<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997       COMMISSION FILE NUMBER 0-21703

                         STYLING TECHNOLOGY CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      75-2665378
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
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          2390 EAST CAMELBACK ROAD, SUITE 435, PHOENIX, ARIZONA 85016
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (602) 955-3353

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE
                              TITLE OF EACH CLASS

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                    COMMON STOCK, PAR VALUE $.0001 PER SHARE
                                (TITLE OF CLASS)

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

     As of March 27, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the average sales
price of such stock as of such date on the Nasdaq National Market, was
$69,358,931. A total of 870,400 shares of Common Stock held by an institutional
investor have been included. Shares of Common Stock held by each officer and
director have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily conclusive.

     As of March 27, 1998, there were 4,034,703 shares of the registrant's
Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive Proxy Statement for the
registrant's 1998 Annual Meeting of Stockholders are incorporated by reference
in Part III hereof.
================================================================================
<PAGE>   2

                         STYLING TECHNOLOGY CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1997

                               TABLE OF CONTENTS

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                                                                          PAGE
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<S>         <C>                                                           <C>
                                       PART I

ITEM 1.     BUSINESS....................................................    1
ITEM 2.     PROPERTIES..................................................   17
ITEM 3.     LEGAL PROCEEDINGS...........................................   17
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   17

                                      PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS.........................................   18
ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA........................   18
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS...................................   20
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
            RISK........................................................
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   32
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE....................................   32

                                      PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   32
ITEM 11.    EXECUTIVE COMPENSATION......................................   32
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT..................................................   33
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   33

                                      PART IV

ITEM 14     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
            8-K.........................................................   33
SIGNATURES..............................................................   36
FINANCIAL STATEMENTS....................................................  F-1
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                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

     The Company develops, produces, and markets professional salon products.
The Company offers a diversified line of well-established, brand-name
professional salon products across all salon product categories, including hair
care, nail care, and skin and body care products, as well as salon appliances
and salonwear. The Company sells its products primarily to beauty and tanning
supply distributors, beauty salon chains, and beauty supply outlets, and, to a
lesser extent, to spas, resorts, and health and country clubs throughout the
United States as well as in Canada, Mexico, Europe, Latin America, Australia,
and Asia. The Company's products are manufactured primarily by third parties,
generally utilizing the Company's formulations, designs, and molds.

     The Company currently sells more than 400 different products under nine
principal brand names, including ABBA Pure and Natural Hair Care(R), Alpha9(R),
Body Drench(R), Clean + Easy(R), Gena(R), Omni P.O. Professionals Only(R), One
Touch(R), Suntopia(TM), and SRC(TM). In the United States, the Company markets
its extensive line of salon products through professional salon industry
distribution channels to more than 2,500 customers, consisting of beauty supply
distributors, tanning supply distributors, beauty salon chains, and beauty
supply outlets. The Company also markets its products directly to more than
3,000 spas, resorts, and health and country clubs through its in-house sales
force. Internationally, the Company sells its products primarily through
international beauty distributors.

     The Company has grown its business, expanded its product offerings, and
strengthened its distribution channels, principally through acquisitions. The
Company acquired four professional salon product businesses in November 1996,
simultaneously with the Company's initial public offering. Prior to that time,
the Company had conducted no operations. The four professional salon product
businesses acquired by the Company were (i) Gena Laboratories, Inc. ("Gena"), a
producer and marketer of professional natural nail care products, pedicure
products, skin care products, including paraffin therapy products and, to a
lesser extent, hair care products; (ii) the Body Drench division ("Body Drench")
of Designs by Norvell, Inc. ( "DBN"), a producer and marketer of high-end
professional tanning, moisturizing, and personal care products; (iii) JDS
Manufacturing Co., Inc. ("JDS"), a producer and marketer of acrylic and
fiberglass nail enhancement products; and (iv) Kotchammer Investments, Inc. (dba
Styling Research Company) ("KII"), a marketer of high-end salon appliances (such
as curling irons and blow dryers) and salon wear (such as capes and aprons).

     During 1997, the Company further expanded its product offerings by
acquiring three professional salon product businesses to complement the
Company's operations. In March 1997, the Company acquired the "Utopia" line of
indoor tanning products now sold under the "Suntopia" brand name from Creative
Laboratories, Inc. In June 1997, the Company purchased U.K. ABBA Products, Inc.
("ABBA"), which produces a proprietary line of aromatherapy-based professional
hair care products. In December 1997, the Company acquired the Clean + Easy and
One Touch product lines of Inverness Corporation and Inverness (UK) Limited,
consisting of salon and retail hair removal apparatus and products marketed
under the "Clean + Easy" and "One Touch" brand names.

     Through these seven strategic transactions, the Company has acquired an
extensive network of strong distribution relationships, experienced sales
forces, established marketing and salon industry education programs, significant
production and sourcing capabilities, and experienced management personnel with
extensive relationships in the professional salon products industry. On a pro
forma basis, total revenue of the Company would have been approximately $51
million and $63 million in 1996 and 1997, respectively, assuming the
acquisitions had taken place on January 1, 1996.

     The Company's objective is to become a dominant developer, producer, and
marketer of professional salon products in the United States and
internationally. Key aspects of the Company's strategy to achieve this objective
are as follows: (i) pursuing acquisitions to capitalize on the substantial
fragmentation and growth potential existing in the professional salon products
industry, (ii) enhancing operational efficiencies of

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acquired businesses; (iii) leveraging its well-established domestic and
international distribution channels; (iv) expanding the distribution of its
products in international markets; and (v) capitalizing on the brand-name
recognition of its product lines by introducing new products and formulations
under these brand names.

     The Company was incorporated in June 1995 in Delaware. The Company's
principal executive offices are located at 2390 East Camelback Road, Suite 435,
Phoenix, Arizona 85016, and its telephone number is (602) 955-3353. As used
herein, the "Company" means Styling Technology Corporation and its subsidiaries.

INDUSTRY OVERVIEW

     Professional salon products consist of hair care, nail care, and skin and
body care products as well as salon appliances and sundries that are used by
salon professionals in rendering salon services to their clients. Many
professional salon products also are retailed to clients and other customers of
salons, resorts, spas, health and country clubs, and beauty supply outlets,
typically upon the advice of a salon professional who recommends products to
address the client's individual needs.

     Professional hair care products include shampoo, conditioner, styling gel,
glaze, mousse, hair spray, permanent, hair relaxer, and hair color products.
Professional nail care products include fiberglass and acrylic nail enhancement
solutions applied by the salon professional in rendering the nail service and
the accessories used by the professional to apply the solutions; natural nail
care and pedicure solutions and accessories; and polishes. Skin and body care
products include body lotions, tanning products, cosmetics, skin moisturizers,
hair removal and depilatory products, and other personal care products (such as
shaving creams and antiperspirants) used by salon professionals in rendering
salon services (such as facials, manicures, pedicures, leg and body waxing,
paraffin therapy, aromatherapy, and thermo-therapy) or available for use by
patrons of tanning salons, spas, resorts, and health and country clubs.
Professional salon appliances and sundries include hair dryers, curling irons,
brushes, furniture, and salonwear (such as capes).

     As the users and "prescribers" of professional salon products, salon
professionals typically select professional salon products on the basis of the
benefits and performance rather than price, which is passed on to the salon
client as part of the price of the salon service or is paid directly by the
salon client if the product is retailed. In addition, beauty and fashion trends
impact the professional salon industry. As a result of performance-based or
fashion-trend purchase decisions, suppliers of professional salon products
market their products primarily by educating wholesale distributors and salon
professionals as to the uses and benefits of their products as well as current
industry trends. The prescriptive nature of the professional salon industry
typically fosters greater brand loyalty, and professional salon products
typically have higher profit margins than the mass-marketed beauty products as a
result of relative price insensitivity.

     The professional salon products industry has grown significantly during the
last several years, which the Company believes has resulted from more frequent
use of salon services by each salon client and the growth and aging of the
United States population. According to industry sources, professional salon
industry revenue (including revenue from salon services and from sales of salon
products) for 1996 was approximately $40 billion in the United States and $80
billion worldwide. The Company believes that between 10% and 30% of salon
revenue results from the resale of professional salon products by salons.
Industry sources estimate that there currently are more than 200,000 licensed
beauty salons and 1.8 million licensed cosmetologists in the United States and
approximately 127 million client visits to salons each month.

     The professional salon products industry is highly fragmented, with
approximately 700 firms selling such products domestically. Many companies
serving the professional salon products market are small and often are either
owner-operated or are operated ancillary to another business. According to Vi
Nelson & Associates, Inc., a consulting firm specializing in the professional
salon industry, most of the salon product companies generate less than $10
million in sales. However, numerous companies in the industry have sales
significantly greater than $10 million. Most of these companies serve only a
single product segment of the professional salon products market. For example,
most companies offering professional salon hair care products do not also offer
nail and skin care products. The Company believes that there are many attractive
acquisition candidates in the professional salon industry because of the highly
fragmented nature of the industry, the need of industry participants for
capital, and their owners' desire for liquidity. Based on the industry
experience of its

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management, the Company believes it is the only company taking advantage of this
fragmentation by targeting the acquisition of professional salon product
companies as a central component of its business strategy.

STRATEGY

     The Company's objective is to become a dominant developer, producer, and
marketer of professional salon products in the United States and
internationally. Key aspects of the Company's strategy to achieve this objective
are as follows:

  Pursuing Strategic Acquisitions

     The Company seeks to acquire professional salon product companies
possessing complementary salon products with well-recognized brand names and
strong distribution channels to capitalize on the substantial fragmentation and
growth potential existing in the professional salon products industry. The
Company evaluates acquisition candidates based on their potential to broaden the
Company's product lines, expand the geographical scope of its distribution
network into new markets, or achieve increased value from the Company's
marketing, distribution, and product development capabilities as well as from
its capital and management resources. The Company also considers the quality of
an acquisition candidate's management, its historical operating results and
future earnings potential, the size and anticipated growth of the market it
serves, and its relative position in that market.

     The Company's acquisition strategy offers potential acquisition candidates
(i) the opportunity to be a part of a diversified professional salon product
company, thereby enhancing their ability to compete in their particular product
segment through an expansion of distribution channels and improved production
and distribution capacities; (ii) the potential for increased profitability as a
result of centralization of certain administrative functions (such as risk
management, accounting, information systems, human resources, and purchasing),
greater purchasing power of raw materials and other supplies and services, and
other economies of scale; (iii) enhanced financial strength and visibility as
part of a public company; (iv) the opportunity for their managements to remain
involved in operations; and (v) an opportunity for liquidity through the receipt
of cash or securities of the Company.

     Most of the Company's officers and the key division managers have been
visible participants in the professional salon product industry, which has
allowed them to become personally acquainted with principals of professional
salon product businesses across the country. The Company believes that the
industry's awareness of the Company, its management, and its strategies will
continue to attract interest from the principals of salon product businesses who
may be seeking liquidity or an exit alternative.

  Enhancing Operational Efficiencies of Acquired Businesses

     The Company's operating strategy with respect to acquired businesses is to
enhance operational efficiencies by eliminating duplicative facilities,
personnel, and functions. The Company integrates the sourcing and distribution
capabilities of acquired businesses with the Company's operations to utilize its
increased purchasing power to maximize cost savings, ensure the quality of its
raw material and components, and achieve efficiencies in distribution. In
addition, the Company integrates the management information systems of acquired
businesses to provide for integrated forecasting, production, inventory
management, distribution, procurement, and accounting.

  Leveraging Well-Established Distribution Channels

     The Company seeks to leverage the well-established domestic and
international distribution channels for its existing product lines to create
cross-marketing opportunities to introduce new products into these channels. The
Company continually attempts to expand its product offerings as well as its
distribution network by acquiring complementary product lines with
well-recognized brand names and strong distribution channels. Taking advantage
of the Company's extensive distribution network and its existing relationships
with its wholesale distributors and professional supply outlets, the Company
offers its distributors and outlets the opportunity to market additional product
lines to their customers. The Company believes it is the only

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professional salon supplier that offers its customers (i) hair care products;
(ii) natural nail care and nail enhancement products; (iii) skin and body care
products, including indoor and outdoor tanning products, moisturizers, lotions,
and hair removal and depilatory products; and (iv) salon appliances and
salonwear. The Company believes that its ability to offer customers a "one-stop"
shop for brand-name professional salon products is a competitive advantage.

  Expanding International Presence

     The Company plans to leverage its relationships with salon professionals
and distributors for its core products and its existing international presence
to gain further international penetration, particularly in Europe, Latin
America, and Asia. The Company believes that international markets for hair,
nail, and skin and body care products represent a significant growth
opportunity. With its recent acquisition of ABBA and the Clean + Easy and One
Touch product lines, the Company estimates that international sales comprise
approximately 20% of its annualized sales.

  Capitalizing on Brand-Name Recognition

     The Company leverages the significant brand-name recognition of its
existing product lines. The Company believes that its brand names are widely
recognized among salon professionals and distributors of beauty, tanning, health
care, and personal care products. The Company intends to continue to strengthen
and broaden its current portfolio of core brands (including ABBA, Alpha 9, Body
Drench, Clean + Easy, Gena, Omni, One Touch, SRC, and Suntopia) by introducing
new products and formulations under these brand names. The Company believes its
diverse product offerings provide it with greater capacity and know-how to
develop, test, and market new products within each of its product lines,
including the cross-utilization of proprietary technologies, product development
resources, and knowledge regarding trends in the professional salon industry.

PRODUCTS

     The Company offers more than 400 professional salon hair care, natural nail
care and nail enhancement products, skin and body care products, and salon
accessories and salonwear products, representing approximately 900 stock keeping
units ("SKUs"). The Company believes that the strength of its brand names is
based on its reputation for quality among salon professionals, product
performance, and focused commitment to the needs of salon professionals and
their clientele. The Company believes these brand names are widely recognized by
salon distributors and professionals and their clients as superior in quality to
mass-marketed product alternatives and other professional salon products.

     ABBA products consist of a line of 100% vegan, aromatherapy-inspired,
herbal hair care products sold under the "ABBA Pure and Natural Hair Care"
trademark. ABBA products are created from only the finest botanical ingredients
to produce a high quality, highly concentrated product. The product line
features a new addition, the Botanical High(TM) line of volume therapy for hair.
This line offers shampoo, conditioner, gel, and hair spray made using a unique
blend of herbal therapy botanicals, tri-molecular proteins, panthenol, and
neutral henna designed to produce fuller, thicker, and shinier hair. ABBA
products are used widely throughout the hair care industry and generate
significant salon retail sales.

     The Alpha 9 and Omni P.O. Professionals Only acrylic professional nail
enhancement products consist of a complete line of liquids, powders, tips,
files, and other implements and treatments necessary for the professional nail
technician to complete the acrylic nail enhancement process.

     Body Drench is a well-known brand name for professional skin and body care
and tanning products. 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, alpha hydroxy
acids for natural skin exfoliation, and Unitrienol T-27 for skin elasticity. The
Body Drench brand name includes indoor tanning products that utilize the
Carboplex(TM) delivery system, which replaces moisture lost during tanning and
produces faster, darker tanning results. The Company also offers outdoor tan
care and sun protection products under the Body Drench name.
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     The Clean + Easy and One Touch brands address the skin and body care market
by offering patented professional hair removal products. The Clean + Easy brand
serves the professional salon market with an extensive line of hair removal
products and related sundries used by salon professionals. The patented Clean +
Easy Roll-On Wax System is one of the Company's top selling hair removal
products. The One Touch line serves the retail consumer in the personal care
market. One Touch offers customers its patented roll-on waxer, depilatory, and
electrolysis products.

     The Gena line of natural nail care products features Warm-O-Lotion(TM), 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(R), a collagen enriched conditioning lotion; Pedi
Care(TM) dry skin lotion; and Pedi Soak(R) foot bath. The Gena product line also
includes paraffin therapy products, such as Paraffin Springs Therapy Spa(TM), a
paraffin bath for conditioning heat therapy treatments; the Tea Tree(TM) lines
of lotions and shampoos that have anesthetic qualities to relieve dry, itching
skin and scalp; the Healthy Hoof(TM) nail and skin treatment line to strengthen,
moisturize, and condition nails and cuticles; and the MRX(TM) antiseptics and
lotions for use by salon professionals.

     The SRC line of professional curling irons and blow dryers are recognized
within the salon industry as the finest quality in salon appliances. The
appliances are designed for high usage and durability and feature quick startup
and recovery capabilities. All SRC professional curling irons are backed by the
industry's only three-year warranty. The Company's Maiko(TM) salonwear line
features an extensive array of salonwear for the stylist and the stylist's
clientele.

     The Suntopia line of exclusively dstributed professional tanning products
bolsters the Company's tanning and personal care product offerings. The Suntopia
line, which includes various tanning creams and lotions, enriched shower gels, a
moisture replenishing lotion, and a tan enhancing product, complements the Body
Drench line by targeting a younger market. The products are made using an exotic
blend of botanicals and forested extracts to build and maintain a dark, healthy,
and long-lasting tan.

     The table below sets forth a description of the Company's principal
products, the brand names under which such products are sold, and the
approximate percentage of such products sold for professional salon use and the
approximate percentage retailed to clients and customers.

<TABLE>
<CAPTION>
                                                                                                      % RETAIL
                                                                                            % SALON   SALES BY
  PRODUCT CATEGORY            PRODUCT DESCRIPTION                   BRAND NAMES             USE(1)    SALONS(1)
  ----------------      -------------------------------   -------------------------------   -------   ---------
<S>                     <C>                               <C>                               <C>       <C>
Hair Care               Shampoo, conditioner, and         ABBA, Body Drench, Gena              40        60
                        styling and finishing aids
Nail Care               Natural nail care products,       Alpha 9, Omni, Gena                  70        30
                        acrylic and fiberglass nail
                        enhancement products, and
                        manicure and pedicure solutions
                        and accessories
Skin and Body Care      Moisturizing lotion, indoor and   Body Drench, Suntopia, Gena,         35        65
                        outdoor tanning products,         Clean + Easy, One Touch
                        personal care products,
                        paraffin waxes, thermo-therapy
                        treatments, and hair removal
                        systems and depilatory products
Salon Appliances        Hairdryers, curling irons, and    Styling Research, Maiko             100         0
  and Sundries          salonwear (capes/aprons)
</TABLE>

---------------
(1) Company estimates

PRODUCT DEVELOPMENT

     The Company seeks to leverage the significant brand-name recognition of its
existing product lines by introducing new products and formulations under its
core brand names. The Company believes that its diverse product offerings
provide it with greater capacity and know-how to develop, test, and market new
products in

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each of its product lines, including the expanded application of proprietary
technologies. The Company's management, working together with its marketing and
product development personnel, continuously monitor shifts in the fashion
industry generally and the salon industry in particular to identify new product
opportunities. The Company believes the experience of its key managers, their
relationships within the industry, and the Company's product line orientation
enable it to quickly recognize and respond to salon innovations and fashion
industry trends.

SALES AND MARKETING

     The Company sells its professional salon products and appliances primarily
through professional salon industry distribution channels to beauty and tanning
supply distributors, beauty 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, Mexico, Europe, Latin America,
Australia, and Asia. The Company believes that its strategy of marketing its
salon products exclusively for use in or resale by the professional salon
industry complements the quality image of the Company's products and fosters a
high degree of loyalty to its products by distributors of professional salon
products.

     The marketing programs and sales forces for each of the Company's product
lines focus on educating salon professionals and salon distributors regarding
the high quality and specific benefits of the Company's products as well as the
latest trends and developments in the fashion and beauty industries. An
important element of the Company's marketing is its participation at salon
industry trade shows, at which salon product manufacturers exhibit and sell
their products to wholesale salon product distributors, and 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. Another key element of the
Company's education-focused marketing includes conducting in-the-field product
demonstrations for salon professionals in a certain locale, usually at the
request of a beauty supply distributor. In addition, the Company's products are
advertised in trade and distributor publications and promoted in national
magazines such as Glamour, Good Housekeeping, In Style, McCall's, Mirabella, and
Self. The Company also produces educational videos and literature for
distribution to beauty supply distributors and salon professionals.

     The Company believes that its marketing and distribution capabilities
support strong relationships in each of the professional salon distribution
channels. The Body Drench product lines are sold throughout the United States
and in Canada, Europe, Latin America, and Australia. Its customers include
approximately 85 beauty supply distributors; approximately 75 tanning supply
distributors; approximately 3,000 spas, resorts, health and country clubs,
beauty salon chains. Its products are sold by a sales force of seven marketing
representatives, telemarketers, and field sales personnel as well as by
approximately 25 independent manufacturer representatives. The Gena product
lines are sold nationally and internationally to approximately 1,300 beauty
supply distributors by a sales force of three marketing representatives and
approximately 35 independent manufacturers' representatives. This distribution
base includes Sally Beauty Company, Inc. ("Sally") (a division of Alberto-Culver
Company), the largest wholesale supplier of professional supply products with
more than 1,900 supply stores worldwide. The Alpha 9 product lines are sold
nationally to more than 1,200 beauty supply distributors and outlets, including
Sally, by a sales force of three marketing representatives and approximately 35
manufacturer representatives. The SRC salon appliances and salonwear lines are
sold nationally on an exclusive basis to more than 50 beauty supply
distributors, 14 beauty schools, and six beauty salon chains by a sales force of
two employees and approximately 30 manufacturer representatives. The ABBA line
of products is sold on an exclusive basis to approximately 45 beauty supply
distributors and major beauty salon chains throughout the United States, Canada,
and Australia through seven regional sales managers and a strong educational
support team. Clean + Easy products are sold to approximately 1,000 customers
through a sales manager and approximately 25 manufacturer representatives. One
Touch products are sold to approximately 400 customers by two sales managers and
approximately 25 manufacturer representatives. Together, Clean + Easy and One
Touch products are sold internationally to approximately 100 customers by a
director of international sales.

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     During 1996 and 1997, Sally accounted for approximately 25% and 13%,
respectively, of the combined net sales of the Company. Assuming the acquisition
of ABBA and the Clean + Easy and One Touch product lines had taken place on
January 1, 1997, Sally would have accounted for 9% of the pro forma combined net
sales of the Company during 1997. The Company has supplied products to Sally on
a purchase order basis for more than five years. The Company, however, does not
have long-term contractual agreements with Sally relating to the supply of
products.

     The Company seeks to capitalize on each product line's marketing programs
and distribution network to introduce the Company's other product lines. The
Company believes this enhanced utilization of its existing marketing and
distribution capacities results in increased sales in some of its product lines
with little or no increase in selling cost.

PRODUCTION

     The Company relies on third parties to manufacture most of its products.
Certain of the Company's hair removal appliances are manufactured by two
offshore manufacturers in China. Although the Company generally does not have
long-term contracts with its manufacturers, the Company owns most of the
formulations, tools, and molds utilized in the manufacturing processes of its
products and believes it could substitute other manufacturers if necessary. See
"Special Considerations -- Dependence on Third Parties for Manufacturing"
contained in Item 1 of this Report.

     The principal production operations of the Company are limited primarily to
solvents and waxes for the Company's Gena line of nail care and pedicure
products and certain wax products for the Company's Clean + Easy and One Touch
product lines. The Company produces solvents and waxes for its Gena line at its
30,000 square foot facility in Duncanville, Texas, near Dallas. The production
area in the Duncanville facility consists of approximately 6,000 square feet of
space and includes formula compounding areas, multiple manual and fully
automated liquid filling lines, and packaging facilities. The compounding or
mixing department utilizes a combination of manual and fully automated batch
processing systems. The Company maintains an inventory of raw materials and
packaging materials as well as certain finished goods in its on-site warehouses
that comprise a total of approximately 20,000 square feet.

     The Company produces certain of its Clean + Easy and One Touch depilatory
products at its 32,000 square foot facility in Fair Lawn, New Jersey. The 8,600
square foot manufacturing area in the Company's Fair Lawn facility is devoted to
the production of wax and the packaging of a variety of hair removal appliances
for domestic and export markets. The wax production area consists of automatic
and manual batching and filling operations. Raw materials and work-in-process
inventories are maintained in a 10,000 square foot warehouse, while finished
goods are maintained in the 5,000 square foot shipping and receiving area. See
"Properties" contained in Item 2 of this Report.

     Raw materials used to produce the Company's professional salon products
(other than salon appliances and sundries) include water, alcohol, mineral and
natural oils, fragrances, other chemicals, and a wide variety of packaging
materials and compounds including containers, such as cardboard boxes and
plastic containers, container caps, tops, valves and labels, all of which it
purchases from outside sources. The principal raw materials and packaging
components for the Company's products are available from several domestic and
international suppliers. Although the Company itself does not purchase the raw
materials used to manufacture the majority of its products, it is potentially
subject to variations in the prices it pays its third-party manufacturers for
products depending on their costs for raw materials. While the industry from
time to time has experienced raw material cost increases, the Company believes
it will be able to purchase its requirements at competitive prices. To date,
increases in raw material costs have not had a material effect on the Company's
operating results.

     The Company maintains an internal control system to monitor the quality of
its products. The Company carries product liability insurance at levels it
believes to be adequate.

                                        7
<PAGE>   10

COMPETITION

     The professional salon products industry is highly competitive. The
Company's products compete directly against professional salon and other similar
products sold through distributors of professional salon products and
professional salons. The Company's principal competitors in the professional
salon hair care products market include Bristol-Myers Squibb Company (under the
trademarks Clairol and Matrix), Nexxus Products Co., Paul Mitchell Systems, and
Redken. The Company's competitors in the professional salon nail care market
include Creative Nail Design, Inc., Star Nail Products, Inc., OPI Products Inc.,
and Backscratchers, Inc. The Company's largest competitors in the professional
salon skin and body care products market include California Suncare, Inc., Supre
Inc., Swedish Beauty Manufacturing, Inc., Australian Gold, Inc., American
International, Inc., and Divi International. The Company's largest competitors
in the professional salon appliances and sundries market are Helen of Troy
Limited, Belson Products (a division of Windmere Corporation), Conair
Corporation, Cricket Brush Company (a division of West Coast Beauty Supply Co.),
Andre (a division of Fromm International, Inc.), and Betty Dain Creations, Inc.
In addition, the Company's professional salon products compete indirectly
against hair care, nail care, and skin and body care products and salon
accessories sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores and, to a lesser extent, mass
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," and catalogs. See "Special Considerations -- Competition"
contained in Item 1 of this Report.

INTELLECTUAL PROPERTY

     The Company markets its products under a number of trademarks and trade
names that are registered in the United States and in foreign countries.
Principal trademarks of the Company include ABBA Pure and Natural Hair Care,
Alpha 9, Body Drench, Clean + Easy, Gena, Omni P.O. Professionals Only, One
Touch, SRC, Suntopia, and the names of most of the products sold under each of
these core brands. The Company believes its position in the marketplace depends
to a significant extent upon the goodwill engendered by its trademarks and trade
names and, therefore, considers trademark protection to be important to its
business. The Company will seek to register significant trademarks and trade
names in other foreign countries as it enters these markets.

     While the Company currently holds certain patents, the Company does not
consider any single patent to be material to the conduct of its business. The
Company relies primarily on trade secret protection for its proprietary
information. See "Special Considerations -- Intellectual Property" contained in
Item 1 of this Report.

GOVERNMENT REGULATION

     Certain of the Company's advertising and product labeling practices are
subject to regulation by the Federal Trade Commission (the "FTC"), and certain
of its professional salon product production practices are subject to regulation
by the Food and Drug Administration (the "FDA") as well as by various other
federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
the Company to date. Nonetheless, federal, state, and local regulations in the
United States that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product claims, production methods,
product content, labeling, and packaging. In addition, any expansion by the
Company of its operations to produce professional salon products that include
over-the-counter drug ingredients (such as certain sun screen ingredients) would
result in the Company becoming subject to additional FDA regulations as well as
a higher degree of inspection and greater burden of regulatory compliance than
currently exist.

     The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals. The failure by the Company to comply with current or future
environmental regulations could result in the imposition of fines on the
Company, suspension of production, or a cessation of operations. Compliance with
such regulations could require the Company to acquire costly equipment or to
incur other significant expenses. Any failure by the Company to control the use,

                                        8
<PAGE>   11

or adequately restrict the discharge, of hazardous substances could subject it
to future liabilities. The Company believes that it is in substantial compliance
with applicable federal, state, and local rules and regulations governing the
discharge of hazardous materials into the environment. There are no significant
capital expenditures for environmental control matters anticipated in the
current year or expected in the near future. See "Special
Considerations -- Regulation and Potential Claims" contained in Item 1 of this
Report.

EMPLOYEES

     At March 27, 1998, the Company employed approximately 195 persons,
consisting of approximately 79 administrative employees, 89 warehouse and
production employees, and 27 sales and marketing employees. None of the
Company's employees are covered by collective bargaining agreements with the
Company, and the Company believes that its relations with its employees are
good.

EXECUTIVE OFFICERS AND KEY EMPLOYEES

     The following table sets forth certain information regarding the executive
officers and key employees of the Company.

<TABLE>
<CAPTION>
                NAME                   AGE                     POSITION
                ----                   ---                     --------
<S>                                    <C>    <C>
Sam L. Leopold.......................   44    Chairman of the Board, President, and Chief
                                                Executive Officer
Richard R. Ross......................   31    Vice President, Chief Financial Officer,
                                                Treasurer, and Secretary
James V. Henrietta...................   53    Executive Vice President -- Sales and Mar-
                                                keting
J. Timothy Montrose..................   32    Corporate Controller
Karen L. Terwilleger.................   49    Director of Operations
</TABLE>

     SAM L. LEOPOLD, a founder of the Company, has served as its Chairman of the
Board and Chief Executive Officer of the Company since the Company's
incorporation in June 1995 and as President of the Company since February 1998.
Mr. Leopold owns and previously served as President and Chairman of Beauty
Boutique International, which was founded in 1990 and operates three retail
salons in Arizona. Mr. Leopold is not involved with the day-to-day operations of
Beauty Boutique International, although Beauty Boutique International purchases
products from the Company in the ordinary course of business. 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 less than 20 retail salons to more
than 50 retail salons and from approximately $8 million in annual revenue to
approximately $25 million in annual revenue. From 1989 to 1991, Mr. Leopold
served as president of Avanti International, Inc. developing a line of hair care
products. Mr. Leopold served as in-house counsel to MDC Holdings, Inc., a
publicly held national home builder, from 1982 to 1984. Mr. Leopold devotes
substantially all of his business time to the Company.

     RICHARD R. ROSS has served as Chief Financial Officer, Treasurer, and
Secretary of the Company since April 1997 and as Vice President of the Company
since June 1997. Mr. Ross served in the audit and business advisory group of
Arthur Andersen LLP from June 1989 to April 1997, most recently in the position
of Manager. In his capacity at Arthur Andersen LLP, Mr. Ross worked with the
Company from its inception in June 1995, as well as with other
acquisition-oriented public companies, until joining the Company in April 1997.
Mr. Ross is a certified public accountant.

     JAMES V. HENRIETTA has served as Executive Vice President -- Sales and
Marketing of the Company since February 1998. From January 1996 to February
1998, Mr. Henrietta served as a Regional Director for Zotos International
("Zotos"). Mr. Henrietta served as a Regional Director for Helene Curtis from
May 1994 until its sale to Zotos in January 1996. From 1991 to 1994, Mr.
Henrietta founded and served as President of JVH, an investment/consulting
business. From 1980 to 1991, Mr. Henrietta served as President of the Paris

                                        9
<PAGE>   12

Ace Beauty Supply Company. During that time, Mr. Henrietta facilitated the
company's sales growth from $5 million in annual revenues to over $21 million by
opening or acquiring over 43 beauty supply stores. In 1976, Mr. Henrietta was
part of the acquisition team that purchased Empress Beauty Supply ("Empress")
and served as President of Empress until 1980, during which time annual sales
grew from $600,000 to over $4 million. From 1971 to 1976, Mr. Henrietta served
as General Manager for the Paris Ace Beauty Supply Company, a wholly owned
subsidiary of Helene Curtis.

     J. TIMOTHY MONTROSE has served as Corporate Controller of the Company since
May 1997 and has been employed by the Company since December 1996. From November
1995 to December 1996, Mr. Montrose served as accounting manager of Cellular
World Corporation, a retail chain of wireless communication products stores.
From April 1993 to November 1995, Mr. Montrose served as senior accountant with
the Dallas Stars Hockey Club of the National Hockey League and was actively
involved in the club's transition from Minneapolis to Dallas.

     KAREN L. TERWILLEGER has served as Director of Operations of the Company
since November 1997. Ms. Terwilleger served as Manager of Non-Inventory
Procurement and Manager of Contract Manufacturing Operations at The Dial
Corporation from September 1995 to February 1997. Ms. Terwilleger served as
Manager of Purchasing, Contract Manufacturing, and Packaging Development at
Benckiser Consumer Products, Inc. from June 1988 to September 1995. Ms.
Terwilleger served as Senior Purchasing Manager for Playtex, Inc. from 1987 to
1988; as Director of Manufacturing for Columbia Products, Inc. from 1985 to
1987; and as Assistant Plant Manager for Oral-B Laboratories, Inc. from 1984 to
1985; and served in various capacities for Bristol-Myers, Co. and its Clairol,
Inc. subsidiary from 1978 to 1984.

                             SPECIAL CONSIDERATIONS

CERTAIN FACTORS THAT COULD ADVERSELY AFFECT OPERATING RESULTS

     The Company's operating results are affected by a wide variety of factors
that could adversely impact its net sales and operating results. These factors,
many of which are beyond the control of the Company, include the Company's
ability to identify trends in the professional salon product industry and to
create and introduce products on a timely basis that take advantage of those
trends, continued market acceptance of its products among salon professionals
and their clientele, the Company's ability to arrange for timely production and
delivery of its products, the level and timing of orders placed by customers,
and competition and competitive pressures on prices.

     The success of the Company's operations depends to an extent upon a number
of factors relating to discretionary consumer spending. These factors include
economic conditions, such as employment, business conditions, interest rates,
and tax rates, as well as the continued growth of the professional salon
products industry. There can be no assurance that consumer spending will not be
adversely affected by general social trends and economic conditions, thereby
impacting the Company's growth, net sales, and profitability. If the demand for
professional salon products and related merchandise were to decline, the
Company's business, financial condition, and operating results could be
adversely affected.

INTEGRATION OF BUSINESS OPERATIONS

     The Company completed a number of acquisitions during fiscal 1997. There
can be no assurance that the Company will be able to complete effectively the
integration of the operations of the acquired businesses with the Company's
operations, to manage effectively the combined operations of the acquired
businesses, to achieve the Company's operating and growth strategies with
respect to these businesses, to obtain increased revenue opportunities as a
result of the anticipated synergies created by expanded product offerings and
additional distribution channels, or to reduce the overall selling, general, and
administrative expenses associated with the acquired operations. The integration
of the management, operations, and facilities of the acquired companies and any
other businesses the Company may acquire in the future could involve unforeseen
difficulties, which could have a material adverse effect on the Company's
business, financial condition, and operating results.
                                       10
<PAGE>   13

     The Company conducts due diligence reviews of each acquired business and
receives representations and warranties regarding each acquired business. There
can be no assurance, however, that unforeseen liabilities will not arise in
connection with the operation of the businesses acquired to date or future
acquired businesses or that any contractual purchase price adjustments, rights
of set-off, or other remedies available to the Company will be sufficient to
compensate the Company in the event unforeseen liabilities arise.

     The Company anticipates using the opportunities created by the combination
of acquired businesses to effect what the Company believes will be substantial
cost savings, including a reduction in operating expenses as a result of the
elimination of duplicative administrative, warehouse, and distribution
facilities, functions, and personnel. Significant uncertainties, however,
accompany any business combination, and there can be no assurance that the
Company will be able to achieve anticipated integration of facilities,
functions, and personnel in order to achieve operating efficiencies or otherwise
realize cost savings as a result of the acquisitions to date or future
acquisitions. The inability to achieve the anticipated cost savings could have a
material adverse effect on the Company's business, financial condition, and
operating results.

ACQUISITION STRATEGY

     The success of the Company's acquisition strategy will depend in large part
on its ability to acquire and operate successfully additional professional salon
product businesses. Although the Company has acquired seven businesses to date,
there can be no assurance that any additional suitable acquisitions can be
identified or consummated or that the operations of any businesses that are
acquired will be successfully integrated into the Company's operations. In
addition, increased competition for acquisition candidates may increase purchase
prices for acquisitions to levels beyond the Company's financial capability or
assessment of value. The Company expects to use cash and its securities,
including its Common Stock, as the primary consideration for future
acquisitions. See "Special Considerations -- Future Capital Needs; Debt Service
Requirements." The size, timing, and integration of any future acquisitions may
cause substantial fluctuations in operating results from quarter to quarter.
Consequently, operating results for any quarter may not be indicative of the
results that may be achieved for any subsequent fiscal quarter or for a full
fiscal year. These fluctuations could adversely affect the market price of the
Company's Common Stock.

DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING

     The Company depends upon third parties to manufacture most of its products.
Although the Company owns most of the formulations, tools, and molds utilized in
the manufacturing processes of its products, the Company has limited control
over the manufacturing processes themselves. As a result, any difficulties
encountered by the third-party manufacturers that result in product defects,
production delays, cost overruns, or the inability to fulfill orders on a timely
basis could have a material adverse effect on the Company's business, financial
condition, and operating results.

     The Company generally does not have long-term contracts with its
third-party manufacturers. Although the Company believes it would be able to
secure other third-party manufacturers to produce its products as a result of
its ownership of the formulations, tools, and molds used in the manufacturing
process, the Company's operations would be adversely affected if it lost its
relationship with any of its current suppliers (including particularly the two
manufacturers of hair removal appliances in China) or if its current suppliers'
operations or sea or air transportation with its China-based manufacturers were
disrupted or terminated even for a relatively short period of time. The
Company's tools and molds are located at the facilities of its domestic and
offshore third-party manufacturers. Accordingly, significant damage to such
facilities could result in the loss of or damage to a material portion of its
key tools and molds and production delays could result while new facilities are
being arranged and replacement tools and molds are being produced. The Company
does not maintain an inventory of sufficient size to provide protection for any
significant period against an interruption of supply, particularly if it were
required to obtain alternative sources of supply.

     Although the Company does not itself purchase the raw materials used to
manufacture the majority of its products, it is potentially subject to
variations in the prices it pays its third-party manufacturers for products
depending on their cost for raw materials.

                                       11
<PAGE>   14

RISK OF INTERNATIONAL OPERATIONS

     With its recent acquisition of ABBA and the Clean + Easy and One Touch
product lines, the Company estimates that international sales comprise
approximately 20% of its annualized sales. The Company intends to expand its
international sales through acquisitions and internal growth. In addition,
certain of the Company's products are manufactured in China. See "Special
Considerations -- Dependence on Third Parties for Manufacturing." The foreign
manufacture and sale of products and the purchase of raw materials and
components from foreign suppliers may be materially and adversely affected by
political and economic conditions abroad. Protectionist trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export compliance laws, or other trade policies could
materially and adversely affect the Company's ability to manufacture or sell
products in foreign markets.

FUTURE CAPITAL NEEDS; DEBT SERVICE REQUIREMENTS

     The Company's business operations have grown considerably in recent years
as a result of significant acquisitions of complementary businesses. The Company
has financed this growth through debt and equity financings. The Company's
future capital requirements will depend upon the size and timing of future
acquisitions and the availability of additional financing. To the extent that
the Company finances future acquisitions in whole or in part through the
issuance of its Common Stock or securities convertible into or exercisable for
Common Stock, existing stockholders will experience a dilution in the voting
power of their Common Stock and may suffer a dilutive effect on earnings per
share. The inability of the Company to raise additional debt or equity
financings or generate cash from operations for future acquisitions could
materially and adversely affect the Company's acquisition program. Any
borrowings made to finance future acquisitions or for operations could make the
Company more vulnerable to a downturn in its operating results, a downturn in
economic conditions, or increases in interest rates on borrowings that are
subject to interest rate fluctuations. If the Company's cash flow from
operations is insufficient to meet its debt service requirements, the Company
could be required to sell additional equity securities, refinance its
obligations, or dispose of assets in order to meet its debt service
requirements. In addition, it is likely any future financial arrangements will
contain financial and operational covenants and other restrictions with which
the Company must comply, including limitations on capital expenditures, the
payment of dividends, and the incurrence of additional indebtedness. There can
be no assurance that such financing will be available if and when needed or will
be available on terms acceptable to the Company. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources" contained in Item 7 of this Report and "Business -- Strategy"
contained in Item 1 of this Report.

CHANGES IN DISTRIBUTION CHANNELS

     The Company sells a significant portion of its products to professional
salon product distributors and salon chains. Distributors and salon chains in
the United States and in foreign markets have periodically experienced
consolidation and other ownership changes and may in the future consolidate,
undergo restructurings, or realign their affiliations, which could decrease the
number of salons that sell the Company's products or increase the ownership
concentration within the professional salon products industry. Some of these
distributors may be thinly capitalized and unable to withstand changes in
business conditions. If a significant distributor of the Company's products
performs poorly and is unable to pay for purchased products, or reorganizes or
liquidates and is unable to continue selling the Company's products, the
Company's business, financial condition, and results of operations could be
materially and adversely affected. While such changes in distribution channels
to date have not had a material adverse effect on the Company's business,
financial condition, and operating results, there can be no assurance as to the
future effect of any such changes. See "Business -- Sales and Marketing"
contained in Item 1 of this Report.

CONSUMER PREFERENCES AND NEW PRODUCT INTRODUCTIONS

     Consumer preferences in the professional salon product industry depend to a
significant extent on the prescriptive role of salon professionals. Relatively
few products achieve wide acceptance in the professional salon market. The
Company believes that its success in the professional salon product industry
depends, in part, on its ability to introduce new and attractive products on a
regular basis. There can be no assurance that any new products introduced by the
Company will achieve any significant degree of market acceptance or that

                                       12
<PAGE>   15

any acceptance that is achieved will be sustained for any significant amount of
time. The failure of new product lines or product innovations to achieve or
sustain market acceptance could have a material adverse effect on the Company's
business, financial condition, and operating results.

MANAGEMENT OF GROWTH

     Since its initial public offering in November 1996, the Company's
operations have undergone significant changes and growth, including the
acquisition and integration of seven professional salon product businesses, the
expansion of its product lines and distribution channels, and the restructuring
of its third-party manufacturing arrangements. The Company's growth and
expanding operations may place a significant strain on the Company's management,
administrative, operational, and financial resources as well as increased
demands on its systems and controls. The Company's ability to manage its growth
will require it to continue to integrate successfully the operations of any
acquired businesses with the Company's operations; to enhance further its
operational, financial, and management systems and its marketing programs; to
motivate, manage, and retain its current employees; and to identify, hire, and
train additional employees. The failure of the Company to manage its growth on
an effective basis could have a material adverse effect on the Company's
business, financial condition, and operating results.

COMPETITION

     The professional salon products industry is highly competitive. The
Company's products compete directly against professional salon and other
functionally similar products sold through distributors of professional salon
products and professional salons. In addition, the Company's professional salon
products compete indirectly against hair care, nail care, and body and skin care
products sold through a variety of non-salon retail channels, including
department stores, mall-based specialty stores, and, to a lesser extent, mass
merchants, drugstores, supermarkets, telemarketing programs, television
"infomercials," and catalogs. Current and potential competitors include a number
of companies that have substantially greater resources than the Company,
including better brand-name recognition, broader product lines, and wider
distribution channels. The professional salon products industry is characterized
by a lack of significant barriers to entry with respect to the development and
production of professional salon products, which may result in new competition,
including possible imitators of one or more of the Company's recognized product
lines. In addition, it is common in the professional salon products industry for
companies to market products that are similar to products being successfully
marketed by competitors. Increased competition and any reductions in
competitors' prices, which requires the Company to implement price reductions in
order to remain competitive, could have a material adverse effect on the
Company's business, financial condition, and operating results. See
"Business -- Competition" contained in Item 1 of this Report.

DEPENDENCE ON MAJOR CUSTOMERS

     The Company depends upon professional beauty and tanning supply
distributors, beauty salon chains, and beauty supply outlets to distribute its
products. The distribution channels for professional salon products are highly
fragmented. The Company estimates that there are more than 3,500 domestic
wholesale distributors, more than 4,000 beauty supply outlets, and more than
200,000 salons, including salon chains. Other than Sally Beauty Company, Inc.
("Sally"), a division of Alberto-Culver Company, no other customer accounts for
a significant portion of the purchases of the Company's professional salon
products.

     During 1996 and 1997, the Company's largest customer, Sally, accounted for
approximately 25% and 13%, respectively, of the net sales of the Company.
Assuming the acquisition of ABBA and the Clean + Easy and One Touch product
lines had taken place on January 1, 1997, Sally would have accounted for 9% of
the pro forma combined net sales of the Company during 1997. The Company
currently maintains more than 5,500 active customer accounts, and no customer
other than Sally accounted for more than 10% of the Company's sales in any of
the last three years. The Company does not have long-term contracts with any of
its customers. An adverse change in, or termination of, the Company's
relationship with, or an adverse change in

                                       13
<PAGE>   16

the financial viability of, one or more of its major customers, including Sally,
could have a material adverse effect on the Company's business, financial
condition, and operating results.

INTELLECTUAL PROPERTY

     The market for the Company's products depends to a significant extent upon
the goodwill associated with its trademarks and trade names. Therefore,
trademark protection is important to the Company's business. Although a number
of the Company's trademarks and trade names are registered in the United States
and in foreign countries, there can be no assurance that the Company will be
successful in asserting trademark or trade name protection for its trademarks
and trade names in the United States or other markets, and the costs to the
Company of such efforts may be substantial. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property rights to
the same extent as the laws of the United States.

     While the Company currently holds certain patents, the Company does not
consider any single patent to be material to the conduct of its business. To the
extent the Company wishes to assert its patent rights, there can be no assurance
that any patents issued to the Company will not be challenged, invalidated, or
circumvented, that any rights granted thereunder will provide adequate
protection to the Company, or that the Company will have sufficient resources to
prosecute its rights. The Company relies primarily on trade secret protection
for its proprietary information. There can be no assurance that the Company will
be able to protect its intellectual property or that third parties will not
assert intellectual property infringement claims against the Company. See
"Business -- Intellectual Property" contained in Item 1 of this Report.

DEPENDENCE ON KEY PERSONNEL

     The Company's success depends to a significant degree upon the skills of
its current key employees and its ability to identify, hire, and retain
additional sales, marketing, and financial personnel. There can be no assurance
that the Company will be successful in retaining its existing key personnel or
in attracting and retaining additional key personnel. The loss of services of
key personnel, particularly Mr. Leopold, or the inability to attract and retain
additional qualified personnel could have a material adverse effect upon the
Company's business and operating results. The Company has an employment
agreement with Mr. Leopold that extends through September 2001. The Company has
obtained key person life insurance on Mr. Leopold in the amount of $1.0 million,
but does not expect to have key person life insurance covering any other
employee.

REGULATION AND POTENTIAL CLAIMS

     Certain of the Company's advertising and product labeling practices are
subject to regulation by the FTC, and certain of its professional salon product
production practices are subject to regulation by the FDA as well as by various
other federal, state, and local regulatory authorities. Compliance with federal,
state, and local laws and regulations has not had a material adverse effect on
the Company to date. Nonetheless, federal, state, and local regulations in the
United States that are designed to protect consumers have had, and can be
expected to have, an increasing influence on product claims, production methods,
product content, labeling, and packaging. In addition, any expansion by the
Company of its operations to produce professional salon products that include
over-the-counter drug ingredients (such as certain sun screen ingredients) would
result in the Company becoming subject to additional FDA regulation as well as a
higher degree of inspection and greater burden of regulatory compliance than
currently exist. The nature and use of professional salon products could give
rise to product liability claims if one or more users of the Company's products
were to suffer adverse reactions following their use of the products. Such
reactions could be caused by various factors, many of which are beyond the
Company's control, including hypoallergenic sensitivity and the possibility of
malicious tampering with the Company's products. In the event of such an
occurrence, the Company could incur substantial litigation expense, receive
adverse publicity, and suffer a loss of sales.

     The operations of the Company subject it to federal, state, and local
governmental regulations related to the use, storage, discharge, and disposal of
hazardous chemicals. The amount of hazardous waste produced by the Company may
increase in the future when the Company increases production at the Duncanville
facility.

                                       14
<PAGE>   17

The failure by the Company to comply with current or future environmental
regulations could result in the imposition of fines on the Company, suspension
of production, or a cessation of operations. Compliance with such regulations
could require the Company to acquire costly equipment or to incur other
significant expenses. Any failure by the Company to control the use, or
adequately restrict the discharge, of hazardous substances could subject it to
future liabilities. The Company believes that it is in substantial compliance
with applicable federal, state, and local rules and regulations governing the
discharge of hazardous materials into the environment. There are no significant
capital expenditures for environmental control matters anticipated in the
current year or expected in the near future. See "Business -- Government
Regulation" contained in Item 1 of this Report.

CONTROL BY MANAGEMENT

     As of March 27, 1998, Mr. Leopold, the Chairman of the Board, President,
and Chief Executive Officer of the Company, beneficially owned approximately
24.4% of the outstanding shares of Common Stock. Consequently, Mr. Leopold will
have the ability to influence the election of all of the directors of the
Company and thereby control the business, affairs, and management of the
Company. In addition, Mr. Leopold will have the ability to influence most
matters requiring stockholder approval including significant corporate matters,
such as the amendment of the Company's Certificate of Incorporation and any
merger, consolidation, or sale of all or substantially all of the assets of the
Company. Such a high level of ownership may have the effect of delaying,
deterring, or preventing a change in the control of the Company, even when such
a change would be in the best interests of the other stockholders, and may
adversely affect the voting and other rights of the other holders of Common
Stock.

POSSIBLE VOLATILITY OF STOCK PRICE

     The trading price of the Common Stock in the future could be subject to
wide fluctuations in response to quarterly variations in operating results of
the Company or its competitors, actual or anticipated announcements of product
developments by the Company or its competitors, changes in analysts' estimates
of the Company's financial performance, developments or disputes concerning
proprietary rights, regulatory developments, general industry conditions,
worldwide economic and financial conditions, and other events and factors.
During certain periods, the stock markets have experienced extreme price and
volume fluctuations. In particular, prices of stocks of rapidly expanding
companies often fluctuate widely, frequently for reasons unrelated to the
operating performance of such companies. These broad market fluctuations and
other factors may adversely affect the market price of the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

     Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices. Of the 4,034,703 shares of Common
Stock outstanding 3,221,852 shares are eligible for resale in the public market
without any restrictions unless held by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act. The remaining 812,851 shares of
Common Stock are "restricted securities" as that term is defined under Rule 144
("Restricted Shares") and may be sold in the public market, subject to volume
and other resale limitations.

     Holders of the 5,000 Restricted Shares issued in connection with the
acquisition of KII have the right to require the Company to register such shares
of Common Stock for sale under the Securities Act pursuant to "piggyback"
registration rights granted by the Company with respect to such shares.

     The Company also has the authority to issue additional shares of Common
Stock and shares of one or more series of preferred stock. The Company may issue
shares of Common Stock or preferred stock for use as a portion of the
consideration in future acquisitions. These shares may be registered under the
Securities Act, in which case they generally will be freely tradeable upon their
issuance. In addition, the Company expects that it will issue shares of Common
Stock that are "restricted securities" under the Securities Act in connection
with future acquisitions. The issuance of such shares would result in the
dilution of the voting power of the shares of Common Stock and could have a
dilutive effect on earnings per share.

                                       15
<PAGE>   18

RIGHTS TO ACQUIRE SHARES

     A total of 400,000 shares of Common Stock have been reserved for issuance
upon exercise of options granted or which may be granted under the Company's
Stock Option Plan. Options to acquire 598,530 shares of Common Stock currently
are outstanding, including options to purchase 589,530 shares granted under the
Company's Stock Option Plan, 189,530 of which require stockholder approval. In
addition, there are outstanding warrants to acquire 20,000 shares of Common
Stock at an exercise price of $12.50 per share, warrants to acquire 203,000
shares of Common Stock at an exercise price of $12.00 per share, warrants to
acquire 150,000 shares of Common Stock at an exercise price of $10.18 per share,
and warrants to acquire 10,000 shares of Common Stock at an exercise price of
$11.38 per share, in each case subject to adjustment in accordance with the
anti-dilution and other provisions set forth in the warrants. During the terms
of such options and warrants, the holders will have the opportunity to profit
from an increase in the market price of the Common Stock. The existence of such
stock options and warrants may adversely affect the terms on which the Company
can obtain additional financing, and the holders of such options and warrants
can be expected to exercise or convert such options and warrants at a time when
the Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such options and warrants.

CHANGE IN CONTROL PROVISIONS

     The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law (the "Delaware GCL") contain provisions that may have
the effect of making more difficult or delaying attempts by others to obtain
control of the Company, even when these attempts may be in the best interests of
stockholders.

     The Company is subject to the provisions of Section 203 of the Delaware
GCL. In general, this statute prohibits a publicly held Delaware corporation
from engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless either
(i) prior to the date at which the stockholder becomes an interested
stockholder, the Board of Directors approved either the business combination or
the transaction in which the person becomes an interested stockholder, (ii) upon
consummation of the transaction in which the stockholder becomes an interested
stockholder, the stockholder owned at least 85% of the outstanding voting stock
of the corporation (excluding shares held by directors who are officers or held
in certain employee stock plans), or (iii) the business combination is approved
by the Board of Directors and by two-thirds of the outstanding voting stock of
the corporation (excluding shares held by the interested stockholder) at a
meeting of stockholders (and not by written consent) held on or subsequent to
the date of the business combination. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or at any time within the
prior three years did own) 15% or more of the corporation's voting stock.
Section 203 defines a "business combination" to include, without limitation,
mergers, consolidations, stock sales and asset based transactions, and other
transactions resulting in a financial benefit to the interested stockholder.

NO CASH DIVIDENDS

     The Company has never paid any dividends on its capital stock and does not
anticipate that it will pay dividends in the foreseeable future. Instead, the
Company intends to apply any earnings to the expansion and development of its
business. The Company's credit facility contains restrictions on the Company's
ability to pay cash dividends, and future borrowings may contain similar
restrictions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

YEAR 2000 COMPLIANCE

     Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in fewer
than two years,

                                       16
<PAGE>   19

computer systems and software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements. Significant uncertainty exists
concerning the potential effects associated with such compliance. The Company
has assessed and continues to assess the impact the Year 2000 issue will have on
its reporting and operating systems. The Company is addressing the Year 2000
issue by upgrading to a new release of its key operating and financial software
system, which will be Year 2000 compliant. The Company will test the new system
for Year 2000 compliance when the system is upgraded. In addition, during 1998
the Company intends to assess the impact any Year 2000 compliance problems
suffered by its customers, third-party contract manufacturers, and suppliers may
have on the Company. Although the Company does not anticipate that the Year 2000
issue will have a significant impact on its business, any significant Year 2000
compliance problem of any of the Company, its customers, or its third-party
contract manufacturers or suppliers could have a material adverse effect on the
Company's business, financial condition, and results of operations.

FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE

     This Report contains various forward-looking statements that are based on
the Company's beliefs as well as assumptions made by and information currently
available to the Company. When used in this Report, the words "believe,"
"expect," "anticipate," "estimate," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties, and assumptions, including those identified under "Special
Considerations." Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected. In addition to the
other risk factors set forth above, among the key factors that may have a direct
bearing on the Company's results are competitive practices in the professional
salon products industries (generally and particularly in the Company's principal
product markets), the ability of the Company to meet existing financial
obligations in the event of adverse industry or economic conditions or to obtain
additional capital to fund future commitments and expansion, the Company's
relationship with employees, the ability to integrate the operations and reduce
production costs of acquired businesses, and the impact of current and future
laws and governmental regulations affecting the professional salon products
industry and the Company's operations.

ITEM 2.  PROPERTIES

     The Company owns its facility in Duncanville, Texas, near Dallas. This
facility contains administrative, production, and warehousing areas. The 20,000
square foot facility includes an approximately 4,000 square foot administrative
area, a 6,000 square foot production area, and a 10,000 square foot warehousing
area. The Company believes the facility is well maintained and adequate for its
needs. The Company also leases additional warehouse space in Duncanville, Texas;
administrative and warehouse space in Fair Lawn, New Jersey and in the United
Kingdom; administrative space in Lebanon, Tennessee and Costa Mesa, California;
as well as the Company's principal executive offices in Phoenix, Arizona.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is, and may in the future be, party to litigation arising in
the ordinary course of its business. The Company does not consider any current
claims to be material to its business, financial condition, or operating
results. There can be no assurance that the Company's insurance coverage will be
adequate to cover all liabilities occurring out of any claims that may be
instituted in the future or that any future claims that are not covered by
insurance will not have an adverse effect on the Company's business, financial
condition, or operating results.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                       17
<PAGE>   20

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

     The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "STYL" since its initial public offering on November 21, 1996
at $10.00 per share. The following table sets forth the high and low sale prices
of the Common Stock for the fiscal quarters indicated as reported on the Nasdaq
National Market.

<TABLE>
<CAPTION>
                                                              HIGH    LOW
                                                              ----    ---
<S>                                                           <C>     <C>
1996
Fourth quarter..............................................  $10 5/8 $ 9 1/4
1997
First quarter...............................................  $12 1/4 $10
Second quarter..............................................  $11 1/2 $ 9
Third quarter...............................................  $16     $11 3/8
Fourth quarter..............................................  $17 1/2 $14 3/4
1998
First quarter (through March 27, 1998)......................  $21 1/4 $15 3/4
</TABLE>

     On March 27, 1998, the closing sale price of the Company's Common Stock was
$20 7/8 per share. On March 27, 1998, there were approximately 10 holders of
record and approximately 600 beneficial owners of the Company's Common Stock.

     The Company has never paid any cash dividends on its Common Stock. The
Company currently plans to retain earnings to finance the growth of the
Company's business rather than to pay cash dividends. Payments of any cash
dividends in the future will depend on the financial condition, results of
operations, and capital requirements of the Company as well as other factors
deemed relevant by the Board of Directors. The Company's credit facility
contains restrictions on the Company's ability to pay cash dividends, and future
borrowing may contain similar restrictions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" contained in Item 7 of this Report.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data as of and for the fiscal
year ended December 31, 1997 and as of December 31, 1996 and the period from
November 27, 1996 to December 31, 1996 is derived from the consolidated
financial statements of the Company, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected historical financial data for
Gena and Body Drench for each of the three years in the periods ended February
29, 1996 and December 31, 1995, respectively, was derived from their financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The selected historical financial data for JDS for each of the
three years in the period ended September 30, 1996, was derived from its
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The selected historical financial data for KII
for the year ended December 31, 1995, was derived from its financial statements,
which have been audited by Arthur Andersen LLP, independent public accountants.
In addition, the selected historical financial data for Gena, Body Drench, JDS,
and KII for the periods March 1, 1996 to November 26, 1996; January 1, 1996 to
November 26, 1996; October 1, 1996 to November 26, 1996; and January 1, 1996 to
November 26, 1996, respectively, was derived from the financial statements of
each acquired business, which have been audited by Arthur Andersen LLP,
independent public accountants. The historical financial information for earlier
periods for Gena, Body Drench, JDS, and KII not specifically referenced above
was derived from each Acquisition's unaudited financial statements. The selected
financial data provided below should be read in conjunction with "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.

                                       18
<PAGE>   21

SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              NOVEMBER 27       YEAR
                                                                1996 TO         ENDED
                                                              DECEMBER 31    DECEMBER 31
                                                                 1996           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
STATEMENT OF OPERATIONS DATA -- STYLING TECHNOLOGY
  CORPORATION:
  Net sales.................................................    $ 1,083        $38,108
  Gross profit..............................................        512         21,352
  Selling, general, and administrative expenses.............        737         12,201
  Income (loss) from operations.............................       (225)         9,151
  Income (loss) before extraordinary item...................       (151)         7,304
  Extraordinary item, net of tax benefit....................         --         (1,377)
  Income (loss) after extraordinary item....................       (151)         2,830
  Basic earnings (loss) per share:
     Income (loss) before extraordinary item................    $ (0.04)       $  1.07
     Extraordinary item, net................................         --           0.35
     Net income (loss)......................................      (0.04)          0.72
  Diluted earnings (loss) per share:
     Income (loss) before extraordinary item................      (0.04)          1.02
     Extraordinary item, net................................         --           0.33
     Net income (loss)......................................      (0.04)          0.69
BALANCE SHEET DATA:
  Working capital...........................................    $ 4,459        $13,886
  Total assets..............................................     32,234         92,489
  Long-term debt and other, less current portion............      2,316         47,377
  Total stockholders' equity................................     25,319         28,568
</TABLE>

<TABLE>
<CAPTION>
                                                                                    FOR THE PERIOD
                                                                                    MARCH 1, 1996
                                                  YEARS ENDED FEBRUARY 28,                TO
                                            ------------------------------------     NOVEMBER 26,
                                             1993      1994      1995      1996          1996
                                            ------    ------    ------    ------    --------------
<S>                                         <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA -- GENA
Net sales.................................  $6,537    $6,426    $7,524    $8,384        $6,708
  Gross profit............................   2,868     3,146     3,360     3,565         2,807
  Selling, general, and administrative
     expenses.............................   2,570     2,744     2,964     3,033         1,984
  Income from operations..................     298       402       396       532           824
  Net income..............................     204       278       232       317           529
</TABLE>

<TABLE>
<CAPTION>
                                                                                   FOR THE PERIOD
                                                                                   JANUARY 1, 1996
                                                YEARS ENDED DECEMBER 31,                 TO
                                         --------------------------------------     NOVEMBER 26,
                                          1992      1993      1994       1995           1996
                                         ------    ------    -------    -------    ---------------
<S>                                      <C>       <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA -- BODY
  DRENCH
Net sales..............................  $6,234    $6,653    $11,138    $11,871        $9,642
  Gross profit.........................   2,667     2,614      4,796      5,444         3,776
  Selling, general, and administrative
     expenses..........................   2,285     2,055      4,076      4,883         4,005
  Income (loss) from operations........     382       559        720        561          (229)
  Net income (loss)....................     382       328        446        294          (137)
</TABLE>

                                       19
<PAGE>   22

<TABLE>
<CAPTION>
                                                                                   FOR THE PERIOD
                                                                                   OCTOBER 1, 1996
                                                YEARS ENDED SEPTEMBER 30,                TO
                                           ------------------------------------     NOVEMBER 26,
                                            1993      1994      1995      1996          1996
                                           ------    ------    ------    ------    ---------------
<S>                                        <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA -- JDS
  Net sales..............................  $3,799    $3,578    $3,368    $3,114        $  613
  Gross profit...........................   2,054     1,926     1,817     1,707           338
  Selling, general, and administrative
     expenses............................   2,092     1,982     1,844     1,615           258
  Income (loss) from operations..........     (38)      (56)      (26)       92            80
  Net income (loss)......................     (29)      (16)        9        69            45
</TABLE>

<TABLE>
<CAPTION>
                                                                                   FOR THE PERIOD
                                                                                   JANUARY 1, 1996
                                                   YEARS ENDED DECEMBER 31,              TO
                                               --------------------------------     NOVEMBER 26,
                                               1992    1993     1994      1995          1996
                                               ----    ----    ------    ------    ---------------
<S>                                            <C>     <C>     <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA -- KII
  Net sales..................................  --      $102    $1,999    $1,558        $1,248
  Gross profit...............................  --        60     1,014       846           663
  Selling, general, and administrative
     expenses................................  --        87     1,040       891           591
  Income (loss) from operations..............  --       (27)      (26)      (45)           72
  Net income (loss)..........................  --       (32)     (104)     (135)           (2)
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

INTRODUCTION

     The Company develops, produces, and markets professional salon products.
The Company offers a diversified line of well-established, brand-name
professional salon products across all salon product categories, including hair
care, nail care, and skin and body care products, as well as salon appliances
and salonwear. The Company sells its products primarily to beauty and tanning
supply distributors, beauty salon chains, and beauty supply outlets, and, to a
lesser extent, to spas, resorts, and health and country clubs throughout the
United States as well as in North America, Latin America, Europe, and Asia.

     The Company was founded in June 1995 and has grown its business, expanded
its product offerings, and strengthened its distribution channels principally
through acquisitions. The Company acquired four professional salon product
businesses in November 1996, simultaneously with the Company's initial public
offering. Prior to that date, the Company had conducted no operations. The four
professional salon product businesses acquired by the Company were (i) Gena
Laboratories, Inc. ("Gena"), a producer and marketer of professional natural
nail care products, pedicure products, skin care products, including paraffin
therapy products and, to a lesser extent, hair care products; (ii) the Body
Drench division ("Body Drench") of Designs by Norvell, Inc. ( "DBN"), a producer
and marketer of high-end professional tanning, moisturizing, and personal care
products; (iii) JDS Manufacturing Co., Inc. ("JDS"), a producer and marketer of
acrylic and fiberglass nail enhancement products; and (iv) Kotchammer
Investments, Inc. (dba Styling Research Company) ("KII"), a marketer of high-end
salon appliances (such as curling irons and blow dryers) and salon wear (such as
capes and aprons). Gena, Body Drench, JDS, and KII collectively are referred to
as the "Acquired Businesses."

     During 1997, the Company further expanded its product offerings by
acquiring three professional salon product businesses to complement the
Company's existing operations. In March 1997, the Company acquired the "Utopia"
line of indoor tanning products now sold under the "Suntopia" brand name from
Creative Laboratories, Inc. In June 1997, the Company purchased U.K. ABBA
Products, Inc. ("ABBA"), which produces a proprietary line of aromatherapy-based
professional hair care products. In December 1997, the Company acquired the
Clean + Easy and One Touch product lines of Inverness Corporation and Inverness
(UK) Limited, consisting of salon and retail hair removal apparatus and products
marketed under the "Clean + Easy" and "One Touch" brand names (collectively, the
"Acquisitions"). Through these strategic

                                       20
<PAGE>   23

transactions, the Company has acquired an extensive network of strong
distribution relationships, experienced sales forces, established marketing and
salon industry education programs, significant production and sourcing
capabilities, and experienced management personnel with extensive relationships
in the professional salon products industry. On a pro forma basis, total revenue
of the Company would have been approximately $51 million and $63 million in 1996
and 1997, respectively, assuming the acquisitions had taken place on January 1,
1996.

     The following discussion has been divided into nine sections: the first
section presents the results of operations of the Company for the year ended
December 31, 1997; the next section presents the results of operations of the
Company for the period November 27, 1996 to December 31, 1996; and the next four
sections contain a discussion of the historical results of operations for each
of the four acquired businesses, and the last three sections contain discussions
of the Company's seasonality and quarterly results, liquidity and capital
resources, and its Year 2000 compliance. The information presented for the four
acquired businesses is based on each company's historical fiscal year end and
the period from the most recently completed fiscal year to November 26, 1996
(the closing date of the four acquisitions).

     Except for the historical information contained herein, the discussion in
this Report contains or may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include those discussed herein, as well as those factors discussed
under "Special Considerations" contained in Item 1 of this Report. Historical
results are not necessarily indicative of trends in operating results for any
future period.

RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997

     Net sales amounted to $38.1 million for the year ended December 31, 1997
compared to combined net sales for the Acquired Businesses of $23.0 million for
the year ended December 31, 1996. The $15.1 million, or 65.7%, increase in sales
was partly the result of increased sales of the Company's Body Drench and Gena
product lines as compared to the sales achieved by the individual Acquired
Businesses in the same period during 1996. In addition, net sales for the year
ended December 31, 1997 include the operating results of ABBA from June 26, 1997
to December 31, 1997 and the operating results of Clean + Easy/One Touch from
December 1, 1997 to December 31, 1997.

  Cost of Sales

     Cost of sales amounted to $16.8 million, or 44.0% as a percentage of net
sales, for the year ended December 31, 1997. Cost of sales as a percentage of
net sales substantially decreased from the 52.7% reported for the period from
November 27, 1996 to December 31, 1996, a percentage which was consistent with
the combined cost of sales as a percentage of net sales incurred by the Acquired
Businesses prior to their acquisition by the Company. The Company anticipates
using the opportunities created by each of its acquisitions in seeking to reduce
cost of sales as a percentage of net sales in future periods by eliminating
duplicative direct costs as well as negotiating lower manufacturing and raw
materials costs with suppliers.

  Gross Profit

     As a result of the foregoing, the Company realized gross profit for the
year ended December 31, 1997, of $21.4 million, or 56.0% as a percentage of net
sales. This improvement in gross margin percentage over that reported by the
individual Acquired Businesses prior to their acquisition is attributable
primarily to the negotiation of reduced product costs in December 1996 with the
primary supplier of the Company's Body Drench product line and the consolidation
of warehousing and production functions of the Gena and Alpha 9/Omni product
lines at the Company's Duncanville, Texas facility. The Company has also
achieved substantial reductions in cost of goods through negotiation with third
party suppliers at ABBA and Clean + Easy/One Touch.

                                       21
<PAGE>   24

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses were $12.2 million, or 32.0%
as a percentage of net sales, for the year ended December 31, 1997, which
represents a significant improvement over such expenses incurred by the
individual Acquired Businesses and Acquisitions prior to their acquisition by
the Company. This improvement in selling, general, and administrative expenses
as a percentage of net sales is primarily attributable to the elimination of
duplicative management and other personnel, duplicative selling and distribution
costs, the consolidation of certain accounting, human resources, and other
administrative functions of the Acquired Businesses and the Acquisitions, and is
partially offset by non-cash goodwill amortization resulting from acquisitions
and increased costs of operating as a public company.

  Extraordinary Item

     In connection with the December 1997 acquisition of the Clean + Easy and
One Touch product lines discussed above, the Company entered into a seven-year,
$75.0 million credit facility (the "New Credit Facility"), as discussed under
"Liquidity and Capital Resources" below. The New Credit Facility replaced the
previous credit facility negotiated in connection with the June 1997 acquisition
of ABBA. The Company reported an extraordinary, non-cash charge of approximately
$1.4 million, net of income taxes, or $0.33 per diluted share, related to the
write-off of unamortized financing costs associated with its previous credit
facility.

  Net Income

     The Company earned net income of $4.2 million, or $1.02 per diluted share,
for the year ended December 31, 1997 before the extraordinary item discussed
above. After the extraordinary item, net income for the year ended December 31,
1997 was $2.8 million, or $0.69 per diluted share. These results mark
significant improvement over the operating results of the Acquired Businesses
prior to their acquisition. The Company attributes the improvement in net income
during the year ended December 31, 1997 primarily to the successful
implementation of a key component of its business strategy, the enhancement of
operating efficiencies of the Acquired Businesses, and subsequent acquisitions.
Prior year financial information for the Acquired Businesses presented and
discussed herein excludes the operating results of ABBA and the Clean + Easy ,
One Touch, and Suntopia product lines, which were acquired during 1997.

  Income from Operations and Earnings Before Interest, Taxes, Depreciation &
Amortization (EBITDA)

     Income from operations was $9.2 million for the year ended December 31,
1997. Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
was $11.0 million for the year ended December 31, 1997. 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
income from operations or net income as an indicator of operating performance or
to net cash provided by operating activities as a measure of liquidity. The
Company believes EBITDA is a measure commonly reported and widely used by
analysts, investors, and other interested parties that monitor performance of
companies that employ a consolidation or "roll-up" strategy. Accordingly, this
information has been disclosed herein to permit a more complete comparative
analysis of the Company's operating performance relative to other consolidators.

PERIOD FROM NOVEMBER 27, 1996 TO DECEMBER 31, 1996

  Net Sales

     Net sales amounted to $1.1 million for the period from November 27, 1996 to
December 31, 1996. The level of sales during this period is not indicative of
anticipated future sales levels or historical sales of the Acquired Businesses,
as the Company's primary focus during this period was the consolidation of the
four Acquired Businesses, which impacted selling efforts at each of the
Company's four divisions.

                                       22
<PAGE>   25

  Cost of Sales

     Cost of sales was $600,000 for the period from November 27, 1996 to
December 31, 1996. Cost of sales as a percentage of net sales was 52.7% for this
period, which is consistent with the combined cost of sales as a percentage of
net sales incurred by the Acquired Businesses, prior to their acquisition.

  Gross Profit

     As a result of the foregoing, gross profit amounted to $500,000 for the
period from November 27, 1996 to December 31, 1996.

  Selling, General, and Administrative Expenses

     Selling, general and administrative expenses were $700,000 for the period
from November 27, 1996 to December 31, 1996, which is generally consistent with
the level of selling, general, and administrative expenses incurred by the
Acquired Businesses on a combined basis, prior to their acquisition. During this
period, the Company was focused primarily on the process of integrating the
operations of the Acquired Businesses.

  Net Loss

     Net loss for the Company was $200,000 for the period from November 27, 1996
to December 31, 1996.

RESULTS OF OPERATIONS -- GENA

PERIOD FROM MARCH 1, 1996 TO NOVEMBER 26, 1996

  Net Sales

     Net sales amounted to $6.7 million for the period from March 1, 1996 to
November 26, 1996. Annualized net sales for this period were approximately $8.9
million, which represents an increase of 6.6% as compared to $8.4 million
recorded in the fiscal year ended February 29, 1996. The increase in net sales
was primarily attributable to an increase in sales related to Gena's paraffin
spa product line.

  Cost of Sales

     Cost of sales amounted to $3.9 million for the period from March 1, 1996 to
November 26, 1996. Cost of sales as a percentage of net sales, increased
slightly to 58.1% for the period from March 1, 1996 to November 26, 1996 as
compared to 57.5% for the 12 months ended February 29, 1996. The increase in
cost of sales as a percentage of net sales was primarily attributable to an
increase in certain material costs, partially offset by increased sales of
Gena's paraffin spa line, which generates higher margins than Gena's other
products.

  Gross Profit

     As a result of the foregoing, gross profit amounted to $2.8 million for the
period from March 1, 1996 to November 26, 1996, which represents a decrease to
41.9% of net sales as compared to 42.5% of net sales for the fiscal year ended
February 29, 1996.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses were $2.0 million for the
period from March 1, 1996 to November 26, 1996. Selling, general, and
administrative expenses, as a percentage of net sales, decreased to 29.6% as
compared to 36.2% for the 12 months ended February 29, 1996. The decrease in
selling, general, and administrative expenses was primarily attributable to
reduced shareholder compensation for the period March 1, 1996 to November 26,
1996 in connection with the sale of Gena to the Company.

                                       23
<PAGE>   26

  Net Income

     Net income for the Company was $500,000 for the period from March 1, 1996
to November 26, 1996.

TWELVE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1995

  Net Sales

     Net sales increased 11.4% to $8.4 million in the 12 months ended February
29, 1996 from $7.5 million in the 12 months ended February 28, 1995. The
increase in net sales was attributable to growth in sales of existing products,
which consisted primarily of increased acceptance of the paraffin spa product
line that was introduced in February 1993 and the continued sales growth of the
MRX product line that was acquired in September 1994.

  Cost of Sales

     Cost of sales, as a percentage of net sales, increased to 57.5% in the 12
months ended February 29, 1996 as compared with 55.3% in the 12 months ended
February 28, 1995. The increase was attributable to additional costs incurred to
produce the new paraffin spa equipment, which has a higher cost of sales, as a
percentage of net sales, at approximately 64.0%. Additionally, cost of sales, as
a percentage of net sales, on the new MRX product line, introduced in September
1994, was approximately 60.0%, which was also higher than Gena's other product
lines.

  Gross Profit

     As a result of the foregoing, gross profits increased 6.1% to $3.6 million
in the 12 months ended February 29, 1996 from $3.4 million in the 12 months
ended February 28, 1995.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses remained relatively constant
at $3.0 million in the 12 months ended February 29, 1996 and 1995. The slight
increase in selling, general, and administrative expenses was attributable to an
increase in selling and promotional costs primarily related to increased sales
of the paraffin spa product. Additionally, Gena was offering greater promotional
incentives to generate additional sales resulting in increased selling costs.
The above increases were partially offset by reduced travel expenses and smaller
management bonuses than had been paid in the previous period.

  Net Income

     Net income increased 36.6% to $300,000 in the 12 months ended February 29,
1996 from $200,000 in the 12 months ended February 28, 1995.

TWELVE MONTHS ENDED FEBRUARY 28, 1995 COMPARED TO TWELVE MONTHS ENDED FEBRUARY
28, 1994

  Net Sales

     Net sales increased 17.1% to $7.5 million in the 12 months ended February
28, 1995 from $6.4 million in the 12 months ended February 28, 1994. The
increase was primarily a result of increased sales of Gena's paraffin spa
product line, which had been introduced in February 1993, and the February 1994
acquisition of Design Classic(TM), a manufacturer of fiberglass nail products.
Gena also acquired the MRX product line, an all-purpose antiseptic and hydrating
lotion, in September 1994 and began to ship substantial quantities in fiscal
1995. Total sales related to the Design Classic and MRX product lines were
approximately $1.0 million in 1995.

  Cost of Sales

     Cost of sales, as a percentage of net sales, increased to 55.3% in the 12
months ended February 28, 1995 as compared with 51.0% in the 12 months ended
February 28, 1994, as a result of additional labor, machine

                                       24
<PAGE>   27

retooling, and material costs incurred to produce the new paraffin spa product,
which has lower gross margins than Gena's other products. In addition, Gena
incurred certain one-time packaging and other costs to integrate their newly
acquired Design Classic product line. Gena also experienced an increase in
certain raw materials costs.

  Gross Profit

     As a result of the foregoing, gross profit increased 6.8% to $3.4 million
in the 12 months ended February 28, 1995 from $3.1 million in the 12 months
ended February 28, 1994.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses increased 8.0% to $3.0
million in the 12 months ended February 28, 1995 from $2.7 million in the 12
months ended February 28, 1994, as a result of the increase in selling and
promotional costs related to the introduction and promotion of the paraffin spa
product line. In addition, Gena incurred an increase in costs related to the
acquisition of Design Classic, which includes amortization of intangible assets,
and increased personnel costs required to support the new product.

  Net Income

     Net income decreased 16.5% to $200,000 in the 12 months ended February 28,
1995 from $300,000 in the 12 months ended February 28, 1994.

RESULTS OF OPERATIONS -- BODY DRENCH

PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 26, 1996

  Net Sales

     Net sales amounted to $9.6 million for the period from January 1, 1996 to
November 26, 1996. Annualized net sales for the period were $10.5 million, which
decreased 11.3% as compared to the net sales of $11.9 million recorded in fiscal
year ended December 31, 1995. The decrease in net sales was attributable to
difficulty in obtaining inventory from third party manufacturers, due to cash
flow difficulties experienced by Body Drench's parent company. Such difficulties
caused Body Drench to be unable to fulfill certain sales orders due to its
inability to deliver products to customers in time for the Spring 1996 tanning
season. In addition, sales of the Contemporary product line, which was
introduced in October 1994, declined during 1996, but was partially offset by
the increased sales of its new tanning product releases: Tan FX, Tan EX, and
increased sales of the Company's line of moisturizing lotion products.

  Cost of Sales

     Cost of sales amounted to $5.9 million for the period January 1, 1996 to
November 26, 1996. Cost of sales as a percentage of net sales increased to 60.8%
for the period January 1, 1996 to November 26, 1996 as compared to 54.1% for the
12 months ended December 31, 1995. The increase in cost of sales was primarily
attributable to a reduction in selling prices for certain products, as well as
increased cash discounts for certain customers in an effort to maximize cash
collections, related to the cash flow difficulties experienced by Body Drench's
parent company.

  Gross Profit

     As a result of the foregoing, gross profit amounted to $3.8 million for the
period from January 1, 1996 to November 26, 1996.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses were $4.0 million for the
period from January 1, 1996 to November 26, 1996. Selling, general, and
administrative expenses, as a percentage of net sales, remained

                                       25
<PAGE>   28

relatively unchanged at 41.5% for the period January 1, 1996 to November 26,
1996 as compared to 41.1% for the 12 months ended December 31, 1995.

  Net Loss

     As a result of the foregoing, Body Drench incurred a net loss amounting to
$137,000 for the period from January 1, 1996 to November 26, 1996.

TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994

  Net Sales

     Net Sales in 1995 increased 6.6% to $11.9 million compared to $11.1 million
in 1994. The increase in net sales was due to the release of the new
Contemporary product line introduced in October 1994. During 1995, Body Drench
realized a full year of Contemporary sales as compared to only a partial year in
1994. The increase in net sales was also impacted by the release of the Tan FX
and Tan EX products, and the Contemporary products introduced in the fourth
quarter of 1994.

  Cost of Sales

     Cost of sales, as a percentage of net sales, decreased to 54.1% for the 12
months ended December 31, 1995 as compared with 56.9% for the 12 months ended
December 31, 1994. This decrease was due primarily to the introduction of the
Contemporary product line in October 1994, which carried a lower raw material
cost in relation to net sales as compared to products sold during 1995.

  Gross Profit

     As a result of the foregoing, gross profit increased 13.5% to $5.4 million
in the 12 months ended December 31, 1995 from $4.8 million in the 12 months
ended December 31, 1994.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses increased 19.8% to $4.9
million in 1995 compared to $4.1 million in 1994. The increase was attributable
to the continued increase of shipping costs in proportion to sales levels due to
the growing number of backorders from the Contemporary product line. Backorders
resulted primarily from Body Drench's inability to produce sufficient product to
meet customer orders due to cash flow shortages at DBN and Body Drench.
Additionally, advertising expense increased by approximately 1.0% of net sales
as a result of the heavy promotional efforts in various magazines, catalogs and
brochures with the release of the new Contemporary product line. Body Drench
also incurred higher personnel costs through the addition of several marketing
and sales professionals.

  Net Income

     Net income decreased 34.1% to $300,000 in the 12 months ended December 31,
1995 compared to $400,000 in the 12 months ended December 31, 1994.

TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993

  Net Sales

     Net sales increased 67.4% to $11.1 million in the 12 months ended December
31, 1994 compared to $6.7 million in the 12 months ended December 31, 1993. The
increase in net sales was attributable to management's decision to expand the
distribution network to include several beauty supply distributors. This
expansion of distribution channels included establishing a dedicated sales force
to promote Body Drench's products to the tanning and beauty industry. In
addition, Body Drench introduced the Contemporary product line in October 1994.

                                       26
<PAGE>   29

  Cost of Sales

     Cost of sales, as a percentage of net sales, decreased to 56.9% for the 12
months ended December 31, 1994 as compared with 60.7% for the 12 months ended
December 31, 1993. This decrease was due primarily to lower purchasing costs as
a result of the higher volume of purchases during 1994. In addition, Body Drench
incurred lower overhead and labor costs as a percentage of revenues, as a result
of increased production efficiencies due to higher utilization of prepackaged,
ready to ship products.

  Gross Profit

     As a result of the foregoing, gross profit increased 83.5% to $4.8 million
in the 12 months ended December 31, 1994 from $2.6 million in the 12 months
ended December 31, 1993.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses increased 98.3% to $4.1
million in 1994 compared to $2.1 million in 1993. The increase in selling,
general, and administrative expenses related to additional sales and
administrative positions to support the corresponding increase in sales. In
addition, Body Drench incurred significant upfront costs of promotional
literature, including new catalogs, brochures and price sheets, related to the
introduction of the Contemporary product line introduced in October 1994. Body
Drench also incurred a higher level of freight charges in proportion to sales
levels due to significant number of backorders, resulting from inventory
shortages, which caused additional shipment costs to customers.

  Net Income

     Net income increased 36.0% to $400,000 in 1994 compared to $300,000 in
1993.

RESULTS OF OPERATIONS -- JDS

PERIOD FROM OCTOBER 1, 1996 TO NOVEMBER 26, 1996

  Net Sales

     Net sales amounted to $600,000 for the period from October 1, 1996 to
November 26, 1996.

  Cost of Sales

     Cost of sales amounted to $300,000 for the period from October 1, 1996 to
November 26, 1996. Cost of sales, as a percentage of net sales, remained
relatively constant at 44.9% for the period October 1, 1996 to November 26, 1996
as compared to 45.2% for the 12 months ended September 30, 1996.

  Gross Profit

     As a result of the foregoing, gross profit amounted to $300,000 for the
period from October 1, 1996 to November 26, 1996.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses were $300,000 for the period
from October 1, 1996 to November 26, 1996. Selling, general, and administrative
expenses, as a percentage of net sales, decreased to 42.0% as compared to 51.8%
for the 12 months ended September 30, 1996. The decrease in selling, general,
and administrative expenses as a percentage of net sales was primarily
attributable to reduced shareholders' compensation for the period October 1,
1996 to November 26, 1996, in connection with the sale of JDS to the Company.

  Net Income

     As a result of the foregoing, net income for the Company was approximately
$45,000 for the period October 1, 1996 to November 26, 1996.
                                       27
<PAGE>   30

TWELVE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO TWELVE MONTHS ENDED SEPTEMBER
30, 1995

  Net Sales

     Net sales decreased 7.5% to $3.1 million in the 12 months ended September
30, 1996 compared to $3.4 million in the 12 months ended September 30, 1995. The
decrease was caused primarily by a decline in its customer base as a result of
the acquisition of several of JDS' customers by a large beauty supply company
that is not a customer of JDS.

  Cost of Sales

     Cost of sales, as a percentage of net sales, for the 12 months ended
September 30, 1996 decreased to 45.2%, as compared to 46.0% in the 12 months
ended September 30, 1995. The decrease as a percentage of net sales is related
primarily to the negotiation of more favorable pricing on its materials costs
with certain of its vendors.

  Gross Profit

     As a result of the foregoing, gross profit decreased 6.1% to $1.7 million
in the 12 months ended September 30, 1996 compared to $1.8 million in the 12
months ended September 30, 1995.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses decreased 12.4% to $1.6
million in the 12 months ended September 30, 1996 compared to $1.8 million in
the 12 months ended September 30, 1995. The decrease resulted primarily from the
elimination of warehouse personnel, as a result of JDS' efforts to reduce
overhead costs.

  Net Income

     As a result of the foregoing, net income was approximately $69,000 in the
12 months ended September 30, 1996 as compared to approximately $9,000 in the 12
months ended September 30, 1995.

TWELVE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO TWELVE MONTHS ENDED SEPTEMBER
30, 1994

  Net Sales

     Net sales decreased 5.9% to $3.4 million for the 12 months ended September
30, 1995, compared to $3.6 million for the 12 months ended September 30, 1994.
The decrease was primarily a result of increased competition from several new
products in the market that impacted JDS' market share.

  Cost of Sales

     Cost of sales, as a percentage of net sales, remained relatively constant
at 46.0% in the 12 months ended September 30, 1995 as compared with 46.2% in the
12 months ended September 30, 1994. The decrease was a result of obtaining more
favorable freight terms with its shipping contractors.

  Gross Profit

     As a result of the foregoing, gross profit decreased 5.6% to $1.8 million
in the 12 months ended September 30, 1995 from $1.9 million in the 12 months
ended September 30, 1994.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses decreased 7.0% to $1.8
million for the 12 months ended September 30, 1995, compared to $2.0 million for
the 12 months ended September 30, 1994. The decrease was primarily a result of a
decrease in promotional costs, as no new products were introduced during 1995,
and a decrease in management salaries resulting from an effort to reduce
overhead costs.

                                       28
<PAGE>   31

  Net Income

     Net income was $8,574 in the 12 months ended September 30, 1995 compared to
a net loss of $16,494 in the 12 months ended September 30, 1994.

RESULTS OF OPERATIONS - KII

PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 26, 1996

  Net Sales

     Net sales amounted to $1.2 million for the period from January 1, 1996 to
November 26, 1996. Annualized net sales for this period were $1.4 million, which
represents a decrease of 12.6% as compared to $1.6 million of net sales recorded
in the fiscal year ended December 31, 1995. The decrease in net sales was
primarily attributable to a reduction in the customer base and decreased
promotional efforts.

  Cost of Sales

     Cost of sales amounted to $600,000 for the period from January 1, 1996 to
November 26, 1996. Cost of sales, as a percentage of net sales, remained
relatively unchanged at 46.9% for the period from January 1, 1996 to November
26, 1996 as compared to 45.7% for the 12 months ended December 31, 1995.

  Gross Profit

     As a result of the foregoing, gross profit amounted to $600,000 for the
period from January 1, 1996 to November 26, 1996.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses were $600,000 for the period
from January 1, 1996 to November 26, 1996. Selling, general, and administrative
expenses, as a percentage of net sales, decreased to 47.3% for the period from
January 1, 1996 to November 26, 1996, as compared to 57.2% for the 12 months
ended December 31, 1995. The decrease in selling, general, and administrative
expenses as a percentage of net sales was primarily attributable to a reduction
in commission expenses related to the decrease in sales as well as lower
promotional costs.

  Net Loss

     As a result of the foregoing, net loss for the KII was approximately $2,000
for the period from January 1, 1996 to November 26, 1996.

TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994

  Net Sales

     Net sales in the 12 months ended December 31, 1995 decreased 22.1% to $1.6
million as compared to $2.0 million in the 12 months ended December 31, 1994. As
part of its overall strategy, KII acquired a division of Redken in December
1993. During 1994, Redken reduced its customer base by 17 distributors, which
had a direct impact on sales for KII.

  Cost of Sales

     Cost of sales, as a percentage of net sales, increased to 45.7% in the 12
months ended December 31, 1995 as compared with 49.3% in the 12 months ended
December 31, 1994. The increase was primarily attributable to increased freight
and duty costs associated with international purchases.

                                       29
<PAGE>   32

  Gross Profit

     As a result of the foregoing, gross profit decreased 16.6% to $800,000 in
the 12 months ended December 31, 1995 from $1.0 million in the 12 months ended
December 31, 1994.

  Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses decreased 14.3% to $900,000
in the 12 months ended December 31, 1995 compared to $1.0 million in the 12
months ended December 31, 1994. The decrease in selling, general, and
administrative expenses was attributable to a decrease in salaries and
commissions through the elimination of several sales positions.

  Net Loss

     Net loss increased to approximately $135,000 in the 12 months ended
December 31, 1995 from approximately $72,000 in the 12 months ended December 31,
1994.

SEASONALITY AND QUARTERLY FINANCIAL RESULTS

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                               ------------------------------------------------------
                                               MARCH 31,    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,
                                                 1997         1997          1997             1997
                                               ---------    --------    -------------    ------------
<S>                                            <C>          <C>         <C>              <C>
Net Sales....................................   $ 7,479     $ 7,437        $10,669         $12,523
Gross Profit.................................     4,245       4,191          5,802           7,114
Selling, general and administrative..........    (2,398)     (2,333)        (3,574)         (3,896)
Income from operations.......................     1,847       1,858          2,228           3,218
Income before Extraordinary Item.............     1,054       1,031            828           1,294
Extraordinary Item, net......................        --          --             --          (1,377)
Net Income (Loss)............................     1,054       1,031            828             (83)
Diluted EPS before Extraordinary Item........   $  0.26     $  0.25        $  0.20         $  0.31
Diluted EPS after Extraordinary Item.........      0.26        0.25           0.20           (0.02)
</TABLE>

The Company has experienced moderate seasonality in quarterly operating results
due mainly to the effect of the seasonality of the indoor tanning season on the
operating results of the Body Drench and Suntopia product lines. The Company
expects the seasonal effect of Body Drench and Suntopia sales to lessen over
time as the Company continues its acquisition strategy.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's working capital position increased to $13.9 million at
December 31, 1997 from $4.5 million at December 31, 1996. The increase of $9.4
million is primarily due to the completion of the Acquisitions during 1997 and
the Company's results of operations for the year ended December 31, 1997. The
Company's working capital at December 31, 1996 was primarily the result of the
completion of an initial public offering and the acquisition of the Acquired
Businesses in November 1996. The offering resulted in net proceeds to the
Company of approximately $27.2 million, reduced by the simultaneous distribution
of the cash portion of the purchase price of the Acquired Businesses of
approximately $20.8 million and the repurchase of treasury shares from a founder
of the Company for $1.8 million.

     During the year ended December 31, 1997, the Company used $2.4 million of
cash in operating activities, which resulted primarily from the increased
investment in accounts receivable and inventory of $7.4 million and $3.0
million, respectively, offset by the increase in accounts payable and accrued
liabilities of $3.5 million. The increased investment in accounts receivable at
December 31, 1997 is primarily related to substantial sales growth in the
Acquired Businesses and the Acquisitions during the fiscal year ended December
31, 1997. The accounts receivable balance at December 31, 1996 was at a low
level due to the Company's focus on the consolidation of operations following
its initial public offering and simultaneous acquisition of the Acquired
Businesses in November 1996 and did not include receivables subsequently
acquired in the Utopia, ABBA,

                                       30
<PAGE>   33

and Clean + Easy/One Touch acquisitions. The increase in inventories and
accounts payable and accrued liabilities during the period relates primarily to
the liabilities assumed in the Acquisitions, as well as internal growth of the
Company's business.

     Effective June 26, 1997, the Company acquired all of the issued and
outstanding capital stock of U.K. ABBA Products, Inc., (ABBA), a producer of a
proprietary line of aromatherapy-based professional hair care products. The
Company paid a purchase price of $20.0 million for the stock of ABBA. This
transaction was accounted for using the purchase method of accounting.

     In connection with the acquisition of ABBA, the Company entered into a
six-year, $28.0 million senior credit facility (the "Old Credit Facility") with
a group of banks for whom Credit Agricole Indosuez acted as agent. The Old
Credit Facility consisted of Term Loan A, Term Loan B, and a Revolving Credit
Facility. Term Loan A was a $13.0 million term loan maturing in June 2002 with
principal and interest payable quarterly, at the agent's prime rate plus 1.50%
(10.0% at December 10, 1997). Term Loan B was a $10.0 million term loan maturing
in June 2003 with principal and interest payable quarterly at the agent's prime
rate plus 2.00% (10.5% at December 10, 1997). The Revolving Credit Facility,
which would have matured in June 2002, provided for up to $5.0 million in
borrowing to be used for general corporate purposes, including working capital,
acquisitions and repayment of existing indebtedness. Interest was payable
quarterly at the agent's prime rate plus 1.50% (10.0% at December 10, 1997). As
of December 10, 1997, there was $1.5 million outstanding under the Revolving
Credit Facility. In connection with the refinancing of the Old Credit Facility
discussed below, costs previously deferred resulted in an extraordinary charge
to earnings of approximately $1.4 million, net of income taxes, or $0.33 per
diluted share, in the fourth quarter of 1997.

     On December 10, 1997, the Company acquired certain assets and assumed
certain liabilities of Inverness Corporation and Inverness (UK) Limited
(collectively, "Inverness"). Inverness produces salon and retail hair removal
apparatus and products under lines known as "One Touch" and "Clean + Easy". The
Company paid a purchase price of $20.0 million, consisting of $16.5 million in
cash and an additional $3.5 million in cash held in escrow pending release
contingent upon the successful transition of the manufacture of certain hair
removal appliances to offshore manufacturing. The Inverness acquisition was
accounted for using the purchase method of accounting.

     In connection with the acquisition of the Clean + Easy and One Touch
product lines, the Company entered into a seven-year, $75.0 million senior
credit facility (the "New Credit Facility") with a group of banks for whom
Credit Agricole Indosuez acted as agent. $50.0 million of the New Credit
Facility was issued to pay for the acquisition, acquisition fees, and the payoff
of the Old Credit Facility. The New Credit Facility consists of four separate
loans: a $25.0 million Term Loan A, a $25.0 million Term Loan B, a $12.5 million
acquisition term loan, and a $12.5 million revolving line of credit. The
principal and interest on the New Credit Facility is paid quarterly and the
interest rate is determined by the base rate (the "Base Rate") as defined in the
New Credit Facility. The Base Rate is equal to the higher of (i) the Federal
Funds Rate plus 0.5%, or (ii) the Credit Agricole Indosuez prime lending rate.
Term Loan A bears interest at the Base Rate plus 1.0%, and matures in December
2002. Term Loan B bears interest at the Base Rate plus 1.5%, and matures in
December 2004. The revolving line of credit bears interest at the Base Rate plus
1.0% and expires in December 2002. The revolving line of credit will be used for
working capital purposes. As of December 31, 1997, there were no amounts
outstanding under the revolving line of credit or the acquisition term loan. The
Company, at its option after January 9, 1998, may convert the interest rates
relating to any of the loans to a LIBOR rate. Under this option, Term Loan A
will bear interest at the LIBOR rate plus 2.5%; Term Loan B will bear interest
at the LIBOR rate plus 3.0%; and the revolving line of credit will bear interest
at the LIBOR rate plus 2.5%. The Company may utilize the acquisition term loan
in connection with funding future acquisitions.

     The Company's line of credit, current cash resources, and expected cash
flows from operations are expected to be sufficient to fund the Company's
capital needs during the next 12 months at its current level of operations,
apart from capital needs resulting from acquisitions. However, the Company may
be required to obtain additional capital to fund its planned growth. The Company
plans to pursue strategic acquisitions to capitalize on the substantial
fragmentation and growth potential existing in the professional salon products

                                       31
<PAGE>   34

industry. The Company intends to fund its future capital needs through a
combination of current cash resources, expected cash flows from operations, bank
financing, seller notes payable, issuance of its Common Stock, and additional
public or private debt or equity financing. The availability of such capital
resources cannot be assured and depends upon prevailing market conditions,
interest rates, and the financial condition of the Company.

YEAR 2000 COMPLIANCE

     Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in fewer
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists concerning the potential effects associated with such
compliance. The Company has assessed and continues to assess the impact the Year
2000 issue will have on its reporting and operating systems. The Company is
addressing the Year 2000 issue by upgrading to a new release of its key
operating and financial software system, which will be Year 2000 compliant. The
Company will test the new system for Year 2000 compliance when the system is
upgraded. In addition, during 1998 the Company intends to assess the impact any
Year 2000 compliance problems suffered by its customers, third-party contract
manufacturers, and suppliers may have on the Company. Although the Company does
not anticipate that the Year 2000 issue will have a significant impact on its
business, any significant Year 2000 compliance problem of any of the Company,
its customers, or its third-party contract manufacturers or suppliers could have
a material adverse effect on the Company's business, financial condition, and
results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the Consolidated Financial Statements, the Notes
thereto and Report of Independent Public Accountants thereon commencing at page
F-1 of this Report, which Consolidated Financial Statements, Notes and Report
are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by Item 10 is incorporated herein by reference to
the information contained under the headings "Proposal to Elect
Directors -- Nominees" as set forth in the Company's definitive proxy statement
for its 1998 Annual Meeting of Stockholders. The information required by this
Item relating to executive officers of the Company is included in
"Business -- Executive Officers and Key Employees" contained in Item 1 of this
Report.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by Item 11 relating to directors of the Company is
incorporated herein by reference to the information under the heading "Director
Compensation and Other Information" and the information relating to executive
officers of the Company is incorporated herein by reference to the information
under the heading "Executive Compensation" as set forth in the Company's
definitive proxy statement for its 1998 Annual Meeting of Stockholders.

                                       32
<PAGE>   35

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by Item 12 is incorporated herein by reference to
the information under the heading "Security Ownership of Principal Stockholders,
Directors and Officers" as set forth in the Company's definitive proxy statement
for its 1998 Annual Meeting of Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is incorporated herein by reference to
the information under the heading "Certain Relationships and Related
Transactions" as set forth in the Company's definitive proxy statement for its
1998 Annual Meeting of Stockholders.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO.                      DESCRIPTION OF EXHIBIT
-----------                      ----------------------
<S>           <C>
 1            Form of Underwriting Agreement(1)
 3.1          Certificate of Incorporation of the Registrant(1)
 3.2          Certificate of Amendment of Certificate of Incorporation(1)
 3.3          Bylaws of the Registrant(1)
 4.1          Specimen of Stock Certificate(1)
 4.2          Specimen of Redeemable Common Stock Warrant(1)
 4.3          Form of Warrant issued to Credit Agricole Indosuez(2)
 4.4          Form of Warrant issued to Bank Boston N.A.(3)
10.1          Stock Purchase Agreement by and among Registrant and Donald
              N. Black, Howard Black, Barbara Black, Robert Black, Don
              Cottam, Jim Cottam and the Cottam Family Partnership, L.P.
              (shareholders) with respect to Gena Laboratories, Inc.(1)
10.2          Stock Purchase Agreement by and among Registrant and Jack
              Sperling and Gary Sperling (Shareholders) with respect to
              JDS Manufacturing Co., Inc.(1)
10.3          Asset Purchase Agreement by and among Registrant, Designs by
              Norvell, Inc. and Joy Norvell Martin (Stockholder) with
              respect to the Body Drench division of Designs by Norvell,
              Inc.(1)
10.4          Asset Purchase Agreement by and among Registrant, Kotchammer
              Investments, Inc. and the Hammer Family Living Trust, The
              Jones Family Trust and Gerald Kotch (Stockholders)(1)
10.5          Employment Agreement between Registrant and Sam L.
              Leopold(1)
10.11         1996 Stock Option Plan(1)
10.12         Stock Repurchase Agreement, as amended, between Registrant
              and Kenneth S. Bernstein(1)
10.13         Bridge Note(1)
10.15         Exclusive Manufacturing Agreement between the Registrant and
              Amole, Incorporated(4)
10.16         Asset Purchase Agreement between the Registrant and Creative
              Laboratories, Inc., dated March 17, 1997(5)
</TABLE>

                                       33
<PAGE>   36

<TABLE>
<CAPTION>
EXHIBIT NO.                      DESCRIPTION OF EXHIBIT
-----------                      ----------------------
<S>           <C>
10.17         Stock Purchase Agreement dated as of June 25, 1997 among the
              Registrant; James Markham; Daniel Genis and Arline Genis,
              Co-Trustees of the 1992 Genis Family Revocable Trust dated
              February 28, 1992; Arthur Benfield Bush, Arthur Benfield
              Bush and Gina L. Bush, Trustees of the Alan and Gina Bush
              Charitable Remainder Unitrust #1, dated June 1, 1997; Arthur
              Benfield Bush and Gina L. Bush, Trustees of the Alan and
              Gina Bush Remainder Unitrust #2, dated June 1, 1997; Yoram
              Fishman, Trustee of the Yoram Fishman Living Trust, dated
              May 18, 1987, and Yuri Levi, Trustee of the Yoram Fishman
              Charitable Remainder Trust dated May 30, 1997.(6)
10.18         Credit Agreement dated as of June 25, 1997 among the
              Registrant and Credit Agricole Indosuez, New York branch, as
              agent and the lending institutions listed therein.(6)
10.19         Asset Purchase Agreement dated as of October 31, 1997 among
              the Registrant, Inverness Corporation, and Inverness (UK)
              Limited.(7)
10.20         Transition and Manufacturing Agreement dated as of December
              10, 1997 the Registrant and Inverness Corporation.(7)
10.21         Credit Agreement dated as of December 10, 1997 among the
              Registrant and Credit Agricole Indosuez, New York branch, as
              agent and the lending institutions listed therein.(7)
21            Subsidiaries of Registrant
23            Consent of Arthur Andersen LLP
27            Financial Data Schedules
</TABLE>

---------------
(1) Incorporated by reference to the Registration Statement on Form S-1
    (Registration No. 333-12469) filed September 20, 1996 and declared effective
    November 12, 1996.

(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
    as filed with the Securities and Exchange Commission (the "Commission") on
    August 14, 1997.

(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
    as filed with the Commission on November 14, 1997.

(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K as
    filed with the Commission on April 10, 1997.

(5) Incorporated by reference to the Registrant's Current Report on Form 8-K as
    filed with the Commission on May 14, 1997.

(6) Incorporated by reference to the Registrant's Current Report on Form 8-K as
    filed with the Commission on July 10, 1997.

(7) Incorporated by reference to the Registrant's Current Report on Form 8-K as
    filed with the Commission on December 24, 1997.

                                       34
<PAGE>   37

     (b) Financial Statements filed as part of this report:

         Consolidated Financial Statements and Supplemental Schedules as listed
         in the Index to Consolidated Financial Statements on page F-1 of this
         report.

     (c) Reports on Form 8-K:

         The Registrant filed a Current Report on Form 8-K with respect to the
         acquisition of the Clean + Easy and One Touch product lines from
         Inverness Corporation and Inverness (UK) Limited on December 24, 1997,
         as amended by the Form 8-K/A filed on February 23, 1998 and the Form 8-
         K/A filed on March 20, 1998.

     (d) Financial Statement Schedules

         None.

                                       35
<PAGE>   38

                                   SIGNATURES

     Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          STYLING TECHNOLOGY CORPORATION

                                          By: /s/    SAM L. LEOPOLD
                                            ------------------------------------
                                                      Sam L. Leopold,
                                             Chairman of the Board, President,
                                                and Chief Executive Officer

                                                                  March 31, 1998

     Pursuant to the requirements of the Securities 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 dates indicated.

<TABLE>
<CAPTION>
                     SIGNATURE                                      TITLE                       DATE
                     ---------                                      -----                       ----
<C>                                                    <S>                                <C>

               By /s/ SAM L. LEOPOLD                   Chairman of the Board,                March 31, 1998
  ----------------------------------------------         President, and Chief
                  Sam L. Leopold                         Executive Officer (Principal
                                                         Executive Officer)

              By /s/ RICHARD R. ROSS                   Vice President, Chief Financial       March 31, 1998
  ----------------------------------------------         Officer, Treasurer, and
                  Richard R. Ross                        Secretary (Principal
                                                         Financial Officer)

              By /s/ JAMES A. BROOKS                   Director                              March 30, 1998
  ----------------------------------------------
                  James A. Brooks

               By /s/ PETER W. BURG                    Director                              March 29, 1998
  ----------------------------------------------
                   Peter W. Burg

            By /s/ MICHAEL H. FEINSTEIN                Director                              March 31, 1998
  ----------------------------------------------
               Michael H. Feinstein

              By /s/ SYLVAN SCHEFLER                   Director                              March 31, 1998
  ----------------------------------------------
                  Sylvan Schefler
</TABLE>

                                       36
<PAGE>   39

                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
STYLING TECHNOLOGY CORPORATION
Report of Independent Public Accountants....................  F-2
Consolidated Balance Sheets.................................  F-3
Consolidated Statements of Operations.......................  F-4
Consolidated Statements of Stockholders' Equity.............  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-7

GENA LABORATORIES, INC.
  Report of Independent Public Accountants..................  F-20
  Balance Sheets............................................  F-21
  Statements of Operations..................................  F-22
  Statements of Stockholders' Equity........................  F-23
  Statements of Cash Flows..................................  F-24
  Notes to Financial Statements.............................  F-25

BODY DRENCH (A DIVISION OF DESIGNS BY NORVELL, INC.)
  Report of Independent Public Accountants..................  F-32
  Balance Sheets............................................  F-33
  Statements of Operations..................................  F-34
  Statements of Changes in Owners' Investment...............  F-35
  Statements of Cash Flows..................................  F-36
  Notes to Financial Statements.............................  F-36

JDS MANUFACTURING CO., INC.
  Report of Independent Public Accountants..................  F-41
  Balance Sheets............................................  F-42
  Statements of Operations..................................  F-43
  Statements of Stockholders' Equity........................  F-44
  Statements of Cash Flows..................................  F-45
  Notes to Financial Statements.............................  F-46

KOTCHAMMER INVESTMENTS, INC.
  Report of Independent Public Accountants..................  F-50
  Balance Sheet.............................................  F-51
  Statements of Operations..................................  F-52
  Statements of Stockholders' Deficit.......................  F-53
  Statements of Cash Flows..................................  F-54
  Notes to Financial Statements.............................  F-55
</TABLE>

                                       F-1
<PAGE>   40

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
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, 1996 and 1997, and the related consolidated
statements of operations and cash flows for the period from November 27, 1996
(commencement of operations) to December 31, 1996 and for the year ended
December 31, 1997, and the related consolidated statements of stockholders'
equity for the period from June 30, 1995 to December 31, 1995 and the years
ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1996, and 1997, and the results of its operations and its cash flows for the
period from November 27, 1996 to December 31, 1996 and for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.

                                          /s/ ARTHUR ANDERSEN LLP
                                          --------------------------------------
                                               Arthur Andersen LLP

Phoenix, Arizona,
  February 19, 1998.

                                       F-2
<PAGE>   41

                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                --------------------------
                                                                   1996           1997
                                                                -----------    -----------
<S>                                                             <C>            <C>
                                          ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................    $ 4,491,000    $ 3,063,000
  Accounts receivable, net of allowance for doubtful
     accounts of approximately $427,000 and $1,032,000,
     respectively...........................................      1,640,000     14,296,000
  Inventory.................................................      2,635,000     10,951,000
  Prepaid expenses and other current assets.................        292,000      2,120,000
                                                                -----------    -----------
          Total current assets..............................      9,058,000     30,430,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
  approximately $11,000 and $394,000, respectively..........      1,125,000      2,640,000
GOODWILL, net of accumulated amortization of approximately
  $86,000 and $1,375,000, respectively......................     21,831,000     56,506,000
OTHER ASSETS................................................        220,000      2,913,000
                                                                -----------    -----------
                                                                $32,234,000    $92,489,000
                                                                ===========    ===========

                           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................    $ 3,000,000    $ 7,065,000
  Accrued liabilities.......................................      1,516,000      3,832,000
  Current portion of long-term debt and other...............         83,000      5,647,000
                                                                -----------    -----------
          Total current liabilities.........................      4,599,000     16,544,000
                                                                -----------    -----------
LONG-TERM DEBT AND OTHER, less current portion..............      2,316,000     47,377,000
                                                                -----------    -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Preferred stock, $.0001 par value, 1,000,000 shares
     authorized.............................................             --             --
  Common stock, $.0001 par value, 10,000,000 shares
     authorized; 4,757,000 shares issued; 3,949,000 shares
     outstanding............................................          1,000          1,000
  Additional paid-in capital................................     27,456,000     27,875,000
  Retained earnings (deficit)...............................       (338,000)     2,492,000
  Treasury stock............................................     (1,800,000)    (1,800,000)
                                                                -----------    -----------
          Total stockholders' equity........................     25,319,000     28,568,000
                                                                -----------    -----------
                                                                $32,234,000    $92,489,000
                                                                ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
                                       F-3
<PAGE>   42

                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            FOR THE PERIOD FROM
                                                             NOVEMBER 27, 1996
                                                               (COMMENCEMENT
                                                             OF OPERATIONS) TO        YEAR ENDED
                                                             DECEMBER 31, 1996     DECEMBER 31, 1997
                                                            -------------------    -----------------
<S>                                                         <C>                    <C>
NET SALES.................................................      $1,083,000            $38,108,000
COST OF SALES.............................................         571,000             16,756,000
                                                                ----------            -----------
          Gross profit....................................         512,000             21,352,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..............         737,000             12,201,000
                                                                ----------            -----------
          Income (loss) from operations...................        (225,000)             9,151,000
INTEREST EXPENSE AND OTHER INCOME, net....................           2,000             (1,847,000)
                                                                ----------            -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND INCOME
  TAXES...................................................        (223,000)             7,304,000
PROVISION FOR (BENEFIT FROM) INCOME TAXES.................         (72,000)             3,097,000
                                                                ----------            -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM...................        (151,000)             4,207,000
EXTRAORDINARY ITEM, net of tax benefit of $882,000........              --             (1,377,000)
                                                                ----------            -----------
NET INCOME (LOSS).........................................      $ (151,000)           $ 2,830,000
                                                                ==========            ===========
BASIC EARNINGS (LOSS) PER SHARE:
  Income (loss) before extraordinary item.................      $    (0.04)           $      1.07
  Extraordinary item, net.................................              --                  (0.35)
                                                                ----------            -----------
  Net income (loss).......................................      $    (0.04)           $      0.72
                                                                ==========            ===========
  Weighted average shares.................................       3,770,000              3,949,000
                                                                ==========            ===========
DILUTED EARNINGS (LOSS) PER SHARE:
  Income (loss) before extraordinary item.................      $    (0.04)           $      1.02
  Extraordinary item, net.................................              --                  (0.33)
                                                                ----------            -----------
  Net income (loss).......................................      $    (0.04)           $      0.69
                                                                ==========            ===========
  Weighted average shares.................................       3,770,000              4,113,000
                                                                ==========            ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       F-4
<PAGE>   43

                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          COMMON STOCK
                                      --------------------   ADDITIONAL     RETAINED                      TOTAL
                                        SHARES      COMMON     PAID-IN      EARNINGS     TREASURY     STOCKHOLDERS'
                                      OUTSTANDING   STOCK      CAPITAL     (DEFICIT)       STOCK         EQUITY
                                      -----------   ------   -----------   ----------   -----------   -------------
<S>                                   <C>           <C>      <C>           <C>          <C>           <C>
BALANCE, June 30, 1995
  (inception).......................          --    $  --    $        --   $       --   $        --    $        --
  Issuance of common stock..........   1,616,000    1,000             --           --            --          1,000
                                       ---------    ------   -----------   ----------   -----------    -----------
BALANCE, December 31, 1995..........   1,616,000    1,000             --           --            --          1,000
  Issuance of common stock and
     warrants.......................      20,000       --        179,000     (187,000)           --         (8,000)
  Issuance of common stock and
     warrants in initial public
     offering, net of offering costs
     of approximately $1,351,000....   3,116,000       --     27,227,000           --            --     27,227,000
  Issuance of common stock in KII
     acquisition....................       5,000       --         50,000           --            --         50,000
  Purchase of 808,000 shares of
     treasury stock.................    (808,000)      --             --           --    (1,800,000)    (1,800,000)
  Net loss for the period from
     November 27, 1996 (commencement
     of operations) to December 31,
     1996...........................          --       --             --     (151,000)           --       (151,000)
                                       ---------    ------   -----------   ----------   -----------    -----------
BALANCE, December 31, 1996..........   3,949,000    1,000     27,456,000     (338,000)   (1,800,000)    25,319,000
  Issuance of warrants..............          --       --        419,000           --            --        419,000
  Net income........................          --       --             --    2,830,000            --      2,830,000
                                       ---------    ------   -----------   ----------   -----------    -----------
BALANCE, December 31, 1997..........   3,949,000    $1,000   $27,875,000   $2,492,000   $(1,800,000)   $28,568,000
                                       =========    ======   ===========   ==========   ===========    ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       F-5
<PAGE>   44

                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              FOR THE PERIOD
                                                                   FROM
                                                               NOVEMBER 27,
                                                                 1996 TO
                                                               DECEMBER 31,    DECEMBER 31,
                                                                   1996            1997
                                                              --------------   ------------
<S>                                                           <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................................   $   (151,000)   $  2,830,000
  Adjustments to reconcile net income (loss) to net cash
     used in operating activities --
     Depreciation and amortization..........................         97,000       1,846,000
     Interest accretion to note payable.....................             --         174,000
  Changes in assets and liabilities --
     Accounts receivable, net...............................        532,000      (7,405,000)
     Inventory..............................................        (21,000)     (2,992,000)
     Prepaid expenses and other assets......................        (34,000)       (353,000)
     Accounts payable and accrued liabilities...............       (788,000)      3,520,000
                                                               ------------    ------------
          Net cash used in operating activities.............       (365,000)     (2,380,000)
                                                               ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of acquired businesses, net of cash acquired.....    (20,523,000)    (45,150,000)
  Purchases of property and equipment.......................        (46,000)       (582,000)
                                                               ------------    ------------
          Net cash used in investing activities.............    (20,569,000)    (45,732,000)
                                                               ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock, net of offering
     and acquisition costs..................................     27,225,000              --
  Proceeds from issuance of long-term debt, net of financing
     costs..................................................             --      71,633,000
  Payments on long-term debt................................             --     (24,949,000)
  Purchase of treasury stock................................     (1,800,000)             --
                                                               ------------    ------------
          Net cash provided by financing activities.........     25,425,000      46,684,000
                                                               ------------    ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............      4,491,000      (1,428,000)

CASH AND CASH EQUIVALENTS, beginning of period..............             --       4,491,000
                                                               ------------    ------------

CASH AND CASH EQUIVALENTS, end of period....................   $  4,491,000    $  3,063,000
                                                               ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for income taxes................................   $         --    $  1,727,000
                                                               ============    ============
  Cash paid for interest....................................   $         --    $  1,155,000
                                                               ============    ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-6
<PAGE>   45

                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) FORMATION OF THE COMPANY:

  Initial Public Offering and Acquired Businesses

     Styling Technology Corporation ("Styling") was formed in June 1995. From
June 1995 through November 26, 1996, Styling conducted no operations and its
only activities related to negotiating acquisitions and related financing.
During November 1996, Styling completed an initial public offering (the
"Offering") of 3,116,000 shares of its common stock. Simultaneously with the
consummation of the Offering, Styling 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 split, including the option terms as discussed herein.

     Upon consummation of the Offering, Styling 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 "Acquired Businesses"). The cost of the Acquired
Businesses, including direct acquisition costs, was approximately $22.9 million.
The combined purchase price was funded with approximately $20.8 million in cash
from the net proceeds of the Offering, and approximately $2.1 million of seller
carryback financing and issuance of common stock. The acquisitions were
accounted for using the purchase method of accounting. The purchase price was
allocated based on the fair market value of the assets and liabilities acquired.
Approximately $5.2 million was allocated to current assets, approximately $1.1
million to property and equipment, approximately $5.0 million to current
liabilities, and approximately $0.3 million to long-term debt. Approximately
$21.9 million of the purchase price represents costs in excess of fair values
acquired, and was recorded as goodwill.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
Styling (which includes the Body Drench division, KII, Suntopia and the Clean
and Easy/One Touch product lines) and the Gena, JDS, U.K. ABBA Products, Inc.
("ABBA") and Styling Technology (UK) Limited subsidiaries (collectively, the
"Subsidiaries"). The Company's accompanying consolidated financial statements
include the operations of Styling and Subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation. Financial information and transactions with Styling Technology
(UK) Limited are reported in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, Foreign Currency Translation.

  Cash Equivalents

     All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.

  Concentrations of Credit Risk

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and trade
receivables. In management's opinion, the Company places its cash and cash
equivalents in high quality credit institutions. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.

                                       F-7
<PAGE>   46
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Reclassifications

     Certain amounts as of December 31, 1996 and for the period from November
27, 1996 to December 31, 1996 have been reclassified to conform with fiscal year
1997 presentation.

  Inventory

     Inventory is valued at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventory for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.

Inventory consists of the following:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                     -------------------------
                                                        1996          1997
                                                     ----------    -----------
<S>                                                  <C>           <C>
Raw materials and work-in-process..................  $1,325,000    $ 2,594,000
Finished goods.....................................   1,310,000      8,357,000
                                                     ----------    -----------
                                                     $2,635,000    $10,951,000
                                                     ==========    ===========
</TABLE>

  Property and Equipment

     Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straightline method over their estimated
useful lives.

     Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred.

  Goodwill

     Goodwill is the cost in excess of fair value of net tangible assets of
acquired businesses and is amortized using the straight-line method over 25
years. The Company continually evaluates whether events and circumstances have
occurred subsequent to its acquisition that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the
undiscounted future cash flows over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

                                       F-8
<PAGE>   47
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Fair Value of Financial Instruments

     The Company's financial instruments include cash, accounts receivable,
long-term debt and letters of credit. The estimated fair value amounts have been
determined by the Company at December 31, 1996 and at December 31, 1997, using
available market information and valuation methodologies described below. The
carrying values of cash and cash equivalents and accounts receivable approximate
fair values due to the short-term maturities of these instruments. The carrying
amount on the long-term debt is estimated to approximate fair value as the
actual interest rates are consistent with rates estimated to be currently
available for debt with similar terms and remaining maturities. The carrying
amount of the letters of credit reflects fair value as the related fees are
competitively determined in the marketplace.

  Revenue Recognition

     The Company recognizes revenue from sales at the time product is shipped.

  Income Taxes

     The Company provides for income taxes using the asset and liability method.
Under this method, deferred income tax assets and liabilities are recognized for
the expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities and carryforwards. This method requires
recognition of deferred tax assets for the expected future tax effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized.

  Other Assets

     Other assets consist primarily of deferred financing costs associated with
the Company completing various financings transactions (see Note 5). These costs
are capitalized as incurred and amortized over the related debt into interest
expense and other income in the accompanying consolidated statements of
operations.

  Recently Issued Accounting Standards

     In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
gains, and losses) in a full set of general-purpose financial statements. SFAS
No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. In management's opinion, the adoption of SFAS No. 130
will not have a material impact on the Company's financial position or results
of operations.

     In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In manage-

                                       F-9
<PAGE>   48
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ment's opinion, the adoption of SFAS No. 131 will not have a material impact on
the Company's financial position or results of operations.

  Earnings (Loss) Per Share

     In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
supersedes Accounting Principles Board Opinion No. 15. SFAS No. 128 modifies the
calculation of primary and fully diluted earnings per share (EPS) and replaces
them with basic and diluted EPS. SFAS No. 128 is effective for financial
statements for both interim and annual periods presented after December 15,
1997, and as a result, all prior-period EPS data presented herein has been
restated.

     A reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the period from November 27, 1996 to December 31,
1996 and the year ended December 31, 1997, is as follows:

<TABLE>
<CAPTION>
                                                1996                                  1997
                                ------------------------------------   -----------------------------------
                                             EFFECT OF                              EFFECT OF
                                               STOCK                                  STOCK
                                              OPTIONS                                OPTIONS
                                  BASIC         AND        DILUTED       BASIC         AND       DILUTED
                                   EPS        WARRANTS       EPS          EPS       WARRANTS       EPS
                                ----------   ----------   ----------   ----------   ---------   ----------
<S>                             <C>          <C>          <C>          <C>          <C>         <C>
Income (loss) before
  extraordinary item
  (numerator).................  $ (151,000)          --   $ (151,000)  $4,207,000         --    $4,207,000
Extraordinary item, net
  (numerator).................          --           --           --    1,377,000         --     1,377,000
                                ----------   ----------   ----------   ----------    -------    ----------
Net income (loss)
  (numerator).................  $ (151,000)          --   $ (151,000)  $2,830,000         --    $2,830,000
                                ==========   ==========   ==========   ==========    =======    ==========
Shares (denominator)..........   3,770,000           --    3,770,000    3,949,000    164,000     4,113,000
                                ==========   ==========   ==========   ==========    =======    ==========
Per share amount -- income
  (loss) before extraordinary
  item........................  $    (0.04)               $    (0.04)  $     1.07               $     1.02
Per share
  amount -- extraordinary
  item, net...................          --                        --        (0.35)                   (0.33)
                                ----------                ----------   ----------               ----------
Per share amount -- net income
  (loss)......................  $    (0.04)               $    (0.04)  $     0.72               $     0.69
                                ==========                ==========   ==========               ==========
</TABLE>

     For the period from November 27, 1996 to December 31, 1996, no common stock
equivalents were considered in the EPS calculations as their effect was
antidilutive. For purposes of applying the treasury stock method, the Company
has assumed that it will fully utilize tax deductions arising from the assumed
exercise of non-qualified stock options.

(3) 1997 BUSINESS COMBINATIONS:

     During March 1997, the Company acquired inventory and other assets of the
Utopia product line of high-end tanning products from Creative Laboratories,
Inc. for approximately $350,000 in cash.

     On June 25, 1997, the Company acquired all of the issued and outstanding
common stock of ABBA, which produces a proprietary line of aromatherapy-based
professional hair care products. The Company paid a purchase price of
approximately $20 million in cash for the ABBA common stock. In connection with
the ABBA acquisition, the Company also negotiated approximately $1.1 million in
facilitation fees, payable over three years, to certain former shareholders of
ABBA for pre-closing efforts to facilitate completion of the acquisition (see
Note 5). The ABBA acquisition is accounted for under the purchase method of
accounting. The purchase price was allocated to assets and liabilities based on
their estimated fair values as of the date of acquisition. The cost in excess of
fair values was approximately $20.1 million and is recorded as goodwill in the
accompanying consolidated balance sheets.

                                      F-10
<PAGE>   49
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On December 10, 1997, the Company acquired certain assets and assumed
certain liabilities of Inverness Corporation and Inverness (UK) Limited
(collectively "Inverness"). Inverness produces salon and retail hair removal
apparatus and products under the brand names "One Touch" and "Clean + Easy." The
Company paid a purchase price consisting of (i) $16.5 million in cash; and (ii)
an additional $3.5 million in cash held in escrow pending release contingent
upon the successful transition of the manufacture of certain hair removal
appliances to offshore manufacturing. The Inverness acquisition is accounted for
under the purchase method of accounting. The purchase price was allocated to
assets and liabilities based on their estimated fair values as of the date of
acquisition. The cost in excess of fair values was approximately $13.4 million
and is recorded as goodwill in the accompanying consolidated balance sheets. The
amounts of assets acquired and liabilities assumed in the Inverness acquisitions
were based on the preliminary fair values as of the date of acquisition, and may
be revised at a later date.

     The following assets were acquired and liabilities assumed at the closing
date of the three acquisitions described above:

<TABLE>
<S>                                                           <C>
Accounts receivable.........................................  $  5,251,000
Inventory...................................................     5,324,000
Other assets................................................     1,475,000
Property and equipment......................................     1,316,000
Accounts payable and accrued liabilities....................    (2,861,000)
                                                              ------------
Net assets acquired.........................................    10,505,000
Cash paid at closing for purchase price and acquisition
  costs.....................................................    45,150,000
                                                              ------------
Goodwill....................................................  $ 34,645,000
                                                              ============
</TABLE>

  Pro Forma Results of Operations

     The following unaudited pro forma summary includes the combined results of
operations of the Company, the Acquired Businesses, and the Utopia, ABBA and
Inverness acquisitions, as if all such acquisitions had occurred at the
beginning of 1996 and 1997 after giving effect to certain pro forma adjustments.
These pro forma adjustments include only the effect of goodwill amortization,
interest expense that would have been incurred to finance a portion of the
purchase of the acquisitions, and the estimated related income tax effects. The
pro forma financial data is for informational purposes only, and is not
necessarily indicative of the results of operations had the acquisitions
occurred at the beginning of 1996 and 1997 and is not necessarily indicative of
future operating results.

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       1996           1997
                                                    -----------    -----------
                                                           (UNAUDITED)
<S>                                                 <C>            <C>
Net sales.........................................  $51,374,000    $62,752,000
Net income (loss).................................   (1,639,000)     2,447,000
Income (loss) per diluted share...................        (0.43)          0.59
</TABLE>

                                      F-11
<PAGE>   50
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) PROPERTY AND EQUIPMENT:

     Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                             USEFUL           DECEMBER 31,
                                              LIVES     ------------------------
                                             (YEARS)       1996          1997
                                             -------    ----------    ----------
<S>                                          <C>        <C>           <C>
Land.......................................     --      $  150,000    $  150,000
Building and leasehold improvements........   7-40         567,000       594,000
Machinery and equipment....................    3-7         274,000     1,559,000
Furniture and fixtures.....................      7          65,000       375,000
Computers, vehicles and other..............    3-5          80,000       356,000
                                                        ----------    ----------
                                                         1,136,000     3,034,000
Less -- accumulated depreciation...........                (11,000)     (394,000)
                                                        ----------    ----------
                                                        $1,125,000    $2,640,000
                                                        ==========    ==========
</TABLE>

     The Company recorded approximately $11,000 and $383,000 in depreciation
expense for the period from November 27, 1996 to December 31, 1996 and the year
ended December 31, 1997, respectively, which is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.

(5) LONG-TERM DEBT AND OTHER:

     Long-term debt and other consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                1996          1997
                                                             ----------    -----------
<S>                                                          <C>           <C>
Senior credit facility, collateralized by substantially all
  the assets of the Company, maturing through December 31,
  2004.....................................................  $       --    $50,000,000
Gena Note, imputed interest at 10%, secured by 225,000
  shares of contingently issuable common stock held in
  escrow and an outstanding letter of credit for $500,000,
  maturing November 26, 1998...............................   1,667,000      1,841,000
Unsecured notes payable related to the acquisition of JDS,
  bearing interest from 8% to 10%, due quarterly, maturing
  November 26, 1998........................................     283,000        283,000
Note payable related to the acquisition of KII, repaid
  during 1997..............................................     140,000             --
Note payable, repaid during 1997...........................     309,000             --
Facilitation fee payable (see Note 3)......................          --        900,000
                                                             ----------    -----------
                                                              2,399,000     53,024,000
Less: current portion......................................     (83,000)    (5,647,000)
                                                             ----------    -----------
                                                             $2,316,000    $47,377,000
                                                             ==========    ===========
</TABLE>

                                      F-12
<PAGE>   51
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Aggregate future maturities of long-term debt and other are as follows at
December 31, 1997:

<TABLE>
<S>                                                       <C>
1998....................................................  $ 5,647,000
1999....................................................    4,797,000
2000....................................................    5,480,000
2001....................................................    6,300,000
2002....................................................    7,300,000
Thereafter..............................................   23,500,000
                                                          -----------
                                                          $53,024,000
                                                          ===========
</TABLE>

  Senior Credit Facilities

     In June 1997, in connection with the ABBA acquisition, the Company entered
into a six year, $28 million credit facility ("Old Credit Facility") with a
group of banks with Credit Agricole Indosuez ("Indosuez") acting as agent. The
Old Credit Facility consisted of three separate loans: a $13 million term A
loan, a $10 million term B loan, and a $5 million revolving line of credit.

     In December 1997, in connection with the acquisition of Inverness, the
Company extinguished the Old Credit Facility and entered into a new credit
facility ("New Credit Facility"). The New Credit Facility is a seven-year, $75
million credit facility with a new group of banks with Indosuez acting as agent.
The New Credit Facility consists of four separate loans: (i) a $25 million term
A loan ("Term A Loan"), (ii) a $25 million term B loan ("Term B Loan"), (iii) a
$12.5 million acquisition term loan, and (iv) a $12.5 million revolving line of
credit. In connection with the extinguishment of the Old Credit Facility, the
Company took an extraordinary non-cash charge of approximately $1.4 million, net
of income taxes, related to the write-off of unamortized financing costs.

     The Company may utilize the acquisition term loan in connection with
funding future acquisitions. These future acquisitions would require the Company
to meet certain pro forma financial ratios. Upon such financing, the acquisition
term loan will convert proportionately into Term A and Term B Loans based on the
respective principal outstanding on the Term A and Term B Loans at that time.

     The interest rate on the New Credit Facility is paid quarterly and
determined by the base rate (the "Base Rate"), as defined. The Base Rate is
equal to the higher of (i) the Federal Funds Rate plus 0.5%, or (ii) the
Indosuez prime lending rate. The Term A Loan bears interest at the Base Rate
plus 1.0%, and matures on December 31, 2002. The Term B Loan bears interest at
the Base Rate plus 1.5% and matures on December 31, 2004. The revolving line of
credit bears interest at the Base Rate plus 1.0%, and expires on December 31,
2002. The revolving line of credit will be used for working capital purposes.

     The Company may, at its option after January 9, 1998, convert the interest
rates relating to any of the loans to a LIBOR rate. Should the Company exercise
this option, the Term A Loan will bear interest at the LIBOR rate plus 2.5%; the
Term B Loan will bear interest at the LIBOR rate plus 3.0%; and the revolving
line of credit will bear interest at the LIBOR rate plus 2.5%.

     The New Credit Facility contains certain provisions that, among other
things, will require the Company to comply with certain financial ratio
requirements and will limit the ability of the Company to make certain capital
expenditures, to incur certain additional indebtedness, to sell assets, or to
declare dividends. In addition, the New Credit Facility requires the Company to
enter into certain interest rate protection instruments. As of December 31,
1997, the Company had not yet entered into any interest rate protection
transactions.

                                      F-13
<PAGE>   52
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) STOCKHOLDERS' EQUITY:

  Treasury Stock

     In October 1996, the Company entered into a stock repurchase agreement with
a founder, pursuant to which the founder agreed to sell approximately 808,000
shares of Company's common stock to the Company for $1.8 million, payable upon
consummation of the Offering. Accordingly, upon consummation of the Offering,
the founder was no longer a stockholder of the Company.

  Initial Public Offering

     In November 1996, the Company completed the Offering of approximately 2.9
million shares of its common stock with an issue price of $10.00 per share.
During December 1996, the Company's underwriters exercised an over allotment
option, resulting in the issuance of approximately 216,000 additional shares.
Net proceeds from the Offering and over allotment option amounted to
approximately $27,226,000. 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.

  Warrants

     In connection with the Old Credit Facility, the Company issued 160,000 five
year warrants to lenders with exercise prices between $10.18 and $11.38 per
share. These warrants have been recorded at fair value as additional paid-in
capital in the accompanying December 31, 1997 consolidated balance sheet.

     In connection with the consummation of the Acquired Businesses and the
Offering, the Company issued warrants to purchase 20,000 shares of common stock
with an exercise price of $12.50 per share.

  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. Subsequent to December 31, 1997,
approximately 72,000 stock options were cancelled in connection with the
officer's retirement.

     During 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"),
which provides for the grant of incentive and nonqualified stock options to
acquire common stock of the Company to key personnel and directors of the
Company.

                                      F-14
<PAGE>   53
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the status of all the Company's stock options at December 31,
1996 and 1997, and changes during the periods ended is presented in the
following table:

<TABLE>
<CAPTION>
                                                    1996                    1997
                                            --------------------    --------------------
                                                        WEIGHTED                WEIGHTED
                                                        AVERAGE                 AVERAGE
                                                        EXERCISE                EXERCISE
                                            OPTIONS      PRICE      OPTIONS      PRICE
                                            --------    --------    --------    --------
<S>                                         <C>         <C>         <C>         <C>
Outstanding at beginning of year..........   162,000     $  .10      250,000     $ 3.58
  Granted.................................    88,000      10.00      430,000      10.57
  Exercised...............................        --         --           --         --
  Canceled................................        --         --     (131,000)     10.60
                                            --------     ------     --------     ------
Outstanding at end of year................   250,000     $ 3.58      549,000     $ 7.38
                                            ========     ======     ========     ======
Exercisable at end of year................    18,000     $10.00      136,000     $ 9.71
                                            ========     ======     ========     ======
Weighted average fair value per share of
  options granted.........................  $   5.65                $   4.13
                                            ========                ========
</TABLE>

     Options outstanding at December 31, 1997 have exercise prices between $0.10
and $11.38. 162,000 options have exercise prices of $0.10 with a remaining
average contractual life of 7.5 years, with cliff vesting after four years.
387,000 options have exercise prices between $9.25 and $11.38 with a remaining
average contractual life of 9.4 years, with vesting between one and five 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.

<TABLE>
<CAPTION>
                                                           FOR THE PERIOD
                                                                FROM
                                                            NOVEMBER 27,
                                                                1996
                                                            (COMMENCEMENT
                                                          OF OPERATIONS) TO
                                                            DECEMBER 31,       DECEMBER 31,
                                                                1996               1997
                                                          -----------------    ------------
<S>                                                       <C>                  <C>
Income (loss) before extraordinary item
  As reported...........................................      $(151,000)       $ 4,207,000
  Pro forma.............................................       (226,000)         3,876,000
  Diluted EPS -- as reported............................          (0.04)              1.02
  Diluted EPS -- pro forma..............................          (0.06)              0.94
Extraordinary item, net
  As reported...........................................             --         (1,337,000)
  Diluted EPS -- as reported............................             --              (0.33)
Net income (loss)
  As reported...........................................       (151,000)         2,830,000
  Pro forma.............................................       (226,000)         2,539,000
  Diluted EPS -- as reported............................          (0.04)              0.69
  Diluted EPS -- pro forma..............................          (0.06)              0.62
</TABLE>

     The fair value of each option is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants in 1996; risk-free interest rates of 5.85%, expected
lives of 3.8 years; and a volatility factor of 60%. The weighted average
assumptions used for grants in 1997 were as follows: risk-free interest rates of
5.99% to 6.62%, expected lives of two to six years; and a volatility factor of
38.59%. The dividend yield assumed is zero for both 1996 and 1997.

                                      F-15
<PAGE>   54
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) INCOME TAXES:

     The provision for (benefit from) income taxes for the periods ended
December 31, 1996 and 1997, consists of the following:

<TABLE>
<CAPTION>
                                                         1996         1997
                                                       --------    ----------
<S>                                                    <C>         <C>
Current expense......................................  $     --    $3,146,000
Deferred benefit.....................................   (72,000)      (49,000)
                                                       --------    ----------
Net income tax expense (benefit).....................  $(72,000)   $3,097,000
                                                       ========    ==========
</TABLE>

     The components of the deferred tax accounts as of December 31, 1996 and
1997, consists of the following:

<TABLE>
<CAPTION>
                                                         1996         1997
                                                       ---------    ---------
<S>                                                    <C>          <C>
Current deferred tax assets
     Tax effect of net operating loss carryforward...  $  86,000    $      --
     Reserves and other accruals.....................     84,000      232,000
     Inventory capitalization........................         --      222,000
     Other...........................................     38,000        8,000
                                                       ---------    ---------
Total deferred tax assets............................    208,000      462,000
                                                       ---------    ---------
Non-current deferred tax liabilities
     Accelerated tax depreciation and amortization...     16,000      162,000
                                                       ---------    ---------
Net deferred tax asset...............................  $ 192,000    $ 300,000
                                                       =========    =========
</TABLE>

     A reconciliation of the U.S. federal statutory income tax rate to the
Company's income (loss) before extraordinary item effective tax rate is as
follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1996      1997
                                                              ----      ----
<S>                                                           <C>       <C>
Statutory federal rate......................................  (34)%      34%
Effect of state taxes.......................................   (5)        4
Nondeductible amortization of goodwill......................    8         4
Other.......................................................   (1)       --
                                                              ---       ---
                                                              (32)%      42%
                                                              ===       ===
</TABLE>

     The net operating loss deferred tax asset of approximately $86,000
originating in the year ended December 31, 1996, was completely utilized as of
December 31, 1997.

(8) RELATED PARTY INFORMATION:

     During 1996, certain founders advanced approximately $112,500 to the
Company to fund various Offering and acquisition costs, all of which was repaid
during the year.

     A member of the Company's Board of Directors serves as President of a
consulting firm which was paid a $150,000 fee in connection with the ABBA
acquisition.

     A member of the Company's Board of Directors is a partner in a law firm
that represents the Company in certain legal matters. The total fees paid to the
firm during 1997 were approximately $8,000.

                                      F-16
<PAGE>   55
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 former member of the Company's Board of Directors serves as a consultant
to the Company. He was paid consulting fees and reimbursement of out of pocket
expenses of approximately $213,000 during the period in which he served as a
Director for the Company.

     The Company's Chief Executive Officer owns a salon chain which is a
customer of the Company. Sales to these stores from all divisions were
approximately $153,000 during 1997. The total accounts receivable balance as of
December 31, 1997, from these stores was approximately $96,000.

(9) COMMITMENTS AND CONTINGENCIES:

  Legal Matters

     The Company is party to certain legal matters arising in the ordinary
course of its business. In management's opinion, as of December 31, 1997, the
expected outcome of such matters will not have a material impact on the
Company's financial position or results of operations.

  Operating Leases

     The Company leases certain equipment and office and warehouse space under
noncancelable operating leases. Rent expense related to these lease agreements
totaled approximately $12,000 for the period November 27, 1996 (commencement of
operations) to December 31, 1996. Rent expense for the year ended December 31,
1997, was approximately $313,000.

     Future lease payments under noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
                     YEARS ENDING
                     DECEMBER 31,
                     ------------
<S>                                                        <C>
  1998.................................................    $  768,000
  1999.................................................       760,000
  2000.................................................       740,000
  2001.................................................       482,000
  2002.................................................       415,000
  Thereafter...........................................       202,000
                                                           ----------
                                                           $3,367,000
                                                           ==========
</TABLE>

  Retirement Plans

     Two of the Company's divisions had 401(k) plans in place at the time of
their acquisition. The first of these plans allows contributions of up to 18% of
compensation for eligible employees. The Company may match up to 25% of the
employee's contribution up to a maximum of 4% of the employee's compensation.
The Company made payments to this 401(k) Plan for approximately $5,000 during
1997. Any full-time employee who has been with that division of the Company for
at least three months may enroll during a semiannual enrollment period.

     The second plan allows contributions of up to 20% of compensation for
eligible employees. The Company may match up to 50% of the employee's
contribution up to a maximum of 6% of compensation. The Company made payments to
this 401(k) plan in the sum of $13,000 during 1997. Any full-time employee who
has been with that division of the Company for at least one year may enroll
during a semi-annual enrollment period.

                                      F-17
<PAGE>   56
                STYLING TECHNOLOGY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) CUSTOMER AND VENDOR CONCENTRATION:

     Sales to a major U.S. beauty supply chain as a percentage of total net
sales approximated 25% for the period November 27, 1996 to December 31, 1996.
During 1997, this customer accounted for approximately 13% of the total net
sales of the Company. The unaudited pro forma concentration of this single
customer would represent 9% of total net sales for the year ended December 31,
1997, assuming the ABBA and Inverness acquisitions had occurred on January 1,
1997.

     As part of the Company's strategy, the Company uses third parties to
manufacture the majority of the Company's products. One of these third party
suppliers accounted for approximately 15% of the total cost of sales for the
year ended December 31, 1997.

                                      F-18
<PAGE>   57

                            GENA LABORATORIES, INC.

                              FINANCIAL STATEMENTS
                 AS OF FEBRUARY 28, 1995 AND FEBRUARY 29, 1996
                            TOGETHER WITH REPORT OF
                         INDEPENDENT PUBLIC ACCOUNTANTS

                                      F-19
<PAGE>   58

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Styling Technology Corporation:

     We have audited the accompanying balance sheets of GENA LABORATORIES, INC.
as of February 28, 1995 and February 29, 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended February 29, 1996, and for the period March 1, 1996 to November
26, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gena Laboratories, Inc. as
of February 28, 1995 and February 29, 1996, and the results of its operations
and its cash flows for each of the three years in the period ended February 29,
1996 and for the period March 1, 1996 to November 26, 1996, in conformity with
generally accepted accounting principles.

                                          /s/  ARTHUR ANDERSEN LLP

                                          --------------------------------------
                                               Arthur Andersen LLP

Phoenix, Arizona,
  March 21, 1997.

                                      F-20
<PAGE>   59

                            GENA LABORATORIES, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              FEBRUARY 28,    FEBRUARY 29,
                                                                  1995            1996
                                                              ------------    ------------
<S>                                                           <C>             <C>
                                          ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................   $  390,325      $  250,644
  Investments...............................................       14,999          46,500
  Accounts receivable, net of allowance for doubtful
     accounts of $120,347 and $136,093, respectively........      863,208         965,615
  Inventory.................................................      965,335       1,213,688
  Deferred tax asset........................................       99,055         131,790
                                                               ----------      ----------
          Total current assets..............................    2,332,922       2,608,237
                                                               ----------      ----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
  $392,026 and $471,771, respectively.......................      884,638         830,093
DEFERRED TAX ASSET, net of current portion..................           --          19,870
OTHER ASSETS................................................      346,866         256,770
                                                               ----------      ----------
                                                               $3,564,426      $3,714,970
                                                               ==========      ==========
                           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................   $  391,381      $  382,926
  Accrued expenses..........................................      302,808         259,903
  Current portion of note payable to related parties........       32,571          34,929
  Current portion of long-term debt.........................       96,056          95,248
                                                               ----------      ----------
          Total current liabilities.........................      822,816         773,006
                                                               ----------      ----------
NOTE PAYABLE TO RELATED PARTIES, less current portion.......      342,464         307,358
                                                               ----------      ----------
LONG-TERM DEBT, net of current portion......................      124,186          11,518
                                                               ----------      ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Common stock, $5 par value, 2,000 shares authorized,
     issued and outstanding.................................       10,000          10,000
  Additional paid-in capital................................       88,303          88,303
  Unrealized holding loss on investment.....................      (35,303)         (3,802)
  Retained earnings.........................................    2,211,960       2,528,587
                                                               ----------      ----------
          Total stockholders' equity........................    2,274,960       2,623,088
                                                               ----------      ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................   $3,564,426      $3,714,970
                                                               ==========      ==========
</TABLE>

  The accompanying notes to financial statements are an integral part of these
                                balance sheets.
                                      F-21
<PAGE>   60

                            GENA LABORATORIES, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                              FOR THE PERIOD
                                                            FOR THE YEARS ENDED               MARCH 1, 1996
                                                 ------------------------------------------         TO
                                                 FEBRUARY 28,   FEBRUARY 28,   FEBRUARY 29,    NOVEMBER 26,
                                                     1994           1995           1996            1996
                                                 ------------   ------------   ------------   --------------
<S>                                              <C>            <C>            <C>            <C>
NET SALES......................................   $6,426,416     $7,523,751     $8,384,092      $6,707,727
COST OF SALES..................................    3,280,046      4,163,395      4,818,786       3,900,347
                                                  ----------     ----------     ----------      ----------
GROSS PROFIT...................................    3,146,370      3,360,356      3,565,306       2,807,380
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...    2,744,363      2,963,926      3,033,409       1,983,650
                                                  ----------     ----------     ----------      ----------
INCOME FROM OPERATIONS.........................      402,007        396,430        531,897         823,730
OTHER INCOME AND (EXPENSE), net................       35,092        (35,282)       (30,480)          2,225
                                                  ----------     ----------     ----------      ----------
INCOME BEFORE PROVISION FOR INCOME TAXES.......      437,099        361,148        501,417         825,955
PROVISION FOR INCOME TAXES.....................      158,613        129,606        184,790         297,344
                                                  ----------     ----------     ----------      ----------
NET INCOME.....................................   $  278,486     $  231,542     $  316,627      $  528,611
                                                  ==========     ==========     ==========      ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-22
<PAGE>   61

                            GENA LABORATORIES, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                         COMMON STOCK       ADDITIONAL                      TOTAL
                                       -----------------     PAID-IN       RETAINED     STOCKHOLDERS'
                                       SHARES    AMOUNT      CAPITAL       EARNINGS        EQUITY
                                       ------    -------    ----------    ----------    -------------
<S>                                    <C>       <C>        <C>           <C>           <C>
BALANCE AT FEBRUARY 28, 1993.........  2,000     $10,000     $88,303      $1,687,828     $1,786,131
  Net income.........................     --          --          --         278,486        278,486
  Net change in unrealized holding
     loss............................     --          --          --           1,006          1,006
                                       -----     -------     -------      ----------     ----------
BALANCE AT FEBRUARY 28, 1994.........  2,000      10,000      88,303       1,967,320      2,065,623
  Net income.........................     --          --          --         231,542        231,542
  Net change in unrealized holding
     loss............................     --          --          --         (22,205)       (22,205)
                                       -----     -------     -------      ----------     ----------
BALANCE AT FEBRUARY 28, 1995.........  2,000      10,000      88,303       2,176,657      2,274,960
  Net income.........................     --          --          --         316,627        316,627
  Net change in unrealized holding
     loss............................     --          --          --          31,501         31,501
                                       -----     -------     -------      ----------     ----------
BALANCE AT FEBRUARY 29, 1996.........  2,000      10,000      88,303       2,524,785      2,623,088
  Net income for the period March 1,
     1996 to November 26, 1996.......     --          --          --         528,611        528,611
  Distributions to stockholders......     --          --          --        (513,000)      (513,000)
                                       -----     -------     -------      ----------     ----------
BALANCE AT NOVEMBER 26, 1996.........  2,000     $10,000     $88,303      $2,540,396     $2,638,699
                                       =====     =======     =======      ==========     ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-23
<PAGE>   62

                            GENA LABORATORIES, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                            FOR THE PERIOD
                                                        FOR THE YEARS ENDED                 MARCH 1, 1996
                                            --------------------------------------------          TO
                                            FEBRUARY 28,    FEBRUARY 28,    FEBRUARY 29,     NOVEMBER 26,
                                                1994            1995            1996             1996
                                            ------------    ------------    ------------    --------------
<S>                                         <C>             <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income..............................   $ 278,486       $ 231,542       $ 316,627        $ 528,611
  Adjustments to reconcile net income to
     net cash used in operating
     activities --
     Depreciation and amortization........     114,021         155,185         168,685           37,939
     Loss on sale of securities on fixed
       assets.............................          --          32,513              --               --
     Decrease (increase) in accounts
       receivable.........................      38,647        (157,714)       (102,407)          90,671
     Decrease (increase) in inventory.....     (14,638)       (118,638)       (248,353)         (24,975)
     Decrease (increase) in other
       assets.............................      80,863         (30,814)        (51,449)        (228,444)
     (Decrease) increase in accounts
       payable and accrued liabilities....    (122,813)        210,426         (51,360)          14,157
                                             ---------       ---------       ---------        ---------
          Net cash provided by (used in)
            operating activities..........     374,566         322,500          31,743          417,959
                                             ---------       ---------       ---------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures....................    (331,996)        (23,648)        (25,200)         (11,886)
  Cost incurred to acquire new
     businesses...........................    (180,213)       (140,000)             --               --
  Proceeds from sale of investments.......          --              --              --           46,500
                                             ---------       ---------       ---------        ---------
          Net cash provided by (used in)
            investing activities..........    (512,209)       (163,648)        (25,200)          34,614
                                             ---------       ---------       ---------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from (payments of) long-term
     debt, net............................     178,585        (136,668)       (146,224)        (137,098)
  Distributions to stockholders...........          --              --              --         (513,000)
                                             ---------       ---------       ---------        ---------
          Net cash provided by (used in)
            financing activities..........     178,585        (136,668)       (146,224)        (650,098)
                                             ---------       ---------       ---------        ---------
NET INCREASE (DECREASE) IN CASH...........      40,942          22,184        (139,681)        (197,525)
CASH AND CASH EQUIVALENTS, beginning of
  period..................................     327,199         368,141         390,325          250,644
                                             ---------       ---------       ---------        ---------
CASH AND CASH EQUIVALENTS, end of
  period..................................   $ 368,141       $ 390,325       $ 250,644        $  53,119
                                             =========       =========       =========        =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Interest paid...........................   $   8,325       $  54,401       $  43,259        $  23,871
                                             =========       =========       =========        =========
  Income taxes paid.......................   $ 137,580       $ 127,609       $ 232,417        $ 195,860
                                             =========       =========       =========        =========
FIXED ASSETS AND NEW BUSINESSES ACQUIRED
  THROUGH FINANCING TRANSACTIONS..........   $ 528,449       $  24,911       $      --        $      --
                                             =========       =========       =========        =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-24
<PAGE>   63

                            GENA LABORATORIES, INC.

                         NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION:

  Acquisition and Basis of Presentation

     Effective November 26, 1996, shareholders of Gena Laboratories, Inc. (the
Company) sold all of its outstanding stock to Styling Technology Corporation for
consideration of approximately $9,700,000. These financial statements present
the historical financial position and results of operations of the acquired
business for periods prescribed by applicable rules of the Securities and
Exchange Commission.

  Organization and Nature of Operations

     The Company was incorporated in 1930 to manufacture nail care and personal
care products. In 1979, the current owners purchased the Company and focused the
operation on professional salon care with an emphasis on nail products. The
Company is now a recognized quality manufacturer and distributor of professional
beauty products worldwide, and offers an extensive line of nail, skin and hair
care products as well as pedicure and other specialty beauty products and
accessories. Principally, its products are sold through wholesale distributors
of professional beauty products, hair and nail salons and professional beauty
supply outlets worldwide.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Cash and Cash Equivalents

     All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.

  Investments

     The Company considers all its investments as available for sale and
accordingly, recognizes any unrealized holding gains and losses as a separate
component of stockholders' equity, in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.

  Inventory

     Inventory is valued at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventory for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                      FEBRUARY 28,    FEBRUARY 29,
                                                          1995            1996
                                                      ------------    ------------
<S>                                                   <C>             <C>
Raw materials and work-in-process...................    $675,735       $  849,582
Finished goods......................................     289,600          364,106
                                                        --------       ----------
                                                        $965,335       $1,213,688
                                                        ========       ==========
</TABLE>

  Property and Equipment

     Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over the estimated
useful lives of the assets.

     Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the years ended
February 28, 1994 and 1995, February 29, 1996, and for the period March 1, 1996
to

                                      F-25
<PAGE>   64
                            GENA LABORATORIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

November 26, 1996, maintenance and repair expenses charged to cost of operations
were approximately $26,000, $47,000, $23,000 and $32,245, respectively.

  Concentration of Credit Risk

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
credit quality institutions. Concentrations of credit risk with respect to trade
receivables are described in Note 6. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.

  Fair Value of Financial Instruments

     The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments. The carrying amount on the long-term debt is
estimated to approximate fair value as the actual interest rates are consistent
with rates estimated to be currently available for debt with similar terms and
remaining maturities.

  Revenue Recognition

     The Company recognizes revenue from sales at the time product is shipped.

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.

(3) OTHER ASSETS:

     Other assets consist primarily of goodwill, which represents the excess of
consideration paid over the fair market values of identifiable net assets
acquired. The goodwill is being amortized on a straight-line basis over 25
years. The Company has also recorded other intangible assets, which include
noncompete, consulting and trademark agreements, related to acquisitions of
various beauty companies. Such assets are being amortized on a straight-line
basis, over a period of 3 to 25 years. Accumulated amortization on such
intangibles was $349,423 and $433,070 as of February 28, 1995 and February 29,
1996.

                                      F-26
<PAGE>   65
                            GENA LABORATORIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(4) PROPERTY AND EQUIPMENT:

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                      FEBRUARY 28,    FEBRUARY 29,
                                                          1995            1996
                                                      ------------    ------------
<S>                                                   <C>             <C>
Land................................................   $  150,000      $  150,000
Factory equipment...................................      407,427         431,832
Computers...........................................       43,030          43,825
Furniture, fixtures and autos.......................      108,875         108,875
Building and leasehold improvements.................      567,332         567,332
                                                       ----------      ----------
                                                        1,276,664       1,301,864
Less: Accumulated depreciation......................     (392,026)       (471,771)
                                                       ----------      ----------
                                                       $  884,638      $  830,093
                                                       ==========      ==========
</TABLE>

(5) LONG-TERM DEBT:

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                      FEBRUARY 28,    FEBRUARY 29,
                                                          1995            1996
                                                      ------------    ------------
<S>                                                   <C>             <C>
Unsecured note payable, bearing interest at prime
  (8.25% at February 29, 1996), unpaid balance due
  by November 1996..................................    $123,529        $ 52,942
Various notes payable, bearing interest from 7.5% to
  8.0%, maturing through 1998.......................      96,713          53,824
                                                        --------        --------
                                                         220,242         106,766
Less: Current maturities............................     (96,056)        (95,248)
                                                        --------        --------
                                                        $124,186        $ 11,518
                                                        ========        ========
</TABLE>

     In 1993, the Company entered into a $250,000 unsecured revolving line of
credit, which bears interest at prime and matures July 1997. As of February 28,
1995 and February 29, 1996, the Company had not drawn on this facility.

     Aggregate principal payments on long-term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28,
------------
<S>                                                 <C>
1997..............................................  $ 95,248
1998..............................................    11,518
                                                    --------
                                                    $106,766
                                                    ========
</TABLE>

(6) MAJOR CUSTOMERS:

     The Company's strategy includes providing production and distribution
services to a major U.S. beauty distribution company. Sales to this customer as
a percentage of total sales approximated 31%, 28% and 28% for the years ended
February 28, 1994, 1995 and February 29, 1996, respectively, and 34% for the
period March 1, 1996 to November 26, 1996.

                                      F-27
<PAGE>   66
                            GENA LABORATORIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(7) INCOME TAXES:

     The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. These
differences result principally from the recognition of revenues and expenses
using the cash basis of accounting and the use of different depreciation and
amortization methods for income tax reporting.

     The components of the income tax provision consist of the following:

<TABLE>
<CAPTION>
                                                                                    FOR THE PERIOD
                                                FOR THE YEARS ENDED                 MARCH 1, 1996
                                    --------------------------------------------          TO
                                    FEBRUARY 28,    FEBRUARY 28,    FEBRUARY 29,     NOVEMBER 26,
                                        1994            1995            1996             1996
                                    ------------    ------------    ------------    --------------
<S>                                 <C>             <C>             <C>             <C>
Current:
  Federal.........................    $134,927        $139,468        $208,499         $303,501
  State...........................      18,699          19,329          28,896           42,054
                                      --------        --------        --------         --------
                                       153,626         158,797         237,395          345,555
Deferred provision (benefit)......       4,987         (29,191)        (52,605)         (48,211)
                                      --------        --------        --------         --------
  Provision for income taxes......    $158,613        $129,606        $184,790         $297,344
                                      ========        ========        ========         ========
</TABLE>

     The components of deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                              FEBRUARY 28,    FEBRUARY 29,
                                                                  1995            1996
                                                              ------------    ------------
<S>                                                           <C>             <C>
Deferred tax assets:
  Inventory reserve.........................................    $  6,707        $  8,376
  Uniform inventory cost capitalization.....................      50,233          62,739
  Capital losses in excess of capital gains.................       1,544          10,362
  Allowance for doubtful accounts...........................      44,492          50,314
  Amortization..............................................      15,773          38,586
                                                                --------        --------
          Total gross deferred tax assets...................     118,749         170,377
                                                                --------        --------
Deferred tax liabilities:
  Depreciation..............................................     (19,694)        (18,717)
                                                                --------        --------
          Total gross deferred tax liabilities..............     (19,694)        (18,717)
                                                                --------        --------
          Net deferred tax asset............................    $ 99,055        $151,660
                                                                ========        ========
</TABLE>

                                      F-28
<PAGE>   67
                            GENA LABORATORIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The following is a reconciliation of income taxes provided at the federal
statutory rate with income taxes recorded by the Company:

<TABLE>
<CAPTION>
                                                                                    FOR THE PERIOD
                                                FOR THE YEARS ENDED                 MARCH 1, 1996
                                    --------------------------------------------          TO
                                    FEBRUARY 28,    FEBRUARY 28,    FEBRUARY 29,     NOVEMBER 26,
                                        1994            1995            1996             1996
                                    ------------    ------------    ------------    --------------
<S>                                 <C>             <C>             <C>             <C>
Tax provision at statutory rate...    $148,614        $122,790        $170,482         $280,824
Expense of permanent differences
  resulting from the recognition
  of interest income and travel
  and entertainment expenses, and
  the effect of state taxes.......       9,999           6,816          14,308           16,520
                                      --------        --------        --------         --------
          Income tax provision....    $158,613        $129,606        $184,790         $297,344
                                      ========        ========        ========         ========
</TABLE>

(8) RELATED PARTY TRANSACTIONS:

     In the fiscal year ended February 28, 1994, the Company purchased land and
building amounting to $650,000, from a partnership (the Partnership) of which
three of the four partners are shareholders of the Company. The sales price
approximated the book value as recorded by the Partnership. Prior to the
transaction the Company leased this real estate from the Partnership. The
Company acquired the land and building using cash, and financed the remaining
portion with a note due the Partnership. Interest and principal of $5,105 are
payable monthly. The loan bears interest at 7%, and fully matures in 2003.

     The total of the related party note payable is as follows:

<TABLE>
<CAPTION>
                                                      FEBRUARY 28,    FEBRUARY 29,
                                                          1995            1996
                                                      ------------    ------------
<S>                                                   <C>             <C>
Total shareholder note payable......................    $375,035        $342,287
  Less: Current maturities..........................     (32,571)        (34,929)
                                                        --------        --------
Shareholder note payable, net of current portion....    $342,464        $307,358
                                                        ========        ========
</TABLE>

     Principal maturities related to this loan are as follows:

<TABLE>
<CAPTION>
                   YEAR ENDING
                   FEBRUARY 28,                      TOTAL
                   ------------                     --------
<S>                                                 <C>
1997..............................................  $ 34,929
1998..............................................    37,454
1999..............................................    40,162
2000..............................................    43,065
2001..............................................    46,178
Thereafter........................................   140,499
                                                    --------
                                                    $342,287
                                                    ========
</TABLE>

     The Company also entered into a lease with the Partnership in 1991, for
approximately 10,000 square feet for storage and production purposes. Lease
expense related to this space totaled approximately $83,049, $44,346, $51,346
and $58,993 for the years ended February 28, 1994 and 1995, February 29, 1996,
and the period March 1, 1996 to November 26, 1996, respectively.

                                      F-29
<PAGE>   68
                            GENA LABORATORIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(9) COMMITMENTS AND CONTINGENCIES:

     In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.

     Lease commitments related primarily to a warehouse space lease are as
follows:

<TABLE>
<CAPTION>
                   YEAR ENDING
                   FEBRUARY 28,                      TOTAL
                   ------------                     --------
<S>                                                 <C>
1997..............................................  $ 41,100
1998..............................................    41,100
1999..............................................    41,100
2000..............................................    41,100
2001..............................................    41,100
Thereafter........................................   202,500
                                                    --------
                                                    $408,000
                                                    ========
</TABLE>

                                      F-30
<PAGE>   69

                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                              FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 1995 AND 1994
                            TOGETHER WITH REPORT OF
                         INDEPENDENT PUBLIC ACCOUNTANTS

                                      F-31
<PAGE>   70

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Styling Technology Corporation:

     We have audited the accompanying balance sheets of BODY DRENCH (a Division
of Designs by Norvell, Inc., a Tennessee corporation) as of December 31, 1994
and 1995, and the related statements of operations, changes in owner's
investment and cash flows for each of the three years in the period ended
December 31, 1995 and for the period January 1, 1996 to November 26, 1996. These
financial statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Body Drench as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years then ended and for the period January 1, 1996 to November 26,
1996, in conformity with generally accepted accounting principles.

                                          /s/  ARTHUR ANDERSEN LLP

                                          --------------------------------------
                                               Arthur Andersen LLP

Phoenix, Arizona,
  March 21, 1997.

                                      F-32
<PAGE>   71

                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 1994          1995
                                                              ----------    ----------
<S>                                                           <C>           <C>
ASSETS
CURRENT ASSETS:
  Accounts receivable, net of allowance for doubtful
     accounts of $89,841
     and $58,242, respectively..............................  $1,396,048    $1,234,966
  Inventories...............................................   3,052,783     3,078,656
  Other current assets......................................       5,152       150,713
                                                              ----------    ----------
          Total current assets..............................   4,453,983     4,464,335
                                                              ----------    ----------
EQUIPMENT, net of accumulated depreciation of $245,424 and
  $297,176, respectively....................................     167,697       316,443
                                                              ----------    ----------
          Total assets......................................  $4,621,680    $4,780,778
                                                              ==========    ==========
LIABILITIES AND OWNER'S INVESTMENT
CURRENT LIABILITIES:
  Accounts payable..........................................  $2,550,654    $3,221,337
  Bank overdraft............................................     651,953       274,810
  Accrued expenses and other................................     296,546       257,813
                                                              ----------    ----------
          Total current liabilities.........................   3,499,153     3,753,960
                                                              ----------    ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
OWNER'S INVESTMENT..........................................   1,122,527     1,026,818
                                                              ----------    ----------
          Total liabilities and owner's investment..........  $4,621,680    $4,780,778
                                                              ==========    ==========
</TABLE>

The accompanying notes to the financial statements are an integral part of these
                                balance sheets.
                                      F-33
<PAGE>   72

                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                    FOR THE PERIOD
                                                                                    JANUARY 1, 1996
                                                YEARS ENDED DECEMBER 31,                  TO
                                        ----------------------------------------     NOVEMBER 26,
                                           1993          1994           1995             1996
                                        ----------    -----------    -----------    ---------------
<S>                                     <C>           <C>            <C>            <C>
NET SALES.............................  $6,653,488    $11,138,369    $11,871,171      $9,642,980
COST OF SALES.........................   4,039,843      6,342,770      6,426,775       5,867,104
                                        ----------    -----------    -----------      ----------
GROSS PROFIT..........................   2,613,645      4,795,599      5,444,396       3,775,876
SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES............................   2,054,919      4,075,756      4,883,265       4,004,728
                                        ----------    -----------    -----------      ----------
INCOME FROM OPERATIONS................     558,726        719,843        561,131        (228,852)
                                        ----------    -----------    -----------      ----------
INTEREST EXPENSE......................      30,159             --         87,585              --
                                        ----------    -----------    -----------      ----------
INCOME BEFORE PROVISION FOR INCOME
  TAXES...............................     528,567        719,843        473,546        (228,852)
PROVISION (BENEFIT) FOR INCOME
  TAXES...............................     200,855        273,540        179,947         (91,541)
                                        ----------    -----------    -----------      ----------
NET INCOME (LOSS).....................  $  327,712    $   446,303    $   293,599      $ (137,311)
                                        ----------    -----------    -----------      ----------
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-34
<PAGE>   73

                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                  STATEMENTS OF CHANGES IN OWNERS' INVESTMENT

<TABLE>
<S>                                                           <C>
BALANCE, December 31, 1992..................................  $  (127,491)
  Net income................................................      327,712
  Net payments to parent....................................     (748,153)
                                                              -----------
BALANCE, December 31, 1993..................................     (547,932)
  Net income................................................      446,303
  Net receipts from parent..................................    1,224,156
                                                              -----------
BALANCE, December 31, 1994..................................    1,122,527
  Net income................................................      293,599
  Net payments to parent....................................     (389,308)
                                                              -----------
BALANCE, December 31, 1995..................................    1,026,818
  Net loss..................................................     (137,311)
  Net payments to parent....................................   (1,311,710)
                                                              -----------
BALANCE, November 26, 1996..................................  $  (422,203)
                                                              ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-35
<PAGE>   74

                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      FOR THE
                                                                                       PERIOD
                                                      FOR THE YEARS ENDED            JANUARY 1,
                                                         DECEMBER 31,                 1996 TO
                                              -----------------------------------   NOVEMBER 26,
                                                1993         1994         1995          1996
                                              ---------   -----------   ---------   ------------
<S>                                           <C>         <C>           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................  $ 327,712   $   446,303   $ 293,599   $  (137,311)
  Adjustments to reconcile net income (loss)
     to net cash used in operating
     activities -- Depreciation.............     67,244        36,619      51,752        94,963
  Changes in operating assets and
     liabilities:
     Accounts receivable, net...............    (49,548)   (1,099,273)    161,082       274,164
     Inventories............................   (224,184)   (2,024,887)    (25,873)
     Other, net.............................     (5,127)        2,084    (145,561)    1,167,937
     Accounts payable.......................    516,725       783,427     670,683       158,304
     Accrued expenses.......................    177,767        33,284     (38,733)     (258,849)
                                              ---------   -----------   ---------   -----------
          Net cash provided by (used in)
            operating activities............    810,589    (1,822,443)    966,949     1,299,208
                                              ---------   -----------   ---------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment....................    (62,436)      (53,666)   (200,498)      (12,502)
                                              ---------   -----------   ---------   -----------
          Net cash provided by (used in)
            investing activities............    (62,436)      (53,666)   (200,498)      (12,502)
                                              ---------   -----------   ---------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Bank overdraft............................         --       651,953    (377,143)       25,004
  Net payments to/receipts from parent......   (748,153)    1,224,156    (389,308)   (1,311,710)
                                              ---------   -----------   ---------   -----------
          Net cash provided by (used in)
            financing activities............   (748,153)    1,876,109    (766,451)   (1,286,706)
                                              ---------   -----------   ---------   -----------
NET CHANGE IN CASH..........................         --            --          --            --
                                              ---------   -----------   ---------   -----------
CASH, beginning of period...................         --            --          --            --
                                              ---------   -----------   ---------   -----------
CASH, end of period.........................  $      --   $        --   $      --   $        --
                                              =========   ===========   =========   ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-36
<PAGE>   75

                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                         NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION:

  Acquisition and Basis of Presentation

     Effective November 26, 1996, Designs by Norvell, Inc. (Norvell) sold the
assets of its Body Drench Division (the Division) to Styling Technology
Corporation (STC) for consideration of approximately $7,900,000. These financial
statements present the historical financial position and results of operations
of the acquired business for periods prescribed by applicable rules of the
Securities and Exchange Commission.

     The accompanying financial statements represent the accounts of the
Division pursuant to the terms of the Asset Purchase Agreement between STC and
Norvell. In addition, interest expense included in the statements of operations
represents allocations of parent company interest, as calculated by Norvell.

  Nature and Seasonality of Operations

     The Division is engaged in the manufacture and distribution of skin care,
sun care and body care products. Their products are sold to professional hair
and tanning salons, health clubs, beauty supply outlets and retail product based
salons, both domestic and international.

     The Division's revenues are seasonal in nature, with the first six months
of the year having the majority of the volume.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Fair Value of Financial Instruments

     The carrying values of receivables, accounts payable and accrued expenses
approximate fair values due to the short-term maturities of these instruments.

  Concentration of Credit Risk

     Financial instruments which potentially subject the Division to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the number of customers comprising the Division's customer base. The Division
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.

  Revenue Recognition

     The Division recognizes revenue from sales at the time product is shipped.

  Equipment

     Equipment is recorded at cost and depreciation on equipment is provided
using the straight-line method over the estimated useful lives of the related
assets.

                                      F-37
<PAGE>   76
                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1995 and for the period January 1, 1996 to November 26, 1996,
maintenance and repair expenses charged to cost of operations were approximately
$25,978, $26,117, $30,498 and $6,021, respectively.

  Inventory

     Inventory is valued at the lower of cost or market. Cost is determined
using the first-in, first-out method.

     The components of inventories are summarized as follows:

<TABLE>
<CAPTION>
                                                         1994          1995
                                                      ----------    ----------
<S>                                                   <C>           <C>
Raw materials and work-in-process...................  $1,675,601    $1,583,372
Finished goods......................................   1,377,182     1,495,284
                                                      ----------    ----------
                                                      $3,052,783    $3,078,656
                                                      ==========    ==========
</TABLE>

(3) PROPERTY AND EQUIPMENT:

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                         1994         1995
                                                       ---------    ---------
<S>                                                    <C>          <C>
Factory equipment....................................  $ 134,880    $ 178,405
Computer equipment...................................    243,647      394,026
Furniture and fixtures...............................     34,594       41,188
                                                       ---------    ---------
                                                         413,121      613,619
Less -- Accumulated depreciation.....................   (245,424)    (297,176)
                                                       ---------    ---------
                                                       $ 167,697    $ 316,443
                                                       =========    =========
</TABLE>

(4) INCOME TAXES:

     The Division accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the recording of deferred tax assets and liabilities based on
differences between the financial statement and tax bases of assets and
liabilities and the tax rates in effect when these differences are expected to
reverse. In accordance with SFAS 109, the Division has recorded a provision for
income taxes separately from Norvell.

(5) COMMITMENTS AND CONTINGENCIES:

  Leases

     The Division leases certain facilities and equipment under operating lease
agreements.

     Future minimum payments under noncancelable operating leases with terms in
excess of one year are as follows:

<TABLE>
<CAPTION>
                   DECEMBER 31,
                   ------------
<S>                                                  <C>
1996...............................................  $79,455
1997...............................................   50,423
1998...............................................   41,067
1999...............................................    2,333
</TABLE>

                                      F-38
<PAGE>   77
                                  BODY DRENCH
                    (A DIVISION OF DESIGNS BY NORVELL, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Rental expense under such operating leases was $52,163, $101,217, $238,746
and $188,761, for the three years ended December 31, 1995, and for the period
January 1, 1996 to November 26, 1996, respectively.

     The Division is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Division's potential
exposure under the pending proceedings is adequately provided for in the
accompanying financial statements.

(6) SIGNIFICANT VENDORS:

     Two vendors accounted for 69.3%, 67.4%, 53.0% and 53.0% of the Division's
total raw materials purchases from vendors for the years ended December 31,
1993, 1994, 1995 and for the period January 1, 1996 to November 26, 1996,
respectively. Management does not believe that the loss of these vendors would
significantly impact the Division's operations.

                                      F-39
<PAGE>   78

                          JDS MANUFACTURING CO., INC.

                              FINANCIAL STATEMENTS
                       AS OF SEPTEMBER 30, 1995 AND 1996
                            TOGETHER WITH REPORT OF
                         INDEPENDENT PUBLIC ACCOUNTANTS

                                      F-40
<PAGE>   79

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Styling Technology Corporation:

     We have audited the accompanying balance sheets of JDS MANUFACTURING CO.,
INC. (a California corporation) as of September 30, 1995 and 1996, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1996 and for the period
October 1, 1996 to November 26, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JDS Manufacturing Co., Inc.
as of September 30, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1996
and for the period October 1, 1996 to November 26, 1996, in conformity with
generally accepted accounting principles.

                                          /s/  ARTHUR ANDERSEN LLP

                                          --------------------------------------
                                               Arthur Andersen LLP

Phoenix, Arizona,
  March 21, 1997.

                                      F-41
<PAGE>   80

                          JDS MANUFACTURING CO., INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,    SEPTEMBER 30,
                                                                  1995             1996
                                                              -------------    -------------
<S>                                                           <C>              <C>
                                           ASSETS
CURRENT ASSETS:
  Cash......................................................    $ 57,397         $ 85,260
  Accounts receivable, net of allowance for doubtful
     accounts of $10,000, and $15,000, respectively.........     329,965          313,405
  Inventory.................................................     264,347          209,140
  Prepaid expenses..........................................      11,861            4,716
                                                                --------         --------
          Total current assets..............................     663,570          612,521
                                                                --------         --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
  $100,031, and $114,660, respectively......................      30,292           19,157
OTHER ASSETS................................................     102,934          136,404
                                                                --------         --------
                                                              79$6,796...        $768,082
                                                                ========         ========
                            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................    $196,309         $152,938
  Accrued expenses..........................................      53,740           81,411
                                                                --------         --------
          Total current liabilities.........................     250,049          234,349
                                                                --------         --------
NOTES PAYABLE TO RELATED PARTIES............................     516,200          434,210
                                                                --------         --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Common stock, $10 par value, 10,000 shares authorized,
     1,000 shares issued and outstanding....................      10,000           10,000
  Retained earnings.........................................      20,547           89,523
                                                                --------         --------
          Total stockholders' equity........................      30,547           99,523
                                                                --------         --------
          Total liabilities and stockholders' equity........    $796,796         $768,082
                                                                ========         ========
</TABLE>

  The accompanying notes to financial statements are an integral part of these
                                balance sheets.
                                      F-42
<PAGE>   81

                          JDS MANUFACTURING CO., INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                    FOR THE PERIOD
                                                                                    OCTOBER 1, 1996
                                            FOR THE YEARS ENDED SEPTEMBER 30,             TO
                                          --------------------------------------     NOVEMBER 26,
                                             1994          1995          1996            1996
                                          ----------    ----------    ----------    ---------------
<S>                                       <C>           <C>           <C>           <C>
SALES...................................  $3,577,779    $3,367,599    $3,113,682       $613,142
COST OF SALES...........................   1,651,965     1,550,155     1,407,128        275,513
                                          ----------    ----------    ----------       --------
          Gross profit..................   1,925,814     1,817,444     1,706,554        337,629
SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES..............................   1,981,928     1,843,871     1,614,505        257,784
                                          ----------    ----------    ----------       --------
          Income (loss) from
            operations..................     (56,114)      (26,427)       92,049         79,845
OTHER INCOME, net.......................      44,191        41,951        35,272          1,263
                                          ----------    ----------    ----------       --------
INCOME (LOSS) BEFORE PROVISION FOR
  INCOME TAXES..........................     (11,923)       15,524       127,321         81,108
PROVISION FOR INCOME TAXES..............       4,571         6,950        58,345         35,688
                                          ----------    ----------    ----------       --------
NET INCOME (LOSS).......................  $  (16,494)   $    8,574    $   68,976       $ 45,420
                                          ==========    ==========    ==========       ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-43
<PAGE>   82

                          JDS MANUFACTURING CO., INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                        COMMON STOCK
                                                      -----------------    RETAINED
                                                      SHARES    AMOUNT     EARNINGS     TOTAL
                                                      ------    -------    --------    --------
<S>                                                   <C>       <C>        <C>         <C>
BALANCE, September 30, 1993.........................  1,000     $10,000    $ 28,467    $ 38,467
  Net loss..........................................     --          --     (16,494)    (16,494)
                                                      -----     -------    --------    --------
BALANCE, September 30, 1994.........................  1,000      10,000      11,973      21,973
  Net income........................................     --          --       8,574       8,574
                                                      -----     -------    --------    --------
BALANCE, September 30, 1995.........................  1,000      10,000      20,547      30,547
  Net income........................................     --          --      68,976      68,976
                                                      -----     -------    --------    --------
BALANCE, September 30, 1996.........................  1,000      10,000      89,523      99,523
  Net income, for the period October 1, 1996 to
     November 26, 1996..............................     --          --      45,420      45,420
                                                      -----     -------    --------    --------
BALANCE, November 26, 1996..........................  1,000     $10,000    $134,943    $144,943
                                                      =====     =======    ========    ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-44
<PAGE>   83

                          JDS MANUFACTURING CO., INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     FOR THE PERIOD
                                                                                     OCTOBER 1, 1996
                                               FOR THE YEARS ENDED SEPTEMBER 30,           TO
                                              -----------------------------------     NOVEMBER 26,
                                                1994         1995         1996            1996
                                              ---------    ---------    ---------    ---------------
<S>                                           <C>          <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................  $(16,494)    $  8,574     $ 68,976        $  45,420
  Adjustments to reconcile net income (loss)
     to net cash used in operating
     activities --
     Depreciation...........................    18,735       15,661       14,628            1,439
     Decrease (increase) in accounts
       receivable...........................    (4,438)      89,139       16,560         (172,645)
     Decrease (increase) in inventory.......    14,441      (34,089)      55,207           47,329
     Decrease (increase) in other assets....   (33,786)     (35,112)     (26,325)         (19,756)
     Increase (decrease) in accounts payable
       and accrued expenses.................     4,263      (47,256)     (15,700)          57,480
                                              --------     --------     --------        ---------
          Net cash provided by (used in)
            operating activities............   (17,279)      (3,083)     113,346          (40,733)
                                              --------     --------     --------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................   (10,582)      (8,203)      (3,493)          (1,912)
                                              --------     --------     --------        ---------
          Net cash used in investing
            activities......................   (10,582)      (8,203)      (3,493)          (1,912)
                                              --------     --------     --------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from (payments to) shareholder
     notes payable, net.....................    24,012       (5,692)     (81,990)         (14,748)
                                              --------     --------     --------        ---------
          Net cash provided by (used in)
            financing activities............    24,012       (5,692)     (81,990)         (14,748)
                                              --------     --------     --------        ---------
NET INCREASE (DECREASE) IN CASH.............    (3,849)     (16,978)      27,863          (57,393)
CASH, beginning of period...................    78,224       74,375       57,397           85,260
                                              --------     --------     --------        ---------
CASH, end of period.........................  $ 74,375     $ 57,397     $ 85,260        $  27,867
                                              ========     ========     ========        =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
     Interest paid..........................  $ 36,134     $ 35,589     $ 39,030        $      --
                                              ========     ========     ========        =========
     Income taxes paid......................  $  4,090     $  4,571     $  7,000        $  53,896
                                              ========     ========     ========        =========
EXCHANGE OF OTHER ASSET FOR REDUCTION IN
  SHAREHOLDER NOTES PAYABLE.................  $     --     $     --     $     --        $ 136,404
                                              ========     ========     ========        =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-45
<PAGE>   84

                          JDS MANUFACTURING CO., INC.

                         NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION:

  Acquisition and Basis of Presentation

     Effective November 26, 1996, shareholders of JDS Manufacturing Co., Inc.
(the Company) sold all of its outstanding stock to Styling Technology
Corporation for consideration of approximately $4,400,000. These financial
statements present the historical financial position and results of operations
of the acquired business for periods prescribed by applicable rules of the
Securities and Exchange Commission.

  Organization and Nature of Operations

     The Company was incorporated in 1987. Since 1989, the Company has been a
manufacturer and distributor of several extensive lines of high quality,
brand-recognized nail enhancement application products and nail accessories. Its
products are sold throughout the United States, principally to professional
supply outlets, beauty distributors, professional nail salons and professional
manicurists.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Cash and Cash Equivalents

     All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.

  Fair Value of Financial Instruments

     The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.

  Inventory

     Inventory is valued at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against inventory for excess,
slow-moving and obsolete items and for items where the net realizable value is
less than cost.

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                    SEPTEMBER 30,    SEPTEMBER 30,
                                                        1995             1996
                                                    -------------    -------------
<S>                                                 <C>              <C>
Raw material and work-in process..................    $ 31,722         $ 25,097
Finished goods....................................     232,625          184,043
                                                      --------         --------
                                                      $264,347         $209,140
                                                      ========         ========
</TABLE>

  Property and Equipment

     Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over their estimated
useful lives.

     Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs, which do not improve assets or extend
their useful lives, are charged to expense as incurred. For the years ended
September 30, 1994, 1995, 1996 and for the period October 1, 1996 to November
26, 1996, maintenance and repair expenses charged to cost of operations were
$5,452, $4,507, $2,509 and $598, respectively.

                                      F-46
<PAGE>   85
                          JDS MANUFACTURING CO., INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  Concentration of Credit Risk

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.

  Revenue Recognition

     The Company recognizes revenue from sales at the time product is shipped.

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.

  Reclassifications

     Certain prior year amounts have been reclassified to conform to the 1996
presentation.

(3) PROPERTY AND EQUIPMENT:

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                    SEPTEMBER 30,    SEPTEMBER 30,
                                                        1995             1996
                                                    -------------    -------------
<S>                                                 <C>              <C>
Furniture and equipment...........................    $  98,490        $ 101,984
Automobiles.......................................       13,976           13,976
Leaseholds and other..............................       17,857           17,857
                                                      ---------        ---------
                                                        130,323          133,817
Less: accumulated depreciation....................     (100,031)        (114,660)
                                                      ---------        ---------
                                                      $  30,292        $  19,157
                                                      =========        =========
</TABLE>

(4) NOTES PAYABLE TO RELATED PARTIES:

     As of September 30, 1995 and 1996, the Company had notes payable due to its
two principal shareholders of $516,200 and $434,210, respectively. These notes
originated in October 1994, and bear interest at 8%. Loan advances and
repayments are made at the shareholders' discretion, with the entire balance
becoming due on September 30, 1997. As such, the entire balance is classified as
long-term.

(5) INCOME TAXES:

     The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
requires the use of an asset and liability approach in accounting for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial statement and tax bases of assets and liabilities and the
tax rates in effect when these differences

                                      F-47
<PAGE>   86
                          JDS MANUFACTURING CO., INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

are expected to reverse. These differences, resulting principally from use of
accelerated depreciation methods for income tax reporting, were not material at
the balance sheet dates.

(6) COMMITMENTS AND CONTINGENCIES:

     In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements.

     Total future commitments for operating leases are $12,459 through September
30, 1997.

(7) SIGNIFICANT CUSTOMER:

     The Company's strategy includes providing nail care and accessories to a
major U.S. beauty distribution company. Sales to this customer as a percentage
of total sales were approximately 11%, 14%, 26% and 26% for September 30, 1994,
1995, 1996 and for the period October 1, 1996 to November 26, 1996,
respectively.

                                      F-48
<PAGE>   87

                          KOTCHAMMER INVESTMENTS, INC.

                              FINANCIAL STATEMENTS
                            AS OF DECEMBER 31, 1995
                            TOGETHER WITH REPORT OF
                         INDEPENDENT PUBLIC ACCOUNTANTS

                                      F-49
<PAGE>   88

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Styling Technology Corporation:

     We have audited the accompanying balance sheet of KOTCHAMMER INVESTMENTS,
INC. (a California corporation) as of December 31, 1995, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1995, and for the period January 1, 1996 to November 26,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kotchammer Investments, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year ended December 31, 1995, and for the period January 1, 1996 to
November 26, 1996, in conformity with generally accepted accounting principles.

                                          /s/  ARTHUR ANDERSEN LLP

                                          --------------------------------------
                                               Arthur Andersen LLP

Phoenix, Arizona,
  March 21, 1997.

                                      F-50
<PAGE>   89

                          KOTCHAMMER INVESTMENTS, INC.

                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1995
                                                              ------------
<S>                                                           <C>
                                  ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................   $  96,364
  Accounts receivable.......................................     136,971
  Inventory, net............................................     403,730
  Prepaid expenses and other................................      21,799
                                                               ---------
          Total current assets..............................     658,864
                                                               ---------
PROPERTY AND EQUIPMENT, net.................................      75,472
OTHER ASSETS................................................       1,026
                                                               ---------
                                                               $ 735,362
                                                               =========
                  LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable..........................................   $  14,015
  Accrued expenses..........................................     121,183
  Line of credit............................................     215,000
  Current portion of notes payable to shareholders..........     270,000
                                                               ---------
          Total current liabilities.........................     620,198
                                                               ---------
NOTES PAYABLE TO SHAREHOLDERS, net of current portion.......     340,000
                                                               ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
  Common stock, $20 par value, 2,500 shares authorized,
     2,500 shares issued and outstanding....................      50,000
  Retained deficit..........................................    (274,836)
                                                               ---------
          Total stockholders' deficit.......................    (224,836)
                                                               ---------
          Total liabilities and stockholders' deficit.......   $ 735,362
                                                               =========
</TABLE>

  The accompanying notes to financial statements are an integral part of this
                                 balance sheet.
                                      F-51
<PAGE>   90

                          KOTCHAMMER INVESTMENTS, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                              FOR THE PERIOD
                                                                FOR THE       JANUARY 1, 1996
                                                               YEAR ENDED           TO
                                                              DECEMBER 31,     NOVEMBER 26,
                                                                  1995             1996
                                                              ------------    ---------------
<S>                                                           <C>             <C>
NET SALES...................................................   $1,557,709       $1,248,460
COST OF SALES...............................................      711,925          585,704
                                                               ----------       ----------
          Gross profit......................................      845,784          662,756
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................      891,146          590,800
                                                               ----------       ----------
          Income (loss) from operations.....................      (45,362)          71,956
INTEREST EXPENSE AND OTHER, net.............................      (89,557)         (74,250)
                                                               ----------       ----------
NET LOSS....................................................   $ (134,919)      $   (2,294)
                                                               ==========       ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-52
<PAGE>   91

                          KOTCHAMMER INVESTMENTS, INC.

                      STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                     COMMON STOCK                        TOTAL
                                                   -----------------    RETAINED     STOCKHOLDERS'
                                                   SHARES    AMOUNT     EARNINGS        DEFICIT
                                                   ------    -------    ---------    -------------
<S>                                                <C>       <C>        <C>          <C>
BALANCE, December 31, 1994.......................  2,500     $50,000    $(139,917)     $ (89,917)
  Net loss.......................................     --          --     (134,919)      (134,919)
                                                   -----     -------    ---------      ---------
BALANCE, December 31,1995........................  2,500      50,000     (274,836)      (224,836)
  Net loss.......................................     --          --       (2,294)        (2,294)
                                                   -----     -------    ---------      ---------
BALANCE, November 26, 1996.......................  2,500     $50,000    $(277,130)     $(227,130)
                                                   =====     =======    =========      =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-53
<PAGE>   92

                          KOTCHAMMER INVESTMENTS, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               FOR THE PERIOD
                                                                FOR THE       JANUARY 1, 1996
                                                               YEAR ENDED            TO
                                                              DECEMBER 31,      NOVEMBER 26,
                                                                  1995              1996
                                                              ------------    ----------------
<S>                                                           <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................   $(134,919)        $  (2,294)
Adjustments to reconcile net loss to net cash used in
  operating activities --
  Depreciation..............................................      23,436            19,203
  Decrease (increase) in accounts receivable................      43,004           (19,111)
  Decrease (increase) in inventory..........................     (45,278)           51,566
  Decrease in prepaids and other assets.....................      63,372             6,502
  Increase (decrease) in accounts payable and accrued
     liabilities............................................     (43,234)           89,960
                                                               ---------         ---------
          Net cash provided by (used in) operating
            activities......................................     (93,619)          145,826
                                                               ---------         ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................     (17,215)               --
                                                               ---------         ---------
          Net cash used in investing activities.............     (17,215)               --
                                                               ---------         ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from (payments to) shareholder notes payable,
     net....................................................     100,000                --
  Proceeds from (payments to) line of credit, net...........      (5,000)         (215,000)
                                                               ---------         ---------
          Net cash (used in) provided by financing
            activities......................................      95,000          (215,000)
                                                               ---------         ---------
NET DECREASE IN CASH........................................     (15,834)          (69,174)
CASH, beginning of period...................................     112,198            96,364
                                                               ---------         ---------
CASH, end of period.........................................   $  96,364         $  27,190
                                                               =========         =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid.............................................   $  72,916         $      --
                                                               =========         =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                      F-54
<PAGE>   93

                          KOTCHAMMER INVESTMENTS, INC.

                         NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION:

  Acquisition and Basis of Presentation

     Effective November 26, 1996, shareholders of Kotchammer Investments, Inc.
(the Company) sold its assets to Styling Technology Corporation for
consideration of approximately $639,000. These financial statements present the
historical financial position and results of operations of the acquired business
for periods prescribed by applicable rules of the Securities and Exchange
Commission.

  Organization and Nature of Operations

     The Company was incorporated in December 1993 to acquire a division of
Redken Laboratories, Inc. The Company distributes and markets professional salon
appliances and salonwear. Its products are sold throughout the United States,
principally to professional supply outlets, beauty distributors, and
professional hair stylists.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Cash and Cash Equivalents

     All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.

  Fair Value of Financial Instruments

     The carrying values of cash, receivables, accounts payable and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amount on the long-term debt is estimated to
approximate fair value as the actual interest rates are consistent with rates
estimated to be currently available for debt with similar terms and remaining
maturities.

  Inventory

     Inventory consists of finished goods and are valued at the lower of cost
(first-in, first-out) or net realizable value. Reserves are established against
inventory for excess, slow-moving and obsolete items and for items where the net
realizable value is less than cost.

  Property and Equipment

     Property and equipment are recorded at cost and depreciation on property
and equipment is provided using the straight-line method over their estimated
useful lives.

  Concentration of Credit Risk

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in high
quality credit institutions. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base.

  Revenue Recognition

     The Company recognizes revenue from sales at the time product is shipped.

                                      F-55
<PAGE>   94
                          KOTCHAMMER INVESTMENTS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Final settlement amounts could differ from those estimates.

(3) PROPERTY AND EQUIPMENT:

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                        USEFUL LIFE      1995
                                                        -----------    --------
<S>                                                     <C>            <C>
Machinery and equipment...............................    5 years      $ 76,803
Furniture and fixtures................................    7 years        22,458
Computer equipment....................................    5 years        16,652
                                                                       --------
                                                                        115,913
Less -- Accumulated depreciation......................                  (40,441)
                                                                       --------
                                                                       $ 75,472
                                                                       ========
</TABLE>

(4) LINE OF CREDIT:

     At December 31, 1995, the Company had a $220,000 line of credit with a bank
which expired in August of 1996 and carried an interest rate of 9.75%. During
1996, the line of credit was repaid.

(5) NOTES PAYABLE TO SHAREHOLDERS:

     Notes payable to shareholders consisted of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1995
                                                              ------------
<S>                                                           <C>
Note payable dated December 8, 1993, interest at a bank's
  reference rate plus 1.25% (11% at December 31, 1995),
  maturing January 15, 2004.................................   $ 120,000
Note payable dated December 8, 1993, interest at a bank's
  reference rate plus 1.25% (11% at December 31, 1995),
  maturing January 15, 2004.................................     120,000
Note payable dated December 8, 1993, interest at a bank's
  reference rate plus 1.25% (11% at December 31, 1995),
  maturing January 31, 2004.................................     270,000
Note payable dated May 3, 1995, interest at a bank's
  reference rate plus 1.25% (11% at December 31, 1995),
  maturing January 31, 2004.................................      70,000
Note payable, dated June 5, 1995, interest at a bank's
  reference rate, plus 1.25% (11% at December 31, 1995),
  maturing January 31, 2004.................................      30,000
                                                               ---------
                                                                 610,000
Less: current maturities....................................    (270,000)
                                                               ---------
                                                               $ 340,000
                                                               =========
</TABLE>

     As of December 31, 1995, one of the notes payable to shareholders was
classified as current as a result of the Company incurring a technical default
with a certain financial covenant.

                                      F-56
<PAGE>   95
                          KOTCHAMMER INVESTMENTS, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(6) INCOME TAXES:

     The Company has elected S Corporation status under Subchapter S of the
Internal Revenue Code. This election results in substantially all U.S. federal
taxable income being taxed to the stockholders. Accordingly, there is no
provision for income taxes reflected in these financial statements for the year
ended December 31, 1995, and for the period January 1, 1996 to November 26,
1996.

(7) COMMITMENTS AND CONTINGENCIES:

     In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
statements. Total future commitments for operating leases are $45,851 through
July 1997. Rent expense incurred under operating leases was $35,363, and $26,173
for the year ended December 31, 1995 and for the period January 1, 1996 to
November 26, 1996, respectively.

                                      F-57