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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[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 the Charter)
DELAWARE 75-2665378
(State of Incorporation) (I.R.S. Employer Identification No.)
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
Indicated 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 [ ] No [X]
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/A 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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<PAGE>
STYLING TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K/A
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 21
ITEM 3. LEGAL PROCEEDINGS.................................................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................................ 22
ITEM 6. SELECTED FINANCIAL DATA............................................ 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (AS RESTATED).................. 24
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................ 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................ 40
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 40
ITEM 11.EXECUTIVE COMPENSATION............................................. 40
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................... 40
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 40
PART IV
ITEM 14.EXHIBITS FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K........................................................ 40
SIGNATURES ............................................................. 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-K/A 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.
<PAGE>
EXPLANATORY NOTE
AMENDED FILING OF FORM 10-K FOR 1998
RESTATEMENT OF FINANCIAL STATEMENTS
AND CHANGES TO CERTAIN INFORMATION
In November 1999, we announced that as a result of errors and
irregularities primarily discovered in the Body Drench division in the recording
of net sales and income the Company anticipated restating its financial
statements. The procedures we have undertaken to determine the extent of the
restatement have resulted in the restatement of our financial statements for
1997 and 1998 (see Note 1 and 13 to the Consolidated Financial Statements filed
with this Report).
General information in the originally filed Form 10-K was presented as of
the March 31, 1999 filing date or earlier, as indicated. Unless otherwise
stated, such information has not been updated in this amended filing. Concurrent
with the filing of this report, we have filed with the Securities and Exchange
Commission (SEC) the 1999 Form 10-K, which discusses recent developments and
contains updated general information.
Financial statements and related disclosures, including Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contained in this amended filing reflect, where appropriate, changes to conform
to the restatement.
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 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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<TABLE>
<CAPTION>
ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION)
----------- ---------------- --------------------------------
<S> <C> <C>
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 tanning and
of Designs by Norvell, Inc. ("DBN") moisturizing products and resort, spa, and health
and country club personal care products)
J.D.S. Manufacturing Co., Inc. ("JDS") November 1996 Alpha 9 (acrylic and fiberglass nail enhancement
products)
Kotchammer Investments, Inc. (dba Styling November 1996 SRC (high-end salon appliances and salonwear)
Research Company) ("KII")
Suntopia Division of Creative Laboratories, March 1997 Suntopia (high-end tanning products)
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 of December 1997 Clean + Easy and One Touch (salon and retail hair
Inverness Corporation and Inverness (UK) removal products)
Limited (together, "Inverness")
Pro Finish USA, Ltd. ("Pro Finish") May 1998 Pro Finish, Kizmit, and Cosmic (nail care
products)
European Touch Co., Incorporated, and June 1998 European Touch (professional nail enhancement and
two related nail companies ("European treatment products)
Touch")
European Touch, Ltd. II ("European Touch II") June 1998 European Touch II (pedicure spa equipment)
Ft. Pitt Acquisition, Inc. and its 90% August 1998 Framesi, Roffler, and Biogenol (professional hair
owned subsidiary Ft. Pitt - Framesi, care products)
Ltd. (together, "Framesi USA")
</TABLE>
The Company's principal executive offices are located at 7400 East Tierra
Buena, Scottsdale, Arizona, 85260. The Company's telephone number is (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 professional 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.
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Professional salon appliances and sundries include hair dryers, curling irons,
brushes, pedicure spas, furniture, and salon wear (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 professional. 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
relative price insensitivity. Consequently, professional salon products
generally command substantially higher profit margins that 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.
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* 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 6% 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 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 system 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
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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 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 earnings before interest,
taxes, depreciation, and amortization "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
extension 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 percentages of such products sold for professional salon
use and retailed to salon and customers.
<TABLE>
<CAPTION>
% % RETAIL
SALON SALES BY
PRODUCT CATEGORY PRODUCT DESCRIPTION BRAND NAMES USE(1) SALONS(1)
---------------- ------------------- ----------- ------ ---------
<S> <C> <C> <C> <C>
Hair Care Shampoo, conditioner, hair ABBA, AquaTonic, 40% 60%
color, and styling and Biogenol, Body Drench,
finishing aids Framesi, Gena, Roffler
Nail Care Natural nail care products, Alpha 9, Cosmic, 70 30
acrylic and fiberglass nail European Touch, Gena,
enhancement products, nail Kizmit, Pro Finish,
treatments, nail polish, Revivanail
light-bonded nail systems, and
manicure and pedicure solutions
and accessories
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Skin and Body Care Moisturizing lotion, indoor and Body Drench, Clean + 35 65
outdoor tanning products, Easy, Gena, One Touch,
personal care products, Suntopia
paraffin waxes, thermo-therapy
treatments, and hair removal
systems and depilatory products
Salon Equipment Hairdryers, curling irons, European Touch II, 100 0
Appliances and Sundries salon pedicure spas, salon Maiko, SRC
furniture, and salonwear
(capes/aprons)
</TABLE>
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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 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
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for conditioning heat therapy treatments; the Healthy Hoof nail and skin
treatment line to strengthen, moisturize, and condition nail 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, Gera, One Touch, and
Suntopia brands.
Body Drench professional skin care products include moisturizing lotions
and body baths supplemented and 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 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 professionals salon market
with an extensive line of hair removal products and related sundries used by
salon professional. 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
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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
participation in salon industry trade shows, at which salon product
manufacturers exhibit and sell their products to wholesale salon product
distributors; several annual domestic and international salon professionals
trade shows; and numerous professional salon distributor-sponsored shows, at
which products, styles, and techniques are demonstrated to salon professionals.
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.
SALON 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." (As Restated)
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.
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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 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."
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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,
Revivanial, 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.
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.
NAME AGE POSITION
---- --- --------
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
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
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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.
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 with
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, when 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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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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INTEGRATION OF BUSINESS OPERATIONS
The integration of the management, operations, and facilities of
acquired businesses could involve unforeseen difficulties. The 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 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
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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 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 manufacturers 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 condition, 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 14% of the net sales of the Company during 1997 and
9% 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 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.
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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 effectively manage 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 $29.2 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.
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;
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* 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 14% of the Company's pro
forma consolidated net sales during 1997 and approximately 6% 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 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 exchange rate fluctuations;
* restrictions on the repatriation of funds;
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* 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 to 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. 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.
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<PAGE>
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.
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.
The operations of the Company subject it to federal, state, and local
government 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
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<PAGE>
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 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
19
<PAGE>
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.
RIGHT 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 businesses.
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 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.
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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 its
business, any significant Year 2000 compliance problem of any of the Company,
its customers, or its third-party contract manufacturers or suppliers could have
a material adverse effect on the Company's business, financial condition, and
operating results. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations (as restated) - 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" (as restated)
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 "Business -
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 fee 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.
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.
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<PAGE>
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.
HIGH LOW
---- ---
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
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.
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 (1997 and 1998 have been restated) 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. 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
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<PAGE>
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, 1996 YEAR ENDED YEAR ENDED
TO DECEMBER 31, 1997 DECEMBER 31, 1998
DECEMBER 31, 1996 (AS RESTATED) (AS RESTATED)
----------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA - STYLING TECHNOLOGY
CORPORATION:
Net sales ......................................... $ 1,083 $ 36,505 $ 83,366
Gross profit ...................................... 512 19,749 44,368
Selling, general, and administrative expenses...... 737 12,201 31,619
Income (loss) from operations ..................... (225) 7,548 12,327
Income (loss) before extraordinary item ........... (151) 3,164 1,651
Extraordinary item, net of tax benefit ............ -- (1,377) (1,091)
Income (loss) after extraordinary item ............ (151) 1,787 560
Basic earnings (loss) per share:
Income (loss) before extraordinary item ......... $ (0.04) $ 0.80 $ 0.41
Extraordinary item, net ......................... -- (0.35) (0.27)
Net income (loss) ............................... (0.04) 0.45 0.14
Diluted earnings (loss) per share:
Income (loss) before extraordinary item ......... (0.04) 0.77 0.38
Extraordinary item, net ......................... -- (0.34) (0.25)
Net income (loss) ............................... (0.04) 0.43 0.13
BALANCE SHEET DATA:
Working capital .................................. 4,459 13,005 30,566
Total assets ..................................... 32,234 90,886 214,073
Long-term debt and other, less current portion.... 2,316 47,377 140,366
Total stockholders' equity ....................... 25,319 27,525 29,248
STATEMENT OF OPERATIONS DATA - INITIAL BUSINESSES
FOR THE PERIOD
YEARS ENDED FEBRUARY 28, MARCH 1, 1996
---------------------------------- TO
1993 1994 1995 1996 NOVEMBER 26, 1996
---- ---- ---- ---- -----------------
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>
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<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED DECEMBER 31, JANUARY 1, 1996
---------------------------------- TO
1992 1993 1994 1995 NOVEMBER 26, 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)
FOR THE PERIOD
YEARS ENDED SEPTEMBER 30, OCTOBER 1, 1996
---------------------------------- TO
1993 1994 1995 1996 NOVEMBER 26, 1996
---- ---- ---- ---- -----------------
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
FOR THE PERIOD
YEARS ENDED DECEMBER 31, JANUARY 1, 1996
--------------------------------- TO
1992 1993 1994 1995 NOVEMBER 26, 1996
---- ---- ---- ---- -----------------
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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (AS RESTATED) -
INTRODUCTION
The following discussion reflects the restatement of our financial
statements for the fiscal years 1997 and 1998. The restatement is a result of an
internal investigation that revealed financial reporting errors and
irregularities in the Body Drench division. It was determined that revenue was
recognized improperly on certain transactions where inventory was not shipped to
customers. The restatement resulted in a decrease in revenues from $38.1 million
and $90.4 million, previously reported, to $36.5 million and $83.4 million for
the years ended December 31, 1997 and 1998, respectively. Net income decreased
from $2.8 million and $4.1 million, previously reported, to $1.8 million and
$560,000 for the years ended December 31, 1997 and 1998, respectively.
24
<PAGE>
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 it 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 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 $109.4 million
and $108.6 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 restated results of operations of the Company for the year
ended December 31, 1998; the second section presents the restated results of
operations of the Company for the year ended December 31, 1997; 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 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.
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<PAGE>
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998 (AS RESTATED)
NET SALES
Net sales for the year ended December 31, 1998 amounted to $83.4 million
compared with net sales of $36.5 million for the year ended December 31, 1997.
The $46.9 million or 128%, 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 $39.0 million, or 46.8% of net sales, for the
year ended December 31, 1998, up slightly on a percentage basis from cost of
sales of $16.8 million, or 46.0% of net sales, during the year ended December
31, 1997.
GROSS PROFIT
As a result of the foregoing, the Company realized gross profit of $44.4
million, or 53.2% of net sales, for the year ended December 31, 1998, remaining
relatively constant with gross profit of $19.7 million, or 54.0% of net sales,
for the year ended December 31, 1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $31.6 million, or 37.9%
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 $32.0 million, or 38.4% of net sales, for the
year ended December 31, 1998 compared with $12.2 million, or 33.4% 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 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."
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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 $1.7 million, or $0.38 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 $0.6 million, or $0.13 per diluted share. Net income for the year ended
December 31, 1997 was $3.2 million, or $0.77 per diluted share, before the
extraordinary item discussed below. After the extraordinary item, net income for
the year ended December 31, 1997 was $1.8 million, or $0.43 per diluted share.
INCOME FROM OPERATIONS AND EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION &
AMORTIZATION (EBITDA)
Income from operations was $12.3 million for the year ended December 31,
1998, an increase of $4.8 million, or 64.0%, over income from operations of $7.5
million for the year ended December 31, 1997. Earnings before interest, taxes,
depreciation, and amortization ("EBITDA") was $17.5 million for the year ended
December 31, 1998, an increase of $8.1 million, or 86.2%, over EBITDA of $9.4
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 (AS RESTATED)
NET SALES
Net sales amounted to $36.5 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 $13.5 million, or 58.7%, 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 and One Touch
from December 1, 1997 to December 31, 1997.
GROSS PROFIT
As a result of the foregoing, the Company realized gross profit for the
year ended December 31, 1997, of $19.7 million, or 54.0% of net sales. The
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 reduction in cost of goods through negotiation with third party
suppliers at ABBA and Clean + Easy and One Touch.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $12.2 million, or 33.4%
of net sales, for the year ended December 31, 1997, which represents a
significant improvement over such expenses incurred by the individual Initial
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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 $(0.34) 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 $3.2 million, or $0.80 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 $1.8 million, or $0.43 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 $7.5 million for the year ended December 31,
1997. Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
was $9.4 million for the year ended December 31, 1997.
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
division 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
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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 margin 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.
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
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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 were $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 incentive 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 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 that 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.
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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 discount for certain customers in an effort to maximum
cash collections, related to the cash flow difficulties experienced by Body
Drench's parent company.
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.
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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 increased 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 expenses 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.
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 increased 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.
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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.
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.
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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.
COST OF SALES
Cost of sales, as a percentage of net sales, remained relatively constant
at 46.9% 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.
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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.
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 (AS RESTATED)
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 as restated. All quarterly information was obtained from unaudited
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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 restated 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 1998
(AS RESTATED)
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................. $14,073 $16,795 $25,400 $27,098
Gross profit.............................. 7,488 8,895 14,195 13,790
Selling, general and administrative....... 5,395 6,514 9,689 10,021
Centralization and reengineering costs.... -- -- -- 422
Income from operations.................... 2,093 2,381 4,506 3,347
Income (loss) before extraordinary item... (256) (164) 437 1,634
Extraordinary item, net................... -- (1,091) -- --
Net income (loss)......................... (256) (1,255) 437 1,634
Diluted EPS before extraordinary item..... $ (0.06) $ (0.04) $ 0.10 $ 0.40
Diluted EPS after extraordinary item...... (0.06) (0.28) 0.10 0.40
FISCAL 1997
(AS RESTATED)
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
---- ---- ---- ----
Net sales................................. $ 7,479 $7,093 $10,210 $11,723
Gross profit.............................. 4,245 3,994 5,480 6,030
Selling, general and administrative....... 2,398 2,333 3,574 3,896
Income from operations.................... 1,847 1,661 1,906 2,134
Income before extraordinary item.......... 1,054 834 506 770
Extraordinary item, net................... -- -- -- (1,377)
Net income (loss)......................... 1,054 834 506 (607)
Diluted EPS before extraordinary item..... $ 0.26 $ 0.20 $ 0.12 $ 0.19
Diluted EPS after extraordinary item...... 0.26 0.20 0.12 (0.15)
</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 (AS RESTATED)
The Company's working capital position increased to $30.6 million at
December 31, 1998 from $13.0 million at December 31, 1997. The increase of $17.6
million is primarily due to increases in accounts receivable and inventory as a
result of the completion of the acquisitions during 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 $4.6 million and $8.6
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.
36
<PAGE>
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. The 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 $0.34 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 and an additional $3.5 million in cash held in escrow pending
release contingent upon the successful transition of the manufacturing 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 $100.0
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
37
<PAGE>
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.
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" complaint. 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.
38
<PAGE>
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
shortage 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 disruption 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 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 on 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 rate 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 $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.
39
<PAGE>
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
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
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1 First Amended and Restated Certificate of Incorporation of the
Registrant
3.3 Bylaws of the Registrant(1)
4.1 Specimen of Stock Certificate(1)
4.2 Specimen of Redeemable Common Stock Warrant(1)
40
<PAGE>
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
----------
(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 From 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.
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has fully 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: October 20, 2000
-----------------------------------
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
--------- -------- ----
<S> <C> <C>
/s/ Sam L. Leopold Chairman of the Board, President, and October 20, 2000
---------------------------- Chief Executive Officer (Principal
Sam L. Leopold Executive Officer)
/s/ James Yeager Executive Vice President and Chief October 20, 2000
---------------------------- Financial Officer, Treasurer, and
James Yeager Secretary (Principal Financial and
Accounting Officer)
/s/ James A. Brooks Director October 20, 2000
----------------------------
James A. Brooks
/s/ Michael H. Feinstein Director October 20, 2000
----------------------------
Michael H. Feinstein
</TABLE>
42
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Consolidated Financial Statements PAGE
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-38
Balance Sheets F-39
Statements of Operations F-40
Statements of Stockholders' Equity F-41
Statements of Cash Flows F-42
Notes to Financial Statements F-43
Body Drench (a Division of Designs by Norvell, Inc.)
Report of Independent Public Accountants F-49
Balance Sheets F-50
Statements of Operations F-51
Statements of Changes in Owners' Investment F-52
Statements of Cash Flows F-53
Notes to Financial Statements F-54
JDS Manufacturing Co., Inc.
Report of Independent Public Accountants F-57
Balance Sheets F-58
Statements of Operations F-56
Statements of Stockholders' Equity F-60
Statements of Cash Flows F-61
Notes to Financial Statements F-62
Kotchammer Investments, Inc.
Report of Independent Public Accountants F-65
Balance Sheet F-66
Statements of Operations F-67
Statements of Stockholders' Deficit F-68
Statements of Cash Flows F-69
Notes to Financial Statements F-70
Financial Statement Schedule
Valuation and Qualifying Accounts S-1
F-1
<PAGE>
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 three years in the period ended December 31, 1998
(1997 and 1998 restated - See Notes 1 and 13). These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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.
As discussed in Note 15, the Company has incurred substantial losses and
defaulted under certain provisions of its Senior Secured Credit facility and
Senior Subordinated Notes. Management's current projections indicate that there
will not be sufficient cash flow from operations to fund the Company's debt
payments in the normal course of operations. On August 31, 2000, the Company
entered into Chapter 11 bankruptcy.
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 accounting principles generally
accepted in the United States.
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
(1997 and 1998 restated) 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
October 18, 2000
F-2
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
--------- ---------
(RESTATED) (RESTATED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,063 $ 4,023
Accounts receivable, net of allowance
for doubtful accounts of $1,032 and $1,786 12,693 24,812
Inventories, net 10,951 25,599
Prepaid expenses and other current assets 2,120 1,375
--------- ---------
Total current assets 28,827 55,809
Property and Equipment, net 2,640 5,362
Goodwill and Other Intangibles, net of
accumulated amortization of $1,375 and $5,188 56,506 139,566
Other Assets 2,913 13,336
--------- ---------
$ 90,886 $ 214,073
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 6,505 $ 12,108
Accrued liabilities 3,670 10,367
Current portion of long-term debt and other 5,647 2,768
--------- ---------
Total current liabilities 15,822 25,243
--------- ---------
Deferred Income Taxes 162 19,216
Long-Term Debt and Other, less current portion 47,377 140,366
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 1
Additional paid-in capital 27,875 29,038
Retained earnings 1,449 2,009
Treasury stock (1,800) (1,800)
--------- ---------
Total stockholders' equity 27,525 29,248
--------- ---------
$ 90,886 $ 214,073
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except share data)
<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
----------------- ----------------- -----------------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Net Sales $ 1,083 $ 36,505 $ 83,366
Cost of Sales 571 16,756 38,998
----------- ----------- -----------
Gross profit 512 19,749 44,368
----------- ----------- -----------
Selling, General and Administrative Expenses 737 12,201 31,619
Centralization and Reengineering Costs -- -- 422
----------- ----------- -----------
737 12,201 32,041
----------- ----------- -----------
Income (Loss) from Operations (225) 7,548 12,327
Interest Expense and Other, net 2 (1,847) (9,206)
----------- ----------- -----------
Income (Loss) Before Extraordinary Item and
Income Taxes (223) 5,701 3,121
Provision for (Benefit from) Income Taxes (72) 2,537 1,470
----------- ----------- -----------
Income (Loss) Before Extraordinary Item (151) 3,164 1,651
Extraordinary Item, net of tax benefit of
$882,000 and $822,000 -- (1,377) (1,091)
----------- ----------- -----------
Net income (loss) $ (151) $ 1,787 $ 560
=========== =========== ===========
Basic Earnings (Loss) per Share:
Income (loss) before extraordinary item $ (0.04) $ 0.80 $ 0.41
Extraordinary item -- (0.35) (0.27)
----------- ----------- -----------
Net income (loss) $ (0.04) $ 0.45 $ 0.14
=========== =========== ===========
Weighted average shares 3,770,000 3,949,000 4,033,000
=========== =========== ===========
Diluted Earnings (Loss) per Share:
Income (loss) before extraordinary item $ (0.04) $ 0.77 $ 0.38
Extraordinary item -- (0.34) (0.25)
----------- ----------- -----------
Net income (loss) $ (0.04) $ 0.43 $ 0.13
=========== =========== ===========
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>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS TOTAL
SHARES COMMON PAID-IN (ACCUMULATED TREASURY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT) STOCK EQUITY
----------- ----- ------- -------- ----- ------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,616 $ 1 $ -- $ -- $ -- $ 1
Issuance of common stock and warrants 20 -- 179 (187) -- (8)
Issuance of common stock and warrants
in initial public offering, net of
offering costs of approximately $1,351,000 3,116 -- 27,227 -- -- 27,227
Issuance of common stock in KII acquisition 5 -- 50 -- -- 50
Purchase of 808,000 shares of treasury stock (808) -- -- -- (1,800) (1,800)
Net loss for the period from November 27, 1996
(commencement of operations) to December 31, 1996 -- -- -- (151) -- (151)
------ ----- ------- ------ ------- -------
Balance, December 31, 1996 3,949 1 27,456 (338) (1,800) 25,319
Issuance of warrants -- -- 419 -- -- 419
Net income -- -- -- 1,787 -- 1,787
------ ----- ------- ------ ------- -------
Balance, December 31, 1997 3,949 1 27,875 1,449 (1,800) 27,525
Issuance of common stock on exercise of stock
options and warrants 119 -- 426 -- -- 426
Tax benefit from stock options exercised -- -- 737 -- -- 737
Net income -- -- -- 560 -- 560
------ ----- ------- ------ ------- -------
Balance, December 31, 1998 4,068 $ 1 $29,038 $2,009 $(1,800) $29,248
====== ===== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
NOVEMBER 27,
1996 TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1997 1998
1996 (RESTATED) (RESTATED)
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (151) $ 1,787 $ 560
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 97 1,846 5,187
Interest accretion to note payable -- 174 159
Extraordinary loss on early extinguishment of debt -- 1,377 1,091
Changes in assets and liabilities:
Accounts receivable, net 532 (5,802) (4,638)
Inventories, net (21) (2,992) (8,588)
Prepaid expenses and other assets (36) (1,730) (2,363)
Accounts payable and accrued liabilities (788) 2,960 1,807
-------- -------- --------
Net cash used in operating activities (367) (2,380) (6,785)
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of acquired businesses, net of cash acquired (20,523) (45,150) (62,677)
Purchases of property and equipment (46) (582) (1,962)
Changes in other assets, net -- -- (4,251)
-------- -------- --------
Net cash used in investing activities (20,569) (45,732) (68,890)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock, net of offering
and acquisition costs 27,227 -- --
Proceeds from credit facility, net of financing costs -- 71,633 47,298
Proceeds from bond offering, net of financing costs -- -- 96,400
Exercise of stock options -- -- 1,163
Payments on long-term debt -- (24,949) (68,226)
Purchase of treasury stock (1,800) -- --
-------- -------- --------
Net cash provided by financing activities 25,427 46,684 76,635
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents 4,491 (1,428) 960
Cash and Cash Equivalents, beginning of period -- 4,491 3,063
-------- -------- --------
Cash and Cash Equivalents, end of period $ 4,491 $ 3,063 $ 4,023
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ -- $ 1,727 $ 2,634
======== ======== ========
Cash paid for interest $ -- $ 1,155 $ 3,699
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Formation and Significant Accounting Policies
a. 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.
b. Restatement
On November 29, 1999, the Company announced that the Audit Committee of the
Board of Directors was initiating (with the assistance of outside counsel
and other experts) an internal investigation of the Body Drench division
and certain financial reporting related errors and irregularities reported
in the previously issued financial statements for first and second quarter
1999 and the 1998 fiscal year end. The Audit Committee's investigation has
since been completed and as a result of its findings, the Company has
restated its previously issued consolidated financial statements for 1997
and 1998 (See Notes 13, 14 and 15).
c. 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.
F-7
<PAGE>
d. 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.
e. 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.
Inventories consist of the following: (in thousands)
DECEMBER 31,
------------------------------
1997 1998
------------- -------------
Raw materials and work-in-process $ 2,594 $ 8,612
Finished goods 8,357 16,987
------------- -------------
$ 10,951 $ 25,599
============= =============
f. 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.
g. Goodwill and Other Intangibles
Goodwill is the cost in excess of fair value of net 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.
h. 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
F-8
<PAGE>
estimates. Significant accounting estimates include establishment of
allowance for doubtful accounts, reserves for sales returns and allowances,
excess and obsolete inventory and litigation exposures.
i. 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.
j. Revenue Recognition
The Company recognizes revenue when title passes, which is usually upon
shipment. Net sales is comprised of gross sales less provisions for
estimated returns, discounts and promotional allowances.
k. 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 guidance, 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.
l. 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.
F-9
<PAGE>
m. Other Assets
Other assets consist primarily of the following: (i) deferred financing
costs associated with the Company completing various financings
transactions (see Note 5) and (ii) deferred tax assets (see Note 7).
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.
n. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards ("SFAS") No. 133 (as amended by SFAS No. 137
and SFAS No. 138), 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, as amended, is
effective for the Company's quarter ending September 30, 2000. The Company
is currently evaluating the impact from the adoption of SFAS No. 133, as
amended, 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 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.
o. 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.
F-10
<PAGE>
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) $ 3,164,000 -- $3,164,000
Extraordinary item, net -- -- -- 1,377,000 -- 1,377,000
---------- ---- ---------- ----------- ------- ----------
Net income (loss) $ (151,000) -- $ (151,000) $ 1,787,000 -- $1,787,000
========== ==== ========== =========== ======= ==========
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) $ 0.80 $ 0.77
Per share amount --
extraordinary item, net -- -- (0.35) (0.34)
---------- ---------- ----------- ----------
Per share amount -- net
income (loss) $ (0.04) $ (0.04) $ 0.45 $ 0.43
========== ========== =========== ==========
1998
-----------------------------------------
EFFECT OF
STOCK
OPTIONS
BASIC AND DILUTED
EPS WARRANTS EPS
--- -------- ---
Income before extraordinary item $1,651,000 -- $1,651,000
Extraordinary item, net 1,091,000 -- 1,091,000
---------- ------- ----------
Net income $ 560,000 -- $ 560,000
========== ======= ==========
Shares 4,033,000 280,000 4,313,000
========== ======= ==========
Per share amount - income before extraordinary item $ 0.41 $ 0.38
Per share amount - extraordinary item, net $ (0.27) $ (0.25)
----------- ----------
Per share amount - net income $ 0.14 $ 0.13
========== ==========
</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.
F-11
<PAGE>
2. 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 5). 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.
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.
F-12
<PAGE>
The following table summarizes acquisitions for the two years ended December 31,
1997 and 1998 (in thousands).
1997 1998
------------- -------------
Accounts receivable $ 5,251 $ 7,481
Inventories 5,324 6,060
Other assets 1,475 803
Property and equipment 1,316 968
Assumed accounts payable and accrued
liabilities (2,861) (9,563)
Assumed debt - (1,716)
------------- -------------
Net assets acquired 10,505 4,033
Cash paid at closing for purchase price and
acquisition costs 45,150 62,677
------------- -------------
Goodwill and other intangibles $ 34,645 $ 58,644
============= =============
a. 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 (in
thousands).
1997 1998
----------- ----------
Net sales $ 109,430 $ 108,601
Net income 2,636 246
Income per basic share 0.67 0.06
Income per diluted share 0.64 0.06
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.
3. Property and Equipment
Property and equipment consist of the following at December 31 (in thousands):
USEFUL
LIVES
(YEARS) 1997 1998
------- ---- ----
Land -- $ 150 $ 150
Building and leasehold improvements 7-40 594 1,065
Machinery and equipment 3-7 1,559 1,706
Furniture and fixtures 7 375 1,326
Computers, vehicles and other 3-5 356 4,216
-------- --------
3,034 8,463
Less -- accumulated depreciation (394) (3,101)
-------- --------
$ 2,640 $ 5,362
======== ========
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.
4. 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>
5. Long-Term Debt and Other
Long-term debt and other consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Senior subordinated notes (the "Notes"), bearing
interest at 10 7/8%, maturing 2008 $ -- $ 100,000
Senior credit facility (the "1998 Credit Facility"),
collateralized by substantially all the assets of the
Company, maturing through June 2003 -- 37,033
Seller carryback financing, related to the acquisition of
Ft. Pitt Acquisition, Inc., bearing interest at 6%,
maturing through August 2001 -- 5,000
Unsecured note payable of Ft. Pitt Acquisition, Inc. -- 1,101
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 --
Gena Note, paid in full in November 1998 1,841 --
Other 1,183 --
--------- ---------
53,024 143,134
Less: current portion (5,647) (2,768)
--------- ---------
$ 47,377 $ 140,366
========= =========
</TABLE>
Aggregate future maturities of long-term debt and other are as follows at
December 31, 1998 (in thousands):
1999 $ 2,768
2000 6,304
2001 5,444
2002 3,076
2003 25,542
Thereafter 100,000
----------
$ 143,134
==========
a. 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, $75.0 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 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
F-14
<PAGE>
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.
b. 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.
c. 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, the Company was in compliance with all applicable covenants.
Subsequent to year end, the Company defaulted on certain credit agreements
due to non-compliance with certain financial and non-financial convents
(see Note 15).
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 12).
d. 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
F-15
<PAGE>
Company believes that, based on the high creditworthiness of these
counterparties, nonperformance is unlikely. The following is a summary of
the Company's Agreements (in thousands) as of December 31, 1998:
Company's Notional
Instrument Effective Rate Amount
---------- -------------- ------
Swap 8.50% $ 12,500
Cap 10.25% 12,500
--------
$ 25,000
========
6. Stockholders' Equity
a. 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.
b. 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.
c. 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.
d. 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.
e. 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
F-16
<PAGE>
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 $ 0.10 250,000 $ 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>
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) $ 3,164,000 $ 1,651,000
Pro forma (226,000) 2,833,000 849,000
Diluted EPS - as reported (0.04) 0.77 0.38
Diluted EPS - pro forma (0.06) 0.69 0.20
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) 1,787,000 560,000
Pro forma (226,000) 1,456,000 (242,000)
Diluted EPS - as reported (0.04) 0.43 0.13
Diluted EPS - pro forma (0.06) 0.36 (0.06)
</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.
7. Income Taxes
The provision for (benefit from) income taxes (in thousands) 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:
1996 1997 1998
---- ------- ------
Current expense $ -- $ 2,586 $ 940
Deferred expense (benefit) (72) (49) 530
---- ------- ------
Net income tax expense (benefit) $(72) $ 2,537 $1,470
==== ======= ======
F-18
<PAGE>
The components of the deferred tax accounts (in thousands) as of December 31,
1997 and 1998, consist of the following:
1997 1998
------ --------
Current deferred tax assets:
Reserves and other accruals $ 232 $ 516
Inventory capitalization 222 1,298
Other 8 --
------ --------
Total current deferred tax assets 462 1,814
------ --------
Long-term deferred tax assets:
Net operating loss carryforward -0- 2,581
Reserves and accruals -- 2,562
------ --------
Total long-term deferred tax assets -- 5,143
------ --------
Non-current deferred tax liabilities:
Accelerated tax deductions, depreciation,
and amortization 162 6,118
Effect of book basis in excess of tax basis
of licenses -- 13,098
------ --------
Total non-current deferred tax liabilities 162 19,216
------ --------
Net deferred tax asset (liability) $ 300 $(12,259)
====== ========
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:
DECEMBER 31,
-------------------------
1996 1997 1998
---- ---- ----
Statutory federal rate (34)% 34% 34%
Effect of state taxes (5)% 4% 4%
Nondeductible amortization of goodwill 7% 7% 9%
--- --- ---
(32)% 45% 47%
=== === ===
8. 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.
9. 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>
The following operating segment information includes financial information (in
thousands) for all four of the Company's operating segments.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
APPLIANCES
SKIN AND AND
HAIR CARE NAIL CARE BODY CARE SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- -------- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $29,224 $18,902 $25,930 $ 9,310 $ -- $ -- $ 83,366
Operating income (loss) 4,385 3,467 3,165 3,489 (2,179) -- 12,327
Depreciation and
amortization 107 2,561 1,189 215 1,115 -- 5,187
Total assets 97,571 46,796 80,375 30,326 94,258 (135,253) 214,073
Capital expenditures 25 134 661 146 996 -- 1,962
DECEMBER 31, 1997
APPLIANCES
SKIN AND AND
HAIR CARE NAIL CARE BODY CARE SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- -------- ------ ------------ -----
Net sales $ 8,768 $12,545 $14,078 $ 1,114 $ -- $ -- $ 36,505
Operating income (loss) 2,352 2,226 4,311 268 (1,609) -- 7,548
Depreciation and
amortization 13 1,058 292 62 421 -- 1,846
Total assets 27,180 20,757 48,686 1,842 25,238 (32,817) 90,886
Capital expenditures -- 90 275 2 215 -- 582
DECEMBER 31, 1996
APPLIANCES
SKIN AND AND
HAIR CARE NAIL CARE BODY CARE SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- -------- ------ ------------ -----
Net sales $ -- $ 697 $ 337 $ 49 $ -- $ -- $ 1,083
Operating income (loss) -- 11 5 (19) (222) -- (225)
Depreciation and
amortization -- 58 11 3 25 -- 97
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%.
10. Commitments and Contingencies
a. 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 adverse
effect on the Company's financial position or results of operations (see
Note 15).
F-20
<PAGE>
b. Operating Leases
The Company leases certain equipment and office and warehouse space under
noncancelable operating leases. Rent expense related to these lease
agreements totaled approximately $12,000, $313,000 and $1,132,000 for the
period from November 27, 1996 to December 31, 1996 and for the years ended
December 31, 1997 and 1998.
Future lease payments under noncancelable operating leases (in thousands)
are as follows:
YEARS ENDING
DECEMBER 31,
------------
1999 $ 2,330
2000 2,117
2001 1,526
2002 1,261
2003 950
Thereafter 4,815
--------
$ 12,999
========
c. 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>
11. 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%.
12. Guarantor and Non-Guarantor Subsidiaries
The Notes described in Note 5 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 restated 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 restated 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>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Balance Sheet
as of December 31, 1997 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,907 $ 156 $ -- $ -- $ 3,063
Accounts receivable, net 8,251 4,442 -- -- 12,693
Inventories, net 5,882 5,069 -- -- 10,951
Prepaid expenses and other current
assets 1,581 539 -- -- 2,120
Due to/from affiliates (2,379) 2,379 -- -- --
-------- ------- -------- -------- --------
Total current assets 16,242 12,585 -- -- 28,827
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 39,468 -- -- (39,468) --
-------- ------- -------- -------- --------
$ 86,276 $44,078 $ -- $(39,468) $ 90,886
======== ======= ======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 4,101 $ 2,404 $ -- $ -- $ 6,505
Accrued liabilities 1,481 2,189 -- -- 3,670
Current portion of long-term debt
and other 5,630 17 -- -- 5,647
-------- ------- -------- -------- --------
Total current liabilities 11,212 4,610 -- -- 15,822
-------- ------- -------- -------- --------
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 1,449 2,700 -- (2,700) 1,449
Treasury stock (1,800) -- -- -- (1,800)
-------- ------- -------- -------- --------
Total stockholders' equity 27,525 39,468 -- (39,468) 27,525
-------- ------- -------- -------- --------
$ 86,276 $44,078 $ -- $(39,468) $ 90,886
======== ======= ======== ======== ========
</TABLE>
F-23
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Balance Sheet
as of December 31, 1998 (in thousands)
<TABLE>
<CAPTION>
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 10,100 8,830 5,882 -- 24,812
Inventories, net 13,456 10,060 2,083 -- 25,599
Prepaid expenses and other current
assets 597 695 83 -- 1,375
Due to/from affiliates 2,383 5,462 (7,845) -- --
--------- ------- --------- --------- ---------
Total current assets 29,403 25,390 1,016 -- 55,809
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 13,033 118 185 -- 13,336
Investment in Subsidiaries, net 104,317 -- -- (104,317) --
--------- ------- --------- --------- ---------
$ 187,506 $79,643 $ 51,241 $(104,317) $ 214,073
========= ======= ========= ========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 8,224 $ 2,960 $ 924 $ -- $ 12,108
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 11,417 9,158 4,668 -- 25,243
--------- ------- --------- --------- ---------
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 2,009 8,715 1,305 (10,020) 2,009
Treasury stock (1,800) -- -- -- (1,800)
--------- ------- --------- --------- ---------
Total stockholders' equity 29,248 70,485 33,832 (104,317) 29,248
--------- ------- --------- --------- ---------
$ 187,506 $79,643 $ 51,241 $(104,317) $ 214,073
========= ======= ========= ========= =========
</TABLE>
F-24
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Statement of Operations
November 27, 1996 to December 31, 1996 (in thousands)
<TABLE>
<CAPTION>
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 (loss) 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>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Statement of Operations
for the Year Ended December 31, 1997 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 15,193 $ 21,312 $ -- $ -- $ 36,505
Cost of sales 6,348 10,408 -- -- 16,756
-------- -------- -------- ------- --------
Gross profit 8,845 10,904 -- -- 19,749
Selling, general and administrative
expenses 5,874 6,327 -- -- 12,201
-------- -------- -------- ------- --------
Income from operations 2,971 4,577 -- -- 7,548
Interest expense and other, net (1,789) (58) -- -- (1,847)
-------- -------- -------- ------- --------
Income before extraordinary item and
income taxes 1,182 4,519 -- -- 5,701
Provision for income taxes 719 1,818 -- -- 2,537
-------- -------- -------- ------- --------
Income before extraordinary item 463 2,701 -- -- 3,164
Extraordinary item, net (1,377) -- -- -- (1,377)
Income from wholly owned subsidiaries 2,701 -- -- (2,701) --
-------- -------- -------- ------- --------
Net income $ 1,787 $ 2,701 $ -- $(2,701) $ 1,787
======== ======== ======== ======= ========
</TABLE>
F-26
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Statement of Operations
for the Year Ended December 31, 1998 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 30,958 $40,326 $12,082 $ -- $ 83,366
Cost of sales 15,684 18,470 4,844 -- 38,998
-------- ------- ------- ------- --------
Gross profit 15,274 21,856 7,238 -- 44,368
Selling, general and administrative
expenses 14,200 11,439 5,980 -- 31,619
Centralization and reengineering costs 422 -- -- -- 422
-------- ------- ------- ------- --------
Income from operations 652 10,417 1,258 -- 12,327
Interest income (expense) and other, net (9,302) -- 96 -- (9,206)
-------- ------- ------- ------- --------
Income (loss) before extraordinary item (8,650) 10,417 1,354 -- 3,121
Provision (benefit) for income taxes (2,981) 4,402 49 -- 1,470
-------- ------- ------- ------- --------
Income (loss) before extraordinary item (5,669) 6,015 1,305 -- 1,651
Extraordinary item, net (1,091) -- -- -- (1,091)
Income from wholly owned subsidiaries 7,320 -- -- (7,320) --
-------- ------- ------- ------- --------
Net income $ 560 $ 6,015 $ 1,305 $(7,320) $ 560
======== ======= ======= ======= ========
</TABLE>
F-27
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Statement Of Cash Flow
as of November 27, 1996 to December 31, 1996 (in thousands)
<TABLE>
<CAPTION>
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)
Purchase of property, and equipment (46) -- -- -- (46)
-------- ----- --------- ----- --------
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-28
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Statement of Cash Flows
for the Year Ended December 31, 1997 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,787 $ 2,701 $ -- $(2,701) $ 1,787
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 (3,624) (2,178) -- -- (5,802)
Inventories, net (2,063) (929) -- -- (2,992)
Prepaid expenses and other assets (1,825) 95 -- -- (1,730)
Accounts payable and accrued liabilities 845 2,115 -- -- 2,960
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:
Purchase of property and equipment (518) (64) -- -- (582)
Purchase of acquired business, net of
cash acquired (45,131) (19) -- -- (45,150)
-------- ------- ------ ------- --------
Net cash 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 year 4,341 150 -- -- 4,491
-------- ------- ------ ------- --------
Cash and Cash Equivalents, end of year $ 2,907 $ 156 $ -- $ -- $ 3,063
======== ======= ====== ======= ========
</TABLE>
F-29
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Statement of Cash Flow for the
Year Ended December 31, 1998 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 560 $ 6,015 $ 1,305 $(7,320) $ 560
Adjustments to reconcile net income to net cash
provided by (used 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 (195) (3,217) (1,226) -- (4,638)
Inventories, net (3,997) (5,329) 738 -- (8,588)
Prepaid expenses and other assets (2,636) (51) 324 -- (2,363)
Accounts payable and accrued liabilities (2,124) 2,641 1,290 -- 1,807
Due to/from affiliates, net (16,157) 992 7,845 7,320 --
-------- ------- -------- ------- --------
Net cash provided by (used in) operating
activities (20,306) 2,890 10,631 -- (6,785)
-------- ------- -------- ------- --------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (1,766) (174) (22) -- (1,962)
Purchase 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 (40) 187 813 -- 960
Cash and Cash Equivalents, beginning of year 2,907 156 -- -- 3,063
-------- ------- -------- ------- --------
Cash and Cash Equivalents, end of year $ 2,867 $ 343 $ 813 $ -- $ 4,023
======== ======= ======== ======= ========
</TABLE>
F-30
<PAGE>
13. Restatement
Subsequent to the issuance of the Company's consolidated financial statements
for the fiscal years ended December 31, 1997 and 1998, it was determined through
an internal investigation that the previously reported results included errors
and irregularities in the Body Drench division. Upon examination it was
determined revenue for certain Body Drench transactions was improperly
recognized when inventory was not shipped to customers. During subsequent
periods, certain of the amounts, which were improperly recognized as sales by
the Body Drench division, were written-off through the bad debt provision. As a
result, the Company has restated previously reported annual results including
the 1998 and 1997 financial information set forth herein.
In addition to the Company's investigation, in October 1999, the Securities and
Exchange Commission (SEC) issued a Formal Order of Private Investigation (see
Note 15). While management has made all adjustments considered necessary as a
result of the investigation into accounting irregularities in the preparation of
the restated financial statements for 1998 and 1997, there can be no assurances
that additional adjustments will not be required as a result of the SEC
investigation. The following statements of operations and balance sheets
reconcile previously reported and restated financial information (in thousands,
except for per share amounts).
F-31
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 38,108 $ 36,505 $ 90,373 $ 83,366
Cost of Sales 16,756 16,756 39,222 38,998
-------- -------- -------- --------
Gross profit 21,352 19,749 51,151 44,368
-------- -------- -------- --------
Selling, General and Administrative Expenses 12,201 12,201 32,715 31,619
Centralization and Reengineering Costs -- -- 422 422
-------- -------- -------- --------
12,201 12,201 33,137 32,041
-------- -------- -------- --------
Income (Loss) from Operations 9,151 7,548 18,014 12,327
Interest Expense and Other, net (1,847) (1,847) (9,206) (9,206)
-------- -------- -------- --------
Income (Loss) Before Extraordinary Item and
Income Taxes 7,304 5,701 8,808 3,121
Provision for (Benefit from) Income Taxes 3,097 2,537 3,635 1,470
-------- -------- -------- --------
Income (Loss) Before Extraordinary Item 4,207 3,164 5,173 1,651
Extraordinary Item, net of tax benefit of $882
and $822 (1,377) (1,377) (1,091) (1,091)
-------- -------- -------- --------
Net Income (Loss) $ 2,830 $ 1,787 $ 4,082 $ 560
======== ======== ======== ========
Basic Earnings (Loss) per Share:
Income (loss) before extraordinary item $ 1.07 $ 0.80 $ 1.28 $ 0.41
Extraordinary item (.35) (.35) (.27) (.27)
-------- -------- -------- --------
Net income (loss) $ 0.72 $ 0.45 $ 1.01 $ 0.14
======== ======== ======== ========
Weighted average shares 3,949 3,949 4,033 4,033
======== ======== ======== ========
Diluted Earnings (Loss) per Share:
Income (loss) before extraordinary item $ 1.02 $ 0.77 $ 1.20 $ 0.38
Extraordinary item (.33) (.34) (.25) (.25)
-------- -------- -------- --------
Net income (loss) $ 0.69 $ 0.43 $ 0.95 $ 0.13
======== ======== ======== ========
Weighted average shares diluted 4,113 4,113 4,313 4,313
======== ======== ======== ========
</TABLE>
F-32
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,063 $ 3,063 $ 4,023 $ 4,023
Accounts receivable, net of allowance
for doubtful accounts of $1,032 and $1,786 14,296 12,693 32,326 24,812
Inventories, net 10,951 10,951 25,375 25,599
Prepaid expenses and other current assets 2,120 2,120 1,791 1,375
-------- --------- --------- ---------
Total current assets 30,430 28,827 63,515 55,809
Property and Equipment, net 2,640 2,640 5,362 5,362
Goodwill and Other Intangibles, net of
accumulated amortization of $1,375 and $4,749 56,506 56,506 139,566 139,566
Other Assets 2,913 2,913 10,755 13,336
-------- --------- --------- ---------
$ 92,489 $ 90,886 $ 219,198 $ 214,073
======== ========= ========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 7,065 $ 6,505 $ 12,668 $ 12,108
Accrued liabilities 3,670 3,670 10,367 10,367
Current portion of long-term debt and other 5,647 5,647 2,768 2,768
-------- --------- --------- ---------
Total current liabilities 16,382 15,822 25,803 25,243
-------- --------- --------- ---------
Deferred Income Taxes 162 162 19,216 19,216
Long-Term Debt and Other, less current portion 47,377 47,377 140,366 140,366
-------- --------- --------- ---------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock -- -- -- --
Common stock 1 1 1 1
Additional paid-in capital 27,875 27,875 29,038 29,038
Retained earnings 2,492 1,449 6,574 2,009
Treasury stock (1,800) (1,800) (1,800) (1,800)
-------- --------- --------- ---------
Total stockholders' equity 28,568 27,525 33,813 29,248
-------- --------- --------- ---------
$ 92,489 $ 90,886 $ 219,198 $ 214,073
======== ========= ========= =========
</TABLE>
F-33
<PAGE>
14. Unaudited Quarterly Financial Data
During 1997 and 1998, the Company recorded transactions in the Body Drench
division that require restatement (see Note 13).
<TABLE>
<CAPTION>
1998
FIRST QUARTER SECOND QUARTER
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales $16,225 $ 14,073 $19,074 $ 16,795
Gross Profit (a) 9,183 7,488 10,624 8,895
Selling, General and Administrative Expenses 5,395 5,395 6,514 6,514
Income from Operations 3,788 2,093 4,110 2,381
Net Income (Loss) before Extraordinary Item 1,439 (256) 1,565 (164)
Extraordinary Item, net -- -- 1,091 1,091
Net Income (Loss) 1,439 (256) 474 (1,255)
Diluted EPS before Extraordinary Item $ 0.34 $ (0.06) $ 0.36 $ (0.04)
Diluted EPS after Extraordinary Item 0.34 (0.06) 0.11 (0.28)
THIRD QUARTER FOURTH QUARTER
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales $26,539 $ 25,400 $28,535 $ 27,098
Gross Profit (a) 15,001 14,195 16,343 13,790
Selling, General and Administrative Expenses 9,689 9,689 11,117 10,021
Income from Operations 5,312 4,506 4,804 3,347
Net Income before Extraordinary Item 1,243 437 926 1,634
Extraordinary Item -- -- -- --
Net Income 1,243 437 926 1,634
Diluted EPS before extraordinary item $ 0.29 $ 0.10 $ 0.23 $ 0.40
Diluted EPS after extraordinary item 0.29 0.10 0.23 0.40
</TABLE>
----------
(a) Management has estimated the gross margin for the Body Drench division on
an interim basis for the restated quarters.
F-34
<PAGE>
<TABLE>
<CAPTION>
1997
FIRST QUARTER SECOND QUARTER
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales $ 7,479 $ 7,479 $ 7,437 $ 7,093
Gross Profit 4,245 4,245 4,191 3,994
Selling, General and Administrative Expenses 2,398 2,398 2,333 2,333
Income from Operations 1,847 1,847 1,858 1,661
Net Income before Extraordinary Item 1,054 1,054 1,031 834
Extraordinary Item -- -- -- --
Net Income 1,054 1,054 1,031 834
Diluted EPS before Extraordinary Item $ 0.26 $ 0.26 $ 0.25 $ 0.20
Diluted EPS after Extraordinary Item 0.26 0.26 0.25 0.20
THIRD QUARTER FOURTH QUARTER
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales $10,669 $10,210 $ 12,523 $ 11,723
Gross Profit 5,802 5,480 7,114 6,030
Selling, General and Administrative Expenses 3,574 3,574 3,896 3,896
Income from Operations 2,228 1,906 3,218 2,134
Net Income before Extraordinary Item 828 506 1,294 770
Extraordinary Item -- -- 1,377 1,377
Net Income (Loss) Net 828 506 (83) (607)
Diluted EPS before Extraordinary Item $ 0.20 $ 0.12 $ 0.31 $ 0.19
Diluted EPS after Extraordinary Item 0.20 0.12 (0.02) (0.15)
</TABLE>
F-35
<PAGE>
15. Subsequent Events
a. Litigation
During the period from December 1999 to January 2000, four class action
lawsuits were filed on behalf of certain shareholders against the Company
and certain of its present and former officers alleging violations of the
federal securities laws. The complaints allege that the defendants reported
increasing sales and earnings before interest, taxes, depreciation and
amortization which caused the Company's stock to trade at artificially
inflated levels and allowed the Company to complete a $100 million senior
subordinated notes offering. The complaints further allege that as a result
of announcements made by the Company of errors and irregularities in
previously issued financial statements, trading of the Company's stock was
halted and the stock was delisted by Nasdaq. If the Company is unable to
settle this matter with the plaintiffs within a reasonable amount of time,
then the Company intends to defend this matter vigorously.
A former employee of Ft. Pitt Acquisition, Inc. is suing the Company for
breach of contract for an employment agreement and non-competition in place
at the time of the acquisition. The employment agreement requires
accelerated payments in the event of a change in control at Ft. Pitt
Acquisition, Inc. The Company's acquisition of Ft. Pitt Acquisition, Inc.
is alleged to constitute a change of control. The alleged payment due to
the former employee is $1.7 million. The Company believes that the
agreements were not properly approved by the board of directors of Ft. Pitt
Acquisition, Inc. and not executed. In addition, the Company believes the
former employee did not perform under the employment agreement. The Company
intends to defend this matter vigorously.
Four minority interest shareholders of Ft. Pitt Acquisition, Inc. filed
separate complaints against the former majority shareholders and the
Company for not accepting an offer from Graham Webb Company to buy all of
the shares of Ft. Pitt Acquisition, Inc., but rather accepting an offer
from the Company. In addition, the minority shareholders allege that the
Company did not allow the minority shareholders to sell to the Company. The
minority shareholders allege these actions by the Company and the former
majority shareholders cause them to incur losses. The minority shareholders
are seeking damages of approximately $5.3 million. The Company is defending
all of these allegations vigorously and is not participating in any
settlement discussions at this time.
A former manufacturer, Amole Incorporated (Amole) assigned receivables
(including amounts owed from Body Drench to Amole) to Comerica Bank.
Comerica Bank filed a claim against the Company for collection of
outstanding receivables in the amount of approximately $1.1 million. The
Company filed a counterclaim in the amount of approximately $1 million
against Amole for breach of contract, negligence, false representation,
negligent representation, various breaches of warranty and indemnification.
Prior to Comerica Bank seizing the assets of Amole, Body Drench had several
complaints regarding changes in product manufactured by Amole for Body
Drench. In accordance with the Exclusive Manufacturing Agreement, Amole is
prohibited from making changes in the product. The case is scheduled for
discovery in fall 2000. The Company intends to defend this matter
vigorously.
Panint (U.S.) Ltd. and Panint Electric Limited filed a lawsuit against the
Company for breach of certain purchase contracts and are seeking payment of
approximately $994,000. The Company has responded to the allegations and
counterclaims that the products received from the plaintiff were defective
and caused the Company lost sales and damage to reputation amongst other
unfavorable reactions. The Company intends to defend this matter
vigorously.
F-36
<PAGE>
b. SEC Investigation
On September 15, 1999 the SEC served the Company a voluntary request for
production of documents. Subsequently, on October 29, 1999, the SEC issued
a Formal Order of Private Investigation. The Company is cooperating with
the SEC in its investigation and simultaneously negotiating a settlement.
The Company cannot predict the term of such investigation or its potential
outcome.
c. Credit Agreements
On June 22, 1999, the Company entered into a $90 million Senior Secured
Revolving Credit Facility (the "GE Credit Facility") with General Electric
Capital Corporation. Proceeds from the GE Credit Facility were used to
repay amounts outstanding under the 1998 Credit Facility. The GE Credit
Facility is collateralized by substantially all of the assets of the
Company. In November, 1999, the Company defaulted on the GE Credit Facility
due to non compliance with certain financial and non-financial covenants.
Additionally, the Company did not make the required interest payment on
July 1, 2000 to the Noteholders of the Notes. On June 28, 2000 an agreement
was reached with 81% of the Noteholders to convert all $100.0 million of
the Notes into 90% of the equity of the Company. The agreement, which as
amended is effective through January 1, 2001, includes a provision that
allows the Company to effect a debt for equity exchange through a
pre-negotiated plan of reorganization if the Company is not able to secure
consents from the remaining 19% of the Noteholders. There can be no
assurance that the lenders will continue to grant waivers. The Company does
not currently have alternative financing to meet its obligations as they
come due.
d. Bankruptcy
During 1999, the Company recorded a net loss of $51.9 million and continued
to experience negative operating results in 2000. As a result, the Company
filed a voluntary petition for reorganization under Chapter 11 of the
Federal Bankruptcy Code on August 31, 2000.
In connection with the audit of the 1999 financial statements, the
Company's independent public accountants issued their report dated October
18, 2000, which expressed significant doubt about the ability of the
Company to continue as a going concern.
e. Sale of One Touch and Clean + Easy
In January 2000, the Company sold certain assets and liabilities of Clean +
Easy and One Touch and entered into a 2 year consulting agreement with the
buyer for a total of $26.5 million in cash. The Company recorded a pre-tax
gain of $4.3 million and deferred $2.4 million to be earned over the two
year life of the consulting agreement.
F-37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of GENA LABORATORIES, INC.
as of February 28, 1995 and February 29, 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended February 29, 1996, and for the period March 1, 1996 to November
26, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gena Laboratories, Inc. as
of February 28, 1995 and February 29, 1996, and the results of its operations
and its cash flows for each of the three years in the period ended February 29,
1996 and for the period March 1, 1996 to November 26, 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-38
<PAGE>
GENA LABORATORIES, INC.
BALANCE SHEETS
FEBRUARY 28, FEBRUARY 29,
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 390,325 $ 250,644
Investments 14,999 46,500
Accounts receivable, net of allowance
for doubtful accounts of $120,347
and $136,093, respectively 863,208 965,615
Inventory 965,335 1,213,688
Deferred tax asset 99,055 131,790
----------- -----------
Total current assets 2,332,922 2,608,237
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $392,026 and $471,771,
respectively 884,638 830,093
DEFERRED TAX ASSET, net of current portion -- 19,870
OTHER ASSETS 346,866 256,770
----------- -----------
$ 3,564,426 $ 3,714,970
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 391,381 $ 382,926
Accrued expenses 302,808 259,903
Current portion of note payable to
related parties 32,571 34,929
Current portion of long-term debt 96,056 95,248
----------- -----------
Total current liabilities 822,816 773,006
----------- -----------
NOTE PAYABLE TO RELATED PARTIES, less
current portion 342,464 307,358
----------- -----------
LONG-TERM DEBT, net of current portion 124,186 11,518
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $5 par value, 2,000 shares
authorized, issued and outstanding 10,000 10,000
Additional paid-in capital 88,303 88,303
Unrealized holding loss on investment (35,303) (3,802)
Retained earnings 2,211,960 2,528,587
----------- -----------
Total stockholders' equity 2,274,960 2,623,088
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,564,426 $ 3,714,970
=========== ===========
The accompanying notes to financial statements are
an integral part of these balance sheets.
F-39
<PAGE>
GENA LABORATORIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MARCH 1, 1996
------------------------------------------ TO
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, NOVEMBER 26,
1994 1995 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $6,426,416 $7,523,751 $8,384,092 $6,707,727
COST OF SALES 3,280,046 4,163,395 4,818,786 3,900,347
---------- ---------- ---------- ----------
GROSS PROFIT 3,146,370 3,360,356 3,565,306 2,807,380
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,744,363 2,963,926 3,033,409 1,983,650
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 402,007 396,430 531,897 823,730
OTHER INCOME AND (EXPENSE), net 35,092 (35,282) (30,480) 2,225
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 437,099 361,148 501,417 825,955
PROVISION FOR INCOME TAXES 158,613 129,606 184,790 297,344
---------- ---------- ---------- ----------
NET INCOME $ 278,486 $ 231,542 $ 316,627 $ 528,611
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
GENA LABORATORIES, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 28, 1993 2,000 $10,000 $88,303 $1,687,828 $1,786,131
Net income - - - 278,486 278,486
Net change in unrealized holding loss - - - 1,006 1,006
----- ------- ------- ---------- ----------
BALANCE AT FEBRUARY 28, 1994 2,000 10,000 88,303 1,967,320 2,065,623
Net income - - - 231,542 231,542
Net change in unrealized holding loss - - - (22,205) (22,205)
----- ------- ------- ---------- ----------
BALANCE AT FEBRUARY 28, 1995 2,000 10,000 88,303 2,176,657 2,274,960
Net income - - - 316,627 316,627
Net change in unrealized holding loss - - - 31,501 31,501
----- ------- ------- ---------- ----------
BALANCE AT FEBRUARY 29, 1996 2,000 10,000 88,303 2,524,785 2,623,088
Net income for the period March 1, 1996
to November 26, 1996 - - - 528,611 528,611
Distributions to stockholders - - - (513,000) (513,000)
----- ------- ------- ---------- ----------
BALANCE AT NOVEMBER 26, 1996 2,000 $10,000 $88,303 $2,540,396 $2,638,699
===== ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
GENA LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED MARCH 1, 1996
------------------------------------------ TO
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, NOVEMBER 26,
1994 1995 1996 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 278,486 $ 231,542 $ 316,627 $ 528,611
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 114,021 155,185 168,685 37,939
Loss on sale of securities on fixed Assets -- 32,513 -- --
Decrease (increase) in accounts Receivable 38,647 (157,714) (102,407) 90,671
Decrease (increase) in inventory (14,638) (118,638) (248,353) (24,975)
Decrease (increase) in other assets 80,863 (30,814) (51,449) (228,444)
(Decrease) increase in accounts payable and
accrued liabilities (122,813) 210,426 (51,360) 14,157
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 374,566 322,500 31,743 417,959
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (331,996) (23,648) (25,200) (11,886)
Cost incurred to acquire new businesses (180,213) (140,000) -- --
Proceeds from sale of investments -- -- -- 46,500
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (512,209) (163,648) (25,200) 34,614
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) long-term debt, Net 178,585 (136,668) (146,224) (137,098)
Distributions to stockholders -- -- -- (513,000)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 178,585 (136,668) (146,224) (650,098)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 40,942 22,184 (139,681) (197,525)
CASH AND CASH EQUIVALENTS, beginning of Period 327,199 368,141 390,325 250,644
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 368,141 $ 390,325 $ 250,644 $ 53,119
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 8,325 $ 54,401 $ 43,259 $ 23,871
========= ========= ========= =========
Income taxes paid $ 137,580 $ 127,609 $ 232,417 $ 195,860
========= ========= ========= =========
FIXED ASSETS AND NEW BUSINESSES ACQUIRED THROUGH
FINANCING TRANSACTIONS $ 528,449 $ 24,911 $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
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:
FEBRUARY 28, FEBRUARY 29,
1995 1996
-------- ----------
Raw materials and work-in-process $675,735 $ 849,582
Finished goods 289,600 364,106
-------- ----------
$965,335 $1,213,688
======== ==========
F-43
<PAGE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over the estimated
useful lives of the assets.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the years ended
February 28, 1994 and 1995, February 29, 1996, and for the period March 1, 1996
to November 26, 1996, maintenance and repair expenses charged to cost of
operations were approximately $26,000, $47,000, $23,000 and $32,245,
respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
credit quality institutions. Concentrations of credit risk with respect to trade
receivables are described in Note 6. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments. The carrying amount on the long-term debt is
estimated to approximate fair value as the actual interest rates are consistent
with rates estimated to be currently available for debt with similar terms and
remaining maturities.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
(3) OTHER ASSETS:
Other assets consist primarily of goodwill, which represents the excess of
consideration paid over the fair market values of identifiable net assets
acquired. The goodwill is being amortized on a straight-line basis over 25
years. The Company has also recorded other intangible assets, which include
noncompete, consulting and trademark agreements, related to acquisitions of
various beauty companies. Such assets are being amortized on a straight-line
basis, over a period of 3 to 25 years. Accumulated amortization on such
intangibles was $349,423 and $433,070 as of February 28, 1995 and February 29,
1996.
F-44
<PAGE>
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
FEBRUARY 28, FEBRUARY 29,
1995 1996
---------- ----------
Land $ 150,000 $ 150,000
Factory equipment 407,427 431,832
Computers 43,030 43,825
Furniture, fixtures and autos 108,875 108,875
Building and leasehold improvements 567,332 567,332
---------- ----------
1,276,664 1,301,864
Less: Accumulated depreciation (392,026) (471,771)
---------- ----------
$ 884,638 $ 830,093
========== ==========
(5) LONG-TERM DEBT:
Long-term debt consists of the following:
FEBRUARY 28, FEBRUARY 29,
1995 1996
-------- --------
Unsecured note payable, bearing interest at
prime (8.25% at February 29, 1996),
unpaid balance due by November 1996 $123,529 $ 52,942
Various notes payable, bearing interest from
7.5% to 8.0%, maturing through 1998 96,713 53,824
-------- --------
220,242 106,766
Less: Current maturities (96,056) (95,248)
-------- --------
$124,186 $ 11,518
======== ========
In 1993, the Company entered into a $250,000 unsecured revolving line of
credit, which bears interest at prime and matures July 1997. As of February 28,
1995 and February 29, 1996, the Company had not drawn on this facility.
Aggregate principal payments on long-term debt are as follows:
YEAR ENDING
FEBRUARY 28,
------------
1997 $ 95,248
1998 11,518
--------
$106,766
========
(6) MAJOR CUSTOMERS:
The Company's strategy includes providing production and distribution
services to a major U.S. beauty distribution company. Sales to this customer as
F-45
<PAGE>
a percentage of total sales approximated 31%, 28% and 28% for the years ended
February 28, 1994, 1995 and February 29, 1996, respectively, and 34% for the
period March 1, 1996 to November 26, 1996.
(7) INCOME TAXES:
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences result principally from the recognition of revenues and expenses
using the cash basis of accounting and the use of different depreciation and
amortization methods for income tax reporting.
The components of the income tax provision consist of the following:
<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:
FEBRUARY 28, FEBRUARY 29,
1995 1996
-------- --------
Deferred tax assets:
Inventory reserve $ 6,707 $ 8,376
Uniform inventory cost capitalization 50,233 62,739
Capital losses in excess of capital gains 1,544 10,362
Allowance for doubtful accounts 44,492 50,314
Amortization 15,773 38,586
-------- --------
Total gross deferred tax assets 118,749 170,377
-------- --------
Deferred tax liabilities:
Depreciation (19,694) (18,717)
-------- --------
Total gross deferred tax liabilities (19,694) (18,717)
-------- --------
Net deferred tax asset $ 99,055 $151,660
======== ========
The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:
F-46
<PAGE>
<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:
FEBRUARY 28, FEBRUARY 29,
1995 1996
-------- --------
Total shareholder note payable $375,035 $342,287
Less: Current maturities (32,571) (34,929)
-------- --------
Shareholder note payable, net of current portion $342,464 $307,358
======== ========
Principal maturities related to this loan are as follows:
YEAR ENDING
FEBRUARY 28, TOTAL
------------ -------
1997 $ 34,929
1998 37,454
1999 40,162
2000 43,065
2001 46,178
Thereafter 140,499
--------
$342,287
========
The Company also entered into a lease with the Partnership in 1991, for
approximately 10,000 square feet for storage and production purposes. Lease
F-47
<PAGE>
expense related to this space totaled approximately $83,049, $44,346, $51,346
and $58,993 for the years ended February 28, 1994 and 1995, February 29, 1996,
and the period March 1, 1996 to November 26, 1996, respectively.
(9) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Lease commitments related primarily to a warehouse space lease are as
follows:
YEAR ENDING
FEBRUARY 28, TOTAL
------------ --------
1997 $ 41,100
1998 41,100
1999 41,100
2000 41,100
2001 41,100
Thereafter 202,500
--------
$408,000
========
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of BODY DRENCH (a Division
of Designs by Norvell, Inc., a Tennessee corporation) as of December 31, 1994
and 1995, and the related statements of operations, changes in owner's
investment and cash flows for each of the three years in the period ended
December 31, 1995 and for the period January 1, 1996 to November 26, 1996. These
financial statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Body Drench as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years then ended and for the period January 1, 1996 to November 26,
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-49
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
BALANCE SHEETS
DECEMBER 31,
------------------------
1994 1995
---------- ----------
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for
doubtful accounts of $89,841 and $58,242,
respectively $1,396,048 $1,234,966
Inventories 3,052,783 3,078,656
Other current assets 5,152 150,713
---------- ----------
Total current assets 4,453,983 4,464,335
---------- ----------
EQUIPMENT, net of accumulated depreciation
of $245,424 and $297,176, respectively 167,697 316,443
---------- ----------
Total assets $4,621,680 $4,780,778
========== ==========
LIABILITIES AND OWNER'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable $2,550,654 $3,221,337
Bank overdraft 651,953 274,810
Accrued expenses and other 296,546 257,813
---------- ----------
Total current liabilities 3,499,153 3,753,960
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
OWNER'S INVESTMENT 1,122,527 1,026,818
---------- ----------
Total liabilities and owner's investment $4,621,680 $4,780,778
========== ==========
The accompanying notes to the financial statements
are an integral part of these balance sheets.
F-50
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED DECEMBER 31, JANUARY 1, 1996
-------------------------------------- TO
1993 1994 1995 NOVEMBER 26, 1996
---------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
NET SALES $6,653,488 $11,138,369 $11,871,171 $9,642,980
COST OF SALES 4,039,843 6,342,770 6,426,775 5,867,104
---------- ----------- ----------- ----------
GROSS PROFIT 2,613,645 4,795,599 5,444,396 3,775,876
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES 2,054,919 4,075,756 4,883,265 4,004,728
---------- ----------- ----------- ----------
INCOME FROM OPERATIONS 558,726 719,843 561,131 (228,852)
---------- ----------- ----------- ----------
INTEREST EXPENSE 30,159 -- 87,585 --
---------- ----------- ----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 528,567 719,843 473,546 (228,852)
PROVISION (BENEFIT) FOR INCOME TAXES 200,855 273,540 179,947 (91,541)
---------- ----------- ----------- ----------
NET INCOME (LOSS) $ 327,712 $ 446,303 $ 293,599 $ (137,311)
========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
STATEMENTS OF CHANGES IN OWNER'S INVESTMENT
BALANCE, December 31, 1992 $ (127,491)
Net income 327,712
Net payments to parent (748,153)
-----------
BALANCE, December 31, 1993 (547,932)
Net income 446,303
Net receipts from parent 1,224,156
-----------
BALANCE, December 31, 1994 1,122,527
Net income 293,599
Net payments to parent (389,308)
-----------
BALANCE, December 31, 1995 1,026,818
Net loss (137,311)
Net payments to parent (1,311,710)
-----------
BALANCE, November 26, 1996 $ (422,203)
===========
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
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
--------- ----------- --------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) $ 327,712 $ 446,303 $ 293,599 $ (137,311)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities --
Depreciation 67,244 36,619 51,752 94,963
Changes in operating assets and
liabilities:
Accounts receivable, net (49,548) (1,099,273) 161,082 274,164
Inventories (224,184) (2,024,887) (25,873) -
Other, net (5,127) 2,084 (145,561) 1,167,937
Accounts payable 516,725 783,427 670,683 158,304
Accrued expenses 177,767 33,284 (38,733) (258,849)
--------- ----------- --------- -----------
Net cash provided by (used in)
operating activities 810,589 (1,822,443) 966,949 1,299,208
--------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (62,436) (53,666) (200,498) (12,502)
--------- ----------- --------- -----------
Net cash provided by (used in)
investing activities (62,436) (53,666) (200,498) (12,502)
--------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft - 651,953 (377,143) 25,004
Net payments to/receipts from parent (748,153) 1,224,156 (389,308) (1,311,710)
--------- ----------- --------- -----------
Net cash provided by (used in)
financing activities (748,153) 1,876,109 (766,451) (1,286,706)
--------- ----------- --------- -----------
NET CHANGE IN CASH -- -- -- --
--------- ----------- --------- -----------
CASH, beginning of period -- -- -- --
--------- ----------- --------- -----------
CASH, end of period $ -- $ -- $ -- $ --
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
BODY DRENCH
(A DIVISION OF DESIGNS BY NORVELL, INC.)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Acquisition and Basis of Presentation
Effective November 26, 1996, Designs by Norvell, Inc. (Norvell) sold the
assets of its Body Drench Division (the Division) to Styling Technology
Corporation (STC) for consideration of approximately $7,900,000. These financial
statements present the historical financial position and results of operations
of the acquired business for periods prescribed by applicable rules of the
Securities and Exchange Commission.
The accompanying financial statements represent the accounts of the
Division pursuant to the terms of the Asset Purchase Agreement between STC and
Norvell. In addition, interest expense included in the statements of operations
represents allocations of parent company interest, as calculated by Norvell.
Nature and Seasonality of Operations
The Division is engaged in the manufacture and distribution of skin care,
sun care and body care products. Their products are sold to professional hair
and tanning salons, health clubs, beauty supply outlets and retail product based
salons, both domestic and international.
The Division's revenues are seasonal in nature, with the first six months
of the year having the majority of the volume.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fair Value of Financial Instruments
The carrying values of receivables, accounts payable and accrued expenses
approximate fair values due to the short-term maturities of these instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Division to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the number of customers comprising the Division's customer base. The Division
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Revenue Recognition
The Division recognizes revenue from sales at the time product is shipped.
Equipment
Equipment is recorded at cost and depreciation on equipment is provided
using the straight-line method over the estimated useful lives of the related
assets.
F-54
<PAGE>
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1995 and for the period January 1, 1996 to November 26, 1996,
maintenance and repair expenses charged to cost of operations were approximately
$25,978, $26,117, $30,498 and $6,021, respectively.
Inventory
Inventory is valued at the lower of cost or market. Cost is determined
using the first-in, first-out method.
The components of inventories are summarized as follows:
1994 1995
---------- ----------
Raw materials and work-in-process $1,675,601 $1,583,372
Finished goods 1,377,182 1,495,284
---------- ----------
$3,052,783 $3,078,656
========== ==========
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
1994 1995
--------- ---------
Factory equipment $ 134,880 $ 178,405
Computer equipment 243,647 394,026
Furniture and fixtures 34,594 41,188
--------- ---------
413,121 613,619
Less -- Accumulated depreciation (245,424) (297,176)
--------- ---------
$ 167,697 $ 316,443
========= =========
(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.
F-55
<PAGE>
Future minimum payments under noncancelable operating leases with terms in
excess of one year are as follows:
December 31,
------------
1996 $79,455
1997 50,423
1998 41,067
1999 2,333
Rental expense under such operating leases was $52,163, $101,217, $238,746
and $188,761, for the three years ended December 31, 1995, and for the period
January 1, 1996 to November 26, 1996, respectively.
The Division is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Division's potential
exposure under the pending proceedings is adequately provided for in the
accompanying financial statements.
(6) SIGNIFICANT VENDORS:
Two vendors accounted for 69.3%, 67.4%, 53.0% and 53.0% of the Division's
total raw materials purchases from vendors for the years ended December 31,
1993, 1994, 1995 and for the period January 1, 1996 to November 26, 1996,
respectively. Management does not believe that the loss of these vendors would
significantly impact the Division's operations.
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheets of JDS MANUFACTURING CO.,
INC. (a California corporation) as of September 30, 1995 and 1996, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1996 and for the period
October 1, 1996 to November 26, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JDS Manufacturing Co., Inc.
as of September 30, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1996
and for the period October 1, 1996 to November 26, 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-57
<PAGE>
JDS MANUFACTURING CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 57,397 $ 85,260
Accounts receivable, net of allowance for doubtful
accounts of $10,000, and $15,000, respectively 329,965 313,405
Inventory 264,347 209,140
Prepaid expenses 11,861 4,716
-------- --------
Total current assets 663,570 612,521
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$100,031, and $114,660, respectively 30,292 19,157
OTHER ASSETS 102,934 136,404
-------- --------
$796,796 $768,082
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $196,309 $152,938
Accrued expenses 53,740 81,411
-------- --------
Total current liabilities 250,049 234,349
-------- --------
NOTES PAYABLE TO RELATED PARTIES 516,200 434,210
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10 par value, 10,000 shares authorized,
1,000 shares issued and outstanding 10,000 10,000
Retained earnings 20,547 89,523
-------- --------
Total stockholders' equity 30,547 99,523
-------- --------
Total liabilities and stockholders' equity $796,796 $768,082
======== ========
</TABLE>
The accompanying notes to financial statements are
an integral part of these balance sheets.
F-58
<PAGE>
JDS MANUFACTURING CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1996
FOR THE YEARS ENDED SEPTEMBER 30, TO
------------------------------------ NOVEMBER 26,
1994 1995 1996 1996
---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
SALES $3,577,779 $3,367,599 $3,113,682 $613,142
COST OF SALES 1,651,965 1,550,155 1,407,128 275,513
---------- ---------- ---------- --------
Gross profit 1,925,814 1,817,444 1,706,554 337,629
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,981,928 1,843,871 1,614,505 257,784
---------- ---------- ---------- --------
Income (loss) from operations (56,114) (26,427) 92,049 79,845
OTHER INCOME, net 44,191 41,951 35,272 1,263
---------- ---------- ---------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES (11,923) 15,524 127,321 81,108
PROVISION FOR INCOME TAXES 4,571 6,950 58,345 35,688
---------- ---------- ---------- --------
NET INCOME (LOSS) $ (16,494) $ 8,574 $ 68,976 $ 45,420
========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
JDS MANUFACTURING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1993 1,000 $10,000 $ 28,467 $ 38,467
Net loss - - (16,494) (16,494)
----- ------- -------- --------
BALANCE, September 30, 1994 1,000 10,000 11,973 21,973
Net income - - 8,574 8,574
----- ------- -------- --------
BALANCE, September 30, 1995 1,000 10,000 20,547 30,547
Net income - - 68,976 68,976
----- ------- -------- --------
BALANCE, September 30, 1996 1,000 10,000 89,523 99,523
Net income, for the period October 1, 1996 to
November 26, 1996 - - 45,420 45,420
----- ------- -------- --------
BALANCE, November 26, 1996 1,000 $10,000 $134,943 $144,943
===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
JDS MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1996
FOR THE YEARS ENDED SEPTEMBER 30, TO
----------------------------------- NOVEMBER 26,
1994 1995 1996 1996
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(16,494) $ 8,574 $ 68,976 $ 45,420
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 18,735 15,661 14,628 1,439
Decrease (increase) in accounts Receivable (4,438) 89,139 16,560 (172,645)
Decrease (increase) in inventory 14,441 (34,089) 55,207 47,329
Decrease (increase) in other assets (33,786) (35,112) (26,325) (19,756)
Increase (decrease) in accounts payable
and accrued expenses 4,263 (47,256) (15,700) 57,480
-------- -------- -------- ---------
Net cash provided by (used in)
operating activities (17,279) (3,083) 113,346 (40,733)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,582) (8,203) (3,493) (1,912)
-------- -------- -------- ---------
Net cash used in investing Activities (10,582) (8,203) (3,493) (1,912)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder
notes payable, net 24,012 (5,692) (81,990) (14,748)
-------- -------- -------- ---------
Net cash provided by (used in)
financing activities 24,012 (5,692) (81,990) (14,748)
-------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH (3,849) (16,978) 27,863 (57,393)
CASH, beginning of period 78,224 74,375 57,397 85,260
-------- -------- -------- ---------
CASH, end of period $ 74,375 $ 57,397 $ 85,260 $ 27,867
======== ======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 36,134 $ 35,589 $ 39,030 $ -
======== ======== ======== =========
Income taxes paid $ 4,090 $ 4,571 $ 7,000 $ 53,896
======== ======== ======== =========
EXCHANGE OF OTHER ASSET FOR REDUCTION IN
SHAREHOLDER NOTES PAYABLE $ - $ - $ - $ 136,404
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
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:
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
-------- --------
Raw material and work-in process $ 31,722 $ 25,097
Finished goods 232,625 184,043
-------- --------
$264,347 $209,140
======== ========
F-62
<PAGE>
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over their estimated
useful lives.
Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives, are charged to expense as incurred. For the years ended
September 30, 1994, 1995, 1996 and for the period October 1, 1996 to November
26, 1996, maintenance and repair expenses charged to cost of operations were
$5,452, $4,507, $2,509 and $598, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
Furniture and equipment $ 98,490 $ 101,984
Automobiles 13,976 13,976
Leaseholds and other 17,857 17,857
--------- ---------
130,323 133,817
Less: accumulated depreciation (100,031) (114,660)
--------- ---------
$ 30,292 $ 19,157
========= =========
(4) NOTES PAYABLE TO RELATED PARTIES:
As of September 30, 1995 and 1996, the Company had notes payable due to its
two principal shareholders of $516,200 and $434,210, respectively. These notes
F-63
<PAGE>
originated in October 1994, and bear interest at 8%. Loan advances and
repayments are made at the shareholders' discretion, with the entire balance
becoming due on September 30, 1997. As such, the entire balance is classified as
long-term.
(5) INCOME TAXES:
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences, resulting principally from use of accelerated depreciation methods
for income tax reporting, were not material at the balance sheet dates.
(6) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.
Total future commitments for operating leases are $12,459 through September
30, 1997.
(7) SIGNIFICANT CUSTOMER:
The Company's strategy includes providing nail care and accessories to a
major U.S. beauty distribution company. Sales to this customer as a percentage
of total sales were approximately 11%, 14%, 26% and 26% for September 30, 1994,
1995, 1996 and for the period October 1, 1996 to November 26, 1996,
respectively.
F-64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Styling Technology Corporation:
We have audited the accompanying balance sheet of KOTCHAMMER INVESTMENTS,
INC. (a California corporation) as of December 31, 1995, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1995, and for the period January 1, 1996 to November 26,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kotchammer Investments, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year ended December 31, 1995, and for the period January 1, 1996 to
November 26, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 21, 1997.
F-65
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
BALANCE SHEET
DECEMBER 31,
1995
---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 96,364
Accounts receivable 136,971
Inventory, net 403,730
Prepaid expenses and other 21,799
---------
Total current assets 658,864
---------
PROPERTY AND EQUIPMENT, net 75,472
OTHER ASSETS 1,026
---------
$ 735,362
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 14,015
Accrued expenses 121,183
Line of credit 215,000
Current portion of notes payable to shareholders 270,000
---------
Total current liabilities 620,198
---------
NOTES PAYABLE TO SHAREHOLDERS, net of current portion 340,000
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $20 par value, 2,500 shares authorized,
2,500 shares issued and outstanding 50,000
Retained deficit (274,836)
---------
Total stockholders' deficit (224,836)
---------
Total liabilities and stockholders' deficit $ 735,362
=========
The accompanying notes to financial statements are
an integral part of this balance sheet.
F-66
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD
FOR THE JANUARY 1, 1996
YEAR ENDED TO
DECEMBER 31, NOVEMBER 26,
1995 1996
---------- ----------
NET SALES $1,557,709 $1,248,460
COST OF SALES 711,925 585,704
---------- ----------
Gross profit 845,784 662,756
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 891,146 590,800
---------- ----------
Income (loss) from operations (45,362) 71,956
INTEREST EXPENSE AND OTHER, net (89,557) (74,250)
---------- ----------
NET LOSS $ (134,919) $ (2,294)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS DEFICIT
------ ------- --------- -------------
BALANCE, December 31, 1994 2,500 $50,000 $(139,917) $ (89,917)
Net loss - - (134,919) (134,919)
----- ------- --------- ---------
BALANCE, December 31,1995 2,500 50,000 (274,836) (224,836)
Net loss - - (2,294) (2,294)
----- ------- --------- ---------
BALANCE, November 26, 1996 2,500 $50,000 $(277,130) $(227,130)
===== ======= ========= =========
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
For the January 1, 1996
Year Ended to
December 31, November 26,
1995 1996
------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(134,919) $ (2,294)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 23,436 19,203
Decrease (increase) in accounts receivable 43,004 (19,111)
Decrease (increase) in inventory (45,278) 51,566
Decrease in prepaids and other assets 63,372 6,502
Increase (decrease) in accounts payable and accrued
Liabilities (43,234) 89,960
--------- ---------
Net cash provided by (used in) operating Activities (93,619) 145,826
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,215) -
--------- ---------
Net cash used in investing activities (17,215) -
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments to) shareholder notes payable, Net 100,000 -
Proceeds from (payments to) line of credit, net (5,000) (215,000)
--------- ---------
Net cash (used in) provided by financing Activities 95,000 (215,000)
--------- ---------
NET DECREASE IN CASH (15,834) (69,174)
CASH, beginning of period 112,198 96,364
--------- ---------
CASH, end of period $ 96,364 $ 27,190
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 72,916 $ -
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
KOTCHAMMER INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Acquisition and Basis of Presentation
Effective November 26, 1996, shareholders of Kotchammer Investments, Inc.
(the Company) sold its assets to Styling Technology Corporation for
consideration of approximately $639,000. These financial statements present the
historical financial position and results of operations of the acquired business
for periods prescribed by applicable rules of the Securities and Exchange
Commission.
Organization and Nature of Operations
The Company was incorporated in December 1993 to acquire a division of
Redken Laboratories, Inc. The Company distributes and markets professional salon
appliances and salonwear. Its products are sold throughout the United States,
principally to professional supply outlets, beauty distributors, and
professional hair stylists.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.
Inventory
Inventory consists of finished goods and are valued at the lower of cost
(first-in, first-out) or net realizable value. Reserves are established against
inventory for excess, slow-moving and obsolete items and for items where the net
realizable value is less than cost.
Property and Equipment
Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over their estimated
useful lives.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base.
Revenue Recognition
The Company recognizes revenue from sales at the time product is shipped.
F-70
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
USEFUL LIFE 1995
----------- --------
Machinery and equipment 5 years $ 76,803
Furniture and fixtures 7 years 22,458
Computer equipment 5 years 16,652
--------
115,913
Less -- Accumulated depreciation (40,441)
--------
$ 75,472
========
(4) LINE OF CREDIT:
At December 31, 1995, the Company had a $220,000 line of credit with a bank
which expired in August of 1996 and carried an interest rate of 9.75%. During
1996, the line of credit was repaid.
(5) NOTES PAYABLE TO SHAREHOLDERS:
Notes payable to shareholders consisted of the following:
DECEMBER 31,
1995
------------
Note payable dated December 8, 1993, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 15, 2004 $ 120,000
Note payable dated December 8, 1993, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 15, 2004 120,000
Note payable dated December 8, 1993, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004 270,000
Note payable dated May 3, 1995, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004 70,000
Note payable dated June 5, 1995, interest at a bank's
reference rate plus 1.25% (11% at December 31, 1995),
maturing January 31, 2004 30,000
---------
610,000
Less current maturities (270,000)
---------
$ 340,000
=========
F-71
<PAGE>
As of December 31, 1995, one of the notes payable to shareholders was
classified as current as a result of the Company incurring a technical default
with a certain financial covenant.
(6) INCOME TAXES:
The Company has elected S Corporation status under Subchapter S of the
Internal Revenue Code. This election results in substantially all U.S. federal
taxable income being taxed to the stockholders. Accordingly, there is no
provision for income taxes reflected in these financial statements for the year
ended December 31, 1995, and for the period January 1, 1996 to November 26,
1996.
(7) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements. Total future commitments for operating leases are $45,851 through
July 1997. Rent expense incurred under operating leases was $35,363, and $26,173
for the year ended December 31, 1995 and for the period January 1, 1996 to
November 26, 1996, respectively.
F-72
<PAGE>
SCHEDULE II
Styling Technology Corporation and Subsidiaries
Valuation and Qualifying Accounts
At December 31,
1996 1997 1998
---- ------- -------
(in thousands)
Allowance for Doubtful accounts:
Balance at beginning of year $ -- $ 427 $ 1,032
Provision 427 710 1,614
Write-offs -- (105) (860)
---- ------- -------
Balance at end of year $427 $ 1,032 $ 1,786
==== ======= =======
S-1
<PAGE>
EXHIBIT NO. EXHIBIT INDEX
----------- -------------
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
----------
(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.
