<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 0-21703
STYLING TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 75-2665378
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7400 EAST TIERRA BUENA LANE, SCOTTSDALE, ARIZONA 85260
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(480) 609-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of the issuer's class of capital stock as of the
latest practicable date, is as follows: 4,067,503 shares of Common Stock, $.0001
par value, as of August 12, 1999.
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<PAGE> 2
STYLING TECHNOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
December 31, 1998 and June 30, 1999.................... 2
Condensed Consolidated Statements of Operations --
Three Months ended June 30, 1998 and June 30, 1999..... 3
Condensed Consolidated Statements of Operations --
Six Months ended June 30, 1998 and June 30, 1999....... 4
Condensed Consolidated Statements of Cash Flows --
Six Months ended June 30, 1998 and June 30, 1999....... 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 21
Item 2. Changes in Securities.............................. 21
Item 3. Defaults Upon Senior Securities.................... 21
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 21
Item 5. Other Information.................................. 22
Item 6. Exhibits and Reports on Form 8-K................... 22
</TABLE>
1
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,023,000 $ 1,512,000
Accounts receivable, net of allowance for doubtful
accounts of $2,882,000 and $3,138,000 (unaudited)...... 32,326,000 43,262,000
Inventories, net.......................................... 25,375,000 26,948,000
Prepaid expenses and other current assets................. 4,021,000 6,147,000
------------ ------------
Total current assets.............................. 65,745,000 77,869,000
PROPERTY AND EQUIPMENT, net................................. 5,362,000 8,688,000
GOODWILL, INTANGIBLES AND OTHER, net of accumulated
amortization of approximately $4,749,000 and $7,617,000
(unaudited)............................................... 148,091,000 152,568,000
------------ ------------
Total assets...................................... $219,198,000 $239,125,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 12,668,000 $ 17,709,000
Accrued liabilities....................................... 10,367,000 10,463,000
Current portion of long-term debt and other............... 2,768,000 3,474,000
------------ ------------
Total current liabilities......................... 25,803,000 31,646,000
------------ ------------
DEFERRED INCOME TAXES....................................... 19,216,000 19,174,000
------------ ------------
LONG-TERM DEBT AND OTHER, less current portion.............. 140,366,000 155,652,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 1,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common stock, $.0001 par value, 10,000,000 shares
authorized, 4,876,000 shares issued and 4,068,000
shares outstanding at December 31, 1998 and
June 30, 1999 (unaudited).............................. 1,000 1,000
Additional paid-in capital................................ 29,038,000 29,038,000
Retained earnings......................................... 6,574,000 5,414,000
Treasury stock............................................ (1,800,000) (1,800,000)
------------ ------------
Total stockholders' equity........................ 33,813,000 32,653,000
------------ ------------
Total liabilities and stockholders' equity........ $219,198,000 $239,125,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE> 4
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET SALES................................................... $19,074,000 $34,518,000
COST OF SALES............................................... 8,450,000 15,012,000
----------- -----------
Gross profit........................................... 10,624,000 19,506,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 6,514,000 12,647,000
CENTRALIZATION AND REENGINEERING COSTS...................... -- 703,000
PROVISION FOR CANCELLED DISTRIBUTORS........................ -- 5,067,000
----------- -----------
6,514,000 18,417,000
----------- -----------
Income from operations................................. 4,110,000 1,089,000
INTEREST EXPENSE, net....................................... 1,364,000 3,946,000
----------- -----------
Income (loss) before extraordinary item and income
taxes................................................. 2,746,000 (2,857,000)
PROVISION FOR (BENEFIT FROM) INCOME TAXES................... 1,181,000 (1,128,000)
----------- -----------
Income (loss) before extraordinary item................ 1,565,000 (1,729,000)
EXTRAORDINARY ITEM, net..................................... 1,091,000 446,000
----------- -----------
Net income (loss)...................................... $ 474,000 $(2,175,000)
=========== ===========
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary item................... $ 0.39 $ (0.42)
Extraordinary item, net................................... (0.27) (0.11)
----------- -----------
Net income (loss)......................................... $ 0.12 $ (0.53)
=========== ===========
Weighted average shares outstanding....................... 4,040,000 4,068,000
=========== ===========
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item................... $ 0.36 $ (0.42)
Extraordinary item, net................................... (0.25) (0.11)
----------- -----------
Net income (loss)......................................... $ 0.11 $ (0.53)
=========== ===========
Weighted average shares outstanding....................... 4,404,000 4,068,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET SALES................................................... $35,299,000 $68,770,000
COST OF SALES............................................... 15,492,000 29,857,000
----------- -----------
Gross profit........................................... 19,807,000 38,913,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 11,909,000 25,775,000
CENTRALIZATION AND REENGINEERING COSTS...................... -- 1,363,000
PROVISION FOR CANCELLED DISTRIBUTORS........................ -- 5,067,000
----------- -----------
11,909,000 32,205,000
----------- -----------
Income from operations................................. 7,898,000 6,708,000
INTEREST EXPENSE, net....................................... 2,628,000 7,874,000
----------- -----------
Income (loss) before extraordinary item and income
taxes................................................. 5,270,000 (1,166,000)
PROVISION FOR (BENEFIT FROM) INCOME TAXES................... 2,266,000 (452,000)
----------- -----------
Income (loss) before extraordinary item................ 3,004,000 (714,000)
EXTRAORDINARY ITEM, net..................................... 1,091,000 446,000
----------- -----------
Net income (loss)...................................... $ 1,913,000 $(1,160,000)
=========== ===========
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary item................... $ 0.75 $ (0.18)
Extraordinary item, net................................... (0.27) (0.11)
----------- -----------
Net income (loss)......................................... $ 0.48 $ (0.29)
=========== ===========
Weighted average shares outstanding....................... 4,006,000 4,068,000
=========== ===========
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item................... $ 0.69 $ (0.18)
Extraordinary item, net................................... (0.25) (0.11)
----------- -----------
Net income (loss)......................................... $ 0.44 $ (0.29)
=========== ===========
Weighted average shares outstanding....................... 4,356,000 4,068,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
STYLING TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 1,913,000 $ (1,160,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 1,856,000 3,492,000
Provision for cancelled distributors................... -- 5,067,000
Interest accretion on note payable..................... 87,000 --
Changes in certain assets and liabilities:
Accounts receivable, net............................. (3,665,000) (16,003,000)
Inventories, net..................................... (1,551,000) (1,573,000)
Prepaid expenses and other assets.................... (363,000) (5,064,000)
Accounts payable, accrued liabilities and deferred
income taxes...................................... (2,796,000) 6,346,000
------------ ------------
Net cash used in operating activities....................... (4,519,000) (8,895,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of acquired businesses, net of cash
acquired............................................. (31,469,000) --
Purchase of property, plant & equipment................ (668,000) (3,440,000)
Changes in investments, long term receivables and
other................................................ (957,000) (2,883,000)
------------ ------------
Net cash used in investing activities....................... (33,094,000) (6,323,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facilities, net of financing costs... 10,265,000 72,469,000
Proceeds from bond offering, net of financing costs....... 96,400,000 --
Exercise of stock options................................. 197,000 --
Repayment of notes payable and credit facility............ (60,655,000) (59,762,000)
------------ ------------
Net cash provided by financing activities................... 46,207,000 12,707,000
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS......................... 8,594,000 (2,511,000)
CASH AND CASH EQUIVALENTS, beginning of period.............. 3,063,000 4,023,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 11,657,000 $ 1,512,000
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The statements presented do not include all information and
footnotes required to be in conformity with generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Results of operations in interim
periods are not necessarily indicative of results for a full year. These
condensed consolidated financial statements and notes thereto should be read in
conjunction with Styling Technology Corporation's (the Company) consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K as of and for the year ended December 31, 1998. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities as well as
disclosure of contingent assets and liabilities at the date of the accompanying
consolidated financial statements, and the reported amounts of the revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Effective January 1, 1999 the Company adopted Statement of Position 98-1,
Accounting for the Costs of Computer Software, ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The adoption of SOP 98-1 did not have a material effect on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities which was amended by the issuance of SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement
No. 133 in June 1999. These statements establish accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. These statements are effective
for the Company's quarter ending March 31, 2001. The Company is currently
evaluating the impact that SFAS Nos. 133 and 137 will have on its future results
of operations and financial position.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 Reporting on the Costs of Start-up Activities ("SOP
98-5"). SOP 98-5 requires costs of start-up activities and organization costs to
be expensed as incurred. The Company adopted this statement effective January 1,
1999. The adoption of SOP 98-5 did not have a material effect on the Company's
financial position or results of operations.
6
<PAGE> 8
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share (EPS) computations for the three and six months ended
June 30, 1998 and June 30, 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 THREE MONTHS ENDED JUNE 30, 1999
----------------------------------- -------------------------------------
EFFECT OF EFFECT OF
STOCK STOCK
OPTIONS OPTIONS
BASIC AND DILUTED BASIC AND DILUTED
EPS WARRANTS EPS EPS WARRANTS EPS
---------- --------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item........... $1,565,000 -- $1,565,000 $(1,729,000) -- $(1,729,000)
Extraordinary item, net........................... 1,091,000 -- 1,091,000 446,000 -- 446,000
---------- ------- ---------- ----------- ------- -----------
Net income (loss)................................. $ 474,000 -- $ 474,000 $(2,175,000) -- $(2,175,000)
========== ======= ========== =========== ======= ===========
Shares............................................ 4,040,000 364,000 4,404,000 4,068,000 -- 4,068,000
========== ======= ========== =========== ======= ===========
Per share amount -- income (loss) before
extraordinary item.............................. $ 0.39 $ 0.36 $ (0.42) $ (0.42)
Per share amount -- extraordinary item, net....... (0.27) (0.25) (0.11) (0.11)
---------- ---------- ----------- -----------
Per share amount -- net income (loss)............. $ 0.12 $ 0.11 $ (0.53) $ (0.53)
========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1999
----------------------------------- -------------------------------------
EFFECT OF EFFECT OF
STOCK STOCK
OPTIONS OPTIONS
BASIC AND DILUTED BASIC AND DILUTED
EPS WARRANTS EPS EPS WARRANTS EPS
---------- --------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item........... $3,004,000 -- $3,004,000 $ (714,000) -- $ (714,000)
Extraordinary item, net........................... 1,091,000 -- 1,091,000 446,000 -- 446,000
---------- ------- ---------- ----------- ------- -----------
Net income (loss)................................. $1,913,000 -- $1,913,000 $(1,160,000) -- $(1,160,000)
========== ======= ========== =========== ======= ===========
Shares (denominator).............................. 4,006,000 350,000 4,356,000 4,068,000 -- 4,068,000
========== ======= ========== =========== ======= ===========
Per share amount -- income (loss) before
extraordinary item.............................. $ 0.75 $ 0.69 $ (0.18) $ (0.18)
Per share amount -- extraordinary item, net....... (0.27) (0.25) (0.11) (0.11)
---------- ---------- ----------- -----------
Per share amount -- net income (loss)............. $ 0.48 $ 0.44 $ (0.29) $ (0.29)
========== ========== =========== ===========
</TABLE>
For the three months and six months ended June 30, 1999, no common stock
equivalents were considered in the EPS calculations as their effect was
antidilutive. For purposes of applying the treasury stock method, the Company
has assumed that it will fully utilize tax deductions arising from the assumed
exercise of non-qualified stock options.
NOTE 4. LONG-TERM DEBT
On June 22, 1999, the Company finalized a $90 million Senior Secured
Revolving Credit Facility (the "GE Credit Facility") with GE Capital
Corporation. Proceeds from the GE Credit Facility were used to repay amounts
outstanding under a previous credit facility. The remaining availability will be
used for future acquisitions and for working capital purposes. The Company
recorded an extraordinary, non-cash charge during the three months ended June
30, 1999 of approximately $446,000, net of tax, or approximately $0.11 per
diluted share, related to the write-off of unamortized financing costs
associated with the previous credit facility.
7
<PAGE> 9
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INTEREST RATE PROTECTION
The Company maintains certain interest rate protection instruments to
reduce the impact of changes in interest rates. These instruments include an
interest rate swap and interest rate cap agreement (the Agreements). 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 June 30, 1999:
<TABLE>
<CAPTION>
COMPANY'S
EFFECTIVE
RATE NOTIONAL VALUE
INSTRUMENT --------- --------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Swap................................................ 8.50% $12,500
Cap................................................. 10.25% 12,500
-------
$25,000
=======
</TABLE>
NOTE 6. SEGMENT INFORMATION
The Company monitors its salon distribution operations according to the
hair care, nail care, skin and body care, and appliances and sundries product
categories. Distribution of the products take place primarily throughout the
United States. Management monitors and evaluates the financial performance of
the Company's operations by its four current operating segments. The following
operating segment information includes financial information (in thousands) for
all four of the Company's operating segments.
THREE MONTHS -- JUNE 30, 1998
<TABLE>
<CAPTION>
SKIN AND APPLIANCES
HAIR CARE NAIL CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 4,079 $ 4,529 $ 8,873 $ 1,593 $ -- $ -- $ 19,074
Operating Income...................... $ 872 $ 766 $ 2,628 $ 591 $ (747) $ -- $ 4,110
Total assets.......................... $27,815 $27,709 $43,772 $24,358 $19,940 $ -- $143,594
</TABLE>
THREE MONTHS -- JUNE 30, 1999
<TABLE>
<CAPTION>
SKIN AND APPLIANCES
HAIR CARE NAIL CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $17,404 $ 4,982 $ 7,110 $ 5,022 $ -- $ -- $ 34,518
Operating Income..................... $ 2,591 $ 422 $ 785 $ 2,069 $ (4,778) $ -- $ 1,089
Total assets......................... $91,083 $30,827 $16,400 $31,605 $188,815 $(119,605) $239,125
</TABLE>
SIX MONTHS -- JUNE 30, 1998
<TABLE>
<CAPTION>
SKIN AND APPLIANCES
HAIR CARE NAIL CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 8,204 $ 7,450 $17,726 $ 1,919 $ -- $-- $ 35,299
Operating Income...................... $ 1,943 $ 1,302 $ 5,329 $ 681 $(1,357) $-- $ 7,898
Total assets.......................... $27,815 $27,709 $43,772 $24,358 $19,940 $-- $143,594
</TABLE>
8
<PAGE> 10
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIX MONTHS -- JUNE 30, 1999
<TABLE>
<CAPTION>
SKIN AND APPLIANCES
HAIR CARE NAIL CARE BODY CARE AND SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $34,609 $10,665 $14,712 $ 8,784 $ -- $ -- $ 68,770
Operating Income..................... $ 5,691 $ 1,346 $ 1,404 $ 3,270 $ (5,003) $ -- $ 6,708
Total assets......................... $91,083 $30,827 $16,400 $31,605 $188,815 $(119,605) $239,125
</TABLE>
NOTE 7. 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 June 30, 1999, the
expected outcome of such matters will not have a material impact on the
Company's financial position or results of operations.
NOTE 8. REALIGNMENT OF DISTRIBUTION CHANNEL.
The Company has historically utilized numerous non-exclusive tanning supply
distributors to sell the tanning products of its Body Drench Division in the
tanning market. In June 1999, the Company changed the method of distribution of
its Body Drench products by eliminating a significant number of tanning supply
distributors. Distribution of Body Drench products to the tanning market will
now be sold through a limited number of exclusive distributors. This change in
the Company's business resulted in a write-off of receivables from cancelled
distributors of approximately $5.1 for the quarter ending June 30, 1999. This
charge is classified as a provision for cancelled distributors in the
consolidated statement of operations as a separate component of income from
operations. Any future change to the realizability of these tanning supply
distributor receivables will be recorded as a component of the provision for
cancelled distributors in the statement of operations at that time. In
management's opinion, by focusing on its core business of selling primarily to
distributors that sell products in multiple categories of the professional salon
market and limiting distribution in the tanning supply channel, the stature of
the Body Drench brand will be enhanced, which should increase gross margins on
tanning products, reduce expenses and capitalize on the Company's core strategy
of offering customers a "one-stop shop" for professional salon products.
NOTE 9. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's long-term debt includes $100 million of 10 7/8% senior
subordinated notes due 2008 (the Notes). The Notes 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 domestic
subsidiaries.
The financial statements presented below include the combined financial
position as of December 31, 1998 and June 30, 1999, the results of operations
for the three and six months ended June 30, 1998 and 1999, and the statements of
cash flows for the six months ended June 30, 1998 and 1999 of Styling Technology
Corporation (Parent); guarantor subsidiaries (Guarantors) and the non-guarantor
subsidiaries (Non-guarantors).
9
<PAGE> 11
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 (IN THOUSANDS)
----------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 2,867 $ 343 $ 813 $ -- $ 4,023
Accounts receivable, net............. 17,614 8,830 5,882 -- 32,326
Inventories, net..................... 13,232 10,060 2,083 -- 25,375
Prepaid expenses and other current
assets............................ 3,243 695 83 -- 4,021
Due to/(from) affiliates............. 2,314 5,545 (7,859) -- --
--------- ------- ------- --------- --------
Total current assets......... 39,270 25,473 1,002 -- 65,745
PROPERTY AND EQUIPMENT, net............ 3,625 1,626 111 -- 5,362
GOODWILL, INTANGIBLES AND OTHER, net... 45,350 52,627 50,114 -- 148,091
INVESTMENT IN SUBSIDIARIES, net........ 104,386 -- -- (104,386) --
--------- ------- ------- --------- --------
$ 192,631 $79,726 $51,227 $(104,386) $219,198
========= ======= ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 8,784 $ 2,960 $ 924 $ -- $ 12,668
Accrued liabilities.................. 1,884 5,841 2,642 -- 10,367
Current portion of long-term debt and
other............................. 1,309 357 1,102 -- 2,768
--------- ------- ------- --------- --------
Total current liabilities.... 11,977 9,158 4,668 -- 25,803
--------- ------- ------- --------- --------
DEFERRED INCOME TAXES.................. 6,475 -- 12,741 -- 19,216
--------- ------- ------- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion.............................. 140,366 -- -- -- 140,366
--------- ------- ------- --------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock...................... -- -- -- -- --
Common stock......................... 1 -- -- -- 1
Additional paid-in capital........... 29,038 61,770 32,527 (94,297) 29,038
Retained earnings.................... 6,574 8,798 1,291 (10,089) 6,574
Treasury stock....................... (1,800) -- -- -- (1,800)
--------- ------- ------- --------- --------
Total stockholders' equity... 33,813 70,568 33,818 (104,386) 33,813
--------- ------- ------- --------- --------
$ 192,631 $79,726 $51,227 $(104,386) $219,198
========= ======= ======= ========= ========
</TABLE>
10
<PAGE> 12
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 198 $ 1,169 $ 145 $ -- $ 1,512
Accounts receivable, net................ 10,637 21,302 11,323 -- 43,262
Inventories, net........................ 11,180 13,221 2,547 -- 26,948
Prepaid expenses and other current
assets............................... 4,385 1,492 270 -- 6,147
Due to/from affiliates.................. 10,055 5,075 (15,130) -- --
-------- -------- -------- --------- --------
Total current assets............ 36,455 42,259 (845) -- 77,869
PROPERTY AND EQUIPMENT, net............... 5,884 2,713 91 -- 8,688
GOODWILL, INTANGIBLES AND OTHER net....... 44,079 57,408 51,081 -- 152,568
INVESTMENTS IN SUBSIDIARIES............... 119,605 -- -- (119,605) --
-------- -------- -------- --------- --------
Total assets.................... $206,023 $102,380 $ 50,327 $(119,605) $239,125
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 6,998 $ 7,698 $ 3,013 $ -- $ 17,709
Accrued liabilities..................... 1,938 6,284 2,241 -- 10,463
Current portion of long-term debt and
other................................ 2,307 1,167 -- -- 3,474
-------- -------- -------- --------- --------
Total current liabilities....... 11,243 15,149 5,254 -- 31,646
-------- -------- -------- --------- --------
OTHER NON-CURRENT LIABILITIES............. 6,475 (42) 12,741 -- 19,174
-------- -------- -------- --------- --------
LONG-TERM DEBT AND OTHER, less current
portion................................. 155,652 -- -- -- 155,652
-------- -------- -------- --------- --------
COMMITMENTS AND CONTINGENCIES.............
STOCKHOLDERS' EQUITY:
Preferred stock......................... -- -- -- -- --
Common stock............................ 1 -- -- -- 1
Additional paid-in capital.............. 29,038 66,769 32,529 (99,298) 29,038
Retained earnings....................... 5,414 20,504 (197) (20,307) 5,414
Treasury stock.......................... (1,800) -- -- -- (1,800)
-------- -------- -------- --------- --------
Total stockholders' equity...... 32,653 87,273 32,332 (119,605) 32,653
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity.......... $206,023 $102,380 $ 50,327 $(119,605) $239,125
======== ======== ======== ========= ========
</TABLE>
11
<PAGE> 13
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1998
-----------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales........................... $9,168 $9,906 $ -- $ -- $19,074
Cost of sales....................... 3,755 4,695 -- -- 8,450
------ ------ ------ ------- -------
Gross profit........................ 5,413 5,211 -- -- 10,624
Selling, general and administrative
expenses.......................... 3,450 3,064 -- -- 6,514
Centralization and reengineering.... -- -- -- -- --
------ ------ ------ ------- -------
Income from operations.............. 1,963 2,147 -- -- 4,110
Interest (expense) and other income,
net............................... (1,364) -- -- (1,364)
------ ------ ------ ------- -------
Income before extraordinary item and
income taxes...................... 599 2,147 -- -- 2,746
Provision for income taxes.......... 258 923 -- -- 1,181
------ ------ ------ ------- -------
Income before extraordinary item.... 341 1,224 -- -- 1,565
Extraordinary item (net of taxes)... (1,091) -- (1,091)
Income from subsidiaries............ 1,224 -- -- (1,224) --
------ ------ ------ ------- -------
Net income.......................... $ 474 $1,224 $ -- $(1,224) $ 474
====== ====== ====== ======= =======
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1999
------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 7,265 $19,712 $ 7,541 $ -- $34,518
Cost of sales...................... 3,627 8,639 2,746 -- 15,012
------- ------- ------- ------- -------
Gross profit....................... 3,638 11,073 4,795 -- 19,506
Selling, general and administrative
expenses......................... 1,840 4,273 6,534 -- 12,647
Centralization and reengineering... 703 -- -- -- 703
Provision for cancelled
distributors..................... 5,067 -- -- -- 5,067
------- ------- ------- ------- -------
Income (loss) from operations...... (3,972) 6,800 (1,739) -- 1,089
Interest (expense) and other
income, net...................... (3,928) -- (18) -- (3,946)
------- ------- ------- ------- -------
Income (loss) before extraordinary
item and income taxes............ (7,900) 6,800 (1,757) -- (2,857)
Provision for (benefit from) income
taxes............................ (3,120) 2,686 (694) -- (1,128)
------- ------- ------- ------- -------
Income (loss) before extraordinary
item............................. (4,780) 4,114 (1,063) -- (1,729)
Extraordinary Item (Net of
taxes)........................... (446) -- -- -- (446)
Income from subsidiaries........... 3,051 -- -- (3,051) --
------- ------- ------- ------- -------
Net income (loss).................. $(2,175) $ 4,114 $(1,063) $(3,051) $(2,175)
======= ======= ======= ======= =======
</TABLE>
12
<PAGE> 14
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales........................ $18,347 $16,952 $-- $ -- $35,299
Cost of sales.................... 7,569 7,923 -- -- 15,492
------- ------- -- ------- -------
Gross profit..................... 10,778 9,029 -- -- 19,807
Selling, general and
administrative expenses........ 6,634 5,275 -- -- 11,909
------- ------- -- ------- -------
Income from operations........... 4,144 3,754 -- -- 7,898
Interest (expense) and other
income, net.................... (2,628) -- -- -- (2,628)
------- ------- -- ------- -------
Income before extraordinary item
and income taxes............... 1,516 3,754 -- -- 5,270
Provision for income taxes....... 653 1,613 -- -- 2,266
------- ------- -- ------- -------
Income before extraordinary
item........................... 863 2,141 -- -- 3,004
Extraordinary item (net of
taxes)......................... (1,091) -- -- (1,091)
Income from subsidiaries......... 2,141 -- -- (2,141) --
------- ------- -- ------- -------
Net income....................... $ 1,913 $ 2,141 $-- $(2,141) $ 1,913
======= ======= == ======= =======
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 15,216 $35,078 $18,476 $ -- $68,770
Cost of sales..................... 7,411 15,744 6,702 -- 29,857
-------- ------- ------- ------- -------
Gross profit...................... 7,805 19,334 11,774 -- 38,913
Selling, general and
administrative expenses......... 4,905 7,968 12,902 -- 25,775
Centralization and
reengineering................... 1,363 -- -- -- 1,363
Provision for cancelled
distributors.................... 5,067 5,067
-------- ------- ------- ------- -------
Income (loss) from operations..... (3,530) 11,366 (1,128) -- 6,708
Interest (expense) and other
income, net..................... (7,841) 11 (44) -- (7,874)
-------- ------- ------- ------- -------
Income (loss) before extraordinary
item and income taxes........... (11,371) 11,377 (1,172) -- (1,166)
Provision for income taxes........ (4,441) 4,494 (505) -- (452)
-------- ------- ------- ------- -------
Income (loss) before extraordinary
item............................ (6,930) 6,883 (667) -- (714)
Extraordinary item (net of
taxes).......................... (446) -- -- -- (446)
Income from subsidiaries.......... 6,216 -- -- (6,216) --
-------- ------- ------- ------- -------
Net income (loss)................. $ (1,160) $ 6,883 $ (667) $(6,216) $(1,160)
======== ======= ======= ======= =======
</TABLE>
13
<PAGE> 15
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 1,913 $ 2,164 $ -- $ (2,164) $ 1,913
Adjustments to reconcile net income to
net cash in operating activities:
Depreciation and amortization........ 1,102 754 -- -- 1,856
Interest accretion on note payable... 87 -- -- -- 87
Change in certain assets and
liabilities........................
Accounts receivable, net........... (2,491) (1,174) -- -- (3,665)
Inventories, net................... (2,724) 1,173 -- -- (1,551)
Prepaids and other assets.......... (1,792) 1,428 -- -- (363)
Accounts payable and accrued
liabilities..................... (3,396) 600 -- -- (2,796)
Due to/(from) affiliates, net...... 1,696 (3,859) -- 2,164 --
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities.......... (5,605) 1,086 -- -- (4,519)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of acquired businesses, net of
cash acquired........................ (31,469) -- -- -- (31,469)
Purchasing of property, plant and
equipment............................ (624) (44) -- -- (668)
Change in investments, long term
receivables and other................ (872) (85) -- -- (957)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities.......... (32,965) (129) -- -- (33,094)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facility, net of
financing costs...................... 10,265 -- -- -- 10,265
Proceeds from bond offering, net of
financing costs...................... 96,400 -- -- -- 96,400
Exercise of stock options............... 197 -- 197
Repayment of notes payable and Credit
Facility............................. (60,655) -- -- -- (60,655)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities.......... 46,207 -- -- -- 46,207
-------- -------- -------- -------- --------
NET CHANGE IN CASH........................ 7,637 957 -- -- 8,594
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, beginning of
period.................................. $ 2,850 $ 213 $ -- 3,063
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 10,487 $ 1,170 $ -- $ -- $ 11,657
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 16
STYLING TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
---------------------------------------------------------------
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ (1,160) $ 6,883 $ (667) $(6,216) $ (1,160)
Adjustments to reconcile net income (loss)
to net cash in operating activities:
Depreciation and amortization........... 1,677 1,568 247 -- 3,492
Provision for cancelled distributors.... 5,067 -- -- -- 5,067
Change in certain assets and liabilities
Accounts receivable, net............. 107 (10,669) (5,441) -- (16,003)
Inventories, net..................... (3,541) 417 (464) -- (3,494)
Prepaids and other assets............ (3,766) (1,214) (84) -- (5,064)
Accounts payable and accrued
liabilities........................ (363) 5,022 1,687 -- 6,346
Due to/(from) affiliates, net........ (12,952) 1,081 5,655 6,216 --
-------- -------- ------- ------- --------
Net cash provided by (used in)
operating activities............ (12,916) 3,088 933 -- (8,895)
-------- -------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchasing of property, plant
and equipment........................ (2,378) (1,046) (16) -- (3,440)
Change in investments, long term
receivables and other................ (384) (1,216) (1,283) -- (2,883)
-------- -------- ------- ------- --------
Net cash provided by (used in)
investing activities............ (2,762) (2,262) (1,299) -- (6,323)
-------- -------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net of
financing costs...................... 72,469 -- -- -- 72,469
Repayment on line of credit............. (59,460) -- (302) -- (59,762)
-------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities............ 13,009 -- (302) -- 12,707
-------- -------- ------- ------- --------
NET CHANGE IN CASH........................ (2,669) 826 (668) -- (2,511)
-------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, beginning of
period.................................. $ 2,867 $ 343 $ 813 $ -- 4,023
-------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 198 $ 1,169 $ 145 $ -- $ 1,512
======== ======== ======= ======= ========
</TABLE>
15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
Styling Technology Corporation (the Company) is a leading developer,
producer, and marketer of a wide array of professional salon products,
addressing all salon product categories, including hair care, nail care, and
skin and body care products, as well as salon appliances and sundries. Through
strategic acquisitions, the Company has acquired well-recognized brand names, a
strong distribution network, established marketing and salon industry education
programs, and significant production and sourcing capabilities.
The Company believes it is the only company that develops, produces, and
markets products in each category of the professional salon products industry
and that its ability to offer customers a "one-stop shop" for brand-name
professional salon products creates a competitive advantage. The Company
currently sells more than 550 products under 17 principal brand names, including
ABBA Pure and Natural Hair Care(R) products, Body Drench(R) skin and body care
products, Clean + Easy(R) hair removal products, European Touch II(R) pedicure
spa equipment, Framesi(R) hair care products, Gena(R) nail and pedicure
products, Kizmit(TM) acrylic nail enhancements, Revivanail(R) nail treatments,
and Roffler(R) hair care products. In the United States, the Company markets its
product lines through professional salon industry distribution channels to more
than 2,300 customers, consisting primarily of salon product and tanning supply
distributors (that resell to beauty and tanning salons), beauty supply outlets,
and salon chains. The Company also markets its products directly to more than
3,000 spas, resorts, and health and country clubs through its in-house sales
force. Internationally, the Company sells its products primarily through
international salon product distributors.
Except for the historical information contained herein, the discussion in
this Quarterly Report contains or may contain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed herein, as
well as those factors discussed under "Special Considerations" contained in Item
1 of the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998. Historical results are not necessarily indicative of operating results
for any future period.
Results of Operations -- Three Months Ended and Six Months Ended June 30, 1999
Compared to Three Months Ended and Six Months Ended June 30, 1998.
Net Sales
Net sales amounted to $34.5 million for the three months ended June 30,
1999, up 81% from net sales of $19.1 million for the three months ended June 30,
1998. Net sales amounted to $68.8 million for the six months ended June 30,
1999, compared to net sales of $35.3 million for the six months ended June 1998.
The $15.4 million, or 81%, increase in sales for the quarter ended June 30, 1999
compared to the quarter ended June 30, 1998 was due primarily to the
contribution of brands acquired during and subsequent to the quarter ended June
30, 1998 in addition to strong performance in the Company's exclusive hair care
lines, ABBA and Framesi, and in the appliances and sundries category. On a pro
forma basis, assuming the 1998 acquisitions had taken place on January 1, 1998,
net sales increased by $4.3 million, or 14%, to $34.5 million in the second
quarter of 1999 from $30.2 million during the second quarter of 1998. Pro forma
net sales for the six months ended June 30, 1999 increased by $10.0 million, or
17%, to $68.8 million from $58.8 million for the six months ended June 30, 1998.
Cost of Sales
Cost of sales amounted to $15.0 million, or 43% as a percentage of net
sales, for the three months ended June 30, 1999, compared to $8.5 million, or
44% as a percentage of net sales, for the three months ended June 30, 1998. Cost
of sales amounted to $29.9 million, or 43% as a percentage of net sales, for the
six months ended June 30, 1999, compared to $15.5 million, or 44% as a
percentage of net sales, for the six months ended June 30, 1998. As a result of
the foregoing, we realized gross profit for the three months ended June 30, 1999
of $19.5 million, or 57% as a percentage of net sales, compared to $10.6
million, or 56% as a percentage of net sales, during the corresponding period in
1998. We realized gross profit for the six months ended June 30, 1999 of $38.9
million, or 57% as a percentage of net sales, compared to $19.8 million, or 56%
as a percentage of net
16
<PAGE> 18
sales, during the corresponding period in 1998. Our ability to sustain this
favorable gross margin percentage is attributable primarily to the acquisition
of businesses that carry similarly favorable gross margins and our continued
efforts to leverage its substantial purchasing power with third-party suppliers
to obtain optimum pricing.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $12.6 million, or 37% of
net sales, for the three months ended June 30, 1999, before recording
centralization and reengineering costs and one-time charges totaling
approximately $5.8 million. Selling, general, and administrative expenses
including the centralization and reengineering costs and one-time charges
amounted to $18.4 million, or 53% of net sales, for the three months ended June
30, 1999 compared with $6.5 million, or 34% of net sales, for the three months
ended June 30, 1998. Selling, general, and administrative expenses were $25.8
million, or 37% of net sales, for the six months ended June 30, 1999, before
recording centralization and reengineering costs and one time charges totaling
approximately $6.4 million. Selling, general, and administrative expenses
including the centralization and reengineering costs and one-time charges
amounted to $32.2 million, or 47% of net sales, for the six months ended June
30, 1999 compared with $11.9 million, or 34% of net sales, for the six months
ended June 30, 1998. Selling, general, and administrative expenses, exclusive of
one-time charges discussed above, increased on an absolute as well as a
percentage basis due primarily to acquisitions completed during and subsequent
to June 30, 1998 and the operating characteristics of those businesses acquired.
The centralization and business process reengineering project, which began in
the fourth quarter of 1998, was substantially complete by June 30, 1999. The
project, which included the centralization of operations in Scottsdale, Arizona
and the outsourcing of segments of our production and warehousing functions,
resulted in costs of $703,000 during the three months ended June 30, 1999, for a
total of $1.4 million during the six months ended June 30, 1999.
During the second quarter of 1999, we changed the method of distribution of
our products by eliminating a significant number of tanning supply distributors.
Distribution of Body Drench products to the tanning market will now be made
through a limited number of exclusive distributors. We believe that by focusing
on our core business of selling our portfolio of brands to the professional
salon distribution channels and limiting distribution in the tanning supply
channel, the stature of the Body Drench brand will be enhanced, which should
increase gross margins on tanning products, reduce expenses, and capitalize on
our core strategy of offering customers a "one-stop-shop" for professional salon
products. This change in our business resulted in a write-off of receivables
from cancelled distributors of approximately $5.1 million during the quarter
ended June 30, 1999. We classified this charge as a provision for cancelled
distributors in the consolidated statement of operations as a separate component
of income from operations. Any future change to the realizability of these
tanning supply distributor receivables will be recorded as a component of the
provision for cancelled distributors in the statement of operations at that
time. The normal recurring bad debt charges are recorded as a component of
selling, general and administrative expenses and amounted to approximately
$171,000 and $1,112,000 for the six months ended June 30, 1998 and 1999,
respectively.
Interest Expense and Other
Interest expense and other amounted to $3.9 million for the three months
ended June 30, 1999, up 179% from $1.4 million for the three months ended June
30, 1998. Interest expense and other amounted to $7.9 million for the six months
ended June 30, 1999, up 200% from $2.6 million for the six months ended June 30,
1998. These increases were primarily a result of an increase in debt associated
with the completion of the 1998 acquisitions and an increase in our effective
interest rate as a result of the issuance of the senior subordinated notes in
June 1998.
Extraordinary Item
A portion of the proceeds from the GE Facility discussed under "Liquidity
and Capital Resources" below was used to repay the previous credit facility. The
Company reported an extraordinary, non-cash charge of approximately $446,000,
net of taxes, or $0.11 per diluted share, related to unamortized financing costs
associated with the previous credit facility.
17
<PAGE> 19
Provision for Income Taxes
The benefit from income taxes for the three months ended June 30, 1999
amounted to $1.1 million, which represents an effective tax rate of
approximately 39.5%, compared with a provision of $1.2 million, which represents
an effective tax rate of approximately 43% for the three months ended June 30,
1998. The benefit from income taxes for the six months ended June 30, 1999
amounted to $452,000, which represents an effective tax rate of approximately
38.8%, compared with a provision of $2.3 million, which represents an effective
tax rate of approximately 43% for the six months ended June 30, 1998. Permanent
differences between book and tax amounts decreased over the twelve month period,
resulting in the lower effective tax rate for the quarter and six months ended
June 30, 1999.
Income from Operations and Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA)
Income from operations was $6.9 million before centralization and
reengineering costs and one-time charges for the three months ended June 30,
1999, compared to $4.1 million for the three months ended June 30, 1998. After
centralization and reengineering costs and one-time charges, income from
operations was $1.1 million for the three months ended June 30, 1999. Income
from operations was $13.1 million before centralization and reengineering costs
and one-time charges for the six months ended June 30, 1999, compared to $7.9
million for the six months ended June 30, 1998. After one-time and non-recurring
charges, income from operations was $6.7 million for the six months ended June
30, 1999. EBITDA for the three months ended June 30, 1999 was $8.7 million
before centralization and reengineering costs and one-time charges, an increase
of $3.7 million, or 74%, over EBITDA of $5.0 million for the three months ended
June 30, 1998. EBITDA after centralization and reengineering costs and one-time
charge was $3.0 million for the quarter. Earnings before interest, taxes,
depreciation, and amortization (EBITDA) was $16.6 million before centralization
and reengineering costs and one-time charges for the six months ended June 30,
1999, an increase of $7.0 million, or 73%, over EBITDA of $9.6 million for the
six months ended June 30, 1998. EBITDA after centralization and reengineering
costs and one-time charges was $10.2 million for the six months ended June 30,
1999. On a proforma basis, assuming the 1998 acquisitions had taken place on
January 1, 1998, EBITDA, before centralization and reengineering costs and
one-time charges, increased by $2.7 million, or 19%, to $16.6 million in the
first six months of 1999 from $13.9 million during the first six months of 1998.
EBITDA is not intended to represent net cash provided by operating activities as
defined by generally accepted accounting principles and should not be considered
as an alternative to net income as an indicator of operating performance or to
net cash provided by operating activities as a measure of liquidity. We believe
EBITDA is a measure commonly reported and widely used by analysts, investors,
and other interested parties who monitor business performance. Accordingly, we
have disclosed this information to permit a more complete comparative analysis
of our operating performance.
Net Income
Net loss for the three months ended June 30, 1999, was $1.7 million, or
$0.42 per diluted share, before extraordinary item compared to net income of
$1.6 million, or $0.36 per diluted share, for the corresponding period during
1998. For the six months ended June 30, 1999, we reported a net loss of
$714,000, or $0.18 per diluted share, before the extraordinary item compared to
net income of $3.0 million, or $0.69 per diluted share, for the corresponding
period during 1998. After the extraordinary item, the net loss for the six
months ended June 30, 1999 was $1.2 million, or $0.29 per diluted share,
compared to net income of $1.9 million for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position increased to $46.2 million at June
30, 1999 from $39.9 million at December 31, 1998. The increase of $6.3 million
is primarily due to an increase investment in accounts receivable as well as the
Company's results of operations for the six months ended June 30, 1999.
During the six months ended June 30, 1999, the Company used approximately
$8.9 million of cash in operating activities, which was primarily due to
increased investment in accounts receivable of $10.9 million
18
<PAGE> 20
resulting from internal sales growth of 17%, increases in prepaid expenses and
other assets of $5.1 million, offset by a decrease in accounts payable of $6.3
million.
Capital expenditures for the six months ended June 30, 1999 totaled
approximately $3.4 million, primarily related to computer hardware and software
costs in connection with the Company's new centralized management and
information systems.
In June 1999, the Company closed the GE Facility, a $90 million Senior
Secured Revolving Credit Facility with GE Capital Corporation acting as agent.
Proceeds from the new facility were used to repay amounts outstanding under the
Company's previous credit facility. The GE Facility will also provide funds for
future acquisitions as well as for working capital purposes. The Company
reported an extraordinary, non-cash charge during the second quarter of
approximately $446,000, net of tax, or approximately $0.11 per diluted share,
related to the write-off of unamortized financing costs associated with the
previous credit facility.
The Company intends to raise additional capital through debt and equity
financings 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,
strategy, 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 will depend upon prevailing market conditions, interest rates, and the
financial condition of the Company.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, within the
next five months, computer systems and software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists concerning the potential effects associated with such
compliance.
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 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 September
30, 1999. The Company is assessing 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"
19
<PAGE> 21
compliance of these non-IT systems and expects to conclude this assessment by
September 1, 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 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 1999, 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 June 30, 1999, 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 9.0%. At June 30,
1999, the Company's total outstanding borrowings on the instruments were
approximately $57.3 million, including approximately $52.2 million outstanding
under the current credit facility and approximately $5.1 million of other debt
instruments. The Company has 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 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 its current 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 its current credit facility at 7.50% plus a credit margin ranging
from 250 to 300 basis points, for a period ending
20
<PAGE> 22
April 2000. The borrowings under the current credit facility not subject to
interest rate swap or interest rate cap agreements at June 30, 1999 totaled
$27.2 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Stockholders was held on June 14,
1999. The following nominees were elected to the Company's Board of Directors to
serve as Class I directors for a three-year term expiring in 2002, or until
their successors are elected and qualified, or until their earlier resignation
or removal:
<TABLE>
<CAPTION>
NOMINEE VOTES IN FAVOR WITHHELD
------- -------------- --------
<S> <C> <C>
James A. Brooks 3,562,370 9,800
Sylvan Schefler 3,561,370 10,800
</TABLE>
The following additional items were voted upon by the Company's
stockholders:
(a) Proposal to approve an amendment to the Company's 1996 Stock Option
Plan to increase the number of shares that may be issued pursuant to the 1996
Stock Option Plan from 750,000 to 1,000,000 shares.
<TABLE>
<CAPTION>
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
- -------------- ------- --------- ---------------
<S> <C> <C> <C>
1,609,590 434,888 4,000 1,523,692
</TABLE>
(b) Proposal to ratify the appointment of Arthur Andersen LLP as the
independent auditors of the Company for the fiscal year ending December 31,
1999.
<TABLE>
<CAPTION>
VOTES IN FAVOR OPPOSED ABSTAINED BROKER NON-VOTE
- -------------- ------- --------- ---------------
<S> <C> <C> <C>
3,560,720 8,600 2,850 -0-
</TABLE>
21
<PAGE> 23
The following directors' terms of office continued after the 1999 Annual
Meeting of Stockholders:
Sam L. Leopold
Richard R. Ross
Peter W. Burg
Michael H. Feinstein
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STYLING TECHNOLOGY CORPORATION
By: /s/ RICHARD R. ROSS
------------------------------------
Richard R. Ross
Executive Vice President and
Chief Financial Officer
(Duly authorized officer of the
Registrant,
principal financial and accounting
officer)
Dated: August 12, 1999
23
<PAGE> 25
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,512
<SECURITIES> 0
<RECEIVABLES> 43,262
<ALLOWANCES> 0
<INVENTORY> 26,948
<CURRENT-ASSETS> 75,639
<PP&E> 8,688
<DEPRECIATION> 0
<TOTAL-ASSETS> 239,125
<CURRENT-LIABILITIES> 31,646
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 32,652
<TOTAL-LIABILITY-AND-EQUITY> 239,125
<SALES> 68,770
<TOTAL-REVENUES> 68,770
<CGS> 29,857
<TOTAL-COSTS> 62,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,874
<INCOME-PRETAX> (1,166)
<INCOME-TAX> (452)
<INCOME-CONTINUING> (714)
<DISCONTINUED> 0
<EXTRAORDINARY> 446
<CHANGES> 0
<NET-INCOME> (1,160)
<EPS-BASIC> (0.29)<F1>
<EPS-DILUTED> (0.29)<F1>
<FN>
<F1>BASIC EPS BEFORE THE EXTRAORDINARY ITEM WAS $(0.18). DILUTED EPS BEFORE THE
EXTRAORDINARY ITEM WAS $(0.18).
</FN>
</TABLE>
