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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999 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 or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average bid and asked price of the
stock on October 16, 2000 was $1,050,800. 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 October 16, 2000, there were 4,068,170 shares of registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
STYLING TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS...........................................................
ITEM 2. PROPERTIES.........................................................
ITEM 3. LEGAL PROCEEDINGS..................................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................................
ITEM 6. SELECTED FINANCIAL DATA............................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................
ITEM 11. EXECUTIVE COMPENSATION.............................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
SIGNATURES .................................................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS AND INFORMATION CONTAINED IN THIS REPORT UNDER THE
HEADINGS "BUSINESS," "SPECIAL CONSIDERATIONS," AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONCERNING OUR
FUTURE, PROPOSED, AND ANTICIPATED ACTIVITIES, CERTAIN TRENDS WITH RESPECT TO OUR
REVENUE, OPERATING RESULTS, CAPITAL RESOURCES, AND LIQUIDITY OR WITH RESPECT TO
THE MARKETS IN WHICH WE COMPETE OR THE BEAUTY CARE INDUSTRY IN GENERAL, AND
OTHER STATEMENTS CONTAINED IN THIS PROSPECTUS REGARDING MATTERS THAT ARE NOT
HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS, AS SUCH TERM IS DEFINED UNDER
THE SECURITIES LAWS. FORWARD-LOOKING STATEMENTS, BY THEIR VERY NATURE, INCLUDE
RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND OUR CONTROL. ACCORDINGLY,
ACTUAL RESULTS MAY DIFFER, PERHAPS MATERIALLY, FROM THOSE EXPRESSED IN OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE THOSE DISCUSSED ELSEWHERE IN ITEM 1,
"BUSINESS - SPECIAL CONSIDERATIONS."
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"ABBA," "Alpha 9," "Biogenol," "Body Drench," "Cosmic," "European Touch,"
"Framesi," "Gena," "Kizmit," "Maiko," "Pro Finish," "Revivanail," "Roffler,"
"SRC," and "Suntopia" are our principal registered trademarks.
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a leading developer, producer, and marketer of a wide array of
branded consumer products sold primarily through professional salon distribution
channels. Our products include hair care, skin and body care, and nail care
products, as well as salon appliances and sundries. We believe we are the only
company that develops, produces, and markets products in each category of the
estimated $40 billion U.S. market and substantially larger worldwide market for
professional salon products and services. We have well-recognized, long-lived
brand names, a strong distribution network, established marketing and salon
industry education programs, and significant production and sourcing
capabilities. We leverage our well-established distribution channels by
providing customers with a comprehensive array of professional salon brands and
products.
We currently sell more than 1,000 products under 12 principal brand names.
In the United States, we market our product lines through professional salon
industry distribution channels to more than 5,300 customers, consisting
primarily of salon product and tanning supply distributors (which resell to
beauty and tanning salons), beauty supply outlets, and salon chains.
Internationally, we sell our products primarily through international salon
product distributors. We believe our ability to offer customers a "one-stop
shop" for brand-name professional salon products creates a competitive
advantage.
We commenced operations in November 1996, when we simultaneously completed
our initial public offering and acquired four professional salon products
businesses. Since that time, we acquired seven additional professional salon
product businesses.
The following table sets forth information regarding each of our
acquisitions:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION)
----------- ---------------- --------------------------------
<S> <C> <C>
Gena Laboratories, Inc. (Gena) November 1996 Gena (professional natural nail care, pedicure,
skin care, and hair care products)
Body Drench Division (Body Drench) November 1996 Body Drench (professional tanning and moisturizing
of Designs by Norvell, Inc. (DBN) 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. (doing November 1996 SRC (salon appliances and salonwear)
business as Styling Research Company)
Suntopia Division of Creative March 1997 Suntopia (tanning products)
Laboratories, Inc. (Suntopia)
U.K. ABBA Products, Inc. (ABBA) June 1997 ABBA Pure and Natural Hair Care (aromatherapy-based
professional hair care products)
One Touch/Clean + Easy Division of December 1997 One Touch/Clean + Easy hair removal products and
Inverness Corporation appliances
Pro Finish USA, Ltd. (Pro Finish) May 1998 Pro Finish, Kizmit, and Cosmic (nail care products)
</TABLE>
1
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<TABLE>
<CAPTION>
ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION)
----------- ---------------- --------------------------------
<S> <C> <C>
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>
In January 2000, we sold our Clean + Easy/One Touch hair removal business
for approximately $26.5 million in cash.
Our principal executive offices are located at 7400 East Tierra Buena,
Scottsdale, Arizona, 85260. Our telephone number is (480) 609-6000. As used
herein, the terms "we," "us," and "Styling" mean Styling Technology Corporation
and its subsidiaries.
SIGNIFICANT DEVELOPMENTS
RESTATEMENT OF FINANCIAL RESULTS
In November 1999, we announced the discovery of errors and irregularities
related to the recording of net sales and income relating primarily to our Body
Drench division. We also announced at the same time that we anticipated
restating our financial statements, and that the adjustments, while not then
quantified, would be material. 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. Concurrent with the filing of this Report, we have
filed with the Securities and Exchange Commission ("SEC") the restatement of our
1997 and 1998 financial results. As part of these procedures, the audit
committee of our board of directors engaged legal counsel, which subsequently
engaged forensic accountants, to further investigate such errors and
irregularities in our Body Drench division as well as other areas of our
operations. The audit committee further charged our legal counsel to determine
if our company or our officers violated federal securities laws and to assist
our company in cooperating fully with the Securities and Exchange Commission
(SEC) regarding these matters.
REORGANIZATION
Following the announcement that we would need to restate our financial
statements, weakness in net sales during the third quarter of 1999, and a
default with respect to obligations under our credit agreement, we began
negotiations with an informal committee comprised of holders of over 80% in
aggregate dollar amount of our 10 7/8% Senior Subordinated Notes (the "Notes")
and in July 2000 reached an agreement (the Restructuring Agreement). The
Restructuring Agreement requires that all $100 million of the Notes be converted
into equity and includes a provision that allows us to effect the
debt-for-equity exchange through a plan of reorganization that would be effected
through a voluntary filing under Chapter 11 of the United States Bankruptcy
Code. Under the Restructuring Agreement, the Notes will be exchanged for 90
percent of our equity through a plan of reorganization in bankruptcy. The
current stockholders and management will each receive five percent of our
post-bankruptcy equity plus warrants to acquire an additional nine percent of
such equity over five years.
On August 31, 2000, we filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Arizona. The bankruptcy case was filed in order to implement the financial
restructuring pursuant to the Restructuring Agreement. We are currently
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operating our business as a debtor-in-possession, subject to the jurisdiction of
the Bankruptcy Court. As a debtor-in-possession, we are authorized to operate
our business in the ordinary course, but may not engage in transactions outside
our ordinary course of business without the approval of the Bankruptcy Court.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
The staff of the Division of Enforcement of the SEC advised the Company in
a letter dated September 15, 1999 that it was conducting an informal inquiry
into the Company's accounting policies and procedures. On October 29, 1999, the
SEC informed the Company that the SEC was commencing a formal investigation of
the Company. The order indicates that the SEC is investigating whether the
Company, certain of its current or former officers, directors, employees and
certain other persons and entities violated the federal securities laws and
regulations by
* filing or causing to be filed inaccurate reports with the SEC,
* failing to maintain accurate books, records and accounts,
* failing to create or maintain adequate internal accounting controls,
or
* making false or misleading statements in reports filed with the SEC or
in other public statements.
The SEC has requested various documents from the Company. The Company has
cooperated fully with the SEC and has furnished the SEC with the documents
requested.
OVERVIEW OF THE PROFESSIONAL SALON PRODUCTS MARKET
Professional salon products consist of hair care, skin and body care, and
nail care products as well as salon appliances and sundries that are used by
salon professionals in rendering salon services to their clients. Many
professional salon products also are retailed to clients and other customers of
salons, resorts, spas, health and country clubs, and beauty supply outlets,
typically upon the advice of a salon professional who recommends products to
address the client's individual needs.
Professional hair care products include shampoo, conditioner, styling gel,
glaze, mousse, hair spray, permanent, hair relaxer, and hair color products.
Skin and body care products include body lotions, tanning products, cosmetics,
skin moisturizers, and other personal care products (such as shaving creams and
antiperspirants) used by salon professionals in rendering salon services (such
as facials, manicures, pedicures, leg and body waxing, paraffin therapy,
aromatherapy, and thermo-therapy) or available for use by patrons of tanning
salons, spas, resorts, and health and country clubs. Professional nail care
products include fiberglass and acrylic nail enhancement solutions applied by
the salon professional when performing nail service and the accessories used by
the professional to apply the solutions; natural nail care and pedicure
solutions and accessories; and polishes. Professional salon appliances and
sundries include hair dryers, curling irons, brushes, pedicure spas, furniture,
and salonwear such as capes and aprons.
Professional salon products have two end consumers: the salon professional
who uses them in the performance of salon services and the salon client who
purchases them from salons for personal use. We believe salons typically
generate between 10% and 30% of their revenue from retail sales of professional
salon products. As the users and "prescribers" of professional salon products,
salon professionals typically select products on the basis of performance rather
than price. As a result, suppliers of professional salon products focus on
educating distributors and salon professionals on the uses and benefits of their
products and on industry trends. Because salon professionals prescribe these
products and sell them primarily in connection with rendering a salon service,
professional salon products typically foster strong brand loyalty and exhibit
relative price insensitivity. Consequently, professional salon products
generally command substantially higher prices and gross margins than
mass-marketed beauty products.
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<PAGE>
PRODUCTS
We offer products in all salon product categories. We sell more than 1,000
professional salon hair care, skin and body care, natural nail care and nail
enhancement products, and salon accessories and sundries, representing
approximately 4,000 stock keeping units, or SKUs. We believe that the strength
of our brand names is based on the reputation of our products for quality among
salon professionals, the performance of our products, and our focused commitment
to the needs of salon professionals and their clientele. We believe these brand
names are widely recognized by salon product distributors and salon
professionals and their clients as high-quality, effective products. In
addition, we believe that the strength of the brand names of our existing
products and our reputation within the industry will assist us to develop and
market product line extensions and new brands successfully.
The table below sets forth a description of our principal products, the
brand names under which the products are sold, and our estimate of approximate
percentages of such products sold for professional salon use and retailed to
salon and customers.
<TABLE>
<CAPTION>
% % RETAIL
SALON SALES BY
PRODUCT CATEGORY PRODUCT DESCRIPTION BRAND NAMES USE SALONS
---------------- ------------------- ----------- --- ------
<S> <C> <C> <C> <C>
Hair Care Shampoo, conditioner, hair color, ABBA, 40% 60%
and styling and finishing aids AquaTonic,
Biogenol, Body
Drench, Framesi,
Gena, Roffler
Skin and Body Care Moisturizing lotion, indoor and Body Drench, 35 65
outdoor tanning products, personal Gena, Suntopia
care products, paraffin waxes,
thermo-therapy treatments, and hair
removal systems and depilatory
products
Nail Care Natural nail care products, acrylic Alpha 9, 70 30
and fiberglass nail enhancement Cosmic, European
products, nail treatments, nail Touch, Gena,
polish, light-bonded nail systems, Kizmit, Pro
and manicure and pedicure solutions Finish,
and accessories Revivanail
Salon Appliances Hairdryers, curling irons, salon European Touch 100 --
and Sundries pedicure spas, salon furniture, and II, Maiko, SRC
salonwear (capes/aprons)
</TABLE>
HAIR CARE PRODUCTS
We offer a variety of hair care products at various price points under the
ABBA, Framesi, Biogenol, Roffler, Body Drench, and Gena 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. Our Framesi
product line features premium quality hair color products marketed exclusively
for use in salons. We also market under the Biogenol brand name a complementary
line of shampoos, conditioners, and styling aids specifically formulated for
color-treated hair. The Roffler line includes high-quality, salon-distributed
shampoos, conditioners, and styling aids designed primarily for men between the
ages of 18 and 40. ABBA, Biogenol, Framesi, and Roffler products are used widely
throughout the hair care industry and generate significant salon retail sales.
See "Special Considerations -- We depend on Framesi S.r.l."
Under the Gena brand name, we offer a line of tea-tree oil hair care
products with anesthetic qualities designed to relieve dry, itching scalp. In
addition, we market hair care products as a part of our Body Drench line of
personal care products, primarily to spas, resorts, and health and country
clubs.
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SKIN AND BODY CARE PRODUCTS
We sell a broad range of professional skin and body care and tanning
products, including moisturizers and lotions, under our Body Drench and Suntopia
brands.
Body Drench professional skin care products include moisturizing lotions
and body baths supplemented with Vitamins A and E and botanical extracts for
moisture retention and skin rejuvenation and alpha hydroxy acids for natural
skin exfoliation. Body Drench indoor tanning products replace moisture lost
during tanning and promote faster, darker tanning results. We also offer outdoor
tan care and sun protection products under the Body Drench name.
The Suntopia line of exclusively distributed professional tanning products
includes various tanning creams and lotions, enriched shower gels, a moisture
replenishing lotion, and a tan enhancing product. Suntopia products, which are
made using an exotic blend of botanicals and forested extracts, are designed to
promote and maintain a long-lasting tan. The Suntopia line complements the Body
Drench line by targeting a younger market.
NAIL CARE PRODUCTS
We believe that we have the most complete and diverse line of branded
products for salon professionals in the nail care category. Our nail care
product offerings consist of products designed to support the various salon
services performed by nail technicians, including manicure, pedicure, acrylic
and fiberglass nail enhancement, natural nail treatments, and nail polishes.
Most nail care companies encourage distributors to purchase their entire product
line in order to buy any of their nail care products. We, however, offer a
number of top-selling products across all segments of the nail category,
permitting our customers to select and purchase individual SKUs from among
multiple brands, including Alpha 9, European Touch, Gena, Kizmit, Pro Finish,
and Revivanail. For example, we offer distributors and salon chains the ability
to purchase our Revivanail nail treatments and Alpha 9 acrylic nail enhancement
products without having to purchase the full line of other Revivanail or Alpha 9
products.
Our Alpha 9, European Touch, and Kizmit acrylic professional nail
enhancement products consist of complete lines of liquids, powders, tips, files,
and other implements and treatments necessary for the professional nail
technician to complete the acrylic nail enhancement process.
The Gena line of natural nail care products features Warm-O-Lotion, a
collagen-enriched manicure lotion that is prominently featured in salons
throughout the United States. The Gena line also includes professional pedicure
products, such as Pedi Soft, a collagen-enriched conditioning lotion; Pedi Care
dry skin lotion; and Pedi Soak foot bath. The Gena product line also includes
paraffin therapy products, such as Paraffin Springs Therapy Spa, a paraffin bath
for conditioning heat therapy treatments; the Healthy Hoof nail and skin
treatment line to strengthen, moisturize, and condition nails and cuticles; and
MRX antiseptics and lotions for use by salon professionals.
We offer base coats, top coats, nail glues, and cuticle lotions under our
European Touch and Pro Finish brands. The Pro Finish line of nail care products
also features a light bonded nail system that seals the nail enhancement under
ultraviolet lighting.
Our European Touch brand features nail treatment products, such as
Revivanail and Theracreme. We also offer Momentum, a three-step nail overlay
system that offers simplicity, speed, and strength.
SALON EQUIPMENT, APPLIANCES, AND SUNDRIES
We sell salon equipment, appliances, and sundries, including pedicure spa
equipment, hairstyling appliances, and salonwear. We market under the European
Touch II name various salon equipment products, such as whirlpool footspas,
salon chairs designed for clients and technicians, manicure and pedicure tables
and footrests, and portable salon accessory carts. These products are intended
to capitalize on the growing trend among salons to offer services beyond the
basic salon services. The SRC product line of professional curling irons and
blow dryers are recognized within the salon industry as among the finest quality
in salon appliances. The appliances are designed for high usage and durability
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and feature quick startup and recovery capabilities. All SRC professional
curling irons are backed by the industry's only three-year warranty. Our Maiko
salonwear line features capes and aprons for the stylist and the stylist's
clientele.
PRODUCT DEVELOPMENT
We seek to leverage the significant brand-name recognition of our existing
product lines by introducing new products and formulations under our core brand
names as well as under newly developed brands. We believe that our diverse
product offerings provide us with greater capacity and know-how to develop,
test, and market new products in each of our product lines, including the
expanded application of proprietary technologies. We contract with third-party
manufacturers to develop new formulations that meet our specifications and
quality standards. We have not incurred and do not expect to incur significant
capital expenditures in connection with our product development efforts.
Our management, working together with our sales and marketing and product
development personnel, continuously monitors shifts in the salon industry to
identify new product opportunities. Feedback from salon professionals and our
educators also plays a significant role in product development. We believe the
experience of our key managers, their relationships within the industry, and our
product line orientation enable us to quickly recognize and respond to salon
innovations and industry trends.
MARKETING
We sell our professional salon products and appliances primarily through
professional salon industry distribution channels to salon product and tanning
supply distributors, salon chains, and beauty supply outlets, and, to a lesser
extent, directly to spas, resorts, and health and country clubs throughout the
United States and in Canada, Europe, Latin America, Australia, and Asia. We
believe that our strategy of marketing our salon products exclusively for use in
or resale by the salon industry complements the professional image of our
products and fosters a high degree of brand loyalty by distributors of
professional salon products.
Our sales and marketing efforts focus on educating salon professionals and
salon product distributors regarding the high quality and performance benefits
of our products as well as the latest trends and developments in the salon
industry. Our marketing program includes participation in salon industry trade
shows, at which salon product manufacturers exhibit and sell their products to
wholesale salon product distributors; several annual domestic and international
salon professionals trade shows; and numerous professional salon
distributor-sponsored shows, at which products, styles, and techniques are
demonstrated to salon professionals. Our marketing program emphasizes customer
education through regular in-the-field product demonstrations for salon
professionals, usually in conjunction with the distributors' sales and marketing
efforts. In addition, our products are advertised in trade and distributor
publications and promoted in national magazines, including GLAMOUR, GOOD
HOUSEKEEPING, INSTYLE, MARIE CLAIRE, MCCALL'S, MIRABELLA, and SELF. We also
produce educational videos and literature for distribution to distributors and
salon professionals.
SALES AND DISTRIBUTION
We believe that we have strong relationships in each of the professional
salon distribution channels, including exclusive and open channels. We depend
upon salon product and tanning supply distributors, beauty supply outlets, and
salon chains to distribute our products. We currently maintain more than 5,300
active customer accounts. We do not, however, have long-term contracts with any
of our customers. Products sold through exclusive channels are available to a
limited number of distributors in each region, while those sold through open
channels are available to all distributors.
Regional sales managers and a strong educational support team sell the ABBA
line of hair care products on an exclusive basis to approximately 50 salon
product distributors and salon chains throughout the United States, Canada, and
Australia. Regional sales managers and an in-house educational support team sell
our hair color and hair care products under the Framesi, Biogenol, and Roffler
brand names on an exclusive basis to 61 salon product distributors throughout
the United States and Latin America.
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A professional outside sales force sells our nail care product lines
nationally and internationally to salon product distributors. This distribution
base includes Sally Beauty Company, Inc., the largest wholesale supplier of
professional supply products with more than 1,900 supply stores worldwide.
A sales force of marketing representatives, telemarketers, and field sales
personnel as well as independent manufacturer representatives sell Body Drench
products to salon product distributors, tanning supply distributors, and
directly to spas, resorts, and health and country clubs throughout the United
States and in Canada, Europe, Latin America, and Australia.
A sales force of employees and manufacturer representatives sell SRC salon
appliances and salonwear nationally on an exclusive basis to salon product
distributors, beauty schools, and salon chains. An internal sales force of
marketing representatives sells our European Touch II pedicure spa products to
salon product distributors and salon chains.
PRODUCTION
We have developed relationships with third parties to manufacture most of
our products. Although we generally do not have long-term contracts with our
manufacturers, we own most of the formulations, tools, and molds utilized in the
manufacturing processes of our products and believe we could substitute other
manufacturers if necessary. In addition, we assemble and upholster our European
Touch II salon furniture and appliances in our 39,000 square foot manufacturing
and warehousing facility in Butler, Wisconsin.
Raw materials used to produce our professional salon products, other than
salon appliances and sundries, include water, alcohol, mineral and natural oils,
fragrances, other chemicals, and a wide variety of packaging materials and
compounds including containers, such as cardboard boxes and plastic containers,
container caps, tops, valves, and labels. We purchase all of these raw materials
from outside sources. The principal raw materials and packaging components for
our products are available from numerous domestic and international suppliers.
Although we do not purchase the raw materials used to manufacture the majority
of our products, we are potentially subject to variations in the prices we pay
our third-party manufacturers for products depending on their costs for raw
materials. While the industry from time to time has experienced raw material
cost increases, we believe we will be able to purchase our requirements at
competitive prices. To date, increases in raw material costs have not had a
material effect on our operating results.
We continually monitor the quality of our products. We also carry product
liability insurance at levels we believe to be adequate.
COMPETITION
Our products compete directly against professional salon and other similar
products sold through distributors and professional salons. We compete on the
basis of brand recognition, quality, performance, distribution, and price.
Our principal competitors in the professional salon hair care products
market include Nexxus Products Co., Paul Mitchell Systems, Matrix, Redken, and
Sebastian International. Our largest competitors in the professional salon skin
and body care products market include California Suncare, Inc., Supre Inc.,
Swedish Beauty Manufacturing, Inc., Australian Gold, Inc., American
International, Inc., and Divi International. Our competitors in the professional
salon nail care market include Creative Nail Design, Inc., OPI Products Inc.,
Star Nail Products, Inc., and Backscratchers, Inc. Our largest competitors in
the professional salon appliances and sundries market are Helen of Troy Limited,
Belson Products (a division of Windmere Corporation), Conair Corporation,
Cricket Brush Company (a division of West Coast Beauty Supply Co.), Andre (a
division of Fromm International, Inc.), and Betty Dain Creations, Inc. In
addition, our professional salon products compete indirectly against hair care,
skin and body care, and nail care products as well as salon appliances and
sundries sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores and, to a lesser extent, mass
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," and catalogs.
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INTELLECTUAL PROPERTY
We have registered, or have pending applications for registration for, our
principal trademarks and brand names in the United States and in foreign
countries. Our principal trademarks and brand names include ABBA Pure and
Natural Hair Care, Alpha 9, AquaTonic, Biogenol, Body Drench, Cosmic, European
Touch, Gena, Kizmit, Pro Finish, Revivanail, Roffler, SRC, and Suntopia.
We believe our position in the marketplace depends to a significant extent
upon the goodwill engendered by our trademarks and brand names and, therefore,
consider trademark protection to be important to our business. We will seek to
register or otherwise protect all significant trademarks and brand names in all
active geographic markets.
While we currently hold certain patents, we do not consider any single
patent to be material to the conduct of our business. We rely on all facets of
intellectual property law to protect our proprietary information.
GOVERNMENT REGULATION
Certain of our advertising and product labeling practices are subject to
regulation by the FTC, and certain of our professional salon product production
practices are subject to regulation by the FDA as well as by various other
federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
us to date. Nonetheless, federal, state, and local regulations in the United
States that are designed to protect consumers have had, and can be expected to
have, an increasing influence on product liability claims, production methods,
product content, labeling, and packaging. In addition, any expansion of our
operations to produce professional salon products that include over-the-counter
drug ingredients, such as certain sun screen ingredients, would result in us
becoming subject to additional FDA regulations as well as a higher degree of
inspection and greater burden of regulatory compliance than currently exist.
Our operations subject us to federal, state, and local governmental
regulations related to the use, storage, discharge, and disposal of hazardous
chemicals. Our failure to comply with current or future environmental
regulations could result in the imposition of fines, suspension of production,
or a cessation of operations. Compliance with such regulations could require us
to acquire costly equipment or to incur other significant expenses. Any failure
by us to control the use, or adequately restrict the discharge, of hazardous
substances could subject us to future liabilities.
The nature and use of professional salon products could give rise to
product liability claims if one or more users of our products were to suffer
adverse reactions following their use of the products. Such reactions could be
caused by various factors, many of which are beyond our control, including
hypoallergenic sensitivity and the possibility of malicious tampering with our
products. In the event of such an occurrence, we could incur substantial
litigation expense, receive adverse publicity, and suffer a loss of sales.
EMPLOYEES
As of August 31, 2000, we employed 182 persons, consisting of 42
administrative employees, 73 warehouse and production employees, and 67 sales
and marketing employees. Framesi USA, one of our subsidiaries, is a party to a
collective bargaining agreement relating to certain production employees. We
believe that our relations with our employees are good.
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SPECIAL CONSIDERATIONS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS REPORT, BEFORE PURCHASING ANY OF OUR COMMON STOCK.
WE HAVE FILED FOR PROTECTION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE.
On August 31, 2000, we filed for protection under Chapter 11 of the
Bankruptcy Code. The fact of this filing, along with the process through the
Bankruptcy Court, could affect our business in a variety of unforeseen ways.
Among other things, the bankruptcy could impair our ability to (a) operate our
business during the pendency of the proceedings; (b) continue normal operating
relationships with our key distributors; (c) obtain shipments and negotiate
terms with vendors; (d) fund, develop, and execute our operating plan; (e)
attract and retain executives and key employees; and (f) otherwise maintain
favorable courses of dealing with vendors could be impaired.
We expect that the equity of the current shareholders in the Company will
be diluted significantly under the plan of reorganization we will propose to the
Bankruptcy Court. We reached an agreement with an informal committee of holders
of an aggregate dollar amount of over 80% of the Notes that requires that all
$100 million of the Notes be exchanged for equity. Under the Restructuring
Agreement, the Notes will be exchanged for 90% of our equity through a plan of
reorganization in bankruptcy. The current stockholders and management will each
receive 5% of our post-bankruptcy equity plus warrants to acquire an additional
nine percent of such equity over five years.
There are various risks associated with our Chapter 11 case. Our plan of
reorganization may not be approved or, even if approved, may not succeed. In
addition, we will need to secure additional financing or renegotiate our
existing credit facility, under which we are in default, to execute our
operating plan. We cannot assure you that we will be able to secure adequate
financing or successfully renegotiate our credit facility.
We depend on our distributor and other key customer relationships. Any
change in these relationships could have a significant negative impact on our
business. The filing of the Chapter 11 case could adversely affect those
relationships. This could cause our sales to decrease. If we cannot improve our
sales, we may not generate sufficient cash to continue in business. In addition,
even if we are able to pay our bills, we may not be able to expand our business
if sales levels do not improve.
OUR COMMON STOCK HAS BEEN DELISTED.
Our common stock has been delisted from Nasdaq for failure to meet their
standards, primarily due to our failure to keep current our required reports to
the SEC. Delisting could materially and adversely affect the trading market for
our common stock and our access to the capital markets. We will have to reapply
for initial listing once Nasdaq determines that we can meet the initial listing
requirements. We currently cannot qualify for initial listing with Nasdaq, and
we may never meet those requirements.
The closing sale price for our common stock on October 16, 2000 was $0.33
per share. Because our common stock is delisted from Nasdaq and our trading
price is less than $5.00 per share, trading in our common stock is subject to
the requirements of rule 15g-9 of the Securities Exchange Act, known as the
"penny stock" rules. Under this rule, broker/dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's written consent prior to the transaction. The
Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires
additional disclosure in connection with any trades involving a stock defined as
a "penny stock" (generally any equity security not traded on an exchange or
quoted on Nasdaq that has a market price less than $5.00 per share, subject to
certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated with the penny stock market. These requirements would likely
limit severely the market liquidity of our common stock and the ability of our
stockholders to dispose of their shares, particularly in a declining market.
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A VARIETY OF FACTORS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
A wide variety of factors could adversely impact our net sales and
operating results. Many of these factors are beyond our control. These factors
include the following:
- our ability to identify trends in the professional salon products
industry;
- our ability to modify our business to adapt to such trends;
- our ability to create and introduce new products on a timely basis
that take advantage of industry trends;
- the continued market acceptance of our products among salon
professionals and their clientele;
- our ability to arrange for timely production and delivery of our
products;
- the level and timing of orders placed by customers; and
- competition and competitive pressures on prices.
The success of our operations depends to an extent upon a number of factors
relating to discretionary consumer spending and continued demand for
professional salon products. These factors include economic conditions, such as
employment, business conditions, interest rates, and tax rates, as well as the
continued growth of the professional salon products industry. General social
trends and economic conditions could adversely affect consumer spending, which
would adversely affect our business, financial condition, and operating results.
WE MUST RESPOND TO CONSUMER PREFERENCES.
Consumer preferences in the professional salon products industry depend to
a significant extent on the prescriptive role of salon professionals. Relatively
few products achieve wide acceptance in the professional salon market. We
believe that our success depends, in part, on our continued ability to introduce
new and attractive products on a regular basis that anticipate and respond to
changing consumer demands and preferences in a timely manner. New products
introduced by us may not achieve any significant degree of market acceptance.
Any acceptance that is achieved may not be sustained for any significant amount
of time. The failure of new product lines or product innovations to achieve or
sustain market acceptance could have a material adverse effect on our business,
financial condition, and operating results.
WE DEPEND ON OUR DISTRIBUTION CHANNELS TO SELL MANY OF OUR PRODUCTS.
We sell many of our products to professional salon product distributors and
salon chains. Distributors and salon chains in the United States and in foreign
markets have periodically experienced consolidation and other ownership changes
and in the future may consolidate, restructure, or realign their ownership or
affiliations. Some distributors and salons may be thinly capitalized and unable
to withstand changes in business conditions. These circumstances could decrease
the number of distributors and salons that sell our products or increase the
ownership concentration within the professional salon products market.
If a significant distributor or salon chain discontinues selling or using
our products, performs poorly, does not pay for purchased products, or
reorganizes or liquidates and is unable to continue selling our products, our
business, financial condition, and operating results could be materially and
adversely affected. In addition, the laws and regulations of various states may
limit our ability to change distributors under certain circumstances, making it
difficult to terminate a distributor without good or just cause, as defined by
applicable statutes or regulations. The resulting difficulty or inability to
replace poorly performing distributors could have a material adverse effect on
our business, financial condition, and operating results.
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WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS.
We depend upon third parties to manufacture most of our products. Although
we own many of the formulations, tools, and molds used in the manufacturing
processes of our products, we have limited control over the manufacturing
processes themselves. As a result, any difficulties encountered by the
third-party manufacturers that result in product defects, production delays,
cost overruns, or the inability to fulfill orders on a timely basis could have a
material adverse effect on our business, financial condition, and operating
results.
We generally do not have long-term contracts with our third-party
manufacturers. Although we believe we would be able to secure other third-party
manufacturers to produce our products, particularly as a result of our ownership
of many of the formulations, tools, and molds used in the manufacturing process,
our operations would be adversely affected if we lost our relationship with any
of our current suppliers.
We do not maintain an inventory of sufficient size to provide protection
for any significant period against an interruption of supply, particularly if we
were required to obtain alternative sources of supply. Although we do not
purchase directly the raw materials used to manufacture the majority of our
products, we are potentially subject to variations in the prices we pay our
third-party manufacturers for products depending on their cost for raw
materials.
WE DEPEND ON FRAMESI S.R.L.
We hold exclusive license rights to sell Framesi brand hair color and hair
care products in the majority of the Western Hemisphere, including the United
States and most of Latin America. We sell these products, which are some of our
most important product offerings, pursuant to an exclusive license with Framesi
S.r.l. (Framesi Italy) that expires in 2036. In addition, we manufacture and
sell hair care products under the Framesi and Biogenol brand names pursuant to
the license. Under our agreement with Framesi Italy, we import hair color
products manufactured by them. Any difficulties encountered by Framesi Italy,
with respect to product defects, production delays, cost overruns, or the
inability to fulfill orders on a timely basis or the termination by Framesi or
breach by Framesi or us of the license agreement could have a material adverse
effect on our business, financial conditions, and operating results.
WE DEPEND ON OUR MAJOR CUSTOMERS.
We depend upon salon product and tanning supply distributors, beauty supply
outlets, and salon chains to distribute our products. We currently maintain more
than 5,300 active customer accounts, but do not have long-term contracts with
any of our customers. An adverse change in, or termination of, our relationship
with, or an adverse change in the financial viability of, one or more of our
major customers could have a material adverse effect on our business, financial
condition, and operating results.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
Having sold our One Touch and Clean + Easy product lines, we expect foreign
sales to decrease in 2000 as compared to 1999. We intend to expand our
international sales over the longer term. Our international operations require
us to maintain equipment and inventories abroad, manufacture and sell products
internationally, and purchase raw materials and components from foreign
suppliers. Our international operations expose us to certain economic and
political risks, including the following:
- compliance with local laws and regulatory requirements, as well as
changes in such laws and requirements;
- foreign currency rate fluctuations;
- restrictions on the repatriation of funds;
- overlap of tax issues;
11
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- political and economic conditions abroad; and
- the possibility of expropriation or nationalization of assets, supply
disruptions, currency controls, and changes in tax laws, tariffs, and
freight rates.
WE DEPEND ON KEY PERSONNEL.
Our success depends to a significant degree upon the skills of our current
key employees and our ability to identify, hire, and retain additional sales,
marketing, and financial personnel. We cannot assure you that we will be able to
retain our existing key personnel or attract and retain additional key
personnel. The loss of services of key personnel, particularly Sam Leopold (our
Chairman of the Board, President, and Chief Executive Officer), or the inability
to attract and retain additional qualified personnel could have a material
adverse effect upon our business, financial condition, and operating results.
WE FACE RISKS ASSOCIATED WITH OUR INTELLECTUAL PROPERTY.
The market for our products depends to a significant extent upon the
goodwill associated with our trademarks and trade names. Therefore, trademark
protection is important to our business. Although most of our trademarks and
trade names are registered in the United States and in foreign countries, we may
not be successful in asserting trademark or trade name protection for our
trademarks and trade names in the United States or other markets. In addition,
the laws of certain foreign countries may not protect our intellectual property
rights to the same extent as the laws of the United States. The costs required
to protect our trademarks and trade names may be substantial.
While we currently hold several patents, we do not consider any single
patent to be material to the conduct of our business. We rely primarily on trade
secret protection for our proprietary information. We face risks associated with
our intellectual property, including the following:
- our intellectual property rights may be challenged, invalidated, or
circumvented;
- our intellectual property rights may not provide adequate protection;
- we may not have sufficient resources to prosecute infringements of our
intellectual property rights;
- we may not be able to protect our intellectual property; and
- third parties may assert intellectual property infringement claims
against us.
THE PROFESSIONAL SALON PRODUCTS INDUSTRY IS VERY COMPETITIVE.
Our products compete directly against professional salon and other similar
products sold through distributors of professional salon products and
professional salons. In addition, our professional salon products compete
indirectly against hair care, nail care, and skin and body care products as well
as salon appliances and sundries sold through a variety of non-salon retail
channels, including department stores, mall-based specialty stores and, to a
lesser extent, mass merchants, drugstores, supermarkets, telemarketing programs,
television "infomercials," the Internet, and catalogs. Current and potential
competitors include a number of companies that have substantially greater
resources than us, including better brand-name recognition, broader product
lines, and wider distribution channels.
The professional salon products industry is characterized by a lack of
significant barriers to entry with respect to the development and production of
professional salon products, which may result in new competition, including
possible imitators of one or more of our recognized product lines. In addition,
companies in the professional salon products industry commonly market products
that are similar to products being successfully marketed by competitors.
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Increased competition and any reductions in competitors' prices that
require us to implement price reductions in order to remain competitive could
have a material adverse effect on our business, financial condition, and
operating results.
WE ARE SUBJECT TO GOVERNMENT REGULATION AND POTENTIAL CLAIMS BY OTHERS.
Certain of our advertising and product labeling practices are subject to
regulation by the Federal Trade Commission, or FTC, and certain of its
professional salon product production practices are subject to regulation by the
Food and Drug Administration, or FDA, as well as by various other federal,
state, and local regulatory authorities. Compliance with federal, state, and
local laws and regulations has not had a material adverse effect on us to date.
Nonetheless, federal, state, and local regulations in the United States that are
designed to protect consumers have had, and can be expected to have, an
increasing influence on product claims, production methods, product content,
labeling, and packaging. In addition, if we expand our operations to produce
professional salon products that include over-the-counter drug ingredients (such
as certain sun screen ingredients) we would become subject to additional FDA
regulations as well as a higher degree of inspection and greater burden of
regulatory compliance than currently exist.
Our operations subject us to federal, state, and local governmental
regulations related to the use, storage, discharge, and disposal of hazardous
chemicals. Our failure to comply with current or future environmental
regulations could result in the imposition of fines, suspension of production,
or a cessation of operations. Compliance with such regulations could require us
to acquire costly equipment or to incur other significant expenses. Any failure
by us to control the use, or adequately restrict the discharge, of hazardous
substances could subject us to future liabilities.
The nature and use of professional salon products could give rise to
product liability claims if one or more users of our products were to suffer
adverse reactions following their use of the products. Such reactions could be
caused by various factors, many of which are beyond our control, including
hypoallergenic sensitivity and the possibility of malicious tampering with our
products. In the event of such an occurrence, we could incur substantial
litigation expense, receive adverse publicity, and suffer a loss of sales.
ITEM 2. PROPERTIES
We lease our corporate headquarters and operations center located in a
66,000 square-foot facility in Scottsdale, Arizona. The facility includes
approximately 43,000 square feet of executive and administrative offices;
approximately 20,000 square feet utilized for warehousing; and approximately
3,000 square feet utilized for a test salon and a retail store. We believe the
facility will be adequate for our needs for the foreseeable future. We also
lease production, administrative, and warehouse space in Fair Lawn, New Jersey;
Butler, Wisconsin; Coraopolis, Pennsylvania; and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
Four class action lawsuits have been filed on behalf of purchasers of our
common stock in the U.S. District Court for the District of Arizona against us
and certain of our present and former officers alleging violations of the
federal securities laws as discussed below.
The allegations of each of the complaints are very similar. The class
period alleged in each of the actions is May 5, 1998 through November 29, 1999.
In general, the actions claim that during the class period, we reported
increasing sales and earnings before interest, taxes, depreciation, and
amortization which caused our common stock to trade at artificially inflated
prices. The complaints allege that the price of our common stock dropped
significantly when we announced that our third quarter 1999 revenues and
earnings would fall short of market expectations. The complaints further allege
that on November 29, 1999, we announced that we could not file our Form 10-Q for
the quarter ended September 30, 1999 because of revenue recognition issues and
allegedly admitted that our results for the first two quarters of 1999 and for
the year ended December 31, 1998 were misstated and would have to be restated
due to errors and irregularities relating to our Body Drench division. The
complaints further allege that as a result of the facts stated above, trading in
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our common stock was halted and our common stock was delisted by Nasdaq. The
plaintiffs claim that we caused the stock to trade at artificially inflated
prices during the class period.
The complaints allege violations of Section 10(b) of the 1934 Act and Rule
10(b)(5) for (a) employing devices, schemes and artifices to defraud; (b) making
untrue statements of material fact or omitting to state material facts such that
they would not be misleading; (c) engaging in acts, practices, and a course of
business that operated as a fraud or deceit upon plaintiff and class members.
The complaints also allege violations of Section 20(a) of the 1934 Act by us and
claim that the plaintiffs and other class members relied on statements made by
us that lead them to purchase stock they would not have otherwise purchased. The
complaints do not make a specific prayer for monetary relief. The complaints
simply claim that plaintiffs and members of the class should be awarded damages,
interest, costs, attorneys' fees, expert witness fees, and other costs and
expenses.
The litigation is in the very early stages. The four class actions have
been consolidated by The Honorable Roslyn O. Silver of the United States
District Court for the District of Arizona. The court has recently appointed the
lead plaintiffs and lead counsel. No timeframes have been determined as of this
date for motions to dismiss.
By letter dated September 15, 1999, the staff of the Division of
Enforcement of the SEC advised us that it was conducting an informal inquiry
into our accounting policies and procedures and requested that we produce
certain documents. In October 1999, the SEC issued a Formal Order of Private
Investigation, designating SEC officers to take testimony. We have provided
numerous documents to the SEC staff and continue to cooperate fully with the SEC
staff. The SEC has not commenced any civil or administrative proceedings as a
result of its investigation, and we cannot predict at this time whether the SEC
will seek to impose any monetary or other penalties against us. Under these
circumstances, we cannot estimate the duration of the investigation or its
outcome.
A former employee of Ft. Pitt Acquisition, Inc., one our subsidiaries, is
suing us for breach of contract for an employment and non-competition agreement
entered into with the subsidiary prior to our acquisition. The non-competition
agreement requires accelerated payments in the event of a change in control of
Ft. Pitt Acquisition, Inc. Our acquisition of Ft. Pitt Acquisition, Inc. is
alleged to constitute a change of control. The payment alleged to be due to the
former employee is $1.7 million. We believe that the employment agreement and
non-competition agreement was not properly approved by Ft. Pitt Acquisition,
Inc.'s board of directors and violated the former director's fiduciary duties to
our subsidiary. In addition, we believe the former director did not perform
under the employment agreement. We intend to defend this matter vigorously.
Four minority interest shareholders of Ft. Pitt Acquisition, Inc. filed
separate complaints against the former majority shareholders of the subsidiary
and us for not accepting an offer from Graham Webb Company to buy all of the
shares of Ft. Pitt Acquisition, Inc., but rather accepting our offer to buy a
majority of the shares. In addition, the minority shareholders allege that we
did not allow the minority shareholders to sell their shares to us. The minority
shareholders allege our actions and actions by the former majority shareholders
caused them to incur losses. The minority shareholders are seeking damages of
approximately $6.8 million. We are defending all of these allegations vigorously
and are not participating in any settlement discussions at this time.
One of our former contract manufacturers, Amole Incorporated (Amole)
assigned receivables (including amounts owed from Body Drench to Amole) to
Comerica Bank. Comerica Bank filed a claim against us for collection of
outstanding receivables in the amount of approximately $1.1 million. We 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 the
product manufactured by Amole for Body Drench. In accordance with the
manufacturing agreement between us and Amole, Amole is prohibited from making
changes in the product. The case is scheduled for discovery in fall 2000. We
intend to defend this matter vigorously.
Panint (U.S.) Ltd. and Panint Electric Limited filed a lawsuit against us
for breach of certain purchase contracts and are seeking payment of
approximately $994,000. We have responded to the allegations and counterclaimed
that the products received from the plaintiff were defective and caused us to
lose sales, damaged our reputation, and created other unfavorable reactions. We
intend to defend this matter vigorously.
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These cases have been stayed as a result of our filing for protection under
Chapter 11 of the Bankruptcy Code. In addition, we are party to certain
additional legal matters arising in the ordinary course of business. In
management's opinion, as of December 31, 1999, the expected outcome of such
matters will not have a material impact on our financial position or results of
operations.
Our insurance coverage may not be adequate to cover all liabilities arising
out of any claims that may be instituted in the future. A lack of insurance
coverage may have an adverse effect on our business, financial condition, and
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock traded on the Nasdaq National Market under the symbol
"STYL" from our initial public offering on November 21, 1996 at $10.00 per share
until Nasdaq halted trading in our common stock from November 29, 1999 until
January 19, 2000, when our common stock was delisted from the Nasdaq National
Market. Since then our common stock has been trading on the over-the-counter
market (commonly referred to as the "pink sheets") under the symbol "STYLE." The
following table sets forth, for the periods indicated, the range of high and low
sales prices on the dates indicated for our common stock for each full quarterly
period within the two most recent fiscal years.
HIGH LOW
--------- --------
1998
First quarter .................................... $ 24.125 $ 15.75
Second quarter ................................... $ 26.625 $ 22.00
Third quarter .................................... $ 23.375 $ 10.875
Fourth quarter ................................... $ 18.875 $ 8.375
1999
First quarter .................................... $ 14.75 $ 9.625
Second quarter ................................... $ 15.1875 $ 12.00
Third quarter .................................... $ 15.50 $ 10.128
Fourth quarter ................................... $ 10.313 $ 3.125
On October 16, 2000, the closing sale price of the Company's Common Stock
was $0.33 per share. On October 16, 2000, there were approximately 15 holders of
record, and more than 800 beneficial owners of our common stock.
We have never paid any cash dividends on our common stock and do not plan
to do so in the near future.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data as of and for the fiscal
years ended December 31, 1999, 1998 and 1997 and as of December 31, 1996 and the
period from November 27, 1996 to December 31, 1996 is derived from the
consolidated financial statements of the Company, which have been audited by
Arthur Andersen LLP, independent public accountants. The selected financial data
provided below should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and related notes thereto
appearing elsewhere in this Report.
<TABLE>
<CAPTION>
NOVEMBER 27,
1996 TO YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA - STYLING TECHNOLOGY
CORPORATION AND SUBSIDIARIES:
Net sales ..................................... $ 1,083 $ 36,505 $ 83,366 $ 107,790
Gross profit .................................. 512 19,749 44,368 53,824
Selling, general, and administrative expenses . 737 12,201 31,619 73,653
Income (loss) from operations ................. (225) 7,548 12,327 (34,673)
Income (loss) before extraordinary item ....... (151) 3,164 1,651 (50,156)
Extraordinary item, net of tax ................ -- (1,377) (1,091) (1,713)
Income (loss) after extraordinary item ........ (151) 1,787 560 (51,869)
Basic earnings (loss) per share:
Income (loss) before extraordinary item ..... (0.04) 0.80 0.41 (12.33)
Extraordinary item, net ..................... -- (0.35) (0.27) (0.42)
Net income (loss) ........................... (0.04) 0.45 0.14 (12.75)
Diluted earnings (loss) per share:
Income (loss) before extraordinary item ..... (0.04) 0.77 0.38 (12.33)
Extraordinary item, net ..................... -- (0.34) (0.25) (0.42)
Net income (loss) ........................... $ (0.04) $ 0.43 $ 0.13 $ (12.75)
BALANCE SHEET DATA:
Working capital ............................... $ 4,459 $ 13,005 $ 30,566 $ (46,810)
Total assets .................................. 32,234 90,886 214,073 180,395
Long-term debt and other, less current
Portion ....................................... 2,316 47,377 140,366 101,801
Total stockholders' equity (deficit) .......... $ 25,319 $ 27,525 $ 29,248 $ (22,611)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We develop, produce, and market a wide array of professional salon
products. We offer 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. We sell our 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.
REORGANIZATION
On August 31, 2000, we filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Arizona. The bankruptcy case was filed in order to implement the financial
restructuring pursuant to a Restructuring Agreement reached with an informal
committee of the holders of our Notes. Pursuant to the Restructuring Agreement,
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all $100 million in Notes will be exchanged for 90 percent of our equity through
a plan of reorganization in bankruptcy. The current stockholders and management
will each receive five percent of our post-bankruptcy equity plus warrants to
acquire an additional nine percent of such equity over five years. We are
currently operating our business as a debtor-in-possession, subject to the
jurisdiction of the Bankruptcy Court. As a debtor-in-possession, we are
authorized to operate our business in the ordinary course, but may not engage in
transactions outside our ordinary course of business without the approval of the
Bankruptcy Court.
The accompanying financial statements have been prepared on a going concern
basis that assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the reorganization proceedings, there are uncertainties relating to our ability
to continue as a going concern. The financial statements do not include any
adjustments that might be necessary as a result of the outcome of the
uncertainties discussed in this Report, including the effects of any plan or
reorganization that may be filed.
RESPONSES TO CURRENT ISSUES
We have taken a number of actions to improve our accounting and finance
controls and processes on a going forward basis. We recently hired a new chief
financial officer, who in turn has hired an experienced controller as well as
certain other accounting and finance personnel. In addition to these personnel
changes, we have taken steps to improve our warehouse and distribution systems.
In order to improve our accounts receivable management, we have implemented new
credit policies and returned goods policies. We are also enhancing our processes
for identifying uncollectible accounts receivable and quantifying the resulting
allowance for doubtful accounts.
We have made substantial progress in reducing our monthly selling, general
and administrative expenses to an average of approximately $3.1 million in 2000
as compared with an average of approximately $6.1 million in 1999. These
reductions are the result of reducing the number of employees from approximately
340 in the beginning of 1999 to less than 190 currently. We have reduced our
advertising costs by selecting more focused and effective media. By reducing our
employee base and managing expenditures more efficiently, our travel costs have
decreased dramatically and with the elimination of duplicative physical
locations due to the centralization of our brands, we have reduced our occupancy
costs dramatically. Other administrative costs such as legal and accounting have
been reduced as well due to the centralization of our systems.
Except for the historical information contained herein, the discussion in
this Report contains or may contain forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed herein, as well as those factors discussed under
"Special Considerations" contained in Item 1 of this Report. Historical results
are not necessarily indicative of trends in operating results for any future
period.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales for the year ended December 31, 1999 were $107.8 million as
compared to net sales of $83.4 million for the year ended December 31, 1998. The
$24.4 million or 29.3%, increase in net sales was due primarily to the addition
of the operating results of the brands acquired during 1998, which included a
full year of sales of Pro Finish, European Touch, European Touch Spa, and
Framesi USA. Net sales decreased by $800,000 from 1998 pro forma sales of $108.6
million. (Pro forma sales are actual sales adjusted to include sales of
companies we have acquired for the period prior to their acquisition.) European
Touch Spa net sales increased by $3.1 million over pro forma 1998 net sales. The
increase was partially offset by the decline in net sales of ABBA of $1.9
million.
COST OF SALES
Cost of sales were $54.0 million, or 50.1% of net sales, for the year ended
December 31, 1999, as compared to cost of sales of $39.0 million, or 46.8% of
net sales, for the year ended December 31, 1998. The increase in our cost of
sales for 1999 over cost of sales for 1998 primarily was due to the inclusion of
companies we acquired for the entire year. Because these brands operate with
lower profit margins than our other products our cost of sales as a percentage
of sales increased 3.3%.
17
<PAGE>
GROSS PROFIT
We realized gross profit of $53.8 million, or 49.9% of net sales, for the
year ended December 31, 1999, as compared to $44.4 million, or 53.2% of net
sales, for the year ended December 31, 1998 compared to gross profit of $19.7
million, or 54.0% of net sales, for the year ended December 31, 1997. Our
increases in sales, cost of sales, and gross profit were the result of an
acquisition made during 1998 and accordingly are not comparable to similar
amounts in 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $73.6 million, or 68.3%
of net sales, for the year ended December 31, 1999 compared with $31.6 million,
or 37.9% of net sales for the year ended December 31, 1998. The increase in
selling, general, and administrative expenses resulted in part from the
acquisitions completed during 1998 having, on average, a higher percentage of
selling, general, and administrative expenses than our existing business. The
increase is also attributable to $13.2 million in bad debt expense (See
Responses to Current Issues), which included $1.4 million related to canceled
distributors for the Body Drench division, $2.0 million in litigation reserves
and legal fees and $2.0 million of advertising costs related to new packaging
and new brands.
Non-recurring charges include $13.4 million impairment of goodwill for the
Gena, Pro Finish, and Alpha 9 brands recorded in 1999. In November 1998, we
began a centralization and process reengineering initiative to further integrate
and consolidate our acquired businesses with the goal of achieving additional
operating efficiencies and improved customer service. The initiative was
completed during 1999. In connection with the centralization business process
reengineering activities, we recorded charges of $422,000 and $1.4 million
during 1998 and 1999, respectively.
EXTRAORDINARY ITEM
In June 1999, we entered into a $90.0 million credit facility (the 1999
Credit Facility). Proceeds from the 1999 Credit Facility were used to repay the
prior credit facility and working capital needs. We reported an extraordinary,
non-cash charge of approximately $1.7 million, or $(0.42) per diluted share,
related to unamortized financing costs associated with the prior credit
facility.
INTEREST EXPENSE AND OTHER
Interest expense and other increased by 115% to $19.8 million from $9.2 in
1998. Interest expense increased by $8.7 million from $9.1 million in 1998 to
$17.8 million due to increased debt incurred during 1999. Included in interest
expense and other is $1.7 million of loss on disposal of assets in connection
with our centralization initiatives.
NET INCOME (LOSS)
We incurred a net loss of $50.2 million, or $(12.33) per diluted share, for
the year ended December 31, 1999 before the extraordinary item discussed above.
After the extraordinary item, net loss for the year ended December 31, 1999 was
$51.9 million, or $(12.75) per diluted share. Net income for the year ended
December 31, 1998 was $1.7 million, or $0.38 per diluted share, before the
extraordinary item discussed below. After the extraordinary item, net income for
the year ended December 31, 1998 was $0.6 million, or $0.13 per diluted share.
INCOME (LOSS) FROM OPERATIONS AND EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION, AND AMORTIZATION (EBITDA)
Loss from operations was $34.7 million for the year ended December 31,
1999, a decrease of $47.0 million, over income from operations of $12.3 million
for the year ended December 31, 1998. Earnings (loss) before interest, taxes,
depreciation, and amortization ("EBITDA") was $(15.5) million for the year ended
December 31, 1999, a decrease of $33.0 million over EBITDA of $17.5 million for
the year ended December 31, 1998. EBITDA is not intended to represent net cash
18
<PAGE>
provided by operating activities as defined by generally accepted accounting
principles and should not be considered as an alternative to net income as an
indicator of operating performance or to net cash provided by operating
activities as a measure of liquidity. We believe EBITDA is a measure commonly
reported and widely used by analysts, investors, and other interested parties
who monitor business performance. Accordingly, we have disclosed this
information to permit a more complete comparative analysis of our operating
performance.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales for the year ended December 31, 1998 were $83.4 million as
compared to 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; European Touch and
European Touch Spa 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 were $39.0 million, or 46.8% of net sales, for the year ended
December 31, 1998, as compared to cost of sales of $16.8 million, or 46.0% of
net sales, during the year ended December 31, 1997.
GROSS PROFIT
We realized gross profit of $44.4 million, or 53.2% of net sales, for the
year ended December 31, 1998, as compared to gross profit of $19.7 million, or
54.0% of net sales, for the year ended December 31, 1997. Our increases in
sales, cost of sales, and gross profit were the results of acquisitions made
during 1998 and accordingly are not comparable to similar categories in 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 our 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, we announced that we would centralize our operations
in Scottsdale, Arizona and outsource segments of our production and warehousing
functions. These initiatives are part of the further integration and
consolidation of our acquired businesses with the goal of obtaining additional
operating efficiencies and positioning us for internal growth. We also announced
that we would take advantage of new capabilities in computer technologies by
combining the reengineering of our business processes with an Enterprise
Resource Planning information technology transformation, which we expect will
improve operating efficiencies and customer service.
These initiatives took place during the fourth quarter of 1998 and
throughout 1999. In connection with the centralization and business process
reengineering activities, we anticipated approximately $1.5 million (before
income taxes) in non-recurring reengineering costs, which were reflected in our
income statement as incurred. Over the same period, we invested approximately
$3.0 million in capital expenditures related to our information technology
transformation. The costs of reengineering and information technology were
accounted for under recently issued accounting pronouncements, Emerging Issues
19
<PAGE>
Task Force Issue No. 97-13, "Accounting for Costs Incurred In Connection With a
Consulting Contract or an Internal Project that Combines Business Process
Reengineering and Information Technology Transformation," Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and Statement of Position 95-3, "Recognition of Liabilities In
Connection with a Purchase Business Combination."
EXTRAORDINARY ITEM
In June 1998, we issued $100.0 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 our then existing
$75.0 million 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 credit facility.
NET INCOME
We 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%, 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%, 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. We believe EBITDA is a measure
commonly reported and widely used by analysts, investors, and other interested
parties who monitor business performance. Accordingly, we have disclosed this
information to permit a more complete comparative analysis of its operating
performance.
SEASONALITY
We have experienced moderate seasonality in quarterly operating results due
mainly to the effect of the seasonality of the indoor tanning season on the
operating results of the Body Drench and Suntopia product lines.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position decreased to a deficit of $46.8 million at
December 31, 1999 from $30.6 million at December 31, 1998. The decrease of $77.4
million is primarily due to default on the 1999 Credit Facility resulting in
current classification of outstanding debt and operating losses incurred during
the year. Our working capital position at December 31, 1998 was primarily the
result of the completion of the acquisitions completed during 1998 and our
results of operations for the year ended December 31, 1998.
As of December 31, 1999, our cash and equivalents were $1.2, a decrease of
$2.8 million from December 31, 1998. Cash used in operations for the year ended
December 31,1999 was $28.1 million compared to $6.8 million during 1998. Cash
used in operating during 1999 was primarily attributable to our net loss and an
increase in inventory partially offset by non-cash items such as provision for
uncollectable accounts, valuation allowance for deferred taxes, impairment of
goodwill and depreciation and amortization.
Cash used in investing activities during the year ended December 31, 1999
was $2.1 million compared to $6.9 million during 1998. Cash used in investing
activities for the year ended December 31, 1999 included acquisition of
additional shares of Ft. Pitt Acquisition, Inc. for $359,000 in cash and an
investment of $4.1 million in our information technology transformation system,
20
<PAGE>
partially offset by an increase in bank overdraft of $2.2 million at December
31, 1999. The information technology transformation was completed during 1999
and we do not anticipate any further significant investment during 2000.
Cash provided by financing activities during the year ended December 31,
1999 was $27.4 million compared to $76.6 million during 1998.
In June 1999, we entered into a $90.0 million credit facility (the 1999
Credit Facility) maturing on June 30, 2004 that bears variable interest,
determined at prime plus 1.75% averaging 9.5% during 1999, payable monthly. All
outstanding amounts on the 1999 Credit Facility were at an interest rate of
10.25% at December 31, 1999. The proceeds were used to repay the 1998 Credit
Facility ($58.2 million) and for working capital purposes ($29.4 million). The
1999 Credit Facility is collateralized by substantially all of our assets. We
issued $100 million of Notes in June 1998. Interest payments are due on January
and July 1 of each year with the principal due upon maturity. As of December 31,
1999, the Company was not in compliance with certain financial and non-financial
covenants of the Notes and the 1999 Credit Facility.
During July 2000 we entered into the Restructuring Agreement with 81% of
the bondholders of the Notes. The Restructuring Agreement requires that all $100
million of the Notes be converted into equity and includes a provision that
allows us to effect the debt-for-equity exchange through a plan of
reorganization that would be effected through a voluntary filing under Chapter
11 of the Bankruptcy Code. On August 31, 2000, we filed a voluntary petition
under Chapter 11 of the Bankruptcy Code. The bankruptcy case was filed in order
to implement the financial restructuring pursuant to the Restructuring
Agreement. We anticipate that 100% of the Notes will convert into 90% of our
equity after we emerge from bankruptcy pursuant to the Restructuring Agreement.
The current stockholders and management will each receive 5% of our post
bankruptcy equity plus warrants to acquire an additional 9% of such equity over
five years.
Our plan of reorganization is subject to approval by the Bankruptcy Court
and there is no certainty that our plan will succeed. We believe despite the
financial uncertainties in the near future, we have developed a business plan
that if successfully funded and executed as part of the restructuring can
improve our operating results. We will need to secure additional financing or
renegotiate our existing credit facility, which we are in default of, to execute
our plan. We cannot assure you that we will secure adequate financing on
favorable terms, if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND
DERIVATIVE COMMODITY INSTRUMENTS. At December 31, 1999, we 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. We hold no investment securities that
would require disclosure on market risk.
PRIMARY MARKET RISK EXPOSURES. Our primary market risk exposures are in the
areas of interest rate risk and foreign currency exchange rate risk. We incur
interest expense on loans made under the Notes at an interest rate, which is
fixed, for a maximum of ten years. At December 31, 1999, our outstanding
borrowings on the Notes were $100 million, at an interest rate of 10.875%. We
also incur interest on loans made under a revolving line of credit at a variable
interest rate which was 10.25% at the end of 1999. At December 31, 1999, the
Company's total outstanding borrowings on the instrument was approximately $68.8
million.
Substantially all of our business outside the United States is conducted in
U.S. dollar denominated transactions. We have a sales division located in the
United Kingdom. Some of the expenses of this foreign subsidiary are denominated
in the British pound sterling. These expenses include local salaries and wages,
utilities, and some operating supplies. However, we believe that the operating
expenses currently incurred in foreign currency are immaterial, and therefore
any associated market risk is unlikely to have a material adverse effect on the
Company's business, results of operations, or financial condition.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers.
NAME AGE POSITION
---- --- --------
Sam L. Leopold .............. 46 Chairman of the Board, President, and
Chief Executive Officer
James Yeager ................ 50 Executive Vice President, Chief Financial
Officer, Treasurer, and Secretary
Allen J. Smith............... 60 Executive Vice President - Sales
Paula Malloy................. 42 Executive Vice President - Marketing
James A. Brooks ............. 70 Director
Peter W. Burg ............... 45 Director
Michael H. Feinstein ........ 65 Director
SAM L. LEOPOLD, a founder of our company, has served as our Chairman of the
Board and Chief Executive Officer since our incorporation in June 1995 and as
our President since February 1998. Mr. Leopold previously owned and served as
President and Chairman of Beauty Boutique International, which was founded in
1990 and operated three retail beauty salons in Arizona. From 1986 to 1991, Mr.
Leopold served as Executive Vice President of Consumer Beauty Supply, Inc. (dba
Beauty Express), a mall-based retail chain of beauty supply salons. During that
time, Mr. Leopold was responsible for day-to-day operations and oversaw the
growth and development of Beauty Express from fewer than 20 retail salons to
more than 50 retail salons. From 1989 to 1991, Mr. Leopold served as President
of Avanti International, Inc. and developed a line of hair care products.
JAMES YEAGER has served as Executive Vice President, Chief Financial
Officer, Treasurer, and Secretary since June, 2000. Prior to joining us, Mr.
Yeager served as Vice President-Finance, Secretary and Treasurer of Main Street
and Main Incorporated, a publicly held company and the world's largest
franchisee of T.G.I. Friday's restaurants, from January 1999 until May, 2000 and
as their Corporate Controller from June 1997 to January 1999. Mr. Yeager was
Chief Financial Officer of Restaurants of America, Inc., a multiple concept
restaurant company. Prior to that, he was Chief Financial Officer of an
engineering and high-tech manufacturing company, a multi-office law firm, a 160
unit chain of retail drug stores, a 60 unit chain of retail drug stores, and a
full-service real estate investment and management company. Mr. Yeager began his
career as a manager and a partner in a local public accounting firm in Dallas,
Texas where he worked from 1972 to 1983.
ALLEN J. SMITH was named Executive Vice President -- Sales during August
1999. Prior to that, Mr. Smith served as our Senior Vice President -- Operations
from November 1998 to August 1999. Mr. Smith served as Vice President of Company
Owned Distribution at Sebastian International from September 1996 to November
1998, and as General Manager, Northern California of that company during
September 1993 to September 1996.
PAULA MALLOY was named Executive Vice President -- Marketing during August
1999. Prior to that, Ms. Malloy served as our Vice President -- Education and
New Product Development from November 1998 to August 1999. Ms. Malloy has also
served as Senior Director -- Education and Research & Development of Sebastian
International from November 1997 to November 1998, and as Director of Education
of that company from April 1995 to November 1997.
JAMES A. BROOKS has served as a director of our company since September
1996. Mr. Brooks has been President of Signe Inc., a management consulting firm
for major consumer product companies and a variety of salon industry companies,
since founding that company in December 1984. Mr. Brooks served as Senior Vice
President of Sales and Marketing of Lamaur, Inc. from 1983 to 1984, at that time
a publicly traded company listed on the New York Stock Exchange and a leading
domestic producer and marketer of a broad range of hair care products. Mr.
Brooks served as Senior Vice President of Sales and Marketing of Redken
Laboratories, Inc. from 1977 to 1983.
22
<PAGE>
PETER W. BURG has served as a director of our company since February 1997.
Mr. Burg has been a director and shareholder in the law firm of Burg Simpson
Eldredge Hersh & Houliston, P.C. (and its predecessor Burg & Aspinwall, P.C.)
since October 1984.
MICHAEL H. FEINSTEIN has served as a director of our company since June
1997. Mr. Feinstein is the Chief Financial Officer of AutoTradeCenter.com, a
public company engaged in the business of wholesale remarketing of used
automobiles and trucks both through land based operations and the Internet. Mr.
Feinstein served as President and Chief Executive Officer of Automated
Solutions, Inc., a privately held Arizona company, from July 1998 until October
1999. Mr. Feinstein also serves as a director of Automated Solutions, Inc. Mr.
Feinstein served as a consultant to Samoth Capital Corporation, a publicly owned
real estate company, from April 1998 to July 1998. Mr. Feinstein served as
Senior Vice President and Chief Financial Officer of Monaco Finance, Inc., a
publicly held specialty finance company, from July 1995 to April 1998. From
September 1993 to July 1995, Mr. Feinstein served initially as Executive Vice
President and subsequently as acting President and Chief Executive Officer of
American Southwest Financial Corporation, which engages in the securitization
and administration of mortgage-backed bonds and certificates. From January 1983
through September 1993, Mr. Feinstein served in various senior management
positions, including, at different times, Chief Financial Officer, Treasurer,
Chief Operating Officer, and Executive and Senior Vice President of Asset
Investors Corporation, a New York Stock Exchange-listed Real Estate Investment
Trust (REIT), and MDC Holdings Inc., a New York Stock Exchange-listed national
homebuilder. Prior to 1983, Mr. Feinstein was a partner in the public accounting
firm now known as Deloitte & Touche.
Directors hold office until their successors have been elected and
qualified. Officers serve at the pleasure of the Board of Directors. There are
no family relationships among any of our directors or officers.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered in all capacities to us for the fiscal years ended December 31, 1997,
1998, and 1999 by our Chief Executive Officer and our other most highly
compensated officer whose aggregate cash compensation exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------------ UNDERLYING COMPENSATION
YEAR SALARY($)(1) BONUS($) OPTIONS(#)(2) ($)(3)
---- ------------ -------- ------------- ------
<S> <C> <C> <C> <C> <C>
SAM L. LEOPOLD ................... 1999 $300,900 $ -- -- $5,000
Chairman of the Board, Chief 1998 $200,000 $280,000 325,000(4) $3,750
Executive Officer, and 1997 $150,000 -- 200,000 --
President
RICHARD R. ROSS(5) ............... 1999 $166,005 $ -- -- $3,340
Executive Vice President, Chief 1998 $150,000 $122,500 125,000(6) $1,563
Financial Officer, Treasurer, 1997 $ 86,667 -- 79,530 --
and Director
ALLEN SMITH ...................... 1999 $176,150 -- 10,000 $3,116
Executive Vice President-Sales 1998 $ 21,632 -- -- --
PAULA MALLOY ..................... 1999 $124,000 -- 7,000 $1,654
Executive Vice
President-Marketing 1998 $ 14,449 -- -- --
</TABLE>
----------
(1) Other annual compensation did not exceed 10% of the total salary and bonus
for any of the Named Executive Officers.
23
<PAGE>
(2) The exercise prices of all stock options granted were equal to the fair
market value of our common stock on the date of grant.
(3) Amounts shown for fiscal 1998 represent matching contributions made by us
to our 401(k) Plan.
(4) Includes 125,000 options that were cancelled in December 1998.
(5) Mr. Ross resigned from his position in March 2000.
(6) Includes 50,000 options that were cancelled in December 1998.
OPTION GRANTS
The following table sets forth certain information regarding options
granted to the Named Executive Officers during the fiscal year ended December
31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------- ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------
GRANTED(#)(1) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
------------- ----------- ------------ ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Sam L. Leopold ..... -- -- -- -- -- --
Richard R. Ross .... -- -- -- -- -- --
Allen Smith ........ 10,000 14.2% 10.13 8/12/09 63,700 161,400
10,000 14.2% 10.13 8/12/09 63,700 161,400
Paula Malloy ....... 8,000 11.3% 10.13 8/12/09 50,960 129,120
</TABLE>
----------
(1) The options were granted at the fair market value of the shares on the date
of grant and have 10-year terms. One-third of the options vest and become
exercisable on each of the first, second, and third anniversaries of the
date of grant.
(2) Calculated from a base price equal to the exercise price of each option,
which was the fair market value of the common stock on the date of grant.
Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the SEC and do not represent our estimate
or projection of the future price of our common stock. Actual gains, if
any, on stock option exercises will depend upon the future market prices of
our common stock.
OPTION EXERCISES AND HOLDINGS
The following table represents information on options exercised in the last
fiscal year by the Named Executive Officers and the value of each such officer's
unexercised options at December 31, 1999.
24
<PAGE>
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY OPTIONS
SHARES VALUE OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2)
ACQUIRED ON REALIZED ------------------------------ --------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sam L. Leopold -- -- 233,334 166,666 $ -- $ --
Richard R. Ross -- -- 69,386 80,144 $ -- $ --
Allen Smith -- -- -- 20,000 $ -- $ --
Paula Malloy -- -- -- 8,000 $ -- $ --
</TABLE>
----------
(1) Calculated based on the market price at exercise multiplied by the number
of options exercised less the total exercise price of the options
exercised.
(2) The exercise prices of all options held by the Named Executive Officers are
greater than or equal to the closing sales price per share of the common
stock as quoted on the Nasdaq National Market on November 29, 1999 when our
common stock was delisted.
EMPLOYMENT AGREEMENTS
Our employment agreement with Mr. Leopold provides for Mr. Leopold to serve
as our Chairman of the Board, President, and Chief Executive Officer through May
2004. Mr. Leopold will receive a base salary of $375,000 per annum, subject to
annual review by the Compensation Committee beginning July 1, 2001. The
employment agreement will be automatically renewed for successive five-year
terms.
In the event of Mr. Leopold's death, at any time and from time to time
during the 12-month period thereafter, his beneficiary will have the right to
require us to repurchase any or all of our common stock owned by Mr. Leopold at
the time of his death at their aggregate closing market price as of the date of
the election to sell. We will not, however, be obligated to purchase any shares
to the extent that the aggregate purchase price of all of the shares exceeds
$5.0 million, or if any such purchase would cause us to become insolvent or
would result in an event of default under any of our loan or credit agreements.
In the event that we cannot purchase all of such shares, Mr. Leopold's
beneficiary may request us to register such stock to enable the beneficiary to
sell the shares to the public.
Mr. Leopold may not
- compete with us during the term of the employment agreement and for a
five-year period after its termination,
- take actions intended to solicit our employees to terminate their
employment relationship with us during the term of the employment
agreement and for a two-year period after its termination, and
- at any time make unauthorized use or disclosure of our confidential
information.
Immediately prior to a change of control of our company, Mr. Leopold will
receive an amount equal to five times his then-current salary plus an amount
equal to five times any incentive compensation paid to him for the prior fiscal
year, both payable in a single sum. In addition, Mr. Leopold will receive
- continuation of all of his benefits that he received from us, unless
he becomes eligible for any equivalent benefits provided by another
employer, and
- outplacement services selected by him with a value of up to 12 months
salary.
25
<PAGE>
Mr. Leopold may expressly waive any of the payments above as a precondition
to a change of control of our company. If his employment is terminated within
the three-year period immediately after such change of control, however, he will
be entitled to receive such benefits as of the date of his termination. Any
payments made under the change of control agreement will be reduced on a
dollar-for-dollar basis to the extent that we are required to make any payments
under the severance provisions of the employment agreement. Mr. Leopold's change
of control agreement also provides for a gross-up for the excise tax on any
amounts that are treated as excess parachute payments under the Internal Revenue
Code.
In the event of a change of control, Mr. Leopold will have the right to
exercise any outstanding option to purchase our common stock, whether or not
such option is vested. If Mr. Leopold is not able to sell all of his shares of
our common stock at the same price as other stockholders, Mr. Leopold may
request us to register such stock to enable him to sell the shares to the
public. In the event that the net proceeds received by Mr. Leopold in connection
with such sale to the public is less than the highest per share consideration
received by any other stockholder for his or her shares of our common stock in
connection with the change of control, we will pay Mr. Leopold an amount per
share equal to the difference between the maximum per share consideration
received by any stockholder, and the average per share price received by Mr.
Leopold.
The Internal Revenue Code currently limits the deductibility for federal
income tax purposes of compensation paid to our five most highly compensated
executive officers. We may deduct certain types of compensation paid to any of
these individuals only to the extent that such compensation during any fiscal
year does not exceed $1.0 million. Certain provisions of the employment and
change of control agreements, if triggered, could limit our ability to deduct
compensation paid to Mr. Leopold and our other executive officers.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan, as amended, (the 1996 Plan) provides for the
grant of options to purchase shares of our common stock. The 1996 Plan is
intended to promote our interests by providing key employees, members of our
board of directors, consultants, and independent contractors who provide
valuable services to us with the opportunity to acquire, or otherwise increase,
their proprietary interest in our company as an incentive to remain in service
to us.
The 1996 Plan is divided into the discretionary grant program and the
automatic option program. The discretionary grant program provides for the
granting of options to acquire our common stock, the direct granting of our
common stock, the granting of stock appreciation rights, or the granting of
other cash awards. Options and awards under the 1996 Plan may be issued to
executives, key employees, and others providing valuable services to us or our
subsidiaries. Options issued under the 1996 Plan may be incentive stock options
or nonqualified stock options. The automatic option program provides for the
automatic grant of options to acquire our common stock granted to members of our
board of directors who are not employed by us.
An aggregate of 1,000,000 shares of our common stock may be issued under
the 1996 Plan. If any change is made in the stock subject to the 1996 Plan, or
subject to any option or award granted under the 1996 Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, split-up,
combination of shares, exchange of shares, change in corporate structure, or
otherwise), the 1996 Plan provides that appropriate adjustments will be made as
to the maximum number of shares subject to the 1996 Plan and the number of
shares and exercise price per share of stock subject to outstanding options and
awards. The 1996 Plan will remain in force until September 2006.
To the extent that granted options are incentive stock options, the terms
and conditions of those options must be consistent with the qualification
requirements set forth in the Internal Revenue Code of 1986. Options that are
incentive stock options may be granted only to our key personnel (and our
subsidiaries) who are also our employees (or our subsidiaries). The maximum
number of shares of stock with respect to which options or stock appreciation
rights may be granted to any employee during the term of the 1996 Plan may not
exceed 50% of the shares of stock covered by the 1996 Plan.
To exercise an option, the optionholder will be required to provide us
written notice of his or her election to exercise the option and deliver to us
full payment of the exercise price for the number of shares as to which the
option is being exercised. Generally, options can be exercised by delivery of
cash, check, or shares of our common stock.
26
<PAGE>
Awards granted in the form of stock appreciation rights entitle the
recipient to receive a payment equal to the appreciation in market value of a
stated number of shares of common stock from the price stated in the award
agreement to the market value of the common stock on the date first exercised or
surrendered. Awards granted in the form of stock awards entitle the recipient to
receive common stock directly. Cash awards entitle the recipient to receive
direct payments of cash depending on the market value or the appreciation of our
common stock or other securities.
Under the automatic option program, each new independent member of our
board of directors automatically will receive an option to acquire 5,000 shares
of common stock on the date of his or her first appointment or election to our
board of directors. In addition, each year at the meeting of our board of
directors held immediately after our annual meeting of stockholders, each
independent member of our board of directors automatically will be granted an
option to acquire an additional 2,500 shares of common stock. Each automatic
option will become exercisable and vest on the first anniversary of the
applicable grant date. An independent member of the board of directors is not
eligible to receive an annual automatic option if the grant date is within 90
days of such independent member receiving an initial automatic option. The
exercise price per share of common stock subject to each automatic option is
equal to 100% of the fair market value per share on the date of the grant. If an
independent director ceases to serve as a director, all automatic options that
are not vested as of the date of cessation will immediately terminate.
1998 EMPLOYEE STOCK OPTION PLAN
The purpose of the 1998 Employee Stock Option Plan (the "1998 Plan") is to
further our interests and our stockholders by encouraging employees associated
with us to acquire shares of our common stock, thereby acquiring a proprietary
interest in its business and an increased personal interest in its continued
success and progress. The 1998 Plan provides for the grant of nonqualified
options to acquire our common stock.
A maximum of 150,000 shares of common stock may be issued under the 1998
Plan. If any option expires or terminates without having been exercised in full,
stock not issued under such option will again be available for the purposes of
the 1998 Plan. If shares of stock are used to pay for the exercise price, those
shares will be added to the shares available under the 1998 Plan. If any change
is made in the stock subject to the 1998 Plan or subject to any option granted
under the 1998 Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, split-up, combination of shares, exchange of
shares, change in corporate structure, or otherwise), the 1998 Plan provides
that appropriate adjustments will be made as to the maximum number of shares
subject to the 1998 Plan and the number of shares and exercise price per share
of stock subject to outstanding options. The 1998 Plan will remain in effect
until May 4, 2008.
Options may be granted under the 1998 Plan only to persons who at the time
of grant are our employees or consultants. Any executive officer (as that term
is defined in Rule 16a-1(f) under the Exchange Act) or director, and all persons
who own 10% or more of our issued and outstanding stock are not eligible to
receive options under the 1998 Plan.
To exercise an option, the optionholder will be required to provide us
written notice of his or her election to exercise the option and deliver to us
full payment of the exercise price for the number of shares as to which the
option is being exercised. Generally, options can be exercised by delivery of
cash, check, or shares of our common stock.
As of September 30, 2000, 100,000 shares of common stock have been issued
upon exercise of options granted under the 1996 Plan and 1998 Plan and there
were 800,000 options outstanding under the 1996 Plan and the 1998 Plan.
27
<PAGE>
401(k) PROFIT SHARING PLAN
In April 1998, we established a defined contribution plan that qualifies as
a cash or deferred profit sharing plan under Sections 401(a) and 401(k) of the
Internal Revenue Code. Under the 401(k) plan, participating employees may defer
from 1% to 20% of their pre-tax compensation, subject to the maximum allowed
under the Internal Revenue Code. We will contribute $1.00 for each dollar
contributed by the employee, up to a maximum contribution of 4% of the
employee's contribution. In addition, the 401(k) plan provides that we may make
an employer profit sharing contribution in such amounts as may be determined by
our board of directors. Our matching contributions vest 25% each year the
employee remains in service, and employees will be fully vested after four years
of service. If the employee terminates service to us, any unvested portion of
our matching contribution will remain in the 401(k) plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock on August 31, 2000 by (1) each
director; (2) each executive officer; (3) all our directors and executive
officers as a group; and (4) each person known by us to be the beneficial owner
of more than 5% of our common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER(1) OWNED(1)(2) PERCENT
--------------------------- ----------- -------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Sam L. Leopold............................................... 1,182,851(3) 26.9%
James Yeager................................................. -- *
Allen Smith.................................................. -- *
Paula Malloy................................................. -- *
James A. Brooks.............................................. 2,500(4) *
Peter W. Burg................................................ 16,075(5) *
Michael H. Feinstein......................................... 7,500(4) *
Directors and executive officers as a group (nine persons)... 1,208,926(6) 28.0%
5% STOCKHOLDERS:
Lance Laifer................................................. 722,800(7) 17.8%
Friedman, Billings, Ramsey Group, Inc. ...................... 421,800(8) 10.4%
Hilltop Partners, L.P........................................ 363,100(7) 8.9%
Wentworth, Hauser & Violich.................................. 312,175(9) 7.3%
Putnam Investments, Inc...................................... 248,963(10) 6.1%
Jon D. Gruber................................................ 248,000(11) 6.1%
J. Patterson McBaine......................................... 229,300(11) 5.6%
David L. Babson Company Incorporated 216,600(12) 5.3%
</TABLE>
----------
* Less than one percent
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. Except as otherwise indicated, each of such
persons may be reached through our offices at 7400 East Tierra Buena Lane,
Scottsdale, Arizona 85260.
(2) The percentages shown are calculated based upon 4,068,170 shares of common
stock outstanding on August 31, 2000. The numbers and percentages shown
include the shares of common stock actually owned as of August 31, 2000 and
the shares of common stock that the person or group had the right to
acquire within 60 days of August 31, 2000. In calculating the percentage of
28
<PAGE>
ownership, all shares of common stock that the identified person or group
had the right to acquire within 60 days of August 31, 2000 upon the
exercise of options are deemed to be outstanding for the purpose of
computing the percentage of the shares of common stock owned by such person
or group, but are not deemed to be outstanding for the purpose of computing
the percentage of the shares of common stock owned by any other person.
(3) Includes 325,000 shares of common stock issuable upon the exercise of stock
options.
(4) Represents shares of common stock issuable upon the exercise of stock
options.
(5) Includes 10,000 shares of common stock issuable upon the exercise of stock
options.
(6) Includes 345,000 shares of common stock issuable upon the exercise of stock
options.
(7) Mr. Laifer, as the President, sole director, and principal stockholder of
Laifer Capital Management, Inc., may be deemed to be the beneficial owner
of 363,100 shares of common stock beneficially owned by Laifer Capital
Management, Inc. in its capacity as General Partner and Investment Advisor
to Hilltop Partners, L.P., and 359,700 shares of common stock beneficially
owned by Laifer Capital Management, Inc. in its capacity as Investment
Advisor to various other clients. These clients include (i) various Wolfson
family entities, and (ii) Hilltop Offshore Limited. Laifer Capital
Management, Inc. has sole voting and dispositive power with respect to the
363,100 shares of common stock beneficially owned by Hilltop Partners, L.P.
Laifer Capital Management, Inc. also has sole voting and dispositive power
with respect to 49,200 shares of common stock owned by Hilltop Offshore
Limited and shared voting and dispositive power with respect to 310,500
shares of common stock beneficially owned by the various Wolfson family
entities. The address of Mr. Laifer and Hilltop Partners, L.P. is 45 West
45th Street, New York, NY 10036. Beneficial ownership information is based
upon a Schedule 13D/A filed with the SEC dated as of January 8, 1999.
(8) Friedman, Billings, Ramsey Group, Inc.'s principal address is 1001 19th
Street North, Arlington, VA 22209-1710. Beneficial ownership information is
based upon a Schedule 13D/A filed with the SEC dated as of June 12, 2000.
(9) Wentworth, Hauser & Violich's principal address is 333 Sacramento St., San
Francisco, CA 94111. Beneficial ownership information is based upon a
Schedule 13D/A filed with the SEC dated as of March 17, 2000.
(10) Represents shares of common stock beneficially owned by Putnam Investments,
Inc. ("PI"), a wholly owned subsidiary of Marsh & McLennan Companies, Inc.
("M&MC"), each of which is a registered investment adviser. All of such
shares are beneficially owned by subsidiaries of PI that are registered
investment advisers. PI has shared dispositive power with respect to all of
such shares, and shared voting power with respect to 10,263 of such shares.
PI and M&MC disclaim beneficial ownership of such shares, and disclaim any
power to vote or dispose of such shares. PI's principal address is One Post
Office Square, Boston, Massachusetts, 02109. Beneficial ownership
information is based upon a Schedule 13G filed with the SEC dated as of
February 11, 1999.
29
<PAGE>
(11) Represents shares of common stock beneficially owned by Jon D. Gruber and
J. Patterson McBaine in their capacities as the sole directors and
executive officers of Gruber and McBaine Capital Management and various
other entities controlled by Messrs. Gruber and McBaine. Mr. Gruber has
shared voting power and shared dispositive power with respect to 217,300 of
such shares, and sole voting power and sole dispositive power with respect
to 30,700 of such shares. Mr. McBaine has shared voting power and shared
dispositive power with respect to 217,300 of such shares, and sole voting
power and sole dispositive power with respect to 12,000 of such shares. The
principal address of Messrs. Gruber and McBaine is 50 Osgood Place,
Penthouse, San Francisco, California, 94133. Beneficial ownership
information is based upon a Schedule 13G filed with the SEC dated as of
December 9, 1997.
(12) David L. Babson and Company Incorporated's principal address is One
Memorial Drive, Cambridge, MA 02412-1300. Beneficial ownership information
is based upon a Schedule 13D/A filed with the SEC dated as of February 10,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
30
<PAGE>
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)
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(9)
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedules
31
<PAGE>
----------
(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.
(9) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Commission on March
31, 1999.
32
<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.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Sam L. Leopold Chairman of the Board, President, October 20, 2000
------------------------ and Chief Executive Officer ----------------
Sam L. Leopold (Principal Executive Officer)
/s/ James Yeager Executive Vice President, 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
33
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
----
Consolidated Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Financial Statement Schedule
Valuation and Qualifying Accounts at December 31, 1997, 1998 and 1999 F-30
<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, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
three years in the period ended December 31, 1999. 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.
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,
1998 and 1999, and the results of its operations and its cash flows for the
years ended December 31, 1997, 1998, and 1999 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred substantial operating losses and
net cash outflows in 1999. On August 31, 2000, the Company filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code to restructure
its debt. Additionally, the Company is subject to several lawsuits and a
Securities and Exchange Commission investigation as described in Note 12. These
factors, among others, raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. In the event a plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Company's ability to
achieve successful future operations. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II listed in Item 14 of Part IV
herein is presented for purposes of complying with the Securities and Exchange
Commission's rules and are not a part of the basic financial statements. This
schedule 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-1
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except for share data)
DECEMBER 31,
----------------------
1998 1999
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,023 $ 1,195
Accounts receivable, net of allowance for
doubtful accounts of $1,786 and $10,875 24,812 11,403
Inventories, net 25,599 33,767
Prepaid expenses and other current assets 1,375 2,129
--------- ---------
Total current assets 55,809 48,494
Property and Equipment, net 5,362 5,702
Goodwill and Other Intangibles, net of accumulated
amortization of $5,188 and $10,378 139,566 120,468
Other Assets 13,336 5,731
--------- ---------
$ 214,073 $ 180,395
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank overdraft $ -- $ 2,189
Accounts payable 12,108 11,168
Accrued liabilities 10,367 10,841
Current portion of long-term debt and other 2,768 71,106
--------- ---------
Total current liabilities 25,243 95,304
--------- ---------
Deferred Income Taxes 19,216 5,901
Long-Term Debt and Other, less current portion 140,366 101,801
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, $.0001 par value, 1,000,000
shares authorized, no shares issued and
outstanding -- --
Common stock, $.0001 par value, 10,000,000 shares
authorized, 4,876,000 shares issued and 4,068,000
shares outstanding at December 31, 1998, and 1999 1 1
Additional paid-in capital 29,038 29,048
Retained earnings (accumulated deficit) 2,009 (49,860)
Treasury stock, 808,000 shares (1,800) (1,800)
--------- ---------
Total stockholders' equity (deficit) 29,248 (22,611)
--------- ---------
$ 214,073 $ 180,395
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations for the Year Ended December 31
(in thousands except for share data)
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales $ 36,505 $ 83,366 $ 107,790
Cost of Sales 16,756 38,998 53,966
----------- ----------- -----------
Gross profit 19,749 44,368 53,824
----------- ----------- -----------
Selling, General, and Administrative Expenses 12,201 31,619 73,653
Goodwill Impairment -- -- 13,438
Centralization and Reengineering Costs -- 422 1,406
----------- ----------- -----------
12,201 32,041 88,497
----------- ----------- -----------
Income (Loss) from Operations 7,548 12,327 (34,673)
Interest Expense and Other, net (1,847) (9,206) (19,771)
----------- ----------- -----------
Income (Loss) Before Extraordinary Item and
Income Taxes 5,701 3,121 (54,444)
Provision for (Benefit from) Income Taxes 2,537 1,470 (4,288)
----------- ----------- -----------
Income (Loss) Before Extraordinary Item 3,164 1,651 (50,156)
Extraordinary Item, net of tax benefit of
approximately $882,000, $822,000, and $0,
respectively (1,377) (1,091) (1,713)
----------- ----------- -----------
Net income (loss) $ 1,787 $ 560 $ (51,869)
=========== =========== ===========
Basic Earnings (Loss) per Share:
Income (loss) before extraordinary item $ 0.80 $ 0.41 $ (12.33)
Extraordinary item (0.35) (0.27) (0.42)
----------- ----------- -----------
Net income (loss) $ 0.45 $ 0.14 $ (12.75)
=========== =========== ===========
Weighted average shares 3,949,000 4,033,000 4,068,000
=========== =========== ===========
Diluted Earnings (Loss) per Share:
Income (loss) before extraordinary item $ 0.77 $ 0.38 $ (12.33)
Extraordinary item (0.34) (0.25) (0.42)
----------- ----------- -----------
Net income (loss) $ 0.43 $ 0.13 $ (12.75)
=========== =========== ===========
Weighted average shares 4,113,000 4,313,000 4,068,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS TOTAL
SHARES COMMON PAID-IN (ACCUMULATED TREASURY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT) STOCK EQUITY (DEFICIT)
----- --- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock on
exercise of stock options -- -- 10 -- -- 10
Net loss -- -- -- (51,869) -- (51,869)
----- --- ------- -------- ------- --------
Balance, December 31, 1999 4,068 $ 1 $29,048 $(49,860) $(1,800) $(22,611)
===== === ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows for the Year Ended December 31
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 1,787 $ 560 $(51,869)
Adjustments to reconcile net income (loss) to
net cash used in operating activities-
Impairment of goodwill and
loss on disposal and sale of assets -- -- 16,044
Depreciation and amortization 1,846 5,187 7,786
Interest accretion to note payable 174 159 --
Extraordinary loss on early extinguishment of debt 1,377 1,091 1,713
Provision for uncollectible accounts receivable 710 1,614 13,194
Increase in deferred tax valuation allowance -- -- (10,941)
Changes in assets and liabilities:
Accounts receivable (6,512) (6,252) 215
Inventories, net (2,992) (8,588) (8,168)
Prepaid expenses and other assets (1,730) (2,363) 4,377
Accounts payable and accrued liabilities 2,960 1,807 (467)
-------- -------- --------
Net cash used in operating activities (2,380) (6,785) (28,116)
-------- -------- --------
Cash Flows from Investing Activities:
Increase in bank overdraft -- -- 2,189
Purchase of acquired businesses, net of cash acquired (45,150) (62,677) (359)
Purchases of property and equipment (582) (1,962) (4,127)
Changes in other assets, net -- (4,251) 176
-------- -------- --------
Net cash used in investing activities (45,732) (68,890) (2,121)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from credit facility, net of financing costs 71,633 47,298 87,626
Payments on credit facility -- -- (58,244)
Proceeds from bond offering, net of financing costs -- 96,400 --
Exercise of stock options -- 1,163 10
Payments on long-term debt (24,949) (68,226) (1,983)
-------- -------- --------
Net cash provided by financing activities 46,684 76,635 27,409
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents (1,428) 960 (2,828)
Cash and Cash Equivalents, beginning of year 4,491 3,063 4,023
-------- -------- --------
Cash and Cash Equivalents, end of year $ 3,063 $ 4,023 $ 1,195
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid (refunded) for income taxes $ 1,727 $ 2,634 $ (2,590)
======== ======== ========
Cash paid for interest $ 1,155 $ 3,699 $ 16,239
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION OF THE COMPANY
Styling Technology Corporation (the "Company") was formed in June 1995. From
June 1995 through November 26, 1996, the Company conducted no operations and its
only activities related to negotiating acquisitions and related financing. In
November 1996, the Company completed an initial public offering (the Offering)
of 3,116,000 shares of its common stock. Simultaneously with the consummation of
the Offering, the Company acquired in separate transactions four businesses that
develop, produce, and market professional salon products. Prior to the Offering,
the Company effected a 0.808-for-1 reverse stock split on all its outstanding
common stock. As a result, all share amounts were adjusted to give effect to the
reverse split.
Upon consummation of the Offering, the Company acquired all of the outstanding
stock of Gena Laboratories, Inc. ("Gena") and JDS Manufacturing Co., Inc.
("JDS") and certain assets and liabilities of the Body Drench Division of
Designs by Norvell, Inc. ("Body Drench") and Kotchammer Investments, Inc.
("KII") (collectively, the "Initial Businesses"). The cost of the Initial
Businesses, including direct acquisition costs, was approximately $22.9 million.
The combined purchase price was funded with approximately $20.8 million in cash
from the net proceeds of the Offering, and approximately $2.1 million of seller
carryback financing and issuance of common stock. The acquisitions were
accounted for using the purchase method of accounting. The purchase price was
allocated based on the fair market value of the assets and liabilities acquired.
Approximately $5.2 million was allocated to current assets, approximately $1.1
million to property and equipment, approximately $5.0 million to current
liabilities, and approximately $0.3 million to long-term debt. Approximately
$21.9 million of the purchase price represents costs in excess of fair values
acquired, and was recorded as goodwill.
2. FINANCIAL RESULTS AND LIQUIDITY
During 1999, the Company incurred a $51.9 million loss and used $28.1 million in
cash for operations. As a result of the financial difficulties the Company has
experienced, the Company did not make the required interest payment due July 1,
2000 on its $100 million Senior Subordinated Notes (the Notes) and is not in
compliance with certain provisions of its credit facility (see Note 7).
As of June 28, 2000, as part of the Company's debt restructuring plan, the
Company entered into a binding agreement with 81% of the holders of the Notes to
convert 100% of the Notes into new equity in the Company. The agreement, which
as amended is effective through January 1, 2001, requires that all $100 million
of the Notes be converted to equity in the Company and includes a provision that
allows the Company to effect the 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 its bondholders. If the Note conversion had
occurred at December 31, 1999, stockholders' equity would have been
approximately $77.4 million and total liabilities would have been $103 million.
On August 31, 2000, the Company and its subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code and
began operating its business as debtors-in-possession under the supervision of
the Bankruptcy Court. The Company has attempted to notify all known or potential
creditors of the filing for the purpose of identifying all prepetition claims
against the Company.
In the Chapter 11 case, substantially all of the liabilities as of the filing
date are subject to settlement under a plan of reorganization. Generally,
actions to enforce or otherwise effect repayment of all prepetition liabilities
as well as all pending litigation against the Company are stayed while the
Company continues its business operations as debtors-in-possession. The Company
will file schedules with the Bankruptcy Court setting forth the assets and
liabilities of the debtors as of the filing date as reflected in the Company's
F-6
<PAGE>
accounting records. Differences between amounts reflected in such schedules and
claims filed by creditors will be investigated and amicably resolved or
adjudicated before the Bankruptcy Court. The ultimate amount and settlement
terms for such liabilities are subject to a plan of reorganization, and
accordingly, are not presently determinable.
All financial disclosures after August 31, 2000 will be made in accordance with
SOP 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code." Further, the plan of reorganization may result in the
impairment of certain assets (including goodwill and other intangibles) recorded
at cost on the balance sheet at December 31, 1999.
The accompanying financial statements have been prepared on a going concern
basis that assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the reorganization proceedings, there are uncertainties relating to our ability
to continue as a going concern. The financial statements do not include any
adjustments that might be necessary as a result of the outcome of the
uncertainties discussed above, including the effects of any plan of
reorganization that has been filed.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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. Certain reclassifications have been made in the 1997 and
1998 financial statements to conform to the 1999 presentation.
b. 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.
c. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
net realizable value. Write-downs are provided 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,
----------------------
1998 1999
--------- ---------
Raw materials and work-in-process $ 8,612 $ 9,351
Finished goods 16,987 24,416
--------- ---------
$ 25,599 $ 33,767
========= =========
F-7
<PAGE>
d. 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.
e. 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. During 1999, the company
recognized a $13.4 million impairment related to goodwill for the
Gena, Pro Finish and JDS acquisitions.
f. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant accounting
estimates include establishment of allowance for doubtful accounts,
reserves for sales returns, discounts and allowances, valuation of
excess and obsolete inventory and litigation exposure.
g. 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 of the letters of credit and notes
payable (other than the Senior Subordinated Debt) reflect fair value
as the related fees are competitively determined in the marketplace.
The fair value of the Senior Subordinated Debt is not determinable at
December 31, 1999 because of uncertainties surrounding the Company's
financial reporting and illiquidity in the trading markets for the
notes. See Note 7.
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.
h. 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.
F-8
<PAGE>
i. 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 combined the reengineering of its business
processes with an Enterprise Resource Planning (ERP) information
technology transformation. During the years ended December 31, 1998
and 1999, the Company recorded pre-tax charges of $422,000 and $1.3
million, respectively, 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, during 1998, the Company accrued approximately
$3.5 million in connection with management's plan to close the
facilities of certain businesses acquired during 1998, as prescribed
in EITF 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination. Under this requirement, the Company has accrued
certain costs as part of the acquisitions during 1998, based on a
specific plan identified by management to close these specific
facilities. During 1998 and 1999, the Company charged approximately
$1.5 million and $2.0 million, respectively, 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.
j. LEGAL COSTS
The Company records charges for the costs it anticipates incurring in
connection with litigation and claims against the Company when
management can reasonably estimate these costs.
k. 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.
l. OTHER ASSETS
Other assets consist primarily of the following: (i) deferred
financing costs associated with the Company completing various
financing transactions (see Note 7) and (ii) deferred tax assets (see
Note 9). Deferred financing costs are amortized over the life of the
related obligation. The Company recorded approximately $170,000,
$333,000 and $673,000 in deferred financing cost amortization for the
years ended December 31, 1997, 1998 and 1999, respectively.
m. 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 does not
anticipate any material impact from the adoption of SFAS No. 133 as
amended, on its future results of operations and financial position.
F-9
<PAGE>
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements, which was subsequently updated by SAB 101B. SAB
101 and SAB 101B summarize certain of the SEC's views in applying
accounting principles generally accepted in the United States to
revenue recognition in financial statements. The Company is required
to adopt SAB 101 no later than the fourth quarter of its fiscal year
ending December 31, 2000. The Company is currently evaluating the
impact of the adoption of SAB 101 on its results of operations and
financial position.
n. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share have been computed as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1998
------------------------------- --------------------------------
EFFECT OF EFFECT OF
STOCK STOCK
OPTIONS OPTIONS
BASIC AND DILUTED BASIC AND DILUTED
EPS WARRANTS EPS EPS WARRANTS EPS
------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item $ 3,164 -- $ 3,164 $ 1,651 -- $ 1,651
Extraordinary item, net (1,377) -- (1,377) (1,091) -- (1,091)
------- ------- ------- ------- -------- -------
Net income $ 1,787 -- $ 1,787 $ 560 -- $ 560
======= ======= ======= ======= ======== =======
Weighted Average Shares 3,949 164 4,113 4,033 280 4,313
======= ======= ======= ======= ======== =======
Per share amount -- income
before extraordinary item $ 0.80 $ 0.77 $ 0.41 $ 0.38
Per share amount -
extraordinary item, net (0.35) (0.34) (0.27) (0.25)
------- ------- ------- -------
Per share amount -
net income $ 0.45 $ 0.43 $ 0.14 $ 0.13
======= ======= ======= =======
</TABLE>
1999
--------------------------------
EFFECT OF
STOCK
OPTIONS
BASIC AND DILUTED
EPS WARRANTS EPS
-------- -------- --------
Net loss before extraordinary item $(50,156) -- $(50,156)
Extraordinary item, net (1,713) -- (1,713)
-------- ------ --------
Net loss $(51,869) -- $(51,869)
======== ====== ========
Weighted Average Shares 4,068 -- 4,068
======== ====== ========
Per share amount - net loss before
extraordinary item $(12.33) (12.33)
Per share amount - extraordinary item, net (0.42) (0.42)
-------- --------
Per share amount - net loss $ (12.75) $ (12.75)
======== ========
The calculation of weighted average common and common equivalent shares for
purposes of calculating the 1999 diluted loss per share excludes approximately
43,000 weighted average shares of options computed under the treasury stock
method, as these shares would be anti-dilutive.
F-10
<PAGE>
4. BUSINESS COMBINATIONS
In May 1998, the Company acquired substantially all of the assets and assumed
certain operating liabilities of Pro Finish USA, Ltd. (Pro Finish), a producer
of name-brand professional nail enhancement and nail care products. The Company
paid a purchase price of approximately $5.0 million in cash. 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, and accounted for 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. 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. During 1999, the Company acquired an additional
8,970 shares of Ft. Pitt Acquisition, Inc. stock for $359,000 in cash. As of
December 31, 1999, the Company owned approximately 84.4% of Ft. Pitt
Acquisition, Inc. See Note 12.
The following table summarizes the allocation of purchase price for acquisitions
completed in 1998 (in thousands).
1998
--------
Accounts receivable $ 7,481
Inventories 6,060
Other assets 803
Property and equipment 968
Assumed accounts payable and accrued liabilities (9,563)
Assumed debt (1,716)
--------
Net assets acquired 4,033
Cash paid at closing for purchase price and acquisition costs 62,677
--------
Goodwill and other intangibles $ 58,644
========
The following table depicts, for the year ended December 31, 1998, unaudited pro
forma consolidated information as if all of the companies acquired in 1998 were
acquired on January 1, 1998 (in thousands).
1998
--------
Net sales $108,601
Net income 246
Income per basic share 0.06
Income per diluted share 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 1998, and is not necessarily indicative of future
operating results.
F-11
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in thousands):
USEFUL
LIVES
(YEARS) 1998 1999
------- -------- --------
Land - $ 150 $ --
Building and leasehold improvements 7-40 1,065 504
Machinery and equipment 3-7 1,706 2,160
Furniture and fixtures 7 1,326 262
Computers, vehicles and other 3-5 4,216 4,940
-------- --------
8,463 7,866
Less -- accumulated depreciation (3,101) (2,164)
-------- --------
$ 5,362 $ 5,702
======== ========
The Company recorded approximately $383,000, $1,342,000 and $2,148,000 in
depreciation expense for the years ended December 31, 1997, 1998 and 1999,
respectively, which is included in selling, general and administrative expenses
in the accompanying consolidated statements of operations.
6. ACCRUED LIABILITIES
Accrued liabilities consist of amounts accrued but unpaid as of December 31,
1998 and 1999. Accrued interest at December 31, 1998 and December 31, 1999 was
$5,798,000 and $6,113,000, respectively. Accrued liabilities also include
commissions, professional fees, taxes, payroll, and other liabilities.
7. LONG-TERM DEBT AND OTHER
Long-term debt and other consists of the following (in thousands) at December
31:
1998 1999
--------- ---------
Senior subordinated notes (the Notes), bearing
interest at 10 7/8%, maturing 2008 $ 100,000 $ 100,000
Senior credit facility (the 1998 Credit Facility),
collateralized by substantially all the assets of
the Company, maturing through June 2003, paid in
full during 1999 37,033 --
Senior secured revolving credit facility (the 1999
Credit Facility), collateralized by substantially
all the assets of the Company, maturing through
June 30, 2004 -- 68,789
Seller carryback financing, related to the
acquisition of Ft. Pitt Acquisition, Inc., bearing
interest at 6%, maturing through August 2001 5,000 3,333
Unsecured note payable of Ft. Pitt Acquisition, Inc. 1,101 --
Other -- 785
--------- ---------
143,134 172,907
Less: current portion (2,768) (71,106)
--------- ---------
$ 140,366 $ 101,801
========= =========
F-12
<PAGE>
Aggregate future maturities of long-term debt and other are as follows at
December 31, 1999 (in thousands):
2000 $ 71,106
2001 1,801
2008 100,000
---------
$ 172,907
=========
a. SENIOR CREDIT FACILITIES
In June 1999, the Company entered into a $90 million credit facility
with General Electric Capital Corporation (the "1999 Credit
Facility"). A portion of the proceeds from the 1999 Credit Facility
was used to repay amounts outstanding under the 1998 Credit Facility.
The remaining proceeds of the 1999 Credit Facility were for working
capital purposes. During 1999, the 1999 Credit Facility had variable
interest rates determined at prime plus 1.75% averaging 9.5% and which
were 10.25% at December 31, 1999, payable monthly. The principal is
due upon maturity on June 30, 2004. The 1999 Credit Facility is
collateralized by substantially all of the assets of the Company.
During 1999, the Company reported an extraordinary, non cash charge of
approximately $1.7 million, ($ 0.42) per diluted share, related to
unamortized financing costs associated with the repayment of the 1998
Credit Facility.
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. 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 acquisitions, to repay existing
indebtedness (including the Company's previous credit facility) and
for working capital purposes.
c. DEBT COVENANTS
The Company's 1999 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, 1999, Styling was not in compliance
with all applicable covenants.
The Notes described above are general unsecured obligations of the
Company and are unconditionally guaranteed on a joint and several
basis by all of the Company's wholly owned current and future
subsidiaries (see Note 15). The Company did not make the required
interest payment on July 1, 2000 to the Noteholders of the Notes. As
of June 28, 2000, an agreement was reached with 81% of the Noteholders
to convert all $100 million of the Notes into 90% of the equity of the
Company. The existing shareholders and management will receive 10% of
the new stock to be issued, together with warrants to acquire an
additional 9% of the Company on a fully diluted basis over 5 years.
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.
F-13
<PAGE>
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. See Note 2.
d. INTEREST RATE PROTECTION
In connection with the 1998 Credit Facility, the Company maintained an
interest rate swap and an interest rate cap (the Agreements) to reduce
the impact of changes in interests rates. During 1999, the Agreements
were terminated when the facility was repaid.
8. STOCKHOLDERS' EQUITY
a. 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.
b. 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 anti-dilution 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.
c. 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. Subsequently,
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 1999 to provide up to 1,000,000 incentive and
nonqualified stock options to acquire common stock of the Company to
key personnel and directors of the Company.
During 1998, the Company adopted the 1998 Employee Stock Option Plan,
which provides for the grant of up to 150,000 nonqualified stock
options to acquire common stock of the Company to employees of the
Company.
F-14
<PAGE>
A summary of the status of all the Company's stock options at December
31, 1997, 1998 and 1999 and changes during the years then ended is
presented in the following table:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
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 250,000 $ 3.58 549,000 $ 7.38 794,000 $10.76
Granted 430,000 10.57 694,000 12.83 86,000 10.41
Exercised -- -- (99,000) 1.87 (1,000) 11.38
Canceled (131,000) 10.60 (350,000) 12.09 (79,000) 11.90
-------- ------ -------- ------ -------- ------
Outstanding at end of year 549,000 $ 7.38 794,000 $10.76 800,000 $10.63
======== ====== ======== ====== ======== ======
Exercisable at end of year 136,000 $ 9.71 279,000 $10.10 412,000 $10.36
======== ====== ======== ====== ======== ======
Weighted average fair value
per share of options
granted $ 4.13 $ 5.44 $ 4.36
====== ====== ======
</TABLE>
Options outstanding at December 31, 1999 have exercise prices between
$0.1 and $24.00 approximately 9,000 options have an exercise price of
$0.1 with a remaining average contractual life of 5.5 years, and are
fully vested. 647,480 options have exercise prices between $9.25 and
$12.375 with a remaining average contractual life of 8.2 years, with
vesting between 1 and 5 years. 143,750 options have exercise prices
between $12.375 and $24.00 with a remaining average contractual life
of 8.65 years, with vesting between 1 and 5 years.
The following pro forma disclosures of net income (loss) are made
assuming the Company had accounted for the stock options pursuant to
the provision of SFAS No. 123, Accounting for Stock-Based Compensation
(in thousands except per share data).
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
Income (loss) before extraordinary item
As reported $ 3,164 $ 1,651 $ (50,156)
Pro forma 2,833 849 (51,352)
Diluted EPS - as reported 0.77 0.38 (12.33)
Diluted EPS - pro forma 0.69 0.20 (12.62)
Extraordinary item, net
As reported (1,337) (1,091) (1,713)
Diluted EPS - as reported (0.34) (0.25) (0.42)
Net income (loss)
As reported 1,787 560 (51,869)
Pro forma 1,456 (242) (53,065)
Diluted EPS - as reported 0.43 0.13 (12.75)
Diluted EPS - pro forma 0.35 (0.05) (13.04)
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 1997: 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 two to six years; and a volatility factor of 38.59%.
F-15
<PAGE>
The weighted average assumptions used for grants in 1999 were as
follows: risk-free interest rates of 5.81%, expected lives of 4.67
years; and a volatility factor of 40%. The assumed dividend yield is
zero for 1997, 1998 and 1999.
9. INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31,
1997, 1998 and 1999 consists of the following (in thousands):
1997 1998 1999
------- ------ -------
Current expense $ 2,586 $ -- $ --
Deferred expense (benefit) (49) 1,470 (4,288)
------- ------ -------
Net income tax expense (benefit) $ 2,537 $1,470 $(4,288)
======= ====== =======
The Company's entire net deferred tax asset was offset with a valuation
allowance at December 31, 1999 in light of the uncertain future utilization of
net operating loss carryforwards (NOLCs), tax credit carryforwards and other
future deductions. At December 31, 1999, the Company has regular federal NOLCs
of approximately $35.8 million which will expire, if unused, through 2019.
Should the restructuring described in Note 2 be accomplished, the NOLCs would be
reduced by the differences between the fair market value of equity issued to the
creditors and the amount of the debt that is discharged. The $5.9 million in
deferred tax liabilities at December 31, 1999 represent temporary differences
which will reverse after the NOLCs expire.
The components of the deferred tax accounts as of December 31, 1998 and 1999,
consist of the following (in thousands):
1998 1999
-------- --------
Current deferred tax assets:
Reserves and other accruals $ 516 $ 4,351
Inventory capitalization 1,298 (1,235)
Valuation allowance -- (3,116)
-------- --------
Total current deferred tax assets 1,814 --
-------- --------
Long-term deferred tax assets:
Net operating loss carry forward 2,581 14,271
Reserves and accruals 2,562 5,128
Valuation allowance -- (7,825)
-------- --------
Total non-current deferred tax assets 5,143 11,574
-------- --------
Non-current deferred tax liabilities:
Accelerated tax deductions, depreciation,
and amortization (6,118) (4,735)
Effect of book basis in excess of tax basis
of licenses (13,098) (12,740)
-------- --------
Total non-current deferred tax liabilities (19,216) (17,475)
-------- --------
Net non-current deferred tax liability $(12,259) $ (5,901)
======== ========
F-16
<PAGE>
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,
---------------------
1997 1998 1999
---- ---- ----
Statutory federal rate 34% 34% (34)%
Effect of state taxes 4% 4% (4)%
Nondeductible amortization, impairment of
goodwill, and other permanent differences 7% 9% 10%
Increase in valuation allowance -- -- 20%
---- ---- ----
45% 47% (8)%
==== ==== ====
10. RELATED PARTY INFORMATION
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.
A member of the Company's Board of Directors is a partner in a law firm which
provided services to the Company related to defending certain legal actions.
During 1999, this firm earned $44,000 for these services.
11. SEGMENT INFORMATION
The Company monitors its salon distribution operations by the hair-care,
nail-care, skin and body care, and appliances and sundries product categories.
Distribution of the product takes place primarily throughout the United States.
Management monitors and evaluates the financial performance of the Company's
operations by its current four operating segments. The following operating
segment information includes financial information (in thousands) for all four
of the Company's operating segments.
DECEMBER 31, 1999
-----------------
<TABLE>
<CAPTION>
APPLIANCES
SKIN AND AND
HAIR CARE NAIL CARE BODY CARE SUNDRIES PARENT ELIMINATIONS TOTAL
--------- --------- --------- -------- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 43,684 $ 19,069 $27,030 $17,987 $ 20 $ -- $ 107,790
Income (Loss) from
Operations (11,794) (12,061) 897 6,263 (17,978) -- (34,673)
Depreciation and
Amortization 2,913 441 2,051 1,055 653 -- 7,113
Total assets 85,692 12,182 40,346 24,238 107,386 (89,449) 180,395
Capital expenditures 195 91 212 193 3,436 -- 4,127
</TABLE>
F-17
<PAGE>
DECEMBER 31, 1998
-----------------
<TABLE>
<CAPTION>
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
Income (Loss) from
Operation 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
Income (Loss) from
Operation 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
</TABLE>
Sales to a major U.S. beauty supply chain as a percentage of total net sales
approximated 13% during 1997. During 1998 and 1999, sales to any single customer
as a percentage of total net sales did not exceed 10%.
12. COMMITMENTS AND CONTINGENCIES
a. LEGAL MATTERS
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.
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.
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 agreements require
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
F-18
<PAGE>
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.
Amounts accrued for litigation matters represent the anticipated costs
(damages and/or settlement amounts) in connection with pending
litigation and claims and related anticipated legal fees for defending
such actions. The costs are accrued when it is both probable that a
liability has been incurred and the amount can be reasonably
estimated. The accruals are based upon management's assessment, after
consult with counsel, of probable loss based on the facts and
circumstances of each case, the legal issues involved, the nature of
the claim made, the nature of the damages sought and any relevant
information about the plaintiffs and other significant factors which
vary by cost. When it is not possible to estimate a specific expected
cost to be incurred, the Company evaluates the range of probable loss
and records the minimum end of the range. At December 31, 1998 and
1999, the Company has recorded accruals for litigation matters of $1.1
million and $530,000, respectively. Management believes that
anticipated probable cost of litigation matters existing at December
31, 1999 and 1998 have been adequately reserved to the extent
determinable.
The Company is party to certain additional legal matters arising in
the ordinary course of its business. In management's opinion, as of
December 31, 1999, the expected outcome of such matters will not have
a material adverse effect on the Company's financial position or
results of operations.
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 $313,000, $1,132,000 and
$2,756,000 for the years ended December 31, 1997, 1998 and 1999.
F-19
<PAGE>
Future lease payments under noncancelable operating leases (in
thousands) are as follows:
YEARS ENDING
DECEMBER 31,
------------
2000 $ 2,487
2001 1,868
2002 1,662
2003 1,256
2004 1,311
Thereafter 4,095
--------
$ 12,679
========
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. Currently, the Company matches 100% of the first 4% 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 and $151,000 during 1998 and 1999, respectively. 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. These plans were terminated effective December
15, 1999. 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 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 and 1999, Ft. Pitt made matching contributions of
approximately $11,000 and $23,000 respectively. Ft. Pitt made a
discretionary profit sharing contribution of $20,000 during 1998. Ft.
Pitt made no discretionary profit sharing contributions during 1999.
13. 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% and 13% of the total cost of sales for the year
ended December 31, 1998 and 1999, respectively. During 1998 and 1999, purchases
from a single supplier as a percentage of total purchases did not exceed 10%.
F-20
<PAGE>
14. OTHER SUBSEQUENT EVENT
During January 2000, the company sold certain assets and liabilities of One
Touch and Clean & Easy 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 approximately $4.3 million and deferred $2.4 million to be earned over the
two year life of the consulting agreement.
During 1999, One Touch and Clean & Easy accounted for approximately $16.4
million in net sales and $2.8 million of pre-tax income before considering
interest expense.
15. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Notes described in Note 7 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, 1998 and 1999; the results of operations and statements of
cash flows for the years ended December 31, 1997, 1998 and 1999 of Styling
Technology Corporation (Parent); guarantor subsidiaries (Guarantors) and the
non-guarantor subsidiaries (Non-guarantors).
F-21
<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-22
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Balance Sheet
as of December 31, 1999 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,275 $ (82) $ 2 $ -- $ 1,195
Accounts receivable, net 2,812 5,475 3,116 -- 11,403
Inventories, net 14,119 13,433 6,215 -- 33,767
Prepaid expenses and other current
assets 2,095 28 6 -- 2,129
Due to/from affiliates 17,951 7,141 (25,092) -- --
--------- -------- -------- --------- ---------
Total current assets 38,252 25,995 (15,753) -- 48,494
Property and Equipment, net 5,201 440 61 -- 5,702
Goodwill and Other Intangibles, net 31,453 40,509 48,506 -- 120,468
Other Assets 5,530 191 10 -- 5,731
Investment in Subsidiaries, net 89,449 -- -- (89,449) --
--------- -------- -------- --------- ---------
$ 169,885 $ 67,135 $ 32,824 $ (89,449) $ 180,395
========= ======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank Overdraft $ 2,189 $ -- $ -- $ -- $ 2,189
Accounts payable 7,842 1,977 1,349 -- 11,168
Accrued liabilities 9,727 274 840 -- 10,841
Current portion of long-term debt -- -- -- -- --
and other 70,941 165 -- -- 71,106
--------- -------- -------- --------- ---------
Total current liabilities 90,699 2,416 2,189 -- 95,304
--------- -------- -------- --------- ---------
Deferred Income Taxes -- -- 5,901 -- 5,901
Long-Term Debt and Other, less current
portion 101,797 4 -- -- 101,801
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock -- -- -- -- --
Common stock 1 -- -- -- 1
Additional paid-in capital 29,048 61,770 32,527 (94,297) 29,048
Retained Earnings(Accumulated Deficit) (49,860) 2,945 (7,793) 4,848 (49,860)
Treasury stock (1,800) -- -- -- (1,800)
--------- -------- -------- --------- ---------
Total stockholders' equity (deficit) (22,611) 64,715 24,734 (89,449) (22,611)
--------- -------- -------- --------- ---------
$ 169,885 $ 67,135 $ 32,824 $ (89,449) $ 180,395
========= ======== ======== ========= =========
</TABLE>
F-23
<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 of tax benefits (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-24
<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
and Income Taxes (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 of tax benefit (1,091) -- -- -- (1,091)
Income from majority owned subsidiaries 7,320 -- -- (7,320) --
-------- ------- ------- ------- --------
Net income $ 560 $ 6,015 $ 1,305 $(7,320) $ 560
======== ======= ======= ======= ========
</TABLE>
F-25
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Statement of Operations
for the Year Ended December 31, 1999 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 32,298 $ 47,019 $ 28,473 $ -- $ 107,790
Cost of sales 16,203 25,899 11,864 -- 53,966
-------- -------- -------- ------- ---------
Gross profit 16,095 21,120 16,609 -- 53,824
Selling, general, and administrative
expenses 32,241 14,698 26,714 -- 73,653
Goodwill impairment 3,977 9,461 -- -- 13,438
Centralization and Reengineering Costs 1,406 -- -- -- 1,406
-------- -------- -------- ------- ---------
Loss from operations (21,529) (3,039) (10,105) -- (34,673)
Interest (expense) and other income, net (18,949) (578) (244) -- (19,771)
-------- -------- -------- ------- ---------
Loss before income taxes (40,478) (3,617) (10,349) -- (54,444)
Provision for (benefit from) income taxes (5,190) 2,153 (1,251) -- (4,288)
-------- -------- -------- ------- ---------
Loss before Extraordinary Item (35,288) (5,770) (9,098) -- (50,156)
Extraordinary Item (1,713) -- -- -- (1,713)
Loss from majority owned subsidiaries (14,868) -- -- 14,868 --
-------- -------- -------- ------- ---------
Net loss $(51,869) $ (5,770) $ (9,098) $14,868 $ (51,869)
======== ======== ======== ======= =========
</TABLE>
F-26
<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)
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
Provision for uncollectable
accounts 710 -- -- -- 710
Change in certain assets and
liabilities:
Accounts receivable, net (4,334) (2,178) -- -- (6,512)
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:
Purchasing of property and equipment (518) (64) -- -- (582)
Purchase of acquired business, net of
cash acquired (45,131) (19) -- -- (45,150)
-------- -------- -------- -------- --------
Net cash used in
investing activities (45,649) (83) -- -- (45,732)
-------- -------- -------- -------- --------
Cash Flows from Financing Activities:
Proceeds from credit facility, net of
financing costs 71,633 -- -- -- 71,633
Payments on long-term debt (24,472) (477) -- -- (24,949)
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities 47,161 (477) -- -- 46,684
-------- -------- -------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents (1,434) 6 -- -- (1,428)
-------- -------- -------- -------- --------
Cash and Cash Equivalents, beginning
of year 4,341 150 -- -- 4,491
-------- -------- -------- -------- --------
Cash and Cash Equivalents, end
of year $ 2,907 $ 156 $ -- $ -- $ 3,063
======== ======== ======== ======== ========
</TABLE>
F-27
<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
Provision for uncollectable
accounts 600 781 233 -- 1,614
Change in certain assets and
liabilities
Accounts receivable, net (795) (3,998) (1,459) -- (6,252)
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:
Purchasing of property, plant and
equipment (1,766) (174) (22) -- (1,962)
Purchasing of acquired business, net of
cash acquired (62,677) -- -- -- (62,677)
Change in other assets 2,978 (2,510) (4,719) -- (4,251)
-------- -------- -------- -------- --------
Net cash 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 period 2,907 156 -- -- 3,063
-------- -------- -------- -------- --------
Cash and Cash Equivalents, end
of period $ 2,867 $ 343 $ 813 $ -- $ 4,023
======== ======== ======== ======== ========
</TABLE>
F-28
<PAGE>
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Statement of Cash Flow
for the Year Ended December 31, 1999 (in thousands)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(51,869) $ (5,770) $ (9,098) $ 14,868 $(51,869)
Adjustments to reconcile net loss to net
cash provided by (used in) in
operating activities:
Net loss on disposal and sale
Assets 5,105 10,817 122 -- 16,044
Depreciation and amortization 3,326 2,577 1,883 -- 7,786
Extraordinary item 1,713 -- -- -- 1,713
Provision for uncollectable accounts
receivable 6,511 3,609 3,074 -- 13,194
Increase in deferred tax valuation
allowance (4,101) -- (6,840) -- (10,941)
Change in certain assets and
liabilities -
Accounts receivable 777 (254) (308) -- 215
Inventory, net (663) (3,373) (4,132) -- (8,168)
Prepaid expenses and other
assets 3,633 667 77 -- 4,377
Accounts payable and accrued
liabilities 7,460 (6,550) (1,377) -- (467)
Due to/from affiliates, net (678) (1,580) 17,126 (14,868) --
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities (28,786) 143 527 -- (28,116)
-------- -------- -------- -------- --------
Cash Flows from Investing Activities:
Increase in bank overdraft 2,189 -- -- -- 2,189
Purchase of acquired business, net of
cash acquired -- -- (359) -- (359)
Purchasing of property, and equipment (3,768) (307) (52) -- (4,127)
Change in other assets, net 74 (73) 175 -- 176
-------- -------- -------- -------- --------
Net cash used in investing
activities (1,505) (380) (236) -- (2,121)
-------- -------- -------- -------- --------
Cash Flows from Financing Activities:
Proceeds from credit facility, net of
financing costs 87,626 -- -- -- 87,626
Payments on credit facility (58,244) -- -- -- (58,244)
Exercise of stock options 10 -- -- -- 10
Payments on long-term debt (693) (188) (1,102) -- (1,983)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 28,699 (188) (1,102) -- 27,409
-------- -------- -------- -------- --------
Decrease in Cash and Cash Equivalents (1,592) (425) (811) -- (2,828)
-------- -------- -------- -------- --------
Cash and Cash Equivalents, beginning
of year 2,867 343 813 -- 4,023
-------- -------- -------- -------- --------
Cash and Cash Equivalents, end
of year $ 1,275 $ (82) $ 2 $ -- $ 1,195
======== ======== ======== ======== ========
</TABLE>
F-29
<PAGE>
SCHEDULE II
STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
At December 31, 1997, 1998, and 1999
1997 1998 1999
-------- -------- --------
(in thousands)
Allowance for doubtful accounts:
Balance at beginning of year $ 427 $ 1,032 $ 1,786
Provision 710 1,614 13,194
Write-offs (105) (860) (4,105)
-------- -------- --------
Balance at end of year $ 1,032 $ 1,786 $ 10,875
======== ======== ========
1997 1998 1999
-------- -------- --------
(in thousands)
Tax valuation:
Balance at beginning of year $ -- $ -- $ --
Provision -- -- (10,941)
-------- -------- --------
Balance at end of year $ -- $ -- $(10,941)
======== ======== ========
F-30
