such series, to fix the
designations, powers, preferences, and rights of the shares of each such series
and any qualifications, limitations, or restrictions thereof, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without any further vote or action by
the stockholders. The board of directors may authorize and issue serial
preferred stock with voting or conversion rights that could adversely affect the
voting power or other rights of the holders of common stock. In addition, the
issuance of serial preferred stock may have the effect of delaying, deterring,
or preventing a change in control of our company. We have no current plan to
issue any shares of serial preferred stock although shares of preferred stock
could be issued as a result of our Shareholders' Rights Plan discussed below.
WARRANTS
Underwriter Warrants
In connection with our initial public offering, we issued 203,000 common
stock purchase warrants (the "Underwriter Warrants"). As of September 7, 1999,
all of the Underwriter Warrants remained outstanding. Each Underwriter Warrant
entitles the holder thereof to purchase at any time prior to November 21, 2001,
one share of common stock at an exercise price of $12.00 per share, subject to
adjustment in accordance with the anti-dilution and other provisions referred to
below. The shares of our common stock underlying the Underwriter Warrants (the
"Underwriter Warrant Shares"), when issued upon the exercise thereof and payment
of the purchase price, will be fully paid and nonassessable. The holders of the
Underwriter Warrants do not have the rights or privileges of holders of common
stock.
The exercise price and the number of shares of common stock purchasable
upon the exercise of the Underwriter Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits, and
combinations or reclassification on or of the common stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of common
stock, consolidation or merger of our company with or into another corporation,
or sale of all or substantially all of our assets in order to enable holders of
Underwriter Warrants to acquire the kind and number of shares that might
otherwise have been purchased upon the exercise of the Underwriter Warrants. No
adjustments will be made unless such
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<PAGE> 56
adjustment, or such adjustment when aggregated with subsequent adjustments,
would require an increase or decrease of at least $.01 in the exercise price of
the Underwriter Warrants.
We have granted certain "piggy-back" registration rights with respect to
the shares of common stock purchasable pursuant to the exercise of the
Underwriter Warrants. Under these registration rights, each holder of common
stock acquired upon the exercise Underwriter Warrants may request us to register
such stock if we propose to register any securities under the securities laws
using the same registration form that would be used to register the Underwriter
Warrant Shares. We have agreed to pay all expenses associated with any
registration of the common stock acquired pursuant to the exercise of the
Underwriter Warrants, except that any fees of legal counsel of the holders and
underwriter's fees, discounts, or commissions relating to the common stock
registered by such holders will be the responsibility of the selling
stockholder. The "piggy-back" registration rights of the Under Warrantholders
expire on November 21, 2003.
We have also granted certain "demand" registration rights with respect to
the shares of common stock purchasable upon the exercise of the Underwriter
Warrants. Under these registration rights, the majority of the holders of the
then outstanding Underwriter Warrants and Underwriter Warrant Shares may request
us to register such stock. We will not be obligated to effect more than two
"demand" registrations. In the event that our registration of common stock is
for a public offering involving an underwriting, the holders of a majority of
the Underwriter Warrants and Underwriter Warrant Shares will have the right to
select the underwriter, subject to our reasonable approval. The "demand"
registration rights of the Underwriter Warrantholders expire on November 21,
2001.
Lender Warrants
In connection with the June 1997 Credit Facility that is no longer
outstanding, we issued 160,000 common stock purchase warrants (the "Lender
Warrants"). As of September 7, 1999, all of the Lender Warrants remained
outstanding. Each Lender Warrant entitles the holder to purchase, at any time
prior to June 25, 2002, with respect to 10,000 Lender Warrants, one share of
common stock at an exercise price of $10.18 per share, and with respect to
150,000 Lender Warrants, one share of common stock at an exercise price of
$11.38 per share. The share amounts and exercise prices are subject to
adjustment in accordance with the anti-dilution and other provisions referred to
below. The shares of our common stock underlying the Lender Warrants (the
"Lender Warrant Shares"), when issued upon the exercise thereof and payment of
the purchase price, will be fully paid and nonassessable. The holders of the
Lender Warrants do not have the rights or privileges of holders of common stock.
The exercise price and the number of shares of common stock purchasable
upon the exercise of the Lender Warrants are subject to adjustment upon the
occurrence of certain events, including cash dividends, stock dividends, stock
splits, and combinations or reclassification on or of the common stock.
Additionally, an adjustment would be made in the case of a reclassification or
exchange of common stock, consolidation or merger of our company with or into
another corporation, or sale of all or substantially all of our assets in order
to enable holders of Lender Warrants to acquire the kind and number of shares
that might otherwise have been purchased upon the exercise of the Lender
Warrants. No adjustments will be made unless such adjustment would require an
increase or decrease of at least 1% in the number of securities then purchasable
under the Lender Warrants.
We have granted certain "incidental" registration rights with respect to
the shares of common stock purchasable pursuant to the exercise of the Lender
Warrants. Under these registration rights, each holder of common stock acquired
pursuant to the exercise of the Lender Warrants may request us to register such
stock if we propose to register any of our equity securities under the
securities laws for sale to the public. We have agreed to pay all expenses
associated with any registration of the common stock acquired pursuant to the
exercise of the Lender Warrants. In the event that our registration of common
stock is for a public offering involving an underwriting, the "incidental"
registration rights described above will entitle the holders of the Lender
Warrants certain preferences to participate in such registration, depending upon
whether we propose the registration, or whether other security holders
possessing similar registration rights propose the registration. The
"incidental" registration rights of the Lender Warrantholders terminate when (1)
such securities have been disposed of in accordance with such an effective
registration statement, (2) our counsel receives a written opinion that such
securities may be sold without registration under the securities laws, (3) the
Lender
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Warrants expire unexercised or are otherwise terminated, or (4) such securities
have been sold through a broker, dealer, or underwriter in a public distribution
or a public securities transaction in which the transferee receives a
certificate without a restrictive legend.
SENIOR SUBORDINATED NOTES DUE JULY 1, 2008
In June 1998, we issued $100 million of senior subordinated notes. We used
the net proceeds of that offering to finance our acquisition of the European
Touch Companies, to repay amounts outstanding under our then existing senior
credit facility, to repay certain other indebtedness, and to provide working
capital.
The senior subordinated notes were issued under an Indenture between us,
certain of our subsidiaries as guarantors, and State Street Bank and Trust
Company of California, N.A., as trustee. The following subsidiaries jointly and
severally guarantee the senior subordinated notes: Gena, JDS, ABBA, European
Touch, European Touch II, Beauty Products Inc., Cosmetics International Inc.,
Ft. Pitt Acquisition, Inc., Ft. Pitt-Framesi, Ltd., Styl Institute, Inc., and
Styling Technology Nail Corporation.
The senior subordinated notes will mature on July 1, 2008, unless
previously redeemed by us. Interest on the senior subordinated notes is payable
semiannually on January 1 and July 1, commencing on January 1, 1999. We have the
option to redeem the senior subordinated notes, in whole or in part, at any time
on or after July 1, 2003. If we redeem the senior subordinated notes before July
1, 2006, we will be required to pay a premium over the principal amount. On or
after that date, the redemption price will be equal to the principal amount. In
either event, we must also pay any accrued and unpaid interest to the date of
redemption. Upon a Change of Control as defined in the agreement covering the
notes, we will be required to make an offer to repurchase all outstanding senior
subordinated notes at 101% of the principal amount plus accrued and unpaid
interest to the date of repurchase. We are not required to make mandatory
redemption or sinking fund payments on the senior subordinated notes.
The senior subordinated notes are our general unsecured obligations. The
senior subordinated notes rank subordinate in right of payment to all senior
debt as defined in the agreement covering the notes and senior or pari passu in
right of payment to all our existing and future subordinated debt as defined in
the agreement covering the notes. The subsidiary guarantees are general
unsecured obligations of the guarantors. The guarantees likewise rank
subordinate in right of payment to all senior debt of the guarantors and senior
or pari passu in right of payment to all existing and future subordinated debt
of the guarantors.
SHAREHOLDER RIGHTS PLAN
We have adopted a Shareholder Rights Plan under which holders of shares of
common stock are entitled to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock at a purchase price of $70, subject to
certain antidilution adjustments. The rights will expire 10 years after issuance
and will be exercisable on a stock acquisition date. A "stock acquisition date"
will occur if (1) a person or group becomes the beneficial owner of 15% or more
of our common stock; (2) persons currently holding 15% or more of the common
stock acquire an additional 1% or more of the common stock; or (3) a person or
group commences a tender or exchange offer that would result in the offeror
beneficially owning 15% or more of the common stock. If a stock acquisition date
occurs, each right, unless redeemed by us, entitles the holder to purchase an
amount of our common stock, or in certain circumstances a combination of
securities and/or assets or the common stock of the acquiror, having a market
value of twice the exercise price of the right. Rights held by the acquiring
person will become void and will not be exercisable to purchase shares at the
bargain purchase price.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors, except pursuant to an offer conditioned
on a substantial number of rights being acquired. The rights should not
interfere with any merger or other business combination approved by the board of
directors since the rights may be redeemed by us at $.01 per right at any time
before a stock acquisition date.
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DELAWARE GENERAL CORPORATION LAW AND CERTAIN CHARTER PROVISIONS
The provisions of our First Amended and Restated Certificate of
Incorporation and Bylaws and the Delaware General Corporation Law summarized
below may have the effect of discouraging, delaying, or preventing hostile
takeovers, including those that might result in a premium over the market price,
or discouraging, delaying, or preventing changes in control or management of our
company.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly held Delaware
corporation from engaging, under certain circumstances, in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless (1) prior to the date at which the stockholder became an
interested stockholder, the board of directors approved either the business
combination or the transaction in which the stockholder becomes an interested
stockholder; (2) upon consummation of the transaction in which the stockholder
becomes an interested stockholder, the stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans); or (3) the business
combination is approved by the board of directors and by two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent) held on or subsequent to the date of the business combination. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 15% or
more of the corporation's voting stock. Section 203 defines a "business
combination" to include mergers, consolidations, stock sales and asset based
transactions, and other transactions resulting in a financial benefit to the
interested stockholder.
Our First Amended and Restated Certificate of Incorporation and Bylaws
contain a number of other provisions relating to corporate governance and to the
rights of stockholders. These provisions include (a) the authority of the board
to fill vacancies on the board, and (b) the authority of the board to issue
preferred stock in series with such voting rights and other powers as the board
may determine.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust Inc., Denver, Colorado.
LISTING
Our common stock trades on the Nasdaq National Market under the symbol
"STYL."
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<PAGE> 59
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, ING Barings LLC, U.S.
Bancorp Piper Jaffray Inc., First Security Van Kasper, and DLJdirect Inc. have
severally agreed to purchase from us the respective number of shares of our
common stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
ING Barings LLC.............................................
U.S. Bancorp Piper Jaffray Inc..............................
First Security Van Kasper...................................
DLJdirect Inc...............................................
----------
Total.................................................. 4,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of our common stock
offered in this prospectus are subject to approval by their counsel of certain
legal matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all of our shares of common stock offered in
this prospectus (other than those shares covered by the over-allotment option
described below) if any are purchased.
The underwriters initially propose to offer our shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers, including the
underwriters, at that price less a concession not in excess of $ per share.
The underwriters may allow, and the dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of our common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
PAID BY US
--------------------
NO FULL
EXERCISE EXERCISE
<S> <C> <C>
Per share................................................... $ $
Total.......................................................
</TABLE>
We will pay the offering expenses, estimated to be $700,000.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 600,000 additional shares of our common stock at
the initial public offering price less underwriting discounts and commissions.
The underwriters may exercise this option solely to cover over-allotments, if
any, made in connection with this offering. To the extent that the underwriters
exercise this option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of the additional shares based on
the underwriter's percentage underwriting commitment as indicated in the
preceding table.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make.
55
<PAGE> 60
We, our executive officers and directors, and certain of our stockholders,
warrant holders, and option holders have agreed, subject to certain exceptions,
not to:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock, or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any of our
common stock
for a period of 120 days after the date of this prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
However, we may:
- grant stock options or stock awards under our existing benefit or
compensation plans, including our 1996 Stock Option Plan and 1998
Employee Stock Option Plan,
- issue shares of our common stock upon the exercise of options, warrants
or rights or the conversion of currently outstanding securities, and
- issue, offer and sell shares of our common stock or securities
convertible into, or exercisable or exchangeable for, our common stock in
transactions not involving a public offering, or in connection with
future acquisitions, as long as each recipient of the securities agrees
in writing to be bound by the restrictions in this paragraph.
In addition, during this 120-day period, we have also agreed not to file
any registration statement with respect to, and each of our executive officers
and directors and certain of our stockholders and option holders have agreed not
to make any demand for, or exercise any right with respect to, the registration
of any shares of our common stock or any securities convertible into or
exercisable or exchangeable for our common stock without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock offered in this prospectus in any jurisdiction where action for the
purpose is required. The shares of our common stock offered in this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisements in connection with the offer and
sale of any shares of our common stock be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with the
applicable rules and regulations of the jurisdiction. Persons with this
prospectus should inform themselves about and observe any restrictions relating
to this offering and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of our common stock offered in this prospectus in any jurisdiction in which an
offer or a solicitation of this kind is unlawful.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot, which would involve
syndicate sales in excess of the offering size, creating a syndicate short
position. The underwriters may bid for and stabilize the price of our common
stock. In addition, the underwriting syndicate may reclaim selling concessions
from syndicate members and selected dealers if they repurchase previously
distributed our common stock in syndicate covering transactions, in stabilizing
transactions or otherwise. These activities may stabilize or maintain the market
price of our common stock above independent market levels. The underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
56
<PAGE> 61
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Greenberg Traurig, P.A., Phoenix, Arizona and for the underwriters by
Thompson & Knight L.L.P., Dallas, Texas.
EXPERTS
The audited financial statements of Styling Technology Corporation and
subsidiaries, Gena Laboratories, Inc., Body Drench (a Division of Designs by
Norvell, Inc.), JDS Manufacturing Co., Inc., Kotchammer Investments, Inc.,
European Touch, Ltd. II, and U.K. ABBA Products, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Ft. Pitt Acquisition, Inc. and
subsidiary as of December 31, 1997 and for the year then ended, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to an agreement for the
sale of a majority of Ft. Pitt Acquisition, Inc.'s outstanding common stock),
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the SEC relating to
the common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. Statements contained in this prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance we refer you to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. For further information with respect to us
and the common stock offered hereby, we refer you to the registration statement,
exhibits and schedules.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and file reports, proxy statements, and other information with the
SEC. These reports, proxy statements, the registration statement, and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549; the Chicago Regional Office, Suite 1400, 500 West
Madison Street, Citicorp Center, Chicago, Illinois 60661; and the New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York 10048.
Copies of such material also can be obtained from the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the prescribed fees. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a
Web site on the Internet that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the SEC. The address of this site on the Internet is http://www.sec.gov.
Our common stock is quoted on the Nasdaq National Market.
57
<PAGE> 62
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-35
Unaudited Pro Forma Condensed Consolidated Statement of
Operations................................................ F-36
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-37
GENA LABORATORIES, INC.
Report of Independent Public Accountants.................... F-38
Balance Sheets.............................................. F-39
Statements of Operations.................................... F-40
Statements of Stockholders' Equity.......................... F-41
Statements of Cash Flows.................................... F-42
Notes to Financial Statements............................... F-43
BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
Report of Independent Public Accountants.................... F-49
Balance Sheets.............................................. F-50
Statements of Operations.................................... F-51
Statements of Changes in Owner's Investment................. F-52
Statements of Cash Flows.................................... F-53
Notes to Financial Statements............................... F-54
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants.................... F-57
Balance Sheets.............................................. F-58
Statements of Operations.................................... F-59
Statements of Stockholders' Equity.......................... F-60
Statements of Cash Flows.................................... F-61
Notes to Financial Statements............................... F-62
KOTCHAMMER INVESTMENTS, INC.
Report of Independent Public Accountants.................... F-65
Balance Sheet............................................... F-66
Statements of Operations.................................... F-67
Statements of Stockholders' Deficit......................... F-68
Statements of Cash Flows.................................... F-69
Notes to Financial Statements............................... F-70
</TABLE>
F-1
<PAGE> 63
<TABLE>
<S> <C>
U.K. ABBA PRODUCTS, INC.
Report of Independent Public Accountants.................... F-73
Balance Sheets.............................................. F-74
Statements of Operations.................................... F-75
Statements of Stockholders' Equity.......................... F-76
Statements of Cash Flows.................................... F-77
Notes to Financial Statements............................... F-78
EUROPEAN TOUCH, LTD. II
Report of Independent Public Accountants.................... F-83
Balance Sheets.............................................. F-84
Statements of Operations.................................... F-85
Statements of Stockholders' Equity.......................... F-86
Statements of Cash Flows.................................... F-87
Notes to Financial Statements............................... F-88
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
Independent Auditors' Report................................ F-92
Consolidated Balance Sheets................................. F-93
Consolidated Statements of Operations....................... F-94
Consolidated Statements of Stockholders' Equity............. F-95
Consolidated Statements of Cash Flows....................... F-96
Notes to Consolidated Financial Statements.................. F-97
</TABLE>
F-2
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Styling Technology Corporation:
We have audited the accompanying consolidated balance sheets of STYLING
TECHNOLOGY CORPORATION, a Delaware corporation, and subsidiaries (the
"Company"), as of December 31, 1997 and 1998, and the related consolidated
statements of operations and cash flows for the period from November 27, 1996
(commencement of operations) to December 31, 1996 and for the years ended
December 31, 1997 and 1998, and the related consolidated statements of
stockholders' equity for the years ended December 31, 1996, 1997 and 1998. 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 audits 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 the Company as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from November 27, 1996 to December 31, 1996 and for the years ended
December 31, 1997 and 1998, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 15, 1999 (except
with respect to the matters
discussed in Note 13,
as to which the
date is June 22, 1999).
F-3
<PAGE> 65
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 3,063,000 $ 4,023,000 $ 1,512,000
Accounts receivable, net of allowance for doubtful
accounts of approximately $1,032,000, $2,882,000,
and $3,138,000 (unaudited)....................... 14,296,000 32,326,000 43,262,000
Inventories, net.................................... 10,951,000 25,375,000 26,948,000
Prepaid expenses and other current assets........... 2,120,000 4,021,000 6,147,000
----------- ------------ ------------
Total current assets........................ 30,430,000 65,745,000 77,869,000
PROPERTY AND EQUIPMENT, net........................... 2,640,000 5,362,000 8,688,000
GOODWILL, INTANGIBLES AND OTHER, net of accumulated
amortization of approximately $1,375,000,
$4,749,000, and $7,617,000 (unaudited).............. 59,419,000 148,091,000 152,568,000
----------- ------------ ------------
$92,489,000 $219,198,000 $239,125,000
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 7,065,000 $ 12,668,000 $ 17,709,000
Accrued liabilities................................. 3,670,000 10,367,000 10,463,000
Current portion of long-term debt and other......... 5,647,000 2,768,000 3,474,000
----------- ------------ ------------
Total current liabilities................... 16,382,000 25,803,000 31,646,000
----------- ------------ ------------
DEFERRED INCOME TAXES................................. 162,000 19,216,000 19,174,000
----------- ------------ ------------
LONG-TERM DEBT AND OTHER, less current portion........ 47,377,000 140,366,000 155,652,000
----------- ------------ ------------
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, 4,757,000 shares issued and 3,949,000
shares outstanding at December 31, 1997; and
4,876,000 shares issued and 4,068,000 shares
outstanding at December 31, 1998 and June 30,
1999 (unaudited)................................. 1,000 1,000 1,000
Additional paid-in capital.......................... 27,875,000 29,038,000 29,038,000
Retained earnings................................... 2,492,000 6,574,000 5,414,000
Treasury stock...................................... (1,800,000) (1,800,000) (1,800,000)
----------- ------------ ------------
Total stockholders' equity.................. 28,568,000 33,813,000 32,653,000
----------- ------------ ------------
$92,489,000 $219,198,000 $239,125,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 66
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
NOVEMBER 27, 1996
(COMMENCEMENT SIX MONTHS SIX MONTHS
OF OPERATIONS) TO YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1999
------------------- ----------------- ----------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES....................... $1,083,000 $38,108,000 $90,373,000 $35,299,000 $68,770,000
COST OF SALES................... 571,000 16,756,000 39,222,000 15,492,000 29,857,000
---------- ----------- ----------- ----------- -----------
Gross profit.......... 512,000 21,352,000 51,151,000 19,807,000 38,913,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....... 737,000 12,201,000 32,715,000 11,909,000 25,775,000
CENTRALIZATION AND REENGINEERING
COSTS......................... -- -- 422,000 -- 1,363,000
PROVISION FOR CANCELLED
DISTRIBUTORS.................. -- -- -- -- 5,067,000
---------- ----------- ----------- ----------- -----------
737,000 12,201,000 33,137,000 11,909,000 32,205,000
---------- ----------- ----------- ----------- -----------
Income (loss) from
operations.......... (225,000) 9,151,000 18,014,000 7,898,000 6,708,000
INTEREST EXPENSE (INCOME) AND
OTHER, net.................... 2,000 (1,847,000) (9,206,000) 2,628,000 7,874,000
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM AND INCOME
TAXES......................... (223,000) 7,304,000 8,808,000 5,270,000 (1,166,000)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES.................. (72,000) 3,097,000 3,635,000 2,266,000 (452,000)
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM............ (151,000) 4,207,000 5,173,000 3,004,000 (714,000)
EXTRAORDINARY ITEM, net of tax
benefit....................... -- (1,377,000) (1,091,000) 1,091,000 446,000
---------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)............... $ (151,000) $ 2,830,000 $ 4,082,000 $ 1,913,000 $(1,160,000)
========== =========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before
extraordinary item......... $ (0.04) $ 1.07 $ 1.28 $ .75 $ (.18)
Extraordinary item, net....... -- (0.35) (.27) (.27) (.11)
---------- ----------- ----------- ----------- -----------
Net income (loss)............. $ (0.04) $ 0.72 $ 1.01 $ .48 $ (.29)
========== =========== =========== =========== ===========
Weighted average shares....... 3,770,000 3,949,000 4,033,000 4,006,000 4,068,000
========== =========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER
SHARE:
Income (loss) before
extraordinary item......... $ (0.04) $ 1.02 $ 1.20 $ .69 $ (.18)
Extraordinary item, net....... -- (0.33) (.25) (.25) (.11)
---------- ----------- ----------- ----------- -----------
Net income (loss)............. $ (0.04) $ 0.69 $ 0.95 $ .44 $ (.29)
========== =========== =========== =========== ===========
Weighted average shares....... 3,770,000 4,113,000 4,313,000 4,356,000 4,068,000
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 67
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
-------------------- ADDITIONAL EARNINGS TOTAL
SHARES COMMON PAID-IN (ACCUMULATED TREASURY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT) STOCK EQUITY
----------- ------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995....... 1,616,000 $1,000 $ -- $ -- $ -- $ 1,000
Issuance of common stock and
warrants.................... 20,000 -- 179,000 (187,000) -- (8,000)
Issuance of common stock and
warrants in initial public
offering, net of offering
costs of approximately
$1,351,000.................. 3,116,000 -- 27,227,000 -- -- 27,227,000
Issuance of common stock in KII
acquisition................. 5,000 -- 50,000 -- -- 50,000
Purchase of 808,000 shares of
treasury stock.............. (808,000) -- -- -- (1,800,000) (1,800,000)
Net loss for the period from
November 27, 1996
(commencement of operations)
to December 31, 1996........ -- -- -- (151,000) -- (151,000)
---------- ------ ----------- ----------- ----------- -----------
BALANCE, December 31, 1996....... 3,949,000 1,000 27,456,000 (338,000) (1,800,000) 25,319,000
Issuance of warrants........... -- -- 419,000 -- -- 419,000
Net income..................... -- -- -- 2,830,000 -- 2,830,000
---------- ------ ----------- ----------- ----------- -----------
BALANCE, December 31, 1997....... 3,949,000 1,000 27,875,000 2,492,000 (1,800,000) 28,568,000
Issuance of common stock on
exercise of stock options
and warrants................ 119,000 -- 426,000 -- -- 426,000
Tax benefit from stock options
exercised................... -- -- 737,000 -- -- 737,000
Net income..................... -- -- -- 4,082,000 -- 4,082,000
---------- ------ ----------- ----------- ----------- -----------
BALANCE, December 31, 1998....... 4,068,000 1,000 29,038,000 6,574,000 (1,800,000) 33,813,000
Net loss (unaudited)........... -- -- -- (1,160,000) -- (1,160,000)
---------- ------ ----------- ----------- ----------- -----------
BALANCE, June 30, 1999
(unaudited).................... 4,068,000 $1,000 $29,038,000 $ 5,414,000 $(1,800,000) $32,653,000
========== ====== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 68
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
NOVEMBER 27, SIX MONTHS SIX MONTHS
1996 TO ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1998 1998 1999
-------------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (151,000) $ 2,830,000 $ 4,082,000 $ 1,913,000 $ (1,160,000)
Adjustments to reconcile net income (loss) to
net cash used in operating activities --
Depreciation and amortization................ 97,000 1,846,000 5,187,000 1,856,000 3,492,000
Provision for cancelled distributors......... -- -- -- -- 5,067,000
Interest accretion to note payable........... -- 174,000 159,000 87,000 --
Extraordinary loss on early extinguishment of
debt...................................... -- 1,377,000 1,091,000 -- --
Changes in assets and liabilities --
Accounts receivable, net..................... 532,000 (7,405,000) (10,549,000) (3,665,000) (16,003,000)
Inventories, net............................. (21,000) (2,992,000) (8,364,000) (1,551,000) (1,573,000)
Prepaid expenses and other assets............ (36,000) (1,730,000) (198,000) (363,000) (5,064,000)
Accounts payable and accrued liabilities..... (788,000) 3,520,000 1,807,000 (2,796,000) 6,346,000
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities... (367,000) (2,380,000) (6,785,000) (4,519,000) (8,895,000)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of acquired businesses, net of cash
acquired..................................... (20,523,000) (45,150,000) (62,677,000) (31,469,000) --
Purchases of property and equipment............ (46,000) (582,000) (1,962,000) (668,000) (3,440,000)
Changes in other assets, net................... -- -- (4,251,000) (957,000) (2,883,000)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities... (20,569,000) (45,732,000) (68,890,000) (33,094,000) (6,323,000)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
offering and acquisition costs............... 27,227,000 -- -- -- --
Proceeds from credit facilities, net of
financing costs.............................. -- 71,633,000 47,298,000 10,265,000 72,469,000
Proceeds from bond offering, net of financing
costs........................................ -- -- 96,400,000 96,400,000 --
Exercise of stock options...................... -- -- 1,163,000 197,000 --
Payments on long-term debt..................... -- (24,949,000) (68,226,000) (60,655,000) (59,762,000)
Purchase of treasury stock..................... (1,800,000) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities............................ 25,427,000 46,684,000 76,635,000 46,207,000 12,707,000
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 4,491,000 (1,428,000) 960,000 8,594,000 (2,511,000)
CASH AND CASH EQUIVALENTS, beginning of period... -- 4,491,000 3,063,000 3,063,000 4,023,000
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period......... $ 4,491,000 $ 3,063,000 $ 4,023,000 $ 11,657,000 $ 1,512,000
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes..................... $ -- $ 1,727,000 $ 2,634,000 $ 1,637,000 $ 7,500
============ ============ ============ ============ ============
Cash paid for interest......................... $ -- $ 1,155,000 $ 3,699,000 $ 1,983,000 $ 7,410,000
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 69
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) FORMATION OF THE COMPANY:
Initial Public Offering and the Initial Businesses
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. In November 1996, the Company completed an initial public offering
(the "IPO") of 3,116,000 shares of its common stock. Simultaneously with the
consummation of the IPO, the Company acquired in separate transactions four
businesses that develop, produce, and market professional salon products. Prior
to the IPO, 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 reverse split.
Upon consummation of the IPO, the Company acquired all of the outstanding
stock of Gena Laboratories, Inc. and JDS Manufacturing Co., Inc. and certain
assets and liabilities of the Body Drench Division of Designs by Norvell, Inc.
and Kotchammer Investments, Inc. (collectively, the "Initial Businesses"). The
cost of the Initial Businesses, including direct acquisition costs, was
approximately $22.9 million. The combined purchase price was funded with
approximately $20.8 million in cash from the net proceeds of the IPO, and
approximately $2.1 million 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 $5.2 million was allocated to
current assets, approximately $1.1 million to property and equipment,
approximately $5.0 million to current liabilities, and approximately $0.3
million to long-term debt. Approximately $21.9 million of the purchase price
represents costs in excess of fair values acquired, and was recorded as
goodwill.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include all the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. All references to the Company
herein refer to Styling Technology Corporation and its subsidiaries.
Cash and Cash Equivalents and Concentrations of Credit Risk
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents. Financial instruments that
potentially subject the Company to concentrations of credit risk consist of cash
and cash equivalents and trade receivables. The Company believes that it places
its cash and cash equivalents in high quality credit institutions. Concentration
of credit risk is limited due to the large number of customers comprising the
Company's customer base. The Company performs ongoing credit evaluations of its
customers, but does not require collateral to support customer receivables. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventories for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.
F-8
<PAGE> 70
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Raw materials and work-in-process................... $ 2,594,000 $ 8,612,000
Finished goods...................................... 8,357,000 16,763,000
----------- -----------
$10,951,000 $25,375,000
=========== ===========
</TABLE>
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.
Goodwill, Intangibles and Other
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. Other intangible assets include the cost assigned to an exclusive
license, which is being amortized using the straight-line method over its
contractual life of 40 years. The Company continually evaluates whether events
and circumstances have occurred subsequent to acquisitions that indicate the
remaining estimated useful life of goodwill or other intangible assets may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that goodwill or other intangible assets should be evaluated
for possible impairment, the Company uses an estimate of the undiscounted future
cash flows over the remaining life in measuring whether the goodwill or other
intangible assets are recoverable. Goodwill and other intangibles, net of
accumulated amortization, was $56,506,000, $139,566,000, and $139,942,000
(unaudited) at December 31, 1997, December 31, 1998, and June 30, 1999,
respectively.
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. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, debt and letters of
credit. 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 on the 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. The carrying amount of the letters of credit reflects fair
value as the related fees are competitively determined in the marketplace. Fair
value estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
F-9
<PAGE> 71
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue from sales upon shipment or when title
passes.
Business Process Reengineering Charges and Exit Costs Of Acquired Businesses
During the third quarter of 1998, the Company implemented a strategic
consolidation initiative, which included the centralization of its operations
into its new primary facility located in Scottsdale, Arizona. This initiative
included the closing of several of its facilities. In addition, the Company is
combining the reengineering of its business processes with an Enterprise
Resource Planning (ERP) information technology transformation. During the year
ended December 31, 1998, the Company recorded a pre-tax charge of $422,000
related to the reengineering of its business processes, as prescribed under EITF
97-13, Accounting for Business Process Reengineering-Consulting Costs. EITF
97-13 requires companies to expense all costs related to business process
reengineering activities, whether done internally or by third parties as they
are incurred. In addition, the Company accrued approximately $3.5 million in
connection with management's plan to close the facilities of certain businesses
acquired during 1998, as prescribed in EITF 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. Under this requirement, the
Company has accrued certain costs as part of the acquisitions during 1998, based
on a specific plan identified by management to close these specific facilities.
During the year, the Company charged approximately $1.5 million against this
accrual related to direct costs paid to exit these activities, which included
employee severance costs, costs associated with the physical closing of the
facilities, and external consulting costs. The balance of this accrual of
approximately $2.0 million is included in accrued liabilities in the
accompanying 1998 consolidated balance sheet.
Income Taxes
The Company provides for income taxes using the asset and liability method.
Under this method, deferred income tax assets and liabilities are recognized for
the expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities and carryforwards. This method requires
recognition of deferred tax assets for the expected future tax effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized.
Other Assets
Other assets consist primarily of the following: (i) deferred financing
costs associated with the Company completing various financings transactions
(see Note 6) and (ii) deferred tax assets (see Note 8). Deferred financing costs
are amortized over the life of the related obligation. The Company recorded
approximately $170,000 and $333,000 in deferred financing cost amortization for
the years ended December 31, 1997 and 1998, respectively.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Boards ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
The statement is presently effective for the Company's quarter ending March 31,
2000. The Company is currently evaluating the impact that SFAS No. 133 will have
on its future results of operations and financial position.
F-10
<PAGE> 72
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1998, the Company adopted SFAS No. 130 Reporting
Comprehensive Income. This statement requires the Company to classify items of
other comprehensive income, defined to be the change in equity of the Company
during the period from transactions and other events and circumstances from
non-owner sources, in a separate financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital. Adoption of this standard did not have an effect on
the Company's financial statements as the Company has no items of other
comprehensive income for any period presented.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 Reporting on the Costs of Start-Up Activities ("SOP
98-5"). SOP 98-5 requires costs of start-up activities and organization costs to
be expensed as incurred. The adoption of SOP 98-5 did not have a material effect
on the Company's financial position or results of operations (unaudited).
Unaudited Interim Financial Data
The unaudited interim financial data as of June 30, 1999 and for the six
months ended June 30, 1998 and 1999 includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods. Operating results and cash flows for the six months
ended June 30, 1998 and 1999 are not necessarily indicative of the results that
will be achieved for the full year.
Earnings (Loss) Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
supersedes Accounting Principles Board Opinion No. 15. SFAS No. 128 modifies the
calculation of primary and fully diluted earnings per share (EPS) and replaces
them with basic and diluted EPS. SFAS No. 128 is effective for financial
statements for both interim and annual periods presented after December 15,
1997, and as a result, all prior-period EPS data presented herein has been
restated.
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the period from November 27, 1996 to December 31,
1996 and the years ended December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------ ----------------------------------- ----------------------
EFFECT OF EFFECT OF EFFECT OF
STOCK STOCK STOCK
OPTIONS OPTIONS OPTIONS
BASIC AND DILUTED BASIC AND DILUTED BASIC AND
EPS WARRANTS EPS EPS WARRANTS EPS EPS WARRANTS
---------- ---------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary item..... $ (151,000) -- $ (151,000) $4,207,000 -- $4,207,000 $5,173,000 --
Extraordinary item,
net.................... -- -- -- 1,377,000 -- 1,377,000 1,091,000 --
---------- ---------- ---------- ---------- ------- ---------- ---------- -------
Net income (loss)
(numerator)............ $ (151,000) -- $ (151,000) $2,830,000 -- $2,830,000 $4,082,000 --
========== ========== ========== ========== ======= ========== ========== =======
Shares (denominator)..... 3,770,000 -- 3,770,000 3,949,000 164,000 4,113,000 4,033,000 280,000
========== ========== ========== ========== ======= ========== ========== =======
Per share amount --income
(loss) before
extraordinary item..... $ (0.04) $ (0.04) $ 1.07 $ 1.02 $ 1.28
Per share amount --
extraordinary item,
net.................... -- -- (0.35) (0.33) (0.27)
---------- ---------- ---------- ---------- ----------
Per share amount -- net
income (loss).......... $ (0.04) $ (0.04) $ 0.72 $ 0.69 $ 1.01
========== ========== ========== ========== ==========
<CAPTION>
1998
----------
DILUTED
EPS
----------
<S> <C>
Income (loss) before
extraordinary item..... $5,173,000
Extraordinary item,
net.................... 1,091,000
----------
Net income (loss)
(numerator)............ $4,082,000
==========
Shares (denominator)..... 4,313,000
==========
Per share amount --income
(loss) before
extraordinary item..... $ 1.20
Per share amount --
extraordinary item,
net.................... (0.25)
----------
Per share amount -- net
income (loss).......... $ 0.95
==========
</TABLE>
F-11
<PAGE> 73
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1999
----------------------------------- -------------------------------------
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 (loss) before extraordinary item........... $3,004,000 -- $3,004,000 $ (714,000) -- $ (714,000)
Extraordinary item, net........................... 1,091,000 -- 1,091,000 446,000 -- 446,000
---------- ------- ---------- ----------- ------- -----------
Net income (loss)................................. $1,913,000 -- $1,913,000 $(1,160,000) -- $(1,160,000)
========== ======= ========== =========== ======= ===========
Shares............................................ 4,006,000 350,000 4,356,000 4,068,000 -- 4,068,000
========== ======= ========== =========== ======= ===========
Per share amount -- income (loss) before
extraordinary item.............................. $ 0.75 $ 0.69 $ (0.18) $ (0.18)
Per share amount -- extraordinary item, net....... (0.27) (0.25) (0.11) (0.11)
---------- ---------- ----------- -----------
Per share amount -- net income (loss)............. $ 0.48 $ 0.44 $ (0.29) $ (0.29)
========== ========== =========== ===========
</TABLE>
For the period from November 27, 1996 to December 31, 1996 and the six
months ended June 30, 1999, no common stock equivalents were considered in the
EPS calculations as their effect was antidilutive. 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.
(3) BUSINESS COMBINATIONS:
During March 1997, the Company acquired inventory and other assets of the
Utopia product line of high-end tanning products from Creative Laboratories,
Inc. for approximately $350,000 in cash.
On June 25, 1997, the Company acquired all of the issued and outstanding
common stock of U.K. ABBA Products ("ABBA") which produces a proprietary line of
aromatherapy-based professional hair care products. The Company paid a purchase
price of approximately $20 million in cash for the ABBA common stock. In
connection with the ABBA acquisition, the Company also negotiated approximately
$1.1 million in facilitation fees, payable over three years, to certain former
shareholders of ABBA for pre-closing efforts to facilitate completion of the
acquisition (see Note 6). The Company satisfied its obligation with respect to
this facilitation agreement during 1998. The ABBA acquisition was accounted for
under the purchase method of accounting.
On December 10, 1997, the Company acquired certain assets and assumed
certain liabilities of Inverness Corporation and Inverness (UK) Limited
(together "Inverness"). Inverness produces salon and retail hair removal
apparatus and products under the brand names "One Touch" and "Clean + Easy." The
Company paid a purchase price consisting of (i) $16.5 million in cash, and (ii)
an additional $3.5 million in cash held in escrow pending release contingent
upon the successful transition of the manufacture of certain hair removal
appliances to offshore manufacturing. The Inverness acquisition was accounted
for under the purchase method of accounting.
In May 1998, the Company acquired substantially all of the assets and
assumed certain operating liabilities of Pro Finish USA, Ltd., 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. 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 is a developer, producer, and marketer of professional nail enhancement
and treatment products, and European Touch II, Ltd. II is a developer, producer,
and marketer of salon pedicure equipment. These companies were purchased for a
combined purchase price of approximately $25.0 million in cash, using the
purchase method of accounting.
F-12
<PAGE> 74
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1998, the Company acquired a controlling interest in Ft. Pitt
Acquisition, Inc. ("Fort Pitt") and its 90% owned subsidiary, Ft. Pitt-Framesi,
Ltd. (together "Framesi USA"). Framesi USA holds exclusive license rights for
the sale in the United States and most of Latin America of Framesi hair color
products along with its complementary Biogenol line of shampoos, conditioners,
and styling products. The Company paid approximately $33.0 million for the Fort
Pitt stock, in the form of cash and seller carryback financing of approximately
$5.0 million. The acquisition was accounted for using the purchase method of
accounting. As of December 31, 1998, the Company owned approximately 85% of Fort
Pitt. The excess of the purchase price paid over the net assets was allocated to
the exclusive license rights, which is being amortized over its contractual life
of 40 years.
The following table summarizes acquisitions for the two years ended
December 31, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accounts receivable......................................... $ 5,251,000 $ 7,481,000
Inventories................................................. 5,324,000 6,060,000
Other assets................................................ 1,475,000 803,000
Property and equipment...................................... 1,316,000 968,000
Assumed accounts payable and accrued liabilities............ (2,861,000) (9,563,000)
Assumed debt................................................ -- (1,716,000)
----------- -----------
Net assets acquired......................................... 10,505,000 4,033,000
Cash paid at closing for purchase price and acquisition
costs..................................................... 45,150,000 62,677,000
----------- -----------
Goodwill and other intangibles.............................. $34,645,000 $58,644,000
=========== ===========
</TABLE>
Unaudited Pro Forma Consolidated Results of Operations
The following table depicts, for the years ended December 31, 1997 and
1998, unaudited pro forma consolidated information as if all of the companies
acquired in 1997 and 1998 were acquired on January 1, 1997.
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Net sales......................................... $111,033,000 $115,608,000
Income before extraordinary item.................. 3,679,000 3,404,000
Basic earnings per share before extraordinary
item............................................ 0.93 0.84
Diluted earnings per share before extraordinary
item............................................ 0.89 0.79
</TABLE>
The unaudited pro forma financial data is for informational purposes only,
is not necessarily indicative of the results of operations had the acquisitions
occurred on January 1, 1997 and is not necessarily indicative of future
operating results.
F-13
<PAGE> 75
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
USEFUL
LIVES
(YEARS) 1997 1998
------- ---------- -----------
<S> <C> <C> <C>
Land.................................................. -- $ 150,000 $ 150,000
Building and leasehold improvements................... 7-40 594,000 1,065,000
Machinery and equipment............................... 3-7 1,559,000 1,706,000
Furniture and fixtures................................ 7 375,000 1,326,000
Computers, vehicles and other......................... 3-5 356,000 4,216,000
---------- -----------
3,034,000 8,463,000
Less -- accumulated depreciation...................... (394,000) (3,101,000)
---------- -----------
$2,640,000 $ 5,362,000
========== ===========
</TABLE>
The Company recorded approximately $11,000, $383,000 and $1,342,000 in
depreciation expense during the period from November 27, 1996 to December 31,
1996, and for the years ended December 31, 1997 and 1998, respectively, which is
included in selling, general, and administrative expenses in the accompanying
consolidated statements of operations.
(5) ACCRUED LIABILITIES:
Accrued liabilities consist of amounts accrued but unpaid as of December
31, 1997 and 1998. Accrued interest at December 31, 1997 and December 31, 1998
was $291,000 and $5,798,000, respectively. Accrued liabilities also include
commissions, professional fees, taxes, payroll, and other liabilities.
(6) LONG-TERM DEBT AND OTHER:
Long-term debt and other consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Senior subordinated notes (the "Notes"), bearing interest
at 10 7/8%, maturing 2008................................ $ -- $100,000,000
Senior credit facility (the "1998 Credit Facility"),
collateralized by substantially all the assets of the
Company, maturing through June 2003...................... -- 37,033,000
Seller carryback financing, related to the acquisition of
Ft. Pitt Acquisition, Inc., bearing interest at 6%,
maturing through August 2001............................. -- 5,000,000
Unsecured note payable of Ft. Pitt Acquisition, Inc. ...... -- 1,101,000
Senior credit facility (the "December 1997 Credit
Facility"), collateralized by substantially all the
assets of the Company, paid in full in June 1998......... 50,000,000 --
Gena Note, paid in full in November 1998................... 1,841,000 --
Other...................................................... 1,183,000 --
----------- ------------
53,024,000 143,134,000
Less: current portion...................................... (5,647,000) (2,768,000)
----------- ------------
$47,377,000 $140,366,000
=========== ============
</TABLE>
F-14
<PAGE> 76
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate future maturities of long-term debt and other are as follows at
December 31, 1998:
<TABLE>
<S> <C>
1999................................................... $ 2,768,000
2000................................................... 6,304,000
2001................................................... 5,444,000
2002................................................... 3,076,000
2003................................................... 25,542,000
Thereafter............................................. 100,000,000
------------
$143,134,000
============
</TABLE>
Senior Credit Facilities
In December 1997, in connection with the acquisition of Clean & Easy and
One Touch product lines, the Company extinguished a previous credit facility and
entered into the December 1997 Credit Facility. The December 1997 Credit
Facility was a seven-year, $75 million credit facility with a group of banks
with Credit Agricole Indosuez acting as agent. In connection with the
extinguishment of the previous credit facility, the Company took an
extraordinary non-cash charge of approximately $1.4 million, net of income
taxes, related to the write-off of unamortized financing costs.
In connection with the Note Offering as defined below, the Company entered
into the 1998 Credit Facility. The 1998 Credit Facility is a five-year, $50.0
million senior credit facility with a group of banks for whom NationsBank, N.A.
and Bank of Boston, N.A. acted as co-agents. The 1998 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 1998 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 plus (iii) the
Applicable Base Rate Margin or (b) the sum of (i) the Prime Rate 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. If the Company converts to the LIBOR-based interest rate, interest is
paid on the LIBOR-based maturity date, which is generally three months from the
conversion date (see Note 13).
As of December 31, 1998, the Company had borrowed approximately $12.0
million under the revolving line of credit for working capital purposes
including financing the inventory and receivable buildup related to the launch
of the ABBA packaging and funding capital expenditures associated with the
centralization and reengineering project undertaken during the fourth quarter of
1998. In addition, the borrowing was used to repay debt created in conjunction
with the IPO in November 1996 as well as to repay existing debt assumed in the
acquisition of Framesi USA.
Notes
On June 23, 1998, the Company issued the Notes in an offering (the "Note
Offering") exempt from registration under the Securities Act of 1933. Interest
under the Notes is payable semi-annually in arrears commencing January 1, 1999,
and the Notes are not callable until July 2003 subject to the terms of the
Indenture under which the Notes were issued. The Company filed a registration
statement under the Securities Act, relating to an exchange offer for these
Notes, which was declared effective in August 1998. The proceeds from the Note
Offering were used to finance the purchase price and related costs of acquiring
all of the issued and outstanding capital stock of European Touch and European
Touch, Ltd. II, to repay existing indebtedness (including the Company's December
1997 Credit Facility) and for working capital purposes.
F-15
<PAGE> 77
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 repayment of the December 1997 Credit
Facility.
Debt Covenants
The 1998 Credit Facility agreement contains provisions that, among other
things, require the Company to comply with certain financial ratios and net
worth requirements and limits the ability of the Company and its subsidiaries to
incur additional indebtedness, pay dividends, sell assets, or engage in certain
mergers or consolidations. At December 31, 1998, the Company was in compliance
with all applicable financial covenants.
The Notes described above are general unsecured obligations of the Company
and are unconditionally guaranteed on a joint and several basis by all of the
Company's wholly owned current and future subsidiaries (see Note 14).
Interest Rate Protection
In connection with the 1998 Credit Facility, the Company maintains certain
interest rate protection instruments. As of December 31, 1998, the Company has
entered into interest rate swap and interest rate cap agreements (the
"Agreements") to reduce the impact of changes in interests 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, the Company
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 December 31, 1998:
<TABLE>
<CAPTION>
COMPANY'S NOTIONAL
INSTRUMENT EFFECTIVE RATE AMOUNT
---------- -------------- --------------
<S> <C> <C>
Swap 8.50% $12,500,000
Cap 10.25% 12,500,000
-----------
$25,000,000
===========
</TABLE>
(7) STOCKHOLDERS' EQUITY:
Treasury Stock
In October 1996, the Company entered into a stock repurchase agreement with
a founder, pursuant to which the founder agreed to sell approximately 808,000
shares of Company's common stock to the Company for $1.8 million, payable upon
consummation of the IPO. Accordingly, upon consummation of the IPO, the founder
was no longer a stockholder of the Company.
Initial Public Offering
In November 1996, the Company completed the IPO, selling approximately 2.9
million shares of its common stock with an issue price of $10.00 per share.
During December 1996, the Company's underwriters exercised an over allotment
option, resulting in the issuance of approximately 216,000 additional shares.
Net proceeds from the IPO and over allotment option amounted to approximately
$27.2 million.
Warrants
In connection with a previous credit facility, the Company issued 160,000
five year warrants to lenders with exercise prices between $10.18 and $11.38 per
share. In connection with the IPO, the Company issued 203,000 five-year warrants
to its underwriters with an exercise price of $12.00 per share. These warrants
have
F-16
<PAGE> 78
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been recorded at fair value as additional paid-in capital in the accompanying
consolidated balance sheets. Prior to the IPO, the Company issued 20,000
warrants with an exercise price $12.50 per share. During 1998, this warrant
holder exercised all 20,000 warrants.
Shareholder Rights Plan
During February 1999, the Company's Board of Directors adopted a
shareholder rights plan, which authorized the distribution of one right to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock, at a purchase price of $70, subject to certain antidilution
adjustments. The rights will expire 10 years after issuance and will be
exercisable if (i) a person or group becomes the beneficial owner of 15% or more
of the Company's common stock; (ii) persons currently holding 15% or more of the
common stock acquire an additional 1% or more of the common stock; or (iii) a
person or group commences a tender or exchange offer that would result in the
offeror beneficially owning 15% or more of the common stock (a "Stock
Acquisition Date"). If a Stock Acquisition Date occurs, each right, unless
redeemed by the Company, entitles the holder to purchase an amount of common
stock of the Company, or in certain circumstances a combination of securities
and/or assets or the common stock of the acquiror, having a market value of
twice the exercise price of the right. Rights held by the acquiring person will
become void and will not be exercisable to purchase shares at the bargain
purchase price.
Stock Options
At the initial capitalization of the Company, 162,000 stock options to
purchase shares of the common stock of the Company were issued to an officer
with an exercise price of $0.10 per share. During the year ended December 31,
1998, approximately 72,000 stock options were cancelled in connection with the
officer's retirement.
During 1996, the Company adopted the 1996 Stock Option Plan, which was
amended during 1998 to provide up to 750,000 incentive and nonqualified stock
options to acquire common stock of the Company to key personnel and directors of
the Company.
During 1998, the Company adopted the 1998 Employee Stock Option Plan, which
provides for the grant of up to 150,000 nonqualified stock options to acquire
common stock of the Company to employees of the Company. On December 14, 1998,
the Company repriced 246,000 options.
F-17
<PAGE> 79
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of all the Company's stock options at December 31,
1996, 1997 and 1998 and changes during the periods ended is presented in the
following table:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year..................... 162,000 $ .10 250,000 $ 3.58 549,000 $ 7.38
Granted.................. 88,000 10.00 430,000 10.57 694,000 12.83
Exercised................ -- -- -- -- (99,000) 1.87
Canceled................. -- -- (131,000) 10.60 (350,000) 12.09
-------- ------ -------- ------ -------- ------
Outstanding at end of
year..................... 250,000 $ 3.58 549,000 $ 7.38 794,000 $10.76
======== ====== ======== ====== ======== ======
Exercisable at end of
year..................... 18,000 $10.00 136,000 $ 9.71 279,000 $10.10
======== ====== ======== ====== ======== ======
Weighted average fair value
per share of options
granted.................. $ 5.65 $ 4.13 $ 5.44
======== ======== ========
</TABLE>
Options outstanding at December 31, 1998 have exercise prices between $0.10
and $24.00. Of the options, 9,000 options have an exercise price of $0.10 with a
remaining average contractual life of 6.1 years, and are fully vested; 597,000
options have exercise prices between $9.25 and $11.38 with a remaining average
contractual life of 9.03 years, with vesting between one and five years; and
188,000 options have exercise prices between $11.80 and $24.00 with a remaining
average contractual life of 9.57 years, with vesting between one and five years.
The following pro forma disclosures of net income (loss) are made assuming
the Company had accounted for the stock options pursuant to the provision of
SFAS No. 123, Accounting for Stock-Based Compensation.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
NOVEMBER 27,
1996
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
Income (loss) before extraordinary item
As reported........................... $(151,000) $ 4,207,000 $ 5,173,000
Pro forma............................. (226,000) 3,876,000 4,371,000
Diluted EPS -- as reported............ (0.04) 1.02 1.20
Diluted EPS -- pro forma.............. (0.06) 0.94 1.01
Extraordinary item, net
As reported........................... -- (1,337,000) (1,091,000)
Diluted EPS -- as reported............ -- (0.33) (0.25)
Net income (loss)
As reported........................... (151,000) 2,830,000 4,082,000
Pro forma............................. (226,000) 2,539,000 3,280,000
Diluted EPS -- as reported............ (0.04) 0.69 0.95
Diluted EPS -- pro forma.............. (0.06) 0.62 0.76
</TABLE>
F-18
<PAGE> 80
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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%, expected
lives of 3.8 years, and a volatility factor of 60%. The weighted average
assumptions used for grants in 1997 were as follows: risk-free interest rates of
5.99% to 6.62%, expected lives of two to six years, and a volatility factor of
38.59%. The weighted average assumptions used for grants in 1998 were as
follows: risk-free interest rates of 4.98%, expected lives of 4.97 years, and a
volatility factor of 43.07%. The assumed dividend yield is zero for 1996, 1997
and 1998.
(8) INCOME TAXES:
The provision for (benefit from) income taxes for the period from November
27, 1996 to December 31, 1996 and for the years ended December 31, 1997, and
1998 consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Current expense......................... $ -- $3,146,000 $ --
Deferred expense (benefit).............. (72,000) (49,000) 3,635,000
-------- ---------- ----------
Net income tax expense (benefit)........ $(72,000) $3,097,000 $3,635,000
======== ========== ==========
</TABLE>
The components of the deferred tax accounts as of December 31, 1997 and
1998, consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ------------
<S> <C> <C>
Current deferred tax assets
Reserves and other accruals.................. $ 232,000 $ 932,000
Inventory capitalization..................... 222,000 1,298,000
Other........................................ 8,000 --
--------- ------------
Total current deferred tax assets................. 462,000 2,230,000
--------- ------------
Long term deferred tax assets
Reserves and accruals........................ -- 2,562,000
--------- ------------
Total long term deferred tax assets............... -- 2,562,000
--------- ------------
Non-current deferred tax liabilities
Accelerated tax deductions, depreciation, and
amortization................................. 162,000 6,118,000
Effect of book basis in excess of tax basis of
licenses..................................... -- 13,098,000
--------- ------------
Total non-current deferred tax liabilities........ 162,000 19,216,000
--------- ------------
Net deferred tax asset (liability)................ $ 300,000 $(14,424,000)
========= ============
</TABLE>
A reconciliation of the U.S. federal statutory income tax rate to the
Company's income before extraordinary item effective tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate............................. (34)% 34% 34%
Effect of state taxes.............................. (5) 4 4
Nondeductible amortization of goodwill............. 7 4 3
--- --- ---
(32)% 42% 41%
=== === ===
</TABLE>
F-19
<PAGE> 81
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED PARTY INFORMATION:
Sam L. Leopold, the Company's Chairman of the Board, President, and Chief
Executive Officer, previously owned three Beauty Boutique International stores
in Arizona, which he sold during fiscal 1998. The Company's sales to these
Beauty Boutique International stores approximated $150,000 during 1997, and
$21,000 during the period of fiscal 1998 which Mr. Leopold owned such stores.
The sales to these Beauty Boutique International stores were made in the
ordinary course of business and in management's opinion on terms no more
favorable than terms extended to the Company's other customers.
The Company's IPO in November 1996 was co-managed by Friedman, Billings,
Ramsey & Co., Inc. ("FBR"), and Prime Charter Ltd. ("Prime Charter"). Mr. Sylvan
Schefler was the Vice Chairman of Prime Charter at the time of the IPO, but was
not a director of the Company at that time. In connection with the public
offering, FBR and Prime Charter each received warrants to purchase 101,500
shares of the Company's common stock.
During 1996, certain founders advanced approximately $112,500 to the
Company to fund various IPO and acquisition costs, all of which was repaid
during the year.
A member of the Company's Board of Directors serves as president of a
consulting firm, which was paid a $150,000 fee during 1997 in connection with
the ABBA acquisition.
A member of the Company's Board of Directors is a partner in a merchant
banking firm, which provided services to the Company related to obtaining
financing and completing certain acquisitions. During 1997, this firm earned
$1,120,000 for these services.
(10) SEGMENT INFORMATION:
The Company monitors its salon distribution operations by the hair-care,
nail-care, skin and body care, and appliances and sundries product categories.
Distribution of the product takes place primarily throughout the United States.
Management monitors and evaluates the financial performance of the
Company's operations by its current four operating segments.
The following operating segment information includes financial information
(in thousands) for all four of the Company's operating segments.
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $34,609 $10,665 $14,712 $ 8,784 $ -- $ -- $ 68,770
Income (loss) from
operations.......... 5,691 1,346 1,404 3,270 (5,003) -- 6,708
Total assets.......... 91,083 30,827 16,400 31,605 188,815 (119,605) 239,125
</TABLE>
F-20
<PAGE> 82
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 8,204 $ 7,450 $17,726 $ 1,919 $ -- $-- $ 35,299
Income (loss) from
operations.......... 1,943 1,302 5,329 681 (1,357) -- 7,898
Total assets.......... 27,815 27,709 43,772 24,358 19,940 0 143,594
</TABLE>
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $29,224 $18,902 $32,937 $ 9,310 $ -- $ -- $ 90,373
Income (loss) from
operations........... 4,385 3,467 8,852 3,489 (2,179) -- 18,014
Depreciation........... 74 150 968 88 62 -- 1,342
Total assets........... 97,571 46,796 87,665 30,326 92,093 (135,253) 219,198
Capital expenditures... 25 134 661 146 996 -- 1,962
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
------- ------- --------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 8,768 $12,545 $15,681 $1,114 $ -- $ -- $38,108
Income (loss) from
operations............ 2,352 2,226 5,914 268 (1,609) -- 9,151
Depreciation............ -- 141 208 14 20 -- 383
Total assets............ 27,180 20,757 50,289 1,842 25,238 (32,817) 92,489
Capital expenditures.... -- 90 275 2 215 -- 582
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
HAIR NAIL SKIN AND APPLIANCES
CARE CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
---- ------- --------- ------------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $-- $ 697 $ 337 $ 49 $ -- $ -- $ 1,083
Income (loss) from
operations................ -- 11 5 (19) (222) -- (225)
Depreciation................ -- 4 6 -- 1 -- 11
Total assets................ -- 15,066 12,542 663 6,156 (2,193) 32,234
Capital expenditures........ -- -- -- -- 46 -- 46
</TABLE>
Sales to a major U.S. beauty supply chain as a percentage of total net
sales approximated 25% for the period from November 27, 1996 to December 31,
1996. During 1997, this customer accounted for approximately 13% of the total
net sales of the Company. During 1998 and the six months ended June 30, 1999,
sales to any single customer as a percentage of total net sales did not exceed
10%.
F-21
<PAGE> 83
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES:
Legal Matters
The Company is party to certain legal matters arising in the ordinary
course of its business. In management's opinion, as of December 31, 1998, the
expected outcome of such matters will not have a material impact on the
Company's financial position or results of operations.
Operating Leases
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, $313,000 and $1,132,000 for the period from
November 27, 1996 to December 31, 1996 and for the years ended December 31, 1997
and 1998.
Future lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ------------
<S> <C>
1999.................................................. $ 2,330,000
2000.................................................. 2,117,000
2001.................................................. 1,526,000
2002.................................................. 1,261,000
2003.................................................. 950,000
Thereafter............................................ 4,815,000
-----------
$12,999,000
===========
</TABLE>
Retirement Plans
On April 1, 1998, the Company adopted the Styling Technology Corporation
401(k) Plan (the "401(k) Plan"). The 401(k) Plan allows eligible employees to
contribute up to 20% of their annual pre-tax compensation. The Company will make
a matching contribution of 50% of the first 5% of the employee's contribution.
Generally, employees are eligible to participate at the first calendar quarter
following 90 days of continuous service. Collective bargaining units are
excluded from participation. Vesting in the Company's matching contribution is
25% per year of service; the employee would be 100% vested after four years of
service. The Company made payments to this 401(k) Plan in the sum of $98,000
during 1998. An employee's unvested portion of the Company match goes back to
the 401(k) Plan upon a termination distribution. Forfeited amounts are first
applied toward 401(k) Plan expenses and are then applied toward future matching
contributions.
Four of the Company's divisions or subsidiaries had other 401(k) plans in
place at the time of the acquisition. With the April 1, 1998 adoption of the
401(k) Plan, these four plans are no longer active. All participants of these
plans are eligible to participate in the Company's 401(k) Plan. Ultimately,
these plans will be terminated. Active employees who had participated in these
plans may have the opportunity to roll existing balances into the 401(k) Plan or
to their personal IRA. Terminated employees will have the opportunity to
rollover to their IRA or receive a direct distribution.
Another of the Company's Subsidiaries, Ft. Pitt sponsors a 401(k) plan
("Ft. Pitt 401(k) Plan") for its separate employees. All full time Ft. Pitt
employees, except employees covered by a union plan, are eligible to
participate. The Ft. Pitt 401(k) Plan allows employees to contribute up to 20%
of their annual pre-tax compensation. Ft. Pitt will match 20% of the employees'
deferral, subject to a six year vesting schedule. The Ft. Pitt 401(k) Plan also
provides for discretionary profit-sharing contributions. During 1998, Ft. Pitt
made
F-22
<PAGE> 84
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matching contributions of approximately $11,000. Ft. Pitt made a discretionary
profit sharing contribution of $20,000 in 1998.
(12) VENDOR CONCENTRATION:
As part of the Company's strategy, the Company uses third parties to
manufacture the majority of the Company's products. One of these third party
suppliers accounted for approximately 15% of the total cost of sales for the
year ended December 31, 1997. During 1998, purchases from a single supplier as a
percentage of total purchases did not exceed 10%.
(13) SUBSEQUENT EVENTS:
The Company has historically utilized numerous non-exclusive tanning supply
distributors to sell the tanning products of its Body Drench Division in the
tanning market. In June 1999, the Company changed the method of distribution of
its Body Drench products by eliminating a significant number of tanning supply
distributors. Distribution of Body Drench products to the tanning market will
now be sold through a limited number of exclusive distributors. This change in
the Company's business resulted in a write-off of receivables from cancelled
distributors of approximately $5.1 for the quarter ending June 30, 1999. This
charge is classified as a provision for cancelled distributors in the
consolidated statement of operations as a separate component of income from
operations. Any future change to the realizability of these tanning supply
distributor receivables will be recorded as a component of the provision for
cancelled distributors in the statement of operations at that time. In
management's opinion, by focusing on its core business of selling primarily to
distributors that sell products in multiple categories of the professional salon
market and limiting distribution in the tanning supply channel, the stature of
the Body Drench brand will be enhanced, which should increase gross margins on
tanning products, reduce expenses and capitalize on the Company's core strategy
of offering customers a "one-stop shop" for professional salon products. The
normal recurring bad debt charges are recorded as a component of selling,
general and administrative expenses and amounted to approximately $427,000,
$710,000 and $2.7 million for the period from November 27, 1996 to December 31,
1996, and the years ended December 31, 1997 and 1998, respectively, and $171,000
(unaudited) and $1,112,000 (unaudited) for the six months ended June 30, 1998
and 1999, respectively.
On June 22, 1999, the Company finalized a $90 million Senior Secured
Revolving Credit Facility (the "GE Credit Facility") with GE Capital
Corporation. Proceeds from the GE Credit Facility were used to repay amounts
outstanding under the 1998 Credit Facility the remaining availability will be
used for future acquisitions and for working capital purposes. The Company
recorded an extraordinary, non-cash charge during the three months ended June
30, 1999 of approximately $446,000, net of tax, or approximately $0.11 per
diluted share, related to the write-off of unamortized financing costs
associated with the 1998 Credit Facility.
(14) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:
The Notes described in Note 6 are general unsecured obligations of the
Company and are fully and unconditionally guaranteed on a joint and several
basis by all of the Company's wholly owned current and future subsidiaries. In
management's opinion, separate financial statements of the guarantor
subsidiaries ("Guarantors") and the non-guarantors subsidiaries
("Non-Guarantors") are not material to investors.
The financial statements presented below include the combined financial
position as of December 31, 1997 and 1998 and as of June 30, 1999 (unaudited)
and the results of operations and cash flows for the period from November 27,
1996 to December 31, 1996, for the years ended December 31, 1997 and 1998, and
for the six months ended June 30, 1998 (unaudited) and 1999 (unaudited) of
Styling Technology Corporation ("Parent"); Guarantors and the Non-Guarantors.
F-23
<PAGE> 85
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 2,850 $ 213 $-- $ -- $ 3,063
Accounts receivable, net.............. 9,854 4,442 -- -- 14,296
Inventories, net...................... 5,882 5,069 -- -- 10,951
Prepaid expenses and other current
assets............................. 1,581 539 -- -- 2,120
Due to/(from) affiliates.............. (2,321) 2,321 -- -- --
-------- ------- --- --------- --------
Total current assets.......... 17,846 12,584 -- -- 30,430
PROPERTY AND EQUIPMENT, net............. 1,558 1,082 -- -- 2,640
GOODWILL AND OTHER INTANGIBLES, net..... 26,106 30,400 -- -- 56,506
OTHER ASSETS............................ 2,902 11 -- -- 2,913
INVESTMENT IN SUBSIDIARIES, net......... 39,467 -- -- (39,467) --
-------- ------- --- --------- --------
$ 87,879 $44,077 $-- $(39,467) $ 92,489
======== ======= === ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................... $ 4,661 $ 2,404 $-- $ -- $ 7,065
Accrued liabilities................... 1,481 2,189 -- -- 3,670
Current portion of long-term debt and
other.............................. 5,630 17 -- -- 5,647
-------- ------- --- --------- --------
Total current liabilities..... 11,772 4,610 -- -- 16,382
-------- ------- --- --------- --------
DEFERRED INCOME TAXES................... 162 -- -- -- 162
-------- ------- --- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion............................... 47,377 -- -- -- 47,377
-------- ------- --- --------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock....................... -- -- -- -- --
Common stock.......................... 1 -- -- -- 1
Additional paid-in capital............ 27,875 36,768 -- (36,768) 27,875
Retained earnings..................... 2,492 2,699 -- (2,699) 2,492
Treasury stock........................ (1,800) -- -- -- (1,800)
-------- ------- --- --------- --------
Total stockholders' equity.... 28,568 39,467 -- (39,467) 28,568
-------- ------- --- --------- --------
$ 87,879 $44,077 $-- $(39,467) $ 92,489
======== ======= === ========= ========
</TABLE>
F-24
<PAGE> 86
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 (IN THOUSANDS)
----------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 2,867 $ 343 $ 813 $ -- $ 4,023
Accounts receivable, net............. 17,614 8,830 5,882 -- 32,326
Inventories, net..................... 13,232 10,060 2,083 -- 25,375
Prepaid expenses and other current
assets............................ 3,243 695 83 -- 4,021
Due to/(from) affiliates............. 2,314 5,545 (7,859) -- --
--------- ------- ------- --------- --------
Total current assets......... 39,270 25,473 1,002 -- 65,745
PROPERTY AND EQUIPMENT, net............ 3,625 1,626 111 -- 5,362
GOODWILL, INTANGIBLES AND OTHER, net... 45,350 52,627 50,114 -- 148,091
INVESTMENT IN SUBSIDIARIES, net........ 104,386 -- -- (104,386) --
--------- ------- ------- --------- --------
$ 192,631 $79,726 $51,227 $(104,386) $219,198
========= ======= ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 8,784 $ 2,960 $ 924 $ -- $ 12,668
Accrued liabilities.................. 1,884 5,841 2,642 -- 10,367
Current portion of long-term debt and
other............................. 1,309 357 1,102 -- 2,768
--------- ------- ------- --------- --------
Total current liabilities.... 11,977 9,158 4,668 -- 25,803
--------- ------- ------- --------- --------
DEFERRED INCOME TAXES.................. 6,475 -- 12,741 -- 19,216
--------- ------- ------- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion.............................. 140,366 -- -- -- 140,366
--------- ------- ------- --------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock...................... -- -- -- -- --
Common stock......................... 1 -- -- -- 1
Additional paid-in capital........... 29,038 61,770 32,527 (94,297) 29,038
Retained earnings.................... 6,574 8,798 1,291 (10,089) 6,574
Treasury stock....................... (1,800) -- -- -- (1,800)
--------- ------- ------- --------- --------
Total stockholders' equity... 33,813 70,568 33,818 (104,386) 33,813
--------- ------- ------- --------- --------
$ 192,631 $79,726 $51,227 $(104,386) $219,198
========= ======= ======= ========= ========
</TABLE>
F-25
<PAGE> 87
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 198 $ 1,169 $ 145 $ -- $ 1,512
Accounts receivable, net................ 10,637 21,302 11,323 -- 43,262
Inventories, net........................ 11,180 13,221 2,547 -- 26,948
Prepaid expenses and other current
assets............................... 4,385 1,492 270 -- 6,147
Due to/from affiliates.................. 10,055 5,075 (15,130) -- --
-------- -------- -------- --------- --------
Total current assets............ 36,455 42,259 (845) -- 77,869
PROPERTY AND EQUIPMENT, net............... 5,884 2,713 91 -- 8,688
GOODWILL, INTANGIBLES AND OTHER, net...... 44,079 57,408 51,081 -- 152,568
INVESTMENTS IN SUBSIDIARIES............... 119,605 -- -- (119,605) --
-------- -------- -------- --------- --------
Total assets.................... $206,023 $102,380 $ 50,327 $(119,605) $239,125
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 6,998 $ 7,698 $ 3,013 $ -- $ 17,709
Accrued liabilities..................... 1,938 6,284 2,241 -- 10,463
Current portion of long-term debt and
other................................ 2,307 1,167 -- -- 3,474
-------- -------- -------- --------- --------
Total current liabilities....... 11,243 15,149 5,254 -- 31,646
-------- -------- -------- --------- --------
OTHER NON-CURRENT LIABILITIES............. 6,475 (42) 12,741 -- 19,174
-------- -------- -------- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion................................. 155,652 -- -- -- 155,652
-------- -------- -------- --------- --------
COMMITMENTS AND CONTINGENCIES.............
STOCKHOLDERS' EQUITY:
Preferred stock......................... -- -- -- -- --
Common stock............................ 1 -- -- -- 1
Additional paid-in capital.............. 29,038 66,769 32,529 (99,298) 29,038
Retained earnings....................... 5,414 20,504 (197) (20,307) 5,414
Treasury stock.......................... (1,800) -- -- -- (1,800)
-------- -------- -------- --------- --------
Total stockholders' equity...... 32,653 87,273 32,332 (119,605) 32,653
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity.......... $206,023 $102,380 $ 50,327 $(119,605) $239,125
======== ======== ======== ========= ========
</TABLE>
F-26
<PAGE> 88
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 27, 1996 TO DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 386 $697 $ -- $ -- $1,083
Cost of sales........................... 162 409 -- -- 571
------ ---- ------ ---- ------
Gross profit............................ 224 288 -- -- 512
Selling, general and administrative
expenses.............................. 460 277 -- -- 737
------ ---- ------ ---- ------
Income (loss) from operations........... (236) 11 -- -- (225)
Interest expense (income) and other
income, net........................... 2 -- -- -- 2
------ ---- ------ ---- ------
Income before income taxes.............. (234) 11 -- -- (223)
Provision for (benefit from) income
taxes................................. (84) 12 -- -- (72)
Income (loss) from wholly owned
subsidiaries.......................... (1) -- -- 1 --
------ ---- ------ ---- ------
Net loss................................ $ (151) $ (1) $ -- $ 1 $ (151)
====== ==== ====== ==== ======
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
--------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................................ $16,796 $21,312 $ -- $ -- $38,108
Cost of sales............................ 6,348 10,408 -- -- 16,756
------- ------- ------ ------- -------
Gross profit............................. 10,448 10,904 -- -- 21,352
Selling, general and administrative
expenses............................... 5,874 6,327 -- -- 12,201
------- ------- ------ ------- -------
Income from operations................... 4,574 4,577 -- -- 9,151
Interest expense and other, net.......... (1,789) (58) -- -- (1,847)
------- ------- ------ ------- -------
Income before extraordinary item and
income taxes........................... 2,785 4,519 -- -- 7,304
Provision for income taxes............... 1,279 1,818 -- -- 3,097
------- ------- ------ ------- -------
Income before extraordinary item......... 1,506 2,701 -- -- 4,207
Extraordinary item, net.................. (1,377) -- -- -- (1,377)
Income from subsidiaries................. 2,701 -- -- (2,701) --
------- ------- ------ ------- -------
Net income............................... $ 2,830 $ 2,701 $ -- $(2,701) $ 2,830
======= ======= ====== ======= =======
</TABLE>
F-27
<PAGE> 89
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
--------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................................ $37,965 $40,326 $12,082 $ -- $90,373
Cost of sales............................ 15,908 18,470 4,844 -- 39,222
------- ------- ------- ------ -------
Gross profit............................. 22,057 21,856 7,238 -- 51,151
Selling, general and administrative
expenses............................... 14,171 11,325 7,219 -- 32,715
Centralization and Reengineering Costs... 422 -- -- -- 422
------- ------- ------- ------ -------
Income from operations................... 7,464 10,531 19 -- 18,014
Interest (expense) and other, net........ (9,302) -- 96 -- (9,206)
------- ------- ------- ------ -------
Income (loss) before extraordinary
item................................... (1,838) 10,531 115 -- 8,808
Provision (benefit) for income taxes..... (816) 4,402 49 -- 3,635
------- ------- ------- ------ -------
Income (loss) before extraordinary
item................................... (1,022) 6,129 66 -- 5,173
Extraordinary item, net.................. (1,091) -- -- -- (1,091)
Income from subsidiaries................. 6,195 -- -- 6,195 --
------- ------- ------- ------ -------
Net income............................... $ 4,082 $ 6,129 $ 66 $6,195 $ 4,082
======= ======= ======= ====== =======
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS) UNAUDITED
-------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales................................ $18,347 $16,952 $ -- $ -- $35,299
------- ------- ------- ------- -------
Cost of sales............................ 7,569 7,923 -- -- 15,492
------- ------- ------- ------- -------
Gross profit............................. 10,778 9,029 -- -- 19,807
Selling, general and administrative
expenses............................... 6,634 5,275 -- -- 11,909
Centralization and reengineering......... -- -- -- -- --
------- ------- ------- ------- -------
Income from operations................... 4,144 3,754 -- -- 7,898
Interest (expense) and other income,
net.................................... (2,628) -- -- (2,628)
------- ------- ------- ------- -------
Income before extraordinary item and
income taxes........................... 1,516 3,754 -- -- 5,270
Provision for income taxes............... 653 1,613 -- -- 2,266
------- ------- ------- ------- -------
Income before extraordinary item......... 863 2,141 -- -- 3,004
Extraordinary Item (Net of taxes)........ (1,091) -- (1,091)
Income from subsidiaries................. 2,141 -- -- (2,141) --
------- ------- ------- ------- -------
Net income............................... $ 1,913 $ 2,141 $ -- $(2,141) $ 1,913
======= ======= ======= ======= =======
</TABLE>
F-28
<PAGE> 90
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 15,216 $35,078 $18,476 $ -- $68,770
Cost of sales..................... 7,411 15,744 6,702 -- 29,857
-------- ------- ------- ------- -------
Gross profit...................... 7,805 19,334 11,774 -- 38,913
Selling, general and
administrative expenses......... 4,905 7,968 12,902 -- 25,775
Centralization and
reengineering................... 1,363 -- -- -- 1,363
Provision for cancelled
distributors.................... 5,067 5,067
-------- ------- ------- ------- -------
Income (loss) from operations..... (3,530) 11,366 (1,128) -- 6,708
Interest (expense) and other
income, net..................... (7,841) 11 (44) -- (7,874)
-------- ------- ------- ------- -------
Income (loss) before extraordinary
item and income taxes........... (11,371) 11,377 (1,172) -- (1,166)
Provision for income taxes........ (4,441) 4,494 (505) -- (452)
-------- ------- ------- ------- -------
Income (loss) before extraordinary
item............................ (6,930) 6,883 (667) -- (714)
Extraordinary Item (Net of
taxes).......................... (446) -- -- -- (446)
Income from subsidiaries.......... 6,216 -- -- (6,216) --
-------- ------- ------- ------- -------
Net income (loss)................. $ (1,160) $ 6,883 $ (667) $(6,216) $(1,160)
======== ======= ======= ======= =======
</TABLE>
F-29
<PAGE> 91
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 27, 1996 TO DECEMBER 31, 1996 (IN THOUSANDS)
--------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
--------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss............................. $ (151) $ (1) $ -- $ 1 $ (151)
Adjustments to reconcile net loss to
net cash provided by (used in) in
operating activities:
Depreciation and amortization..... 93 4 -- -- 97
Change in certain assets and
liabilities --
Accounts receivable, net........ 390 142 -- -- 532
Inventory, net.................. (28) 7 -- -- (21)
Prepaid expenses and other
assets....................... (65) 31 -- -- (34)
Accounts payable and accrued
liabilities.................. (756) (32) -- -- (788)
Due to/from affiliates, net..... 2 (1) -- (1) --
-------- ---- ---- ---- -------
Net cash provided by (used
in) operating activities... (515) 150 -- -- (365)
-------- ---- ---- ---- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of acquired business, net of
cash acquired..................... (20,523) -- -- -- (20,523)
Purchasing of property, and
equipment......................... (46) -- -- -- (46)
Change in other assets, net.......... -- -- -- -- --
-------- ---- ---- ---- -------
Net cash used in investing
activities................. (20,569) -- -- -- (20,569)
-------- ---- ---- ---- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of offering and
acquisition costs................. 27,225 -- -- -- 27,225
Purchase of treasury stock........... (1,800) -- -- -- (1,800)
-------- ---- ---- ---- -------
Net cash provided by
financing activities....... 25,425 -- -- -- 25,425
-------- ---- ---- ---- -------
INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 4,341 150 -- -- 4,491
-------- ---- ---- ---- -------
CASH AND CASH EQUIVALENTS, beginning of
period............................... -- -- -- -- --
-------- ---- ---- ---- -------
CASH AND CASH EQUIVALENTS, end of
period............................... $ 4,341 $150 $ -- $ -- $ 4,491
======== ==== ==== ==== =======
</TABLE>
F-30
<PAGE> 92
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................ $ 2,830 $ 2,701 $-- $(2,701) $ 2,830
Adjustments to reconcile net income to
net cash provided by (used in) in
operating activities:
Depreciation and amortization...... 1,058 788 -- -- 1,846
Interest accretion on note
payable.......................... 6 168 -- -- 174
Extraordinary loss on early
extinguishment of debt........... 1,377 -- -- -- 1,377
Change in certain assets and
liabilities
Accounts receivable, net......... (5,227) (2,178) -- -- (7,405)
Inventories, net................. (2,063) (929) -- -- (2,992)
Prepaid expenses and other
assets........................ (1,825) 95 -- -- (1,730)
Accounts payable and accrued
liabilities................... 1,405 2,115 -- -- 3,520
Due to/from affiliates, net...... (564) (2,137) -- 2,701 --
-------- ------- --- ------- --------
Net cash provided by (used in)
operating activities........ (3,003) 623 -- -- (2,380)
-------- ------- --- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchasing of property and
equipment.......................... (518) (64) -- -- (582)
Purchase of acquired business, net of
cash acquired...................... (45,131) (19) -- -- (45,150)
Change in other assets................ -- -- -- -- --
-------- ------- --- ------- --------
Net cash provided by (used in)
investing activities........ (45,649) (83) -- -- (45,732)
-------- ------- --- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility, net of
financing costs.................... 71,633 -- -- -- 71,633
Payments on long-term debt............ (24,472) (477) -- -- (24,949)
-------- ------- --- ------- --------
Net cash provided by (used in)
financing activities........ 47,161 (477) -- -- 46,684
-------- ------- --- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (1,491) 63 -- -- (1,428)
-------- ------- --- ------- --------
CASH AND CASH EQUIVALENTS, beginning of
period................................ 4,341 150 -- -- 4,491
-------- ------- --- ------- --------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 2,850 $ 213 $-- $ -- $ 3,063
======== ======= === ======= ========
</TABLE>
F-31
<PAGE> 93
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................. $ 4,082 $ 6,129 $ 66 $(6,195) $ 4,082
Adjustments to reconcile net income to
net cash in operating activities:
Depreciation and amortization....... 2,993 1,839 355 -- 5,187
Interest accretion on note
payable........................... 159 -- -- -- 159
Extraordinary loss on early
extinguishment
of debt........................... 1,091 -- -- -- 1,091
Change in certain assets and
liabilities
Accounts receivable, net.......... (6,106) (3,217) (1,226) -- (10,549)
Inventories, net.................. (3,773) (5,329) 738 -- (8,364)
Prepaid expenses and other
assets......................... (471) (51) 324 -- (198)
Accounts payable and accrued
liabilities.................... (2,124) 2,641 1,290 -- 1,807
Due to/from affiliates, net....... (16,100) 821 9,084 6,195 --
-------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities......... (20,249) 2,833 10,631 -- (6,785)
-------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchasing of property, plant and
equipment........................... (1,766) (174) (22) -- (1,962)
Purchasing of acquired business, net of
cash
acquired............................ (62,677) -- -- -- (62,677)
Change in other assets................. 2,978 (2,510) (4,719) -- (4,251)
-------- ------- ------- ------- --------
Net cash provided by (used in)
investing activities......... (61,465) (2,684) (4,741) -- (68,890)
-------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility, net of
financing costs..................... 47,298 -- -- -- 47,298
Proceeds from bond offering, net of
offering costs...................... 96,400 -- -- -- 96,400
Exercise of stock options.............. 1,163 -- -- -- 1,163
Payments on long-term debt............. (63,130) (19) (5,077) -- (68,226)
-------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities......... 81,731 (19) (5,077) -- 76,635
-------- ------- ------- ------- --------
INCREASE IN CASH AND CASH EQUIVALENTS.... 17 130 813 -- 960
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, beginning of
period................................. 2,850 213 -- -- 3,063
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 2,867 $ 343 $ 813 $ -- $ 4,023
======== ======= ======= ======= ========
</TABLE>
F-32
<PAGE> 94
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................. $ 1,913 $ 2,164 $-- $(2,164) $ 1,913
Adjustments to reconcile net income to
net cash in operating activities:
Depreciation and amortization........ 1,102 754 -- -- 1,856
Interest accretion on note payable... 87 -- -- -- 87
Change in certain assets and
liabilities
Accounts receivable, net.......... (2,491) (1,174) -- -- (3,665)
Inventory, net.................... (2,724) 1,173 -- -- (1,551)
Prepaids and other assets......... (1,792) 1,428 -- -- (363)
Accounts payable, accrued
liabilities and deferred income
taxes........................... (3,396) 600 -- -- (2,796)
Due to (from) affiliates, net..... 1,696 (3,859) -- 2,164 0
-------- ------- -- ------- --------
Net cash used in operating
activities................. (5,605) 1,086 -- -- (4,519)
-------- ------- -- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of acquired businesses, net
of cash acquired.................. (31,469) -- (31,469)
Purchasing of property, plant and
equipment......................... (624) (44) -- -- (668)
Change in investments, long term
receivables and other............. (872) (85) -- -- (957)
-------- ------- -- ------- --------
Net cash used in investing
activities................. (32,965) (129) -- -- (33,094)
-------- ------- -- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facility, net of
financing costs................... 10,265 -- -- -- 10,265
Proceeds from bond offering, net of
financing costs................... 96,400 -- 96,400
Exercise of stock options............ 197 -- 197
Repayment of notes payable and Credit
Facility.......................... (60,655) -- -- -- (60,655)
-------- ------- -- ------- --------
Net cash provided by
financing activities....... 46,207 -- -- -- 46,207
-------- ------- -- ------- --------
INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 7,637 957 -- -- 8,594
-------- ------- -- ------- --------
CASH AND CASH EQUIVALENTS,
beginning of period.................. $ 2,850 $ 213 -- $ -- 3,063
-------- ------- -- ------- --------
CASH AND CASH EQUIVALENTS,
end of period........................ $ 10,487 $ 1,170 $-- $ -- $ 11,657
======== ======= == ======= ========
</TABLE>
F-33
<PAGE> 95
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ (1,160) $ 6,883 $ (667) $(6,216) $ (1,160)
Adjustments to reconcile net income (loss)
to net cash in operating activities:
Depreciation and amortization........... 1,677 1,568 247 -- 3,492
Provision for cancelled distributors.... 5,067 -- -- -- 5,067
Change in certain assets and liabilities
Accounts receivable, net............. 107 (10,669) (5,441) -- (16,003)
Inventories, net..................... (1,526) 417 (464) -- (1,573)
Prepaids and other assets............ (3,766) (1,214) (84) -- (5,064)
Accounts payable and accrued
liabilities........................ (363) 5,022 1,687 -- 6,346
Due to (from) affiliates, net........ (12,952) 1,081 5,655 6,216 --
-------- -------- ------- ------- --------
Net cash provided by (used in)
operating activities............ (12,916) 3,088 933 -- (8,895)
-------- -------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchasing of property, plant
and equipment........................ (2,378) (1,046) (16) -- (3,440)
Change in investments, long term
receivables and other................ (384) (1,216) (1,283) -- (2,883)
-------- -------- ------- ------- --------
Net cash provided by (used in)
investing activities............ (2,762) (2,262) (1,299) -- (6,323)
-------- -------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facilities, net of
financing costs...................... 72,469 -- -- -- 72,469
Repayment on line of credit............. (59,460) -- (302) -- (59,762)
-------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities............ 13,009 -- (302) -- 12,707
-------- -------- ------- ------- --------
NET CHANGE IN CASH........................ (2,669) 826 (668) -- (2,511)
-------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, beginning of
period.................................. $ 2,867 $ 343 $ 813 $ -- 4,023
-------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 198 $ 1,169 $ 145 $ -- $ 1,512
======== ======== ======= ======= ========
</TABLE>
F-34
<PAGE> 96
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited 1998 pro forma condensed consolidated financial
information should be read in conjunction with the historical consolidated
financial statements and notes thereto of STC, European Touch II and Ft. Pitt,
contained elsewhere in this prospectus and registration statement. The unaudited
pro forma condensed consolidated pro forma financial information reflects the
results of the Company, which includes all of the Company's acquisitions,
including Pro Finish, European Touch II, European Touch and Ft. Pitt (the
"Recent Acquisitions"). The unaudited pro forma condensed consolidated financial
information also reflects certain pro forma adjustments that are more fully
described in the accompanying notes. The Unaudited Pro Forma Condensed
Consolidated Statement of Operations reflects the historical financial
information of STC, together with the issuance of the Notes (assuming this had
occurred as of January 1, 1998), and the operations of the Recent Acquisitions
during 1998, prior to being acquired by STC (including certain adjustments to
the historical financial statements that are more fully described in the notes
hereto). The Unaudited Pro Forma Condensed Consolidated Statement of Operations
may not be indicative of actual results that would have been achieved if the
issuance of the Notes and the Recent Acquisitions had occurred on the dates
indicated or the results that may be realized in the future. The unaudited pro
forma condensed consolidated financial information contains only certain
adjustments that are directly attributable to the issuance of the Notes and the
Recent Acquisitions.
F-35
<PAGE> 97
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS
-------------------------------------------
EUROPEAN EUROPEAN PRO FORMA
STC PRO FINISH TOUCH II TOUCH FT. PITT TOTAL ADJUSTMENTS PRO FORMA
------- ---------- -------- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $90,373 $2,723 $4,152 $2,420 $15,940 $115,608 $ -- $115,608
Cost of sales............. 39,222 1,388 1,615 776 5,860 48,861 -- 48,861
------- ------ ------ ------ ------- -------- -------- --------
Gross Profit.............. 51,151 1,335 2,537 1,644 10,080 66,747 -- 66,747
Selling, general, and
administrative
expenses................ 33,137 1,023 765 991 10,560 46,476 (639)(a) 45,837
------- ------ ------ ------ ------- -------- -------- --------
Income from operations.... 18,014 312 1,772 653 (480) 20,271 639 20,910
Interest (expense)
income.................. (9,206) -- 61 -- (311) (9,456) (4,768)(b) (14,224)
------- ------ ------ ------ ------- -------- -------- --------
Income (loss) from
continuing operations... 8,808 312 1,833 653 (791) 10,815 (4,129) 6,686
Provision for income
taxes................... 3,635 86 -- -- (83) 3,638 (356)(c) 3,282
------- ------ ------ ------ ------- -------- -------- --------
Income before
extraordinary item...... $ 5,173 $ 226 $1,833 $ 653 $ (708) $ 7,177 $ (3,773) $ 3,404
======= ====== ====== ====== ======= ======== ======== ========
Basic earnings per share
before extraordinary
item.................... $ 1.28 $ 0.84
======= ========
Diluted earnings per share
before extraordinary
item.................... $ 1.20 $ 0.79
======= ========
Basic weighted average
shares.................. 4,033 4,033
======= ========
Diluted weighted average
shares.................. 4,313 4,313
======= ========
</TABLE>
F-36
<PAGE> 98
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
(a) Reflects the net impact in selling, general, and administrative
expenses of an aggregate of (i) approximately $1.7 million to reflect
the elimination of salaries and benefits of specific individuals not
continuing with the combined companies, and (ii) approximately $1.1
million to reflect the additional amortization of goodwill associated
with each acquisition.
(b) Represents cash interest expense on the Notes plus amortization of
related financing costs.
(c) Reflects adjustment to the income tax provision, based on applying the
statutory income tax rates of each company, adjusted for goodwill
amortization from the ABBA, Gena, and JDS acquisitions, which is not
deductible for income tax reporting purposes.
F-37
<PAGE> 99
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
Phoenix, Arizona,
March 21, 1997.
F-38
<PAGE> 100
GENA LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-39
<PAGE> 101
GENA LABORATORIES, INC.
STATEMENTS OF OPERATIONS
<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>
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
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 102
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............ 2,000 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-41
<PAGE> 103
GENA LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<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>
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-42
<PAGE> 104
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.
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
Raw materials and work-in-process................. $675,735 $ 849,582
Finished goods.................................... 289,600 364,106
-------- ----------
$965,335 $1,213,688
======== ==========
</TABLE>
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
F-43
<PAGE> 105
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-44
<PAGE> 106
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
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
========== ==========
</TABLE>
(5) LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
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
======== ========
</TABLE>
In 1993, the Company entered into a $250,000 unsecured revolving line of
credit, which bears interest at prime and matures July 1997. As of February 28,
1995 and February 29, 1996, the Company had not drawn on this facility.
Aggregate principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28,
- ------------
<S> <C>
1997.............................................. $ 95,248
1998.............................................. 11,518
--------
$106,766
========
</TABLE>
(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.
F-45
<PAGE> 107
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES:
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences result principally from the recognition of revenues and expenses
using the cash basis of accounting and the use of different depreciation and
amortization methods for income tax reporting.
The components of the income tax provision consist of the following:
<TABLE>
<CAPTION>
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>
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
======== ======== ======== ========
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
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
======== ========
</TABLE>
F-46
<PAGE> 108
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
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.
The total of the related party note payable is as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1995 1996
------------ ------------
<S> <C> <C>
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
======== ========
</TABLE>
Principal maturities related to this loan are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28, TOTAL
------------ --------
<S> <C>
1997.............................................. $ 34,929
1998.............................................. 37,454
1999.............................................. 40,162
2000.............................................. 43,065
2001.............................................. 46,178
Thereafter........................................ 140,499
--------
$342,287
========
</TABLE>
The Company also entered into a lease with the Partnership in 1991, for
approximately 10,000 square feet for storage and production purposes. Lease
expense related to this space totaled approximately $83,049, $44,346, $51,346
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.
F-47
<PAGE> 109
GENA LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Lease commitments related primarily to a warehouse space lease are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28, TOTAL
------------ --------
<S> <C>
1997.............................................. $ 41,100
1998.............................................. 41,100
1999.............................................. 41,100
2000.............................................. 41,100
2001.............................................. 41,100
Thereafter........................................ 202,500
--------
$408,000
========
</TABLE>
F-48
<PAGE> 110
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
Phoenix, Arizona,
March 21, 1997.
F-49
<PAGE> 111
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes to the financial statements are an
integral part of these balance sheets.
F-50
<PAGE> 112
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1996
YEARS ENDED DECEMBER 31, TO
-------------------------------------- NOVEMBER 26,
1993 1994 1995 1996
---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
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)
---------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 113
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CHANGES IN OWNER'S INVESTMENT
<TABLE>
<S> <C>
BALANCE, December 31, 1992.................................. $ (127,491)
Net income................................................ 327,712
Net payments to parent.................................... (748,153)
-----------
BALANCE, December 31, 1993.................................. (547,932)
Net income................................................ 446,303
Net receipts from parent.................................. 1,224,156
-----------
BALANCE, December 31, 1994.................................. 1,122,527
Net income................................................ 293,599
Net payments to parent.................................... (389,308)
-----------
BALANCE, December 31, 1995.................................. 1,026,818
Net loss.................................................. (137,311)
Net payments to parent.................................... (1,311,710)
-----------
BALANCE, November 26, 1996.................................. $ (422,203)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 114
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE YEARS ENDED JANUARY 1,
DECEMBER 31, 1996 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 (loss) 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-53
<PAGE> 115
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.
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.
F-54
<PAGE> 116
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the 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:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
(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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1996............................................... $79,455
1997............................................... 50,423
1998............................................... 41,067
1999............................................... 2,333
</TABLE>
F-55
<PAGE> 117
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-56
<PAGE> 118
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
Phoenix, Arizona,
March 21, 1997.
F-57
<PAGE> 119
JDS MANUFACTURING CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
F-58
<PAGE> 120
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-59
<PAGE> 121
JDS MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1993........................ 1,000 $10,000 $ 28,467 $ 38,467
Net loss......................................... -- -- (16,494) (16,494)
----- ------- -------- --------
BALANCE, September 30, 1994........................ 1,000 10,000 11,973 21,973
Net income....................................... -- -- 8,574 8,574
----- ------- -------- --------
BALANCE, September 30, 1995........................ 1,000 10,000 20,547 30,547
Net 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
===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 122
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-61
<PAGE> 123
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.
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Raw material and work-in process................ $ 31,722 $ 25,097
Finished goods.................................. 232,625 184,043
-------- --------
$264,347 $209,140
======== ========
</TABLE>
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.
F-62
<PAGE> 124
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
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
========= =========
</TABLE>
(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
F-63
<PAGE> 125
JDS MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-64
<PAGE> 126
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
Phoenix, Arizona,
March 21, 1997.
F-65
<PAGE> 127
KOTCHAMMER INVESTMENTS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
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
=========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-66
<PAGE> 128
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, NOVEMBER 26,
1995 1996
------------ ---------------
<S> <C> <C>
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)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 129
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS DEFICIT
------ ------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... 2,500 $50,000 $(139,917) $ (89,917)
Net loss..................................... -- -- (134,919) (134,919)
----- ------- --------- ---------
BALANCE, December 31,1995...................... 2,500 50,000 (274,836) (224,836)
Net loss..................................... -- -- (2,294) (2,294)
----- ------- --------- ---------
BALANCE, November 26, 1996..................... 2,500 $50,000 $(277,130) $(227,130)
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 130
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, NOVEMBER 26,
1995 1996
------------ ----------------
<S> <C> <C>
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 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE> 131
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.
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.
F-70
<PAGE> 132
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1995
----------- --------
<S> <C> <C>
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
========
</TABLE>
(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.
(5) NOTES PAYABLE TO SHAREHOLDERS:
Notes payable to shareholders consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
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
=========
</TABLE>
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.
F-71
<PAGE> 133
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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. 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-72
<PAGE> 134
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Styling Technology Corporation:
We have audited the accompanying balance sheets of U.K. ABBA PRODUCTS, INC.
(a California corporation) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 U.K. ABBA Products, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
June 20, 1997.
F-73
<PAGE> 135
U.K. ABBA PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 308,020 $ 337,274 $ 475,037
Accounts receivable.................................. 775,858 872,602 1,063,784
Inventory............................................ 1,079,833 1,377,373 1,683,241
Other current assets................................. 302,078 68,938 72,244
---------- ---------- ----------
Total current assets......................... 2,465,789 2,656,187 3,294,306
PROPERTY AND EQUIPMENT, net............................ 238,230 219,169 216,625
OTHER ASSETS........................................... 10,318 8,818 24,333
---------- ---------- ----------
$2,714,337 $2,884,174 $3,535,264
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 388,676 $ 323,840 $ 857,061
Accrued expenses..................................... 146,819 313,004 284,556
Current portion of note payable and capital lease
obligation........................................ 51,954 86,867 70,247
Income taxes payable................................. 328,654 121,144 209,885
Line of credit....................................... 200,000 100,000 --
---------- ---------- ----------
Total current liabilities.................... 1,116,103 944,855 1,421,749
---------- ---------- ----------
DEFERRED INCOME TAXES.................................. 6,788 16,774 25,774
---------- ---------- ----------
NOTE PAYABLE AND CAPITAL LEASE OBLIGATION, net of
current portion...................................... 86,872 -- --
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 200,000 shares
authorized, 118,518 issued and outstanding........ 360,000 360,000 360,000
Retained earnings.................................... 1,144,574 1,562,545 1,727,741
---------- ---------- ----------
Total stockholders' equity................... 1,504,574 1,922,545 2,087,741
---------- ---------- ----------
Total liabilities and stockholders' equity... $2,714,337 $2,884,174 $3,535,264
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-74
<PAGE> 136
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE THREE
ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ ----------------------------
1995 1996 1996 1997
---------- ----------- ---------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES.................................. $9,056,549 $10,603,312 $2,477,101 $3,150,100
COST OF SALES.............................. 4,193,992 5,013,178 1,180,306 1,518,524
---------- ----------- ---------- ----------
Gross profit............................. 4,862,557 5,590,134 1,296,795 1,631,576
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 4,182,192 4,880,380 979,204 1,351,127
---------- ----------- ---------- ----------
Income from operations................... 680,365 709,754 317,591 280,449
INTEREST EXPENSE AND OTHER, net............ 12,453 1,328 3,831 454
---------- ----------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES... 667,912 708,426 313,760 279,995
PROVISION FOR INCOME TAXES................. 267,165 290,455 128,642 114,799
---------- ----------- ---------- ----------
NET INCOME................................. $ 400,747 $ 417,971 $ 185,118 $ 165,196
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE> 137
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994................... 118,518 $360,000 $ 743,827 $1,103,827
Net income................................. -- -- 400,747 400,747
------- -------- ---------- ----------
BALANCE, December 31, 1995................... 118,518 360,000 1,144,574 1,504,574
Net income................................. -- -- 417,971 417,971
------- -------- ---------- ----------
BALANCE, December 31, 1996................... 118,518 360,000 1,562,545 1,922,545
Net income (unaudited)..................... -- -- 165,196 165,196
------- -------- ---------- ----------
BALANCE, March 31, 1997 (unaudited).......... 118,518 $360,000 $1,727,741 $2,087,741
======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE> 138
U.K. ABBA PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE THREE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
--------------------- ---------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 400,747 $ 417,971 $ 185,118 $ 165,196
Adjustments to reconcile net income to net cash
provided by operating
activities-Depreciation........................ 40,194 58,590 20,837 14,155
Increase in accounts receivable................ (36,463) (96,744) (85,595) (191,182)
Increase in inventory.......................... (239,437) (297,540) (165,829) (305,868)
(Increase) decrease in other assets............ (281,508) 234,640 249,492 (18,821)
(Decrease) increase in accounts payable........ (53,711) (64,836) (887) 533,221
Increase (decrease) in accrued expenses........ 143,958 166,185 (5,435) (28,448)
Increase (decrease) in income taxes payable.... 65,070 (207,510) 71,142 88,741
Increase in deferred income taxes.............. 6,788 9,986 -- 9,000
--------- --------- --------- ---------
Net cash provided by operating
activities.............................. 45,638 220,742 268,843 265,994
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (80,367) (39,529) (24,655) (11,611)
--------- --------- --------- ---------
Net cash used in investing activities..... (80,367) (39,529) (24,655) (11,611)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit.... 200,000 (100,000) (200,000) (100,000)
Payments of note payable and capital lease
obligation..................................... (58,458) (51,959) (16,370) (16,620)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities.............................. 141,542 (151,959) (216,370) (116,620)
--------- --------- --------- ---------
NET INCREASE IN CASH................................ 106,813 29,254 27,818 137,763
CASH, beginning of period........................... 201,207 308,020 308,020 337,274
--------- --------- --------- ---------
CASH, end of period................................. $ 308,020 $ 337,274 $ 335,838 $ 475,037
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid..................................... $ 23,926 $ 13,890 $ 5,946 $ 2,914
========= ========= ========= =========
Income taxes paid................................. $ 335,377 $ 497,965 $ 137,642 $ --
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company assumed a capital lease for property and equipment for $59,284.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE> 139
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization and Nature of Operations
U.K. ABBA Products, Inc. (the Company), was incorporated in 1988 to
manufacture pure and natural hair care products, using proprietary formulas it
owns, and distribute them exclusively through distributor relationships to
professional hair salons and supply stores. The Company is a provider of hair
care products, specializing in the cleansing, restoring, styling and finishing
aspects of the hair care process. The Company maintains its pure and natural
approach by using botanical formulas, which does not include the use of any
animal ingredients. The Company has approximately 18 different products, and
distributes nationally and internationally throughout the United States, Puerto
Rico and Canada.
Acquisition Agreement
In accordance with the terms of an acquisition agreement (the Agreement)
between Styling Technology Corporation, (STC) and the Company dated June 25,
1997, STC agreed to acquire all of the common stock of the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventory is stated 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 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ -----------
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and work-in-process...... $ 176,398 $ 200,915 $ 180,276
Finished goods......................... 903,435 1,176,458 1,502,965
---------- ---------- ----------
$1,079,833 $1,377,373 $1,683,241
========== ========== ==========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided on the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 7
Office equipment............................................ 3-7
</TABLE>
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which are not significant and do not
improve assets or extend their useful lives, are charged to expense as incurred.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its cash in high quality
F-78
<PAGE> 140
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
credit institutions. 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, receivables, accounts payable, and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amounts on the note payable and line of credit are
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 upon shipment of the product.
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. Actual results could differ from those estimates.
Unaudited Interim Financial Information
In management's opinion, the financial statements for the three-month
periods ended March 31, 1996 and 1997, include all adjustments, consisting of
normal recurring adjustments, necessary to present fairly on a basis consistent
with that of the audited data presented herein the Company's financial position
and results of operations as of and for the periods then ended in accordance
with generally accepted accounting principles. Operating results for the
three-month period ended March 31, 1997, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1997.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures........................... $157,170 $ 182,803 $ 187,132
Office equipment................................. 178,580 192,476 199,758
-------- --------- ---------
335,750 375,279 386,890
Less-Accumulated depreciation.................... (97,520) (156,110) (170,265)
-------- --------- ---------
$238,230 $ 219,169 $ 216,625
======== ========= =========
</TABLE>
F-79
<PAGE> 141
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTE PAYABLE AND CAPITAL LEASE OBLIGATION
The note payable and capital lease obligation consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, interest at prime plus 1.5% (10.0%
and 9.75% at December 31, 1995 and 1996,
respectively, and 9.75% (unaudited) at March 31,
1997), monthly principal and interest payments
until December 1997, secured by substantially
all assets of the Company....................... $ 86,808 $ 45,138 $ 31,250
Capital lease obligation, payable in monthly
installments of $1,242 until April 2000......... 52,018 41,729 38,997
-------- -------- --------
138,826 86,867 70,247
Less- Current portion............................. (51,954) (86,867) (70,247)
-------- -------- --------
$ 86,872 $ -- $ --
======== ======== ========
</TABLE>
The Company has classified the note payable and capital lease obligation as
current in the accompanying balance sheets at December 31, 1996 and March 31,
1997 as it is the intent of STC to pay off these instruments upon the
consummation of the Acquisition.
(5) LINE OF CREDIT
As of December 31, 1996, the Company has a $700,000 revolving line of
credit (the Old Line of Credit), which bears interest at prime plus 1.0% and
matures April 1997. In April 1997, the Company negotiated a new line of credit
of up to $1,000,000 (unaudited). As of December 31, 1995 and 1996, the Company
had $200,000, and $100,000, respectively, outstanding the Old Line of Credit. As
of March 31, 1997, the Company had not drawn on the Old Line of Credit. The Old
Line of Credit is secured by substantially all the assets of the Company.
(6) 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 reserve expenses for
financial reporting purposes which do not generate current tax deductions, and
the use of different depreciation and inventory capitalization methods for
income tax and financial reporting.
F-80
<PAGE> 142
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax provision (benefit) consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------------------
1995 1996 1996 1997
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal..................................... $259,138 $255,450 $113,138 $106,686
State....................................... 45,731 45,079 19,966 11,613
-------- -------- -------- --------
304,869 300,529 133,104 118,299
Deferred...................................... (37,704) (10,074) (4,462) (3,500)
-------- -------- -------- --------
Provision for income taxes.................. $267,165 $290,455 $128,642 $114,799
======== ======== ======== ========
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Uniform inventory cost capitalization..................... $32,000 $54,000 $59,500
Other..................................................... 15,878 13,938 13,938
------- ------- -------
Total gross deferred tax assets................... 47,878 67,938 73,438
------- ------- -------
Deferred tax liabilities:
Depreciation.............................................. 6,788 16,774 25,774
------- ------- -------
Total gross deferred tax liabilities.............. 6,788 16,774 25,774
------- ------- -------
Net deferred tax asset...................................... $41,090 $51,164 $47,664
======= ======= =======
</TABLE>
The total gross deferred tax assets are included in other current assets in
the accompanying balance sheets.
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax provision at statutory rate............................. 34% 34% 34% 34%
Expense of permanent differences resulting from the
corporate owned life insurance and travel and
entertainment expenses, and the effect of state taxes..... 6% 7% 7% 7%
-- -- -- --
Income tax provision...................................... 40% 41% 41% 41%
== == == ==
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company utilizes third party warehouses for its storage, production and
distribution of its inventory. The Company's minority shareholder is a
shareholder of one of these third party warehouses. In the ordinary course of
business, the Company contracts for the manufacturing of various products with
this warehouse. Management believes these transactions were under terms no less
favorable to the Company than those arranged with other parties. During the
years ended December 31, 1995 and 1996, and the three months ended March 31,
1996 and 1997, the Company paid approximately $2,799,532, $2,741,167, $511,020,
F-81
<PAGE> 143
U.K. ABBA PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited) and $674,977 (unaudited) respectively, for storage, production and
distribution services to this third party. The following inventory amounts with
this third party as of December 31, 1995 and 1996, and March 31, 1997, were
$171,539, $189,592, $168,106 (unaudited), respectively.
(8) 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 relate primarily to the rental of office equipment and
the office building lease. Minimum payments under these noncancelable lease
obligations are as follows for the year ended December 31:
<TABLE>
<S> <C>
1997.................................................. $126,120
1998.................................................. 33,000
1999.................................................. 25,800
2000.................................................. 21,600
--------
$206,520
========
</TABLE>
F-82
<PAGE> 144
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of EUROPEAN TOUCH, LTD. II
(a Wisconsin S Corporation) as of December 31, 1997, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of European Touch, Ltd. II as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
May 1, 1998.
F-83
<PAGE> 145
EUROPEAN TOUCH, LTD. II
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
-----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 992,475 $ 429,636
Accounts receivable, net of allowance for doubtful
accounts of $54,945 and $54,945, respectively.......... 1,011,622 982,354
Inventory................................................. 440,446 560,957
---------- ----------
Total current assets.............................. 2,444,543 1,972,947
PROPERTY AND EQUIPMENT, net................................. 399,614 436,240
OTHER ASSETS................................................ 2,375 16,990
---------- ----------
$2,846,532 $2,426,177
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 327,203 $ 285,012
Accrued liabilities....................................... 31,088 31,114
Current portion of deferred income........................ 58,675 54,214
Customer deposits and other............................... 78,956 58,651
---------- ----------
Total current liabilities......................... 495,922 428,991
DEFERRED INCOME, net of current portion..................... 50,000 46,183
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized and
issued 750 shares outstanding.......................... 1,000 1,000
Treasury stock at cost, 250 shares........................ (58,000) (58,000)
Retained earnings......................................... 2,357,610 2,008,003
---------- ----------
Total stockholders' equity........................ 2,300,610 1,951,003
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $2,846,532 $2,426,177
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-84
<PAGE> 146
EUROPEAN TOUCH, LTD. II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES............................................ $8,628,485 $1,483,359 $2,094,596
COST OF SALES........................................ 3,713,799 592,063 877,060
---------- ---------- ----------
Gross profit....................................... 4,914,686 891,296 1,217,536
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 2,256,213 460,566 589,069
---------- ---------- ----------
INCOME FROM OPERATIONS............................... 2,658,473 430,730 628,467
OTHER INCOME......................................... 106,394 31,222 32,126
---------- ---------- ----------
NET INCOME........................................... $2,764,867 $ 461,952 $ 660,593
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE> 147
EUROPEAN TOUCH, LTD. II
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- TREASURY RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
------ ------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996....... 1,000 $1,000 $(58,000) $ 1,418,893 $ 1,361,893
Net income....................... -- -- -- 2,764,867 2,764,867
Distributions to stockholders.... -- -- -- (1,826,150) (1,826,150)
----- ------ -------- ----------- -----------
BALANCE AT DECEMBER 31, 1997....... 1,000 1,000 (58,000) 2,357,610 2,300,610
Net income (unaudited)........... -- -- -- 660,593 660,593
Distributions to stockholders
(unaudited)................... -- -- -- (1,010,200) (1,010,200)
----- ------ -------- ----------- -----------
BALANCE AT MARCH 31, 1998
(unaudited)...................... 1,000 $1,000 $(58,000) $ 2,008,003 $ 1,951,003
===== ====== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE> 148
EUROPEAN TOUCH, LTD. II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED -----------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 2,764,867 $ 461,952 $ 660,593
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization..................... 60,695 10,356 18,510
Loss on disposal of assets........................ 24,692 -- --
(Increase) decrease in accounts receivable........ (221,918) (146,847) 29,268
Increase in inventory............................. (189,348) -- (120,511)
Increase in other assets.......................... (61) (59) (14,615)
Increase (decrease) in accounts payable and
accrued liabilities............................. 186,446 (62,445) (42,165)
Increase (decrease) in deferred income............ 18,773 21,845 (8,278)
Increase (decrease) in customer deposits and
other........................................... 45,727 4,013 (20,305)
----------- --------- -----------
Net cash provided by operating activities.... 2,689,873 288,815 502,497
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (274,007) (17,091) (55,136)
----------- --------- -----------
Net cash used in investing activities........ (274,007) (17,091) (55,136)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders........................ (1,826,150) (157,941) (1,010,200)
----------- --------- -----------
Net cash used in financing activities........ (1,826,150) (157,941) (1,010,200)
----------- --------- -----------
NET INCREASE (DECREASE) IN CASH........................ 589,716 113,783 (562,839)
CASH AND CASH EQUIVALENTS, beginning of period......... 402,759 402,759 992,475
----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period............... $ 992,475 $ 516,542 $ 429,636
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 149
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Organization and Nature of Operations
European Touch, Ltd. II (the Company) was incorporated in 1985 to
manufacture and distribute whirlpool pedicure spas and accessories. The Company
sells its products primarily to wholesale distributors of professional salon
equipment, nail salons, and, to a lesser extent, spas and resorts throughout the
United States, as well as Canada, Europe, Latin America, Mexico and Asia.
Acquisition Agreement
In accordance with the terms of a definitive Acquisition Agreement between
Styling Technology Corporation (STC) and European Touch, Ltd. II, Inc. (the
Company), STC agreed to acquire all of the stock of the Company for a purchase
price of $20.1 million. The closing is estimated to take place in the second
quarter of 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents.
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 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Raw materials and work-in-process................ $ 30,831 $ 39,267
Finished goods................................... 409,615 521,690
-------- --------
$440,446 $560,957
======== ========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which range from 3-15 years.
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. Maintenance and repair
expenses charged to cost of operations were approximately $500, $0 and $134 for
the year ended December 31, 1997 and the three-month unaudited periods ended
March 31, 1997 and 1998, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are described in
F-88
<PAGE> 150
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Note 5. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
Income Taxes
The Company's stockholders have elected to have the Company treated as an S
Corporation for income tax purposes. Therefore, no provision for income taxes is
reflected in the accompanying financial statements.
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.
Revenue Recognition
The Company recognizes revenue at the time product is shipped. However,
installment sales are accounted for under the installment method. Installment
sale terms require 50% in cash before shipment is made and monthly payments for
the balance over the period ranging from 12 to 24 months. Installment sales are
recognized as payments are received.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Interim Unaudited Financial Information
In management's opinion, the financial statements for the three-month
periods ended March 31, 1997 and 1998, include all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows as of and for the
periods then ended. Operating results for the three-month period ended March 31,
1998, are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998.
(3) ACCOUNTS RECEIVABLE:
Accounts receivable include installment receivable amounts. Of the total of
these receivables of $217,350 and $200,794 as of December 31, 1997 and March 31,
1998 (unaudited), approximately $100,000 and $92,000, respectively, were due
beyond one year from these balance sheet dates.
F-89
<PAGE> 151
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements........................... $ 9,400 $ 9,400
Production tooling and equipment................. 210,943 263,303
Furniture and fixtures........................... 149,800 149,800
Computers and vehicles........................... 179,669 182,445
--------- ---------
549,812 604,948
Less- Accumulated depreciation................... (150,198) (168,708)
--------- ---------
$ 399,614 $ 436,240
========= =========
</TABLE>
(5) CUSTOMER CONCENTRATION:
Sales to a major U.S. beauty distribution company as a percentage of total
net sales approximated 13%, 13% and 16% for the year ended December 31, 1997 and
the three-month unaudited periods ended March 31, 1997 and 1998, respectively.
Three of the Company's customers had accounts receivable totaling 45% and 28%
(unaudited) of the Company's total accounts receivable balance as of December
31, 1997 and March 31, 1998, respectively.
(6) RELATED PARTY TRANSACTIONS:
The Company leases its primary facilities from a partnership of which all
partners are stockholders of the Company. Lease expense related to this space
totaled $98,721, $37,260 and $45,332 for the year ended December 31,1997 and the
three-month unaudited periods ended March 31, 1997 and 1998, respectively.
The Company advances certain expenses related to trade shows and computer
services to a company of which two of the three stockholders are stockholders of
the Company. Expenses paid by the Company on behalf of the related company were
approximately $39,000, $2,300 and $25,000 for the year ended December 31, 1997
and the three-month unaudited periods ended March 31, 1997 and 1998,
respectively. The total accounts receivable balance as of December 31, 1997 and
March 31, 1998, from this company was approximately $7,000 and $10,000,
respectively.
(7) COMMITMENTS AND CONTINGENCIES:
Legal Matters
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
conditions or results of operations.
F-90
<PAGE> 152
EUROPEAN TOUCH, LTD. II
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
The Company leases office and warehouse space under operating lease
agreements. Future lease payments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.................................................. $142,796
1999.................................................. 146,196
2000.................................................. 146,196
2001.................................................. 108,796
2002.................................................. 43,915
--------
$587,899
========
</TABLE>
Retirement Plans
The Company has a defined contribution plan under 401(k) (the Plan) of the
Internal Revenue Code. Employees of the Company are eligible to participate in
the Plan after completing one year of service, 1,000 work hours and reaching age
21. Voluntary salary reductions may be elected by each participating employee
and contributed to the Plan (not to exceed $9,500 for a calendar year). The
Company may match up to 25% of the employee's contribution up to a maximum of
6.5% of the employee's compensation. The Company expensed $38,997 related to the
Plan during 1997.
F-91
<PAGE> 153
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Ft. Pitt Acquisition, Inc.:
We have audited the accompanying consolidated balance sheet of Ft. Pitt
Acquisition, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Ft. Pitt Acquisition, Inc. and
subsidiary at December 31, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the consolidated financial statements, on August
3, 1998, the Company entered into a Stock Purchase Agreement with its majority
shareholders and Styling Technology Corporation, which provides for the purchase
of a majority of the issued and outstanding common stock of the Company by
Styling Technology Corporation.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 2, 1998 (August 3, 1998 as to Note 10)
F-92
<PAGE> 154
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $58,389 (unaudited) and $156,660........... $ 5,218,020 $4,926,093
Inventories............................................... 2,237,324 2,087,677
Prepaid and other current assets.......................... 179,197 319,586
Deferred tax asset........................................ 250,000 250,000
----------- ----------
Total current assets................................... 7,884,541 7,583,356
----------- ----------
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 752,891 750,887
Office equipment.......................................... 627,392 534,428
Automobiles and trucks.................................... 6,849 6,849
Leasehold improvements.................................... 66,752 66,752
----------- ----------
1,453,884 1,358,916
Less accumulated depreciation............................. 1,294,753 1,225,652
----------- ----------
159,131 133,264
INTANGIBLES:
License agreement......................................... 1,524,942 1,652,142
Goodwill.................................................. 489,235 427,253
----------- ----------
TOTAL ASSETS................................................ $10,057,849 $9,796,015
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts........................................... $ 336,294 $ 429,472
Current maturities of long-term debt...................... 881,294 848,201
Accounts payable.......................................... 363,935 377,285
Accounts payable -- related party......................... 609,037 294,095
Accrued royalty -- related party.......................... 372,348 284,183
Accrued bonuses........................................... 222,343 439,931
Accrued income taxes...................................... 13,992 329,934
Other accrued liabilities................................. 903,126 400,570
----------- ----------
Total current liabilities.............................. 3,702,369 3,403,671
LONG-TERM AND SUBORDINATED DEBT............................. 4,313,452 4,227,013
DEFERRED TAX LIABILITY...................................... 552,000 552,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock; no par value; 315,586 shares authorized;
254,639 shares outstanding, including those held in
treasury............................................... 1,077,114 1,077,114
Warrant................................................... 52,179 52,179
Retained earnings......................................... 660,735 784,038
Treasury stock -- at cost................................. (300,000) (300,000)
----------- ----------
1,490,028 1,613,331
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $10,057,849 $9,796,015
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-93
<PAGE> 155
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------- YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES........................................... $14,166,121 $12,757,683 $26,097,739
COST OF SALES....................................... 5,242,145 4,653,792 9,757,863
----------- ----------- -----------
Gross profit.............................. 8,923,976 8,103,891 16,339,876
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 8,262,084 6,700,382 13,697,245
PROVISION FOR DOUBTFUL ACCOUNTS..................... 26,033 24,835 140,003
ROYALTY EXPENSE -- RELATED PARTY.................... 372,348 323,055 674,709
DEPRECIATION........................................ 69,101 83,365 170,342
AMORTIZATION OF INTANGIBLE ASSETS................... 133,200 133,268 266,400
----------- ----------- -----------
Income from operations before interest
expense and income taxes................ 61,210 838,986 1,391,177
INTEREST EXPENSE.................................... 267,513 259,494 539,327
----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES................... (206,303) 579,492 851,850
INCOME TAX (BENEFIT) PROVISION...................... (83,000) 235,000 346,000
----------- ----------- -----------
NET (LOSS) INCOME................................... $ (123,303) $ 344,492 $ 505,850
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-94
<PAGE> 156
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
COMMON COMMON TREASURY RETAINED
SHARES STOCK STOCK WARRANT EARNINGS TOTAL
--------- ---------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996......... 244,263 $1,076,078 $(300,000) $52,179 $ 278,188 $1,106,445
Common stock issued.............. 10,376 1,036 -- -- -- 1,036
Net income....................... -- -- -- -- 505,850 505,850
------- ---------- --------- ------- --------- ----------
BALANCE, December 31, 1997......... 254,639 1,077,114 (300,000) 52,179 784,038 1,613,331
Net loss (Unaudited)............. -- -- -- -- (123,303) (123,303)
------- ---------- --------- ------- --------- ----------
BALANCE, June 30, 1998
(Unaudited)...................... 254,639 $1,077,114 $(300,000) $52,179 $ 660,735 $1,490,028
======= ========== ========= ======= ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-95
<PAGE> 157
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------- YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income..................................... $(123,303) $ 344,492 $ 505,850
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 202,301 216,633 436,742
Changes in assets and liabilities:
Increase in accounts receivable.................... (291,927) (478,555) (716,290)
Increase in inventories............................ (149,647) (869,422) (206,204)
Decrease (increase) in prepaid and other current
assets........................................... 140,389 48,633 (3,134)
(Decrease) increase in accounts payable............ (13,350) 355,273 (6,195)
Increase in accounts payable -- related party...... 314,942 330,150 51,095
Increase in accrued royalty -- related party....... 88,165 78,933 40,061
(Decrease) increase in accrued liabilities......... (30,974) (227,544) 70,506
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... 136,596 (201,407) 172,431
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (94,968) (41,334) (83,031)
Additions to intangibles.............................. (67,982) (32,873) (80,140)
--------- --------- ---------
Cash used in investing activities............. (162,950) (74,207) (163,171)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit facility........... 535,565 515,644 368,543
(Decrease) increase in bank overdrafts................ (93,178) 146,046 407,922
Principal payments on long-term debt.................. (416,033) (386,076) (786,761)
Proceeds from issuance of common stock................ -- -- 1,036
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... 26,354 275,614 (9,260)
--------- --------- ---------
NET CHANGE IN CASH...................................... -- -- --
--------- --------- ---------
CASH, BEGINNING AND END OF PERIOD....................... $ -- $ -- $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................ $ 544,937
=========
Cash paid for income taxes............................ $ 196,843
=========
</TABLE>
See notes to consolidated financial statements.
F-96
<PAGE> 158
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation -- The consolidated financial statements
include the accounts of Ft. Pitt Acquisition, Inc. and its 90% owned subsidiary,
Ft. Pitt-Framesi, Ltd. (Framesi of USA, Inc.) (collectively, the "Company"). All
intercompany balances and transactions have been eliminated.
b. Nature of Operations -- The Company's primary business is the
distribution, in the Western Hemisphere, and limited production of an Italian
line of hair coloring and hair care products under the "Framesi" brand name and
the manufacture and distribution of hair care products under the "Roffler" and
"Color Plus" Company-owned brand names. The Company performs periodic credit
evaluations of its distributors and maintains the right to rescind the
distributor agreements at any time.
c. Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
d. Unaudited Interim Financial Information -- The interim condensed
consolidated financial statements as of June 30, 1998 and for the six months
ended June 30, 1998 and June 30, 1997, are unaudited. The interim condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments that, in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods indicated. Results of operations for interim periods may
not be indicative of the operating results that may be expected for the full
year. The interim condensed consolidated financial statements do not include all
footnotes which would be required for complete financial statements prepared in
accordance with generally accepted accounting principles.
e. Revenue Recognition -- Sales are recognized when product is shipped.
f. Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out inventory method.
g. Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is provided for on the straight-line method over the estimated
useful lives for financial reporting and on accelerated methods for tax
reporting.
h. Intangibles -- Intangible assets are amortized over their estimated
useful lives using the straight-line method.
i. Income Taxes -- The Company applies the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under the provisions of SFAS No. 109, deferred tax assets and liabilities are
provided for the effects of net operating loss and inventory contribution
carryforwards, and for temporary differences between financial and tax reporting
which are primarily associated with amortization of intangibles, an allowance
for doubtful accounts and the difference between the book and tax basis for
property and equipment and inventories. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
j. Bank Overdrafts -- The Company utilizes a cash management system under
which a book balance cash overdraft exists for the Company's primary
disbursement accounts. This overdraft represents uncleared checks in excess of
cash balances in bank accounts. Drawdowns of the Company's revolving credit
facility are made as checks are presented for clearing.
F-97
<PAGE> 159
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
k. Financial Instruments -- The Company's financial instruments include
long-term debt obligations. The carrying values of all instruments at December
31, 1997 approximated their fair value. The fair value of the instruments were
based on the rate available to the Company for instruments of the same
maturities.
2. INTANGIBLES
The license agreement sets forth the rights and obligations governing the
exclusive manufacture, promotion and sale of the "Framesi" line of products and
the use of the "Framesi" name in most of the Western Hemisphere. This agreement
is with the minority stockholder of the subsidiary. The license will expire in
2036 and for financial statement purposes, six and one-half years remain on the
life of the license at December 31, 1997. Accumulated amortization as of
December 31, 1997 was $2,672,858.
Goodwill represents the excess purchase price over the estimated fair
market value of net asset acquired from the prior owner of the business (the
"Seller"). This amount is being amortized on a straight-line basis over 40 years
and is net of accumulated amortization of $61,373 as of December 31, 1997. The
Company's agreement with the Seller also provides for contingent payments to the
Seller based upon a defined formula, up to a maximum of $500,000 over the
agreement term, which expires in June 2000. Payments made are considered an
increase in the purchase price paid for the business. During the year ended
December 31, 1997, the Company made payments under the terms of the agreement of
$80,140, which were charged to goodwill and are being amortized over the
remaining life of goodwill.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials and work-in-progress............... $ 383,863 $ 318,050
Packaging........................................ 435,551 480,025
Finished goods................................... 1,430,087 1,329,602
---------- ----------
2,249,501 2,127,677
Reserve for obsolete inventory................... (12,177) (40,000)
---------- ----------
$2,237,324 $2,087,677
========== ==========
</TABLE>
F-98
<PAGE> 160
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BORROWING ARRANGEMENTS
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Bank debt:
Revolving credit facility................................. $2,872,272
Term loan................................................. 452,978
Promissory notes:
Promissory note (A)....................................... 1,261,378
Promissory note (B)....................................... 488,586
----------
Total debt.................................................. 5,075,214
Less current maturities..................................... 848,201
----------
Long-term debt.............................................. $4,227,013
==========
</TABLE>
The Company entered into a credit agreement in 1995 which included a
$1,000,000 term loan and a revolving credit facility. Under the terms of the
credit agreement, as amended in 1997, the revolving credit facility expires July
31, 2001 and is limited to the lesser of $5,000,000 or an amount equal to the
sum of 80% of the eligible accounts receivable plus the lesser of $1,700,000 or
60% of eligible finished goods inventories. The available and unused portion of
the credit facilities was $1,160,122 at December 31, 1997. Interest accrues on
the outstanding balance at the bank's prime rate plus 1%, and a fee of .25% is
charged by the bank on the unused portion of the revolving credit facility. The
Company will incur a prepayment penalty of 1% of the sum of $5,000,000 plus the
then outstanding principal balance of the term loan if the revolving credit
facility is terminated before July 31, 2001. The prime rate was 8.5% at December
31, 1997.
The term loan is a three year note payable in monthly installments of
$16,667, including interest at the bank's prime rate plus 1.5% through April
2000.
The bank has a security interest in the accounts receivable, inventories,
machinery and equipment and related proceeds and all other tangible and
intangible assets of the Company. In addition, these obligations are secured by
the outstanding common stock of Framesi and personal guarantees of certain
officers of the Company. The agreements contain various covenants, including
maintenance of certain levels of net income, leverage ratios, debt service
ratios and restrictions on rentals, additional debt, dividends and other
distributions to stockholders.
The Company failed to meet the limit on rentals for the year ended December
31, 1997 required under the credit agreement. The Company's bank waived
maintenance of this covenant requirement for the year ended December 31, 1997
and modified the requirement for future periods.
Promissory note (A) is a ten-year note payable in monthly installments
ranging between $27,750 to $47,695, including interest at 10% through June 15,
2000. Promissory note (B) is a ten-year note payable in monthly installments of
$18,474, including interest at 10% through June 1, 2000. Promissory notes (A)
and (B) are subordinate to the outstanding debt with the bank. Covenants on the
promissory notes require that the Company maintain compliance with the bank debt
agreements. As a result of receipt of the bank waiver, the Company remains in
compliance with the promissory notes covenants.
F-99
<PAGE> 161
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities for principal payments on long-term and subordinated
debt for the years ending December 31, are:
<TABLE>
<S> <C>
1998..................................................... $ 848,201
1999..................................................... 969,056
2000..................................................... 385,685
2001..................................................... 2,872,272
----------
$5,075,214
==========
</TABLE>
5. OPERATING LEASES
The Company has noncancelable operating leases for its operating facilities
and Company vehicles. Rental expense for such leases was $298,940 for the year
ended December 31, 1997. The leases do not provide for contingent rentals,
renewal or purchase options or escalation clauses, and contain no restrictive
covenants. Future minimum lease commitments under operating leases are as
follows:
<TABLE>
<S> <C>
1998...................................................... $244,920
1999...................................................... 143,900
2000...................................................... 126,055
2001...................................................... 114,996
2002...................................................... 114,996
Thereafter................................................ 114,996
--------
Total minimum lease commitment.................. $859,863
========
</TABLE>
6. STOCKHOLDERS' EQUITY
Stock Option Plan -- The Company had a stock option plan that granted
directors, officers and key employees options to purchase shares of common
stock. No options have been granted since 1992. The options expired not more
than ten years after the date of grant and were exercisable only while the
holder was in the employment of the Company. During the year ended December 31,
1997, 10,376 options were exercised at $.10 per option. At December 31, 1997,
there were no options outstanding and the plan was canceled.
Warrant -- The warrant entitles the holder to purchase 5% of the Company's
outstanding stock for $44,000 and is exercisable at any time before July 31,
2000. The warrant has certain antidilution rights, but no voting rights.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current:
Federal............................................... $336,000
State................................................. 10,000
--------
Total current expense......................... $346,000
========
</TABLE>
F-100
<PAGE> 162
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes in the accompanying consolidated balance sheet
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Deferred Tax Assets:
Allowance for doubtful accounts....................... $ 60,000
Reserve for obsolete inventory........................ 15,000
Section 263A costs.................................... 116,000
Inventory contribution carryforwards.................. 120,000
Depreciation.......................................... 14,000
---------
$ 325,000
=========
Deferred Tax Liability:
Intangibles........................................... $(627,000)
=========
Composition of amounts in the consolidated balance
sheet:
Current deferred tax asset............................ $ 250,000
=========
Non-current deferred tax liability.................... $(627,000)
Non-current deferred tax assets....................... 75,000
---------
Net non-current deferred tax liability............. $(552,000)
=========
</TABLE>
The Company's effective tax rate differed from the statutory federal tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Percent of pre-tax earnings............................. 34.0%
Non-deductible expenses................................. 5.4
State income taxes, net of federal benefit.............. 1.2
----
Effective tax rate...................................... 40.6%
====
</TABLE>
8. RETIREMENT PLAN
The Company has a 401(k) plan in which all full-time, nonunion employees
are eligible to participate. The plan provides for the Company to match employee
contributions at its discretion and to make other discretionary contributions.
Total related expense was $20,439 for the year ended December 31, 1997.
The Company participates in a multiemployer pension plan on behalf of its
union employees. The Company contributes $.15 per hour to the plan for all
employees who have completed six months of service. Total related expense
incurred for the year ended December 31, 1997 was $29,260.
9. RELATED PARTIES
The Company has entered into consulting and employment agreements with
certain members of the Board of Directors. Payments totaling $200,000 were made
during the year ended December 31, 1997, under these agreements. One agreement
includes a noncompetition agreement for eight years starting on January 1, 2000
which includes payments of $200,000 a year over the term. Payments, if any,
under the noncompetition agreement are contingent upon the completion of
employment through December 31, 1999.
Framesi's minority stockholder is the supplier of products for the
Company's primary business of distribution and limited production of an Italian
line of hair coloring and hair care products, cosmetics and related products
under the "Framesi" brand name. Total purchases from the minority stockholder
were
F-101
<PAGE> 163
FT. PITT ACQUISITION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,562,217 (unaudited) and $2,670,577 (unaudited) for the six months ended June
30, 1998 and 1997, respectively, and $6,063,163 for the year ended December 31,
1997. In addition, a royalty at various percentages on certain net sales of
products acquired from the minority stockholder is payable semiannually to the
minority stockholder.
10. SUBSEQUENT EVENTS
On August 3, 1998, the Company entered into a Stock Purchase Agreement (the
"Agreement") with its majority shareholders and Styling Technology Corporation,
which provides for the purchase of a majority of the issued and outstanding
common stock of the Company by Styling Technology Corporation for approximately
$30,000,000 in cash and a seller note.
As a result of the signing of the Agreement, the warrant described in Note
6 was exercised and the outstanding balance under the revolving credit facility
became due and payable.
F-102
<PAGE> 164
[INSIDE BACK COVER]
This page will contain five representative photos of our product lines,
showing the variety of packaging and displays of our products.
<PAGE> 165
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[STYLING TECHNOLOGY LOGO]
4,000,000 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE
ING BARINGS
U.S. BANCORP PIPER JAFFRAY
FIRST SECURITY VAN KASPER
DLJdirect INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Styling
Technology have not changed since the date hereof.
- --------------------------------------------------------------------------------
<PAGE> 166
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with the offering
described in the Registration Statement.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,507
NASD filing fee............................................. 5,359
Nasdaq National Market fees................................. 17,500
Transfer agent and registrar fees........................... 2,000*
Accountants' fees and expenses.............................. 150,000*
Legal fees and expenses..................................... 250,000*
Printing and engraving expenses............................. 225,000*
Miscellaneous fees.......................................... 36,634*
--------
Total....................................................... $700,000
========
</TABLE>
- ---------------
* Estimates
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article IX of the Company's First Amended and Restated Certificate of
Incorporation (the "Certificate"), the Company shall indemnify and advance
expenses, to the fullest extent permitted by the Delaware General Corporation
Law to each person who is or was a director, officer or employee of the Company,
or who serves or served any other enterprise or organization at the request of
the Company (an "Indemnitee"). In addition, the Company has adopted provisions
in its Bylaws that require the Company to indemnify its directors, officers, and
certain other representatives of the Company against expenses and certain other
liabilities arising out of their conduct on behalf of the Company to the maximum
extent and under all circumstances permitted by law.
Under Delaware law, to the extent that an Indemnitee is successful on the
merits or otherwise in defense of a suit or proceeding brought against him or
her by reason of the fact that he or she is or was a director, officer or
employee of the Company, or serves or served any other enterprise or
organization at the request of the Company, the Company shall indemnify him or
her against expenses (including attorneys' fees) actually and reasonably
incurred in connection with such action.
An Indemnitee also may be indemnified under Delaware law against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement if
he or she acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the Company, and, with respect
to any criminal action, had no reasonable cause to believe his or her conduct
was unlawful.
An Indemnitee also may be indemnified under Delaware law against expenses
(including attorneys' fees) actually and reasonably incurred in the defense or
settlement of a suit by or in the right of the Company if he or she acted in
good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Company, except that no indemnification
may be made if the Indemnitee is adjudged to be liable to the Company, unless a
court determines that such Indemnitee is entitled to indemnification for such
expenses which the court deems proper.
Also under Delaware law, expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding may be paid by the
Company in advance of the final disposition of the suit, action or proceeding
upon receipt of an undertaking by or on behalf of the officer or director to
repay such amount if it is ultimately determined that he or she is not entitled
to be indemnified by the Company. The Company may
II-1
<PAGE> 167
also advance expenses incurred by other employees and agents of the Company upon
such terms and conditions, if any, that the Board of Directors of the Company
deems appropriate.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors or persons controlling the
Company pursuant to Delaware law or the Company's Certificate, the Company has
been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1996, the Company sold to a single foreign investor a
promissory note in the principal amount of $400,000 at an interest rate of 10%
per annum that was repaid in the same year. Upon completion of the Company's
initial public offering, the Company issued to Sylvan Schefler upon his election
as a director of the Company (i) 20,000 shares of common stock, (ii) warrants to
purchase 20,000 shares of common stock at an exercise price of $12.50 per share,
and (iii) options to purchase 5,000 shares of common stock at an exercise price
of $10 per share. The Company issued the note in reliance upon an exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933, as a
transaction not involving a public offering.
In November 1996, in connection with its initial public offering, the
Company issued 203,000 common stock purchase warrants to its underwriters,
Friedman, Billings, Ramsey & Co., Inc. and Prime Charter Ltd. Each warrant
entitles the holder thereof to purchase at any time prior to November 21, 2001,
one share of common stock at an exercise price of $12.00 per share. The Company
issued the warrants in reliance upon an exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933, as a transaction not involving a
public offering. See "Description of Securities -- Warrants."
In June 1997, in connection with its June 1997 Credit Facility that is no
longer outstanding, the Company issued 150,000 common stock purchase warrants to
Credit Agricole Indosuez at an exercise price of $10.18 per share, and 10,000
common stock purchase warrants to Bank Boston, N.A at an exercise price of
$11.38 per share. Each warrant entitles the holder to purchase at any time prior
to June 24, 2002, one share of common stock at the exercise price. The Company
issued the warrants in reliance upon an exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933, as a transaction not involving a
public offering. See "Description of Securities -- Warrants."
In June 1998, the Company completed a $100.0 million senior subordinated
debt 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 December 1997 Credit Facility), and for
working capital purposes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
1.1 Form of Underwriting Agreement+
3.1 First Amended and Restated Certificate of Incorporation of
the Company(1)
3.3 Bylaws of the Company(2)
4.1 Specimen of Stock Certificate(2)
4.2 Specimen of Redeemable Common Stock Warrant(2)
4.3 Form of Warrant issued to Credit Agricole Indosuez(3)
4.4 Form of Warrant issued to Bank Boston N.A.(4)
4.5 Indenture dated as of June 23, 1998, by and among the
Company, the Guarantors Signatories thereto, and State
Street Bank and Trust Company of California, N.A.(4)
4.6 Form of Global Notes(5)
</TABLE>
II-2
<PAGE> 168
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
4.8 Rights Agreement, dated February 23, 1999, between Styling
Technology Corporation and American Securities Transfer &
Trust Inc., as Rights Agent, together with the following
exhibits thereto: Exhibit A-Form of Certificate of
Designation of Series A Junior Participating Preferred Stock
of Styling Technology Corporation; Exhibit B-Form of Right
Certificate; Exhibit C-Summary of Rights to Purchase Shares
of Preferred Stock of Styling Technology Corporation.(6)
5 Opinion of Greenberg Traurig, P.A.
10.5 Employment Agreement dated June 1, 1999 between the Company
and Sam L. Leopold
10.5(a) Change of Control Agreement dated June 1, 1999 between the
Company and Sam L. Leopold
10.11 1996 Stock Option Plan (as amended through April 19, 1999)+
10.19 Asset Purchase Agreement dated as of October 31, 1997 among
the Company, Inverness Corporation, and Inverness (UK)
Limited.(7)
10.20 Transition and Manufacturing Agreement dated as of December
10, 1997 the Company and Inverness Corporation.(7)
10.23 Stock Purchase Agreement dated as of June 23, 1998 among the
Company and the former shareholders of European Touch, Ltd.
II(8)
10.24 Credit Agreement dated June 30, 1998 among the Company,
BankBoston, N.A., and NationsBank, N.A.(9)
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik(7)
10.26 1998 Employee Stock Option Plan(1)
10.27 First Amendment to Credit Agreement dated as of March 30,
1999 by and among the Company, NationsBank, N.A., and
BankBoston, N.A., as lenders, and NationsBank, N.A., as
administrative agent.(10)
10.28 Credit Agreement dated June 22, 1999 among the Company, the
other credit parties signatory thereto from time to time,
the lenders signatory thereto from time to time, and General
Electric Capital Corporation.+
10.29 Employment Agreement dated June 22, 1999 by and between the
Company and Richard R. Ross.+
21 Subsidiaries of Registrant+
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5)
23.2 Consent of Arthur Andersen LLP+
23.3 Consent of Deloitte & Touche LLP+
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Page of the Registration
Statement)+
27 Financial Data Schedule(1)(11)
</TABLE>
- ---------------
+ Previously filed.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Commission on March
31, 1999.
(2) 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.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 as filed with the Commission on August
14, 1997.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 as filed with the Commission on
November 14, 1997.
(5) Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-61035) filed August 7, 1998 and declared effective
September 18, 1998.
II-3
<PAGE> 169
(6) Incorporated by reference to the Registration Statement on Form 8-A as
filed with the Commission on March 8, 1999
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
(9) Incorporated by reference to Amendment No. 1 to Form S-4 (Registration No.
333-61035) filed September 17, 1998 and declared effective September 18,
1998.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 as filed with the Commission on May
17, 1999.
(11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 as filed with the Commission on August
13, 1999.
(b) Financial Statements filed as part of this report:
Consolidated Financial Statements as listed in the Index to
Consolidated Financial Statements on page F-1 of this Registration
Statement.
(c) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts.(1)
- ---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 as filed with the Commission on March 31,
1999.
All other schedules have been omitted on the basis of immateriality or
because such schedules are not otherwise applicable.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant, in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Scottsdale, State of
Arizona, on September 7, 1999.
STYLING TECHNOLOGY CORPORATION
By: /s/ SAM L. LEOPOLD
------------------------------------
Sam L. Leopold, Chairman of the
Board,
President, and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SAM L. LEOPOLD Chairman of the Board, September 7, 1999
- --------------------------------------------------- President, and Chief
Sam L. Leopold Executive Officer (Principal
Executive Officer)
* Executive Vice President, Chief September 7, 1999
- --------------------------------------------------- Financial Officer, Treasurer,
Richard R. Ross and Director (Principal
Financial Officer)
* Chief Accounting Officer September 7, 1999
- --------------------------------------------------- (Principal Accounting
J. Timothy Montrose Officer)
* Director September 7, 1999
- ---------------------------------------------------
James A. Brooks
* Director September 7, 1999
- ---------------------------------------------------
Peter W. Burg
* Director September 7, 1999
- ---------------------------------------------------
Michael H. Feinstein
* Director September 7, 1999
- ---------------------------------------------------
Sylvan Schefler
*By: /s/ SAM L. LEOPOLD
- --------------------------------------------------
Sam L. Leopold
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 171
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
1.1 Form of Underwriting Agreement+
3.1 First Amended and Restated Certificate of Incorporation of
the Company(1)
3.3 Bylaws of the Company(2)
4.1 Specimen of Stock Certificate(2)
4.2 Specimen of Redeemable Common Stock Warrant(2)
4.3 Form of Warrant issued to Credit Agricole Indosuez(3)
4.4 Form of Warrant issued to Bank Boston N.A.(4)
4.5 Indenture dated as of June 23, 1998, by and among the
Company, the Guarantors Signatories thereto, and State
Street Bank and Trust Company of California, N.A.(4)
4.6 Form of Global Notes(5)
4.8 Rights Agreement, dated February 23, 1999, between Styling
Technology Corporation and American Securities Transfer &
Trust Inc., as Rights Agent, together with the following
exhibits thereto: Exhibit A-Form of Certificate of
Designation of Series A Junior Participating Preferred Stock
of Styling Technology Corporation; Exhibit B-Form of Right
Certificate; Exhibit C -- Summary of Rights to Purchase
Shares of Preferred Stock of Styling Technology
Corporation.(6)
5 Opinion of Greenburg Traurig, P.A.
10.5 Employment Agreement dated June 1, 1999 between the Company
and Sam L. Leopold
10.5(a) Change of Control Agreement dated June 1, 1999 between the
Company and Sam L. Leopold
10.11 1996 Stock Option Plan (as amended through April 19, 1999)+
10.19 Asset Purchase Agreement dated as of October 31, 1997 among
the Company, Inverness Corporation, and Inverness (UK)
Limited.(7)
10.20 Transition and Manufacturing Agreement dated as of December
10, 1997 the Company and Inverness Corporation.(7)
10.23 Stock Purchase Agreement dated as of June 23, 1998 among the
Company and the former shareholders of European Touch, Ltd.
II(8)
10.24 Credit Agreement dated June 30, 1998 among the Company,
BankBoston, N.A., and NationsBank, N.A.(9)
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik(7)
10.26 1998 Employee Stock Option Plan(1)
10.27 First Amendment to Credit Agreement dated as of March 30,
1999 by and among the Company, NationsBank, N.A., and
BankBoston, N.A., as lenders, and NationsBank, N.A., as
administrative agent.(10)
10.28 Credit Agreement dated June 22, 1999 among the Company, the
other credit parties signatory thereto from time to time,
the lenders signatory thereto from time to time, and General
Electric Capital Corporation.+
10.29 Employment Agreement dated June 22, 1999 by and between the
Company and Richard R. Ross.+
21 Subsidiaries of Registrant+
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5)
23.2 Consent of Arthur Andersen LLP+
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
23.3 Consent of Deloitte & Touche LLP+
24 Power of Attorney of Directors and Executive Officers
(included on the Signature Page of the Registration
Statement)+
27 Financial Data Schedule(1)(11)
</TABLE>
- ---------------
+ Previously filed
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Commission on March
31, 1999.
(2) 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.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 as filed with the Commission on August
14, 1997.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 as filed with the Commission on
November 14, 1997.
(5) Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-61035) filed August 7, 1998 and declared effective
September 18, 1998.
(6) Incorporated by reference to the Registration Statement on Form 8-A as
filed with the Commission on March 8, 1999
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
(9) Incorporated by reference to Amendment No. 1 to Form S-4 (Registration No.
333-61035) filed September 17, 1998 and declared effective September 18,
1998.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 as filed with the Commission on May
17, 1999.
(11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 as filed with the Commission on August
13, 1999.
<PAGE> 1
Exhibit 5
GREENBERG TRAURIG, P.A.
One East Camelback
Phoenix, Arizona 85012
(602) 263-2300
E-Mail:
Robert S. Kant [email protected]
602-263-2606 September 7, 1999 File No. 31114-806
Styling Technology Corporation
7400 East Tierra Buena Lane
Scottsdale, Arizona 85260
RE: REGISTRATION STATEMENT ON FORM S-1
STYLING TECHNOLOGY CORPORATION
Ladies and Gentlemen:
As legal counsel to Styling Technology Corporation, a Delaware
corporation (the "Company"), we have assisted in the preparation of the
Company's Registration Statement on Form S-1 (the "Registration Statement"), to
be filed with the Securities and Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of 4,000,000 shares
of common stock of the Company covered by the Registration Statement (the
"Shares"). The facts, as we understand them, are set forth in the Registration
Statement.
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The First Amended and Restated Certificate of Incorporation of
the Company;
B. The Bylaws of the Company;
C. The Registration Statement; and
D. The Resolutions of the Board of Directors of the Company
relating to the approval of the filing of the Registration
Statement and the transactions in connection therewith.
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to the further limitations and qualifications set forth
below, it is our opinion that, when (a) the Registration Statement as then
amended shall have been declared effective by the Commission, (b) the
Underwriting Agreement shall have
<PAGE> 2
GREENBERG TRAURIG
Styling Technology Corporation
September 7, 1999
Page 2
been duly executed and delivered, and (c) the Shares have been duly issued,
authenticated, paid for, sold, and delivered, by the Company as described in the
Registration Statement and in accordance with the provisions of the Underwriting
Agreement, the Shares will be validly issued, fully paid, and nonassessable.
Our opinion is limited to the legality of matters under
federal securities laws and the General Corporation Laws of the State of
Delaware. Further, our opinion is based solely upon existing laws, rules, and
regulations and we undertake no obligation to advise you of any changes that may
be brought to our attention after the date hereof.
We hereby expressly consent to any reference to our firm in
the Registration Statement and in any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933 for this same offering, the
inclusion of this opinion as an exhibit to the Registration Statement and the
incorporation by reference into any such additional registration statement, and
to the filing of this opinion with any other appropriate governmental agency.
Very truly yours,
/s/ Greenberg Traurig, P.A.
RSK/bfg
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
AGREEMENT effective as of the 1st day of June, 1999, between
STYLING TECHNOLOGY CORPORATION, a Delaware corporation (the "Employer"), and SAM
L. LEOPOLD, an individual who resides at the address appearing below (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive is desirous of continuing to be
employed by the Employer and the Employer desires to continue to employ the
Executive; and
WHEREAS, the Employer wishes to enter into an agreement with
the Executive governing the terms and conditions of his continued employment,
and the Executive is willing to continue to be employed on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter set forth, the parties hereby agree as follows:
1. EMPLOYMENT. The Employer shall continue to employ the
Executive, and the Executive shall continue in the employ of the Employer, from
and after the date first set forth above (the "Effective Date") on the terms and
subject to the conditions set forth in this Agreement. The Executive shall serve
in the position of Chairman of the Board, President and Chief Executive Officer
of the Employer with authority, duties and responsibilities commensurate with
his authority, duties and responsibilities immediately prior to the Effective
Date, plus any additional duties and responsibilities upon which the Employer
and the Executive may agree from time to time. The Executive shall devote his
best efforts to the business of the Employer.
2. TERM. The term of this Agreement shall initially be five
(5) years commencing on the Effective Date hereof, and thereafter shall be
automatically renewed for successive five (5) year terms, provided that the
employment of the Executive may be terminated at any time after the Effective
Date in accordance with paragraph 5.
3. LOCATION. The Executive shall not be required to relocate
his primary place of employment outside Maricopa County, Arizona. The Executive
shall, however, also travel to other locations at such times as may be
reasonably necessary for the performance of his duties under this Agreement. Any
such travel undertaken by the Executive shall be at the Employer's expense, and
when travelling on business relating to the performance of his duties under this
Agreement the Executive shall be entitled to first class air transportation and
first class hotel accommodations.
4. COMPENSATION. During the Executive's period of employment,
the Executive shall be compensated by the Employer as follows:
(a) Annual Salary. The Executive shall be paid an
annual salary at a rate computed on the basis of Three Hundred
Seventy-Five Thousand Dollars
<PAGE> 2
($375,000) per year commencing from and after the Effective Date. As of
July 1, 2001, and each July 1 thereafter, the Executive's annual salary
shall be reviewed and, if appropriate based upon merit or other
factors, increased by the Compensation Committee of the Board of
Directors of the Employer (the "Board"). The Executive's salary shall
be paid in accordance with the Employer's normal payroll cycle and
policies.
(b) Employee Benefits. The Executive shall be
entitled to participate in any and all retirement benefit, welfare
benefit and other employee benefit plans or programs, which are from
time to time maintained by the Employer for its senior executives, in
accordance with the provisions of such plans or programs as from time
to time in effect. The Executive shall also be entitled to the benefits
set forth in Schedule A attached hereto and made a part of this
Agreement.
(c) Business Expenses. The Executive shall be
reimbursed, in a manner consistent with the policies of the Employer,
for all reasonable business expenses incurred in the performance of his
duties pursuant to this Agreement, to the extent such expenses are
substantiated in writing, are approved by the Employer, and are
consistent with the general policies of the Employer relating to the
reimbursement of expenses of its senior executives. Except as otherwise
provided in this Agreement, expenses for items reasonably deemed to be
personal by the Employer shall not be reimbursed by the Employer and
are the sole responsibility of the Executive.
(d) Deduction and Withholding. All compensation and
benefits to or on behalf of the Executive pursuant to this Agreement
shall be subject to such deductions and withholding as may be agreed to
by the Executive or required by applicable law.
(e) Indemnification and Insurance. The Employer
shall, to the fullest extent permitted or required by Section 145 of
the Delaware General Corporation Law, including any amendments thereto
(but in the case of any such amendment, only to the extent such
amendment permits or requires the Employer to provide broader
indemnification rights than prior to such amendment), indemnify the
Executive against any and all Liabilities (as defined below), and
advance any and all reasonable Expenses (as defined below), incurred by
him in any Proceeding (as defined below). The rights to indemnification
hereunder shall not be deemed exclusive of any other rights to
indemnification against Liabilities or the advancement of Expenses
which the Executive may be entitled under any other written agreement,
Board resolution, vote of shareholders, the Delaware General
Corporation Law or otherwise.
For purposes of this Agreement:
(1) "Liabilities" shall include, without
limitation, judgments, amounts incurred in settlement, fines,
penalties and, with respect to any employee benefit plan, any
excise tax or penalty incurred in connection therewith, and
any and all liabilities of every type or nature whatsoever.
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<PAGE> 3
(2) "Expenses" shall include, without
limitation, any and all expenses, fees, costs, charges,
attorneys' fees and disbursements, other out-of-pocket costs,
reasonable compensation for time spent by the Executive in
connection with the Proceeding for which he is not otherwise
compensated by the Employer or any third party, and any and
all other direct or indirect costs of any type or nature
whatsoever.
(3) "Proceeding" shall include, without
limitation, any threatened, pending or completed action,
claim, litigation, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative,
whether predicated on foreign, federal, state or local law,
whether brought under and/or predicated upon the Securities
Act of 1933, as amended (the "Securities Act"), and/or the
Securities Exchange Act of 1934, as amended, and/or their
respective state counterparts and/or any rule or regulation
promulgated thereunder, whether a derivative action and
whether formal or informal.
The Employer shall supplement the foregoing rights to
indemnification by the purchase of insurance on behalf of its officers
and directors, including the Executive, in the amount of no less than
Ten Million Dollars ($10,000,000) against Liabilities and/or the
advancement of Expenses.
5. TERMINATION.
(a) Termination for Cause. The Employer may terminate
the Executive's employment for Cause (as defined below) immediately
upon notice to the Executive. Such notice shall specify in reasonable
detail the nature of the Cause. For purposes of this Agreement, "Cause"
shall mean a material unremedied breach of this Agreement or a
conviction of a felony committed against the Employer; provided,
however, the Executive shall be provided with at least thirty (30)
days' prior notice of, and an opportunity within the thirty (30) days
to cure, any grounds for terminating his employment for Cause
hereunder. The existence of Cause shall be determined in good faith by
the Board at a duly held meeting thereof. In the event of the
involuntary termination by the Employer of his employment for Cause,
the Executive shall be entitled to receive as compensation only his
salary and benefits as accrued through the effective date of such
termination.
(b) Termination Other Than for Cause. The Employer
may terminate the Executive's employment for any reason, upon at least
sixty (60) days' prior notice to the Executive, in which event the
Executive's employment shall terminate as of the effective date of
termination. In the event of the involuntary termination by the
Employer of his employment other than for Cause, the Executive shall be
entitled to receive as compensation: (1) his salary and benefits as
accrued through the effective date of such termination, (2) an amount
equal to the Executive's then current salary for a period of five (5)
years (in accordance with the Employer's normal payroll cycle and
policies), which amount shall be payable in a single sum on
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<PAGE> 4
his employment termination date, (3) continuation, at the Employer's
expense, of all employee benefits during the period described in
subparagraph (2) hereof, except to the extent that he becomes eligible
for any equivalent benefits provided by another employer, and (4) an
amount equal to five (5) times any incentive compensation paid to him
for the fiscal year immediately preceding the fiscal year in which his
employment termination date occurs, which amount shall be payable in a
single sum on his employment termination date. If continuation coverage
is not available for any reason beyond the control of the Employer for
any employee benefits for any portion of the period described in
subparagraph (2), then the Employer shall pay the cash equivalent of
such coverage to the Executive for the remaining portion of such
period. The amount of the cash equivalent shall be determined in good
faith by the Board.
(c) Voluntary Termination for Good Reason. The
Executive may voluntarily terminate his employment for Good Reason (as
defined below) at any time upon at least sixty (60) days' prior notice
to the Employer, in which event the Executive's employment shall
terminate as of the effective date of termination. For purposes of this
Agreement, "Good Reason" shall mean the Employer's material unremedied
breach of this Agreement or any adverse change, without the Executive's
written consent, in his authority, duties, responsibilities, position,
status, geographic location or working conditions from his authority,
duties, responsibilities, position, status, geographic location or
working conditions in effect immediately prior to the Effective Date;
provided, however, the Employer shall be provided with at least thirty
(30) days' prior notice of, and an opportunity within the thirty (30)
days to cure, any grounds for the Executive terminating his employment
for Good Reason hereunder. The existence of Good Reason shall be
determined in good faith by the Executive. In the event of his
voluntary termination of employment for Good Reason, the Executive
shall be entitled to all of the compensation and benefit payments
described in paragraph 5(b).
(d) Voluntary Termination Other Than for Good Reason.
The Executive may voluntarily terminate his employment other than for
Good Reason at any time upon at least sixty (60) days' prior notice to
the Employer, in which event the Executive's employment shall terminate
as of the effective date of termination. In the event of his voluntary
termination of employment other than for Good Reason, the Executive
shall be entitled to receive only his salary and benefits as accrued
through the effective date of such termination and COBRA continuation
coverage benefits.
(e) Death or Disability. The Executive's employment
pursuant to this Agreement shall terminate automatically on the date of
the Executive's death or disability. No compensation shall be payable
after the Executive's death or disability other than the Executive's
salary and benefits as accrued through the date of his death or
disability, whichever is applicable, and any employee benefits, such as
disability insurance proceeds, provided pursuant to paragraph 4(b) in
the event of the Executive's death or disability; provided, however,
that the Executive (or, in the event of his death, his estate) shall be
entitled to receive a pro rata portion of any incentive compensation
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<PAGE> 5
that would be payable to him (but for his death or disability) for the
fiscal year in which his death or disability occurs, which pro rata
portion shall be based upon the ratio that the part of such fiscal year
during which he was employed bears to the entire fiscal year.
For purposes of this Agreement, the term "disability"
means a physical or mental condition that prevents the Executive from
performing the essential functions of his position with or without
reasonable accommodations.
(f) Administrative Leave. In the event of the
Employer's involuntary termination of the Executive's employment for
Cause, or the Executive's voluntary termination of his employment other
than for Good Reason, the Employer may place the Executive on paid
administrative leave and/or bar or restrict his access to the
Employer's facilities, contemporaneously with or at any time after the
delivery of the termination notice.
(g) No Duty to Mitigate. Except as expressly provided
herein, the obligation of the Employer to pay any salary, benefits or
other amounts to the Executive pursuant to this paragraph 5 shall not
be dependent upon, or otherwise affected by, whether or not the
Executive seeks or obtains any other employment after the termination
of his employment for any reason or otherwise makes any effort to
mitigate the effects of such termination.
(h) Avoidance of Duplicate Severance Benefits. In the
event of the involuntary termination by the Employer of the Executive's
employment other than for Cause, or the Executive's termination of his
employment for Good Reason after a Change of Control (as defined in the
Change of Control Agreement dated as of June 1, 1999, between the
Employer and the Executive (the "Change of Control Agreement")), the
amount of any severance benefits payable under subparagraph 5(b) or
5(c) of this Agreement shall be reduced on a dollar-for-dollar basis to
the extent of any severance benefits paid by the Employer to the
Executive as a condition precedent to the Change of Control pursuant to
paragraph 1(a) of the Change of Control Agreement.
6. OPTION AND REGISTRATION RIGHTS.
(a) Option. In the event of a termination of
employment of the Executive due to his death, his Beneficiary (as
defined below) shall be entitled to put to the Employer any or all of
the Executive's shares of common stock of the Employer (the "Shares")
at any time and from time to time during the twelve (12) month period
immediately following his death. In such event, his Beneficiary shall
exercise the put by providing thirty (30) days' prior notice to the
Employer, which notice shall specify the number of Shares being put to
the Employer. The Employer shall be obligated to purchase the put
Shares within the thirty (30) days at their aggregate closing market
price as of the date of the put notice; provided that:
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<PAGE> 6
(1) the Employer shall not have any
obligation to purchase any put Shares to the extent that the
aggregate purchase price of all of the Shares put to the
Employer pursuant to this paragraph 6 would exceed Five
Million Dollars ($5,000,000); or
(2) the Employer shall not have any
obligation to purchase any put Shares to the extent that the
Employer is, or by reason of the purchase would become,
insolvent or such purchase would result in an event of default
under any loan or financing document to which the Employer is
a party or under which the Employer is obligated to any person
or entity.
(b) Demand Registration. In the event that the
Beneficiary exercises the put described in paragraph 6(a), but either
the Beneficiary cannot put all of the Shares, or the Employer cannot
purchase all of the put Shares, by reason of the limitation imposed by
subparagraph 6(a)(1) or (2), the Beneficiary may demand in writing that
the Employer file a registration statement (the "Demand Registration
Statement") under the Securities Act of 1933 with the Securities and
Exchange Commission (the "Commission") covering the proposed sale to
the public of the specified number of his Shares. Within forty-five
(45) days of its receipt of such a demand, the Employer, at its
expense, shall prepare and file with the Commission (and any
appropriate state securities authorities) a registration statement on
Form S-1, S-2 or S-3 (or the successors to such Forms) covering the
proposed offer and sale of all Shares to be registered pursuant to the
Demand Registration Statement.
(1) The Employer in its discretion may
effect the public offering of the Shares to be covered by the
Demand Registration Statement through either (i) a shelf
offering on a Form S-2 or S-3 (or any successor or similar
Form) registration statement (provided that the Employer is
then eligible to utilize such Form under the Securities Act),
with sales of the Shares registered thereunder to be effected
though normal brokers' transactions or in transactions on the
NASDAQ National Market or on any national securities exchange
or other market on which the shares of common stock of the
Employer are listed or traded or in a privately negotiated
transaction or (ii) a firmly underwritten offering utilizing
one or more underwriters chosen by the Employer after
consulting with the Beneficiary and considering such factors
as the underwriting discount proposed by, and the reputation
and market presence of, such underwriters.
(2) The Employer shall use its best efforts
to have the Demand Registration Statement declared effective
under the Securities Act by the Commission (and under
applicable state securities laws by all appropriate state
securities authorities) as soon as practicable after the
filing thereof and to maintain the effectiveness thereof for a
period of no longer than ninety (90) days (or until all of the
Shares covered thereby have been sold, if such sales are
completed before the end of such ninety (90) days period).
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<PAGE> 7
7. BENEFICIARY DESIGNATION. The Executive may designate a
beneficiary to receive any remaining compensation under paragraph 5 in the event
of the Executive's death after the commencement of payment of any compensation
(the "Beneficiary"),to exercise the put option under paragraph 6 in the event of
the Executive's death prior to the end of the twelve (12) month period
immediately following his employment termination date, and to exercise the
demand registration right under paragraph 6. Such designation shall be made by
filing a written designation with the Board in such form as the Board or its
Compensation Committee may provide and may be changed by the Executive from time
to time by similar action. If no such designation is made by the Executive or if
the Executive is not survived by his designated Beneficiary, any remaining
compensation under paragraph 5 at the time of the Executive's death shall be
paid to the Executive's estate and the put option and/or demand registration
right may be exercised under paragraph 6 by the personal representative of the
Executive's estate.
8. COVENANT NOT TO COMPETE.
(a) Scope. During the term of his employment with the
Employer and for a period of sixty (60) months thereafter (the
"Noncompetition Period"), except as authorized in writing by the Board,
the Executive shall not, directly or indirectly, render services to,
assist, participate in the affairs of, or otherwise be connected with,
any person or business enterprise, except the Employer (which person or
enterprise is engaged in, or is planning to engage in, any business
that is in any respect competitive with the business of the Employer),
in any capacity that
(1) would utilize the Executive's services
with respect to such business which sells products similar to
those of the Employer within any state or possession of the
United States, or any substantially comparable political
subdivision of any other country, wherein the Employer sold or
actively attempted to sell its products within a twelve (12)
month period immediately prior to the termination of the
Executive's employment with the Employer, irrespective of
where the Executive renders such services,
(2) would utilize the Executive's services
in selling any products similar to those of the Employer to
any person or entity to which the Employer sold or actively
attempted to sell its products during the twelve (12) month
period immediately prior to the termination of the Executive's
employment with the Employer, irrespective of where the
Executive renders such services, or
(3) would reasonably be expected to utilize
any trade secrets acquired by the Executive during the term of
his employment by the Employer.
Notwithstanding anything in this subparagraph 8(a) to the contrary, the
Executive shall not be prohibited from owning or operating any beauty
salons at any time and at any location.
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<PAGE> 8
(b) Compliance With Applicable Laws. This Agreement
shall not reduce any obligation of the Executive to comply with any
applicable laws relating to trade secrets.
(c) Reform. If a court of competent jurisdiction
should declare any or all of this Agreement unenforceable because of
any unreasonable restriction of duration and/or geographical area in
subparagraph 8(a), then such court shall have the express authority to
reform subparagraph 8(a) to provide for reasonable restrictions and/or
to grant the Employer such other relief, at law or in equity, as are
reasonably necessary to protect the interests of the Employer.
9. RESPONSIBILITIES UPON TERMINATION. Upon the termination of
his employment by the Employer for whatever reason and irrespective of whether
or not such termination is voluntary on his part, the Executive shall promptly
deliver to the Employer all data, designs, drawings, plans, manuals, notes,
memoranda, work sheets, specifications, customer lists, supplier lists, computer
programs, and all other materials which are or have become the property of the
Employer and all copies or reproductions of any such materials (whether or not
such copies or reproductions are the property of the Employer).
10. SEPARATE AGREEMENTS. The covenants of the Executive
contained in paragraphs 8 and 9 of this Agreement shall be construed as separate
agreements independent of any other agreement, claim or cause of action of the
Executive against the Employer, whether predicated on this Agreement or
otherwise, and no other agreement, claim or cause of action asserted by the
Executive shall constitute a defense to the enforcement by the Employer of these
covenants. The covenants contained in this Agreement are necessary to protect
the legitimate business interests of the Employer. Damages for the violation of
any such covenants will not give full and sufficient relief to the Employer. In
the event of any violation of any such covenants, the Employer shall be entitled
to (a) injunctive relief against the continued violation thereof and (b) its
actual damages; provided, however, the Employer may not set off against any such
damages, or otherwise withhold payment of, any amounts that the Employer is
obligated to pay to the Executive under this Agreement or any other agreement
between the Employer and the Executive.
11. NO SOLICITATION OF EMPLOYEES. The Executive shall not,
during his employment with the Employer (except in the normal course of the
Employer's business) and for a period of twenty-four (24) months after the
termination of his employment hereunder by the Employer for Cause or by the
Executive other than for Good Reason, directly or indirectly induce any
executive of the Employer or any affiliate of the Employer to resign or sever
his or her employment relationship with the Employer or any affiliate of the
Employer.
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<PAGE> 9
12. GENERAL.
(a) Survival. The rights and obligations of the
parties hereto shall survive the term of the Executive's employment
under this Agreement to the extent that any performance is required
under this Agreement after the expiration or termination of such term.
(b) Notices. All notices, demands and other
communications provided for by this Agreement shall be in writing and
shall be deemed to have been given at the time the same is delivered in
person or is mailed by registered or certified mail addressed as
follows:
To the Employer: Styling Technology Corporation
7400 East Tierra Buena Lane
Scottsdale, Arizona 85260
Attention: Secretary
To the Executive: 6105 North Palo Cristi Drive
Paradise Valley, Arizona 85253
Either party wishing to change the address to which notices, requests,
demands and other communications under this Agreement are to be sent
shall give written notice of such change to the other party.
(c) Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the Employer, its
successors and assigns, and the Executive, his heirs, executors,
administrators and legal representatives. The Employer shall require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Employer to assume its obligations under this
Agreement in the same manner and to the same extent that the Employer
would be required to perform it if no such succession had taken place.
The Executive shall not have the right to transfer, assign, or delegate
this Agreement or any of his rights or obligations hereunder without
the prior written consent of the Employer.
(d) Governing Law. This Agreement shall be governed
by the laws of the State of Arizona.
(e) Waiver. The waiver or failure of either party to
insist in any one or more instances upon performance of any term,
covenant or condition of this Agreement shall not be construed as a
waiver of future performance of any such term, covenant or condition,
but the obligations of either party with respect to such term, covenant
or condition shall continue in full force and effect. No course of
dealing shall be implied or arise from any waiver or series of waivers
of any right or remedy hereunder.
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<PAGE> 10
(f) Severability. Each provision of this Agreement
shall be interpreted where possible in a manner necessary to sustain
its legality and enforceability. If any provision of this Agreement
shall be unenforceable or invalid under applicable law, such provision
shall be limited to the minimum extent necessary to render the same
enforceable or valid. The unenforceability of any provision of this
Agreement in a specific situation, or the unenforceability of any
portion of any provision of this Agreement in a specific situation,
shall not affect the enforceability of (1) that provision or portion of
provision in another situation or (2) the other provisions or portions
of provisions of this Agreement if such other provisions or the
remaining portions could then continue to conform with the purposes of
this Agreement and the terms and requirements of applicable law.
(g) Amendments. This Agreement shall not be amended
orally, but only by a written instrument executed by each party to this
Agreement.
(h) Headings. The headings used in this Agreement are
for convenience only, shall not be deemed to constitute a part hereof,
and shall not be deemed to limit, characterize or in any way affect the
construction or enforcement of the provisions of this Agreement.
(i) Disputes. In any dispute between the Executive
and the Employer concerning whether either party has breached any of
his or its obligations under this Agreement, the prevailing party shall
be entitled to payment from the other party for any and all expenses,
including attorneys' fees and expenses, incurred by the prevailing
party in connection with such dispute
(j) Entire Agreement. This Agreement embodies the
entire agreement and understanding between the parties with respect to
the subject matter hereof and supersedes all prior agreements and
understandings between the Employer and the Executive with respect to
the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
STYLING TECHNOLOGY EXECUTIVE
CORPORATION
By: /s/ Richard R. Ross /s/ Sam L. Leopold
- ------------------------------ - ---------------------
Its: Executive Vice President Sam L. Leopold
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<PAGE> 11
SCHEDULE A
BENEFITS
The capitalized terms herein shall have the same meanings as
the capitalized terms in the Employment Agreement dated as of June 1, 1999,
between Styling Technology Corporation and Sam L. Leopold (the "Employment
Agreement").
1. CHANGE OF CONTROL. The Executive shall be entitled to his
rights and benefits under the Change of Control Agreement.
2. NONQUALIFIED DEFERRED COMPENSATION. The Executive shall be
entitled to his rights and benefits under the Nonqualified Deferred Compensation
Agreement dated as of the date hereof between the Employer and the Executive.
3. LIFE INSURANCE. The Employer shall purchase and pay the
premiums on a whole life insurance policy on the life of the Executive, subject
to a "split dollar" arrangement. The minimum death benefit under such whole life
policy shall be One Million Five Hundred Thousand Dollars ($1,500,000), and the
premiums shall be paid by the Employer so that such policy will be paid up
within twelve (12) years. In addition, the Employer shall purchase and pay the
premiums on a term insurance policy of the life of the Executive. The minimum
death benefit under such term policy shall be Three Million Dollars
($3,000,000), and the Executive may designate the beneficiaries. Such policies
shall be in addition to and exclusive of any insurance policy that the Employer
may obtain on the life of the Executive for which the Employer is or will be the
beneficiary and any insurance policy maintained by the Employer pursuant to
paragraph 4(b) of the Agreement.
4. COUNTRY CLUB. The Employer shall reimburse the Executive
for the annual dues and fees incurred with respect to any country club, provided
that the amount of such reimbursement shall not exceed Fifteen Thousand Dollars
($15,000) per calendar year.
5. AUTOMOBILE ALLOWANCE. The Executive shall be entitled to
payment of a monthly automobile allowance in the amount of Two Thousand Dollars
($2,000).
6. FAMILY TRAVEL. The Employer shall reimburse the Executive
for the expenses incurred by the Executive for first class air transportation
and first class hotel accommodations for the Executive's spouse and two children
for their travel in conjunction with his travel relating to the performance of
his duties pursuant to the Employment Agreement (not to exceed two trips in any
calendar year between Phoenix, Arizona, and any business destination of the
Executive).
7. TAX AND ESTATE PLANNING SERVICES. The Employer shall pay
any expenses incurred by the Executive in connection with individual income tax
return preparation and related tax and estate planning and accounting services
for him, provided that the amount of such payment shall not exceed Twenty-Five
Thousand Dollars ($25,000) per calendar year.
<PAGE> 12
8. VACATION. The Executive shall be entitled to eight (8)
weeks' paid vacation for each twelve (12) consecutive months of employment with
the Employer. Such vacation shall not be cumulative and shall be taken by the
Executive in his discretion, provided that any such vacation shall not interfere
with the performance of his duties pursuant to the Employment Agreement.
<PAGE> 1
EXHIBIT 10.5(a)
CHANGE OF CONTROL AGREEMENT
AGREEMENT dated as of the 1st day of June, 1999, between
STYLING TECHNOLOGY CORPORATION, a Delaware corporation (the "Employer"), and SAM
L. LEOPOLD, an individual who resides at the address appearing below (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive is employed by the Employer pursuant to
the Employment Agreement dated as of the date hereof between the Employer and
the Executive (the "Employment Agreement");
WHEREAS, it is desirable to provide severance and other
benefits to the Executive in the event that his employment with the Employer is
terminated for any reason following a change of control of the Employer; and
WHEREAS, the Employer and the Executive wish to enter into an
agreement governing the terms and conditions on which he will be entitled to
severance and other benefits following a change of control of the Employer.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter set forth, the parties hereby agree as follows:
1. SEVERANCE BENEFITS.
(a) Payment Upon a Change of Control. As a condition
precedent to a Change of Control (as defined below), unless expressly
waived in writing by the Executive, he shall be entitled to receive,
and the Employer shall provide to him, the following benefits:
(1) an amount equal to five (5) times his
then current annual salary, which amount shall be payable in a
single sum immediately prior to the Change of Control;
(2) an amount equal to five (5) times any
incentive compensation paid to him for the fiscal year of the
Employer immediately preceding the fiscal year in which the
Change of Control occurs, which amount shall be payable in a
single sum payment immediately prior to the Change of Control;
(3) continuation coverage, at the Employer's
expense, under any Employer-sponsored group or individual
benefit plans, policies, programs or arrangements covering the
Executive immediately prior to the Change of Control
(including, without limitation, any benefit plans, policies,
programs or arrangements covering the Executive under his
Employment Agreement dated as of the date hereof or any
successor agreement thereto, if then in effect), for the
<PAGE> 2
five (5) year period immediately following the Change of
Control, unless he becomes eligible for equivalent coverage
under a plan, policy, program or arrangement provided by
another employer; provided, however, that if continuation
coverage is not available for any reason beyond the control of
the Employer for any employee benefit plans for any portion of
such five (5) year period, then the Employer shall pay the
cash equivalent of such coverage to the Executive for the
remaining portion of such period (which cash equivalent shall
be the subject of a good faith determination by the Board of
Directors of the Employer (the "Board"));
(4) outplacement services selected by the
Executive with a value of up to twelve (12) months' salary or,
at the Executive's election, the cash equivalent of such
services; and
(5) such additional benefits as the
Employer, in its discretion, may provide.
(b) Payment After a Change of Control. If the
Executive expressly waives in writing the payment of benefits pursuant
to subparagraph 1(a) as a precondition to a Change of Control, then
upon the termination of the employment of the Executive for any reason
(except upon the involuntary termination by the Employer of the
Executive's employment for Cause (as defined below)) within the
thirty-six (36) month period immediately after the Change of Control
(the "Stay Period"), the Executive shall be entitled to receive, and
the Employer shall provide to the Executive, such benefits; provided
that his employment termination date shall replace the Change of
Control with respect to the determination and timing of the payment or
provision of such benefits. In the event of the involuntary termination
by the Employer of the Executive's employment other than for Cause, or
the Executive's termination of his employment for Good Reason (as
defined in the Employment Agreement), after a Change of Control, the
amount of any severance benefits payable under this subparagraph 1(b)
shall be reduced on a dollar-for-dollar basis to the extent of any
actual post-employment payments by the Employer to the Executive
pursuant to the relevant provisions of the Employment Agreement.
(c) Excess Parachute Payment. If any portion of the
benefits payable to the Executive pursuant to subparagraph 1(a), 1(b)
or 2(b) or any other payments in the nature of compensation (as defined
in Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code")) to him or for his benefit under this Agreement or otherwise,
the receipt of which is contingent on a Change of Control
(collectively, the "Total Payments"), constitutes an Excess Parachute
Payment (as defined below), then the Total Payments to be made to the
Executive shall be increased, such that the value of the Total Payments
that the Executive is entitled to receive shall include such benefits
and other payments as well as the following:
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<PAGE> 3
(1) an amount equal to the aggregate excise
tax liability, if any, attributable to such Total Payments,
including, without limitation, any increase in the Total
Payments pursuant to this subparagraph 1(c) and
(2) in the event of any payment of
additional compensation to the Executive or his Beneficiary
pursuant to paragraph 2(b), an amount determined as follows:
(i) the combined marginal federal and state ordinary income
tax rate of the Executive for the tax year in which he or his
Beneficiary receives such payment multiplied by the amount of
such payment less (ii) the federal and state capital gains
taxes that the Executive otherwise would have paid for the
same year, if such payment were characterized as long-term
capital gains, rather than as ordinary income.
(d) Definitions. For purposes of this Agreement:
(1) "Cause" shall mean the Executive's
material unremedied breach of the Employment Agreement or a
conviction of a felony committed against the Employer;
provided, however, the Executive shall be provided with at
least thirty (30) days' prior notice of, and an opportunity
within the thirty (30) days to cure, any grounds for
terminating his employment for Cause. The existence of Cause
shall be determined in good faith by the Board at a duly held
meeting thereof.
(2) A "Change of Control" of the Employer
shall be deemed to have occurred for purposes of this
Agreement, if the event set forth in any one of the following
paragraphs shall have occurred:
(A) any Person (as defined in
Section 3(a)(9) of the Securities Exchange Act of
1934 (the "Exchange Act"), as modified and used in
Sections 13(d) and 14(d) thereof) or Persons become
the Beneficial Owner (as defined in Rule 13d-3 under
the Exchange Act) or Beneficial Owners, directly or
indirectly, of securities of the Employer
representing thirty percent (30%) or more of either
the then outstanding shares of common stock of the
Employer or the combined voting power of the
Employer's then outstanding voting securities; except
that, for purposes of the Agreement, Person shall not
include (i) the Employer or any subsidiary thereof,
(ii) a trustee or other fiduciary holding securities
under an employee benefit plan of the Employer or any
current subsidiary thereof, (iii) an underwriter
temporarily holding securities pursuant to an
offering of such securities, (iv) an entity owned,
directly or indirectly, by any current subsidiary of
the Employer or (v) the Executive or any entity of
which he is the Beneficial Owner, directly or
indirectly, of more than five percent (5%) of its
outstanding equity interests;
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<PAGE> 4
(B) a merger or consolidation of the
Employer with any other corporation or the issuance
of voting securities of the Employer in connection
with a merger or consolidation of the Employer or any
direct or indirect parent or subsidiary of the
Employer other than a merger or consolidation in
which no Person or Persons become the Beneficial
Owner or Beneficial Owners, directly or indirectly,
of securities of the Employer representing fifty
percent (50%) or more of either the then outstanding
shares of common stock of the Employer or the
combined voting power of the Employer's then
outstanding voting securities;
(C) the complete liquidation or
dissolution of the Employer or the sale or
disposition by the Employer of all or substantially
all of the Employer's assets (in one transaction or a
series of related transactions within any period of
twenty-four (24) consecutive months), other than a
sale or disposition by the Employer of all or
substantially all of the Employer's assets to (i) any
current subsidiary of the Employer or (ii) an entity
owned, directly or indirectly, by any current
subsidiary of the Employer;
(D) during any period of twenty-four
(24) consecutive months, individuals who, at the
beginning of such period, constituted the Board
cease, for any reason, to constitute at least a
majority thereof, unless the election or nomination
for election of each new director was approved by the
vote of at least two-thirds (2/3) of the directors
then still in office who were directors at the
beginning of such period; or
(E) a change in control of the
Employer of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act, or
any successor regulation of similar import,
regardless of whether the Employer is subject to such
reporting requirement.
(3) "Excess Parachute Payment" shall have
the same meaning as such term has under Code Section 280G and
any temporary, proposed or final regulations thereunder, and
any Total Payments shall be valued as provided therein.
2. REGISTRATION RIGHTS.
(a) Demand Registration. In the event of a Change of
Control in which the Executive is not able to sell all of his shares of
common stock of the Employer (the "Shares") for the highest
consideration and on the same terms on which any shares of common stock
of the Employer were acquired from any other shareholder of the
Employer in connection with the Change of Control, the Executive (or,
in the event of his death, his Beneficiary (as defined below)) may
demand that the Employer file a registration statement (the "Demand
Registration Statement") under the Securities
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<PAGE> 5
Act of 1933 with the Securities and Exchange Commission (the
"Commission") covering the proposed sale to the public of the specified
number of his Shares. Unless the Executive or the Beneficiary, as
applicable, delivers the demand within sixty (60) days after the Change
of Control, all rights of the Executive and the Beneficiary to make
such a demand shall terminate. Within forty-five (45) days of its
receipt of such a demand, the Employer, at its expense, shall prepare
and file with the Commission (and any appropriate state securities
authorities) a registration statement on Form S-1, S-2 or S-3 (or the
successors to such Forms) covering the proposed offer and sale of all
Shares to be registered pursuant to the Demand Registration Statement.
(1) The Employer, in its discretion, may
effect the public offering of the Shares to be covered by the
Demand Registration Statement through either (i) a shelf
offering on a Form S-2 or S-3 (or any successor or similar
Form) registration statement (provided that the Employer is
then eligible to utilize such Form under the Securities Act),
with sales of the Shares registered thereunder to be effected
though normal brokers' transactions or in transactions on the
NASDAQ National Market or on any national securities exchange
or other market on which the shares of common stock of the
Employer are listed or traded or in a privately negotiated
transaction or (ii) a firmly underwritten offering utilizing
one or more underwriters chosen by the Executive or the
Beneficiary, as applicable, after consulting with the Employer
and considering such factors as the underwriting discount
proposed by, and the reputation and market presence of, such
underwriters.
(2) The Employer shall use its best efforts
to have the Demand Registration Statement declared effective
under the Securities Act by the Commission (and under
applicable state securities laws by all appropriate state
securities authorities) as soon as practicable after the
filing thereof and to maintain the effectiveness thereof for a
period of no longer than ninety (90) days (or until all of the
Shares covered thereby have been sold, if such sales are
completed before the end of such ninety (90) days period).
(b) Additional Compensation. If, for any reason, the
Executive (or, in the event of his death, his Beneficiary) exercises
the demand registration rights pursuant to paragraph 2(a) with respect
to the sale of any number of the Shares, but the net proceeds received
by the Executive or the Beneficiary in connection therewith are less
per Share than the highest per share consideration received by any
other shareholder for his or her shares of common stock of the Employer
in connection with the Change of Control, then the Employer shall pay
the Executive additional compensation in an amount equal to the
difference between:
(1) the maximum per share consideration
received by any shareholder for his or her shares of common
stock in connection with the Change of Control and
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<PAGE> 6
(2) the average per Share price received by
the Executive in connection with any offer or sale of his
Shares within six (6) months after the Change of Control,
which difference shall then be multiplied by the number of Shares
offered or sold by the Executive within six (6) months after the Change
of Control.
(c) Stock Options. In the event of a Change of
Control, the Executive (or, in the event of his death, his Beneficiary)
shall have the right at any time thereafter to exercise any outstanding
Employer stock option in full, whether or not the option was
theretofore exercisable. Any Shares acquired by the Executive or his
Beneficiary, as applicable, upon the exercise of any outstanding stock
option shall be subject to the provisions of this paragraph 2.
3. BENEFICIARY DESIGNATION. The Executive may designate a
beneficiary to receive any remaining severance benefits under paragraph 1 in the
event of the Executive's death after the commencement of payment of any
severance benefits (the "Beneficiary") and to exercise any outstanding Employer
stock options or demand registration rights and/or receive any remaining
compensation payments under paragraph 2 in the event of the Executive's death.
Such designation shall be made by filing a written designation with the Board in
such form as the Board or its Compensation Committee may provide and may be
changed by the Executive from time to time by similar action. If no such
designation is made by the Executive or if the Executive is not survived by his
designated Beneficiary, any remaining benefits or payments under paragraphs 1
and 2 at the time of the Executive's death shall be paid to the Executive's
estate and any options and/or demand registration rights may be exercised under
paragraph 2 by the personal representative of the Executive's estate.
4. SUCCESSORS. The Employer shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Employer to assume
its obligations under this Agreement in the same manner and to the same extent
that the Employer would be required to perform it if no such succession had
taken place. The failure of the Employer to obtain such assumption prior to the
effectiveness of any such succession shall entitle the Executive to (i) the
severance benefits set forth in paragraph 1 on the same terms to which he would
be entitled thereunder if his employment were terminated for any reason other
than Cause following a Change of Control; provided, however, for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be considered as though such date were his employment
termination date; and (ii) the additional compensation payment set forth in
paragraph 2 on the same terms to which he would be entitled thereunder if he
exercised his demand registration rights with respect to all of his Shares and
did not receive any proceeds from the sale of the Shares.
5. ALTERNATIVE DISPUTE RESOLUTION. All claims, disputes and
other matters in question between the parties arising under this Agreement shall
be resolved in accordance with the mediation, arbitration or alternative dispute
resolution provisions of the Employment
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<PAGE> 7
Agreement or any successor employment agreement then in effect between the
Employer and the Executive. If no written employment agreement is in effect at
the time such a claim, dispute or matter in question arises, or if the
employment agreement then in effect does not include any mediation, arbitration
or dispute resolution provisions, then the claim, dispute or other matter in
question shall be decided by arbitration in Phoenix, Arizona, in accordance with
the National Rules for the Resolution of Employment Disputes of the American
Arbitration Association (including such procedures governing the selection of
the specific arbitrator or arbitrators), unless the parties mutually agree
otherwise. The Employer shall pay the costs of any such arbitration. The award
by the arbitrator or arbitrators shall be final, and judgment may be entered
upon it in accordance with applicable law in any state or Federal court having
jurisdiction thereof.
6. EXPENSES AND INTEREST. If a dispute arises with respect to
the enforcement of the rights of the Executive under this Agreement or if any
arbitration or legal proceeding is brought by the Executive to enforce or
interpret any provision of this Agreement, or to recover damages for breach
hereof, and the Executive is the prevailing party, he shall be entitled to
recover from the Employer any reasonable attorneys' fees and necessary costs and
disbursements incurred as a result of such dispute or legal proceeding, and
prejudgment interest on any money judgment obtained by him calculated at the
prime rate, as published in the Wall Street Journal, from the date that payments
to him should have been made under this Agreement. The Employer shall not be
entitled to recover from the Executive any attorneys' fees, costs, disbursements
or interest as a result of any dispute or legal proceeding involving the
Employer and the Executive.
7. EFFECT ON EMPLOYMENT AGREEMENT. This Agreement supplements,
and does not replace, the Employment Agreement. However, if there is any
conflict between the provisions of this Agreement and the Employment Agreement,
the provisions of this Agreement shall control.
8. NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of
this Agreement shall not be deemed to constitute a contract of employment
between the Employer and the Executive. Neither the Executive nor his
Beneficiary shall have any rights against the Employer, except as may otherwise
be specifically provided herein. Moreover, nothing in this Agreement shall be
deemed to give the Executive the right to be retained in the employment of the
Employer or to interfere with the right of the Employer to discipline or
discharge him at any time whether with or without Cause nor to restrict the
Executive's rights to terminate his employment with the Employer for any reason.
9. NONALIENATION OF BENEFITS. The Executive shall not
transfer, assign, alienate, anticipate, pledge or encumber any part of such
benefits, nor shall such benefits or any assets of the Employer be subject to
seizure by legal process by any creditor of the Executive. Any attempt to effect
such a diversion or seizure as aforedescribed shall be deemed null and void for
all purposes hereunder.
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<PAGE> 8
\ 10. UNSECURED RIGHTS. The Executive or his Beneficiary shall
not have any right or interest in the benefits under paragraph 1, except for the
right to receive a distribution as provided herein. The position of the
Executive and his Beneficiary with respect to such distribution is that of a
general unsecured creditor of the Employer.
11. GENERAL.
(a) Survival. The rights and obligations of the
parties hereto shall survive the term of the Executive's employment
under the Employment Agreement to the extent that any performance is
required under this Agreement after the expiration or termination of
such term.
(b) Notices. All notices, demands and other
communications provided for by this Agreement shall be in writing and
shall be deemed to have been given at the time the same is delivered in
person or is mailed by registered or certified mail addressed as
follows:
To the Employer: 7400 East Tierra Buena Lane
Scottsdale, Arizona 85260
Attention: Secretary
To the Executive: 6105 North Palo Cristi Drive
Paradise Valley, Arizona 85253
Either party wishing to change the address to which notices, requests,
demands and other communications under this Agreement are to be sent
shall give notice of such change to the other party.
(c) Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the Employer, its
successors and assigns, and the Executive, his heirs, executors,
administrators and legal representatives. The Executive shall not have
the right to transfer, assign, or delegate this Agreement or any of his
rights or obligations hereunder without the prior written consent of
the Employer.
(d) Governing Law. This Agreement shall be governed
by the laws of the State of Arizona.
(e) Waiver. The waiver or failure of either party to
insist in any one or more instances upon performance of any term,
covenant or condition of this Agreement shall not be construed as a
waiver of future performance of any such term, covenant or condition,
but the obligations of either party with respect to such term, covenant
or condition shall continue in full force and effect. No course of
dealing shall be implied or arise from any waiver or series of waivers
of any right or remedy hereunder.
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<PAGE> 9
(f) Severability. Each provision of this Agreement
shall be interpreted where possible in a manner necessary to sustain
its legality and enforceability. If any provision of this Agreement
shall be unenforceable or invalid under applicable law, such provision
shall be limited to the minimum extent necessary to render the same
enforceable or valid. The unenforceability of any provision of this
Agreement in a specific situation, or the unenforceability of any
portion of any provision of this Agreement in a specific situation,
shall not affect the enforceability of (1) that provision or portion of
provision in another situation or (2) the other provisions or portions
of provisions of this Agreement if such other provisions or the
remaining portions could then continue to conform with the purposes of
this Agreement and the terms and requirements of applicable law.
(g) Amendments. This Agreement shall not be amended
orally, but only by a written instrument executed by each party to this
Agreement.
(h) Headings. The headings used in this Agreement are
for convenience only, shall not be deemed to constitute a part hereof,
and shall not be deemed to limit, characterize or in any way affect the
construction or enforcement of the provisions of this Agreement.
(i) Entire Agreement. This Agreement embodies the
entire agreement and understanding between the parties with respect to
the subject matter hereof and supersedes all prior agreements and
understandings between the Employer and the Executive with respect to
the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
STYLING TECHNOLOGY CORPORATION
By: /s/ Michael L. Kaplan
--------------------------------
Its: Executive Vice President
--------------------------------
EXECUTIVE
/s/ Sam L. Leopold
-------------------------------
Sam L. Leopold
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