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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-21703
STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 75-2665378
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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7400 E. TIERRA BUENA LANE
SCOTTSDALE, ARIZONA 85260
(480) 609-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 29, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the average sales
price of such stock as of such date on the Nasdaq National Market, was
$41,640,001. Shares of Common Stock held by each officer and director have been
excluded in that such persons may be deemed to be affiliates. The determination
of affiliate status is not necessarily conclusive.
As of March 29, 1999, there were 4,067,503 shares of registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the
registrant's 1999 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
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STYLING TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 21
ITEM 3. LEGAL PROCEEDINGS........................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 22
ITEM 6. SELECTED FINANCIAL DATA..................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 41
ITEM 11. EXECUTIVE COMPENSATION...................................... 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 41
SIGNATURES.............................................................. 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding the
Company's "expectations," "estimates," "anticipation," "intentions," "beliefs,"
"plans," or "strategies" regarding the future. Forward-looking statements also
include statements regarding operating results, capital resources, and liquidity
or statements with respect to the markets in which the Company competes or the
beauty care industry in general. All forward-looking statements included in this
Report are based on information available to the Company as of the filing date
of this Report, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from the forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors discussed in Item 1,
"Business -- Special Considerations."
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"ABBA," "Alpha 9," "Biogenol," "Body Drench," "Clean + Easy," "Cosmic,"
"European Touch," "Framesi," "Gena," "Kizmit," "Maiko," "One Touch," "Pro
Finish," "Revivanail," "Roffler," "SRC," and "Suntopia" are the Company's
principal registered trademarks. This Report also includes other trademarks of
the Company.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company is a leading developer, producer, and marketer of a wide array
of professional salon products, including hair care, nail care, and skin and
body care products, as well as salon appliances and sundries. The Company has
well-recognized brand names, a strong distribution network, established
marketing and salon industry education programs, and significant production and
sourcing capabilities.
The Company believes it is the only company that develops, produces, and
markets products in each category of the professional salon products industry
and that its ability to offer customers a "one-stop shop" for brand-name
professional salon products creates a competitive advantage. The Company
currently sells more than 550 products under 17 principal brand names, including
ABBA Pure and Natural Hair Care products, AquaTonic hair care products, Biogenol
hair care products, Body Drench skin and body care products, Clean + Easy hair
removal products, European Touch II pedicure spa equipment, Framesi hair care
products, Gena nail and pedicure products, Kizmit acrylic nail enhancements,
Revivanail nail treatments, and Roffler hair care products. In the United
States, the Company markets its product lines through professional salon
industry distribution channels to more than 2,300 customers, consisting
primarily of salon product and tanning supply distributors (which resell to
beauty and tanning salons), beauty supply outlets, and salon chains. The Company
also markets its products directly to more than 3,000 spas, resorts, and health
and country clubs through its in-house sales force. Internationally, the Company
sells its products primarily through international salon product distributors.
The Company was founded in June 1995 and commenced operations on November
26, 1996. On that date, the Company simultaneously completed its initial public
offering and acquired four professional salon products businesses (the "Initial
Businesses"). Since that time, the Company has completed seven additional
acquisitions.
The following table sets forth information regarding each of the Company's
acquisitions:
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ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION)
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Gena Laboratories, Inc. ("Gena") November 1996 Gena (professional natural nail
care, pedicure, skin care, and hair
care products)
Body Drench Division ("Body Drench") November 1996 Body Drench (high-end professional
of Designs by Norvell, Inc. tanning and moisturizing products
("DBN") 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
("JDS") enhancement products)
Kotchammer Investments, Inc. (dba November 1996 SRC (high-end salon appliances and
Styling Research Company)("KII") salonwear)
Suntopia Division of Creative March 1997 Suntopia (high-end tanning products)
Laboratories, Inc. ("Suntopia")
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)
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ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION)
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European Touch Co., Incorporated, June 1998 European Touch (professional nail
and two related nail 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")
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The Company's principal executive offices are located at 7400 East Tierra
Buena, Scottsdale, Arizona, 85260. Effective April 1, 1999, the Company's
telephone number will be (480) 609-6000. As used herein, the terms the "Company"
and "Styling" mean Styling Technology Corporation and its subsidiaries.
INDUSTRY OVERVIEW
Professional salon products consist of hair care, nail care, and skin and
body care products as well as salon appliances and sundries that are used by
salon professionals in rendering salon services to their clients. Many
professional salon products also are retailed to clients and other customers of
salons, resorts, spas, health and country clubs, and beauty supply outlets,
typically upon the advice of a salon professional who recommends products to
address 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.
Professional nail care products include fiberglass and acrylic nail enhancement
solutions applied by the salon professional when performing the nail service and
the accessories used by the professional to apply the solutions; natural nail
care and pedicure solutions and accessories; and polishes. 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 salon appliances and sundries include hair dryers, curling irons,
brushes, pedicure spas, furniture, and salonwear (such as capes).
The professional salon products industry has grown significantly during the
last several years. According to industry sources, professional salon industry
revenue (which includes revenue from salon services and the sale of salon
products) for 1998 was approximately $40 billion in the United States and $80
billion worldwide. Industry sources estimate that there are approximately 127
million client visits to salons each month and that there are more than 200,000
beauty salons and 1.8 million licensed cosmetologists in the United States.
Professional salon products companies sell their products primarily to regional,
full-service salon product distributors that resell products from multiple
manufacturers to salons and salon professionals. The professional salon products
industry is highly fragmented. Of the approximately 700 companies selling
professional salon products in the United States, most generate less than $10
million in sales and focus on a single product category. For example, most
companies offering professional salon hair care products do not also offer nail
or skin care products.
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. The Company believes 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 the rendering of a service,
professional salon products typically foster strong brand loyalty and exhibit
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relative price insensitivity. Consequently, professional salon products
generally command substantially higher profit margins than mass-marketed beauty
products.
STRATEGY
The Company's objective is to be the leading professional salon products
company in the United States and internationally. In order to achieve this
objective, the Company is pursuing a strategy of continued growth through
internal business expansion and acquisitions. Key elements of this strategy
include the following:
Internal Growth Strategy
The Company intends to increase revenue and improve margins within its
existing product lines and to develop new product lines. Elements of its
internal growth strategy include the following:
- Leverage Well-Established Distribution Channels. The Company intends to
leverage its distribution channels by providing distributors 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, the Company has developed
and integrated an increasingly extensive distribution network. The
Company believes that offering a growing array of well-known brands in
all salon product categories will further enhance its position as a key
supplier to many of its customers.
- Capitalize on Brand Name Recognition; Line Extensions. The Company
believes the strong brand name recognition of its product lines lends
itself to line extension. 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. The Company
believes 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. Strong brand names also provide the
Company the opportunity to cross-market established and developing brands
and products.
- Expand Distribution to Salon Chains. The Company is aggressively
targeting sales directly to salon chains, which the Company believes are
underserved by distributors and other salon product companies. The
Company believes that its increasingly diverse product offerings will
enable it to offer salon chains the benefits of one-stop shopping,
centralized single-source ordering, tailored promotional programs, and
dedicated customer service. The Company has formed a sales and marketing
team focused exclusively on further penetrating this underserved segment
of the salon product market.
- Expand Distribution of Existing Products Internationally. The Company
believes significant opportunities exist to increase sales and profits
through the expansion of the international distribution of its products.
Currently, the non-U.S. market for professional salon products represents
approximately 50% of the worldwide market. The Company, however,
generated only approximately 12% of its pro forma 1998 net sales outside
of the United States. The Company is expanding its international
distribution, which currently includes 37 countries. The Company will
continue to focus on introducing its products into its recently expanded
international distribution channels, which provide access to most
international beauty markets.
- Enhance Operational Efficiencies of Acquired Businesses. The Company
focuses on integrating acquired businesses. Following each acquisition,
the Company enhances 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 the Company's operations.
The Company plans to further enhance operational efficiency through its
new corporate headquarters and centralized operations center in
Scottsdale, Arizona. The Company believes that the continued realization
of operational efficiencies through its centralization and business
process reengineering efforts will enhance internal growth and
profitability.
- Capitalize on Lifestyle Trends. The Company intends to continue to
capitalize on current lifestyle trends that are favorable to the
professional salon industry. Growing consumer focus on healthy living and
personal indulgences will continue to fuel expansion in the salon/spa
industry, as the demand for
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services such as body treatments and massages increases. Additionally, the aging
of the "baby boomers," those born between 1945 and 1964, is expected to benefit
the salon industry.
During 1999, the Company will be implementing new centralized management
and information systems, which the Company believes will enhance the
productivity of its existing operations and future acquisitions. The systems
will permit the Company to improve economies of scale through centralized
systems for accounting, purchasing, inventory management, financial reporting,
and customer service. The Company believes that its investment in its management
and information systems will create a platform for long-term growth. The new
systems will assist the Company to access real-time information regarding
customers, distributors, purchase orders, inventory availability, sales order
history, and other information. The systems will facilitate the Company's
integration of future acquired businesses and improve operations by allowing the
Company to
- provide greater 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 the Company's centralized management
and information systems more efficiently by providing a more flexible
platform for data conversion.
Acquisition Strategy
The Company seeks 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 fragmentation
and growth potential existing in the professional salon products industry. The
Company believes 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 and the desire of owners for exit strategies.
The Company maintains a disciplined approach to acquisitions and evaluates each
potential acquisition based on the following acquisition goals:
- Continue to Acquire Leading Brands. The Company plans to continue its
strategy of acquiring leading brand names that complement its portfolio
of brands and command strong customer loyalty. By following this
strategy, the Company plans to solidify its position as a leading
supplier of professional salon products and further enhance its
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 Product Offerings. The Company intends to
acquire companies and product lines that diversify and strengthen its
portfolio of salon products. In this regard, the Company seeks to acquire
complementary products that will enable it to offer multiple brands in
each salon product category and a broader range of products addressing
the various niches within these categories. The Company believes that
this approach will enable it 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. The Company intends to acquire
companies and product lines that strengthen its relationships with
domestic and international distributors. By acquiring companies with
strong distribution networks, the Company will be in a position to
increase sales by introducing its existing products into new distribution
channels and newly acquired or developed products into existing
distribution channels.
- Continue to Pursue Acquisitions at Attractive Cash Flow Multiples. The
Company plans to continue to pursue acquisition candidates at attractive
cash flow multiples. To achieve this goal, the Company evaluates each
acquisition candidate's historical operating results and future earnings
potential, the size
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and anticipated growth of the market it serves, and its relative position
in that market. The Company typically seeks to acquire companies and
product lines at acquisition multiples of three to six times EBITDA.
PRODUCTS
The Company offers products in all salon product categories. The Company
sells more than 550 professional salon hair care, natural nail care and nail
enhancement products, skin and body care products, and salon accessories and
sundries, representing approximately 1,500 stock keeping units ("SKUs"). The
Company believes that the strength of its brand names is based on the reputation
of its products for quality among salon professionals, the performance of its
products, and its focused commitment to the needs of salon professionals and
their clientele. The Company believes these brand names are widely recognized by
salon product distributors and salon professionals and their clients as
high-quality, effective products. In addition, the Company believes that the
strength of the brand names of its existing products and its reputation within
the industry will assist it to successfully develop and market product line
extensions and new brands.
The table below sets forth a description of the Company's principal
products, the brand names under which the products are sold, and the Company's
estimate of approximate percentage of such products sold for professional salon
use and retailed to salon and customers.
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% % RETAIL
SALON SALES BY
PRODUCT CATEGORY PRODUCT DESCRIPTION BRAND NAMES USE(1) SALONS(1)
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Hair Care Shampoo, conditioner, hair color, and ABBA, 40% 60%
styling and finishing aids AquaTonic,
Biogenol, Body
Drench,
Framesi, Gena,
Roffler
Nail Care Natural nail care products, acrylic Alpha 9, 70 30
and fiberglass nail enhancement Cosmic,
products, nail treatments, nail European Touch,
polish, light-bonded nail systems, and Gena, Kizmit,
manicure and pedicure solutions and Pro Finish,
accessories Revivanail
Skin and Body Care Moisturizing lotion, indoor and Body Drench, 35 65
outdoor tanning products, personal Clean + Easy,
care products, paraffin waxes, Gena, One
thermo-therapy treatments, and hair Touch, Suntopia
removal systems and depilatory
products
Salon Appliances and Hairdryers, curling irons, salon European Touch 100 0
Sundries pedicure spas, salon furniture, and II, Maiko, SRC
salonwear (capes/aprons)
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(1) Company estimates
Hair Care Products
The Company offers 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
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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. The Company
recently introduced AquaTonic, its 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. The Company's Framesi product
line features premium quality hair color products marketed exclusively for use
in salons. The Company also markets 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.
Under the Gena brand name, the Company offers a line of tea-tree oil hair
care products with anesthetic qualities designed to relieve dry, itching scalp.
In addition, the Company markets hair care products as a part of its Body Drench
line of personal care products, primarily to spas, resorts, and health and
country clubs.
Nail Care Products
The Company believes that it has the most complete and diverse line of
branded products for salon professionals in the nail care category. The
Company's 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. The
Company, however, offers a number of top-selling products across all segments of
the nail category, permitting its customers to select and purchase individual
SKUs from among multiple brands, including Alpha 9, European Touch, Gena,
Kizmit, Pro Finish, and Revivanail. The Company, for example, offers
distributors and salon chains the ability to purchase the Company's Revivanail
nail treatments and Alpha 9 acrylic nail enhancement products without having to
purchase the full line of Revivanail or Alpha 9 products.
The Company's 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.
The Company offers base coats, top coats, nail glues, and cuticle lotions
under its 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.
The Company's European Touch brand features nail treatment products, such
as Revivanail and Theracreme. The Company also offers Momentum, a three-step
nail overlay system that offers simplicity, speed, and strength.
Skin and Body Care
The Company sells a broad range of professional skin and body care and
tanning products, including moisturizers, lotions, depilatories, and hair
removal products, under its 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 acids for natural
skin exfoliation. Body Drench indoor tanning products replace moisture lost
during tanning
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and promote faster, darker tanning results. The Company also offers 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 the Company's
top selling hair removal products. The One Touch line serves the retail consumer
in the personal care market. One Touch products include roll-on waxers,
depilatories, and electrolysis products.
Salon Equipment, Appliances, and Sundries
The Company sells salon equipment, appliances, and sundries, including
pedicure spa equipment, hairstyling appliances, and salonwear. The Company
markets 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 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. All
SRC professional curling irons are backed by the industry's only three-year
warranty. The Company's Maiko salonwear line features capes and aprons for the
stylist and the stylist's clientele.
PRODUCT DEVELOPMENT
The Company seeks to leverage the significant brand-name recognition of its
existing product lines by introducing new products and formulations under its
core brand names as well as under newly developed brands. The Company believes
that its diverse product offerings provide it with greater capacity and know-how
to develop, test, and market new products in each of its product lines,
including the expanded application of proprietary technologies. The Company
contracts with third-party manufacturers to develop new formulations that meet
the Company's specifications and quality standards. The Company has not incurred
and does not expect to incur significant capital expenditures in connection with
its product development efforts. The Company's management, working together with
its sales and marketing and product development personnel, continuously monitors
shifts in the salon industry to identify new product opportunities. Feedback
from salon professionals and the Company's educators also play a significant
role in product development. The Company believes the experience of its key
managers, their relationships within the industry, and the Company's product
line orientation enable it to quickly recognize and respond to salon innovations
and industry trends.
MARKETING
The Company sells its 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. The Company believes that its strategy of marketing its salon products
exclusively for use in or resale by the salon industry complements the
professional image of the Company's products and fosters a high degree of
loyalty by distributors of professional salon products.
The Company's sales and marketing efforts focus on educating salon
professionals and salon product distributors regarding the high quality and
performance benefits of the Company's products as well as the latest trends and
developments in the salon industry. The Company's marketing program includes
participa-
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tion 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. The Company's 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, the Company's 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. The Company also produces educational videos and
literature for distribution to distributors and salon professionals.
SALES AND DISTRIBUTION
The Company believes that it has strong relationships in each of the
professional salon distribution channels, including exclusive and open channels.
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 Item 1, "Business -- Special
Considerations -- Dependence on Major Customers."
Seven 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. Eight regional sales managers and an in-house educational
support team sell the Company's 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.
A professional outside sales force of 24 representatives sells the
Company's nail care product lines nationally and internationally to
approximately 500 salon product distributors. This distribution base includes
Sally Beauty Company, Inc. ("Sally"), the largest wholesale supplier of
professional supply products with more than 1,900 supply stores worldwide.
A sales force of seven marketing representatives, telemarketers, and field
sales personnel as well as approximately 25 independent manufacturer
representatives sell Body Drench products to approximately 155 salon product
distributors, 75 tanning supply distributors, and directly to more than 3,000
spas, resorts, and health and country clubs throughout the United States and in
Canada, Europe, Latin America, and Australia.
A sales force of two employees and approximately 30 manufacturer
representatives sell SRC salon appliances and salonwear nationally on an
exclusive basis to more than 50 salon product distributors, 14 beauty schools,
and six salon chains. One sales manager and approximately 25 manufacturer
representatives sell Clean + Easy products to approximately 1,000 customers. Two
sales managers and approximately 25 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 six marketing representatives
sells the Company's European Touch II pedicure spa products to approximately 700
salon product distributors and three salon chains.
PRODUCTION
The Company has developed relationships with third parties to manufacture
most of its products. Two manufacturers in China produce certain of the
Company's hair removal appliances. Although the Company generally does not have
long-term contracts with its manufacturers, the Company owns most of the
formulations, tools, and molds utilized in the manufacturing processes of its
products and believes it could substitute other manufacturers if necessary. See
Item 1, "Business -- Special Considerations -- Dependence on Third Parties for
Manufacturing" and "Special Considerations -- Risk of International Operations."
The Company produces certain of its Clean + Easy and One Touch depilatory
products at its 32,000 square foot facility in Fair Lawn, New Jersey. The 8,600
square foot manufacturing area in the Company's 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. The Company maintains raw materials
and work-in-process inventories in a
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<PAGE> 11
10,000 square foot warehouse and maintains finished goods in the 5,000 square
foot shipping and receiving area.
The Company produces certain of its Biogenol and Roffler hair care
products, including shampoos, conditioners, and styling aids in its
approximately 47,000 square foot facility in Corapolis, Pennsylvania. In
addition, the Company assembles and upholsters its European Touch II salon
furniture and appliances in its 15,000 square foot manufacturing and warehousing
facility in Butler, Wisconsin.
Raw materials used to produce the Company's 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. The Company
purchases all of these raw materials from outside sources. The principal raw
materials and packaging components for the Company's products are available from
numerous domestic and international suppliers. Although the Company itself does
not purchase the raw materials used to manufacture the majority of its products,
it is potentially subject to variations in the prices it pays its 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, the
Company believes it will be able to purchase its requirements at competitive
prices. To date, increases in raw material costs have not had a material effect
on the Company's operating results.
The Company continually monitors the quality of its products. The Company
also carries product liability insurance at levels it believes to be adequate.
COMPETITION
The Company's products compete directly against professional salon and
other similar products sold through distributors and professional salons. The
Company competes on the basis of brand recognition, quality, performance,
distribution, and price.
The Company's principal competitors in the professional salon hair care
products market include Nexxus Products Co., Paul Mitchell Systems, Matrix,
Redken, and Sebastian International. The Company's competitors in the
professional salon nail care market include Creative Nail Design, Inc., OPI
Products Inc., Star Nail Products, Inc., and Backscratchers, Inc. The Company's
largest competitors in the professional salon skin and body care products market
include California Suncare, Inc., Supre Inc., Swedish Beauty Manufacturing,
Inc., Australian Gold, Inc., American International, Inc., and Divi
International. The Company's 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, the Company's
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 merchants, drugstores,
supermarkets, telemarketing programs, television "infomercials," and catalogs.
See Item 1, "Business -- Special Considerations -- Competition."
INTELLECTUAL PROPERTY
The Company has registered, or has pending applications for registration
for, its principal trademarks and brand names in the United States and in
foreign countries. Principal trademarks and brand names of the Company 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.
The Company believes its position in the marketplace depends to a
significant extent upon the goodwill engendered by its trademarks and brand
names and, therefore, considers trademark protection to be important to its
business. The Company will seek to register or otherwise protect all significant
trademarks and brand names in all active geographic markets.
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<PAGE> 12
While the Company currently holds certain patents, the Company does not
consider any single patent to be material to the conduct of its business. The
Company relies on all facets of intellectual property law to protect its
proprietary information. See Item 1, "Business -- Special
Considerations -- Intellectual Property."
GOVERNMENT REGULATION
Certain of the Company's advertising and product labeling practices are
subject to regulation by the Federal Trade Commission (the "FTC"), and certain
of its professional salon product production practices are subject to regulation
by the Food and Drug Administration (the "FDA") as well as by various other
federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
the Company to date. Nonetheless, federal, state, and local regulations in the
United States that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product liability claims,
production methods, product content, labeling, and packaging. In addition, any
expansion by the Company of its operations to produce professional salon
products that include over-the-counter drug ingredients (such as certain sun
screen ingredients) would result in the Company becoming subject to additional
FDA regulations as well as a higher degree of inspection and greater burden of
regulatory compliance than currently exist.
EMPLOYEES
As of March 1, 1999, the Company employed 346 persons, consisting of 135
administrative employees, 139 warehouse and production employees, and 72 sales
and marketing employees. Framesi USA, a subsidiary of the Company, is a party to
a collective bargaining agreement relating to certain production employees. The
Company believes that its relations with its employees are good.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company.
<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
</TABLE>
SAM L. LEOPOLD, a founder of the Company, has served as Chairman of the
Board and Chief Executive Officer of the Company since June 1995 and as
President of the Company 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 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 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 Chief Financial Officer and Treasurer of the
Company since April 1997 and as Executive Vice President and a director of the
Company 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 the Company from its inception in June 1995, as well as with other
acquisition-oriented public companies, until joining the Company in April 1997.
Mr. Ross is a certified public accountant.
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N. BRUCE COWGILL has served as Executive Vice President -- Operations of
the Company 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.
Mr. Cowgill served as President of Environmental Solutions Labs until 1995. Mr.
Cowgill served as President and Chief Executive Officer of State Supply
Warehouse Co., the largest professional 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 for 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 Executive Vice President, General Counsel,
and Secretary of the Company 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 the Company. Mr. Kaplan also
was an attorney with Fennemore Craig, P.C. from September 1993 to August 1995.
J. TIMOTHY MONTROSE has served as Chief Accounting Officer of the Company
since November 1998 and has been employed by the Company since December 1996.
From November 1995 to December 1996, Mr. Montrose served as the 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.
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<PAGE> 14
SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in this
Report, should be carefully considered in evaluating the Company and its
business.
CERTAIN FACTORS THAT COULD ADVERSELY AFFECT OPERATING RESULTS
A wide variety of factors could adversely impact the Company's net sales
and operating results. Many of these factors are beyond the Company's control.
These factors include
- the Company's ability to identify trends in the professional salon
products industry;
- the Company's ability to create and introduce products on a timely basis
that take advantage of industry trends;
- the continued market acceptance of the Company's products among salon
professionals and their clientele;
- the Company's ability to arrange for timely production and delivery of
its products;
- the level and timing of orders placed by customers; and
- competition and competitive pressures on prices.
The success of the Company's operations depends to an extent upon a number
of factors relating to discretionary consumer spending. These factors include
economic conditions, such as employment, business conditions, interest rates,
and tax rates, as well as the continued growth of the professional salon
products industry. General social trends and economic conditions could adversely
affect consumer spending, which would impact the Company's growth, net sales,
and profitability. In addition, a decline in the demand for professional salon
products and related merchandise could adversely affect the Company's business,
financial condition, and operating results.
ACQUISITION STRATEGY
The Company completed four acquisitions in fiscal 1996, three acquisitions
in fiscal 1997, and four acquisitions in fiscal 1998. The success of the
Company's acquisition strategy depends in large part on its ability to acquire
additional professional salon product businesses.
The Company may not be able to continue to identify and complete suitable
acquisition opportunities. In addition, increased competition for acquisition
candidates may increase purchase prices for acquisitions to levels beyond the
Company's financial capability or assessment of value. Unforeseen expenses,
difficulties, and delays frequently encountered in connection with acquisitions
could inhibit the Company's growth and negatively impact profitability.
The Company's ability to complete acquisitions successfully will depend
upon the availability of adequate cash reserves, the Company's ability to issue
its securities, including Common Stock, in acquisitions, and its ability to
raise additional cash through debt and equity financing. The amount of
securities that the Company may be required to issue and the terms on which the
Company can secure debt or equity financing will depend on the operating
performance and financial condition of the Company, the trading price of its
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 the Company may issue shares of Common Stock in connection with
future acquisitions. The issuance of such shares would result in the dilution of
the voting power of the currently outstanding shares and could have a dilutive
effect on earnings per share.
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<PAGE> 15
INTEGRATION OF BUSINESS OPERATIONS
The integration of the management, operations, and facilities of acquired
businesses could involve unforeseen difficulties. These difficulties could have
a material adverse effect on the Company's business, financial condition, and
operating results. The Company could encounter difficulties in
- integrating and managing effectively the operations of acquired
businesses with the Company's operations;
- achieving the Company's 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.
The Company conducts due diligence reviews of each acquired business and
receives representations and warranties regarding each acquired business. The
Company's acquisition agreement with respect to each acquisition generally
contains purchase price adjustments, rights of set-off, and other remedies in
the event that certain unforeseen liabilities or issues arise in connection with
the acquisition. However, these remedies may not be sufficient to compensate the
Company in the event that any unforeseen liabilities or other issues arise.
The Company has begun to use the opportunities created by the combination
of acquired businesses to effect substantial cost savings, including a reduction
in operating expenses as a result of the elimination of duplicative
administrative, warehouse, and distribution facilities, functions, and
personnel. During fiscal 1998, the Company began to implement a new computer
system to assist with the integration of acquired businesses. The new computer
system will assist Company personnel in accessing information regarding
customers, distributors, purchase orders, inventory levels, sales order history,
and other information. See Item 1, "Business -- Strategy -- Internal Growth
Strategy." Significant uncertainties, however, accompany any business
combination, and the Company may not always be able to integrate the facilities,
functions, and personnel of an acquired business in order to achieve operating
efficiencies or otherwise realize cost savings. The inability to achieve the
anticipated cost savings could have a material adverse effect on the Company's
business, financial condition, and operating results.
CONSUMER PREFERENCES AND NEW PRODUCT INTRODUCTIONS
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. The
Company believes that its success depends, in part, on its continued ability to
introduce new and attractive products on a regular basis that anticipate and
respond to changing consumer demands and preferences in a timely manner. New
products introduced by the Company 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 the Company's business, financial condition, and operating
results.
DEPENDENCE ON DISTRIBUTION CHANNELS
The Company sells a significant portion of its 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 the Company's products or increase the ownership concentration
within the professional salon products industry.
If a significant distributor or salon chain discontinues selling or using
the Company's products, performs poorly, cannot pay for purchased products, or
reorganizes or liquidates and is unable to continue selling the
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<PAGE> 16
Company's products, the Company's business, financial condition, and operating
results could be materially and adversely affected. In addition, the laws and
regulations of various states may limit the ability of the Company 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 distributors, poor
performance of distributors, or the inability to collect accounts receivable
from major distributors could have a material adverse effect on the Company's
business, financial condition, and operating results.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company depends upon third parties to manufacture most of its products.
Although the Company owns many of the formulations, tools, and molds used in the
manufacturing processes of its products, the Company has 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 the Company's business, financial
condition, and operating results.
The Company generally does not have long-term contracts with its
third-party manufacturers. Although the Company believes it would be able to
secure other third-party manufacturers to produce its products, particularly as
a result of its ownership of many of the formulations, tools, and molds used in
the manufacturing process, the Company's operations would be adversely affected
if it lost its relationship with any of its current suppliers (including
particularly two manufacturers of hair removal appliances in China) or if the
operations of its current suppliers or sea or air transportation with its
China-based manufacturers were disrupted or terminated even for a relatively
short period of time. See Item 1, "Business -- Special Considerations -- Risk of
International Operations." The Company's tools and molds are located at the
facilities of its 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 the Company's key tools and molds, and production delays
could result while new facilities are being arranged and replacement tools and
molds are being produced.
The Company does not maintain an inventory of sufficient size to provide
protection for any significant period against an interruption of supply,
particularly if it were required to obtain alternative sources of supply.
Although the Company does not purchase directly the raw materials used to
manufacture the majority of its products, it is potentially subject to
variations in the prices it pays its third-party manufacturers for products
depending on their cost for raw materials.
DEPENDENCE ON FRAMESI S.P.A.
The Company holds exclusive license rights to sell of Framesi brand hair
color and hair care products in the majority of the Western Hemisphere,
including the United States and most of Latin America. The Company sells these
products pursuant to an exclusive 40-year license with Framesi S.p.A. that
expires in 2036. In addition, the Company manufactures and sells hair care
products under the Framesi and Biogenol brand names pursuant to the license.
Under the agreement, the Company imports hair color products manufactured by
Framesi S.p.A. 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 the Company's business, financial
conditions, and operating results.
DEPENDENCE ON MAJOR CUSTOMERS
The Company depends upon salon product and tanning supply distributors,
beauty supply outlets, and salon chains to distribute its products. The
Company's largest customer, Sally, a division of Alberto-Culver Company,
accounted for approximately 13% of the net sales of the Company during 1997 and
8% of the net sales of the Company during 1998. Sally would have accounted for
approximately 9% of the pro forma consolidated net sales of the Company during
1997 and 7% of the pro forma consolidated net sales of the
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<PAGE> 17
Company during 1998. The Company currently maintains more than 5,300 active
customer accounts. The Company, however, does not have long-term contracts with
any of its customers. An adverse change in, or termination of, the Company's
relationship with, or an adverse change in the financial viability of, one or
more of its major customers, including Sally, could have a material adverse
effect on the Company's business, financial condition, and operating results.
MANAGEMENT OF GROWTH
Since its initial public offering in November 1996, the Company's
operations have undergone significant changes and growth. These changes include
- the acquisition and integration of 11 professional salon businesses;
- the expansion of its product lines and distribution channels; and
- the restructuring of its third-party manufacturing arrangements.
The Company's growth and expanding operations may place a significant
strain on the Company's management, administrative, operational, and financial
resources as well as increased demands on its systems and controls. The
Company's ability to manage its growth will require it to
- integrate successfully the operations of acquired businesses with the
Company's operations;
- enhance further its operational, financial, and management systems and
its marketing programs;
- motivate, manage, and retain its current employees; and
- identify, hire, and train additional employees.
The failure of the Company to manage effectively its growth could have a
material adverse effect on the Company's business, financial condition, and
operating results.
LEVERAGE
The Company is highly leveraged. On December 31, 1998, the Company had
total indebtedness of approximately $143.1 million and stockholders' equity of
approximately $33.8 million. This indebtedness included $100 million of 10 7/8%
senior subordinated notes due 2008 (the "Notes"), approximately $37 million of
debt under its five-year senior credit facility with a group of banks ("1998
Credit Facility"), and approximately $6.1 million of indebtedness in connection
with one acquisition. Subject to certain conditions, the Company and its
subsidiaries will be permitted to incur additional indebtedness in the future.
The Company intends to raise additional capital through debt or equity
financings beginning in the second quarter of 1999 to fund its continued growth.
At this time, it is not possible to assess the type of financings the Company
will pursue or the terms or availability of such financings. The inability to
secure such financing on acceptable terms could have an adverse effect on the
Company's business, operations, and financial position. In addition, it is
possible that such financing will further increase the Company's leverage.
The Company's ability to service, repay, or refinance its indebtedness and
to fund planned capital expenditures and product development expenses will
depend on its future performance. To a certain extent, the Company's performance
will be subject to general economic, financial, competitive, legislative,
regulatory, and other factors that are beyond its control. The Company may not
be able to generate sufficient cash flow from operations, or future borrowings
may not be available under the 1998 Credit Facility in an amount sufficient to
enable the Company to service or repay its indebtedness or to fund its other
liquidity needs. In addition, the Company may not be able to refinance its
indebtedness on commercially reasonable terms or at all if it desires to do so.
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The degree to which the Company is leveraged could have important
consequences, including the following:
- making it more difficult for the Company to raise additional funds to
finance desired acquisitions;
- increasing the Company's vulnerability to general adverse economic and
industry conditions;
- limiting the Company's ability to obtain other funds to finance future
working capital, capital expenditures, product development, and other
general corporate requirements;
- limiting the Company's flexibility in planning for, or reacting to,
changes in its business and the industry; and
- placing the Company at a competitive disadvantage as compared to less
leveraged competitors.
RESTRICTIVE DEBT COVENANTS
The Company's 1998 Credit Facility and the agreement covering the Notes
contain certain restrictive financial and operating covenants that limit the
Company's discretion with respect to certain business matters. These covenants
place significant restrictions on, among other things, the ability of the
Company to
- incur additional indebtedness;
- create liens or other encumbrances;
- make certain payments and investments; and
- purchase, sell, or otherwise dispose of assets and merge or
consolidate with other entities.
The 1998 Credit Facility requires the Company to meet certain financial
ratios and tests. A failure to comply with the obligations contained in the 1998
Credit Facility or the agreement covering the Notes, if not cured or waived,
could result in the acceleration of the related debt and the acceleration of
debt under other instruments that contain cross-acceleration or cross-default
provisions. If the Company were obligated to repay all or a significant portion
of its indebtedness, the Company may not have sufficient cash to do so and may
not be able to refinance such indebtedness. Other indebtedness that the Company
may incur in the future may contain financial or other covenants more
restrictive than those of the 1998 Credit Facility or the Notes.
POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a change of control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of their principal amount plus accrued
and unpaid interest to the date of repurchase. The Company may not have
sufficient funds available at the time of any change of control to make any
required repurchases of Notes tendered. In addition, restrictions in the 1998
Credit Facility may not allow the Company to make such required repurchases.
RISK OF INTERNATIONAL OPERATIONS
International sales constituted approximately 15% of the Company's pro
forma consolidated net sales during 1997 and approximately 12% of the Company's
pro forma consolidated net sales during 1998. In addition, certain of the
Company's products are manufactured in China. See Item 1, "Business -- Special
Considerations -- Dependence on Third Parties for Manufacturing." The Company
intends to expand its international sales through acquisitions and internal
growth.
The Company's international operations require it to maintain equipment and
inventories abroad, manufacture and sell products internationally, and purchase
raw materials and components from foreign suppliers. The Company also relies on
its third-party manufacturers to provide personnel and facilities in
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<PAGE> 19
China. The Company's international operations expose it 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;
- overlap of tax issues;
- the business and financial condition of the third-party manufacturers;
- political and economic conditions abroad; and
- the possibility of
-- expropriation or nationalization of assets
-- supply disruptions
-- currency controls
-- changes in tax laws, tariffs, and freight rates.
These factors could disrupt or adversely affect the Company's relationships
with its third-party manufacturers in China. Based on existing market
conditions, the Company believes that it could establish alternative supply
relationships if its supply sources in China were disrupted. However, because
establishing these relationships involves numerous uncertainties relating to
delivery requirements, price, payment terms, quality control, and other matters,
the Company is unable to predict whether such relationships would be on terms
satisfactory to the Company.
The Company's relationships with its 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 the Company imports 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 accordingly 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.
China may not continue to enjoy most favored nation status. 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 duty
rates.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the skills of
its current key employees and its ability to identify, hire, and retain
additional sales, marketing, and financial personnel. The Company cannot provide
assurance that it will be able to retain its existing key personnel or attract
and retain additional key personnel. The loss of services of key personnel,
particularly Sam Leopold (the Company's 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 the Company's
business, financial condition, and operating results. The Company has an
employment agreement with Mr. Leopold that extends through September 2001.
INTELLECTUAL PROPERTY
The market for the Company's products depends to a significant extent upon
the goodwill associated with its trademarks and trade names. Therefore,
trademark protection is important to the Company's business.
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<PAGE> 20
Although most of the Company's trademarks and trade names are registered in the
United States and in foreign countries, the Company may not be successful in
asserting trademark or trade name protection for its trademarks and trade names
in the United States or other markets, and the costs to the Company of such
efforts may be substantial. In addition, the laws of certain foreign countries
may not protect the Company's intellectual property rights to the same extent as
the laws of the United States.
While the Company currently holds certain patents, the Company does not
consider any single patent to be material to the conduct of its business. The
Company relies primarily on trade secret protection for its proprietary
information. The Company faces risks associated with its intellectual property,
including the following:
- the Company's intellectual property rights may be challenged,
invalidated, or circumvented;
- the Company's intellectual property rights may not provide adequate
protection;
- the Company may not have sufficient resources to prosecute infringements
of its intellectual property rights;
- the Company may not be able to protect its intellectual property; and
- third parties may assert intellectual property infringement claims
against the Company.
See Item 1, "Business -- Intellectual Property."
COMPETITION
The professional salon products industry is very competitive. The Company's
products compete directly against professional salon and other similar products
sold through distributors of professional salon products and professional
salons. In addition, the Company's professional salon products compete
indirectly against hair care, nail care, and 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 merchants, drugstores, supermarkets, telemarketing programs,
television "infomercials," and catalogs. Current and potential competitors
include a number of companies that have substantially greater resources than the
Company, including better brand-name recognition, broader product lines, and
wider distribution channels.
The professional salon products industry is characterized by a lack of
significant barriers to entry with respect to the development and production of
professional salon products, which may result in new competition, including
possible imitators of one or more of the Company's recognized product lines. In
addition, 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 the Company to implement price reductions in order to remain competitive
could have a material adverse effect on the Company's business, financial
condition, and operating results. See Item 1, "Business -- Competition."
GOVERNMENT REGULATION AND POTENTIAL CLAIMS
Certain of the Company's advertising and product labeling practices are
subject to regulation by the FTC, and certain of its professional salon product
production practices are subject to regulation by the FDA as well as by various
other federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
the Company to date. Nonetheless, federal, state, and local regulations in the
United States that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product claims, production methods,
product content, labeling, and packaging. In addition, any expansion by the
Company of its operations to produce professional salon products that include
over-the-counter drug ingredients (such as certain sun screen ingredients) would
result in the Company becoming subject to additional FDA regulations as well as
a higher degree of inspection and greater burden of regulatory compliance than
currently exist.
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<PAGE> 21
The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals. The Company's 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 the Company to acquire costly equipment or to incur other significant
expenses. Any failure by the Company to control the use, or adequately restrict
the discharge, of hazardous substances could subject it to future liabilities.
The Company believes that it is in substantial compliance with applicable
federal, state, and local rules and regulations governing the discharge of
hazardous materials into the environment. The Company does not anticipate that
it will make significant capital expenditures for environmental control matters
in the near future.
The nature and use of professional salon products could give rise to
product liability claims if one or more users of the Company's products were to
suffer adverse reactions following their use of the products. Such reactions
could be caused by various factors, many of which are beyond the Company's
control, including hypoallergenic sensitivity and the possibility of malicious
tampering with the Company's products. In the event of such an occurrence, the
Company could incur substantial litigation expense, receive adverse publicity,
and suffer a loss of sales.
CONTROL BY MANAGEMENT
Sam Leopold (the Chairman of the Board, President, and Chief Executive
Officer of the Company) beneficially owns approximately 25% of the outstanding
shares of the Company's Common Stock. Consequently, Mr. Leopold has the ability
to influence the election of all of the directors of the Company and thereby
control the business, affairs, and management of the Company. In addition, Mr.
Leopold has the ability to influence most matters requiring stockholder approval
including significant corporate matters, such as amendments to the Company's
Certificate of Incorporation and any merger, consolidation, or sale of all or
substantially all of the assets of the Company. Such a high level of ownership
may have the effect of delaying, deterring, or preventing a change in the
control of the Company, even when such a change would be in the best interests
of the other stockholders, and may adversely affect the voting and other rights
of the other holders of the Company's Common Stock.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK
The market price of the Company's Common Stock has fluctuated significantly
since the Company's 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 the Company. These
favorable conditions may not continue. The trading price of the Company's Common
Stock in the future could be subject to a variety of factors, including
- wide fluctuations in response to quarterly variations in operating
results of the Company;
- actual or anticipated announcements of new products by the Company or its
competitors;
- changes in analysts' estimates of the Company's financial performance;
- general conditions in the markets in which the Company competes; 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 the Company's Common Stock. Any reduction in the
trading price of the Company's Common Stock could adversely affect the Company's
ability to raise capital in the public market and adversely affect the Company's
ability to complete acquisitions. The market price of the Company's Common Stock
may affect the willingness of the Company to use its Common Stock to acquire
other companies and the willingness of potential acquired companies or their
owners to accept the Company's
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<PAGE> 22
Common Stock. Declines in the market price of the Company's Common Stock may
cause acquired companies to seek adjustments to purchase prices or other
remedies to offset any decline in value.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock by stockholders of the
Company, or even the potential for such sales, are likely to adversely affect
the market price of the Common Stock and could impair the Company's ability to
raise capital by selling equity securities. Of the 4,067,503 shares of Common
Stock outstanding as of March 29, 1999, approximately 3,203,077 were freely
tradeable without restriction or further registration under the securities laws.
An aggregate of 864,426 shares held by certain officers and directors currently
are available for sale. Shares held by these affiliates of the Company are
subject to the resale limitations of Rule 144 described below.
Generally, under Rule 144, an affiliate of the 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 the
Company may, every three months, sell in ordinary brokerage transactions or to
market makers and amount of shares equal to the greater of 1% of the Company's
then-outstanding Common Stock or the average weekly trading volume for the four
weeks prior to the proposed sale of such shares.
The Company also has authority to issue additional shares of Common Stock
and shares of one or more series of preferred stock. The Company may issue
shares of Common Stock or preferred stock for use as a portion of the
consideration in future acquisitions. These shares may be registered under the
Securities Act, in which case they generally will be freely tradeable upon their
issuance.
RIGHTS TO ACQUIRE SHARES
A total of 891,200 shares of Common Stock have been reserved for issuance
upon exercise of options granted or which may be granted under the Company's
stock option plans. Options to acquire 794,381 shares of Common Stock currently
are outstanding, including options to purchase 785,381 shares granted under the
Company's 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 the Common
Stock. The existence of such stock options and warrants may adversely affect the
terms on which the Company can obtain additional financing, and the holders of
such options and warrants can be expected to exercise or convert such options
and warrants at a time when the Company, in all likelihood, would be able to
obtain additional capital by offering shares of its Common Stock on terms more
favorable to the Company than those provided by the exercise of such options and
warrants.
LACK OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not currently anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply its earnings to the expansion and
development of its business.
CHANGE IN CONTROL PROVISIONS
The Company's First Amended and Restated 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 the Company, even when these attempts may be in the best interests of
stockholders.
During February 1999, the Company adopted a Shareholder Rights Plan
pursuant to which holders of shares of Common Stock are entitled to purchase one
one-thousandth of a share of Series A Junior
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<PAGE> 23
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.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's 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 the Company at $.01
per right at any time before a Stock Acquisition Date.
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 the Company, its customers
and suppliers, and other service providers. Although the Company does not
anticipate that the Year 2000 issue will have a significant impact on is
business, any significant Year 2000 compliance problem of any of the Company,
its customers, or its third-party contract manufacturers or suppliers could have
a material adverse effect on the Company's business, financial condition, and
operating results. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this Report under the
headings "Business," "Special Considerations," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" concerning future,
proposed, and anticipated activities of the Company; certain trends with respect
to the Company's revenue, operating results, capital resources, and liquidity or
with respect to the markets in which the Company competes or the beauty care
industry in general; and other statements contained in this Report regarding
matters that are not historical facts are forward-looking statements, as such
term is defined in the applicable securities laws. Forward-looking statements,
by their very nature, include risks and uncertainties, many of which are beyond
the Company's 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 "Special Considerations."
ITEM 2. PROPERTIES
The Company leases its 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. The Company
believes the facility will be adequate for its needs for the foreseeable future.
The Company also leases 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.
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<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
The Company is, and may in the future be, party to litigation arising in
the ordinary course of its business. The Company does not consider any current
claims to be material to its business, financial condition, or operating
results. The Company's insurance coverage may not be adequate to cover all
liabilities occurring out of any claims that may be instituted in the future,
and insurance may not cover some future claims. A lack of insurance coverage may
have an adverse effect on the Company's business, financial condition, or
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "STYL" since its 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>
1996
Fourth quarter (since November 21, 1996).................... $10 5/8 $ 9 1/4
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
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
1999
First quarter (through March 29, 1999)...................... $14 3/4 $ 9 5/8
</TABLE>
On March 29, 1999, the closing sale price of the Company's Common Stock was
$13 per share. On March 29, 1999, there were approximately 14 holders of record
and approximately 1,142 beneficial owners of the Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Company currently plans to retain earnings to finance the growth of the
Company's business rather than to pay cash dividends. Payments of any cash
dividends in the future will depend on the financial condition, results of
operations, and capital requirements of the Company as well as other factors
deemed relevant by the Board of Directors. The Company's credit facility and its
agreement covering the Notes contain restrictions on the Company's 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" contained in Item 7 of this
Report.
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<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the fiscal
years ended December 31, 1998 and 1997 and as of December 31, 1996 and the
period from November 27, 1996 to December 31, 1996 is derived from the
consolidated financial statements of the Company, which have been audited by
Arthur Andersen LLP, independent public accountants. The selected historical
financial data for Gena and Body Drench for each of the three 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 selected historical financial data for JDS
for the three 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 selected historical financial data for 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.
In addition, the selected historical 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. The historical financial information for earlier
periods for Gena, Body Drench, JDS, and KII not specifically referenced above
was derived from each of the Initial Businesses unaudited financial statements.
The selected financial data provided below should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company and
related notes thereto appearing elsewhere in this Report.
SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 27, YEAR YEAR
1996 TO ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- STYLING TECHNOLOGY
CORPORATION:
Net sales........................................ $1,083 $38,108 $ 90,373
Gross profit..................................... 512 21,352 51,151
Selling, general, and administrative expenses.... 737 12,201 33,137
Income (loss) from operations.................... (225) 9,151 18,014
Income (loss) before extraordinary item.......... (151) 4,207 5,173
Extraordinary item, net of tax benefit........... -- (1,377) (1,091)
Income (loss) after extraordinary item........... (151) 2,830 4,082
Basic earnings (loss) per share:
Income (loss) before extraordinary item....... $(0.04) $ 1.07 $ 1.28
Extraordinary item, net....................... -- (0.35) (0.27)
Net income (loss)............................. (0.04) 0.72 1.01
Diluted earnings (loss) per share:
Income (loss) before extraordinary item....... (0.04) 1.02 1.20
Extraordinary item, net....................... -- (0.33) (0.25)
Net income (loss)............................. (0.04) 0.69 0.95
BALANCE SHEET DATA:
Working capital.................................. $4,459 $14,048 $ 37,712
Total assets..................................... 32,234 92,489 219,198
Long-term debt and other, less current portion... 2,316 47,377 140,366
Total stockholders' equity....................... 25,319 28,568 33,813
</TABLE>
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<PAGE> 26
STATEMENT OF OPERATIONS DATA -- INITIAL BUSINESSES
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 1, 1996
YEARS ENDED FEBRUARY 28, TO
------------------------------------ NOVEMBER 26,
1993 1994 1995 1996 1996
------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- GENA
Net sales............................... $6,537 $6,426 $7,524 $8,384 $6,708
Gross profit............................ 2,868 3,146 3,360 3,565 2,807
Selling, general, and administrative
expenses............................. 2,570 2,744 2,964 3,033 1,984
Income from operations.................. 298 402 396 532 823
Net income.............................. 204 278 232 317 529
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1996
YEARS ENDED DECEMBER 31, TO
-------------------------------------- NOVEMBER 26,
1992 1993 1994 1995 1996
------ ------ ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- BODY
DRENCH
Net sales............................ $6,234 $6,653 $11,138 $11,871 $9,642
Gross profit......................... 2,667 2,614 4,796 5,444 3,776
Selling, general, and administrative
expenses.......................... 2,285 2,055 4,076 4,883 4,005
Income (loss) from operations........ 382 559 720 561 (229)
Net income (loss).................... 382 328 446 294 (137)
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1996
YEARS ENDED SEPTEMBER 30, TO
--------------------------------- NOVEMBER 26,
1993 1994 1995 1996 1996
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- JDS
Net sales.................................. $3,799 $3,578 $3,368 $3,114 $ 613
Gross profit............................... 2,054 1,926 1,817 1,707 338
Selling, general, and administrative
expenses................................ 2,092 1,982 1,844 1,615 258
Income (loss) from operations.............. (38) (56) (27) 92 80
Net income (loss).......................... (29) (16) 9 69 45
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1996
YEARS ENDED DECEMBER 31, TO
-------------------------------- NOVEMBER 26,
1992 1993 1994 1995 1996
---- ---- ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA -- KII
Net sales.................................. -- $102 $1,999 $1,558 $1,248
Gross profit............................... -- 60 1,014 846 663
Selling, general, and administrative
expenses................................ -- 87 1,040 891 591
Income (loss) from operations.............. -- (27) (26) (45) 72
Net income (loss).......................... -- (32) (104) (135) (2)
</TABLE>
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<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company develops, produces, and markets a wide array of professional
salon products. The Company offers a diversified line of well-established,
brand-name professional salon products across all salon product categories,
including hair care, nail care, and skin and body care products, as well as
salon appliances and sundries. The Company sells its products primarily to
professional salon industry distribution channels, beauty salon outlets, and
salon chains, and, to a lesser extent, to spas, resorts, and health and country
clubs throughout the United States as well as in other parts of North America,
Latin America, Europe, and Asia.
The Company was founded in June 1995 and has grown its business, expanded
its product offerings, and strengthened its distribution channels principally
through acquisitions. The Company acquired four professional salon product
businesses in November 1996, simultaneously with the Company's initial public
offering. Prior to that date, the Company had conducted no operations. The four
professional salon product businesses acquired by the Company were (i) Gena, a
producer and marketer of professional natural nail care products, pedicure
products, skin care products, including paraffin therapy products and, to a
lesser extent, hair care products; (ii) Body Drench, a producer and marketer of
high-end professional tanning, moisturizing, and personal care products; (iii)
JDS, a producer and marketer of acrylic and fiberglass nail enhancement
products; and (iv) KII, a marketer of high-end salon appliances (such as curling
irons and blow dryers) and salon wear (such as capes and aprons). Gena, Body
Drench, JDS, and KII collectively are referred to as the "Initial Businesses."
During 1997, the Company further expanded its product offerings by
acquiring three professional salon product businesses to complement the
Company's existing operations. In March 1997, the Company acquired the "Utopia"
line of indoor tanning products now sold under the "Suntopia" brand name from
Creative Laboratories, Inc. In June 1997, the Company purchased ABBA, which
produces a proprietary line of aromatherapy-based professional hair care
products. In December 1997, the Company acquired the Clean + Easy and One Touch
product lines of Inverness, consisting of salon and retail hair removal
apparatus and products marketed under the "Clean + Easy" and "One Touch" brand
names. In May 1998, the Company acquired substantially all of the assets and
assumed certain operating liabilities of Pro Finish, a producer of name-brand
professional nail enhancement and nail care products. In June 1998, the Company
acquired European Touch and European Touch II (together the "European Touch
Companies"). European Touch is a developer, producer, and marketer of
professional nail enhancement and treatment products and European Touch II is a
developer, producer, and marketer of salon pedicure equipment. In August 1998,
the Company acquired 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. Through these strategic transactions, the Company has
acquired an extensive network of strong distribution relationships, experienced
sales forces, established marketing and salon industry education programs,
significant production and sourcing capabilities, and experienced management
personnel with extensive relationships in the professional salon products
industry.
The combined purchase price of the acquisitions in 1997 and 1998 were
approximately $45.0 million and $63.0 million, respectively. On a pro forma
basis, total revenue of the Company would have been approximately $111.0 million
and $115.6 million in 1997 and 1998, respectively, assuming the acquisitions
described above had taken place on January 1, 1997.
The following discussion has been divided into ten sections. The first
section presents the results of operations of the Company for the year ended
December 31, 1998; the second section presents the results of operations of the
Company for the year ended December 31, 1997; the next section presents the
results of operations of the Company for the period November 27, 1996 to
December 31, 1996; the next four sections contain a discussion of the historical
results of operations for each of the four Initial Businesses, and the last
three sections contain discussions of the Company's seasonality and quarterly
results, liquidity and capital resources, and its Year 2000 compliance. The
information presented for the four Initial Businesses is based on
25
<PAGE> 28
each company's historical fiscal year end and the period from the most recently
completed fiscal year to November 26, 1996 (the closing date of the acquisitions
of the Initial Businesses).
Except for the historical information contained herein, the discussion in
this Report contains or may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include those discussed herein, as well as those factors discussed
under "Special Considerations" contained in Item 1 of this Report. Historical
results are not necessarily indicative of trends in operating results for any
future period.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1998
Net Sales
Net sales for the year ended December 31, 1998 amounted to $90.4 million
compared with 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 the Company's 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, the Company 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 with $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 the Company's existing business. The increase also
is 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, the Company announced it would centralize its
operations in Scottsdale, Arizona and outsource segments of its production and
warehousing functions. These initiatives are part of the further integration and
consolidation of the Company's acquired businesses with the goal of obtaining
additional operating efficiencies and positioning the Company for continued
internal growth and future acquisitions. The Company also announced it would
take advantage of new capabilities in computer technologies by combining the
reengineering of its business processes with an Enterprise Resource Planning
information technology transformation, which it expects will drive operating
efficiencies and improved customer service.
These initiatives took place during the fourth quarter of 1998 and will
continue during the first and second quarters of 1999. In connection with the
centralization and business process reengineering activities, the
26
<PAGE> 29
Company anticipates approximately $1.5 million (before income taxes) in
non-recurring reengineering costs, which will be reflected in the Company's
income statement as incurred. Over the same period, the Company will invest
approximately $3.0 million in capital expenditures related to its information
technology transformation. The costs of reengineering and information technology
will be 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."
Extraordinary Item
In June 1998, the Company issued $100 million of 10 7/8% Senior
Subordinated Notes due 2008 in an offering exempt from registration under the
Securities Act. A portion of the proceeds from the offering was used to repay
the Company's $75.0 million credit facility ("December 1997 Credit Facility").
The Company 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.
Net Income
The Company earned 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 Earnings Before Interest, Taxes, Depreciation &
Amortization (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. Earnings before interest, taxes,
depreciation, and amortization ("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. EBITDA is not intended to
represent net cash provided by operating activities as defined by generally
accepted accounting principles and should not be considered as an alternative to
net income as an indicator of operating performance or to net cash provided by
operating activities as a measure of liquidity. The Company believes EBITDA is a
measure commonly reported and widely used by analysts, investors, and other
interested parties who monitor business performance. Accordingly, the Company
has disclosed this information to permit a more complete comparative analysis of
its operating performance.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997
Net Sales
Net sales amounted to $38.1 million for the year ended December 31, 1997
compared to combined net sales for the Initial Businesses of $23.0 million for
the year ended December 31, 1996. The $15.1 million, or 65.7%, increase in net
sales was partly the result of increased sales of the Company's 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/One Touch from
December 1, 1997 to December 31, 1997.
27
<PAGE> 30
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 the Company.
Gross Profit
As a result of the foregoing, the Company 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 is attributable primarily to the
negotiation of reduced product costs in December 1996 with the primary supplier
of the Company's Body Drench product line and the consolidation of warehousing
and production functions of the Gena and Alpha 9/Omni product lines at the
Company's old facility in Duncanville, Texas. The Company also achieved
substantial reductions in cost of goods through negotiation with third party
suppliers at ABBA and Clean + Easy/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 represents a
significant improvement over such expenses incurred by the individual Initial
Businesses and other acquired companies prior to their acquisition by the
Company. This improvement in selling, general, and administrative expenses as a
percentage of net sales is 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 acquired companies.
This improvement, however, is 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, the Company 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 ("June 1997
Credit Facility"). The Company 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 its June
1997 Credit Facility.
Net Income
The Company earned 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 mark
significant improvement over the operating results of the Initial Businesses
prior to their acquisition. The Company attributes the improvement in net income
during the year ended December 31, 1997 primarily to the successful
implementation of a key component of its business strategy, the enhancement of
operating efficiencies of the Initial Businesses, and subsequent acquisitions.
Prior year financial information for the Initial Businesses presented and
discussed herein excludes the operating results of ABBA and the Clean + Easy ,
One Touch, and Suntopia product lines, which were acquired during 1997.
Income from Operations and Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA)
Income from operations was $9.2 million for the year ended December 31,
1997. Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
was $11.0 million for the year ended December 31, 1997.
28
<PAGE> 31
PERIOD FROM NOVEMBER 27, 1996 TO DECEMBER 31, 1996
Net Sales
Net sales amounted to $1.1 million for the period from November 27, 1996 to
December 31, 1996. The level of sales during this period is not indicative of
anticipated future sales levels or historical sales of the Initial Businesses,
as the Company's primary focus during this period was the consolidation of the
four Initial Businesses, which impacted selling efforts at each of the Company's
divisions that existed at that time.
Cost of Sales
Cost of sales was $600,000 for the period from November 27, 1996 to
December 31, 1996. Cost of sales was 52.7% of net sales for this period, which
is consistent with the combined cost of sales as a percentage of net sales
incurred by the Initial Businesses, prior to their acquisition.
Gross Profit
As a result of the foregoing, gross profit amounted to $500,000 for the
period from November 27, 1996 to December 31, 1996.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses were $700,000 for the period
from November 27, 1996 to December 31, 1996, which is generally consistent with
the level of selling, general, and administrative expenses incurred by the
Initial Businesses on a combined basis, prior to their acquisition. During this
period, the Company was focused primarily on the process of integrating the
operations of the Initial Businesses.
Net Loss
Net loss for the Company was $200,000 for the period from November 27, 1996
to December 31, 1996.
RESULTS OF OPERATIONS -- GENA
PERIOD FROM MARCH 1, 1996 TO NOVEMBER 26, 1996
Net Sales
Net sales amounted to $6.7 million for the period from March 1, 1996 to
November 26, 1996. Annualized net sales for this period were approximately $8.9
million, which represents an increase of 6.6% as compared with $8.4 million
recorded in the fiscal year ended February 29, 1996. The increase in net sales
was primarily attributable to an increase in sales related to Gena's paraffin
spa product line.
Cost of Sales
Cost of sales amounted to $3.9 million for the period from March 1, 1996 to
November 26, 1996. Cost of sales as a percentage of net sales, increased
slightly to 58.1% for the period from March 1, 1996 to November 26, 1996 as
compared to 57.5% for the 12 months ended February 29, 1996. The increase in
cost of sales as a percentage of net sales was primarily attributable to an
increase in certain material costs, partially offset by increased sales of
Gena's paraffin spa line, which generates higher margins than Gena's other
products.
Gross Profit
As a result of the foregoing, gross profit amounted to $2.8 million for the
period from March 1, 1996 to November 26, 1996, which represents a decrease to
41.9% of net sales as compared to 42.5% of net sales for the fiscal year ended
February 29, 1996.
29
<PAGE> 32
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $2.0 million for the
period from March 1, 1996 to November 26, 1996. Selling, general, and
administrative expenses, as a percentage of net sales, decreased to 29.6% as
compared with 36.2% for the 12 months ended February 29, 1996. The decrease in
selling, general, and administrative expenses was primarily attributable to
reduced shareholder compensation for the period March 1, 1996 to November 26,
1996 in connection with the sale of Gena to the Company.
Net Income
Net income for the Company was $500,000 for the period from March 1, 1996
to November 26, 1996.
TWELVE MONTHS ENDED FEBRUARY 29, 1996
Net Sales
Net sales increased 11.4% to $8.4 million in the 12 months ended February
29, 1996 from $7.5 million in the 12 months ended February 28, 1995. The
increase in net sales was attributable to growth in sales of existing products,
which consisted primarily of increased acceptance of the paraffin spa product
line that was introduced in February 1993 and the continued sales growth of the
MRX product line that was acquired in September 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 57.5% in the 12
months ended February 29, 1996 as compared with 55.3% in the 12 months ended
February 28, 1995. The increase was attributable to additional costs incurred to
produce the new paraffin spa equipment, which has a higher cost of sales, as a
percentage of net sales, at approximately 64.0%. Additionally, cost of sales, as
a percentage of net sales, on the new MRX product line, introduced in September
1994, was approximately 60.0%, which was also higher than Gena's other product
lines.
Gross Profit
As a result of the foregoing, gross profits increased 6.1% to $3.6 million
in the 12 months ended February 29, 1996 from $3.4 million in the 12 months
ended February 28, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses remained relatively constant
at $3.0 million in the 12 months ended February 29, 1996 and 1995. The slight
increase in selling, general, and administrative expenses was attributable to an
increase in selling and promotional costs primarily related to increased sales
of the paraffin spa product. Additionally, Gena was offering greater promotional
incentives to generate additional sales resulting in increased selling costs.
The above increases were partially offset by reduced travel expenses and smaller
management bonuses than had been paid in the previous period.
Net Income
Net income increased 36.6% to $300,000 in the 12 months ended February 29,
1996 from $200,000 in the 12 months ended February 28, 1995.
TWELVE MONTHS ENDED FEBRUARY 28, 1995
Net Sales
Net sales increased 17.1% to $7.5 million in the 12 months ended February
28, 1995 from $6.4 million in the 12 months ended February 28, 1994. The
increase was primarily a result of increased sales of Gena's paraffin spa
product line, which had been introduced in February 1993, and the February 1994
acquisition of Design Classic, a manufacturer of fiberglass nail products. Gena
also acquired the MRX product line, an
30
<PAGE> 33
all-purpose antiseptic and hydrating lotion, in September 1994 and began to ship
substantial quantities in fiscal 1995. Total sales related to the Design Classic
and MRX product lines were approximately $1.0 million in 1995.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 55.3% in the 12
months ended February 28, 1995 as compared with 51.0% in the 12 months ended
February 28, 1994, as a result of additional labor, machine retooling, and
material costs incurred to produce the new paraffin spa product, which has lower
gross margins than Gena's other products. In addition, Gena incurred certain
one-time packaging and other costs to integrate their newly acquired Design
Classic product line. Gena also experienced an increase in certain raw materials
costs.
Gross Profit
As a result of the foregoing, gross profit increased 6.8% to $3.4 million
in the 12 months ended February 28, 1995 from $3.1 million in the 12 months
ended February 28, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 8.0% to $3.0
million in the 12 months ended February 28, 1995 from $2.7 million in the 12
months ended February 28, 1994, as a result of the increase in selling and
promotional costs related to the introduction and promotion of the paraffin spa
product line. In addition, Gena incurred an increase in costs related to the
acquisition of Design Classic, which includes amortization of intangible assets,
and increased personnel costs required to support the new product.
Net Income
Net income decreased 16.5% to $200,000 in the 12 months ended February 28,
1995 from $300,000 in the 12 months ended February 28, 1994.
RESULTS OF OPERATIONS -- BODY DRENCH
PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 26, 1996
Net Sales
Net sales amounted to $9.6 million for the period from January 1, 1996 to
November 26, 1996. Annualized net sales for the period were $10.5 million, which
decreased 11.3% as compared with the net sales of $11.9 million recorded in
fiscal year ended December 31, 1995. The decrease in net sales was attributable
to difficulty in obtaining inventory from third party manufacturers, due to cash
flow difficulties experienced by Body Drench's parent company. Such difficulties
caused Body Drench to be unable to fulfill certain sales orders due to its
inability to deliver products to customers in time for the Spring 1996 tanning
season. In addition, sales of the Contemporary product line, which was
introduced in October 1994, declined during 1996, but was partially offset by
the increased sales of its new tanning product releases: Tan FX, Tan EX, and
increased sales of the Company's line of moisturizing lotion products.
Cost of Sales
Cost of sales amounted to $5.9 million for the period January 1, 1996 to
November 26, 1996. Cost of sales as a percentage of net sales increased to 60.8%
for the period January 1, 1996 to November 26, 1996 as compared with 54.1% for
the 12 months ended December 31, 1995. The increase in cost of sales was
primarily attributable to a reduction in selling prices for certain products, as
well as increased cash discounts for certain customers in an effort to maximize
cash collections, related to the cash flow difficulties experienced by Body
Drench's parent company.
31
<PAGE> 34
Gross Profit
As a result of the foregoing, gross profit amounted to $3.8 million for the
period from January 1, 1996 to November 26, 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $4.0 million for the
period from January 1, 1996 to November 26, 1996. Selling, general, and
administrative expenses, as a percentage of net sales, remained relatively
unchanged at 41.5% for the period January 1, 1996 to November 26, 1996 as
compared with 41.1% for the 12 months ended December 31, 1995.
Net Loss
As a result of the foregoing, Body Drench incurred a net loss amounting to
$137,000 for the period from January 1, 1996 to November 26, 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1995
Net Sales
Net Sales in 1995 increased 6.6% to $11.9 million compared with $11.1
million in 1994. The increase in net sales was due to the release of the new
Contemporary product line introduced in October 1994. During 1995, Body Drench
realized a full year of Contemporary sales as compared to only a partial year in
1994. The increase in net sales was also impacted by the release of the Tan FX
and Tan EX products, and the Contemporary products introduced in the fourth
quarter of 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 54.1% for the 12
months ended December 31, 1995 as compared with 56.9% for the 12 months ended
December 31, 1994. This decrease was due primarily to the introduction of the
Contemporary product line in October 1994, which carried a lower raw material
cost in relation to net sales as compared to products sold during 1995.
Gross Profit
As a result of the foregoing, gross profit increased 13.5% to $5.4 million
in the 12 months ended December 31, 1995 from $4.8 million in the 12 months
ended December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 19.8% to $4.9
million in 1995 compared with $4.1 million in 1994. The increase was
attributable to the continued increase of shipping costs in proportion to sales
levels due to the growing number of backorders from the Contemporary product
line. Backorders resulted primarily from Body Drench's inability to produce
sufficient product to meet customer orders due to cash flow shortages at DBN and
Body Drench. Additionally, advertising expense increased by approximately 1.0%
of net sales as a result of the heavy promotional efforts in various magazines,
catalogs and brochures with the release of the new Contemporary product line.
Body Drench also incurred higher personnel costs through the addition of several
marketing and sales professionals.
Net Income
Net income decreased 34.1% to $300,000 in the 12 months ended December 31,
1995 compared with $400,000 in the 12 months ended December 31, 1994.
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<PAGE> 35
TWELVE MONTHS ENDED DECEMBER 31, 1994
Net Sales
Net sales increased 67.4% to $11.1 million in the 12 months ended December
31, 1994 compared with $6.7 million in the 12 months ended December 31, 1993.
The increase in net sales was attributable to management's decision to expand
the distribution network to include several beauty supply distributors. This
expansion of distribution channels included establishing a dedicated sales force
to promote Body Drench's products to the tanning and beauty industry. In
addition, Body Drench introduced the Contemporary product line in October 1994.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 56.9% for the 12
months ended December 31, 1994 as compared with 60.7% for the 12 months ended
December 31, 1993. This decrease was due primarily to lower purchasing costs as
a result of the higher volume of purchases during 1994. In addition, Body Drench
incurred lower overhead and labor costs as a percentage of revenues, as a result
of increased production efficiencies due to higher utilization of prepackaged,
ready to ship products.
Gross Profit
As a result of the foregoing, gross profit increased 83.5% to $4.8 million
in the 12 months ended December 31, 1994 from $2.6 million in the 12 months
ended December 31, 1993.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased 98.3% to $4.1
million in 1994 compared with $2.1 million in 1993. The increase in selling,
general, and administrative expenses related to additional sales and
administrative positions to support the corresponding increase in sales. In
addition, Body Drench incurred significant upfront costs of promotional
literature, including new catalogs, brochures and price sheets, related to the
introduction of the Contemporary product line introduced in October 1994. Body
Drench also incurred a higher level of freight charges in proportion to sales
levels due to significant number of backorders, resulting from inventory
shortages, which caused additional shipment costs to customers.
Net Income
Net income increased 36.0% to $400,000 in 1994 compared with $300,000 in
1993.
RESULTS OF OPERATIONS -- JDS
PERIOD FROM OCTOBER 1, 1996 TO NOVEMBER 26, 1996
Net Sales
Net sales amounted to $600,000 for the period from October 1, 1996 to
November 26, 1996.
Cost of Sales
Cost of sales amounted to $300,000 for the period from October 1, 1996 to
November 26, 1996. Cost of sales, as a percentage of net sales, remained
relatively constant at 44.9% for the period October 1, 1996 to November 26, 1996
as compared with 45.2% for the 12 months ended September 30, 1996.
Gross Profit
As a result of the foregoing, gross profit amounted to $300,000 for the
period from October 1, 1996 to November 26, 1996.
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<PAGE> 36
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $300,000 for the period
from October 1, 1996 to November 26, 1996. Selling, general, and administrative
expenses, as a percentage of net sales, decreased to 42.0% as compared with
51.8% for the 12 months ended September 30, 1996. The decrease in selling,
general, and administrative expenses as a percentage of net sales was primarily
attributable to reduced shareholders' compensation for the period October 1,
1996 to November 26, 1996, in connection with the sale of JDS to the Company.
Net Income
As a result of the foregoing, net income for the Company was approximately
$45,000 for the period October 1, 1996 to November 26, 1996.
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
Net Sales
Net sales decreased 7.5% to $3.1 million in the 12 months ended September
30, 1996 compared with $3.4 million in the 12 months ended September 30, 1995.
The decrease was caused primarily by a decline in its customer base as a result
of the acquisition of several of JDS' customers by a large beauty supply company
that is not a customer of JDS.
Cost of Sales
Cost of sales, as a percentage of net sales, for the 12 months ended
September 30, 1996 decreased to 45.2%, as compared with 46.0% in the 12 months
ended September 30, 1995. The decrease as a percentage of net sales is related
primarily to the negotiation of more favorable pricing on its materials costs
with certain of its vendors.
Gross Profit
As a result of the foregoing, gross profit decreased 6.1% to $1.7 million
in the 12 months ended September 30, 1996 compared with $1.8 million in the 12
months ended September 30, 1995.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 12.4% to $1.6
million in the 12 months ended September 30, 1996 compared with $1.8 million in
the 12 months ended September 30, 1995. The decrease resulted primarily from the
elimination of warehouse personnel, as a result of JDS' efforts to reduce
overhead costs.
Net Income
As a result of the foregoing, net income was approximately $69,000 in the
12 months ended September 30, 1996 as compared with approximately $9,000 in the
12 months ended September 30, 1995.
TWELVE MONTHS ENDED SEPTEMBER 30, 1995
Net Sales
Net sales decreased 5.9% to $3.4 million for the 12 months ended September
30, 1995, compared with $3.6 million for the 12 months ended September 30, 1994.
The decrease was primarily a result of increased competition from several new
products in the market that impacted JDS' market share.
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<PAGE> 37
Cost of Sales
Cost of sales, as a percentage of net sales, remained relatively constant
at 46.0% in the 12 months ended September 30, 1995 as compared with 46.2% in the
12 months ended September 30, 1994. The decrease was a result of obtaining more
favorable freight terms with its shipping contractors.
Gross Profit
As a result of the foregoing, gross profit decreased 5.6% to $1.8 million
in the 12 months ended September 30, 1995 from $1.9 million in the 12 months
ended September 30, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 7.0% to $1.8
million for the 12 months ended September 30, 1995, compared with $2.0 million
for the 12 months ended September 30, 1994. The decrease was primarily a result
of a decrease in promotional costs, as no new products were introduced during
1995, and a decrease in management salaries resulting from an effort to reduce
overhead costs.
Net Income
Net income was $8,574 in the 12 months ended September 30, 1995 compared
with a net loss of $16,494 in the 12 months ended September 30, 1994.
RESULTS OF OPERATIONS -- KII
PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 26, 1996
Net Sales
Net sales amounted to $1.2 million for the period from January 1, 1996 to
November 26, 1996. Annualized net sales for this period were $1.4 million, which
represents a decrease of 12.6% as compared with $1.6 million of net sales
recorded in the fiscal year ended December 31, 1995. The decrease in net sales
was primarily attributable to a reduction in the customer base and decreased
promotional efforts.
Cost of Sales
Cost of sales amounted to $600,000 for the period from January 1, 1996 to
November 26, 1996. Cost of sales, as a percentage of net sales, remained
relatively unchanged at 46.9% for the period from January 1, 1996 to November
26, 1996 as compared with 45.7% for the 12 months ended December 31, 1995.
Gross Profit
As a result of the foregoing, gross profit amounted to $600,000 for the
period from January 1, 1996 to November 26, 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $600,000 for the period
from January 1, 1996 to November 26, 1996. Selling, general, and administrative
expenses, as a percentage of net sales, decreased to 47.3% for the period from
January 1, 1996 to November 26, 1996, as compared with 57.2% for the 12 months
ended December 31, 1995. The decrease in selling, general, and administrative
expenses as a percentage of net sales was primarily attributable to a reduction
in commission expenses related to the decrease in sales as well as lower
promotional costs.
Net Loss
As a result of the foregoing, net loss for the KII was approximately $2,000
for the period from January 1, 1996 to November 26, 1996.
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<PAGE> 38
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED WITH TWELVE MONTHS ENDED DECEMBER
31, 1994
Net Sales
Net sales in the 12 months ended December 31, 1995 decreased 22.1% to $1.6
million as compared with $2.0 million in the 12 months ended December 31, 1994.
As part of its overall strategy, KII acquired a division of Redken in December
1993. During 1994, Redken reduced its customer base by 17 distributors, which
had a direct impact on sales for KII.
Cost of Sales
Cost of sales, as a percentage of net sales, increased to 45.7% in the 12
months ended December 31, 1995 as compared with 49.3% in the 12 months ended
December 31, 1994. The increase was primarily attributable to increased freight
and duty costs associated with international purchases.
Gross Profit
As a result of the foregoing, gross profit decreased 16.6% to $800,000 in
the 12 months ended December 31, 1995 from $1.0 million in the 12 months ended
December 31, 1994.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased 14.3% to $900,000
in the 12 months ended December 31, 1995 compared with $1.0 million in the 12
months ended December 31, 1994. The decrease in selling, general, and
administrative expenses was attributable to a decrease in salaries and
commissions through the elimination of several sales positions.
Net Loss
Net loss increased to approximately $135,000 in the 12 months ended
December 31, 1995 from approximately $72,000 in the 12 months ended December 31,
1994.
SEASONALITY AND QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters in the fiscal years ended December 31,
1997 and 1998. All quarterly information was obtained from unaudited financial
statements not otherwise contained herein. The Company believes that all
necessary adjustments have been made to present fairly the quarterly information
when read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere in this Report. The operating results for any quarter
are not necessarily indicative of the results for any future period (in
thousands, except per share data).
<TABLE>
<CAPTION>
FISCAL 1997
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
-------------- ------------- ------------------ -----------------
<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
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>
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<PAGE> 39
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales............................ $16,225 $19,074 $26,539 $28,535
Gross profit......................... 9,183 10,624 15,001 16,343
Selling, general and
administrative..................... 5,395 6,514 9,689 11,117
Centralization and reengineering
costs.............................. -- -- -- 422
Income from operations............... 3,788 4,110 5,312 4,804
Income before extraordinary item..... 1,439 1,565 1,243 926
Extraordinary item, net.............. -- 1,091 -- --
Net income........................... 1,439 474 1,243 926
Diluted EPS before extraordinary
item............................... $ 0.34 $ 0.36 $ 0.29 $ 0.23
Diluted EPS after extraordinary
item............................... 0.34 0.11 0.29 0.23
</TABLE>
The Company has experienced moderate seasonality in quarterly operating
results due mainly to the effect of the seasonality of the indoor tanning season
on the operating results of the Body Drench and Suntopia product lines. The
Company expects 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
The Company's 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 is primarily due to increases in accounts receivable and inventory as a
result of the completion of the acquisitions during 1998, the issuance of the
Notes, and the Company's results of operations for the year ended December 31,
1998. The Company's working capital position at December 31, 1997 was primarily
the result of the completion of the acquisitions completed during 1997 and the
Company's results of operations for the year ended December 31, 1997.
During the year ended December 31, 1998, the Company used $6.8 million of
cash in operating activities, which was primarily the result of the increased
investment in accounts receivable and inventory of $10.5 million and $8.4
million, respectively, 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 is 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 relates primarily to
the liabilities assumed in the acquisitions, as well as internal growth of the
Company's business.
Capital expenditures for the year ended December 31, 1998 totaled
approximately $2.0 million, primarily related to computer hardware and software
costs in connection with Company's new centralized management and information
systems.
Effective June 26, 1997, the Company acquired all of the issued and
outstanding capital stock of ABBA, a producer of a proprietary line of
aromatherapy-based professional hair care products. The Company paid a purchase
price of $20.0 million for the stock of ABBA. This transaction was accounted for
using the purchase method of accounting.
In connection with the acquisition of ABBA, the Company entered into the
June 1997 Credit Facility. The Company repaid the June 1997 Credit Facility with
the proceeds from the December 1997 Credit Facility, discussed below. In
connection with the refinancing of the June 1997 Credit Facility, costs
previously deferred resulted in an extraordinary charge to earnings of
approximately $1.4 million, net of income taxes, or $0.33 per diluted share, in
the fourth quarter of 1997.
On December 10, 1997, the Company acquired certain assets and assumed
certain liabilities of Inverness. Inverness produces salon and retail hair
removal apparatus and products under lines known as "One Touch" and "Clean +
Easy." The Company paid a purchase price of $20.0 million, consisting of $16.5
million in cash
37
<PAGE> 40
and 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 using the purchase method of accounting.
In connection with the acquisition of the Clean + Easy and One Touch
product lines, the Company entered into the December 1997 Credit Facility with a
group of banks for whom Credit Agricole Indosuez acted as agent. The Company
used $50.0 million of the December 1997 Credit Facility to pay for the
acquisition, acquisition fees, and the payoff of the June 1997 Credit Facility.
The Company repaid the December 1997 Credit Facility with the proceeds from the
1998 Credit Facility, discussed below.
In May 1998, the Company acquired substantially all of the assets and
assumed certain operating liabilities of Pro Finish, a producer of name-brand
professional nail enhancement and nail care products. The Company paid a
purchase price of approximately $5.0 million in cash. The Company financed the
acquisition with proceeds from the December 1997 Credit Facility. The
acquisition was accounted for using the purchase method of accounting.
In June 1998, the Company issued the Notes. The Company used the $100
million proceeds to finance the purchase price and related costs of acquiring
all of the issued and outstanding capital stock of the European Touch Companies,
as well as to repay all amounts outstanding under the December 1997 Credit
Facility. European Touch is a developer, producer, and marketer of professional
nail enhancement and treatment products and European Touch II is a developer,
producer, and marketer of salon pedicure equipment. These companies were
purchased for a purchase price of approximately $25.0 million in cash, using the
purchase method of accounting.
In connection with the offering of the Notes, the Company entered into the
1998 Credit Facility, which is a five-year, $50.0 million senior credit facility
with a group of banks for which 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. The Company
utilized net proceeds of $37.0 million from the 1998 Credit Facility to finance
acquisitions and working capital requirements during the year ended December 31,
1998.
In August 1998, the Company acquired Framesi USA. Framesi USA holds
exclusive license rights for the sale in the United States and most of Latin
America of Framesi brand hair color products along with its complementary
Biogenol line of shampoos, conditioners, and styling products. The Company paid
approximately $33.0 million for Framesi USA in the form of cash and seller
carryback financing of approximately $5.0 million. Approximately $25.0 million
from the 1998 Credit Facility was used to finance the purchase price. The
acquisition was accounted for using the purchase method of accounting. As of
December 31, 1998, the Company owned approximately 85% of Ft. Pitt Acquisition,
Inc.
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 new ABBA packaging and funding capital expenditures associated with the
centralization and business process reengineering project undertaken during the
fourth quarter of 1998. In addition, the borrowing was used to repay debt
created in conjunction with the acquisition of Gena and JDS as well as to repay
existing debt assumed in the acquisition of Framesi USA.
38
<PAGE> 41
The Company intends to raise additional capital through debt and equity
financings beginning in the second quarter of 1999 to fund its continued growth.
At this time, it is not possible to assess the type of financings the Company
will pursue or the terms or availability of such financings. The inability to
secure such financing on acceptable terms could have an adverse effect on the
Company's business, operations, and financial position. In addition, it is
possible that such financing will further increase the Company's leverage.
The Company plans to drive internal growth through the expansion of
distribution, new products, product line extensions, and brand introductions.
The Company also plans to pursue strategic acquisitions to capitalize on the
substantial fragmentation and growth potential existing in the professional
salon and personal care products industry. The Company intends to fund its
future capital needs through a combination of current cash resources, expected
cash flows from operations, bank financing, seller notes payable, issuance of
its 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 the
financial condition of the Company.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in 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 year,
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.
Company's State of Readiness
The Company has completed an assessment of its internal systems and
processes with respect to the "Year 2000" issue. The Company's sales, accounts
receivable, inventory management, accounts payable, general ledger and payroll
systems comprise its critical information technology ("IT") systems. The Company
has assessed its "Year 2000" readiness with regard to these critical IT systems.
Based on internal assessments and upon vendor representations, the Company
believes that its 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. The Company believes that it will complete the
implementation of its new processes and systems associated with the critical IT
systems by June 30, 1999. The Company intends to assess the potential impact of
"Year 2000" failures from vendors, customers, and outside parties upon its
business and is currently taking steps to assess and minimize the risk of such
"Year 2000" failures. Based upon the Company's current state of readiness and
the steps currently being taken, the Company does not believe that the "Year
2000" problem will have a material adverse effect on the Company's business,
financial condition, or results of operations.
Software and hardware, such as security and telephone systems, that
facilitate the operations of its warehouses and operating locations that are not
affected by the centralization and reengineering plan comprise the Company's
primary non-IT systems. The Company is in the process of assessing the "Year
2000" compliance of these non-IT systems and expects to conclude this assessment
by June 30, 1999. The Company has not incurred, nor does it expect to incur,
material costs in readying its non-IT systems for the Year 2000.
Company's Risks of "Year 2000" Issues
The Company procures a significant amount of raw materials and components
from external suppliers and relies upon third-party contract manufacturers to
manufacture most of its products. As a result, the Company 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 such suppliers and
manufacturers to be "Year 2000" compliant may cause raw material and product
shortages that would adversely impact the Company's operations. As a result, the
Company may be at risk with respect to suppliers and manufacturers that may not
be "Year 2000" compliant. The Company believes that the most likely negative
effects, if any, could include disruptions in both shipments and receipts of raw
materials, components, and products by the Company and
39
<PAGE> 42
its customers. In addition, the Company's customers may experience "Year 2000"
failures, which could result in delays in the Company's receipt of payments from
customers.
Contingency Plans
The Company is developing contingency plans with respect to significant
"Year 2000" issues. For example, the Company is in the process of assessing and
verifying the "Year 2000" compliance of its international and domestic suppliers
and contract manufacturers. Verification will be accomplished through the use of
"Year 2000" readiness inquiries sent to key suppliers and manufacturers. The
Company is investigating transferring supplier and manufacturing relationships
to alternate providers if current suppliers and manufacturers are not "Year
2000" compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. At December 31, 1998, the Company did not
participate in any 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. The Company holds no
investment securities that would require disclosure of market risk.
Primary Market Risk Exposures. The Company's primary market risk exposures
are in the areas of interest rate risk and foreign currency exchange rate risk.
The Company incurs interest expense on loans made under the Notes at an interest
rate, which is fixed, for a maximum of ten years. At December 31, 1998, the
Company's outstanding borrowings on the Notes were $100 million, at an interest
rate of 10.875%. The Company also incurs interest on loans made under a
revolving line of credit and other debt instruments at variable interest rates
ranging from 6.0% to 8.5%. At December 31, 1998, the Company's total outstanding
borrowings on the instruments was approximately $43.1 million. The Company
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, the Company entered into an interest rate swap agreement, which
effectively fixed the interest rate on a $12.5 million notional principal amount
under the 1998 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, the Company
entered into an interest rate cap agreement, which effectively limits the
Company's interest rate exposure on a $12.5 million notional principal amount
under the 1998 Credit Facility at 7.50% plus a credit margin ranging from 250 to
300 basis points, for a period ending April 2000. The borrowings not subject to
interest rate swap or interest rate cap agreements at December 31, 1998 totaled
$12.0 million.
Substantially all of the Company's business outside the United States is
conducted in U.S. dollar denominated transactions. The Company has 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, the
Company believes 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 the Company's business, results of operations,
or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, financial statement
schedule, the notes thereto, and report thereon, commencing at page F-1 of this
Report, which financial statements, schedule, notes, and report are incorporated
herein by reference.
40
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to directors of the Company
is incorporated herein by reference to the definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") for the Company's 1999 Annual Meeting of
Stockholders. The information required by this Item relating to executive
officers of the Company is included in Item 1, "Business -- Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for the Company's 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for the Company's 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for the Company's 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES:
(1) Financial Statements are listed in the Index to Consolidated
Financial Statements on page F-1 of this Report.
(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the consolidated financial statements or notes thereto.
(B) REPORTS ON FORM 8-K.
Not applicable.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
3.1 First Amended and Restated Certificate of Incorporation of
the Registrant
3.3 Bylaws of the Registrant(1)
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
4.1 Specimen of Stock Certificate(1)
4.2 Specimen of Redeemable Common Stock Warrant(1)
4.3 Form of Warrant issued to Credit Agricole Indosuez(2)
4.4 Form of Warrant issued to Bank Boston N.A.(3)
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(4)
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.(5)
10.5 Employment Agreement between Registrant and Sam L.
Leopold(1)
10.11 1996 Stock Option Plan(1)
10.19 Asset Purchase Agreement dated as of October 31, 1997 among
the Registrant, Inverness Corporation, and Inverness (UK)
Limited.(6)
10.20 Transition and Manufacturing Agreement dated as of December
10, 1997 the Registrant and Inverness Corporation.(6)
10.23 Stock Purchase Agreement dated as of June 23, 1998 among the
Company and the former shareholders of European Touch, Ltd.
II(7)
10.24 Credit Agreement dated June 30, 1998 among the Company,
BankBoston, N.A., and NationsBank, N.A.(8)
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik(6)
10.26 1998 Employee Stock Option Plan
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedules
</TABLE>
- ---------------
(1) Incorporated by reference to the Registration Statement on Form S-1
(Registration No. 333-12469) filed September 20, 1996 and declared
effective November 12, 1996.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission (the "Commission") on
August 14, 1997.
(3) Quarterly Report on Form 10-Q as filed with the Commission on November 14,
1997.
(4) 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.
(5) Incorporated by reference to the Registration Statement on Form 8-A as
filed with the Commission on March 8, 1999
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
(8) 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.
42
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
STYLING TECHNOLOGY CORPORATION
/s/ SAM L. LEOPOLD
--------------------------------------
Sam L. Leopold,
Chairman of the Board, President,
and Chief Executive Officer
Date: March 31, 1999
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ SAM L. LEOPOLD Chairman of the Board, President, March 31, 1999
- ------------------------------------------------ and Chief Executive Officer
Sam L. Leopold (Principal Executive Officer)
/s/ RICHARD R. ROSS Executive Vice President, Chief March 31, 1999
- ------------------------------------------------ Financial Officer, Treasurer,
Richard R. Ross and Director (Principal
Financial Officer)
/s/ J. TIMOTHY MONTROSE Chief Accounting Officer March 31, 1999
- ------------------------------------------------ (Principal Accounting Officer)
J. Timothy Montrose
/s/ JAMES A. BROOKS Director March 31, 1999
- ------------------------------------------------
James A. Brooks
/s/ PETER W. BURG Director March 31, 1999
- ------------------------------------------------
Peter W. Burg
/s/ MICHAEL H. FEINSTEIN Director March 31, 1999
- ------------------------------------------------
Michael H. Feinstein
/s/ SYLVAN SCHEFLER Director March 31, 1999
- ------------------------------------------------
Sylvan Schefler
</TABLE>
43
<PAGE> 46
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STYLING TECHNOLOGY CORPORATION
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
GENA LABORATORIES, INC.
Report of Independent Public Accountants.................. F-30
Balance Sheets............................................ F-31
Statements of Operations.................................. F-32
Statements of Stockholders' Equity........................ F-33
Statements of Cash Flows.................................. F-34
Notes to Financial Statements............................. F-35
BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
Report of Independent Public Accountants.................. F-41
Balance Sheets............................................ F-42
Statements of Operations.................................. F-43
Statements of Changes in Owners' Investment............... F-44
Statements of Cash Flows.................................. F-45
Notes to Financial Statements............................. F-46
JDS MANUFACTURING CO., INC.
Report of Independent Public Accountants.................. F-49
Balance Sheets............................................ F-50
Statements of Operations.................................. F-51
Statements of Stockholders' Equity........................ F-52
Statements of Cash Flows.................................. F-53
Notes to Financial Statements............................. F-54
KOTCHAMMER INVESTMENTS, INC.
Report of Independent Public Accountants.................. F-57
Balance Sheet............................................. F-58
Statements of Operations.................................. F-59
Statements of Stockholders' Deficit....................... F-60
Statements of Cash Flows.................................. F-61
Notes to Financial Statements............................. F-62
</TABLE>
F-1
<PAGE> 47
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 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 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II listed in Item 14 of Part IV
herein is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This information has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 15, 1999.
F-2
<PAGE> 48
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,063,000 $ 4,023,000
Accounts receivable, net of allowance for doubtful
accounts of approximately $1,032,000 and $2,882,000.... 14,296,000 32,326,000
Inventories, net.......................................... 10,951,000 25,375,000
Prepaid expenses and other current assets................. 2,120,000 1,791,000
----------- ------------
Total current assets.............................. 30,430,000 63,515,000
PROPERTY AND EQUIPMENT, net................................. 2,640,000 5,362,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization of approximately $1,375,000 and $4,749,000... 56,506,000 139,566,000
OTHER ASSETS................................................ 2,913,000 10,755,000
----------- ------------
$92,489,000 $219,198,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 7,065,000 $ 12,668,000
Accrued liabilities....................................... 3,670,000 10,367,000
Current portion of long-term debt and other............... 5,647,000 2,768,000
----------- ------------
Total current liabilities......................... 16,382,000 25,803,000
----------- ------------
DEFERRED INCOME TAXES....................................... 162,000 19,216,000
----------- ------------
LONG-TERM DEBT AND OTHER, less current portion.............. 47,377,000 140,366,000
----------- ------------
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...................................... 1,000 1,000
Additional paid-in capital................................ 27,875,000 29,038,000
Retained earnings......................................... 2,492,000 6,574,000
Treasury stock............................................ (1,800,000) (1,800,000)
----------- ------------
Total stockholders' equity........................ 28,568,000 33,813,000
----------- ------------
$92,489,000 $219,198,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 49
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
NOVEMBER 27, 1996
(COMMENCEMENT
OF OPERATIONS) TO YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- ----------------- -----------------
<S> <C> <C> <C>
NET SALES..................................... $1,083,000 $38,108,000 $90,373,000
COST OF SALES................................. 571,000 16,756,000 39,222,000
---------- ----------- -----------
Gross profit........................ 512,000 21,352,000 51,151,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................... 737,000 12,201,000 32,715,000
CENTRALIZATION AND REENGINEERING COSTS........ -- -- 422,000
---------- ----------- -----------
737,000 12,201,000 33,137,000
---------- ----------- -----------
Income (loss) from operations....... (225,000) 9,151,000 18,014,000
INTEREST EXPENSE AND OTHER, net............... 2,000 (1,847,000) (9,206,000)
---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
INCOME TAXES................................ (223,000) 7,304,000 8,808,000
PROVISION FOR (BENEFIT FROM) INCOME TAXES..... (72,000) 3,097,000 3,635,000
---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM....... (151,000) 4,207,000 5,173,000
EXTRAORDINARY ITEM, net of tax benefit of
$882,000 and $822,000....................... -- (1,377,000) (1,091,000)
---------- ----------- -----------
NET INCOME (LOSS)............................. $ (151,000) $ 2,830,000 $ 4,082,000
========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item..... $ (0.04) $ 1.07 $ 1.28
Extraordinary item.......................... -- (0.35) (0.27)
---------- ----------- -----------
Net income (loss)........................... $ (0.04) $ 0.72 $ 1.01
========== =========== ===========
Weighted average shares..................... 3,770,000 3,949,000 4,033,000
========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item..... $ (0.04) $ 1.02 $ 1.20
Extraordinary item.......................... -- (0.33) (0.25)
---------- ----------- -----------
Net income (loss)........................... $ (0.04) $ 0.69 $ 0.95
========== =========== ===========
Weighted average shares..................... 3,770,000 4,113,000 4,313,000
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 50
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
========= ====== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 51
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
NOVEMBER 27,
1996 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
-------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (151,000) $ 2,830,000 $ 4,082,000
Adjustments to reconcile net income (loss) to net
cash used in operating activities --
Depreciation and amortization................... 97,000 1,846,000 5,187,000
Interest accretion to note payable.............. -- 174,000 159,000
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)
Inventories, net................................ (21,000) (2,992,000) (8,364,000)
Prepaid expenses and other assets............... (36,000) (1,730,000) (198,000)
Accounts payable and accrued liabilities........ (788,000) 3,520,000 1,807,000
------------ ------------ ------------
Net cash used in operating activities...... (367,000) (2,380,000) (6,785,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of acquired businesses, net of cash
acquired........................................ (20,523,000) (45,150,000) (62,677,000)
Purchases of property and equipment................ (46,000) (582,000) (1,962,000)
Changes in other assets, net....................... -- -- (4,251,000)
------------ ------------ ------------
Net cash used in investing activities...... (20,569,000) (45,732,000) (68,890,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
offering and acquisition costs.................. 27,227,000 -- --
Proceeds from credit facility, net of financing
costs........................................... -- 71,633,000 47,298,000
Proceeds from bond offering, net of financing
costs........................................... -- -- 96,400,000
Exercise of stock options.......................... -- -- 1,163,000
Payments on long-term debt......................... -- (24,949,000) (68,226,000)
Purchase of treasury stock......................... (1,800,000) -- --
------------ ------------ ------------
Net cash provided by financing
activities............................... 25,427,000 46,684,000 76,635,000
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 4,491,000 (1,428,000) 960,000
CASH AND CASH EQUIVALENTS, beginning of period....... -- 4,491,000 3,063,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period............. $ 4,491,000 $ 3,063,000 4,023,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes......................... $ -- $ 1,727,000 $ 2,634,000
============ ============ ============
Cash paid for interest............................. $ -- $ 1,155,000 $ 3,699,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 52
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 "Offering") of 3,116,000 shares of its common stock. Simultaneously with
the consummation of the Offering, the Company acquired in separate transactions
four businesses that develop, produce, and market professional salon products.
Prior to the Offering, the Company effected a 0.808-for-1 reverse stock split on
all its outstanding common stock. As a result, all share amounts were adjusted
to give effect to the reverse split.
Upon consummation of the Offering, the Company acquired all of the
outstanding stock of Gena Laboratories, Inc. ("Gena") and JDS Manufacturing Co.,
Inc. ("JDS") and certain assets and liabilities of the Body Drench Division of
Designs by Norvell, Inc. ("Body Drench") and Kotchammer Investments, Inc.
("KII") (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 Offering, 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
which 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-7
<PAGE> 53
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 & Other Intangibles
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.
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.
Revenue Recognition
The Company recognizes revenue from sales upon shipment or when title
passes.
F-8
<PAGE> 54
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 a new 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 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
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.
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
F-9
<PAGE> 55
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. This new statement is effective for fiscal years
beginning after December 15, 1998. The Company intends to adopt this statement
effective January 1, 1999. Initial application of SOP 98-5 is required to be
reported as the cumulative effect of a change in accounting. The Company
believes that its adoption will not have a material effect on its financial
position or results of operations.
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
------------------------------------ -----------------------------------
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............. $ (151,000) -- $ (151,000) $4,207,000 -- $4,207,000
Extraordinary item, net.......... -- -- -- 1,377,000 -- 1,377,000
---------- ---------- ---------- ---------- ------- ----------
Net income (loss)................ $ (151,000) -- $ (151,000) $2,830,000 -- $2,830,000
========== ========== ========== ========== ======= ==========
Shares........................... 3,770,000 -- 3,770,000 3,949,000 164,000 4,113,000
========== ========== ========== ========== ======= ==========
Per share amount -- income (loss)
before extraordinary item...... $ (0.04) $ (0.04) $ 1.07 $ 1.02
Per share amount -- extraordinary
item, net...................... -- -- (0.35) (0.33)
---------- ---------- ---------- ----------
Per share amount -- net income
(loss)......................... $ (0.04) $ (0.04) $ 0.72 $ 0.69
========== ========== ========== ==========
</TABLE>
F-10
<PAGE> 56
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------
EFFECT OF
STOCK
OPTIONS
BASIC AND DILUTED
EPS WARRANTS EPS
---------- ---------- ----------
<S> <C> <C> <C>
Income before extraordinary item............................ $5,173,000 -- $5,173,000
Extraordinary item, net..................................... 1,091,000 -- 1,091,000
---------- ---------- ----------
Net income.................................................. $4,082,000 -- $4,082,000
========== ========== ==========
Shares...................................................... 4,033,000 280,000 4,313,000
========== ========== ==========
Per share amount -- income before extraordinary item........ $ 1.28 $ 1.20
Per share amount -- extraordinary item, net................. (0.27) (0.25)
---------- ----------
Per share amount -- net income.............................. $ 1.01 $ 0.95
========== ==========
</TABLE>
For the period from November 27, 1996 to December 31, 1996, 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 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
(collectively 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 is 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. (Pro Finish), a
producer of name-brand professional nail enhancement and nail care products. The
Company paid a purchase price of approximately $5.0 million in cash. The
acquisition was accounted for using the purchase method of accounting.
F-11
<PAGE> 57
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
In August 1998, the Company acquired a controlling interest in Ft. Pitt
Acquisition, Inc. 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 Ft. Pitt
Acquisition, Inc. 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 Ft. Pitt Acquisition, Inc. 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
Net income........................................ $ 3,679,000 3,768,000
Income per basic share............................ 0.93 0.93
Income per diluted share.......................... 0.89 0.87
</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 at the beginning of 1997 and 1998, and is not necessarily indicative of
future operating results.
F-12
<PAGE> 58
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.
F-13
<PAGE> 59
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
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 Notes Offering as defined below, the Company entered
into a five-year, $50.0 million senior credit facility (the "1998 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
F-14
<PAGE> 60
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 initial public offering 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 "Notes
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 of the Notes
Offering were used to finance the purchase price and related costs of acquiring
all of the issued and outstanding capital stock of the European Touch Companies,
to repay existing indebtedness (including the Company's previous credit
facility) and for working capital purposes.
A portion of the proceeds from the Notes Offering was used to repay the
December 1997 Credit Facility. The Company reported an extraordinary, non-cash
charge of approximately $1.1 million, net of taxes, or $0.25 per diluted share,
related to unamortized financing costs associated with the repayment of the
December 1997 Credit Facility.
Debt Covenants
The Company's 1998 Credit Facility agreement contains provisions that,
among other things, require the Company to comply with certain financial ratios
and net worth requirements and will limit 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, Styling was
in compliance with all applicable 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 13.
F-15
<PAGE> 61
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Offering. Accordingly, upon consummation of the Offering,
the founder was no longer a stockholder of the Company.
Initial Public Offering
In November 1996, the Company completed the Offering of 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 Offering and over allotment option amounted to
approximately $27,227,000.
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 Offering, the Company issued 203,000 five-year
warrants to its underwriters with an exercise price of $12.00 per share. These
warrants have been recorded at fair value as additional paid-in capital in the
accompanying consolidated balance sheets. Prior to the Offering, the Company
issued 20,000 warrants with an exercise price $12.50 per share. During 1998,
this warrant holder exercised all 20,000 warrants.
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.
F-16
<PAGE> 62
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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. 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. 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.
F-17
<PAGE> 63
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-18
<PAGE> 64
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
(9) RELATED PARTY INFORMATION:
During 1996, certain founders advanced approximately $112,500 to the
Company to fund various Offering and acquisition costs, all of which was repaid
during the year.
A member of the Company's Board of Directors 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.
F-19
<PAGE> 65
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following operating segment information includes financial information
(in thousands) for all four of the Company's operating segments.
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
Operating income.......... 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...... 25 134 661 146 296 -- 2,557
</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
Operating income........... 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
Operating income............... -- 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, sales to any single customer as a
percentage of total net sales did not exceed 10%.
(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
F-20
<PAGE> 66
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$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 Acquisition, Inc., ("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 matching contributions of approximately $11,000. Ft.
Pitt made a discretionary profit sharing contribution of $20,000 in 1998.
F-21
<PAGE> 67
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:
The Notes described in Note 6 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.
The financial statements presented below include the combined financial
position as of December 31, 1997 and 1998; the results of operations for the
period from November 27, 1996 to December 31, 1996 and for the years ended
December 31, 1997 and 1998; and the statements of cash flows for the period from
November 27, 1996 to December 31, 1996 and for the years ended December 31, 1997
and 1998 of Styling Technology Corporation (Parent); guarantor subsidiaries
(Guarantors) and the non-guarantor subsidiaries (Non-guarantors).
F-22
<PAGE> 68
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-23
<PAGE> 69
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..... 1,013 695 83 -- 1,791
Due to/from affiliates........................ 2,314 5,545 (7,859) -- --
--------- ------- ------- --------- --------
Total current assets.................. 37,040 25,473 1,002 -- 63,515
PROPERTY AND EQUIPMENT, net..................... 3,625 1,626 111 -- 5,362
GOODWILL AND OTHER INTANGIBLES, net............. 37,128 52,509 49,929 -- 139,566
OTHER ASSETS.................................... 10,452 118 185 -- 10,755
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-24
<PAGE> 70
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 27, 1996 TO DECEMBER 31, 1996
-------------------------------------------------------------
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) 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>
F-25
<PAGE> 71
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 wholly owned subsidiaries........ 2,701 -- -- (2,701) --
------- ------- ------ ------- -------
Net income................................... $ 2,830 $ 2,701 $ -- $(2,701) $ 2,830
======= ======= ====== ======= =======
</TABLE>
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 income (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 wholly owned subsidiaries........ 6,129 -- -- (6,129) --
------- ------- ------- ------- -------
Net income................................... $ 4,016 $ 6,129 $ 66 $(6,129) $ 4,082
======= ======= ======= ======= =======
</TABLE>
F-26
<PAGE> 72
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
AS OF 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........ (67) 31 -- -- (36)
Accounts payable and accrued
liabilities........................... (756) (32) -- -- (788)
Due to/from affiliates, net.............. 2 (1) -- (1) --
-------- ---- ---- ---- -------
Net cash provided by (used in)
operating activities................ (517) 150 -- -- (367)
-------- ---- ---- ---- -------
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............. 27,227 -- -- -- 27,227
Purchase of treasury stock.................... (1,800) -- -- -- (1,800)
-------- ---- ---- ---- -------
Net cash provided by financing
activities.......................... 25,427 -- -- -- 25,427
-------- ---- ---- ---- -------
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-27
<PAGE> 73
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.................... (507) (2,194) -- (2,701) --
-------- ------- --- ------- --------
Net cash provided by (used in) operating
activities................................ (2,946) 566 -- -- (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...... (1,434) 6 -- -- (1,428)
-------- ------- --- ------- --------
CASH AND CASH EQUIVALENTS, beginning of period........ 4,288 203 -- -- 4,491
-------- ------- --- ------- --------
CASH AND CASH EQUIVALENTS, end of period.............. $ 2,854 $ 209 $-- $ -- $ 3,063
======== ======= === ======= ========
</TABLE>
F-28
<PAGE> 74
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOW
<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..................................... $ 4,016 $ 6,129 $ 66 $(6,129) $ 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............... (16,297) 1,085 9,083 6,129 --
-------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities................. (20,512) 3,097 10,630 -- (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 (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (246) 394 812 -- 960
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, beginning of period... 2,850 213 -- -- 3,063
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of period......... $ 2,604 $ 607 $ 812 $ -- $ 4,023
======== ======= ======= ======= ========
</TABLE>
F-29
<PAGE> 75
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-30
<PAGE> 76
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-31
<PAGE> 77
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-32
<PAGE> 78
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-33
<PAGE> 79
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-34
<PAGE> 80
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-35
<PAGE> 81
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-36
<PAGE> 82
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-37
<PAGE> 83
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-38
<PAGE> 84
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-39
<PAGE> 85
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-40
<PAGE> 86
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-41
<PAGE> 87
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-42
<PAGE> 88
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-43
<PAGE> 89
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-44
<PAGE> 90
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-45
<PAGE> 91
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-46
<PAGE> 92
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-47
<PAGE> 93
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-48
<PAGE> 94
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-49
<PAGE> 95
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-50
<PAGE> 96
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-51
<PAGE> 97
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-52
<PAGE> 98
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-53
<PAGE> 99
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-54
<PAGE> 100
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-55
<PAGE> 101
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-56
<PAGE> 102
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-57
<PAGE> 103
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-58
<PAGE> 104
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-59
<PAGE> 105
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-60
<PAGE> 106
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-61
<PAGE> 107
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-62
<PAGE> 108
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-63
<PAGE> 109
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-64
<PAGE> 110
SCHEDULE II
STYLING TECHNOLOGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 1998
---- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of year.............................. $ -- $ 427 $ 1,032
Provision................................................. 427 710 2,710
Write-offs................................................ -- (105) (860)
---- ------- -------
Balance at end of year.................................... $427 $ 1,032 $ 2,882
==== ======= =======
</TABLE>
S-1
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT INDEX
- ----------- -------------
<S> <C> <C>
3.1 First Amended and Restated Certificate of Incorporation of
the Registrant
3.2 Certificate of Amendment of Certificate of Incorporation(1)
3.3 Bylaws of the Registrant(1)
4.1 Specimen of Stock Certificate(1)
4.2 Specimen of Redeemable Common Stock Warrant(1)
4.3 Form of Warrant issued to Credit Agricole Indosuez(2)
4.4 Form of Warrant issued to Bank Boston N.A.(3)
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(4)
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.(5)
10.5 Employment Agreement between Registrant and Sam L.
Leopold(1)
10.11 1996 Stock Option Plan(1)
10.19 Asset Purchase Agreement dated as of October 31, 1997 among
the Registrant, Inverness Corporation, and Inverness (UK)
Limited.(6)
10.20 Transition and Manufacturing Agreement dated as of December
10, 1997 the Registrant and Inverness Corporation.(6)
10.23 Stock Purchase Agreement dated as of June 23, 1998 among the
Company and the former shareholders of European Touch, Ltd.
II(7)
10.24 Credit Agreement dated June 30, 1998 among the Company,
BankBoston, N.A., and NationsBank, N.A.(8)
10.25 Stock Purchase Agreement dated as of August 3, 1998, among
the Company, Kevin T. Weir, Carol M. Weir, and Dennis M.
Katawczik(6)
10.26 1998 Employee Stock Option Plan
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedules
</TABLE>
- ---------------
(1) Incorporated by reference to the Registration Statement on Form S-1
(Registration No. 333-12469) filed September 20, 1996 and declared
effective November 12, 1996.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission (the "Commission") on
August 14, 1997.
(3) Quarterly Report on Form 10-Q as filed with the Commission on November 14,
1997.
(4) 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.
<PAGE> 112
(5) Incorporated by reference to the Registration Statement on Form 8-A as
filed with the Commission on March 8, 1999
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on December 24, 1997.
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on July 8, 1998.
(8) 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.
<PAGE> 1
Exhibit 3.1
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
STYLING TECHNOLOGY CORPORATION
1. The name of the corporation is STYLING TECHNOLOGY CORPORATION (which is
hereinafter referred to as the "Corporation").
2. The original Certificate of Incorporation was filed with the Secretary
of State of the State of Delaware on June 29, 1995, under the name LEOPOLD
STYLING PRODUCTS, INC.
3. The original Certificate of Incorporation was amended on September 23,
1996 providing for a reverse stock split and changing the name of the
Corporation to Styling Technology Corporation.
4. This First Restated Certificate of Incorporation has been duly proposed
by resolutions adopted and declared advisable by the Board of Directors of the
Corporation, duly adopted by the stockholders of the Corporation at a meeting
duly called, and duly executed and acknowledged by the officers of the
Corporation in accordance with the provisions of Sections 103 and 245 of the
General Corporation Law of the State of Delaware, and amends, restates, and
integrates the provisions of the Certificate of Incorporation of the Corporation
and, upon filing with the Secretary of State in accordance with Section 103 and
242, shall thenceforth supersede the Certificate of Incorporation and all
amendments thereto, and shall, as it may thereafter be amended in accordance
with its terms and applicable law, be the Certificate of Incorporation of the
Corporation.
5. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read in its entirety as follows:
ARTICLE I
NAME
The name of the Corporation shall be Styling Technology Corporation.
<PAGE> 2
ARTICLE II
ADDRESS
The registered office of the Corporation in the State of Delaware is 1209
Orange Street, in the City of Wilmington, County of New Castle. The name and
address of the Corporation's registered agent is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended (the "GCL").
ARTICLE IV
STOCK
The Corporation shall be authorized to issue two classes of shares of
capital stock, to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares of Common Stock and Preferred Stock which the
Corporation shall have authority to issue is eleven million (11,000,000) of
which ten million (10,000,000) shares shall be Common Stock and one million
(1,000,000) shall be Preferred Stock. The par value of the shares of Common
Stock is one hundredth of one cent (.0001) per share. The par value of the
shares of Preferred Stock is one hundredth of one cent (.0001) per share.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized, by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each series,
and to fix the designation, powers, preferences, and rights of the shares of
each such series and the qualifications, limitations, or restrictions thereof,
including, but not limited to, the fixing or alteration of the dividend rights,
dividend rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences of any wholly unissued series of shares of Preferred
Stock, or any of them; and to increase or decrease the number of shares of any
series subsequent to the issue of the shares of that series, but not below the
number of shares of that series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of that series.
2
<PAGE> 3
ARTICLE V
ADDRESS OF INCORPORATOR
The name and mailing address of the incorporator is M.C. Kinnamon, 1209
Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
ARTICLE VI
BOARD OF DIRECTORS
The number of directors which shall comprise the initial Board of Directors
of the Corporation shall be two (2). The size of the Board of Directors may be
increased or decreased in the manner provided in the Bylaws of the Corporation.
All corporate powers of the Corporation shall be exercised by or under the
direction of the Board of Directors except as otherwise provided herein or by
law.
In furtherance and not in limitation of the powers conferred by law, the
Board of Directors is expressly authorized:
(i) to fix, abolish, determine, and vary from time to time the amount
or amounts to be set apart as reserves;
(ii) to adopt, amend, and repeal Bylaws of the Corporation;
(iii) to authorize and cause to be executed mortgages and liens, with
or without limit as to amount, upon the real or personal property of the
Corporation;
(iv) from time to time to determine whether and to what extent, at
what time and place, and under what conditions and regulations the accounts and
books of the Corporation, or any of them, shall be open to the inspection of any
stockholder; and no stockholder shall have any right to inspect any account or
book or document of the Corporation except as conferred by statute or bylaw or
as authorized by resolution of the stockholders or Board of Directors;
(v) to authorize the payment of compensation to the directors for
services to the Corporation, including fees for attendance at meetings of the
Board of Directors or of any committee thereof and/or salaries for serving as
such directors or committee members, and to determine the amount of such
compensation;
(vi) from time to time to formulate, establish, promote, and carry
out, and to amend, alter, change, revise, recall, repeal, or abolish, a plan or
plans for the participation by all or any of the employees, including directors
and officers, of the Corporation, or of any corporation,
3
<PAGE> 4
company, association, trust, or organization in which or in the welfare of which
the Corporation has any interest, and those actively engaged in the conduct of
the Corporation's business, in the profits, gains, or business of the
Corporation or of any branch or division thereof, as part of the Corporation's
legitimate expenses, and/or for the furnishing to such employees, directors,
officers, or persons, or any of them, at the Corporation's expense, of medical
services, insurance against accident, sickness, or death, pensions during old
age, disability or unemployment, education, housing, social services,
recreation, or other similar aids for their relief or general welfare, in such
manner and upon such terms and conditions as the Board of Directors shall
determine; and
(vii) to authorize the guaranty by the Corporation of securities,
evidences of indebtedness, and obligations of other persons, firms,
associations, and corporations.
ARTICLE VII
ELECTION OF DIRECTORS
Unless and except to the extent that the Bylaws of the Corporation shall so
require, the election of directors of the Corporation need not be by written
ballot.
ARTICLE VIII
STRUCTURE OF BOARD OF DIRECTORS
A. The Board (other than those directors elected by the holders of any
series of Preferred Stock provided for or fixed pursuant to the provisions of
Article IV hereof ("Preferred Stock Directors") shall be divided into three
classes, as nearly equal in number as possible, designated Class I, Class II,
and Class III. Class I directors shall initially serve until the 1999 meeting of
stockholders; Class II directors shall initially serve until the 2000 meeting of
stockholders; and Class III directors shall initially serve until the 2001
meeting of stockholders. Commencing with the annual meeting of stockholders in
1999, directors of each class, the term of which shall then expire, shall be
elected to hold office for a three-year term and until the election and
qualification of their respective successors in office. In case of any increase
or decrease, from time to time, in the number of directors (other than Preferred
Stock Directors), the number of directors in each class shall be apportioned as
nearly equal as possible.
B. Any director chosen to fill a vacancy or newly created directorship
shall hold office until the next election of the class for which such director
shall have been chosen and until his or her successor shall be elected and
qualified or until their earlier death, resignation, disqualification, or
removal.
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ARTICLE IX
INDEMNIFICATION
Every person who was or is a party or is threatened to be made a party to
or is involved in any threatened, pending or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
("Proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation, or as its representative in a partnership,
joint venture, trust, employee benefit plan, or other enterprise, shall be
indemnified and held harmless by the Corporation, and the Corporation shall
advance expenses to such person, to the fullest extent legally permissible under
the GCL, against all expenses, liabilities, and losses (including attorneys'
fees, judgments, fines, and amounts paid in settlement) reasonably incurred or
suffered by him or her in connection therewith. Nothing contained herein shall
affect any rights to indemnification to which employees other than directors and
officers may be entitled by law. No amendment or repeal of this Article IX shall
apply to or have any effect on any right to indemnification provided hereunder
with respect to any acts or omissions occurring prior to such amendment or
repeal. The right of indemnification shall be a contract right that may be
enforced in any manner desired by such person. The right of indemnification
shall not be exclusive of any other right that such directors, officers, or
representatives may have or hereafter acquire and, without limiting the
generality of such statement, they shall be entitled to their respective rights
of indemnification under any bylaws, agreement, vote of stockholders, provision
of law or otherwise, as well as their rights under this Article. Notwithstanding
any other provision of this Article IX, no person shall be entitled to
indemnification or advancement of expenses under this Article with respect to
any Proceeding, or any claim therein, brought or made by him or her against the
Corporation, unless such Proceeding or claim is approved by the Board of
Directors of the Corporation.
The Board of Directors may adopt bylaws from time to time with respect to
indemnification to provide at all time the fullest indemnification permitted by
the GCL, and may cause the Corporation to purchase and maintain insurance, at
the Corporation's expense, on behalf of any person who is or was a director,
officer, employee, or agent of the Corporation, or is or was serving at the
request of the Corporation as a director or officer of another corporation, or
as its representative in a partnership, joint venture, trust, or other
enterprise against any liability asserted against such person and incurred in
any such capacity or arising out of such status, whether or not the Corporation
would have the power to indemnify such person against such liability. The
Corporation may also create a trust fund, grant a security interest and/or use
other means (including, but not limited to, letters of credit, surety bonds
and/or other similar arrangements), as well as enter into contracts providing
indemnification to the full extent authorized or permitted by law and including
as part thereof provisions with respect to any or all of the foregoing, to
ensure the payment of such amounts as may become necessary to effect
indemnification as provided therein, or elsewhere.
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ARTICLE X
REMOVAL OF DIRECTORS
Any director or the entire Board of Directors may be removed, with or
without cause, at any time by the holders of a majority of the shares then
entitled to vote at an election of directors, and the vacancy in the Board of
Directors caused by such removal may be filled by the stockholders at the time
of such removal.
ARTICLE XI
LIMITATION ON LIABILITY FOR BREACH OF FIDUCIARY DUTY
A director of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the GCL. Any repeal or modification of this Article shall not
adversely affect any right or protection of a director of the Corporation
existing hereunder with respect to any act or omission occurring prior to such
repeal or modification.
ARTICLE XII
AMENDMENT OF BYLAWS
Subject to the power of the stockholders of the Corporation to alter or
repeal any Bylaw made by the Board of Directors, the Board of Directors is
expressly authorized and empowered to make, alter, and repeal the Bylaws of the
Corporation.
ARTICLE XIII
AMENDMENT OF ARTICLES
The Corporation reserves the right at any time, and from time to time, to
amend, alter, change, or repeal any provision contained in this First Restated
Certificate of Incorporation, and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law; and all rights, preferences, and privileges
of whatsoever nature conferred upon stockholders, directors, or any other
persons whomsoever by and pursuant to this First Restated Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
the rights reserved in this Article.
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ARTICLE XIV
BOARD CONSIDERATIONS UPON SIGNIFICANT EVENTS
The Board, when evaluating any (A) tender offer or invitation for tenders,
or proposal to make a tender offer or request or invitation for tenders, by
another party, for any equity security of the Corporation, or (B) proposal or
offer by another party to (1) merge or consolidate the Corporation or any
subsidiary with another corporation or other entity, (2) purchase or otherwise
acquire all or a substantial portion of the properties or assets of the
Corporation or any subsidiary, or sell or otherwise dispose of to the
Corporation or any subsidiary all or a substantial portion of the properties or
assets of such other party, or (3) liquidate, dissolve, reclassify the
securities of, declare an extraordinary dividend of, recapitalize or reorganize
the Corporation, shall take into account all factors that the Board deems
relevant, including, without limitation, to the extent so deemed relevant, the
potential impact on employees, customers, suppliers, partners, joint venturers
and other constituents of the Corporation and the communities in which the
Corporation operates.
In addition to any affirmative vote required by applicable law and in
addition to any vote of the holders of any series of Preferred Stock provided
for or fixed pursuant to the provisions of Article IV of this First Restated
Certificate of Incorporation, any alteration, amendment or repeal relating to
this Article XIV must be approved by the affirmative vote of the holders of at
least sixty six and two-thirds percent (66 2/3%) of the combined voting power of
the issued and outstanding shares of Voting Stock (as defined in Article XVI),
voting together as a single class.
ARTICLE XV
STOCKHOLDER CONSENT
No action that is required or permitted to be taken by the stockholders of
the Corporation at any annual or special meeting of stockholders may be effected
by written consent of stockholders in lieu of a meeting of stockholders, unless
the action to be effected by written consent of stockholders and the taking of
such action by such written consent have expressly been approved in advance by
the Board.
In addition to any affirmative vote required by applicable law and in
addition to any vote of the holders of any series of Preferred Stock provided
for or fixed pursuant to the provisions of Article IV of this First Restated
Certificate of Incorporation, any alteration, amendment or repeal relating to
this Article XV must be approved by the affirmative vote of the holders of at
least sixty six and two-thirds percent (66 2/3%) of the combined voting power of
the issued and outstanding shares of Voting Stock (as defined in Article XVI),
voting together as a single class.
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ARTICLE XVI
BUSINESS COMBINATIONS; FAIR PRICE
A. In addition to any affirmative vote required by law or this First
Restated Certificate of Incorporation, and except as otherwise expressly
provided in paragraph B of this Article XVI:
1. any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (a) any Interested Stockholder (as
hereinafter defined), or (b) any other corporation, partnership, or other
entity (whether or not itself an Interested Stockholder) which is, or after
such merger or consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder other than a merger enacted in
accordance with Section 253 of the Delaware General Corporation Law or any
successor thereof; or
2. any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder, including all Affiliates of the Interested
Stockholder, of any assets of the Corporation or any Subsidiary having an
aggregate Fair Market Value (as hereinafter defined) of ten million dollars
($10,000,000) or more; or
3. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder, including all
Affiliates of the Interested Stockholder, in exchange for cash, securities,
or other property (or a combination thereof) having an aggregate Fair
Market Value of ten million dollars ($10,000,000) or more (other than on a
pro rata basis to all holders of Voting Stock of the same class held by the
Interested Stockholder pursuant to a stock split, stock dividend or
distribution of warrants or rights and other than in connection with the
exercise or conversion of securities exercisable for or convertible into
securities of the Corporation of any of its subsidiaries which securities
have been distributed pro rata to all holders of Voting Stock); or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliates of an Interested Stockholder; or
5. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not an Interested Stockholder is a party thereto)
which has the effect, directly or indirectly, of increasing the
proportionate share by more than one percent (1%) of the issued and
outstanding shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which are directly or indirectly owned by any
Interested Stockholder or one or more Affiliates of the Interested
Stockholder; shall require the affirmative vote of the holders of at least
sixty six
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and two-thirds percent (66 2/3%) of the voting power of the then issued and
outstanding Voting Stock, as hereinafter defined, voting together as a
single class, including the affirmative vote of the holders of at least
sixty six and two-thirds percent (66 2/3%) of the voting power of the then
issued and outstanding Voting Stock not Beneficially Owned directly or
indirectly by an Interested Stockholder or any Affiliate of any Interested
Stockholder. Such affirmative vote shall be required notwithstanding the
fact that no vote may be required, or that a lesser percentage may be
permitted, by law or in any agreement with any national securities exchange
or otherwise.
B. The provisions of Section A of this Article XVI shall not be
applicable to any particular Business Combination (as hereinafter defined), and
such Business Combination shall require only such affirmative vote as is
required by law or any other provision of this First Restated Certificate of
Incorporation, if the conditions specified in either of the following paragraph
1 or 2 are met:
1. the Business Combination shall have been approved by a majority of
the Continuing Directors (as hereinafter defined); or
2. all of the following price and procedural conditions shall have
been met:
(a) the aggregate amount of the cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of the Business
Combination of consideration other than cash, to be received per share by
the holders of Common Stock in such Business Combination, shall be at least
equal to the highest of the following:
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid by the Interested Stockholder for any shares of Common Stock
acquired by it (A) within the two (2) year period immediately prior to
the first public announcement of the proposal of such Business
Combination (the "Announcement Date"), or (B) in the transaction in
which it became an Interested Stockholder, whichever is higher;
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Stockholder
became an Interested Stockholder (the "Determination Date"), whichever
is higher; and
(iii) (if applicable) the price per share equal to the Fair
Market Value per share of Common Stock determined pursuant to
paragraph 2(a)(ii) above, multiplied by the ratio of (A) the highest
per share price (including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by the Interested Stockholder for
any shares of Common Stock acquired by it within the two (2) year
period immediately prior to the Announcement Date to (B) the Fair
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Market Value per share of Common Stock on the first day in such two
(2) year period upon which the Interested Stockholder acquired any
shares of Common Stock; and
(b) the aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of shares of any other
class, other than Common Stock or Excluded Preferred Stock, of issued and
outstanding Voting Stock shall be at least equal to the highest of the
following (it being intended that the requirements of this paragraph 2(b)
shall be required to be met with respect to every such class of issued and
outstanding Voting Stock, whether or not the Interested Stockholder has
previously acquired any shares of a particular class of Voting Stock):
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid by the Interested Stockholder for any shares of such class of
Voting Stock acquired by it (A) within the two (2) year period
immediately prior to the Announcement Date, or (B) in the transaction
in which it became an Interested Stockholder, whichever is higher;
(ii) (if applicable) the highest preferential amount per share to
which the holders of shares of such class of Voting Stock are entitled
in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation;
(iii) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination Date, whichever
is higher; and
(iv) (if applicable) the price per share equal to the Fair Market
Value per share of such class of Voting Stock determined pursuant to
paragraph 2(b)(iii) above, multiplied by the ratio of (A) the highest
per share price (including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by the Interested Stockholder for
any shares of such class of Voting Stock acquired by it within the two
(2) year period immediately prior to the Announcement Date to (B) the
Fair Market Value per share of such class of Voting Stock on the first
day in such two (2) year period upon which the Interested Stockholder
acquired any shares of such class of Voting Stock; and
(c) the consideration to be received by holders of a particular class
of issued and outstanding Voting Stock (including Common Stock and other
than Excluded Preferred Stock) shall be in cash or in the same form as the
Interested Stockholder has previously paid for shares of such class of
Voting Stock (if the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration for such class of Voting Stock shall be either cash or the
form used to
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acquire the largest number of shares of such class of Voting Stock
previously acquired by it); and
(d) after such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (i)
there shall have been no failure to declare and pay at the regular date
therefor any full quarterly dividends (whether or not cumulative) on any
issued and outstanding preferred stock, except as approved by a majority of
the Continuing Directors; (ii) there shall have been no reduction in the
annual rate of dividends paid on the Common Stock (except as necessary to
reflect any subdivision of the Common Stock), except as approved by a
majority of the Continuing Directors; (iii) there shall have been an
increase in the annual rate of dividends as necessary fully to reflect any
recapitalization (including any reverse stock split), reorganization or any
similar reorganization which has the effect of reducing the number of
issued and outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the Continuing
Directors; and (iv) such Interested Stockholder shall not have become the
Beneficial Owner of any additional Voting Stock except as part of the
transaction which results in such Interested Stockholder becoming an
Interested Stockholder; and
(e) after such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a shareholder),
of any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business Combination
or otherwise; and
(f) a proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934 and the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations) shall be mailed to
stockholders of the Corporation at least thirty (30) days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be marked pursuant to such Act or
subsequent provisions).
C. For purposes of this Article XVI the following terms shall have the
following meanings:
1. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on June 21, 1996.
2. "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations of the Securities Exchange Act
of 1934, as in effect on June 21, 1996. In addition, a Person shall be the
"Beneficial Owner" of any Voting Stock which such Person or any of its
Affiliates or Associates has: (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement,
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arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise; or (b) the right to
vote pursuant to any agreement, arrangement or understanding (but neither such
Person nor any such Affiliate or Associate shall be deemed to be the Beneficial
Owner of any shares of Voting Stock solely by reason of a revocable proxy
granted for a particular meeting of the stockholders, pursuant to a public
solicitation of proxies for such meeting, and with respect to which shares
neither such Person nor any such Affiliate of Associate is otherwise deemed the
Beneficial Owner).
3. "Business Combination" shall mean any transaction described in any
one or more of clauses (1) through (5) of Section A of this Article XVI.
4. "Continuing Director" shall mean any member of the Board who is
unaffiliated with and is not the Interested Stockholder and was a member of the
Board prior to the time that the Interested Stockholder became an Interested
Stockholder, and any director who is thereafter chosen to fill any vacancy on
the Board or who is elected and who, in either event, is unaffiliated with the
Interested Stockholder and in connection with his or her initial assumption of
office is recommended for appointment or election by a majority of Continuing
Directors then on the Board.
5. "Excluded Preferred Stock" means any series of Preferred Stock with
respect to which a majority of the Continuing Directors have approved a
Preferred Stock Designation creating such series that expressly provides that
the provisions of this Article XVI shall not apply.
6. "Fair Market Value" shall mean: (a) in the case of stock, the
highest closing sale price during the thirty (30) day period immediately
preceding the date in question of a share of such stock on the Composite Tape
for New York Stock Exchange listed stocks, or, if such stock is not quoted on
the composite tape, on the New York Stock Exchange, or, if such stock is not
listed on such exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the thirty
(30) day period preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotation System or any system then in use in
its stead, or if no such quotations are available, the fair market value on the
date in question of a share of such stock as determined by the Board in
accordance with Section D of this Article XVI; and (b) in the case of property
other than cash or stock, the fair market value of such property on the date in
question as determined by the Board in accordance with Section D of this Article
XVI.
7. "Interested Stockholder" shall mean any Person to or which:
(a) itself, or along with its Affiliates, is the Beneficial
Owner, directly or indirectly, of more than fifteen percent (15%) of
the then issued and outstanding Voting Stock; or
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(b) is an Affiliate of the Corporation and at any time within the
two (2) year period immediately prior to the date in question was
itself, or along with its Affiliates, the Beneficial Owner, directly
or indirectly, of fifteen percent (15%) or more of the then issued and
outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any Voting
Stock which was at any time within the two (2) year period immediately
prior to the date in question beneficially owned by an Interested
Stockholder, if such assignment or succession shall have occurred in
the course of a transaction or series of transactions not involving a
public offering within the meaning of the Securities Act of 1933.
For the purpose of determining whether a Person is an Interested
Stockholder pursuant to paragraph 7 of this Section C, the number of shares of
Voting Stock deemed to be issued and outstanding shall include shares deemed
owned through application of paragraph 2 of this Section C but shall not include
any other shares of Voting Stock that may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights, warrants or
options or otherwise.
Notwithstanding anything to the contrary contained in this First
Restated Certificate of Incorporation, for purposes of this First Restated
Certificate of Incorporation, the term "Interested Stockholder" shall not, for
any purpose, include, and the provisions of Article XVI(A) hereof shall not
apply to: (a) the Corporation or any Subsidiary; or (b) any employee stock
ownership plan of the Corporation or any Subsidiary.
8. In the event of any Business Combination in which the Corporation
survives, the phrase "other consideration to be received" as used in paragraphs
2(a) and (b) and paragraph B of this Article XVI shall include the shares of
Common Stock and/or the shares of any other class of issued and outstanding
Voting Stock retained by the holders of such shares.
9. "Person" shall mean any individual, firm, corporation, partnership
or other entity.
10. "Subsidiary" shall mean any corporation or other entity of which
the Corporation owns, directly or indirectly, securities that enable the
Corporation to elect a majority of the board of directors or other persons
performing similar functions of such corporation or entity or that otherwise
give to the Corporation the power to control such corporation or entity.
11. "Voting Stock" means all issued and outstanding shares of capital
stock of the Corporation that pursuant to or in accordance with this First
Restated Certificate of Incorporation are entitled to vote generally in the
election of directors of the Corporation, and each reference herein, where
appropriate, to a percentage or portion of shares of Voting Stock shall refer to
such percentage or portion of the voting power of such shares entitled to vote.
The issued and outstanding shares of Voting Stock shall not include any shares
of Voting Stock that may be
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issuable pursuant to any agreement, or upon the exercise or conversion of any
rights, warrants or options or otherwise.
D. The Continuing Directors of the Corporation shall have the power and
duty to determine for the purposes of this Article XVI, on the basis of
information known to them after reasonable inquiry, all facts necessary to
determine compliance with this Article XVI, including, without limitation: (i)
whether a Person is an Interested Stockholder; (ii) the number of shares of
Voting Stock beneficially owned by any Person; (iii) whether a Person is an
Affiliate or Associate of another; (iv) whether the applicable conditions set
forth in paragraph 2 of paragraph B of this Article XVI have been met with
respect to any Business Combination; (v) the Fair Market Value of stock or other
property in accordance with paragraph 6 of paragraph C of this Article XVI; and
(vi) whether the assets which are the subject of any Business Combination have,
or the consideration to be received for the issuance or transfer of securities
by the Corporation or any Subsidiary in any Business Combination has, an
aggregate Fair Market Value of ten million dollars ($10,000,000) or more.
E. Nothing contained in this Article XVI shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
F. In addition to any affirmative vote required by applicable law and in
addition to any vote of the holders of any series of Preferred Stock provided
for or fixed pursuant to the provisions of Article IV of this First Restated
Certificate of Incorporation, any alteration, amendment or repeal relating to
this Article XVI must be approved by the affirmative vote of the holders of at
least sixty six and two-thirds percent (66 2/3%) of the combined voting power of
the issued and outstanding shares of Voting Stock, voting together as a single
class.
IN WITNESS WHEREOF, the undersigned, being the Chairman of the Board,
President and Chief Executive Officer of the Corporation, for and on behalf of
the Corporation, has executed this First Restated Certificate of Incorporation
this 18th day of June, 1998, and hereby acknowledges, under penalties of
perjury, that this First Restated Certificate of Incorporation is the act and
deed of the Corporation and that facts stated in this First Restated Certificate
of Incorporate are true.
STYLING TECHNOLOGY CORPORATION
By:_____________________________________
Richard R. Ross, Executive Vice President,
Chief Financial Officer and Secretary
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STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before this ____ day of June,
1998, by Richard R. Ross, Executive Vice President, Chief Financial Officer and
Secretary of Styling Technology Corporation, a Delaware corporation, on behalf
of the corporation.
___________________________________
Notary Public
My commission expires:
___________________________________
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Exhibit 10.26
STYLING TECHNOLOGY CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
SECTION 1. PURPOSE OF PLAN; TERM
(a) General Purpose. The purpose of the Plan is to further the interests of
Styling Technology Corporation, a Delaware corporation (the "Company"), and its
stockholders by encouraging employees associated with the Company (or parent or
subsidiary corporations of the Company) to acquire shares of the Company's
common stock, thereby acquiring a proprietary interest in its business and an
increased personal interest in its continued success and progress. Such purpose
shall be accomplished by providing for the granting of options to acquire the
Company's common stock ("Options"). A "parent corporation" for purposes of this
Plan is any corporation in the unbroken chain of corporations ending with the
employer corporation, where, at each link of the chain, the corporation and the
link above owns at least 50 percent of the combined total voting power of all
classes of the stock in the corporation in the link below. A "subsidiary
corporation" for purposes of this Plan is any corporation in the unbroken chain
of corporations starting with the employer corporation, where, at each link of
the chain, the corporation and the link above owns at least 50 percent of the
combined voting power of all classes of stock in the corporation below.
(b) Options. All Options granted under this Plan will be nonqualified
options and shall not be "incentive stock options" as defined in section 422 of
the Code.
(c) Duration of Plan. The term of the Plan is 10 years commencing on the
date of adoption of the Plan by the Board, which was on May 4, 1998. No Option
shall be granted under the Plan unless granted within 10 years of the adoption
of the Plan by the Board, but Options outstanding on that date shall not be
terminated or otherwise affected by virtue of the Plan's expiration.
SECTION 2. STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN
(a) Description of Stock and maximum Shares Allocated. The stock subject to
the provisions of the Plan and issuable upon the grant of Options granted under
the Plan is shares of the Company's common stock, $.0001 par value per share
(the "Stock"), which may be either unissued or treasury shares, as the Board may
from time to time determine. Subject to adjustment as provided in Section 7
hereof, the aggregate number of shares of Stock covered by the Plan and issuable
thereunder shall be 150,000 shares of Stock.
(b) Calculation of Available Shares. For purposes of calculating the
maximum number of shares of Stock that may be issued under the Plan, the shares
issued (including the shares, if any, withheld for tax withholding requirements)
upon exercise of an Option shall be counted.
(c) Restoration of Unpurchased Shares. If an Option expires of terminates
for any reason prior to its exercise in full and before the term of the Plan
expires, the shares of Stock subject to, but not issued under, such Option
shall, without further action or by or on behalf of the Company, again be
available under the Plan. If shares of Stock are used to pay for the exercise
price, those shares shall be added to the shares available under the Plan.
SECTION 3. ADMINISTRATION; APPROVAL; AMENDMENTS
(a) General Administration. The power to administer the Plan with respect
to Eligible Persons shall be vested exclusively with the Board.
(b) Plan Administrator. The Board shall be referred to herein as the "Plan
Administrator." The Board may, at any time, appoint a committee of one or more
persons who are members of the Aboard and delegate to that committee the power
to administer the Plan. Members of such committee shall serve for such period of
time as the Board may determine and shall be subject to removal by the Board at
any time. The Board may, at any time, terminate the functions of any such
committee and reassume all powers and authority previously delegated to that
committee. The Plan Administrator shall have the authority and discretion to
select which Eligible Persons shall
<PAGE> 2
participate in the Plan, to grant Options under the Plan, to establish such
rules and regulations as they may deem appropriate with the proper
administration of the Plan and to make such determinations under, and issue such
interpretations of, the Plan and any outstanding Option as they may deem
necessary or advisable. Decisions of the Plan Administrator shall be final and
binding on all parties who have an interest in the Plan or any outstanding
Option.
(c) Approval of Plan. This Plan shall not require the approval of the
stockholders of the Company and shall be effective as of the date adopted by the
Board.
(d) Amendments to Plan. The Board may, without action on the part of the
Company's stockholders, make such amendments to, changes in and additions to the
Plan as it may, from time to time, deem necessary or appropriate and in the best
interests of the Company; provided, the Board may not, without the consent of
the Optionholder, take any action which adversely affects or impairs the rights
of the Optionholder of any Option outstanding under the Plan.
SECTION 4. PARTICIPANTS
(a) Eligibility and Participation. Options may be granted only to persons
("Eligible Persons") who at the time of grant are employees of or consultants to
the Company or parent or subsidiaries of the Company; provided, however, that
any person that is an Affiliate shall not be an Eligible Person under this Plan.
The Plan Administrator shall have full authority to determine which Eligible
Persons in its administered group are to receive Option grants under the Plan,
the number of shares to be covered by each such grant, the time or times at
which each such Option is to become exercisable, and the maximum term for which
the Option is to be outstanding.
(b) Guidelines for Participation. In designating and selecting Eligible
Persons for participation in the Plan, the Plan Administrator shall consult with
and give consideration to the recommendations and criticisms submitted by
appropriate managerial and executive officers of the Company. The Plan
Administrator also shall take into account the duties and responsibilities of
the Eligible Persons, their past, present and potential contributions to the
success of the Company and such other factors as the Plan Administrator shall
deem relevant in connection with accomplishing the purpose of the Plan.
SECTION 5. TERMS AND CONDITIONS OF OPTION
(a) Allotment of Shares. The Plan Administrator shall determine the number
of shares of Stock to be optioned form time to time and the number of shares to
be optioned to any Eligible Person (the "Optioned Shares"). The grant of an
Option to a person shall neither entitle such person to, nor disqualify such
person from, participation in any other grant of Options under this Plan or any
other stock option plan of the Company.
(b) Exercise Price. Upon the grant of any Option, the Plan Administrator
shall specify the option price per shares. In no event may the option price per
share specified by the Plan Administrator be less than 100 percent of the fair
market value per share of the Stock on the date the Option is granted.
(c) Calculation of Fair Market Value of Stock. The fair market value of a
shares of Stock on any relevant date shall be the closing selling price per
share of Stock on the date in question on the stock exchange determined by the
Board to be the primary market for the Stock, as such price is officially quoted
in the composite tape of transactions on such exchange. If there is no reported
sale of Stock on such exchange on the date in question, then the fair market
value shall be the closing selling price on the exchange on the last preceding
date for which such quotation exists.
(d) Individual Stock Option Agreements. Options granted under the Plan
shall be evidenced by option agreements in such form and content as the Plan
Administrator from time to time approves, which agreements shall substantially
comply with and be subject to the terms of the Plan, including the terms and
conditions of this Section 5. As determined by a Plan Administrator, each option
agreement shall state (i) the total number of shares to which it pertains, (ii)
the exercise price for the shares covered by the Option, (iii) the time at which
the Options vest and become exercisable and (iv) the Option's scheduled
expiration date. The option
2
<PAGE> 3
agreements may contain such other provisions or conditions as the Plan
Administrator deems necessary or appropriate to effectuate the sense and purpose
of the Plan, including covenants by the Optionholder not-to-compete and remedies
to the Company in the event of the breach of any such covenant.
(e) Option Period. No Option granted under the Plan shall be exercisable
for a period in excess of 10 years from the date of its grant subject to earlier
termination in the event of termination of employment, retirement or death of
the Optionholder. An Option may be exercised in full or in part at any time or
from time to time during the term of the Option or provide for its exercise in
stated installments at stated times during the Option's term.
(f) Vesting; Limitations. The time at which the Optioned Shares vest with
respect to a participant shall be in the discretion of the Plan Administrator.
(g) No Fractional Shares. Options shall be exercisable only for whole
shares; no fractional shares will be issuable upon exercise of any Option
granted under the Plan.
(h) Method of Exercising Options; Full Payment. Options shall be exercised
by written notice to the Company, addressed to the Company at its principal
place of business. Such notice shall state the election to exercise the Option
and the number of shares with respect to which it is being exercised, and shall
be signed by the person exercising the Option. Such notice shall be accompanied
by payment in full of the exercise price for the number of shares being
purchased. Payment may be made in cash or by check as prescribed by the
applicable Plan Administrator or by tendering duly endorsed certificates
representing shares of Stock then owned by the Optionholder and held for the
requisite period necessary to avoid a charge to the Company's earnings and
valued at fair market value on the date of exercise (as determined in accordance
with Section 5(c) hereof). Upon the exercise of any Option, the Company shall
deliver, or cause to be delivered, to the Optionholder a certificate or
certificates representing the shares of Stock purchased upon such exercise as
soon as practicable after payment for those shares has been received by the
Company. If an Option is exercised pursuant to Section 5(j) hereof by any person
other than the Optionholder, such notice shall be accompanied by appropriate
proof of the right of such person to exercise the Option. All shares that are
purchased and paid for in full upon the exercise of an Option shall be fully
paid and non-assessable.
(i) Rights of a Stockholder. An Optionholder shall have no rights as a
stockholder with respect to shares covered by his Option until such Option
holder shall have exercised the Option and paid the full exercise price for the
Optioned Shares. No adjustment will be made for dividends or other rights with
respect to any Optioned Shares for which the record date is prior to the date on
which the Optionholder exercises the Option for such shares.
(j) Exercise of Options After Cessation of Service; Termination of
Employment. If any Optionholder ceases to be in Service to the Company for a
reason other than death, such Optionholder may, within one month after the date
of termination of such Service, but in no event after the Option's stated
expiration date, exercise some or all of the Options that the Optionholder was
entitled to exercise on the date the Optionholder's Service terminated;
provided, that (i) if the Optionholder's Service is terminated by the Company in
its good faith judgment, for (A) commission of a crime by the Optionholder or
for reasons involving moral turpitude; (B) an act by the Optionholder which
tends to bring the Company into disrepute; or (C) negligent, fraudulent or
willful misconduct by the Optionholder, or (ii) if after the Service of the
Optionholder is terminated, the Optionholder commits acts detrimental to the
Company's interests, then the Option shall thereafter be void for all purposes.
Notwithstanding the foregoing, if any Optionholder who is an employee of the
Company ceases to be in Service to the Company by reason of permanent disability
within the meaning of section 22(e)(3) of the Internal Revenue Code (as
determined by the applicable Plan Administrator), the Optionholder shall have 12
months after the date of termination of Service, but in no event after
Optionholder's Option's stated expiration date, to exercise Options that the
Optionholder was entitled to exercise on the date the Optionholder's Service
terminated as a result of disability.
(k) Death of Optionholder. If an Optionholder dies while in the Company's
Service, the Optionholder's vested Options on the date of death shall be
exercisable within three months of such death or until the stated expiration
date of the Optionholder's Option, whichever occurs first, by the person or
persons
3
<PAGE> 4
("successors") to whom the Optionholder's rights pass under a will or by the
laws of descent and distribution. An Option may be exercised and payment of the
option price made in full by the successors only after written notice to the
Company specifying the number of shares to be purchased. Such notice shall state
that the Option price is being paid in full in the manner specified in Section
5(h) hereof. As soon as practicable after receipt by the Company of such notice
and of payment in full of the Option price, a certificate or certificates
representing such shares shall be registered in the name or names specified by
the successors in the written notice of exercise and shall be delivered to the
successors.
(l) Other Plan Provisions Still Applicable. If an Option is exercised upon
the termination of Service or death of an Optionholder under this Section 5, the
other provisions of the Plan shall still be applicable to such exercise.
(m) Definition of "Service." For purposes of this Plan, unless it is
evidenced otherwise in the option agreement with the Optionholder, the
Optionholder shall be deemed to be in "Service" to the Company so long as such
individual renders services on a periodic basis to the Company (or to any parent
or subsidiary corporation) in the capacity of an employee or a consultant or
independent contractor. The Optionholder shall be considered to be an employee
for so long as such individual remains in the employ of the Company or one or
more of its parent or subsidiary corporations.
(n) Nonassignability. Except as specifically allowed by the Plan
Administrator at the time of grant and as set forth in the documents evidencing
an Option, no Option granted under the Plan or any of the rights and privileges
conferred thereby shall be assignable or transferable by an Optionholder other
than by will or the laws of descent and distribution, and such Option shall be
exercisable during the Optionholder's lifetime only by the Optionholder.
SECTION 6. CERTAIN ADJUSTMENT.
(a) Capital Adjustments. The aggregate number of shares of Stock subject to
the Plan (and the number of shares covered by outstanding Options and the price
per share stated in such Options) shall be proportionately adjusted for any
increase or decrease in the number of outstanding shares of Stock of the Company
resulting from a subdivision or consolidation of shares or any other capital
adjustment or the payment of a stock dividend or any other increase or decrease
in the number of outstanding shares of Stock of the Company resulting from a
subdivision or consolidation of shares or any other capital adjustment or the
payment of a stock dividend or any other increase or decrease in the number of
shares effected without the Company's receipt of consideration therefor in
money, services or property.
(b) Mergers, Etc. If the Company is the surviving corporation in any merger
or consolidation, any Option granted under the Plan shall pertain to and apply
to the securities to which a holder of the number of shares of Stock subject to
the Option would have been entitled prior to the merger or consolidation. A
dissolution or liquidation of the Company shall cause every Option outstanding
hereunder to terminate. A merger or consolidation in which the Company is not
the surviving corporation shall also cause every Option outstanding hereunder to
terminate.
(c) Change in Control. With respect to any Change in Control, the Plan
Administrator shall have the discretion and authority, exercisable at any time,
whether before or after the Change in Control, to provide for the automatic
acceleration of one or more outstanding Options granted by it under the Plan
upon the occurrence of such Change in Control. The Plan Administrator may also
impose limitations upon the automatic acceleration of such Options to the extent
it deems appropriate. Any Options accelerated upon a Change in Control will
remain fully exercisable until the expiration or sooner termination of the
Option term.
SECTION 7. MISCELLANEOUS
(a) Use of Proceeds. The proceeds received by the Company from the sale of
Stock pursuant to the exercise of Options hereunder, if any, shall be used for
general corporate purposes.
4
<PAGE> 5
(b) Cancellation of Options. The Plan Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Options
granted under the Plan by the Plan Administrator and to grant in substitution
therefore new Options under the Plan covering the same or different numbers of
shares of Stock as long as such new Options have an exercise price per share of
Stock no less than the minimum exercise price as set forth in Section 5(b)
hereof on the new grant date.
(c) Regulatory Approvals. The implementation of the Plan, the granting of
any Option hereunder, and the issuance of Stock upon the exercise of any such
Option shall be subject to the procurement by the Company of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the Options granted under it and the Stock issued pursuant to it.
(d) Indemnification. In addition to such other rights of indemnification as
they may have, the members of the Plan Administrator shall be indemnified and
held harmless by the Company, to the extent permitted under applicable law, for,
from and against all costs and expenses reasonably incurred by them in
connection with any action, legal proceeding to which any member thereof may be
a party by reason of any action taken, failure to act under or in connection
with the Plan or any rights granted thereunder and against all amounts paid by
them in settlement thereof or paid by them in satisfaction of a judgment of any
such action, suit or proceeding, except a judgment based upon a finding of bad
faith.
(e) Plan Not Exclusive. This Plan is not intended to be the exclusive means
by which the Company may issue options or warrants to acquire its Stock, stock
awards or any other type of award. To the extent permitted by applicable law,
any such other option, warrants or awards may be issued by the Company other
than pursuant to this Plan without stockholder approval.
(f) Governing Law. The Plan shall be governed by, and all questions arising
hereunder shall be determined in accordance with, the laws of the State of
Arizona.
(g) Withholding Taxes. Whenever the Company issues Stock under the Plan
pursuant to an Option, the Company shall have the right to require the grantee
to remit to the Company an amount sufficient to satisfy any federal, state
and/or local withholding or employment tax requirements prior to the delivery of
any certificate or certificates for such shares. Alternatively, the Company may
issue or transfer such shares of Stock net of the number of shares sufficient to
satisfy the withholding or employment tax requirements. For such purposes, the
shares of Stock shall be valued on the date the withholding or employment tax
obligation is incurred.
SECTION 8. SECURITIES RESTRICTIONS
(a) Legend on Certificates. All certificates representing shares of Stock
issued upon exercise of Options granted under the Plan shall be endorsed with a
legend reading as follows:
The shares of Common Stock evidenced by this certificate have been
issued to the registered owner in reliance upon written representations
that these shares have been purchased solely for investment. These
shares may not be sold, transferred or assigned unless in the opinion
of the Company and its legal counsel such sale, transfer or assignment
will not be in violation of the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
(b) Private Offering for Investment Only. The Options are, and shall be,
made available only to a limited number of present and future employees of the
Company, and their permitted transferees, who have knowledge of the Company's
financial condition, management and its affairs. The Plan is not intended to
provide additional capital for the Company, but to encourage ownership of Stock
among the Company's employees. By the act of accepting an Option, each grantee
or such permitted transferee agrees (i) that, any shares of Stock acquired will
be solely for investment and not with any intention to resell or redistribute
those shares and (ii) such intention
5
<PAGE> 6
will be confirmed by an appropriate certificate at the time the Stock is
acquired if requested by the Company. The neglect or failure to execute such a
certificate, however, shall not limit or negate the foregoing agreement.
(c) Registration Statement. If a Registration Statement covering the shares
of Stock issuable upon exercise of options granted under the Plan is filed under
the Securities Exchange Act of 1933, as amended, and is declared effective by
the Securities Exchange Commission, the provisions of Sections 8(a) and (b)
shall terminate during the period of time that such Registration Statement, as
periodically amended, remains effective.
SECTION 9. DEFINITIONS.
The following capitalized terms used in this Plan shall have the meaning
described below:
"Affiliates" shall mean all "executive officers" (as that term is defined
in Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934) and
directors of the Company and all persons who own 10 percent or more of the
Company's issued and outstanding Stock.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean (i) a person or related group of persons,
other than the Company or a person that directly or indirectly controls, is
controlled by, or under common control with the Company, acquires ownership of
40 percent or more of the Company's outstanding common stock pursuant to a
tender or exchange offer which the Board of Directors recommends that the
Company's stockholders not accept, or (ii) the change in the composition of the
Board occurs such that those individuals who were elected to the Board at the
last stockholders' meeting at which there was not a contested election for Board
membership subsequently ceased to comprise a majority of the Board by reason of
a contested election.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean Styling Technology Corporation, a Delaware
corporation.
"Eligible Persons" shall mean those persons who, at the time that the
Option is granted, are employees of the Company, who provide valuable services
to the Company or parent or subsidiaries of the Company.
"Optionholder" shall mean an Eligible Person to whom Options have been
granted.
"Optioned Shares" shall be those shares of Stock to be optioned from time
to time to any Eligible Person.
"Options" shall mean options to acquire Stock granted under the Plan.
"Plan" shall mean this stock option plan for Styling Technology
Corporation.
"Plan Administrator" shall mean the Board of Directors or a committee
thereof.
"Service" shall have the meaning set forth in Section 5(m) hereof.
"Stock" shall mean shares of the Company's common stock, $.0001 par value
per share, which may be unissued or treasury shares, as the Board may from time
to time determine.
6
<PAGE> 7
This Plan is hereby executed this ______ day of __________, 1998.
STYLING TECHNOLOGY CORPORATION
By: ___________________________________
Name: Sam L. Leopold
Its: Chairman, President, and Chief
Executive Officer
ATTESTED BY:
____________________________________
Secretary
7
<PAGE> 1
Exhibit 12
Ratio of Earnings to Fixed Charges
STYLING TECHNOLOGY CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(000 omitted)
<TABLE>
<CAPTION>
November 27, Year Ended
1996 to December 31, Year Ended
December 31, 1996 1997 December 31, 1998
----------------- ------------ -----------------
<S> <C> <C> <C>
Income (Loss) Before Income Taxes.......... $ (151) $ 7,304 $ 8,808
Fixed Charges:
Actual Interest Expense and
amortization of debt issuance costs...... -- 1,847 9,540
Net Income (Loss) As Adjusted.............. $ (151) $ 9,151 $ 18,348
Ratio...................................... N/A 5.0x 0.5x
--------- ---------- --------
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
NAME STATE OF INCORPORATION
- ---- ----------------------
Gena Laboratories, Inc. Texas
JDS Manufacturing Co., Inc. California
U.K. ABBA Products, Inc. California
Styling (UK) Limited England
European Touch Co., Incorporated Wisconsin
European Touch, Ltd. II Wisconsin
Beauty Products Inc. Wisconsin
Cosmetics International Inc. Wisconsin
Ft. Pitt Acquisition, Inc. Pennsylvania
Styling Technology Nail Corporation Arizona
STYL Institute, Inc. Arizona
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No.'s 33-43599, 333-47131 and 333-61035.
/s/ ARTHUR ANDERSEN, LLP
Phoenix, Arizona
March 15, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,023
<SECURITIES> 0
<RECEIVABLES> 32,326
<ALLOWANCES> 0
<INVENTORY> 25,375
<CURRENT-ASSETS> 1,791
<PP&E> 8,463
<DEPRECIATION> 3,101
<TOTAL-ASSETS> 219,198
<CURRENT-LIABILITIES> 25,803
<BONDS> 100,000
0
0
<COMMON> 1
<OTHER-SE> 33,812
<TOTAL-LIABILITY-AND-EQUITY> 219,198
<SALES> 90,373
<TOTAL-REVENUES> 90,373
<CGS> 39,222
<TOTAL-COSTS> 33,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,206
<INCOME-PRETAX> 8,808
<INCOME-TAX> 3,635
<INCOME-CONTINUING> 5,173
<DISCONTINUED> 0
<EXTRAORDINARY> 1,091
<CHANGES> 0
<NET-INCOME> 4,082
<EPS-PRIMARY> 1.01<F1><F2>
<EPS-DILUTED> 0.95<F1><F2>
<FN>
<F1>BASIC EPS BEFORE THE EXTRAORDINARY ITEM WAS $1.28. DILUTED EPS BEFORE THE
EXTRAORDINARY ITEM WAS $1.20.
<F2>EPS HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128 AND BASIC AND DILUTED EPS
HAVE BEEN ENTERED INTO THE PRIMARY AND FULLY DILUTED EPS LINE ITEMS ABOVE.
</FN>
</TABLE>
