-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KHtQqa/97dSnw1kZWoxqq54jkSwtUMI59tKfoVzVfMZRWVD1YvFc2oiXrGakJYyG juLQQlduPylFAxz9B8J1jA== /in/edgar/work/0000950147-00-001613/0000950147-00-001613.txt : 20001023 0000950147-00-001613.hdr.sgml : 20001023 ACCESSION NUMBER: 0000950147-00-001613 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20001020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STYLING TECHNOLOGY CORP CENTRAL INDEX KEY: 0001022832 STANDARD INDUSTRIAL CLASSIFICATION: [2844 ] IRS NUMBER: 752665378 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21703 FILM NUMBER: 743686 BUSINESS ADDRESS: STREET 1: 7400 TIERRA BUENA LANE STREET 2: STE 435 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 602-609-60 MAIL ADDRESS: STREET 1: 7400 TIERRA BUENA LANE STREET 2: SUITE 435 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 FORMER COMPANY: FORMER CONFORMED NAME: STYLING TECHNOLOGIES INC DATE OF NAME CHANGE: 19960913 10-K 1 0001.txt ANNUAL REPORT FOR FISCAL YEAR ENDED 12/31/99 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- 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 ================================================================================ STYLING TECHNOLOGY CORPORATION ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS Page ---- 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.................................. ---------- 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." ---------- "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. 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:
ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION) - ----------- ---------------- -------------------------------- 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)
1
ACQUISITION ACQUISITION DATE BRAND NAME (PRODUCT DESCRIPTION) - ----------- ---------------- -------------------------------- 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)
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 2 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. 3 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.
% % RETAIL SALON SALES BY PRODUCT CATEGORY PRODUCT DESCRIPTION BRAND NAMES USE SALONS - ---------------- ------------------- ----------- --- ------ 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)
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. 4 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 5 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. 6 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. 7 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. 8 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. 9 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. 10 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 - 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. 12 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 13 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. 14 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. 15 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.
NOVEMBER 27, 1996 TO YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1997 1998 1999 -------- -------- --------- --------- 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)
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, 16 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 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 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 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 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 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 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 $100,000 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------- AWARDS ------------- ANNUAL COMPENSATION SECURITIES ALL OTHER ------------------------------ UNDERLYING COMPENSATION YEAR SALARY($)(1) BONUS($) OPTIONS(#)(2) ($)(3) ---- ------------ -------- ------------- ------ 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 -- -- --
- ---------- (1) Other annual compensation did not exceed 10% of the total salary and bonus for any of the Named Executive Officers. 23 (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
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%($) ------------- ----------- ------------ ---------- ----- ------ Sam L. Leopold ..... -- -- -- -- -- -- Richard R. Ross .... -- -- -- -- -- -- Allen Smith ........ 10,000 14.2% 10.13 8/12/09 63,700 161,400 10,000 14.2% 10.13 8/12/09 63,700 161,400 Paula Malloy ....... 8,000 11.3% 10.13 8/12/09 50,960 129,120
- ---------- (1) The options were granted at the fair market value of the shares on the date of grant and have 10-year terms. One-third of the options vest and become exercisable on each of the first, second, and third anniversaries of the date of grant. (2) Calculated from a base price equal to the exercise price of each option, which was the fair market value of the common stock on the date of grant. Potential gains are net of the exercise price, but before taxes associated with the exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the SEC and do not represent our estimate or projection of the future price of our common stock. Actual gains, if any, on stock option exercises will depend upon the future market prices of our common stock. OPTION EXERCISES AND HOLDINGS The following table represents information on options exercised in the last fiscal year by the Named Executive Officers and the value of each such officer's unexercised options at December 31, 1999. 24 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN THE MONEY OPTIONS SHARES VALUE OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2) ACQUIRED ON REALIZED ------------------------------ -------------------------- NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ ------ ----------- ------------- ----------- ------------- Sam L. Leopold -- -- 233,334 166,666 $ -- $ -- Richard R. Ross -- -- 69,386 80,144 $ -- $ -- Allen Smith -- -- -- 20,000 $ -- $ -- Paula Malloy -- -- -- 8,000 $ -- $ --
- ---------- (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 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 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. 27 401(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.
SHARES BENEFICIALLY NAME OF BENEFICIAL OWNER(1) OWNED(1)(2) PERCENT - --------------------------- ----------- ------- 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%
- ---------- * 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 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 (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 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 - ---------- (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 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 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 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 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 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations for the Year Ended December 31 (in thousands except for share data)
1997 1998 1999 ----------- ----------- ----------- 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 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) (in thousands)
COMMON STOCK RETAINED --------------------- ADDITIONAL EARNINGS TOTAL SHARES COMMON PAID-IN (ACCUMULATED TREASURY STOCKHOLDERS' OUTSTANDING STOCK CAPITAL DEFICIT) STOCK EQUITY (DEFICIT) ----- --- ------- -------- ------- -------- 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) ===== === ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows for the Year Ended December 31 (in thousands)
1997 1998 1999 -------- -------- -------- 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 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 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 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 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 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 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):
1997 1998 ------------------------------- -------------------------------- EFFECT OF EFFECT OF STOCK STOCK OPTIONS OPTIONS BASIC AND DILUTED BASIC AND DILUTED EPS WARRANTS EPS EPS WARRANTS EPS ------- ------- ------- ------- -------- ------- 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 ======= ======= ======= =======
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 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 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 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 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 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:
1997 1998 1999 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE -------- ------ -------- ------ -------- ------ 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 ====== ====== ======
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 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 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 - -----------------
APPLIANCES SKIN AND AND HAIR CARE NAIL CARE BODY CARE SUNDRIES PARENT ELIMINATIONS TOTAL --------- --------- --------- -------- ------ ------------ ----- 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
F-17 DECEMBER 31, 1998 - -----------------
APPLIANCES SKIN AND AND HAIR CARE NAIL CARE BODY CARE SUNDRIES PARENT ELIMINATIONS TOTAL --------- --------- --------- -------- ------ ------------ ----- 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
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 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 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 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 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Balance Sheet as of December 31, 1998 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED ------ ---------- ---------- ----------- ------------ 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 ========= ======= ========= ========= =========
F-22 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Balance Sheet as of December 31, 1999 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED ------ ---------- ---------- ----------- ------------ 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 ========= ======== ======== ========= =========
F-23 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Statement of Operations for the Year Ended December 31, 1997 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED ------ ---------- ---------- ----------- ------------ 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 ======== ======== ======== ======= ========
F-24 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Statement of Operations for the Year Ended December 31, 1998 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED ------ ---------- ---------- ----------- ------------ 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 ======== ======= ======= ======= ========
F-25 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Statement of Operations for the Year Ended December 31, 1999 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED ------ ---------- ---------- ----------- ------------ 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) ======== ======== ======== ======= =========
F-26 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Statement of Cash Flows for the Year Ended December 31, 1997 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED -------- -------- -------- -------- -------- 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 ======== ======== ======== ======== ========
F-27 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Statement of Cash Flow for the Year Ended December 31, 1998 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED -------- -------- -------- -------- -------- 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 ======== ======== ======== ======== ========
F-28 STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES Statement of Cash Flow for the Year Ended December 31, 1999 (in thousands)
NON- PARENT GUARANTORS GUARANTORS ELIMINATING CONSOLIDATED -------- -------- -------- -------- -------- 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 ======== ======== ======== ======== ========
F-29 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 EX-3.1 2 0002.txt AMENDED & RESTATED ARTICLES OF INCORPORATION FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF STYLING TECHNOLOGY CORPORATION 1. The name of the corporation is STYLING TECHNOLOGY CORPORATION (which is hereinafter referred to as the "Corporation"). 2. The original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 29, 1995, under the name LEOPOLD STYLING PRODUCTS, INC. 3. The original Certificate of Incorporation was amended on September 23, 1996 providing for a reverse stock split and changing the name of the Corporation to Styling Technology Corporation. 4. This First Restated Certificate of Incorporation has been duly proposed by resolutions adopted and declared advisable by the Board of Directors of the Corporation, duly adopted by the stockholders of the Corporation at a meeting duly called, and duly executed and acknowledged by the officers of the Corporation in accordance with the provisions of Sections 103 and 245 of the General Corporation Law of the State of Delaware, and amends, restates, and integrates the provisions of the Certificate of Incorporation of the Corporation and, upon filing with the Secretary of State in accordance with Section 103 and 242, shall thenceforth supersede the Certificate of Incorporation and all amendments thereto, and shall, as it may thereafter be amended in accordance with its terms and applicable law, be the Certificate of Incorporation of the Corporation. 5. The text of the Certificate of Incorporation of the Corporation is hereby amended and restated to read in its entirety as follows: ARTICLE I NAME The name of the Corporation shall be Styling Technology Corporation. ARTICLE II ADDRESS The registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name and address of the Corporation's registered agent is The Corporation Trust Company. ARTICLE III PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (the "GCL"). ARTICLE IV STOCK The Corporation shall be authorized to issue two classes of shares of capital stock, to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares of Common Stock and Preferred Stock which the Corporation shall have authority to issue is eleven million (11,000,000) of which ten million (10,000,000) shares shall be Common Stock and one million (1,000,000) shall be Preferred Stock. The par value of the shares of Common Stock is one hundredth of one cent (.0001) per share. The par value of the shares of Preferred Stock is one hundredth of one cent (.0001) per share. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations, or restrictions thereof, including, but not limited to, the fixing or alteration of the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of shares of Preferred Stock, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of the shares of that series, but not below the number of shares of that series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of that series. ARTICLE V ADDRESS OF INCORPORATOR The name and mailing address of the incorporator is M.C. Kinnamon, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. ARTICLE VI BOARD OF DIRECTORS The number of directors which shall comprise the initial Board of Directors of the Corporation shall be two (2). The size of the Board of Directors may be increased or decreased in the manner provided in the Bylaws of the Corporation. All corporate powers of the Corporation shall be exercised by or under the direction of the Board of Directors except as otherwise provided herein or by law. In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized: (i) to fix, abolish, determine, and vary from time to time the amount or amounts to be set apart as reserves; (ii) to adopt, amend, and repeal Bylaws of the Corporation; (iii) to authorize and cause to be executed mortgages and liens, with or without limit as to amount, upon the real or personal property of the Corporation; (iv) from time to time to determine whether and to what extent, at what time and place, and under what conditions and regulations the accounts and books of the Corporation, or any of them, shall be open to the inspection of any stockholder; and no stockholder shall have any right to inspect any account or book or document of the Corporation except as conferred by statute or bylaw or as authorized by resolution of the stockholders or Board of Directors; (v) to authorize the payment of compensation to the directors for services to the Corporation, including fees for attendance at meetings of the Board of Directors or of any committee thereof and/or salaries for serving as such directors or committee members, and to determine the amount of such compensation; (vi) from time to time to formulate, establish, promote, and carry out, and to amend, alter, change, revise, recall, repeal, or abolish, a plan or plans for the participation by all or any of the employees, including directors and officers, of the Corporation, or of any corporation, company, association, trust, or organization in which or in the welfare of which the Corporation has any interest, and those actively engaged in the conduct of the Corporation's business, in the profits, gains, or business of the Corporation or of any branch or division thereof, as part of the Corporation's legitimate expenses, and/or for the furnishing to such employees, directors, officers, or persons, or any of them, at the Corporation's expense, of medical services, insurance against accident, sickness, or death, pensions during old age, disability or unemployment, education, housing, social services, recreation, or other similar aids for their relief or general welfare, in such manner and upon such terms and conditions as the Board of Directors shall determine; and (vii) to authorize the guaranty by the Corporation of securities, evidences of indebtedness, and obligations of other persons, firms, associations, and corporations. ARTICLE VII ELECTION OF DIRECTORS Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. ARTICLE VIII STRUCTURE OF BOARD OF DIRECTORS A. The Board (other than those directors elected by the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV hereof ("Preferred Stock Directors") shall be divided into three classes, as nearly equal in number as possible, designated Class I, Class II, and Class III. Class I directors shall initially serve until the 1999 meeting of stockholders; Class II directors shall initially serve until the 2000 meeting of stockholders; and Class III directors shall initially serve until the 2001 meeting of stockholders. Commencing with the annual meeting of stockholders in 1999, directors of each class, the term of which shall then expire, shall be elected to hold office for a three-year term and until the election and qualification of their respective successors in office. In case of any increase or decrease, from time to time, in the number of directors (other than Preferred Stock Directors), the number of directors in each class shall be apportioned as nearly equal as possible. B. Any director chosen to fill a vacancy or newly created directorship shall hold office until the next election of the class for which such director shall have been chosen and until his or her successor shall be elected and qualified or until their earlier death, resignation, disqualification, or removal. ARTICLE IX INDEMNIFICATION Every person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative ("Proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust, employee benefit plan, or other enterprise, shall be indemnified and held harmless by the Corporation, and the Corporation shall advance expenses to such person, to the fullest extent legally permissible under the GCL, against all expenses, liabilities, and losses (including attorneys' fees, judgments, fines, and amounts paid in settlement) reasonably incurred or suffered by him or her in connection therewith. Nothing contained herein shall affect any rights to indemnification to which employees other than directors and officers may be entitled by law. No amendment or repeal of this Article IX shall apply to or have any effect on any right to indemnification provided hereunder with respect to any acts or omissions occurring prior to such amendment or repeal. The right of indemnification shall be a contract right that may be enforced in any manner desired by such person. The right of indemnification shall not be exclusive of any other right that such directors, officers, or representatives may have or hereafter acquire and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaws, agreement, vote of stockholders, provision of law or otherwise, as well as their rights under this Article. Notwithstanding any other provision of this Article IX, no person shall be entitled to indemnification or advancement of expenses under this Article with respect to any Proceeding, or any claim therein, brought or made by him or her against the Corporation, unless such Proceeding or claim is approved by the Board of Directors of the Corporation. The Board of Directors may adopt bylaws from time to time with respect to indemnification to provide at all time the fullest indemnification permitted by the GCL, and may cause the Corporation to purchase and maintain insurance, at the Corporation's expense, on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust, or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not the Corporation would have the power to indemnify such person against such liability. The Corporation may also create a trust fund, grant a security interest and/or use other means (including, but not limited to, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the full extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing, to ensure the payment of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere. ARTICLE X REMOVAL OF DIRECTORS Any director or the entire Board of Directors may be removed, with or without cause, at any time by the holders of a majority of the shares then entitled to vote at an election of directors, and the vacancy in the Board of Directors caused by such removal may be filled by the stockholders at the time of such removal. ARTICLE XI LIMITATION ON LIABILITY FOR BREACH OF FIDUCIARY DUTY A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the GCL. Any repeal or modification of this Article shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. ARTICLE XII AMENDMENT OF BYLAWS Subject to the power of the stockholders of the Corporation to alter or repeal any Bylaw made by the Board of Directors, the Board of Directors is expressly authorized and empowered to make, alter, and repeal the Bylaws of the Corporation. ARTICLE XIII AMENDMENT OF ARTICLES The Corporation reserves the right at any time, and from time to time, to amend, alter, change, or repeal any provision contained in this First Restated Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences, and privileges of whatsoever nature conferred upon stockholders, directors, or any other persons whomsoever by and pursuant to this First Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article. ARTICLE XIV BOARD CONSIDERATIONS UPON SIGNIFICANT EVENTS The Board, when evaluating any (A) tender offer or invitation for tenders, or proposal to make a tender offer or request or invitation for tenders, by another party, for any equity security of the Corporation, or (B) proposal or offer by another party to (1) merge or consolidate the Corporation or any subsidiary with another corporation or other entity, (2) purchase or otherwise acquire all or a substantial portion of the properties or assets of the Corporation or any subsidiary, or sell or otherwise dispose of to the Corporation or any subsidiary all or a substantial portion of the properties or assets of such other party, or (3) liquidate, dissolve, reclassify the securities of, declare an extraordinary dividend of, recapitalize or reorganize the Corporation, shall take into account all factors that the Board deems relevant, including, without limitation, to the extent so deemed relevant, the potential impact on employees, customers, suppliers, partners, joint venturers and other constituents of the Corporation and the communities in which the Corporation operates. In addition to any affirmative vote required by applicable law and in addition to any vote of the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV of this First Restated Certificate of Incorporation, any alteration, amendment or repeal relating to this Article XIV must be approved by the affirmative vote of the holders of at least sixty six and two-thirds percent (66 2/3%) of the combined voting power of the issued and outstanding shares of Voting Stock (as defined in Article XVI), voting together as a single class. ARTICLE XV STOCKHOLDER CONSENT No action that is required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders may be effected by written consent of stockholders in lieu of a meeting of stockholders, unless the action to be effected by written consent of stockholders and the taking of such action by such written consent have expressly been approved in advance by the Board. In addition to any affirmative vote required by applicable law and in addition to any vote of the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV of this First Restated Certificate of Incorporation, any alteration, amendment or repeal relating to this Article XV must be approved by the affirmative vote of the holders of at least sixty six and two-thirds percent (66 2/3%) of the combined voting power of the issued and outstanding shares of Voting Stock (as defined in Article XVI), voting together as a single class. ARTICLE XVI BUSINESS COMBINATIONS; FAIR PRICE A. In addition to any affirmative vote required by law or this First Restated Certificate of Incorporation, and except as otherwise expressly provided in paragraph B of this Article XVI: 1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined), or (b) any other corporation, partnership, or other entity (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder other than a merger enacted in accordance with Section 253 of the Delaware General Corporation Law or any successor thereof; or 2. any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, including all Affiliates of the Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of ten million dollars ($10,000,000) or more; or 3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder, including all Affiliates of the Interested Stockholder, in exchange for cash, securities, or other property (or a combination thereof) having an aggregate Fair Market Value of ten million dollars ($10,000,000) or more (other than on a pro rata basis to all holders of Voting Stock of the same class held by the Interested Stockholder pursuant to a stock split, stock dividend or distribution of warrants or rights and other than in connection with the exercise or conversion of securities exercisable for or convertible into securities of the Corporation of any of its subsidiaries which securities have been distributed pro rata to all holders of Voting Stock); or 4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliates of an Interested Stockholder; or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not an Interested Stockholder is a party thereto) which has the effect, directly or indirectly, of increasing the proportionate share by more than one percent (1%) of the issued and outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which are directly or indirectly owned by any Interested Stockholder or one or more Affiliates of the Interested Stockholder; shall require the affirmative vote of the holders of at least sixty six and two-thirds percent (66 2/3%) of the voting power of the then issued and outstanding Voting Stock, as hereinafter defined, voting together as a single class, including the affirmative vote of the holders of at least sixty six and two-thirds percent (66 2/3%) of the voting power of the then issued and outstanding Voting Stock not Beneficially Owned directly or indirectly by an Interested Stockholder or any Affiliate of any Interested Stockholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be permitted, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Article XVI shall not be applicable to any particular Business Combination (as hereinafter defined), and such Business Combination shall require only such affirmative vote as is required by law or any other provision of this First Restated Certificate of Incorporation, if the conditions specified in either of the following paragraph 1 or 2 are met: 1. the Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined); or 2. all of the following price and procedural conditions shall have been met: (a) the aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash, to be received per share by the holders of Common Stock in such Business Combination, shall be at least equal to the highest of the following: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it (A) within the two (2) year period immediately prior to the first public announcement of the proposal of such Business Combination (the "Announcement Date"), or (B) in the transaction in which it became an Interested Stockholder, whichever is higher; (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date"), whichever is higher; and (iii) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to paragraph 2(a)(ii) above, multiplied by the ratio of (A) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it within the two (2) year period immediately prior to the Announcement Date to (B) the Fair Market Value per share of Common Stock on the first day in such two (2) year period upon which the Interested Stockholder acquired any shares of Common Stock; and (b) the aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class, other than Common Stock or Excluded Preferred Stock, of issued and outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph 2(b) shall be required to be met with respect to every such class of issued and outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (A) within the two (2) year period immediately prior to the Announcement Date, or (B) in the transaction in which it became an Interested Stockholder, whichever is higher; (ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (iii) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and (iv) (if applicable) the price per share equal to the Fair Market Value per share of such class of Voting Stock determined pursuant to paragraph 2(b)(iii) above, multiplied by the ratio of (A) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two (2) year period immediately prior to the Announcement Date to (B) the Fair Market Value per share of such class of Voting Stock on the first day in such two (2) year period upon which the Interested Stockholder acquired any shares of such class of Voting Stock; and (c) the consideration to be received by holders of a particular class of issued and outstanding Voting Stock (including Common Stock and other than Excluded Preferred Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock (if the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it); and (d) after such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (i) there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any issued and outstanding preferred stock, except as approved by a majority of the Continuing Directors; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors; (iii) there shall have been an increase in the annual rate of dividends as necessary fully to reflect any recapitalization (including any reverse stock split), reorganization or any similar reorganization which has the effect of reducing the number of issued and outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (iv) such Interested Stockholder shall not have become the Beneficial Owner of any additional Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder; and (e) after such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and (f) a proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be marked pursuant to such Act or subsequent provisions). C. For purposes of this Article XVI the following terms shall have the following meanings: 1. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 21, 1996. 2. "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations of the Securities Exchange Act of 1934, as in effect on June 21, 1996. In addition, a Person shall be the "Beneficial Owner" of any Voting Stock which such Person or any of its Affiliates or Associates has: (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; or (b) the right to vote pursuant to any agreement, arrangement or understanding (but neither such Person nor any such Affiliate or Associate shall be deemed to be the Beneficial Owner of any shares of Voting Stock solely by reason of a revocable proxy granted for a particular meeting of the stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such Person nor any such Affiliate of Associate is otherwise deemed the Beneficial Owner). 3. "Business Combination" shall mean any transaction described in any one or more of clauses (1) through (5) of Section A of this Article XVI. 4. "Continuing Director" shall mean any member of the Board who is unaffiliated with and is not the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any director who is thereafter chosen to fill any vacancy on the Board or who is elected and who, in either event, is unaffiliated with the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Continuing Directors then on the Board. 5. "Excluded Preferred Stock" means any series of Preferred Stock with respect to which a majority of the Continuing Directors have approved a Preferred Stock Designation creating such series that expressly provides that the provisions of this Article XVI shall not apply. 6. "Fair Market Value" shall mean: (a) in the case of stock, the highest closing sale price during the thirty (30) day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange listed stocks, or, if such stock is not quoted on the composite tape, on the New York Stock Exchange, or, if such stock is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty (30) day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotation System or any system then in use in its stead, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in accordance with Section D of this Article XVI; and (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in accordance with Section D of this Article XVI. 7. "Interested Stockholder" shall mean any Person to or which: (a) itself, or along with its Affiliates, is the Beneficial Owner, directly or indirectly, of more than fifteen percent (15%) of the then issued and outstanding Voting Stock; or (b) is an Affiliate of the Corporation and at any time within the two (2) year period immediately prior to the date in question was itself, or along with its Affiliates, the Beneficial Owner, directly or indirectly, of fifteen percent (15%) or more of the then issued and outstanding Voting Stock; or (c) is an assignee of or has otherwise succeeded to any Voting Stock which was at any time within the two (2) year period immediately prior to the date in question beneficially owned by an Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. For the purpose of determining whether a Person is an Interested Stockholder pursuant to paragraph 7 of this Section C, the number of shares of Voting Stock deemed to be issued and outstanding shall include shares deemed owned through application of paragraph 2 of this Section C but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants oroptions or otherwise. Notwithstanding anything to the contrary contained in this First Restated Certificate of Incorporation, for purposes of this First Restated Certificate of Incorporation, the term "Interested Stockholder" shall not, for any purpose, include, and the provisions of Article XVI(A) hereof shall not apply to: (a) the Corporation or any Subsidiary; or (b) any employee stock ownership plan of the Corporation or any Subsidiary. 8. In the event of any Business Combination in which the Corporation survives, the phrase "other consideration to be received" as used in paragraphs 2(a) and (b) and paragraph B of this Article XVI shall include the shares of Common Stock and/or the shares of any other class of issued and outstanding Voting Stock retained by the holders of such shares. 9. "Person" shall mean any individual, firm, corporation, partnership or other entity. 10. "Subsidiary" shall mean any corporation or other entity of which the Corporation owns, directly or indirectly, securities that enable the Corporation to elect a majority of the board of directors or other persons performing similar functions of such corporation or entity or that otherwise give to the Corporation the power to control such corporation or entity. 11. "Voting Stock" means all issued and outstanding shares of capital stock of the Corporation that pursuant to or in accordance with this First Restated Certificate of Incorporation are entitled to vote generally in the election of directors of the Corporation, and each reference herein, where appropriate, to a percentage or portion of shares of Voting Stock shall refer to such percentage or portion of the voting power of such shares entitled to vote. The issued and outstanding shares of Voting Stock shall not include any shares of Voting Stock that may be issuable pursuant to any agreement, or upon the exercise or conversion of any rights, warrants or options or otherwise. D. The Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article XVI, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article XVI, including, without limitation: (i) whether a Person is an Interested Stockholder; (ii) the number of shares of Voting Stock beneficially owned by any Person; (iii) whether a Person is an Affiliate or Associate of another; (iv) whether the applicable conditions set forth in paragraph 2 of paragraph B of this Article XVI have been met with respect to any Business Combination; (v) the Fair Market Value of stock or other property in accordance with paragraph 6 of paragraph C of this Article XVI; and (vi) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of ten million dollars ($10,000,000) or more. E. Nothing contained in this Article XVI shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. In addition to any affirmative vote required by applicable law and in addition to any vote of the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV of this First Restated Certificate of Incorporation, any alteration, amendment or repeal relating to this Article XVI must be approved by the affirmative vote of the holders of at least sixty six and two-thirds percent (66 2/3%) of the combined voting power of the issued and outstanding shares of Voting Stock, voting together as a single class. IN WITNESS WHEREOF, the undersigned, being the Chairman of the Board, President and Chief Executive Officer of the Corporation, for and on behalf of the Corporation, has executed this First Restated Certificate of Incorporation this 18th day of June, 1998, and hereby acknowledges, under penalties of perjury, that this First Restated Certificate of Incorporation is the act and deed of the Corporation and that facts stated in this First Restated Certificate of Incorporate are true. STYLING TECHNOLOGY CORPORATION By: /s/ Richard R. Ross ------------------------------------ Richard R. Ross, Executive Vice President, Chief Financial Officer and Secretary STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before this ____ day of June, 1998, by Richard R. Ross, Executive Vice President, Chief Financial Officer and Secretary of Styling Technology Corporation, a Delaware corporation, on behalf of the corporation. - ----------------------------------- Notary Public My commission expires: - ----------------------------------- EX-12 3 0003.txt COMPUTATION OF RATIO OF EARNINGS STYLING TECHNOLOGY CORPORATION RATIO OF EARNINGS TO FIXED CHARGES (in thousands)
PERIOD FROM FOR THE YEARS ENDED NOVEMBER 27, 1996 ---------------------------------- TO DECEMBER 31, 1996 1997 1998 1999 -------------------- ------ ------- ---------- Income (Loss) Before Income Taxes $ (151) $5,701 $ 3,121 $ (54,444) Fixed Charges: Actual Interest Expense and amortization of debt issuance cost $ -- $1,847 $ 9,540 $ 19,323 Net Income (Loss) As Adjusted $ (151) $7,548 $12,661 $ (35,121) Ratio N/A 4.0x 1.3x (A) - ---------- (A) Net loss was deficient by $54,444 to cover fixed charges.
EX-21 4 0004.txt SUBSIDIARIES OF REGISTRANT SUBSIDIARIES OF REGISTRANT NAME STATE OF INCORPORATION - ---- ---------------------- U.K. ABBA Products, Inc. California Styling (UK) Limited England European Touch, Ltd. II Wisconsin Beauty Products Inc. Wisconsin Cosmetics International Inc. Wisconsin Ft. Pitt Acquisition, Inc. Pennsylvania Styling Technology Nail Corporation Arizona STYL Institute, Inc. Arizona EX-23.1 5 0005.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-43599, 333-47131 and 333-61035. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona October 18, 2000 EX-27 6 0006.txt FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,195 0 11,403 0 33,767 48,494 7,866 2,164 180,395 95,304 100,000 0 0 1 (22,610) 180,395 107,790 107,790 53,966 88,497 0 0 19,771 (54,444) 4,288 (50,156) 0 1,713 0 (51,869) (12.75) (12.75) BASIC EPS BEFORE THE EXTRAORDINARY ITEM WAS $(12.33). DILUTED EPS BEFORE THE EXTRAORDINARY ITEM WAS $(12.33). EPS HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128 AND BASIC AND DILUTED EPS HAVE BEEN ENTERED INTO THE PRIMARY AND FULLY DILUTED EPS LINE ITEMS ABOVE.
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