TrueYou was organized on September 9, 1998 under the laws of the State of
Delaware by its former parent, United Network Technologies Corp. In January
1999, United Network Technologies transferred all 100 shares of its Common Stock
in the Company to United Network Marketing Services, Inc., a wholly-owned
subsidiary of United Network Technologies. In April 1999, TrueYou effected a
33,300-to-1 stock split and amended its certificate of incorporation to increase
its authorized capital stock to 21,000,000 shares consisting of 20,000,000
common shares and 1,000,000 preferred shares. Immediately thereafter, United
Network Marketing distributed all 3,330,000 shares of its Common Stock in
TrueYou to its stockholders rendering TrueYou a stand alone business.
Until December 20, 2005 TrueYou was a developer of Web-based,
direct-to-direct personal potential and professional development programs
designed for businesses. TrueYou's product offerings, which consisted of sales
productivity, work-life balance and employee retention programs were designed to
be delivered via the Internet or corporate intranet in the form of three to five
minute Best Steps Learning Modules. Such products were intended for sale
principally to large and middle market companies. TrueYou's Web site went "live"
on the internet in October 1999.
On December 20, 2005, TrueYou signed a Share Exchange Agreement with KAAI
and the security holders of KAAI. As a result of this transaction, KAAI became a
subsidiary of TrueYou.
On December 22, 2005, affiliates of North Sound Capital LLC and Valesco
Capital Management LP invested $15.3 million in exchange for 1,530 newly issued
shares of our Series D Preferred Stock, each of which is convertible into
approximately 52,175 shares of Common Stock, and Warrants to purchase 2,394.8407
shares of Series B Preferred Stock.
History of Klinger Advanced Aesthetics, Inc.
Principals of Kidd & Company LLC, a Greenwich, Connecticut based principal
investment firm ("KCO"), founded KAAI. KCO invested approximately $4.0 million
in research prior to forming KAAI to address what it believed are the unmet
needs in the aesthetics market.
KAAI commenced business operations on June 29, 2003 as Advanced Aesthetics,
Inc. when it purchased the capital stock of the Dischino Corporation for cash,
shares of its series A convertible preferred stock and a secured subordinated
promissory note. Dischino operated an established, well-known, beauty salon and
spa in West Palm Beach, Florida. In connection with and as part of the financing
of the Dischino acquisition, KAAI issued shares of its common stock and series B
preferred stock to investors.
In November 2003, KAAI acquired three additional facilities. The first was
the acquisition of a Palm Beach Gardens spa and clinic facility for cash, shares
of its series A convertible preferred stock and a subordinated promissory note.
The second acquisition was of a similar facility in Boca Raton, Florida for
cash, shares of KAAI's series A convertible preferred stock and assumption of
indebtedness and a third facility located at Boca Pointe in Boca Raton, Florida
was acquired for cash and shares of KAAI's series A convertible preferred stock.
Concurrent with the three acquisitions, KAAI entered into an agreement with L
Capital, a private equity fund, whereby L Capital acquired a subordinated
convertible promissory note in the amount of $13,300,000 convertible into KAAI's
common stock. Subsequently, L Capital also acquired $8,200,000 in KAAI's series
D preferred stock.
In April 2004, KAAI expanded its operations by acquiring nine locations of
Georgette Klinger, Inc. for cash, assumption of indebtedness, the issuance of a
promissory note and the issuance of series A preferred stock. Georgette Klinger
is a well-established chain of high-end beauty salons and clinics. In
conjunction with the transaction, KAAI borrowed $10 million from TICC and used a
portion of such borrowings to help finance the acquisition of the Klinger
operations.
30
On July 7, 2005 KAAI closed a $5,000,000 financing with affiliates of
Pequot Capital Management, Inc. through the issuance of its series F preferred
stock and warrants to purchase KAAI's common stock. On September 1, 2005, the
affiliates of Pequot Capital Management, Inc. exchanged their shares of series F
preferred stock for new shares of KAAI's series H preferred stock.
On September 1, 2005, KAAI closed a $10,775,000 private placement financing
through the issuance of its series G preferred stock and warrants to purchase
KAAI's common stock.
As described above, on December 20, 2005, KAAI became a subsidiary of
TrueYou.
On January 9, 2006, KAAI changed its name from Advanced Aesthetics, Inc. to
Klinger Advanced Aesthetics, Inc.
The Company's Mission
We are a business platform that offers fully integrated
appearance-enhancement services and scientifically tested beauty products that
deliver measurable results. We bring medical aesthetics (cosmetic dermatology,
cosmetic surgery and cosmetic dentistry) and non-medical aesthetics services
(salon and spa care) and products together in an upscale environment. We
currently have 12 locations in top markets across the United States, including
two fully integrated facilities and 10 spa/salons that are awaiting conversion
to our model.
Prior to forming KAAI, KCO invested approximately $4.0 million in research
to analyze and determine what it believed are the unmet needs in the aesthetics
market - a market which, according to a study conducted by The Monitor Group,
generated $97 billion in domestic revenue in 2004. Based on this research, KAAI
was formed to respond to the key findings that consumers desire an aesthetics
platform that delivers the following:
o Results - measurable benefits from a brand;
o Convenience - an end-to-end delivery system for aesthetic procedures;
o Products - medical grade skin care products;
o Confidence - peace of mind about the quality and safety of services
and products; and
o Quality - a facility that combines high quality procedures,
professionals and client service and care.
Until the launch of our first fully integrated center in early 2004, this
combination was, to our knowledge, not available in the marketplace. We believe
that consumers, while highly intrigued by aesthetic services and products,
remain confused due to the highly fragmented nature of delivery platforms,
conflicting information and absence of standardized metrics.
We try to fill this market gap, offering consumers a single, trusted brand
and delivery system for accessing services and products that deliver predictable
and measurable benefits.
Strategic Differentiation
Our market positioning and strategy aim to provide strategic
differentiation. In almost all areas of the aesthetics market, for both services
and products, there is consumer confusion around basic questions such as: what
works? what's safe? who's good? Our concept is to differentiate ourselves by
providing high quality integrated services and products that address clients'
needs. We bring together five strategic assets and relationships that elevate
our brand and enable strategic differentiation from our competitors. These
assets and relationships include:
31
Johns Hopkins
Johns Hopkins, one of the nation's most respected medical institutions, has
allied with us to review and assess our process for verifying the safety and
clinical quality of our practitioners, protocols and facilities. Johns Hopkins
is also providing oversight of the scientific testing of Cosmedicine, a new
product line which we are developing, for safety and efficacy.
Sephora USA, Inc.
Sephora is a fast growing upscale beauty retailer with 95 locations in the
U.S. and over 400 locations abroad. We have embarked on a three-pronged
strategic partnership with Sephora that includes:
o development of our Cosmedicine skin care line for distribution in
Sephora stores (for which Johns Hopkins is providing oversight of
safety and efficacy testing);
o a store-within-a-store concept, whereby we will have mini-stores
within Sephora that feature Cosmedicine as well as the SkinState, our
proprietary skin care diagnostic system; and
o the development of smaller-scale KAAI stores that are situated
adjacent to select Sephora locations and accessible via an adjoining
door.
Sephora paid us a performance deposit of $5 million in December 2004 for certain
exclusive distribution rights. We are required to return 50% of the deposit to
Sephora when the Net Revenues of Sephora relating to the sale of Cosmedicine
products, plus certain Sephora capital expenditures, equal $30 million. We are
required to return the remaining 50% when such revenues and capital expenditures
equal $60 million. See "Certain Relationships and Related Party Transactions -
Sephona."
Georgette Klinger
KAAI acquired the locations of Georgette Klinger ("GK"), a 62-year old
venerable brand, which was an early innovator of "facials" that measurably
improve the quality and health of facial skin. Georgette Klinger's thousands of
clients and nine prestige locations in Beverly Hills, Manhattan, Chicago, Short
Hills, Manhasset, Washington D.C., Costa Mesa, Palm Beach and Dallas represent
an ideal client and real estate platform for our aesthetic service and product
offerings.
Strategic Pharma Partner
We are currently negotiating a business partnership with a leading
pharmaceutical company, which is more than 150 years old and specializes in the
dermatology market. We are in discussions with this company to participate in a
strategic alliance whereby:
o the pharma partner will distribute specially formulated Cosmedicine
products both in the U.S. and globally through its existing
distribution channels;
o both companies will jointly share data and technology;
o both companies will jointly develop a medical aesthetics media
information center; and
o both companies will consider jointly forming an "Aesthetics
University," which will serve as a training facility where clinicians
can learn the latest KAAI techniques.
32
Medical Advisory Board
Our Medical Advisory Board includes leaders from several professional
associations in the field of aesthetic medicine, including the American Society
of Plastic Surgeons, the American Society of Aesthetic Plastic Surgeons and the
American Society of Cosmetic Dermatology and Aesthetic Surgery. Johns Hopkins
oversees our Medical Advisory Board.
Our Medical Advisory Board meets quarterly and attendance by a Johns
Hopkins representative is mandatory. During Medical Advisory Board meetings,
members review and discuss our clinical policies to ensure practices are in
accordance with approved Johns Hopkins reviewed protocols. The Medical Advisory
Board recommends changes where necessary.
Johns Hopkins also reviews the process by which we approve clinical
practitioners. Often this review is conducted between quarterly Medical Advisory
Board sessions on an as needed basis.
Business Strategy
There are four key pillars to our long-term business plan:
Integrated Flagships - Integrated Flagships feature a full suite of
cosmetic surgery, dermatology, dentistry, spa care, salon services, and retail
products and establish our brand. Integrated Flagships will range from
6,000-15,000 square feet in size. We currently have two existing Integrated
Flagships in the Palm Beaches. We intend to convert the majority of our
remaining facilities to this fully integrated model.
Stand-Alone Boutiques - Stand-Alone Boutiques will feature "KAAI Signature
Services," a select menu of spa/salon services and non-invasive medical
modalities and will be approximately 5,000 square feet in size. Our Stand-Alone
Boutiques will be able to capture the full retail mark-up of Cosmedicine
products. We are currently developing two Stand-Alone Boutiques, one as a
refurbishment of our Beverly Hills facility and the second is a relocation of
our DC facility to a new location. Our plan is to open several Stand-Alone
Boutiques by fiscal year 2009.
Sephora-Adjacent Boutiques - We plan to begin construction on
Sephora-Adjacent Boutiques next to certain Sephora store locations during the
latter part of fiscal year 2006 and the early part of fiscal year 2007. The
stores will feature an adjoining common door to facilitate the free pass-through
of customers and maximize the "store extension" feel. These facilities will
feature the same "KAAI Signature Services" available at the Stand-Alone
Boutique. The Cosmedicine product line will be available at Sephora's adjoining
retail locations and in our boutiques. (Sephora will realize a commission on
Cosmedicine product that is sold in our boutiques.) The Sephora-Adjacent
Boutiques will be approximately 5,000 square feet in size.
Cosmedicine Product Line - We plan to produce and distribute Cosmedicine, a
medical grade private label skin care line, using what we believe are the most
sophisticated, effective ingredients available. Johns Hopkins is providing
oversight of the scientific testing of Cosmedicine for safety and efficacy. We
expect that Johns Hopkins will authorize us to use the the Johns Hopkins name on
our Cosmedicine packaging.
The first 18 Cosmedicine products to be introduced will encompass skin
cleansing, fortifying, hydrating, sun protection and eye care. The line will be
sold at all Sephora and our store locations as well as online at
www.klinger.com, www.sephora.com, www.aai.com and www.cosmedicine.com.
Cosmedicine products will be differentiated across several levels:
o All products will contain medical grade, hypoallergenic ingredients
formulated to be appropriate for even the most highly sensitive skin
types.
o Certain Cosmedicine products will be of "over-the-counter" versus
cosmetic quality.
33
o Many Cosmedicine products contain a proprietary ingredient,
cross-linked sodium hyaluronate, a topical that is proven to be four
to five times more effective at binding and attracting moisture to the
skin than hyaluronic acid.
o Johns Hopkins has reviewed and assessed our clinical processes and the
testing results of Cosmedicine products for safety.
We believe that the Cosmedicine line's brand status will be enhanced by its
exclusive channels of distribution. The line is expected to be available
exclusively in more than 95 of Sephora's retail stores, KAAI-owned and
franchised locations and, when final agreements have been reached, more than
15,000 aesthetic physicians' offices nationwide (via the planned Pharma Partner
distribution alliance). Sephora's agreement to distribute our products through
its exclusive retail license, coupled with its commitment to launch
Sephora-Adjacent Boutiques, will, we believe, enhance the products' credentials
in the retail channel.
The first products are scheduled to ship in February 2006 for in-store
launch at Sephora and our locations. The next suite of Cosmedicine launch
products currently under development are expected to be over-the-counter drugs
that will target the skin conditions acne and rosacea.
All Cosmedicine products are being developed and formulated for the Company
by Atlantis Labs pursuant to an agreement we have with them.
Following the launch of Cosmedicine, we will continue to sell the private
labels Georgette Klinger and Anushka brands in the Georgette Klinger and Anushka
facilities, respectively, and on our website.
Current Operations
Overview
Our locations include two fully integrated properties and ten other stores
that are currently in planning stages for conversion to the KAAI model. Taken
together, our operating presence is national in scope, with locations in key
markets such as New York, Beverly Hills, Boca Raton, Palm Beach Gardens, West
Palm Beach, Dallas, Chicago and Short Hills, among others.
Our flagship facilities in West Palm Beach and Palm Beach Gardens feature
cosmetic dermatology, spa services, salon care and retail products on-site, and
cosmetic surgery and dentistry via off-site, affiliated providers. Our
credentialing process for providers (both on and off-site) is conducted by our
Medical Advisory Board, which is overseen by Johns Hopkins. Clients are able to
use our SkinState diagnostic tools which objectively record facial aesthetic
metrics such as hydration (moisture) level, sebum (oil) level, pore size, UB
damage, etc. In addition, we help clients navigate through the confusing array
of beauty enhancement options through our Aesthetics Concierge function. The
Aesthetics Concierge guides interested clients through the patent-pending
Personal Aesthetics Blueprint, a comprehensive analysis of the client's current
aesthetic characteristics and goals. The Aesthetics Concierge also provides
information and decision support on all our treatments, services and products.
We have found the Aesthetics Concierge function is integral in educating
consumers about aesthetic services and products and that it translates into
client interest in additional products and services.
Our Business Model
Core Model Components
We employ a series of components to answer market/consumer needs. These
components are present across all of our various delivery vehicles:
High-Profile Strategic Partners - Strategic alliances with Johns Hopkins,
Sephora and leading aesthetic physicians who constitute our Medical Advisory
Board as well as a pending partnership with a leading
34
pharmaceutical company specializing in the dermatology market, provide us with
credibility across aesthetic services and products that we believe will
translate into a built-in platform for rapid distribution and growth.
Rigorous Credentialing - We use a methodology developed by our Medical
Advisory Board and overseen by Johns Hopkins to assure the competency and safety
of our medical practitioners.
Protocol-Driven Signature Service Strategy - For every aesthetic offering
on our menu, we designed protocols to deliver Signature Service highly
differentiated processes that, we believe, deliver consistent quality, superior
results and a higher level of client experience. Successful execution of these
protocols requires investment in both our operator training and marketing to
consumers to communicate the differentiated nature of the offering.
The Aesthetics Concierge - We rigorously train these aesthetics
decision-support professionals to educate and assist clients with all service,
product and information needs.
Diagnostics - This suite of existing and evolving technologies measures
skin quality, skin issues, tooth color and facial/body symmetry. The goal of
this capability in the short term is to allow clients to better understand their
aesthetic issues and in the long term to allow us to measure and report on
detailed clinical outcomes.
Cosmetic Medical Products (Cosmedicine) - These medical grade skin care
products are being developed with the goal of measurably improving skin health
and appearance. Johns Hopkins is providing oversight of the scientific testing
of Cosmedicine for safety and efficacy. We expect Johns Hopkins will authorize
us to use the Johns Hopkins Medicine name as part of the marketing of our
Cosmedicine packaging.
A Comfortable Environment - Our facilities are designed to provide client
comfort and privacy.
Key Growth Metrics
Cross Selling Services
A large portion of growth at our Palm Beach facilities has been achieved
through the migration of loyal clients to additional services, including
higher-end medical procedures. Prior to being acquired by us, both Palm Beach
facilities enjoyed a combined loyal, customer base of approximately 25,000
clients who we believe to be naturally interested in additional aesthetic
services. We have been able to realize financial value primarily by facilitating
the migration of this large base of clients to skin care, hair care and
accessory products as well as a higher level of medical services and related
products.
Retail Growth
We believe the following four factors are critical to generating retail
momentum as we roll out our proprietary Cosmedicine line:
o retail products must be well-integrated into the services performed on
clients;
o merchandise should feature a blend of branded and private label
products;
o adequate floor space must be devoted to retail sales; and
o operators must be trained on product benefits and selling techniques.
Market Access Vehicles
We have focused our roll-out strategy on utilizing the following four
market access vehicles:
o Integrated Flagships;
35
o Stand-Alone Boutiques;
o Sephora-Adjacent Boutiques; and
o The Cosmedicine Product Line.
For the specifics of each vehicle's strategy and economics, see, "Description of
Business -- Business Strategy."
The Market
According to a study conducted by The Monitor Group, the highly fragmented
aesthetics market generated over $80 billion in domestic revenue in 2002. The
study futher projected the market would reach $120 billion by 2007. Prior to
formation, over $4 million was expended by KAAI for proprietary research about
the market, which revealed that clients are eager for a "total appearance
improvement solution" both in terms of services and products.
The aesthetics market enjoys many favorable characteristics. The market,
particularly the more "medically oriented" segments, is enjoying high growth.
According to The Monitor Group study, nationally, cosmetic surgery, cosmetic
dentistry and cosmetic dermatology were expected to grow at a combined five year
CAGR of 11% from 2002 to 2007; management believes that in key vanity markets
this CAGR is 15%. According to a study by the Kline Group, professional grade
skin-care products (i.e., non-prescription, but with potent levels of actives)
accounted for an additional $1.6 billion in U.S. retail sales in 2004. This
segment is expected to grow at an average of 7% per annum through 2009. Here
too, management believes sales in vanity markets far outpace the national
average.
We believe this organic market growth is being driven by (i) aging
demographics, (ii) increasing public acceptance of aesthetic interventions,
(iii) the emergence of new, less invasive modalities, such as Botox, wrinkle
fillers (e.g., Restylane) and lasers, (iv) the introduction of new
over-the-counter active product ingredients (e.g., alphahydroxy acid) and (iv)
heavy media interest and coverage of the industry. The category's relative
recession-resistance represents another one of the market's attractive features.
According to The Monitor Group, personal care services and products did not
suffer price erosion in the previous recession during the early 1990s, and our
target customers (primarily females, ages 35-50 with household income of more
than $50,000) exhibited the most resiliency in spending and the strongest growth
trajectory.
Despite the market's considerable advantages, however, key market gaps
remain. While time-pressured consumers find themselves increasingly curious
about engaging in appearance improvement, they remain confused and concerned
about which procedures to undergo, which products to use, what the results will
be and which providers to trust. In large measure, we believe, and our business
model assumes, that this is because the aesthetic market is profoundly
fragmented and not configured to meet consumer needs.
The American Dental Association estimates that as of 2002, over 75% of
dental practitioners were sole proprietorships. The Monitor Group determined
that approximately 90% of salons and spas are solo-operations. Furthermore,
aesthetic service providers usually limit their services to their designated
discipline (e.g. spa care, dentistry, dermatology). Thus, the consumer in search
of holistic appearance improvement must research and maintain complex
relationships with multiple providers, a dynamic which we believe has created
dissatisfaction, inefficiency and confusion. While some providers have
endeavored to deepen relationships with clients by supplementing their
offerings, they have done so on a limited basis (e.g., dentists are offering
manicures and pedicures, surgeons are offering facials and makeup). With
insufficient business training/acumen, the quality of these medical
practitioners' ancillary services is usually sub-par, which we believe has only
magnified consumer frustration.
Moreover, we believe most medical practitioners are not specifically
trained to deliver aesthetic treatments. For example, dermatologists are
schooled in how to remove pre-cancerous moles, not artfully inject wrinkle
fillers and dentists are trained to make good crown impressions, not mold for a
natural-looking veneer. In addition, most providers make very limited use of
diagnostics and outcomes tools and measurements, so at best, consumers may be
left with only subjective assurances about the quality of the results for the
treatments they undergo. These dynamics
36
drive a wide variety in aesthetic outcomes (even from consumers visiting the
same physician), which only amplifies consumer anxiety.
Research we conducted suggests that providers appreciate such consumer
anxieties, and that they also wish to provide more objectively measurable
results and partake in a more comprehensive offering. We conducted over eighty
in-depth interviews with medical and dental practitioners and over 90% agreed
that their fields were changing and that they were ill-equipped to respond
effectively to meet consumers' broadening needs. Our integrated model aims to
address provider concerns about their clients' needs, as well as their own
desire for a long-term liquidity vehicle.
In a series of customer focus groups commissioned by us as well as hundreds
of in-person interviews conducted in the Boca Raton, Palm Beach, Miami, and
Chicago markets, the vast majority of target consumers voiced a desire for a
trusted single resource they could depend on for all their appearance
improvement service and product needs. They expressed strong emotional
investment in the category, but said the time pressures they faced coupled with
the lack of trusted information and decision support deterred them from
participating more deeply and frequently in the category. In a Harris
Interactive national survey conducted on our behalf prior to launch, nine in ten
consumers said the most critical catalyst for participating more heavily in the
category was being able to trust the quality of the providers. Additionally, 70%
rated a "concierge" that could serve as a trusted information source about
aesthetic enhancement as extremely important. Nearly half noted that given the
brand promise, they would be predisposed to buy product from us although we
realize that the results of consumer focus groups or surveys do not ensure any
actual purchases or results from these or other customers.
On the retail side, despite a flurry of "physician-brand" over-the-counter
introductions (e.g., MD Skincare, N.V. Perricone M.D.), these products have not
captured significant market share. In other channels, skin care sales have grown
to over $4 billion, despite the fact that marketing promises made by prestige
and mass skin care brands alike are not fulfilled, which in our opinion, is
because precious few contain active ingredient concentration levels capable of
producing clinical efficacy. Consumers want to find a brand they can trust.
Pursuant to a Kline Group study 42% of consumers are still looking for the
best (i.e., most effective) product for their skin, and 42% also stated that
they would switch on the recommendation of a physician or aesthetician.
This data suggested to us that if an over-the-counter skin care product
were introduced for which Johns Hopkins provided oversight of testing for safety
and efficacy, it could enjoy significant success.
These gaps in integrated service, medical aesthetic training, diagnostic
and outcomes measurements, and product formulation create an opportunity for the
development of a service-oriented, outcomes-driven aesthetic improvement
positioning and capability - both in terms of services and products. We, along
with our Cosmedicine line, attempt to deliver this promise.
Competition
In each of our lines of services, (i) salons and spas, (ii) key cosmetic
dentists, (iii) dermatologists and (iv) surgeons, we are faced with competition.
Numerous competitors currently compete with some sub-section of our product and
services offerings and might pose an increasing challenge if they were to expand
their menu of offerings.
Medispas. An increasing number of companies are offering a limited
combination of spa and dermatology services, as well as retail products. Some
multi-site and/or regionally oriented competitors such as SkinKlinic and Lumity
focus their offerings on a combination of invasive (e.g. Botox) and non-invasive
(e.g., laser) dermatological aesthetic treatments and products.
Spas. Elizabeth Arden's Red Door is our largest national competitor.
Regional and supra-regional players which may deepen their current offerings
include Bliss Spa and Spa Nordstrom. Bliss Spa is an indirect subsidiary of LVMH
and as a result is an affilate of L Capital.
37
Salons. The Salon market is the most fragmented service line with over
250,000 businesses classifying themselves as beauty salons. The largest
competitor, Regis Corporation, has an approximate market share of 2%.
According to published reports, approximately 80% of salons have annual
revenue of $0.5 million or less. Chain salons growth is increasing and many are
attempting to offer spa oriented services.
Dental Chains. We belive that the most significant tooth whitening service
provider is BriteSmile. BriteSmile has retail locations in several major cities
in the United States and its whitening machines and products are offered by
affiliated dentists nationwide. Based on publicly available information, we
expect that BriteSmile will continue to remain focused on the dental segment of
the market.
Product Manufacturers. Several product manufacturers have entered, or have
announced that they are considering entry, into our niche. Avon has opened a spa
in New York City. Estee Lauder has pursued retail stores (e.g. Origins) and has
made a foray into the beauty service arena through its Aveda Spas.
Furthermore, several independent "physician brand" professional
over-the-counter skin care lines (e.g. MD Skincare, N.V. Perricone M.D. and
Cosmeceuticals) have achieved distribution on a national scale. Major consumer
product companies such as the Procter and Gamble Company and Unilever are
seeking to launch over-the-counter grade skin care products. Our planned new
product line, Cosmedicine, will compete directly with these brands. Further,
home whitening kits such as Crest's Whitestrips or GoSmile may also pose
competition to the dental component of our operations.
Regulatory Matters
The following is a summary of certain regulatory matters that may be
applicable to the Company.
Reimbursement
Government Reimbursement in General
Most individuals have insurance coverage through Medicare, Medicaid, a
federal or state healthcare program or a private insurance company. Medicare is
the commonly used name for the healthcare payment program governed by certain
provisions of the United States Social Security Act. Medicare is an exclusively
federal program that provides certain healthcare benefits to beneficiaries who
are 65 years of age or older, disabled or qualify for the End Stage Renal
Disease Program. Medicaid is a program that pays for medical assistance for
certain individuals and families with low incomes and resources. This program
became law in 1965 and is jointly funded by the Federal and State governments
(including the District of Columbia and the Territories) to assist states in
providing medical long-term care assistance to people who meet certain
eligibility criteria. Medicaid is the largest source of funding for medical and
health-related services for people with limited income.
Private Reimbursement in General
Most healthcare providers rely on third-party payers to reimburse for the
healthcare provider's services. Many private insurance companies contract with
healthcare providers on an "exclusive" or a "preferred" provider basis, and some
insurers have introduced plans known as preferred provider organizations
("PPOs"). Under preferred provider plans, patients who use the services of
contracted providers are subject to more favorable co-payments and deductibles
than apply when they use non-contracted providers. Under an exclusive provider
plan, which includes most health maintenance organizations ("HMOs"), private
payers limit coverage to those services provided by selected hospitals. With
this contracting authority, private payers direct patients away from nonselected
providers by denying coverage for services provided by them.
Increased sensitivity to the cost of health care and the desire to reduce
healthcare costs have led to substantial growth among HMOs, PPOs, and other
alternative delivery systems. Most PPOs and HMOs currently pay healthcare
providers on a fee-for-service basis or on a fixed rate basis. Some HMOs are now
offering or mandating a "capitation" payment method under which healthcare
providers are paid a predetermined periodic rate
38
for each enrollee in the HMO. In a capitated payment system, the healthcare
providers assume a financial risk for the cost and scope of care given to such
HMO enrollees for the term of the contract.
Our Anticipated Reimbursement for Healthcare Services
Currently, we do not intend to submit claims for reimbursement to Medicare,
Medicaid, any state or federal healthcare payor, or any private insurance
company. We will bill our clients directly for healthcare services and clients
will be responsible for paying for those services.
Since we do not plan to submit claims to any federal healthcare program,
the federal laws and regulations described above are not currently applicable to
our operations. If at some future time we begin seeking payment for our services
from any federal payor, these federal laws may apply to our operations.
Federal Anti-kickback and Self-Referral Regulations
Federal Anti-kickback Statute
Section 1128B(b) of the Social Security Act; the Anti-kickback Statute,
prohibits the offer, payment, solicitation or receipt of remuneration (including
any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in
cash or in kind, for (a) the referral of patients or arranging for the referral
of patients to receive services for which payment may be made in whole or in
part under a federal healthcare program, which includes Medicare and Medicaid,
or (b) the purchase, lease, order, or arranging for the purchase, lease or order
of any good, facility, service or item for which payment may be made under a
federal healthcare program.
Federal and state law enforcement authorities may scrutinize arrangements
between healthcare providers and potential referral sources to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient care referrals. Courts have generally adopted a broad interpretation of
the scope of the Anti-kickback Statute and have held, for example, that the
Statute may be violated if merely one purpose of a payment arrangement is to
induce referrals. Violations of the Anti-kickback Statute can result in both
criminal and civil sanctions.
Federal Physician Self-Referral Law
Provisions of the Social Security Act commonly referred to as the "Stark
Law" prohibit referrals by a physician of Medicare patients to providers for
certain "designated health services" if the physician (or his or her immediate
family member) has an ownership interest in, or other financial relationship
with, the provider, unless an exception applies. This law also prohibits the
physician or the person receiving the referral from submitting a claim to
Medicare or Medicaid for payment for the services rendered pursuant to the
prohibited referral.
We may have arrangements under which we compensate various physicians and
other healthcare providers for services, which arrangements could constitute
financial arrangements under the Stark Law definition. If we begin seeking
Medicare reimbursement in the future, the Stark Law may apply to these
arrangements to the extent that we or our allied professionals offer "designated
health services" to our clients.
"Corporate Practice" Prohibitions
Many states, including California, Illinois, New Jersey, New York and
Texas, have statutes that either expressly prohibit or have been interpreted to
prohibit what is known as the "corporate practice of medicine." These laws are
designed to prevent interference in the medical decision-making process from
anyone who is not a licensed physician. Most states that prohibit the corporate
practice of medicine also have similar restrictions in connection with the
practice of dentistry, nursing, and other health professions. Application of
these prohibitions varies from state to state. Some states may allow a business
to exercise significant management responsibilities over the day-to-day
operation of a professional practice, while other states restrict or prohibit
such activities.
39
In states with "corporate practice" prohibitions, we will be unable to
provide through the Company any services that may only be performed by licensed
persons, or to assert financial control of our allied professionals' practices.
Furthermore, in those states, we may be unable to bill our clients directly for
services performed by such professionals, and will be unable to include revenues
from the performance of such services in our own revenues.
State Anti-kickback and Fee-Splitting Laws
Many states, including California, Illinois, New Jersey, New York and
Texas, have laws which are similar to the federal anti-kickback laws. These
state laws apply to healthcare services performed in the state even when not
reimbursed by Medicare, Medicaid, or other federal health benefit programs. In
order to avoid violating a particular state's anti-kickback law, we will need to
structure our arrangements with other parties such that management is not viewed
as a mechanism to exchange remuneration for referrals of their patients to us or
our allied professionals for healthcare services.
Many states have statutes and regulations that either expressly prohibit or
have been interpreted to prohibit physicians and other healthcare providers from
sharing or splitting fees with unlicensed entities, such as us. Other states
have fee-splitting prohibitions that apply when professional fees are shared
with a referral source or even an unaffiliated licensed professional.
Violations of any of these state laws may result in censure, fines, loss of
a healthcare provider's license, or even criminal penalties. These statutes and
regulations vary from state to state and are often vague and subject to
differing interpretations.
We have not yet opened any Integrated Flagship facilities in California,
Illinois, New Jersey, New York or Texas, but intend to do so. Because of the
corporate practice of medicine, fee-splitting and self-referral prohibitions in
those states, the Company intends to enter into management or facility fee
arrangements with physicians (or professional entities owned by physicians) in
which we will provide office space and management services in exchange for an
upfront negotiated fee. The physician or entity will be responsible for
employing or contracting with physicians, nurse practitioners and other
healthcare professionals and will be solely responsible for all aspects of
diagnostic, clinical and other healthcare services, including the selection,
training, direction and supervision of licensed professionals. We intend to make
clear to the public that our facilities do not provide medical services and that
any medical service provided at our facilities is performed solely by or under
the supervision of the medical professional.
In Florida, where we currently operate several facilities, there is no
corporate practice of medicine prohibition and, accordingly, we are able to
employ or contract with physicians, nurse practitioners and other medical
professionals and to hold ourselves out to the public as providing medical
services. Under the current model, a portion of the total fees paid by the
patient is retained by us as compensation for the management services and office
space that we provide. We do not receive a portion of the fees from patients
relating to the medical professional's rendering of medical services. We are
considering opening a facility in Maryland which, like Florida, does not have a
corporate practice of medicine prohibition. Accordingly, we may operate any
Maryland facility in a manner similar to the manner in which it operates in
Florida.
Licensing
We will be required to obtain licenses from various federal, state, and
local agencies to provide our services. In addition, every state imposes
licensing requirements on the individual medical, dental, and other healthcare
providers with whom we intend to enter into arrangements. Finally, states impose
licensing and other requirements on many of the spa and salon services we
propose to offer.
FDA Regulations
Our Cosmedicine skin care product line will be regulated by the United
States, Department of Health and Human Services, Food and Drug Administration,
the FDA. The Cosmedicine skin care product line consists of products that are
regulated by the FDA as cosmetics and may also be regulated as over-the-counter
drugs. The Food, Drug, and Cosmetic Act, the FD&C Act, the federal law that
governs cosmetics and drugs, defines cosmetics
40
by their intended use, as articles intended to be rubbed, poured, sprinkled, or
sprayed on, introduced into, or otherwise applied to the human body for
cleansing, beautifying, promoting attractiveness, or altering the appearance
(i.e., skin moisturizers). Drugs are defined by their intended use, as articles
intended for use in the diagnosis, cure, mitigation, treatment, or prevention of
disease and articles (other than food) intended to affect the structure or any
function of the body of man or other animals.
Intended use may be established in a number of ways. Among them are:
o Claims stated on the product labeling, in advertising, on the
Internet, or in other promotional materials.
o Consumer perception, which may be established through the product's
reputation.
o Ingredients that may cause a product to be considered a drug because
they have a well known (to the public and industry) therapeutic use.
Some of the Cosmedicine skin care products may meet the definition of both
cosmetics and drugs. This may happen when a product has two intended uses, for
example, moisturizers and makeup marketed with sun-protection claims. Such
products must comply with the requirements for both cosmetics and drugs.
Although not exhaustive, the following is a summary of cosmetic laws and
regulations that may be applicable to the Cosmedicine skin product line.
FDA Cosmetic Requirements
The two most important FDA laws pertaining to cosmetics marketed in the
United States are the FD&C Act and the Fair Packaging and Labeling Act, the
FPLA. FDA's legal authority over cosmetics is different from other products
regulated by the agency, such as drugs, biologics, and medical devices. With the
exception of color additives, cosmetic products and ingredients are not subject
to FDA pre-market approval authority. The FD&C Act prohibits the marketing of
adulterated or misbranded cosmetics in interstate commerce. Violations of the
Act involving product composition - whether they result from ingredients,
contaminants, processing, packaging, or shipping and handling - cause cosmetics
to be adulterated and subject to regulatory action. Improperly labeled or
deceptively packaged products are considered misbranded and subject to
regulatory action. In addition, regulations prohibit or restrict the use of
several ingredients in cosmetic products and may require warning statements on
the labels of certain types of cosmetics. Under the authority of the FPLA, the
Federal Trade Commission, FTC, requires an ingredient declaration to enable
consumers to make informed purchasing decisions. Cosmetics that fail to comply
with the FPLA are considered misbranded under the FD&C Act.
Cosmetic firms are responsible for substantiating the safety of their
products and ingredients before marketing. FDA may take regulatory action if it
has information showing that a cosmetic is adulterated or misbranded. FDA can
and does inspect cosmetic manufacturing facilities to assure cosmetic product
safety and determine whether cosmetics are adulterated or misbranded under the
FD&C Act or FPLA. The agency can pursue action through the Department of Justice
to remove adulterated and misbranded cosmetics from the market. To prevent
further shipment of an adulterated or misbranded product, the agency may request
a federal district court to issue a restraining order against the manufacturer
or distributor of the violative cosmetic. Violative cosmetics may be subject to
seizure. FDA also may initiate criminal action against a person violating the
law.
The FD&C Act does not set forth any regulations that require specific Good
Manufacturing Practices (GMP) or registration requirements for cosmetics but
does so for drug products. The FDA, however, does maintain the Voluntary
Cosmetic Registration Program for cosmetic establishments and formulations that
choose to register.
FTC Regulations
As described elsewhere in this prospectus, the packaging, labeling,
marketing and promotion of our products are subject to regulation by the Federal
Trade commission as well as various state governmental agencies.
41
These regulations will apply directly to our Cosmedicine line of products and
could also be applied to other products and services we offer.
Other Regulation
In addition to government regulation described above, The National
Advertising Division of the Better Business Bureau (NAD) and Network Ad
Clearance Divisions closely monitor product claims. These self-regulatory bodies
require scientific substantiation of claims and can refuse to run non-complying
ads.
Material Agreements
Agreements with Johns Hopkins
On November 21, 2003 we entered into a Consulting Services Agreement with
Johns Hopkins Medicine, acting through Johns Hopkins Health System Corporation,
and the Johns Hopkins University. Under the Agreement, Johns Hopkins agreed to
provide consulting services to us consisting of: (i) review and assessment of
our medical delivery protocol document and (ii) consultation on the development
of outcomes studies methodologies. The agreement also sets forth the conditions
for the use of the Johns Hopkins mark. The term of the agreement is until
November 21, 2008. The agreement may be terminated by either party at any time.
The consideration for the review and assessment services provided by Johns
Hopkins was $5,000 per day. The consideration for the limited use of the Johns
Hopkins mark was $300,000 per year, payable in quarterly installments, and 500
shares of KAAI's series E preferred stock.
We agreed with Johns Hopkins to explore a broader relationship, which we
are currently negotiating. If we agree on the terms of such relationship, we
will be required to make additional payments to Johns Hopkins.
In December 2004 we entered into a Services and Licensing Agreement with
Johns Hopkins Medicine, acting through Johns Hopkins Health System Corporation,
and the Johns Hopkins University. This agreement was subject to the satisfaction
of certain conditions precedent, which we had to satisfy by October 31, 2005. On
November 10, 2005, the period by which we are required to satisfy the conditions
precedent was extended to December 31, 2005. On January 3, 2006, the parties
extended such period until March 31, 2006. Under the Agreement, Johns Hopkins
agreed to provide the following services to us: (i) investigate current methods
for skin care parameter testing at the point of sale; (ii) develop acceptable
methods to measure the condition of clients' skin, (iii) create a new testing
methodology to validate skin care product efficacy, (iv) oversee the ongoing
testing of skin care products using the Johns Hopkins testing standards and (v)
oversee the testing of 15 of our skin care products using the agreed upon
testing standards. The term of the agreement is 5 years after the satisfaction
of the conditions precedent.
Johns Hopkins also agreed that the Company and Sephora may make a factual
statement that (i) certain skin care parameter testing methodologies have been
developed by Johns Hopkins or found by Johns Hopkins to be effective and (ii)
certain skin care products have been found to be effective based on the Johns
Hopkins testing standards.
Under the agreement, we will pay a fee of $5,000 per day to perform the
services and we will provide Johns Hopkins with substantial additional
compensation to be negotiated.
Agreement with Sephora
In December 2004 we entered into a Retail Alliance Agreement with Sephora
USA, LLC. Pursuant to the agreement we granted Sephora the rights to: (i) sell
our Cosmedicine products in the Sephora retails stores, through its website and
any other retail channel, (ii) utilize certain of our intellectual property and
methods in order to operate the KAAI stores within the Sephora stores, (iii)
develop with us the adjacent KAAI facilities and (iv) sublease retails space
from us for the purpose of constructing and operating a Sephora store within our
centers. The term of the agreement is until December 31, 2010.
42
Upon execution of the agreement, Sephora deposited a performance deposit in
an amount of $5 million with an escrow agent, which was subsequently paid to
KAAI. If Sephora, pursuant to the terms of the agreement, terminates the
agreement with us it may have the right to recoup a portion of the $5 million
performance deposit. Sephora will also have the right to earn back its
performance deposit if the arrangement is successful. We will be required to
return to Sephora 50% of the performance deposit at such time that the "Net
Revenues" of Sephora relating to the sale of Cosmedicine products plus Sephora
"Capital Expenditures" (each as defined in the agreement) equals $30 million and
the remaining performance deposit at such time that such "Net Revenues" plus
"Capital Expenditures" equals $60 million. See "Certain Relationships and
Related Pary Transactions - Sephora."
Intellectual Property
We consider trademark protection to be important to our business and we are
the owners of numerous U.S. and foreign trademark applications/registrations.
Significant trademarks include; KAAI, the KAAI logo, KAAI Signature Services,
Klinger Advanced Aesthetics, Cosmedicine, Georgette Klinger, SkinState, Personal
Aesthetics Blueprint, Aesthetic Concierge, Truth is Beauty and the Place of
Possibilities.
We also consider patent protection to be important to our business and we
are the owners of a pending U.S. patent application and related foreign
applications covering systems and methods relating to aesthetic improvement.
Employees
On December 31, 2005, we had 525 employees. We consider our relations with
our employees to be satisfactory. We believe our future will depend in large
part on our ability to attract and retain highly skilled employees.
PROPERTIES
Corporate Headquarters
Our corporate headquarters are located in leased premises at Building No
501, Fifth Floor, 7 Corporate Park, Norwalk, CT 06851.
Integrated Flagships
Our two Integrated Flagships in West Palm Beach and Palm Beach Gardens were
formed by acquiring two leading spa/salons in 2003, and integrating SkinState
diagnostics, medical and Aesthetic Concierge capabilities into the physical
footprint and business flow.
Upon KAAI's formation, we focused significant efforts on re-crafting our
retail space and operations, installing experienced management and overhauling
purchasing, training, merchandising and commission structure.
Other Locations
Our ten other facilities include one spa/salon in Boca Raton and nine
Georgette Klinger properties; these ten locations have not yet been re-launched
with our integrated offering.
Georgette Klinger
We acquired the Georgette Klinger properties in May 2004. To date, changes
since their acquisition have been limited to installing experienced
unit-managers where needed and overhauling the retail training, merchandising
and commission structure. Management expects Georgette Klinger locations to form
the platform for the launch of future Integrated Flagships in New York, Beverly
Hills and Washington DC and Stand-Alone Boutiques in Beverly Hills and
Washington, D.C.
43
Boca Raton
We acquired the Boca Raton spa/salon in late 2003. Changes to date have
been limited to installing experienced unit-managers where needed and
overhauling the retail training, merchandising and commission structure. This
facility is expected to be converted into an Integrated Flagship by late 2006.
The following chart summarizes the relevant data regarding each of our
facilities:
---------------------------------------------------------------------------------------------------------------------------------
Facility Lease
City Address Size Expiration Annual
(sq/ft) Date Base Rent
---------------------------------------------------------------------------------------------------------------------------------
Costa Mesa Southcoast Plaza Retail Center 3,300 1/31/2007 $103,455
(Spa Facility) Suite 2600
Costa Mesa, CA
---------------------------------------------------------------------------------------------------------------------------------
Beverly Hills 131 South Rodeo Drive, 6,530 9/30/2015 $378,300
(Spa Facility) Beverly Hills, CA
---------------------------------------------------------------------------------------------------------------------------------
Dallas Inwood Village Shopping Center 6,856 5/30/2006 $150,832
(Spa Facility) 5560 West Lovers Lane
Suites 250 & 252,
Dallas, TX
---------------------------------------------------------------------------------------------------------------------------------
Millburn The Mall at Short Hills 3,475 1/31/2008 $225,875
(Spa Facility) Store # A139
Millburn, NJ
---------------------------------------------------------------------------------------------------------------------------------
Manhasset 1950 Northern Blvd. 6,313 2/27/2007 $473,475
(Spa Facility) Space A-2
Manhasset, NY
---------------------------------------------------------------------------------------------------------------------------------
Chicago Water Tower Place 4,779 12/31/2012 $215,055
(Spa Facility) Space No. 4035
845 North Michigan Avenue
Chicago, IL
---------------------------------------------------------------------------------------------------------------------------------
Washington Chevy Chase Pavillion 5,551 5/31/2007 $277,550
(Spa Facility) Space No. 4035
5335 Wisconsin Ave. N.W.
Washington, DC
---------------------------------------------------------------------------------------------------------------------------------
Palm Beach The Esplande 2,739 5/31/2010 $92,907
(Spa Facility) Store No. 211
150 Worth Ave.
Palm Beach, FL
---------------------------------------------------------------------------------------------------------------------------------
Hasbrouck Heights Hasbrouck Seventeen 2,260 2/28/2008 $44,070
(Office) 500 Route 17, Suite 307
Hasbrouck Heights, NJ
---------------------------------------------------------------------------------------------------------------------------------
Palm Beach Gardens 5530-5540 PGA Blvd. 8,498 3/7/2008 $186,956
(Spa Facility) Suite 200
Palm Beach Gardens, FL
---------------------------------------------------------------------------------------------------------------------------------
44
---------------------------------------------------------------------------------------------------------------------------------
Facility Lease
City Address Size Expiration Annual
(sq/ft) Date Base Rent
---------------------------------------------------------------------------------------------------------------------------------
West Palm Beach 2511 South Dixie Highway 10,732 6/30/2008 $236,104
(Spa Facility) West Palm Beach, FL
---------------------------------------------------------------------------------------------------------------------------------
Boca Raton Building H 3,889 1/31/2008 $78,868
(Spa Facility) 6853 S.W. 18th Street
Boca Raton, FL
---------------------------------------------------------------------------------------------------------------------------------
Boca Raton Building H 7,923 2/29/2008 $152,325
(Spa Facility) 6877 S.W. 18th Street
Boca Raton, FL
---------------------------------------------------------------------------------------------------------------------------------
New York (Spa) 501 Madison Ave. 13,800 4/30/2013 $800,000
New York, NY
---------------------------------------------------------------------------------------------------------------------------------
New York (Prior Corporate Headquarters) 501 Madison Ave. 3,800 4/30/2013 $152,000
New York, NY
---------------------------------------------------------------------------------------------------------------------------------
Connecticut Building 501 13,340 1/12/2006 $226,780
(Corporate Headquarters) Merritt 7 Corporate Park
Norwalk, CT
---------------------------------------------------------------------------------------------------------------------------------
LEGAL PROCEEDINGS
The Company is a party to legal proceedings in the ordinary course of its
business. Management of the Company does not believe that such legal proceedings
would, if adversely determined, materially adversely affect the business or
financial condition of the Company.
To the Company's knowledge, no director, officer or affiliate of the
Company, and no owner of record or beneficial owner of more than five percent
(5%) of the securities of the Company, or any associate of any such director,
officer or security holder is a party adverse to the Company or has a material
interest adverse to the Company in reference to pending litigation.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of each of our executive
officers and directors as of January 19, 2006.
Name Age Position
---- --- --------
Richard Rakowski 53 Chairman and Chief Executive Officer
John Higgins 45 President and Director
Jane Terker 53 Executive Vice President, Chief Marketing
Officer and Director
Susan Riley 47 Executive Vice President and Chief
Financial Officer
Carolyn Aversano 36 Executive Vice President of Marketing,
Merchandising and Education
Andrew D. Lipman 38 Director
Stephen H. Coltrin 60 Director
45
Name Age Position
---- --- --------
Daniel Piette 60 Director
Philippe Franchet 40 Director
Richard Rakowski - Chairman and Chief Executive Officer
Richard Rakowski has been Chairman and Chief Executive Officer of KAAI
since its formation in July 2003. He is also a Principal of KCO since March
2002. Prior to joining KCO as a Principal in March 2002, Richard Rakowski's
diverse 26-year career spanned manufacturing, consulting, business development,
marketing, entrepreneurship and the Presidency of American Healthways, Inc.
(NASDAQ: AMHC) from June 2001 to March 2002. From 1992 until 2001, Mr. Rakowski
was a founder of New Paradigm Ventures, a consulting and investment firm in the
health-care and food industry market. He was also a partner at Marketing
Corporation of America. Mr. Rakowski's background also includes process control
consulting work for Fortune 500 Companies in the U.S. and abroad. He holds a BA
from City University of New York.
John Higgins - President
John Higgins is a seasoned operating executive with over 20 years of
professional experience. Prior to joining KAAI in January 2005, Mr. Higgins was
from April 2001 to January 2005 first the Chief Operating Officer and then the
Chief Executive Officer of Spencer Trask & Co., a venture capital firm. At
Spencer Trask he was responsible for the operating performance of the firm, with
an emphasis on the due diligence process for potential investments as well as
the creation and implementation of strategic initiatives for the portfolio
companies. Additionally, Mr. Higgins has held several senior operating positions
including Chief Executive Officer of Priceline Perfect Yardsale from January
2000 to March 2001, Chief Operating Officer for the international division of
the Home Shopping Network, and Executive Vice President of Customer Services for
Victoria's Secret Catalogue. Earlier in his career, Mr. Higgins held various
sales and operating roles at Northwest Airlines, Chase Manhattan Bank, Dreyfus
Service Corporation, and the Bank of New York.
Jane Terker - Executive Vice President, Chief Marketing Officer and Director
Jane Terker has over 30 years experience as a management executive and
business builder. Immediately prior to joining KAAI, Ms. Terker co-founded and
served from December 2001 to July 2004 as President and Chief Operating Officer
of Cradle Holdings, Inc., a company created to acquire and reposition prestige
beauty brands for maximum growth and profitability. From May 1992 to March 1998
Ms. Terker also founded, developed and served as President of the Donna Karan
Beauty Company. Ms. Terker also founded and ran JTP Associates from March 1998
to November 2001, which was a product consulting company with clients including
J Crew, MD Skincare, Linda Cantello Beauty, CCSI inshop.com and Kiss My Face.
Earlier in her career, Ms. Terker held various marketing and retail executive
roles at Esmark, L'Oreal and Glemby International. She holds a BA, magna cum
laude, from New York University and also attended Columbia University's
Executive Education Program.
Susan Riley - Chief Financial Officer
Susan Riley joined KAAI in July 2005. She has over 20 years of experience
as a finance and management executive. Prior to joining KAAI, Ms. Riley was the
Chief Financial Officer and Senior Vice President of Abercrombie and Fitch from
February 2004 to April 2005. Prior thereto, Ms. Riley held the position of Chief
Financial Officer at The Mount Sinai Medical Center in New York from August 2002
to November 2003. She was Vice President and Treasurer of Colgate Palmolive from
January 2001 to August 2002 and Senior Vice President and Chief Financial
Officer of The Dial Corporation from August 1997 to August 2000. Ms. Riley holds
a BS from Rochester Institute of Technology and an MBA from Pace University and
is a Certified Public Accountant.
46
Carolyn Aversano - Executive Vice President of Marketing, Merchandising and
Education
Carolyn Aversano joined KAAI in June 2005. Prior to joining KAAI, Ms.
Aversano worked for Sephora as a Strategic Development Consultant from July 2004
to June 2005. From July 1999 to April 2003, Ms. Aversano was a member of the
startup team for beauty retailer Gloss.com, which was acquired by the Estee
Lauder Companies in 2000. At Estee Lauder Companies she oversaw the e-commerce
businesses of the various Estee Lauder Companies' brands including Estee Lauder,
Origins, Prescriptives, Stila, La Mer, Jo Malone and Kate Spade. Ms. Aversano
holds a BS degree in marketing from New York University.
Andrew D. Lipman - Director
Andrew Lipman was Vice President and one of the founding principals of KCO.
Prior to co-founding KCO in 1996, Mr. Lipman served as a Vice President of the
firm's predecessor, Kidd, Kamm & Company. Earlier in his career, Mr. Lipman was
a management and strategic consultant with The George Group and Andersen
Consulting. He holds a BS in Electrical Engineering from Union College.
Stephen H. Coltrin - Director
Stephen H. Coltrin founded Coltrin & Associates, Inc. in 1982. In addition
to serving as a member of our Board of Directors, Mr. Coltrin also currently
serves as a Vice Chairman on the Board of Directors for the International Radio
and Television Society Foundation, on the National Advisory Board of America's
Freedom Festival at Provo, and on the Advisory and Advancement Council of the
Utah State University Journalism & Communication Department. Mr. Coltrin
received a BS in psychology from Brigham Young University.
Daniel Piette - Director
Daniel Piette co-founded L Capital in June 2001 and serves both as the
President of L Capital Management and as a member of the Supervisory Committee
of the L Capital fund. Additionally, he is a member of Moet Hennessy Louis
Vuitton LVMH Group's Executive Committee. He is also co-founder, Chairman and
CEO of LV Capital. Mr. Piette joined LVMH in 1990 as Group Executive Vice
President. Mr. Piette started his career focus in the fashion luxury sector as
the Brand Operating Officer for the DMC Group. Earlier in his career, Mr. Piette
held the post of Executive Vice President of Manurhin. He was also a manager at
the Bosch Company and a consultant at Arthur D. Little. Mr. Piette graduated
from ESSEC in Paris and also holds an MBA from Columbia Business School.
Philippe Franchet - Director
Philippe Franchet joined L Capital in September 2001 as a director of L
Capital Management. Prior to L Capital, Mr. Franchet was from June 2000 until
June 2001 the Senior Vice President, leading investments for Europatweb, an
Internet investment group formed by Bernard Arnault. Prior to Europatweb, Mr.
Franchet was from January 1998 until June 2000 the Head of Private Equity
Investments for the Lazard Group's two public investment holding companies, Azeo
and Eurafrance (now Eurazeo). While at the Lazard Group, Mr. Franchet and his
team invested approximately FF 500 million in over 15 transactions across a
variety of sectors in countries including France, the UK, the US and Japan.
Earlier in his career, Mr. Franchet was a consultant with McKinsey & Co. and a
financial derivatives market trader with Credit Lyonnais. Mr. Franchet holds an
MSEE from ENST in Paris and an MBA from Harvard Business School.
Other Key Employees
The following employees who are not our executive officers are instrumental to
our business:
Bruce Alexander - Senior Vice President of Operations
Bruce Alexander, age 35, is responsible for the reporting and analysis of
all the Company's operating businesses, as well as the leadership of
reservations, fulfillment, inventory planning, and information technology.
47
Prior to joining KAAI in August 2005, Mr. Alexander served as Managing Director
of Strategy, Planning and Analysis at Spencer Trask & Company, a venture capital
firm, from January 2000 to August 2005. Mr. Alexander held operating and
strategic management positions at Andersen Consulting from September 1998 to
January 1999 and Playtex Products, Inc. from January 1999 to January 2000. Bruce
received his MBA from Duke University in May 1997 and his BA in Economics from
Vanderbilt University in May 1991.
Garry M. Chocky - Vice President of Finance and Controller
Garry M. Chocky, age 52, has been responsible for overseeing KAAI's
accounting function since April, 2004. He served as Vice President and Acting
Chief Financial Officer from January 2005 until July 2005 when he became Vice
President of Finance and Controller. Prior to joining KAAI, Mr. Chocky served as
the controller of Georgette Klinger from December 2000 until April 2004 when the
assets of Georgette Klinger were acquired by KAAI.
Wade Haddad - Senior Vice President of Real Estate and Legal
Wade Haddad, age 39, has been responsible for overseeing KAAI's legal
affairs and the site selection, lease negotiation, store design and construction
of KAAI's locations since July 2005. Prior to joining KAAI, Mr. Haddad worked
for Bieri Company, a specialty retail real estate consulting firm, as the
Director of Leasing, where he managed real estate strategies on behalf of
landlord and tenant clients for Bieri Company from March 2002 to July 2005. From
May 1999 to February 2002, Mr. Haddad worked with The Taubman Company, a
national developer of regional shopping centers, as a Leasing Agent, where he
represented the landlord in lease negotiations with retail tenants on behalf of
The Taubman Company. Mr. Haddad holds a BA in Political Economy from Princeton
University and a JD, magna cum laude, from the University of Detroit School of
Law.
Michael S. Rodriguez - Senior Vice President, Business Development
Michael Rodriguez, age 37, serves as the Senior Vice President of Business
Development of KAAI since September 2003. Prior to joining KAAI, Mr. Rodriquez
founded and ran three business consulting companies in the healthcare and
financial service sectors, Three Realms, LLC, Impact Partners, LLC, and
Broadband Digital, Inc. from April 2000 to September 2003. From May 1995 to
April 2000, Mr. Rodriquez worked with Visa USA where he was employed in senior
management roles in operations, marketing, and business development. From June
1991 to May 1995, Mr. Rodriquez worked with GE Capital. Mr. Rodriguez holds a BA
in Finance and Economics from Southern Methodist University and is also a
graduate of the GE Capital Management Development Program.
Medical Advisory Board
We have a Medical Advisory Board that includes leaders in the medical
aesthetics industry. In addition to Johns Hopkins oversight of medical
governance activities, the Medical Advisory Board includes the following:
Dr. Kaveh Alizadeh - Medical Director and Advisor to the Medical Advisory Board
Dr. Alizadeh is currently a partner and vice president of Long Island
Plastic Surgical Group, the largest and oldest continuously running practice in
North America. He is also the Vice Chairman of Plastic Surgery and Director of
Microsurgery at Winthrop University Hospital, and the curriculum director for
the Nassau University Plastic Surgery Residency Program. Prior to joining Long
Island Plastic Surgical Group, Dr. Alizadeh pursued a year of training in cancer
reconstruction and cosmetic surgery at the Memorial Sloan Kettering Cancer
Center in 1999. Between 1993 and 1999, he carried out specialty training in
surgery and subspecialty training in Plastic and Reconstructive Surgery at the
University of Chicago Hospitals. Dr. Alizadeh earned his medical degree from
Cornell University Medical College.
Dr. Rod Rohrich - Chairman of Medical Advisory Board
Dr. Rod Rohrich is Professor and Chairman, Department of Plastic Surgery,
Crystal Charity Ball Distinguished Chair in Plastic Surgery and Warren and Betty
Woodward Chair in Plastic and Reconstructive
48
Surgery at the University of Texas Southwestern Medical Center in Dallas, Texas.
Dr. Rohrich earned his medical degree from Baylor College of Medicine in
Houston, TX. He completed residencies in both General Surgery and Plastic and
Reconstructive Surgery at the University of Michigan Medical Center in Ann
Arbor, MI. Dr. Rohrich also completed a Fellowship in Hand and Microsurgery at
Massachusetts General Hospital in Boston, MA and a Pediatric Fellowship at
Oxford University in Oxford, England. Dr. Rohrich is board certified in plastic
surgery. He has served as President of the American Society of Plastic Surgery
and has served on the Board of Directors of the American Society of Plastic
Surgery, the Plastic Surgery Educational Foundation, and the American society
for Aesthetic Plastic Surgery. He serves on the Board of the Aesthetic Society
Education and Research Foundation. He is a member of numerous other professional
societies. Dr. Rohrich is the editor-in-chief of Plastic and Reconstructive
Surgery, the most prestigious scientific journal in the world in plastic
surgery. He is the author or co-author of more than 400 articles and book
chapters, five books and has made more than 1500 presentations nationally and
internationally.
Dr. Steven Fagien
Dr. Steven Fagien is our acting Florida Medical Director and has a private
surgical practice in Ophthalmic Plastic and Reconstructive Surgery/Aesthetic
Eyelid Plastic Surgery in Boca Raton, Florida. Dr. Fagien grew up in Florida and
attended college and medical school at the University of Florida, where he also
completed his internship and residency training. He then completed a fellowship
in Ophthalmic Plastic and Reconstructive Surgery at the University of Illinois
in Chicago. Dr. Fagien has earned the reputation as one of the foremost experts
in his field. "W" and "More" magazines and the New York Times have rated him as
one of the best eyelid plastic surgeons in the world. He serves on the medical
advisory boards of many of the largest aesthetic-related companies in the
industry. He also co-chairs the International Plastic Surgery Education
Initiative and the National Education Faculty that instructs surgeons worldwide
on the latest advances in injectable treatments for facial rejuvenation,
including Botox and a host of facial soft tissue augmentation agents.
Dr. Peter Fodor
Dr. Peter Fodor is Associate Clinical Professor of Plastic Surgery at UCLA
Medical Center in Los Angeles. Dr. Fodor graduated from the University of
Wisconsin Medical School and completed his residency training at Columbia
University in New York before obtaining Board Certification in general surgery,
as well as plastic surgery. Dr. Fodor served as President of the Lipoplasty
Society of North America and is on the Board of Directors of the American
Society of Plastic Surgeons and the Plastic Surgery Educational Foundation.
Currently, he is Immediate Past President and Chairman of the Board of Trustees
of The American Society for Aesthetic Plastic Surgery. He has been distinguished
by "W" Magazine as "Best in the World" in body sculpting, as well as named to
the "Best Physicians" list in "Town & Country," and "Los Angeles" magazines and
many other publications.
Dr. Victor Martel
Dr. Victor Martel has a private cosmetic dental practice in Palm Beach,
Florida. He lectures nationally on the topics of Aesthetic Dentistryand
Occlusion. Dr. Martel received his dental degree at the University of Medicine
and Dentistry of New Jersey. Dr. Martel serves on the Board of Directors for the
Atlantic Coast Dental Research Clinic, the Florida Academy of Cosmetic
Dentistry, and is a faculty member of The Dawson Center for Advanced Dental
Studies.
Dr. Mark Rubin
Dr. Mark Rubin is a board certified dermatologist. He is an assistant
clinical professor of dermatology at the University of California, San Diego. In
addition, he has a cosmetic dermatology practice at the Lasky Skin Center in
Beverly Hills, California. Dr. Rubin is the author of textbooks on chemical
peeling, and has written numerous book chapters and articles on skin
rejuvenation, chemical peeling and laser therapy. He has trained physicians in
over 10 countries in his techniques for skin rejuvenation. He is involved in
clinical trials of multiple new products and technologies. Dr. Rubin also serves
on the advisory boards of several skin care, pharmaceutical and medical device
companies.
49
Board of Directors
Our directors are elected annually by our stockholders. They serve until
the next annual meeting of our stockholders or until their successors have been
duly elected and qualified or until their earlier resignation or removal.
We have adopted a code of conduct that applies to all of our directors,
officers (including our Chief Executive Officer and Chief Financial Officer) and
employees.
We presently do not have an audit committee, compensation committee or
nominating committee. We do not have an audit committee charter or a charter
governing the nominating process as our management believes that until this
point it has been premature at the early stage of our management and business
development to form an audit, compensation or nominating committee. However, a
new management plans to form an audit, compensation and nominating committee in
the near future. Until these committees are established, these decisions will
continue to be made by the Board of Directors. Although the Board of Directors
has not established any minimum qualifications for director candidates, when
considering potential director candidates, the Board considers the candidate's
character, judgment, skills and experience in the context of the needs of the
Company and the Board of Directors.
Director Compensation
All directors are reimbursed for out-of-pocket expenses in connection with
attendance at meetings of the Board of Directors.
Executive Compensation
The following table sets forth all cash compensation earned in the most
recent three years by our Chief Executive Officer and each of our other four
most highly compensated executive officers during the past fiscal year (the
"Named Executive Officers"). The compensation arrangements for each of these
officers that are currently in effect are described under the caption
"Employment Arrangements, Termination of Employment Arrangements and Change in
Control Arrangements" below.
50
Annual Compensation Long-Term Compensation
-------------------------- ---------------------------
No. of Common Stock
Underlying Options
Name and
Principal Position Year Salary Bonus TrueYou KAAI (1)
-----------------------------------------------------------------------------------------------------------------------------
Richard Rakowski 2005 199,583 -- -- --
Chairman of the Board and
Chief Executive Officer 2004 373,846 -- -- --
2003 -- -- -- --
Jane Terker 2005 $216,345 -- -- 150,000
Executive Vice President and
Chief Marketing Officer 2004 N/A N/A N/A N/A
2003 N/A N/A N/A N/A
John Higgins 2005 $105,769 $75,000 -- --
President 2004 N/A N/A N/A N/A
2003 N/A N/A N/A N/A
Dave Jordan 2005 $144,500 8,000 -- --
Former Chief Financial Officer 2004 200,000 42,313 N/A N/A
2003 N/A N/A N/A N/A
Joseph Crace 2005 $57,115 -- -- --
Former President 2004 $247,184 $143,125 N/A N/A
2003 N/A N/A N/A N/A
(1) Shares subject to options granted under KAAI 2003 Stock Option Plan.
Employment Arrangements, Termination of Employment Arrangements and Change in
Control Arrangements
KAAI entered into an Employment Agreement with Jane Terker, effective
January 1, 2005, pursuant to which KAAI employed Ms. Terker as the President of
our Cosmedicine division. KAAI agreed to pay Ms. Terker a base salary of
$450,000 per year. In addition, KAAI agreed to pay Ms. Terker bonuses in the
aggregate maximum amount of $550,000 based on achieving certain performance
measures. KAAI also granted Ms. Terker an option to purchase 150,000 shares of
KAAI's common stock at an exercise price of $4.00 per share, vesting over a
period of four years. KAAI also agreed that based on the EBITDA contributed by
the sale of the Cosmedicine products, it will grant Ms. Terker additional
options to purchase up to 160,000 shares of KAAI's common stock. If Ms. Terker
is terminated without "cause", or if Ms. Terker terminates the agreement for
"good reason" (each as defined in the agreement) we will be required to pay Ms.
Terker her accrued and unpaid base salary plus six months' salary. In addition,
a portion of her unvested options will vest.
On January 9, 2005 KAAI entered into a letter agreement with John Higgins,
pursuant to which Mr. Higgins agreed to serve as KAAI's President and a member
of our Board of Directors commencing on January 17, 2005. Pursuant to the
agreement, Mr. Higgins is paid a base salary of $250,000 per year and will be
eligible for a bonus of up to 60% of his base salary. KAAI also agreed to grant
Mr. Higgins an option to purchase 300,000 shares of its common stock vesting
over a three year period. If Mr. Higgins' employment is terminated other than
for "cause" within the first year of his employment he will be entitled to 6
months of severance; thereafter, he will be entitled to 9 months of severance.
On June 1, 2005 KAAI entered into a letter agreement with Carolyn Aversano,
pursuant to which Ms. Aversano agreed to serve as its Executive Vice President
of Marketing, Merchandising and Education commencing on June 20, 2005. Pursuant
to the agreement, Ms. Aversano is paid a base salary of $200,000 per year and
will be eligible for a bonus of up to 30% of her base salary. KAAI also agreed
to grant Ms. Aversano an option to purchase 50,000 shares of its common stock
vesting over a three year period.
51
On June 16, 2005 KAAI entered into a letter agreement with Susan Riley,
pursuant to which Ms. Riley agreed to serve as its Executive Vice President and
Chief Financial Officer commencing on July 3, 2005. Pursuant to the agreement,
Ms. Riley is paid a base salary of $325,000 per year and will be eligible for a
bonus of up to 60% of her base salary. KAAI also agreed to grant Ms. Riley an
option to purchase 250,000 shares of its common stock vesting over a three year
period. If Ms. Riley's employment is involuntarily terminated for reasons other
than for "cause" after 90 days of her employment, she will be entitled to 6
months of severance. If such termination occurs after 18 months of service, she
will be eligible for 9 months of severance.
Option/SAR Grants in Last Fiscal Year
KAAI granted stock options to its executive officers under KAAI's 2003
Stock Option Plan. As of December 8, 2005, options to purchase a total of
1,059,600 shares were outstanding under KAAI's 2003 Stock Option Plan, and a
total of 940,400 shares remained available for grant under KAAI's 2003 Stock
Option Plan.
The following table provides information regarding grants of options to
purchase shares of KAAI common stock under the KAAI 2003 Stock Option Plan to
the Named Executive Officers in the fiscal year ended June 30, 2005:
Individual Grants
% of Total
No. of Shares of Options
Common Stock Granted to
Underlying Employees in Exercise Expiration Grant Date
Name Options Granted (1) Fiscal Year Price Date Present Value (1)
---- ------------------- ----------- ----- ---- -----------------
Richard Rakowski 0 0% --- --- ---
John Higgins 0 0% --- --- ---
Jane Terker 150,000 (2) 8.8% $4.00 January 9, 2015 $79,843
Susan Riley 0 0% --- --- ---
(1) The assumptions used in the models for the grants to Mr. Terker were an
expected volatility of 30%, a risk-free rate of return of 4.23%, a dividend
yield of 0% and an expected option life of 6 years.
(2) Shares subject to options granted under KAAI's 2003 Stock Option Plan.
Aggregated Option/SAR Exercises in the Last Fiscal Year and Fiscal Year-End
Option/SAR Values
During the fiscal year ended June 30, 2005, no options were exercised by
our named executive officers. The following table sets forth the number of
shares of KAAI's common stock underlying unexercised stock options granted to
each of our Named Executive Officers and the number and value of unexercised
options held by each of the Named Executive Officers at June 30, 2005:
Number of Value of Unexercised
Shares of Common Stock In-The-Money
Shares Underlying Unexercised Options/SARS
Acquired Value Options/SARs at June 30, 2005 at June 30, 2005(1)
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Richard Rakowski 0 0 -- -- -- --
John Higgins 0 0 -- -- -- --
Jane Terker 0 0 150,000(2) -- -- --
Susan Riley 0 0 -- -- -- --
(1) The fair value of each stock option grant was estimated using the
Black-Scholes Option Pricing Model assuming a 0% dividend yield, 30%
expected volatility, a risk free interest rate of 4.23% and expected life
of the options of 6 years.
(2) Shares subject to options granted under KAAI's 2003 Stock Option Plan.
52
Employee Benefit Plans
On July 1, 2003, the shareholders of KAAI adopted the Advanced Aesthetics
2003 Stock Option Plan (the "2003 Stock Option Plan") which allows KAAI to grant
nonqualified stock options to employees, vendors and contractors that have
affiliations with the company.
Under the 2003 Stock Option Plan, the Company is authorized to issue
options to acquire 2,000,000 shares of common stock of KAAI for a term not to
exceed ten years from the date of grant.
The 2003 Stock Option Plan contains restrictions on transferability, time
of exercise, exercise price and on disposition of any shares acquired through
exercise of the options. Stock options are granted at not less than fair market
value, which is determined as of the grant date utilizing the Black-Scholes
Option Pricing Model. The Board of Directors determines the 2003 Stock Option
Plan participants and establishes the terms and conditions of each option.
The Company is currently considering the adoption of a new stock option
plan as an alternative to the 2003 Stock Option Plan.
A summary of the KAAI's share option activity and related information for
the three fiscal years ended June 30, 2005, 2004 and 2003 and the three months
ended October 1, 2005 are as follows:
At June 30, 2005, the weighted average exercise prices and remaining contractual
lives of stock options are as follows:
Options outstanding Options exercisable
----------------------------------------------------- ---------------------------------
Weighted
Number of average
options remaining Number
outstanding contractual life Weighted average exercisable Weighted
Range of exercise prices as of 6/30/05 (in years) exercise price as of 6/30/05 average price
------------- ---------- -------------- ------------- -------------
Stock options issued @$4.00 1,059,600 9.01 $4.00 692,587 $4.00
53
The stock options issued during the year ended June 30, 2005 vest at a range of
25-50% per year over a period of two to four years. All options granted relate
to the stock option plan approved by the shareholders of KAAI. The fair value of
each stock option grant was estimated using the Black-Scholes Option Pricing
Model assuming a 0% dividend yield, 30%-36% expected volatility, a risk free
interest rate of 3.56% - 4.61% and expected life of the options of 6 years.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's equity as of January 2006:
o each securityholder known by the Company to be the beneficial owner of
more than 5% of the Company's outstanding securities;
o each of our directors and Named Executive Officers; and
o all directors and executive officers as a group.
Unless otherwise specified, the address of each of the persons set forth
below is in care of Klinger Advanced Aesthetics, Inc., Building No 501, Fifth
Floor, 7 Corporate Park, Norwalk, CT 06851.
Beneficial ownership is calculated in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934. For purposes of this table: (i) shares subject
to stock options, warrants or convertible securities are considered beneficially
owned only to the extent currently exercisable or exercisable within 60 days
after January 19, 2006, (ii) all outstanding Warrants to purchase capital stock
of the Company, are deemed exercisable within 60 days after January 19, 2006,
(iii) all outstanding shares of Series B Preferred Stock (as the substantial
equivalent of Common Stock) are assumed to have been converted into Common Stock
and (iv) the outstanding shares of Series B Preferred Stock (as the substantial
equivlent of Common Stock) are deemed to be outstanding for the purpose of
computing the percentage of the underlying shares of Common Stock by all holders
listed below.
Name and Address of Beneficial Owner Nature Beneficial Ownership Percent of Common Stock
------------------------------------ ---------------------------- -----------------------
Alan Gelband 9,954,860 (1) 3.4%
750 Third Avenue, Suite 600
New York, NY 10017
Mark Bieler 1,200,000 (2) *
2 Black Walnut Road
Scarsdale, NY 10583
Eric Ryan 846,567 *
7 Whitman Drive
Chatham, NJ 07928
Seapine Investments, LLC 91,075,998 (3)(4) 30.68%
c/o Kidd & Company, LLC
10 Glenville Street
Greenwich, CT 06831
Kidd & Company, LLC 38,473,906 (5) 13.10%
10 Glenville Street
Greenwich, CT 06831
FCPR L Capital 113,226,643 (6) 38.57%
c/o L Capital Management SAS
22, avenue Montaigne
75008 Paris
France
54
Name and Address of Beneficial Owner Nature Beneficial Ownership Percent of Common Stock
------------------------------------ ---------------------------- -----------------------
Affiliates of Pequot Capital 90,487,165 (7) 85.8%
Capital Management Inc.
500 Nayala Farm Road
Westport, CT 06880
Andrew Lipman 6,910,365 (4) (8) 2.36%
Richard Rakowski 2,074,149 (4) (9) *
Stephen H. Coltrin 0 0%
Daniel Piette (13) 113,226,643 (10) 38.57%
c/o L Capital Management SAS
22, avenue Montaigne
75008 Paris
France
Philippe Franchet (14) 113,226,643 (11) 38.57%
c/o L Capital Management SAS
22, avenue Montaigne
75008 Paris
France
John Higgins 0 0%
Jane Terker 0 0%
0 0%
Susan Riley
0 0%
Carolyn Aversano
All Directors and Executive Officers 122,211,157 41.50%
as a group (9 persons)
* Less than 1%
(1) Based on a Schedule 13D filed by Mr. Gelband on April 26, 2005, consists of
(i) 6,400,200 shares of the Company's Common Stock held directly by Mr.
Gelband, (ii) 20,000 shares of the Company's Common Stock held by Mr.
Gelband in trust for his son Aaron Gelband, (iii) 20,000 shares of the
Company's Common Stock held in trust for his son Alex Gelband, (iv)
3,502,660 shares of the Company's Common Stock owned by the Alan Gelband
Company Defined Contribution Pension Plan and Trust of which Alan Gelband
is the beneficiary; (v) 10,000 shares held indirectly by Mr. Gelband's
wife and (vi) 2,000 shares held indirectly by the Alden Foundation.
(2) Consists of 1,200,000 shares of the Company's Common Stock issued and
outstanding.
(3) Consists of (i) 8,784.6111 shares of the Company's Series B Preferred Stock
issued and outstanding, which are convertible into 87,846,111 shares of the
Company's Common Stock, and (ii) 322.9887 shares of the Company's Series B
Preferred Stock into which a Warrant is currently exercisable. Carla Kidd,
as the sole Manager of Seapine Investments, LLC, has voting power with
respect to these shares. Carla Kidd and William J. Kidd, her spouse, are
the owners of KCO. Does not include (i) shares of the Company's Series B
Preferred Stock held in trusts for the benefit of the children of Carla and
William Kidd and (ii) shares of the Company's Series B Preferred Stock
beneficially owned by Richard Rakowski and Andrew Lipman who are principals
of KCO and directors and officers of KAAI. Includes shares of the Company's
Series B Preferred Stock held of record by Seapine, which are subject to
purchase by Mr. Lipman and other affiliates of KCO based upon the
occurrence of certain contingent events.
(4) Some of the shares of the Company's Series B Preferred Stock beneficially
owned by the securityholder are subject to certain rights in favor of L
Capital, pursuant to an Amended and Restated Share Transfer
55
Agreement, dated December 20, 2005, among the Company, L Capital and
certain other securityholders signatory thereto.
(5) Consists of 3,847.3906 shares of the Company's Series B Preferred Stock
issued and outstanding, which are convertible into 38,473,906 shares of the
Company's Common Stock.
(6) Consists of 11,322.6643 shares of the Company's Series B Preferred Stock
issued and outstanding, which are convertible into 113,226,643 shares of
the Company's Common Stock.
(7) Consists of (i) 6,443.9891 shares of the Company's Series C Preferred Stock
issued and outstanding, which are convertible into 64,439,891 shares of the
Company's Common Stock, (ii) 1,878.3056 shares of the Company's Series B
Preferred Stock into which Warrants are concurrently exercisable and (iii)
726.4218 shares of the Company's Common Stock into which a Warrant is
currently exercisable.
(8) Consists of (i) 597.5113 shares of the Company's Series B Preferred Stock
owned by the Lipman Family Limited Partnership, which are convertible into
5,975,113 shares of the Company's Common Stock, (ii) 69.0191 shares of the
Company's Series B Preferred Stock owned by Andrew Lipman, which are
convertible into 690,191 shares of the Company's Common Stock, and (iii)
24.506 shares of the Company's Series B Preferred Stock into which a
Warrant is currently exercisable. Does not include shares of the Company's
Series B Preferred Stock, which Mr. Lipman has the right to purchase from
Seapine Investments based upon the occurrence of certain contingent events.
(9) Consists of (i) 200.059 shares of the Company's Series B Preferred Stock
issued and outstanding, which are convertible into 2,000,590 shares of the
Company's Common Stock, and (ii) 7.3559 shares of the Company's Series B
Preferred Stock into which a Warrant is currently exercisable.
(10) Mr. Piette, an executive of L Capital, may be deemed to beneficially own
the shares of the Company's Series B Preferred Stock owned by L Capital.
(11) Mr. Franchet, an executive of L Capital, may be deemed to beneficially own
the shares of the Company's Series B Preferred Stock owned by L Capital.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Except with respect to the Share Exchange Agreement and as set forth below,
none of the Company's directors or officers, nor any of the incoming directors
or officers, nor any person who beneficially owns, directly or indirectly, 5% of
the voting securities of the Company, nor any of the Company's promoters, nor
any relative or spouse of any of the foregoing persons has any material
interest, direct or indirect, in any transaction since July 1, 2004 or in any
presently proposed transaction which, in either case, has affected, or will
materially affect the Company. None of the Company's directors or officers, nor
any incoming director or officer is indebted to the Company.
General
In connection with the formation and capitalization of KAAI, KCO advanced
an aggregate of approximately $5.9 million to KAAI. In addition, affiliates of
KCO including Seapine Investments, LLC ("Seapine"), trusts for the benefit of
the children of William and Carla Kidd ("Kidd Trusts"), Richard Rakowski and
Andrew D. Lipman (collectively "KCO Affiliates"), invested an aggregate of $2
million in KAAI and received shares of KAAI's series B preferred stock, common
stock and Warrants to acquire common stock of KAAI.
In November 2003, in connection with the transactions involving KAAI and L
Capital, KCO received a note from KAAI in the sum of $5,905,085 (which
represented the amount originally advanced plus interest) and agreed that
payment of such note would be based on future performance of KAAI. On December
20, 2005 and in connection with the Share Exchange Agreement, the $7,346,195.53
outstanding under the KCO note was converted into 2,938,478 shares of KAAI
common stock, which was subsequently converted into 3,571.1976 shares of our
Series B Preferred Stock upon the closing of the Share Exchange Agreement.
In November 2003, L Capital invested $13,300,000 and received a
subordinated convertible promissory note (convertible into 5,966,444 shares of
the common stock of KAAI) and entered into a Securityholders
56
Agreement and Registration Rights Agreement with KAAI and KCO. L Capital also
entered into a Share Transfer Agreement with the KCO Affiliates and other
affiliates of KCO (collectively the "KCO Investors") whereby a portion of the
shares of common stock of KAAI held by the KCO Investors was subject to a
clawback in favor of L Capital if L Capital did not receive an investment rate
of return of 25% on its investment in KAAI (the "L Capital IRR test"). In
addition, certain of the KCO Investors had the right to acquire shares of the
common stock of KAAI held by Seapine based upon the occurrence of certain
contingent events.
In June 2004, L Capital invested an additional $8.2 million and acquired
shares of the series D convertible preferred stock of KAAI (convertible into
shares of common stock of KAAI) and concurrently entered into an amendment to
the Share Transfer Agreement with the KCO Investors which increased the number
of shares of the common stock of KAAI owned by the KCO Investors that were
subject to clawback in favor of L Capital. The subordinated convertible
promissory note and the series D convertible preferred stock were converted into
KAAI common stock, which were subsequently converted into 11,322.6643 shares of
our Series B Preferred Stock upon the closing of the Share Exchange Agreement on
December 20, 2005.
Under the Securityholders Agreement, the parties agreed on restrictions on
the transfer of their securities, rights of first offer, tag-along rights as
well as preemptive rights. In addition, the parties agreed to vote their shares
for specified nominees as directors of the Company and also provided each other
with approval rights for specified transactions of KAAI. Under the
Securityholders Agreement, the KCO Investors have the right, until November
2008, to cause the sale of KAAI provided that a specified investment rate of
return for L Capital is met; and if not, after November 2008, L Capital has the
right to cause the sale of KAAI.
On December 20, 2005, the parties amended the Share Transfer Agreement and
the Securityholders Agreement. The amended agreements provide that the KCO
Investors and L Capital vote their shares for specified nominees as directors of
the Company and for certain approval rights for specified transactions of the
Company, as well as specified rights to cause the sale of the Company. On
December 20, 2005, L Capital converted its promissory note and its shares of
KAAI's series D preferred stock into shares of common stock of KAAI, which were
subsequently converted into 11,322.6643 shares of our Series B Preferred Stock
upon the closing of the Share Exchange Agreement. Unpaid and accrued interest on
the L Capital note and accrued and unpaid dividends on the shares of KAAI's
series D preferred stock were not paid or converted and remain as outstanding
obligations of the Company and bear interest at a rate of 7.5% per annum. To the
extent necessary, upon the occurrence of certain events, if L Capital does not
realize the L Capital IRR test, we might be required to pay a portion or all of
such unpaid and accrued interest and dividends to L Capital. The KCO Investors
have also agreed with L Capital, that they will not sell any of their shares of
the Company's Series B Preferred Stock and the Company's Common Stock into which
the Series B Preferred Stock are convertible, until such time as L Capital has
realized the L Capital IRR test.
L Capital Consulting Services Agreement
On November 25, 2003 KAAI entered into a Consulting Services Agreement with
L Capital pursuant to which L Capital performed consulting services for KAAI.
Under the Agreement, we were required to pay L Capital an annual consulting fee,
payable in quarterly installments in arrears, equal to the higher of (a)
$445,000 and (b) 1% of our gross revenues plus $20,000 for such year. As of
December 20, 2005, there were accrued and unpaid consulting fees to L Capital of
approximately $877,639.
On December 20, 2005 we terminated the Consulting Agreement with L Capital
and we will pay all accrued and unpaid consulting fees within one year of
termination.
KCO Advisory Services Agreement
On November 25, 2003 KAAI entered into an Advisory Services Agreement with
KCO pursuant to which KCO performed advisory services for the Company. Under the
Agreement we are required to pay KCO an annual advisory fee, payable in
quarterly installments in arrears, equal to the higher of (a) $425,000 and (b)
1% of our gross revenues for such year. As of December 20, 2005, there were
accrued and unpaid consulting fees to KCO of approximately $838,194.
57
On December 20, 2005 we terminated the Advisory Agreement with KCO and we
will pay all accrued and unpaid advisory fees within one year of termination.
Sephora
Sephora, with whom the Company has a strategic relationship, is a
subsidiary of LVMH and L Capital is a private equity fund sponsored by LVMH and,
as a result, Sephora and L Capital are affiliates. The Company's decision to
enter into a strategic alliance with Sephora was made independent of its
relationship with L Capital and all arrangements with Sephora have been
negotiated on an arms length basis.
Alan Gelband
On June 1, 1999, the Company entered into a consulting agreement with Alan
Gelband, a former director of the Company. Pursuant to the agreement, Mr.
Gelband provides the Company with general management services for a fee of
$10,000 per month. This agreement terminated on February 28, 2003. In July 2004,
Mr. Gelband converted the $415,000 consulting fee due him into 4,150,000 shares
of the Company's Common Stock.
The Company owed the Alan Gelband Company Defined Contribution Pension Plan
& Trust an amount of $250,266. This consisted of a $220,000 loan made to the
Company on February 14, 2003 and accrued interest through July 2004 of $30,266.
In July 2004 the Company converted this debt into 1,000,000 shares of Common
Stock.
During 2004, Alan Gelband individually made three separate loans to the
Company. These loans, together with interest accrued thereon, were in the
aggregate amount of $5,870 as of July 2004. Alan Gelband converted this debt
into 58,700 shares of the Company's Common Stock in July 2004.
An amount equal to $41,487.00 in consulting fees was paid to the Alan
Gelband Company on November 29, 2005 for consulting services provided by the
Alan Gelband Company prior to the Closing of the Share Exchange Agreement and
for the establishment of a reserve to pay down certain accounts payable and
other miscellaneous expenses of the Company that accrued prior to the closing of
the Share Exchange Agreement.
Also in July 2004, the Alan Gelband Company Defined Contribution Pension
Plan and Trust purchased 1,000 shares of the Company's Series A Preferred Stock.
On December 20, 2005, the 1,000 shares of the Series A Preferred Stock was
converted into 2,000,000 shares of Common Stock.
The Company's office, until December 20, 2005 located at 750 Third Avenue,
Suite 1600, New York, New York 10017 was provided free of charge by Alan Gelband
Co., Inc., an investment banking firm controlled by Mr. Gelband.
DESCRIPTION OF CAPITAL STOCK
General
Our certificate of incorporation authorizes 20,000,000 shares of Common
Stock, $.001 par value per share, and 1,000,000 shares of Preferred Stock
$0.001, par value per share. The following description of capital stock is
subject to and qualified by our certificate of incorporation and bylaws and by
the provisions of applicable Delaware law.
Common Stock
Prior to the closing of the Share Exchange Agreement, we had 12,995,513
shares of Common Stock issued and outstanding. In connection with the closing of
the Share Exchange Agreement, 2,000 of our shares of Series A Preferred Stock
were converted into 2,000,000 shares of Common Stock. Subsequently, upon the
closing of the Share Exchange Agreement on December 20, 2005, we had 14,995,513
shares of Common Stock issued and outstanding. In connection with the Share
Exchange Agreement, we agreed with certain of our shareholders that we
58
would amend our Certificate of Incorporation to increase the number of shares of
authorized Common Stock so that all of the shares of our Series B Preferred
Stock will convert automatically into Common Stock. In addition, we have agreed
with the holders of the Series C and Series D Preferred Stock that we would
amend our Certificate of Incorporation to increase the number of shares of
authorized Common Stock so that we would have sufficient shares of Common Stock
available to fully convert our Series C and Series D Preferred Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The holders of Common Stock are
entitled to receive ratably any dividends that may be declared on the Common
Stock from time to time by the board of directors in its discretion out of funds
legally available for that purpose. In the event of our liquidation, dissolution
or winding up, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment in full of liabilities and preferential payments,
if any, to holders of Preferred Stock. The Common Stock has no preemptive or
conversion rights. There are no conversion or redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable.
Preferred Stock
Subject to the approval rights of the holders of currently outstanding
shares of Series C Preferred Stock and Series D Preferred Stock, our board of
directors has the authority, without further action by the stockholders, to
issue up to 1,000,000 shares of Preferred Stock, par value $0.001 per shares, in
one or more series and to fix the designations, powers, preferences, privileges,
rights, qualifications, limitations and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the Common
Stock. Our board of directors, without approval of the holders of Common Stock,
can issue Preferred Stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of Common
Stock. Preferred Stock could thus be issued quickly with terms calculated to
delay or prevent a change of control or make removal of management more
difficult. The issuance of Preferred Stock may have the effect of decreasing the
market price of the Common Stock, and may adversely affect the voting and other
rights of the holders of Common Stock.
Series A Convertible Preferred Stock
Prior to the closing of the Share Exchange Agreement, we had 2,000 shares
of Series A Preferred Stock Issued and outstanding, which were converted, in
connection with the closing of the Share Exchange Agreement, into 2,000,000
shares of our Common Stock. There are no shares of Series A Preferred Stock
presently issued and outstanding.
Dividends. Only dividends that are declared by our Board of Directors shall
accrue and be paid with respect to the Series A Preferred Stock.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up, the holders of Series A Preferred Stock
are entitled to receive $50 with respect to each share and upon receipt of such
liquidation preference the holders of Series A Preferred Stock shall not be
entitled to any further participation in any distribution of assets of the
Company with respect to the Series A Preferred Stock held by them.
Conversion. The holders of Series A Preferred Stock have the right to
convert their shares into 1,000 shares of our Common Stock, subject to
adjustment for stock split and other events.
Voting Rights. The Series A Preferred Stock votes with the Common Stock on
an as converted Common Stock basis.
Series B Convertible Preferred Stock
General. As of December 20, 2005, following the closing of the Share
Exchange Agreement, we had 27,926.4689 shares of Series B Preferred Stock issued
and outstanding.
59
Dividends. In the event that we declare or pay dividends to the holders of
Common Stock, we also have to declare or pay to the holders of the Series B
Preferred Stock at the same time, the dividends which would have been declared
and paid with respect to the Common Stock issuable upon conversion of the Series
B Preferred Stock had all of the outstanding Series B Preferred Stock been
converted immediately prior to the record date for such dividend.
Liquidation. In the event of the liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, after any payments shall be made
or any assets shall be distributed to the holders of the Series C Preferred
Stock and series D Preferred Stock, the assets of the Company legally available
for distribution shall be distributed ratably to the holders of the Common Stock
and the Preferred Stock on an as-converted to Common Stock basis.
Conversion. Upon the amendment of our Certificate of Incorporation to
increase the number of shares of our Common Stock (the "Authorized Shares
Increase"), each share of Series B Preferred Stock will convert into 10,000
shares of Common Stock, subject to adjustment for stock split and other events.
Voting Rights. The Series B Preferred Stock votes with the Common Stock on
an as-converted to Common Stock basis.
Series C Convertible Preferred Stock
General. As of December 20, 2005, following the closing of the Share
Exchange Agreement, we had 8,452.0222 shares of Series C Preferred Stock issued
and outstanding.
Dividends. Dividends on the Series C Preferred Stock shall accrue and be
cumulative from December 20, 2005 and be compounded annually at a rate of 4% per
annum until paid. Upon conversion of any share of Series C Preferred Stock into
Common Stock, the holder of the Series C Preferred Stock shall be entitled to
receive payment of all accrued and unpaid dividends in the form of such number
of additional shares of Common Stock equal to (i) the amount of such accrued and
unpaid dividends, divided by (ii) the then applicable conversion price of the
Series C preferred Stock.
Liquidation Preference. In the event of a liquidation or dissolution, the
holders of Series C Preferred Stock are entitled, to receive $1,916.62 with
respect to each share (subject to adjustment for stock split or other events)
plus all accumulated but unpaid dividends whether or not declared and shall
thereafter share in any remaining amounts on an as-converted basis with the
holders of the Common Stock and the other series of Preferred Stock (other than
the Series B Preferred Stock).
Conversion. Each share of Series C Preferred Stock is convertible at the
option of the holder thereof, at such time as we shall have effected the
Authorized Share Increase, into 10,000 shares of Common Stock, subject to
adjustment for stock split and other events. At such time as (i) we shall have
effected the Authorized Share Increase, (ii) the shares of Common Stock issuable
upon conversion of the Series C Preferred Stock are registered for resale on
Form S-1 or other applicable registration statement with the Securities and
Exchange Commission which registration statement shall have been declared
effective by the SEC or such shares may be sold without restrictions pursuant to
Rule 144(k) promulgated by the SEC, and (iii) we shall have closed a sale of
Common Stock by the Company in an underwritten public offering in which the
aggregate gross proceeds of the offering to the Company are at least
$30,000,000, each outstanding share of Series C Preferred Stock shall
automatically convert into shares of Common Stock.
Voting Rights. The Series C Preferred Stock votes with the Common Stock as
a class on an as-converted to Common Stock basis. Consent of the holders of a
majority of the outstanding Series C Preferred Stock shall be required for the
Company to take certain actions which could adversely affect the rights of the
holders of the Series C Preferred Stock.
Redemption. Each holder of Series C Preferred Stock shall have the right,
but not the obligation, to require the Company to redeem any or all of such
holder's Series C Preferred Stock upon the earliest to occur of: (i) the sale
60
of all or substantially all of the assets of the Company, (ii) a merger,
consolidation or other business combination and (iii) a change of control of the
Company.
Series D Convertible Preferred Stock
General. As of December 22, 2005, following the closing of the Series D
Preferred Financing, we had 1,530 shares of Series D Preferred Stock issued and
outstanding.
Dividends. Dividends on the Series D Preferred Stock shall accrue from
December 22, 2005 at a rate of 4% per annum. Until paid, the right to receive
dividends on the Series D Preferred Stock shall accumulate and shall be payable
semi-annually in arrears in cash or in Common Stock (at the Company's option)
which Common Stock shall be valued based upon the average closing price of the
underlying Common Stock for a period of 5 consecutive trading days ending on the
business day prior to the date of such dividend, or, if there is no such trading
price, fair market value as determined by the Board.
Liquidation Preference. In the event of a liquidation or dissolution, the
holders of Series D Preferred Stock are entitled, to receive $10,000 with
respect to each share (subject to adjustment for stock split or other events)
plus all accumulated but unpaid dividends whether or not declared and shall
thereafter share in any remaining amounts on an as-converted basis with the
holders of the Common Stock and other series of Preferred Stock (other than the
Series C Preferred Stock).
Conversion. Each share of Series D Preferred Stock is convertible at the
option of the holder thereof, at any time following such time as we shall have
effected the Authorized Share Increase, into approximately 52,175 shares of
Common Stock, subject to adjustment for stock split and other events. At such
time as (i) we shall have effected the Authorized Share Increase, (ii) the
shares of Common Stock issuable upon conversion of the Series D Preferred Stock
are registered for resale on Form S-1 or other applicable registration statement
with the Securities and Exchange Commission which registration statement shall
have been declared effective by the SEC or such shares may be sold without
restrictions pursuant to Rule 144(k) promulgated by the SEC, and (iii) we shall
have closed a sale of Common Stock in an underwritten public offering in which
the aggregate gross proceeds of the offering to the Company are at least
$30,000,000, each outstanding share of Series D Preferred Stock shall
automatically convert into shares of Common Stock.
Voting Rights. The Series D Preferred Stock votes with the Common Stock as
a class on an as-converted to Common Stock basis. The number of shares of our
Series D Preferred Stock that shall be entitled to such voting rights is limited
to the extent necessary to ensure that, following such conversion, the number of
shares of our Common Stock then beneficially owned by each holder and any holder
and any other persons or entities whose beneficial ownership of common stock
would be aggregated with the holder's for purposes of the Securities and
Exchange Act of 1934, as amended, does not exceed 4.99% of the total number of
shares of our common stock then outstanding. Consent of the holders of at least
75% of the outstanding Series D Preferred Stock is required for the Company to
take certain actions which could adversely affect the rights of the holders of
the Series D Preferred Stock.
Redemption. Each holder of Series D Preferred Stock shall have the right,
but not the obligation, to require the Company to redeem any or all of such
holder's Series D Preferred Stock upon the earliest to occur of: (i) the sale of
all or substantially all of the assets of the Company, (ii) a merger,
consolidation or other business combination and (iii) a change of control of the
Company.
Anti-Takeover Provisions
Provisions of Delaware law could make the acquisition of our company
through a tender offer, a proxy contest or other means more difficult and could
make the removal of incumbent officers and directors more difficult. We expect
these provisions to discourage coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of our company
to first negotiate with our board of directors. We believe that the benefits
provided by our ability to negotiate with the proponent of an unfriendly or
unsolicited proposal outweigh the disadvantages of discouraging these proposals.
We believe the negotiation of an unfriendly or unsolicited proposal could result
in an improvement of its terms.
61
Effects of Some Provisions of Delaware Law. We are subject to Section 203
of the Delaware General Corporation Law, an anti-takeover law. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years following the date the person became an interested stockholder, unless:
o prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
o the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding
(a) shares owned by persons who are directors and also officers, and
(b) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or
exchange offer; or
o on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66% of the outstanding voting stock which
is not owned by the interested stockholder.
Generally, a "business combination" for these purposes includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the interested stockholder. An "interested stockholder" for these purposes is a
person who, together with affiliates and associates, owns or, within three years
prior to the determination of interested stockholder status, did own 15% or more
of a corporation's outstanding voting securities. We expect the existence of
this provision to have an anti-takeover effect with respect to transactions our
board of directors does not approve in advance. We also anticipate that Section
203 may also discourage attempts that might result in a premium over the market
price for the shares of Common Stock held by stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is American Registrar
and Transfer Company, located at 642 East 900 South, Salt Lake City, Utah 84111.
SELLING SHAREHOLDERS
In private transactions directly with us, each of the selling shareholders
named below acquired or has the right to acquire upon the conversion of
Preferred Stock or upon the exercise of Warrants, the shares of our Common Stock
being offered under this prospectus.
The following table sets forth certain information regarding the selling
shareholders and the shares of Common Stock offered by them pursuant to this
prospectus. In computing the number of shares beneficially owned by a person,
all shares of Common Stock underlying shares of Preferred Stock or Warrants held
or beneficially owned by that person are included. Beneficial ownership is
calculated in accordance with Rule 13d-3 under the Securities Exchange Act of
1934. For purposes of this table: (i) shares subject to stock options, warrants
or convertible securities are considered beneficially owned only to the extent
currently exercisable or exercisable within 60 days after January 19, 2006, (ii)
all outstanding Warrants to purchase capital stock of the Company are deemed
exercisable within 60 days after January 19, 2006, and (iii) all outstanding
shares of Series B Preferred Stock are assumed to have been converted into
Common Stock. To our knowledge, except as indicated in the footnotes in this
table, each person named in the table has sole voting and investment power with
respect to all shares of Common Stock shown in the table to be beneficially
owned by such person.
The following table also assumes that the selling shareholders will sell
all of the shares offered by them in this offering. However, the Company is
unable to determine the exact number of shares that will actually be sold or
when or if these sales will occur.
62
Except as referred to in the footnotes to the following table, none of the
selling shareholders has had any position, office or other material relationship
with us within the past three years.
Number of Number of
Shares Number of Shares to be
Beneficially Shares Owned
Owned Before Registered for After
Offering Sale Offering
--------------- -------------- -------------
Seapine Investments, LLC (1)(2) 91,075,998 91,075,998 0
Kidd & Company, LLC (2)(3) 38,473,906 38,473,906 0
FCPR L Capital (2)(4) 113,226,643 113,226,643 0
Catherine M. Kidd Grantor Trust (5)(6) 6,439,817 6,439,817 0
Cara E. Kidd Trust (5)(6) 6,439,817 6,439,817 0
Thomas C. Kidd Trust (5)(6) 6,439,817 6,439,817 0
Pequot Capital Management, Inc. (7)(8) 90,487,165 90,487,165 0
North Sound Legacy International Ltd. (8)(9)(10)(12) 14,649,900 73,253,957 0
North Sound Legacy Institutional Fund LLC (8)(9)(11)(12) 14,649,900 28,487,650 0
Valesco Healthcare Partners I LP (8)(9)(13) 2,034,818 549,393 0
Valesco Healthcare Partners II LP (8)(9)(14) 2,034,818 651,145 0
Valesco Healthcare Overseas Fund, Ltd. (8)(9)(15) 2,034,818 834,280 0
Lipman Family Limited Partnership (16) 5,975,113 5,975,113 0
Andrew Lipman (5)(17) 935,252 935,252 0
Richard Rakowski (5)(18) 2,074,149 2,074,149 0
DeBiasi Family Limited Partnership (5)(19) 1,196,647 1,196,647 0
Clarice Webb (5)(20) 330,479 330,479 0
Sand Dollar Partners, L.P. (5)(21) 2,435,235 2,435,235 0
Jessica Effress (5)(22) 381,178 381,178 0
Claudine Singer (5)(23) 175,483 175,483 0
Darrin Prescott (5)(24) 175,483 175,483 0
Michael Paley (5)(25) 175,483 175,483 0
Daniel D. Witcher, Jr. (5)(26) 87,742 87,742 0
63
Number of Number of
Shares Number of Shares to be
Beneficially Shares Owned
Owned Before Registered for After
Offering Sale Offering
--------------- -------------- -------------
Patricia Mackey (5)(27) 43,875 43,875 0
Joseph Crace (28) 943,432 943,432 0
David Jordan (29) 188,691 188,691 0
Robyn Collins (30) 188,691 188,691 0
Steven Kenny (31) 117,394 117,394 0
Jon Lauck (32) 939,153 939,153 0
John O'Neil (33) 176,091 176,091 0
Marisa A. Timm Revocable Trust U/A/D May 20, 1997 (34) 234,788 234,788 0
John True (35) 469,576 469,576 0
Cosmo Dischino Living Trust Dated July 9, 2002 (36) 1,526,123 1,526,123 0
Forele Ltd., Inc. (37) 557,622 557,622 0
Judith Dion Pyle (38) 953,827 953,827 0
Thomas F. Pyle (39) 953,827 953,827 0
Ballyshannon Family Partnership, LP (40) 1,376,915 1,376,915 0
Ballyshannon Partners LP (41) 5,507,647 5,507,647 0
Cabernet Partners, LP (42) 1,549,023 1,549,023 0
Northwood Capital Partners, LP (43) 3,098,046 3,098,046 0
Regina Pitaro (44) 1,721,132 1,721,132 0
Jay D. Seid (45) 688,446 688,446 0
Lagunitas Partners, LP (46) 5,438,787 5,438,787 0
Firefly Partners, LP (47) 1,652,295 1,652,295 0
Gruber & McBaine International (48) 1,170,382 1,170,382 0
Jon D. & Linda W. Gruber Trust (49) 1,376,915 1,376,915 0
J. Patterson McBaine (50) 688,446 688,446 0
64
Number of Number of
Shares Number of Shares to be
Beneficially Shares Owned
Owned Before Registered for After
Offering Sale Offering
--------------- -------------- -------------
GGCP, Inc. (51) 1,721,132 1,721,132 0
Alan Gelband (2)(52) 6,400,200 4,058,700 2,341,500
Alan Gelband Company Defined Contribution Pension Plan and Trust (2)(53) 3,502,660 3,502,660 0
Mark Bieler (54) 1,200,000 1,050,000 150,000
VFT Special Ventures, Ltd. (55) 1,378,729 1,378,729 0
Sharon Marie McNie Witcher (56) 87,741 87,741 0
Lord & Foursight, LLC (57) 1,526,123 1,526,123 0
(1) Consists of (i) 8,784.6111 shares of Series B Preferred Stock, which
are convertible into 87,846,111 shares of Common Stock, and (ii)
Common Stock underlying 322.9887 shares of the Company's Series B
Preferred Stock into which a Warrant is currently exercisable. We have
been advised by the selling shareholder that its controlling person is
Carla Kidd. Pursuant to a Schedule 13D filed by the selling
shareholder on December 30, 2005, some of the shares of the Series B
Preferred Stock beneficially owned by the selling shareholder are
subject to certain rights in favor of FCPR L Capital, pursuant to an
Amended and Restated Securityholders Agreement among the selling
shareholder, the Company, L Capital and certain other securityholders
signatory thereto (the "L Capital Securityholders Agreement").
(2) For information regarding such selling shareholders' relationship with
the Company, see "Certain Relationships and Related Party
Transactions."
(3) Consists of 3,847.3906 shares of Series B Preferred Stock, which are
convertible into 38,473,906 shares of the Company's Common Stock. We
have been advised by the selling shareholder that its controlling
persons are Carla Kidd and William Kidd.
(4) Consists of 11,322.6643 shares of Series B Preferred, which are
convertible into 113,226,643 shares of Common Stock. We have been
advised by the selling shareholder that its controlling person is Mr.
Bernard Arnault (together with certain members of his family).
(5) These selling shareholders are affiliates of KCO. For information
regarding KCO's relationship with the Company, see "Certain
Relationships and Related Party Transactions."
(6) Consists of (i) 621.1439 shares of the Series B Preferred Stock issued
and outstanding, which are convertible into 6,211,439 shares of the
Common Stock; and (ii) Common Stock underlying 22.8378 shares of the
Company's Series B Preferred Stock into which Warrants are currently
exercisable. The controlling person of the selling shareholder is Mr.
Edward Mandell, the trustee of the trust. Pursuant to a Schedule 13D
filed by the selling shareholder on December 30, 2005, some of the
shares of the Series B Preferred Stock beneficially owned by the
selling shareholder are subject to certain rights in favor of FCPR L
Capital, pursuant to the L Capital Securityholders Agreement.
(7) Shares beneficially owned by Pequot Capital Management, Inc.
represent: (i) 18,783,056 shares of Common Stock issuable upon
exercise of a Warrant to purchase 1,878.3056 shares of Series B
Preferred Stock; (ii) 64,439,891 shares of Common Stock issuable upon
the conversion of 6,443.9891 shares of Series C Preferred Stock; and
(iii) 7,264,218 shares of Common Stock issuable upon the exercise of a
Warrant to
65
purchase Common Stock (the "Common Stock Warrant"). The Shares are
held of record by the following funds in the following amounts: Pequot
Scout Fund, L.P., 14,199,972 Shares; Pequot Mariner Master Fund, L.P.,
7,355,753 Shares; Premium Series PCC Limited - Cell 33, 835,936
Shares; Pequot Diversified Master Fund, Ltd., 1,741,232 Shares; Pequot
Navigator Offshore Fund, Inc., 12,164,829 Shares; Premium Series PCC
Limited - Cell 32, 4,272,389 Shares; Pequot Healthcare Fund, L.P.,
21,235,092 Shares; Pequot Healthcare Institutional Fund, L.P.,
4,283,309 Shares; and Pequot Healthcare Offshore Fund, Inc.,
24,398,653 Shares. The Series C Preferred Stock is convertible into
Common Stock at the option of the holder thereof at any time after the
Authorized Share Increase. If the Common Stock Warrant is exercised
prior to the Authorized Share Increase, the Common Stock Warrant is
exercisable to purchase an equivalent amount of Series B Preferred
Stock. Pequot Capital Management, Inc. which is the Investment
Manager/Advisor (as applicable) to the above named funds exercises
sole dispositive, investment and voting power for all the shares,
except that Pequot Capital Management, Inc. does not hold voting power
over 835,936 and 4,272,389 shares of Common Stock issuable upon the
conversion of the Series C Preferred Stock and the exercise of the
Warrants to purchase Series B Preferred Stock held of record by
Premium Series PCC Limited Cell 33 and Cell 32, respectively. Arthur
J. Samberg is the controlling shareholder of Pequot Capital
Management, Inc. and disclaims beneficial ownership of the shares
except for his pecuniary interest.
(8) For information regarding such selling shareholders' relationship with
the Company, see "Summary - Recent Financings."
(9) This selling shareholder beneficially owns shares of our Series D
Preferred Stock. Pursuant to the terms of the Certificate of
Designation for the Series D Preferred Stock, the number of shares of
our Common Stock that may be acquired on less than 61 days notice by
any holder of Series D Preferred Stock upon any conversion of the
Series D Preferred Stock or that shall be entitled to voting rights is
limited to the extent necessary to ensure that, following such
conversion, the number of shares of our Common Stock then beneficially
owned by such holder and any other persons or entities whose
beneficial ownership of Common Stock would be aggregated with the
holder's for purposes of the Securities and Exchange Act of 1934, as
amended, does not exceed 4.99% of the total number of shares of our
Common Stock then outstanding. In addition, the holder of the Series D
Preferred Stock also owns Warrants which also provide that the number
of shares of our Common Stock that may be acquired on less than 61
days notice by any holder of the Warrants upon exercise of the
Warrants is limited to the extent necessary to ensure that, following
such exercise, the number of shares of our Common Stock then
beneficially owned by such holder and any other persons or entities
whose beneficial ownership of Common Stock would be aggregated with
the holder's for purposes of the Securities and Exchange Act of 1934,
as amended, does not exceed 4.99% of the total number of shares of our
Common Stock then outstanding. Accordingly, while all shares that are
issuable to a selling shareholder upon the conversion of the Series D
Preferred Stock and exercise of the Warrants are included in the
number of shares being offered in the table, shares which a selling
shareholder is prevented from acquiring as a result of these
provisions are not shown as beneficially owned.
(10) North Sound Capital LLC ("North Sound") is the investment advisor to
North Sound Legacy International Ltd. ("North Sound International").
North Sound International is the direct owner of (i) 1,080 shares of
Series D Preferred Stock, which are convertible into 56,349,198 shares
of Common Stock, and (ii) Warrants to purchase 1,690.4759 shares of
Series B Preferred Stock. Such shares of Series B Preferred Stock
would currently be convertible into 16,904,759 shares of Common Stock.
Thomas McAuley is the manager and controlling person of North Sound
and disclaims beneficial ownership of the shares except for his
pecuniary interest.
(11) North Sound is the managing member of North Sound Legacy Institutional
Fund LLC (the "North Sound Institutional"). North Sound Institutional
is the direct owner of (i) 420 shares of Series D Preferred Stock,
which are convertible into 21,913,577 shares of Common Stock, and (ii)
Warrants to purchase 657.4073 shares of Series B Preferred Stock. Such
shares of Series B Preferred Stock would currently be convertible into
6,574,073 shares of Common Stock. Thomas McAuley is the manager and
controlling person of North Sound and disclaims beneficial ownership
of the shares except for his pecuniary interest.
(12) North Sound International and North Sound Institutional hold shares of
Series D Preferred Stock and Warrants subject to the beneficial
ownership cap described in footnote (9) above. Although the shares of
66
Series D Preferred Stock and Warrants held by them will be convertible
and exercisable over time for up to the number of shares registered
for sale by such entities, such beneficial ownership cap limits
conversion of the Series D Preferred Stock and exercise of the
Warrants held by them such that they may not own more than 4.99% of
our outstanding Common Stock between them at any one time. Based upon
293,585,186 shares of Common Stock presently deemed outstanding
(including the outstanding Series B Preferred Stock on a as-converted
basis), such percentage represents 14,649,900 shares of common stock.
(13) Consists of (i) 8.1 shares of the Series D Preferred Stock, which are
convertible into 422,618 shares of Common Stock and (ii) Warrants to
purchase 12.6785 shares of Series B Preferred Stock. Such shares of
Series B Preferred Stock would currently be convertible into 126,785
shares of Common Stock. We have been advised by the selling
shareholder that its controlling person is Keith Maher.
(14) Consists of (i) 9.6 shares of the Series D Preferred Stock, which are
convertible into 500,881 shares of Common Stock and (ii) Warrants to
purchase 15.0264 shares of the Series B Preferred Stock. Such shares
of Series B Preferred Stock would currently be convertible into
150,264 shares of Common Stock. We have been advised by the selling
shareholder that its controlling person is Keith Maher.
(15) Consists of (i) 12.3 shares of the Series D Preferred Stock, which are
convertible into 641,753 shares of Common Stock and (ii) Common Stock
underlying 19.2526 shares of Series B Preferred Stock. Such shares of
Series B Preferred Stock would currently be convertible into 192,526
shares of Common Stock. We have been advised by the selling
shareholder that its controlling person is Keith Maher.
(16) Consists of 597.5113 shares of the Series B Preferred Stock, which are
convertible into 5,975,113 shares of Common Stock. We have been
advised by the selling shareholder that its controlling person is
Deborah Lipman. Pursuant to a Schedule 13D filed by the selling
shareholder on December 30, 2005, some of the shares of the Series B
Preferred Stock beneficially owned by the selling shareholder are
subject to certain rights in favor of FCPR L Capital, pursuant to an
Amended and Restated Share Transfer Agreement among the selling
shareholder, the Company, L Capital and certain other securityholders
signatory thereto. These shares are deemed to be beneficially owned by
Andrew Lipman, a director of the Company and a Principal of KCO.
(17) Consists of (i) 69.0191 shares of the Series B Preferred Stock, which
are convertible into 690,191 shares of Common Stock and (ii) Common
Stock underlying 24.5060 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement. The selling
shareholder is a director of the Company and a Principal of KCO.
(18) Consists of (i) 200.059 shares of Series B Preferred Stock, which are
convertible into 2,000,590 shares of Common Stock, and (ii) Common
Stock underlying 7.3559 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement. Mr. Richard
Rakowski is the Chairman and Chief Executive Officer of the Company.
He is also a Principal of KCO.
(19) Consists of 119.6647 shares of the Series B Preferred Stock, which are
convertible into 1,196,647 shares of Common Stock. We have been
advised by the selling shareholder that its controlling persons are
Gerald DeBiasi and Patrice A. Reiling. Pursuant to a Schedule 13D
filed by the selling shareholder on December 30, 2005, some of the
shares of the Series B Preferred Stock beneficially owned by the
selling shareholder are subject to certain rights in favor of FCPR L
Capital, pursuant to the L Capital Securityholders Agreement.
(20) Consists of (i) 31.8763 shares of the Series B Preferred Stock, which
are convertible into 318,763 shares of Common Stock and (ii) Common
Stock underlying 1.1716 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement.
67
(21) Consists of 243.5235 shares of the Series B Preferred Stock, which are
convertible into 2,435,235 shares of Common Stock. We have been
advised by the selling shareholders that its controlling person is
Jessica Effress. Pursuant to a Schedule 13D filed by the selling
shareholder on December 30, 2005, some of the shares of the Series B
Preferred Stock beneficially owned by the selling shareholder are
subject to certain rights in favor of FCPR L Capital, pursuant to the
L Capital Securityholders Agreement.
(22) Consists of (i) 28.1299 shares of the Series B Preferred Stock, which
are convertible into 281,299 shares of Common Stock and (ii) Common
Stock underlying 9.9879 shares of Series B Preferred Stock into which
a Warrant is currently exercisable.
(23) Consists of (i) 16.9261 shares of the Series B Preferred Stock, which
are convertible into 169,261 shares of Common Stock and (ii) Common
Stock underlying 0.6222 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement.
(24) Consists of (i) 16.9261 shares of the Series B Preferred Stock, which
are convertible into 169,261 shares of Common Stock and (ii) Common
Stock underlying 0.6222 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement.
(25) Consists of (i) 16.9261 shares of the Series B Preferred Stock, which
are convertible into 169,261 shares of Common Stock and (ii) Common
Stock underlying 0.6222 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement.
(26) Consists of (i) 8.4631 shares of the Series B Preferred Stock, which
are convertible into 84,631 shares of Common Stock and (ii) Common
Stock underlying 0.3111 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement.
(27) Consists of (i) 4.2314 shares of the Series B Preferred Stock, which
are convertible into 42,314 shares of Common Stock and (ii) Common
Stock underlying 0.1561 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. Pursuant to a Schedule 13D filed
by the selling shareholder on December 30, 2005, some of the shares of
the Series B Preferred Stock beneficially owned by the selling
shareholder are subject to certain rights in favor of FCPR L Capital,
pursuant to the L Capital Securityholders Agreement.
(28) Consists of (i) 90.9975 shares of the Series B Preferred Stock, which
are convertible into 909.975 shares of Common Stock and (ii) Common
Stock underlying 3.3457 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. The selling shareholder is a
former President of KAAI.
(29) Consists of (i) 18.2000 shares of the Series B Preferred Stock, which
are convertible into 182,000 shares of Common Stock and (ii) Common
Stock underlying 0.6691 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. The selling shareholder is a
former Chief Financial Officer of KAAI.
(30) Consists of (i) 18.2000 shares of the Series B Preferred Stock, which
are convertible into 182,000 shares of Common Stock and (ii) Common
Stock underlying 0.6691 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. The selling shareholder is a
former officer of KAAI.
(31) Consists of Common Stock underlying 11.7394 shares of Series B
Preferred Stock into which a Warrant is currently exercisable.
68
(32) Consists of Common Stock underlying 93.9153 shares of Series B
Preferred Stock into which a Warrant is currently exercisable.
(33) Consists of Common Stock underlying 17.6091 shares of Series B
Preferred Stock into which a Warrant is currently exercisable.
(34) Consists of Common Stock underlying 23.4788 shares of Series B
Preferred Stock into which a Warrant is currently exercisable. We have
been advised by the selling shareholder that its controlling person is
Marisa A. Timm, the trustee of the trust.
(35) Consists of Common Stock underlying 46.9576 shares of Series B
Preferred Stock into which a Warrant is currently exercisable.
(36) Consists of 152.6123 shares of the Series B Preferred Stock, which are
convertible into 1,526,123 shares of Common Stock. We have been
advised by the selling shareholder that its controlling person is
Cosmo Dischino, a former owner of Dischino Corporation. For
information regarding Dischino Corporation's relationship with the
Company, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview."
(37) Consists of 55.7622 shares of the Series B Preferred Stock, which are
convertible into 557,622 shares of Common Stock. We acquired a spa
location in Florida from the selling shareholder. The controlling
person for the selling shareholder is Ford Malmin. For information
regarding the selling shareholder's relationship with the Company, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview."
(38) Consists of (i) 95.3827 shares of the Series B Preferred Stock, which
are convertible into 953,827 shares of Common Stock. The selling
shareholder is a former owner of Georgette Klinger Corporation, from
whom we acquired the Georgette Klinger locations and assets as
described in this prospectus. For information regarding Georgette
Klinger Corporation's relationship with the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
(39) Consists of (i) 95.3827 shares of the Series B Preferred Stock, which
are convertible into 953,827 shares of Common Stock. The selling
shareholder is a former owner of Georgette Klinger Corporation, from
whom we acquired the Georgette Klinger locations and assets as
described in this prospectus. For information regarding Georgette
Klinger Corporation's relationship with the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
(40) Consists of (i) 106.3860 shares of the Series C Preferred Stock, which
are convertible into 1,063,860 shares of Common Stock and (ii) Common
Stock underlying 31.3055 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. We have been advised by the
selling shareholder that its controlling person is Bruce E. Terker.
(41) Consists of (i) 425.5439 shares of the Series C Preferred Stock, which
are convertible into 4,255,439 shares of Common Stock and (ii)
125.2208 shares of the Company's Series B Preferred Stock into which a
Warrant is currently exercisable. We have been advised by the selling
shareholder that its controlling person is Bruce E. Terker.
(42) Consists of (i) 119.6841 shares of the Series C Preferred Stock, which
are convertible into 1,196,841 shares of Common Stock and (ii) Common
Stock underlying 35.2182 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. We have been advised by the
selling shareholder that its controlling person is Robert Berlacher.
(43) Consists of (i) 239.3862 shares of the Series C Preferred Stock, which
are convertible into 2,393.682 shares of Common Stock and (ii) Common
Stock underlying 70.4365 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. We have been advised by the
selling shareholder that its controlling person is Robert Berlacher.
(44) Consists of (i) 132.9822 shares of the Series C Preferred Stock, which
are convertible into 1,329,822 shares of Common Stock and (ii) Common
Stock underlying 39.1310 shares of Series B Preferred Stock into which
a Warrant is currently exercisable.
69
(45) Consists of (i) 53.1924 shares of the Series C Preferred Stock, which
are convertible into 531,924 shares of Common Stock and (ii) Common
Stock underlying 15.6522 shares of Series B Preferred Stock into which
a Warrant is currently exercisable.
(46) Consists of (i) 420.2240 shares of the Series C Preferred Stock, which
are convertible into 4,202,240 shares of Common Stock and (ii) Common
Stock underlying 123.6547 shares of Series B Preferred Stock into
which a Warrant is currently exercisable. We have been advised by the
selling shareholder that its controlling persons are Jon D. Gruber and
J. Patterson McBaine.
(47) Consists of (i) 127.6634 shares of the Series C Preferred Stock, which
are convertible into 1,276,634 shares of Common Stock and (ii) Common
Stock underlying 37.5661 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. We have been advised by the
selling shareholder that its controlling persons are Jon D. Gruber and
J. Patterson McBaine.
(48) Consists of (i) 90.4285 shares of the Series C Preferred Stock, which
are convertible into 904,285 shares of Common Stock and (ii) Common
Stock underlying 26.6097 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. We have been advised by the
selling shareholder that its controlling persons are Jon D. Gruber and
J. Patterson McBaine.
(49) Consists of (i) 106.3860 shares of the Series C Preferred Stock, which
are convertible into 1,063,860 shares of Common Stock and (ii) Common
Stock underlying 31.3055 shares of Series B Preferred Stock into which
a Warrant is currently exercisable. We have been advised by the
selling shareholder that its controlling person is Jon D. Gruber, the
trustee of the trust.
(50) Consists of (i) 53.1924 shares of the Series C Preferred Stock, which
are convertible into 531,924 shares of Common Stock and (ii) Common
Stock underlying 15.6522 shares of Series B Preferred Stock into which
a Warrant is currently exercisable.
(51) Consists of (i) 132.9822 shares of the Series C Preferred Stock, which
are convertible into 1,329,822 shares of Common Stock and (ii) Common
Stock underlying 39.1310 shares of the Company's Series B Preferred
Stock into which a Warrant is currently exercisable. We have been
advised by the selling shareholder that its controlling person is
Mario J. Gabelli.
(52) Based on a Schedule 13D filed by the selling shareholder on April 26,
2005 and consists of 6,400,200 shares of Common Stock.
(53) Based on a Schedule 13D filed by Alan Gelband on April 26, 2005,
consists of 3,502,660 shares of Common Stock. We have been advised by
the selling shareholder that its controlling person is Alan Gelband.
(54) Consists of 1,200,000 shares of Common Stock. The selling shareholder
is a former director of the Company.
(55) Consists of 137.8729 shares of Series B Preferred Stock into which a
Warrant is currently exercisable. We have been advised by the selling
shareholder that its controlling persons are Robert Berlacher and Greg
Berlacher.
(56) Consists of (i) Common Stock underlying 8.4631 shares of the Series B
Preferred Stock, which are convertible into 84,631 shares of Common
Stock and (ii) Common Stock underlying 0.3111 shares of Series B
Preferred Stock into which a Warrant is currently exercisable.
Pursuant to a Schedule 13D filed by Daniel Witcher, Jr. on December
30, 2005, some of the shares of the Series B Preferred Stock
beneficially owned by the selling shareholder are subject to certain
rights in favor of FCPR L Capital, pursuant to the L Capital
Securityholders Agreement.
(57) Consists of 152.6123 shares of the Series B Preferred Stock, which are
convertible into 1,526,123 shares of Common Stock. We acquired a spa
location in Florida from the selling shareholder. The controlling
person for the selling shareholder is Janice Worth. For information
regarding the selling shareholder's relationship with the Company, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview."
70
PLAN OF DISTRIBUTION
We are registering the shares of Common Stock on behalf of the selling
shareholders. Sales of shares may be made by selling shareholders, including
their respective donees, transferees, pledges or other successors-in-interest
directly to purchasers or to or through underwriters, broker-dealers or through
agents. Sales may be made from time to time on the OTC Bulletin Board, any other
exchange or market upon which our shares may trade in the future, in the
over-the-counter market or otherwise, at market prices prevailing at the time of
sale, at prices related to market prices, or at negotiated or fixed prices. The
shares may be sold by one or more of, or a combination of, the following:
o a block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction (including crosses in which the
same broker acts as agent for both sides of the transaction);
o purchases by a broker-dealer as principal and resale by such broker-dealer,
including resales for its account, pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o through options, swaps or derivatives;
o in privately negotiated transactions;
o in making short sales or in transactions to cover short sales; and
o put or call option transactions relating to the shares.
The selling shareholders may effect these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. These broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling shareholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The selling
shareholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities.
The selling shareholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with those
transactions, the broker-dealers or other financial institutions may engage in
short sales of the shares or of securities convertible into or exchangeable for
the shares in the course of hedging positions they assume with the selling
shareholders. The selling shareholders may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery of shares offered by this prospectus to those broker-dealers or
other financial institutions. The broker-dealer or other financial institution
may then resell the shares pursuant to this prospectus (as amended or
supplemented, if required by applicable law, to reflect those transactions).
The selling shareholders and any broker-dealers that act in connection with
the sale of shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933, and any commissions received by
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals may be deemed to be underwriting discounts or commissions
under the Securities Act. The selling shareholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against liabilities, including liabilities arising under the
Securities Act. We have agreed to indemnify each of the selling shareholders and
each selling shareholder has agreed, severally and not jointly, to indemnify us
against some liabilities in connection with the offering of the shares,
including liabilities arising under the Securities Act.
71
The selling shareholders will be subject to the prospectus delivery
requirements of the Securities Act. We have informed the selling shareholders
that the anti-manipulative provisions of Regulation M promulgated under the
Securities Exchange Act of 1934 may apply to their sales in the market.
Selling shareholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
they meet the criteria and conform to the requirements of Rule 144.
Upon being notified by a selling shareholder that a material arrangement
has been entered into with a broker-dealer for the sale of shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, we will file a supplement to this
prospectus, if required pursuant to Rule 424(b) under the Securities Act,
disclosing:
o the name of each such selling shareholder and of the participating
broker-dealer(s);
o the number of shares involved;
o the initial price at which the shares were sold;
o the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus; and
o other facts material to the transactions.
In addition, if required under applicable law or the rules or regulations
of the Commission, we will file a supplement to this prospectus when a selling
shareholder notifies us that a donee or pledgee intends to sell more than 500
shares of common stock.
We are paying all expenses and fees customarily paid by the issuer in
connection with the registration of the shares. The selling shareholders will
bear all brokerage or underwriting discounts or commissions paid to
broker-dealers in connection with the sale of the shares.
VALIDITY OF SECURITIES
The validity of the Common Stock offered hereby will be passed upon for us
by Troutman Sanders LLP, New York, New York.
EXPERTS
The consolidated financial statements of Klinger Advanced Aesthetics, Inc.,
formerly Advanced Aesthetics, Inc. and subsidiaries, as of June 30, 2005 and
2004 and for the years ended June 30, 2005 and 2004 and the period from
inception (June 29, 2003) through June 30, 2003, the financial statements of
Georgette Klinger, Inc. for the period from July 1, 2003 through April 23, 2004,
the financial statements of Wild Hare Salon, Inc. for the period from July 1,
2003 through November 26, 2003, the financial statements of Lord & Foursight,
LLC for the period from July 1, 2003 through November 26, 2003 and the financial
statements of Forele Ltd, Inc. for the period from July 1, 2003 through November
26, 2003, included in this prospectus have been audited by Amper, Politziner &
Mattia, P.C., an independent registered public accounting firm, as stated in
their reports herein, and have been so included in reliance upon the reports of
such firm given upon their authority as experts in auditing and accounting.
72
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto. For
further information with respect to us and the Common Stock offered hereby, you
should refer to the registration statement and to the exhibits and schedules
filed therewith. Statements contained in this prospectus regarding the contents
of any contract or any other document that is filed as an exhibit to the
registration statement are not necessarily complete, and each such statement is
qualified in all respects by reference to the full text of such contract or
other document filed as an exhibit to the registration statement. In addition,
we have filed periodic reports under the Securities Exchange Act of 1934. This
prospectus does not contain all of the information set forth in our periodic
filings. A copy of this registration statement and the exhibits and schedules
thereto may be inspected without charge at the public reference room maintained
by the SEC located at 100 F Street, N.E., Washington, DC 20549. Copies of all or
any portion of the registration statement and the filings may be obtained from
such offices upon payment of prescribed fees. The public may obtain information
on the operation of the public reference room by calling the SEC at
l-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains
reports, proxy and information statements and other information regarding
companies that file electronically with the SEC.
73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The audited Financial Statements of Klinger Advanced Aesthetics,
Inc., formerly Advanced Aesthetics Inc., for the fiscal years
ended June 30, 2005 and 2004, and for the period from
June 29, 2003 through June 30, 2003 and the accompanying
notes thereto. F-1
The unaudited Financial Statements for Klinger Advanced Aesthetics,
Inc., formerly Advanced Aesthetics Inc., for the quarter
ended October 1, 2005 and September 30, 2004, and the
accompanying notes thereto. F-38
The audited Financial Statements of Georgette Klinger, Inc.
for the period from July 1, 2003 through April 22, 2004
and the accompanying notes thereto. F-46
The audited Financial Statements of Wild Hare Salon, Inc. for
the period from July 1, 2003 through November 26, 2003
and the accompanying notes thereto. F-51
The audited Financial Statements of Lord & Foursight, LLC
for the period from July 1, 2003 through November 26, 2003
and accompanying notes thereto. F-56
The audited Financial Statements of Forele Ltd, Inc. for the
period from July 1, 2003 to November 26, 2003 and the
accompanying notes thereto. F-61
The unaudited Pro Forma Consolidated Statements of Operations
for Klinger Advanced Aesthetics, Inc. for the year
ended June 30, 2004. F-66
The unaudited Pro Forma Consolidated Statements of Operations
for Klinger Advanced Aesthetics, Inc., formerly Advanced
Aesthetics Inc., for the twelve months ended June 30, 2005
and for the three months ended October 1, 2005 and the
unaudited pro forma consolidated balance sheet as of
October 1, 2005. F-68
74
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Advanced Aesthetics, Inc.:
We have audited the consolidated balance sheets of Advanced Aesthetics, Inc. and
subsidiaries as of June 30, 2005 and 2004, and the related consolidated
statements of operations, shareholders' deficit and cash flows for the years
then ended and for the period from June 29, 2003 (Inception) to June 30, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Aesthetics,
Inc. and subsidiaries as of June 30, 2005 and 2004 and the results of their
operations and their cash flows for the years then ended and for the period from
June 29, 2003 (Inception) through June 30, 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred operating losses and
negative cash flows from operations since inception, and has a working capital
deficiency, which raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with respect to this uncertainty
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Amper, Politziner & Mattia, P.C.
Edison, New Jersey
November 24, 2005 except for Note 7a.
which is as of November 29, 2005
F-1
Advanced Aesthetics, Inc.
Consolidated Balance Sheets
--------------------------------------------------------------------------------------------------------------------------
As of June 30,
---------------------------
In thousands, except share and per share amounts 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Assets:
--------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 133 $ 6,689
Restricted cash, current portion 1,228 1,502
Inventories 2,120 1,602
Other current assets 704 508
---------------------------
Total current assets 4,185 10,301
Property and equipment, net 6,561 7,242
Other assets 392 275
Deferred financing costs, net 330 418
Restricted cash, non-current portion 369 1,210
Goodwill 18,072 18,072
Other intangibles, net 7,115 5,026
---------------------------
Total assets $ 37,024 $ 42,544
===========================
Liabilities and Shareholders' Deficit:
Liabilities:
Current liabilities:
Cash overdraft $ 163 $ -
Accounts payable 3,632 917
Accrued expenses and other current liabilities 8,209 4,964
Deferred revenue 8,882 10,025
Current portion of long term debt 744 225
---------------------------
Total current liabilities 21,630 16,131
Senior debt (net of debt discount of $1,164 and $1,475 8,836 8,525
as of June 30, 2005 and 2004 respectively )
Senior subordinated debt (net of debt discount of $1,234 and $1,465 12,066 11,835
as of June 30, 2005 and 2004 respectively )
Other long term debt (net of current portion) 7,061 7,580
Other long term liabilities 9,780 1,491
---------------------------
Total liabilities 59,373 45,562
---------------------------
Commitments and contingencies - -
Shareholders' deficit:
Preferred stock, series A, cumulative, convertible, redeemable, par value $.01, authorized 2,130 2,130
20,000 shares, issued and outstanding 7,950 shares (liquidation preference of $7,950)
Preferred stock, series B, cumulative, redeemable, par value $.01, authorized 600,000 965 965
shares, issued and outstanding 1,900 shares (liquidation preference of $1,900)
Preferred stock, series C, cumulative, convertible, redeemable, par value $.01, authorized 350 350
20,000 shares, issued and outstanding 1,300 shares (liquidation preference of $1,300)
Preferred stock, series D, cumulative, convertible, redeemable, par value $.01, authorized 8,146 8,200
as of June 30, 2005 and 2004, 8,146 shares and 8,200 shares, respectively, issued and
outstanding 8,146 and 8,200 shares
(liquidation preference of $8,146 and $8,200 respectively)
Preferred stock, series E, cumulative, convertible, redeemable, par value $.01, authorized 135 135
500 shares, issued and outstanding 500 shares (liquidation preference of $500)
Common stock, par value $.01, authorized 30,000,000 shares, issued and outstanding 93 93
9,268,609 shares
Additional paid-in capital 3,765 4,929
Accumulated deficit (37,933) (19,820)
---------------------------
Total shareholders' deficit (22,349) (3,018)
---------------------------
Total liabilities and shareholders' deficit $ 37,024 $ 42,544
===========================
The accompanying notes are an integral part of the consolidated financial statements
F-2
Advanced Aesthetics, Inc.
Consolidated Statements of Operations
--------------------------------------------------------------------------------------------------------------------------
For the Period From
June 29, (inception)
For Year Ended June 30, To June 30,
----------------------------------------------------
In thousands, except share and per share amounts 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Revenues:
Service $ 25,731 $ 11,185 $ -
Retail 7,202 2,124
------------------------------------------------
Total Revenue 32,933 13,309 -
----------------------------------------------------------------------------------------------------------------------
Cost of Revenue:
Service 13,572 6,372 -
Retail 2,886 1,236 -
------------------------------------------------
Total Cost of Revenue 16,458 7,608 -
----------------------------------------------------------------------------------------------------------------------
Gross margin 16,475 5,701 -
----------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 26,837 15,683 4,990
Depreciation and amortization 3,725 1,679 -
----------------------------------------------------------------------------------------------------------------------
Total operating expenses 30,562 17,362 4,990
----------------------------------------------------------------------------------------------------------------------
Operating loss (14,087) (11,661) (4,990)
Interest expense, net 4,026 2,173 -
----------------------------------------------------------------------------------------------------------------------
Loss before income tax provision (18,113) (13,834) (4,990)
Income tax provision - - -
----------------------------------------------------------------------------------------------------------------------
Net loss (18,113) (13,834) (4,990)
Dividends on preferred stock 1,400 488 -
----------------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (19,513) $ (14,322) $ (4,990)
======================================================================================================================
Basic and diluted loss per common share: $ (2.11) $ (1.55) $ (0.54)
================================================
Weighted average common shares outstanding, basic and diluted 9,268,609 9,268,609 9,268,609
================================================
The accompanying notes are an integral part of the consolidated financial statements
F-3
Advanced Aesthetics, Inc.
Consolidated Statements of Shareholders' Deficit
------------------------------------------------------------------------------------------------------------------------------------
TOTAL
Preferred Common Additional
Stock Stock Paid Accumulated
In thousands, except share amounts Shares Amount Shares Amount In Capital Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
Beginning Balance - $ - - $ - $ - $ - $ -
Issuance of common stock - - 9,268,609 93 7 100
Issuance of series B preferred stock,
net of warrants of 2,725 1,790 935 2,725
Issuance of series C preferred stock 1,300 350 350
Net loss - - (4,990) (4,990)
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 4,025 2,140 9,268,609 93 942 (4,990) (1,815)
----------------------------------------------------------------------------------------------------------------------------------
Issuance of series A preferred stock 7,950 2,130 2,130
Redemption of series B preferred stock (825) (825) (825)
Issuance of series D preferred stock 8,200 8,200 8,200
Issuance of series E preferred stock 500 135 135
Issuance of warrants attached to Senior Debt - - 1,553 1,553
Amortization of deferred-stock based compensation - - 253 253
Issuances of stock options for intangible assets - - 57 57
Beneficial Conversion associated with senior
subordinated debt - - 1,616 1,616
Beneficial Conversion associated with series D
preferred stock - - 996 (996) -
Dividends Declared - - (488) (488)
Net loss - - (13,834) (13,834)
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004 19,850 11,780 9,268,609 93 4,929 (19,820) (3,018)
----------------------------------------------------------------------------------------------------------------------------------
Issuance costs related to series D preferred stock (54) (54) (54)
Amortization of deferred-stock based compensation - - 236 236
Dividends Declared - - (1,400) (1,400)
Net loss - - (18,113) (18,113)
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 19,796 $ 11,726 9,268,609 $ 93 $3,765 $(37,933) $ (22,349)
----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements
F-4
Advanced Aesthetics, Inc.
Consolidated Statements of Cash Flows
For the Period
From June 29,
(inception)
For Year Ended June 30, To June 30,
------------------------------------------------------------------------------------------------------------------------------------
In thousands 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Cash flows used in operating activities:
Net loss $ (18,113) $ (13,834) $ (4,990)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 3,725 1,679 -
Stock-based compensation expense 236 253 -
Interest expense recorded for beneficial conversion 542 229 -
Changes in operating assets and liabilities:
Inventories (518) 236 -
Other current assets (196) (267) -
Other assets (117) 86 -
Accounts payable 2,715 (20) -
Accrued expenses 1,845 3,852 9
Deferred revenue (1,143) 242 -
Net cash used in operating activities (11,024) (7,544) (4,981)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Capital expenditures (1,197) (3,944) -
Purchase of intangible asset (43) - -
Business acquisitions, net of cash acquired - (11,064) (1,102)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,240) (15,008) (1,102)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows used in financing activities:
Cash overdraft 163 - -
Proceeds from issuance of long term debt, net
of deferred financing costs of $440 - 22,860 5,905
Redemption of long term debt - (800) -
Other Long-Term Liabilities 4,484 (264) -
Proceeds from issuance of preferred stock, series B - - 2,725
Redemption of series B preferred stock - (825) -
Proceeds from issuance of preferred stock, series C - - -
Proceeds from issuance of series D preferred stock (54) 8,200 -
Decrease (Increase) in restricted cash 1,115 (2,712) -
Proceeds of Issuance of Common Stock - - 100
Proceeds from issuance of Series E Preferred Stock - 135
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,708 26,594 8,730
-----------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents (6,556) 4,042 2,647
Cash and cash equivalents - beginning of year 6,689 2,647 -
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 133 $ 6,689 $ 2,647
===================================================================================================================================
Supplemental cash flow information
----------------------------------
Non-cash investing and financing transactions:
Issuance of preferred stock and debt for acquisition of businesses $ - $ 5,180 $ 1,650
Other business acquisitions - 2,416 -
Licensing agreements 3,805 1,498 -
Purchase of Property and Equipment - Capital leases - 286 -
Accrual of preferred dividends 1,400 488 -
Accretion of beneficial conversion feature on Preferred Stock - 996 -
Cash paid during the year for:
Income taxes - - -
Interest paid $ 1,505 $ 129 $ -
The accompanying notes are an integral part of the consolidated financial statements
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General Information and Summary of Significant Accounting Policies
Organization and Business Activity: Advanced Aesthetics, Inc. (the "Company" or
"AAI") was formed in 2003 by Kidd & Company, LLC ("KCO"), a Greenwich,
Connecticut based investment firm. In addition to KCO, the Company's other major
investor is L Capital, a $300 million private equity fund ("L Capital")
sponsored by Moet Hennessy Louis Vuitton SA. Technology Investment Capital Corp.
("TICC"), a publicly traded business development company also assisted in the
financing of the Company.
AAI offers both cosmetic services and medical procedures to customers under one
delivery system in facilities being rolled out across the United States. AAI
brings cosmetic surgery, cosmetic dentistry, cosmetic dermatology and salon and
spa services together under a single brand; giving clients access to top service
providers, unique treatments and predictable results in a state-of-the-art
environment. AAI co-brands its trade name with the trade names of the salons and
spas AAI has acquired. AAI's salons and spas share certain corporate resources
such as senior management and administrative services of AAI. As of June 30,
2005, the Company had 519 employees.
AAI commenced business operations on June 29, 2003 when it acquired Dischino
Corporation. Dischino operated an established, well-known, beauty salon and spa
in West Palm Beach, Florida. In November 2003, AAI acquired three additional
facilities. The first was the acquisition of a Palm Beach Gardens spa and a
similar facility in Boca Raton (Anushka acquisitions), and a third facility
located at Boca Pointe in Boca Raton, Florida. In April 2004, AAI expanded
operations by acquiring nine locations of Georgette Klinger, Inc., a
well-established chain of high-end spas and beauty salons.
AAI's operating presence is national in scope, with locations in key markets
such as New York (NY), Beverly Hills (CA), Boca Raton (FL), Palm Beach Gardens
(FL), West Palm Beach (FL), Dallas (TX), Chicago (IL), and Short Hills (NJ). Its
flagship facilities in West Palm Beach and Palm Beach Gardens in Florida feature
cosmetic dermatology, spa services, salon care and retail products on-site and
cosmetic surgery and dentistry which are performed off-site.
The Company considers that it operates in one segment for spa and salon domestic
operations
Basis of Consolidation: The consolidated financial statements include the
accounts of the Company's wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year is the twelve month period ended June 30. The 2003
fiscal period is from [inception] June 29 2003 to June 30, 2003. Beginning in
fiscal year 2006, the Company will follow the standard fiscal year of the retail
industry, which is a 52 or 53 week period ending on the Saturday closest to June
30 of the following year.
F-6
Going Concern Disclosure: The accompanying financial statements have been
prepared on the going concern basis which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Since its
inception, the Company has experienced operating losses and negative cash flow
from operations. As of June 30, 2005, the Company had a cumulative deficit of
$37.9 million and a working capital deficiency of $17.4 million, as compared to
June 30, 2004, the Company had a cumulative deficit of $19.8 million and a
working capital deficiency of $5.8 million. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern is ultimately dependent on its ability to
increase sales and reduce expenses to a level that will allow it to operate
profitably and sustain positive operating cash flows.
In December of 2004, the Company received a performance deposit of $5.0 million
from Sephora USA, LLC (Sephora). If Sephora, pursuant to the terms of the
agreement, terminates the agreement with the Company, it may have the right to
recover a portion of the $5 million performance deposit. Sephora will also have
the right to earn back its performance deposit if certain sales objectives are
met. In July of 2005, the Company successfully raised $5.0 million in gross
proceeds in the form of series F convertible preferred stock, that were
subsequently exchanged for shares of Series H preferred stock. This financing
was completed through a private placement of equity. In September of 2005, the
Company successfully raised an additional $10.775 million in gross proceeds in
the form of series G convertible preferred stock. This financing was also
completed through a private placement of equity. In September of 2005, the
Company raised an additional $15.0 million in gross proceeds that is currently
in escrow. [See Note 14] The funds will be released from escrow for the purchase
of common stock upon the Company's completion of a planned share exchange
transaction expected to be completed by December of 2005 and the finalization of
transaction documents with the investors.
There is no assurance that the recent financings will be sufficient to fund
operations until sales and profitability improves to the point that the Company
is able to operate from internally generated cash flows. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern. The ability of the Company to continue
as a going concern is dependent upon executing the expansion plans per the
business plan and obtaining additional capital and debt financing. However,
there can be no assurance that these sources will provide sufficient cash
inflows to enable the Company to achieve its operational objectives.
Use of Estimates: In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
in the consolidated financial statements and accompanying notes. The more
significant management estimates are the valuation of goodwill and other
intangibles, useful lives of property and equipment and intangible assets, fair
value of assets acquired in business combinations, provisions for inventory
obsolescence, deferred revenue expirations and various contingencies. Actual
results could differ from those estimates. Changes in facts and circumstances
may result in revised estimates, which are recorded in the period in which they
become known.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of ninety days or less.
F-7
Inventories: Inventories consist principally of hair care and skin care products
held either for retail sale or for use in salon, spa and medical services.
Inventories are stated at the lower of cost or market on a first-in, first-out
basis.
Property & Equipment: Property and equipment are carried at cost, less
accumulated depreciation and amortization. Property, equipment and improvements
to leased premises are depreciated using the straight-line method over the
estimated useful lives of the assets or when applicable, the term of the lease,
whichever is shorter. Estimated useful lives generally range from 5 to 15 years
for leasehold improvements and 3 to 7 years for fixtures and equipment. Repair
and maintenance expenses, which do not improve or extend the life of the
respective assets, are charged directly to expense as incurred. The Company
maintains a policy to capitalize all property and equipment purchases in excess
of $1,000. The assets and related depreciation and amortization accounts are
adjusted for property retirements and disposals with the resulting gain or loss
included in operations. Fully depreciated assets remain in the accounts until
retired from service. [See Note 4]
Acquisitions: The Company completed one acquisition during the year ended June
30, 2003 and completed four acquisitions during the year ended June 30, 2004.
The purchase price has been allocated to assets acquired and liabilities assumed
based on their estimated fair values at the dates of acquisition. [See Note 2]
Goodwill: Goodwill is tested for impairment annually or more frequently in
accordance with the provisions of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." Fair values are estimated based
on the Company's best estimate of the expected present value of future cash
flows and compared with the corresponding carrying value of the reporting unit,
including goodwill. The Company considers its facilities to be reporting units
when it tests for goodwill impairment because that is where the Company believes
goodwill naturally resides. The Company tested for goodwill at June 30, 2005 and
determined that the estimated fair value of the reporting units exceeded their
carrying amounts, indicating no impairment of goodwill. A similar review will be
conducted annually in June, or more frequently if indicators of potential
impairment exist.
The Company's impairment review process is based on a discounted future cash
flow approach that uses estimates of revenues for the reporting units, driven by
assumed growth rates, estimated future gross margin and expense rates, as well
as acquisition integration and maturation, and appropriate discount rates. These
estimates are consistent with the plans and estimates that are used to manage
the underlying businesses. Charges for impairment of goodwill for a reporting
unit may be incurred in the future if the reporting unit fails to achieve its
assumed revenue growth rates or assumed gross margin, or if interest rates
increase significantly.
Intangible Assets: Certain intangible asset amounts are based on purchase price
allocations associated with acquisitions and are based upon valuations conducted
by independent appraisers.
All intangible assets, other than goodwill, have been assigned an estimated
finite useful life, and are amortized on a straight line basis over the number
of years that approximate their respective useful lives (ranging from two to six
years). Total accumulated amortization related to amortizable intangible assets
was $2.8 million, $1.0 million and $0.0 for the years ended June 30, 2005, 2004
and 2003 respectively. [See Note 6]
F-8
Impairment of Long-Lived Assets: The Company reviews long-lived assets for
impairment at the facility level annually or if events or circumstances indicate
that the carrying value of such assets may not be fully recoverable. Impairment
is evaluated based on the sum of undiscounted estimated future cash flows
expected to result from use of the assets compared to its carrying value. If
impairment is recognized, the carrying value of the impaired asset is reduced to
its fair value, based on discounted estimated future cash flows.
Senior Note Offering Costs: Debt costs and transaction fees, which are directly
associated with the issuance of the Senior Notes, are recorded on the balance
sheet as deferred financing costs and amortized (charged to interest expense)
using the straight line method over the term of the related notes. Senior Notes
must be repaid before subordinated notes receive any principal payments.
Amortization and deferred financing costs totaled $.3 million, $.4 million and
$0.0 for years ended June 30, 2005, 2004 and 2003. If the Senior Notes are
redeemed, the unamortized debt issuance costs and transaction fees related to
the Senior Notes being redeemed will be charged to expense in that period.
Revenue Recognition: The Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 104 (SAB 104" Revenue Recognition") at the time the
customer either receives services or takes possession of merchandise and pays
for such service or merchandise with cash, check, gift card or a credit card.
When the Company receives payment from customers before the services have been
performed or the customer has taken possession of the merchandise, which
principally relates to the sale of gift cards, the amount received is recorded
as deferred revenue on the Company's consolidated balance sheet. The liability
remains on the balance sheet until the earlier of redemption, escheatment, or 36
months. It is the Company's and its predecessors' historical experience that the
likelihood of redemption after 36 months is remote. After 36 months, 80% of the
remaining liability is relieved and recognized as revenue. After 48 months, an
additional 10% of the remaining liability is relieved and recognized as revenue.
After 60 months, the last 10% of the remaining liability is relieved and
recognized as revenue. For the years ended June 30, 2005, 2004 and 2003, the
Company included $0.8 million, $0.7 and $0.0, respectively, in income related to
unredeemed gift cards.
As of June 30, 2005 and 2004 deferred revenue totaled $8.882 million, $10.025
million respectively.
Cost of Revenue: Cost of sales for services include salaries associated with
employees that are directly related to providing various services to clients.
These services include hair cuts, hair coloring, facials, medical procedures,
waxing, massages, pedicures and manicures. In addition, the cost of products
utilized as part of the service is also included in cost of revenues.
Product costs are determined by utilizing the cost that the product was acquired
for from various vendors and manufacturers on a first-in first-out (FIFO) basis.
Significant changes in product costs, product pricing, revenue mix, shrinkage
and vendor allowances and rebates could have a material impact on our gross
margin.
Selling, General and Administrative Costs: Included in selling, general and
administrative costs are salaries and related benefit costs for all corporate
personnel and facility level personnel that
F-9
are not directly associated with performing services for our clients. Selling,
general and administrative costs also include all occupancy, insurance,
pre-formation organizational costs, supplies, telephone, advertising, travel,
professional fees and cleaning expenses.
Advertising Costs: Advertising costs include costs related to public relations,
agency fees, promotional programs, and the cost of in store marketing materials.
All advertising costs are expensed as incurred. Advertising costs expensed were
$1.4 million for each of the years ended June 30, 2005 and 2004, respectively
and $0.0 for year ended June 30, 2003.
Income Taxes: The Company provides for federal and state income taxes currently
payable, as well as for those deferred due to temporary differences between
reporting income and expenses for financial statement purposes versus tax
purposes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled. Realization of
deferred tax assets is ultimately dependent upon future taxable income. The
effect of a change in tax rates is recognized as income or expense in the period
of the change.
As of June 30, 2005 and 2004, the Company had deferred tax assets in the amounts
of $17.3 million and $5.7 million, respectively. As of June 30, 2005 and 2004,
100% valuation allowances in the amounts of $17.3 million and 5.7 million
respectively, were reserved; as management believes that it is more likely than
not that the Company will not utilize the deferred tax asset. [See Note 9]
Interest Expense, net: Interest expense was $4.0 million and $2.2 million for
the years ended June 30, 2005 and 2004, respectively, net of interest income of
$.050 million and $.048 million.
Fair Value of Financial Instruments: The Company has estimated the fair value of
financial instruments using available market information and other valuation
methodologies in accordance with Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments." Management of the
Company believes that the fair value of financial instruments, consisting of
cash, accounts receivable, accounts payable and accrued liabilities,
approximates carrying value due to the immediate or short-term maturity
associated with these instruments and that the long term debt is carried at fair
value in that it carries interest rates that are comparable to similar
instruments with similar maturities.
Loss per Common Share: Basic loss per share is calculated as net loss divided by
the weighted average number of common shares outstanding. The Company's dilutive
securities include shares issued under the Company's stock option plan, warrants
issued in conjunction with the Series B preferred stock and TICC Senior Note,
convertible senior subordinated debt, Series A, Series C, Series D, and Series E
convertible preferred stock. In each case, each security is evaluated to
determine if the security or note is dilutive or anti-dilutive. If the security
is to be deemed anti-dilutive, it is excluded from the computation for diluted
loss per common share. A total of 10,197,503 equivalent shares related to
convertible securities were considered anti-dilutive, due to the Company having
a net loss applicable to common shareholders for the years ended June 30, 2005
and 2004 and a total of 130,000 equivalent shares related to convertible
F-10
securities were considered anti-dilutive for the year ended June 30, 2003 and
were therefore excluded from the loss per common share calculation. Stock
options and warrants with exercise prices greater than the average market value
of the Company's common stock are excluded from the computation of diluted loss
per common share. A total of 3,688,207, 1,947,689, and 542,820 equivalent shares
were considered anti-dilutive as of the years ended June 30, 2005, June 30,
2004, and June 30, 2003 respectively and were therefore excluded from the loss
per common share calculation. [See Note 11]
Stock-based Compensation: In December 2004, the FASB issued SFAS No. 123(R),
Share Based Payment. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods and
services. It focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions (employee stock
options). The statement requires the measurement of the cost of employee
services received in exchange for an award of equity instruments (such as
employee stock options) at fair value on the grant date. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award (the requisite service period). The Company
adopted FAS 123R, "Share-Based payment", effective for its year ended June 30,
2004, applying the modified retrospective method. [See Note 11]
Recently Issued Accounting Pronouncements
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 revises the accounting for
certain financial instruments that, under previous guidance, issuers could
account for as equity. SFAS No. 150 requires that those instruments be
classified as liabilities in statements of financial position. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective for interim periods beginning after June 15, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's
consolidated results of operations or financial position.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
153 "Exchange of Non-monetary assets". An Amendment of APB Opinion No. 29." FAS
153 eliminates the exception from fair value measurement for non-monetary
exchanges of similar productive assets in paragraph 21(b) of APB 29 and replaces
it with an exception for exchanges that do not have commercial substance. FAS
153 specifies that a non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of FAS 153 are effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
adoption of FAS 153 is not expected to have a material impact on the results of
operations or financial position of the Company.
In June 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
154," Accounting Changes and Error Corrections". ("FAS 154"). FAS 154 replaces
APB Opinion No. 20, Accounting Changes and FAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. FAS 154 requires that a voluntary
change in accounting principle be applied retrospectively with all prior period
financial statements presented on the new accounting principle. FAS 154 also
requires that a change in method of depreciating or amortizing a long-
F-11
lived non-financial asset be accounted for prospectively as a change in
estimate, and correction of errors in previously issued financial statements
should be termed a restatement. FAS 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
2. Acquisitions
Since its inception, the Company has completed five acquisitions and the
purchase price for each acquisition has been allocated to assets acquired and
liabilities assumed based on their estimated fair values at the dates of
acquisition, as set forth in the table below.
On June 29, 2003, the Company acquired Dischino Corporation for total
consideration of $2.8 million. Dischino Corporation consisted of a salon and spa
business in West Palm Beach, Florida. An independent appraiser was hired to
assist in estimating the fair values at date of acquisition for this
acquisition. This acquisition was material to the Company's operations and the
operation of this acquired company has been included in the operations of the
Company since the date of acquisition.
On November 26, 2003, the Company acquired the assets of Anushka Spa and
Sanctuary for total consideration of $3.6 million. Anushka Spa and Sanctuary
consisted of a salon and spa business in Palm Beach Gardens, Florida. An
independent appraiser was hired to assist in estimating the fair values at date
of acquisition for this acquisition. This acquisition was material to the
Company's operations and the operation of this acquired company has been
included in the operations of the Company since the date of acquisition.
On November 26, 2003, the Company acquired the assets of Anushka Boca Spa for
total consideration of $1.2 million. Anushka Boca Spa consisted of a spa
business in Boca Raton, Florida. An independent appraiser was hired to assist in
estimating the fair values at date of acquisition for this acquisition. This
acquisition was material to the Company's operations and the operation of this
acquired company has been included in the operations of the Company since the
date of acquisition.
On November 26, 2003, the Company acquired the assets of Wild Hare Salon for
total consideration of $4.2 million. Wild Hare Salon consisted of a salon
business in Boca Raton, Florida. An independent appraiser was hired to assist in
estimating the fair values at date of acquisition for this acquisition. This
acquisition was material to the Company's operations and the operation of this
acquired company has been included in the operations of the Company since the
date of acquisition.
On April 23, 2004, the Company acquired the assets of Georgette Klinger for
total consideration of $16.9 million. Georgette Klinger consisted of a chain of
nine spa facilities operating in seven states across the United States. An
independent appraiser was hired to assist in estimating the fair values at date
of acquisition for this acquisition. This acquisition was material to the
Company's operations and the operation of this acquired company has been
included in the operations of the Company since the date of acquisition.
The components of the aggregate acquisition purchase prices and the allocation
of the purchase prices were as follows:
A portion of the purchase price for each acquisition is accounted for as
goodwill rather than as identifiable intangible assets. Goodwill further
represents the Company's opportunity to strategically integrate the acquired
businesses and leverage the business platforms across each other. In addition,
goodwill represents the growth prospects of the combined business that are not
captured as part of the acquired tangible and identifiable intangible assets.
The following unaudited pro forma results are presented as if the acquisitions,
except for Dischino Corporation, had occurred on July 1, 2003:
-----------------------------------------------------------------------------------------------------------------------------
Year Ended
June 30,
In thousands, except share and per share amounts 2004
-----------------------------------------------------------------------------------------------------------------------------
Pro forma combined revenues $ 30,476
Pro forma combined cost of goods sold 15,571
-----------------------------------------------------------------------------------------------------------------------------
Pro forma combined gross margin 14,905
-----------------------------------------------------------------------------------------------------------------------------
Pro forma combined operating expenses 28,693
Pro forma combined interest expenses and taxes, net 3,910
-----------------------------------------------------------------------------------------------------------------------------
Pro forma combined net loss $ (17,698)
=============================================================================================================================
Pro forma combined basic and diluted loss per share $ (1.91)
====================
Pro forma weighted average number of common shares outstanding - basic and diluted 9,268,609
====================
F-13
3. Restricted Cash
Following are the components of restricted cash included in the Consolidated
Balance Sheets as of June 30, 2005 and 2004:
As of June 30,
-----------------------------------
(Dollars in thousands) 2005 2004
--------------------------------------------------------------------------------------------- -----------------------------------
Escrow account for prefunded interest on senior debt $ 1,228 $ 2,421
Restricted certificate of deposit for Manhasset facility to collateralize lease 200 200
Initial restricted certificate of deposit for Beverly Hills facility to collateralize lease 72 72
Secondary restricted certificate of deposit for Beverly Hills facility to collateralize lease 78 -
Restricted certificate of deposit for Boca Raton facility to collateralize lease 19 19
---------------------------------
Total restricted cash 1,597 2,712
Less current portion 1,228 1,502
---------------------------------
Total non-current restricted cash $ 369 $ 1,210
=================================
As of June 30, 2005 and 2004 respectively, the Company's CEO and Chairman for
Advanced Aesthetics, Inc., Richard Rakowski, has personally guaranteed the
letter of credit and restricted certificate of deposit for the Manhasset
facility in the amount of $.2 million.
4. Property and Equipment
Following are the components of property and equipment included in the
Consolidated Balance Sheets as of June 30, 2005 and 2004:
June 30,
-------------------------------------
(Dollars in thousands) 2005 2004
-------------------------------------------------------------------------------------------------
Furniture and fixtures $ 1,489 $ 1,398
Machinery and equipment 1,666 987
Leasehold improvements 5,628 5,201
Capital lease assets 286 286
-------------------------------------
Total property and equipment 9,069 7,872
Accumulated depreciation and amortization (2,508) (630)
-------------------------------------
Total property and equipment, net $ 6,561 $ 7,242
=====================================
Depreciation and amortization expense for the years ended June 30, 2005, 2004
and 2003 was $1.9 million, $.6 million, and $0.0, respectively.
F-14
5. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities were $8.2 million and $5.0
million as of June 30, 2005 and 2004, respectively.
As of June 30,
--------------------------
(Dollars in thousands) 2005 2004
----------------------------------------------------------
Accrued Expenses $ 2,702 $ 2,692
Accrued Interest 3,654 1,819
Accrued Dividends 1,853 453
--------------------------
--------------------------
$ 8,209 $ 4,964
==========================
==========================
6. Intangible Assets
All intangible assets, other than goodwill, have been assigned an estimated
finite useful life, and are amortized on a straight line basis over the number
of years that approximate their respective useful lives (ranging from two to six
years). Total amortization expense related to amortizable intangible assets for
the years ended June 30, 2005, 2004 and 2003 was $1.8 million, $1.0 million, and
$0.0 respectively. The following table provides additional information
concerning intangible assets as of June 30, 2005 and 2004:
-------------------------------- ------------------------- -----------------------------------------
Gross Cost Gross Cost Amortization Expense Net Cost As of June 30, Estimated
(Dollars in thousands) 2005 2004 2005 2004 2005 2004 Useful Life
------------------------ -------------------------------- ------------------------- -----------------------------------------
Non-compete agreements $ 1,687 $ 1,687 $ 1,115 $ 436 $ 572 $ 1,251 2-3 years
Trademark/trade name 1,110 1,110 577 208 $ 533 $ 902 3 years
Customer relationships 1,764 1,764 564 211 $ 1,200 $ 1,553 5 years
Licensing agreements 5,247 1,441 513 168 $ 4,734 $ 1,273 5 years
Domain Name 50 50 13 3 $ 37 $ 47 2-5 years
Sephora 43 - 4 - $ 39 $ - 6 years
---------------------------------------------------------------------------------------
Total $ 9,901 $ 6,052 $ 2,786 $ 1,026 $ 7,115 $ 5,026
================================ ========================= =========================
The following table provides the amortization expense to be incurred over the
next five years:
(Dollars in thousands) For The Years Ended
June 30,
-------------------------------------------
2006 $ 2,180
2007 1,594
2008 1,334
2009 1,120
2010 887
-----------------
$ 7,115
=================
F-15
7. Long-Term Debt and Other Long-Term Liabilities
The Company's long-term debt and other long-term liabilities as of June 30, 2005
and 2004 consist of the following:
Amounts Outstanding as of June 30,
Maturity ---------------------------------
(Dollars in thousands) Dates Interest Rate % 2005 2004
---------------------- ----- --------------- ---- ----
Senior debt (a) 3/31/2009 12% $ 8,836 $ 8,525
Senior subordinated debt (b) 11/4/2010 10% 12,066 11,835
Other long term debt
Note payable 7/1/2010 6% - 12% 5,905 5,905
Seller notes payable Varies 5% - 15% 1,900 1,900
Other long term liabilities ( c)
Long term licensing obligation [See Note 13] 12/1/2008 6% 4,555 1,114
Deferred construction allowance 170 190
Capital lease obligations Varies 6% 55 187
Deferred Liability
Sephora [See Note 13] 12/31/2010 5,000 -
---------------------------------
Total 38,487 29,656
Less current portion 744 225
---------------------------------
Long-term portion $ 37,743 $ 29,431
=================================
(a) - Senior Debt
On April 1, 2004, the Company borrowed $10.0 million from TICC under a 12%
senior note due on March 31, 2009. The proceeds were used to finance the
Georgette Klinger acquisition and for general working capital purposes. As part
of the agreement, $2.4 million of interest expense was pre-funded and placed
into an escrow account for the purpose of paying the first two years of interest
expense on the note. In addition, 618,789 warrants with an exercise price of
$.01 were issued in conjunction with the note. These warrants contain
anti-dilution provisions in the event that the Company issues more equity in the
future below a specified price. As of June 30, 2005 and 2004, this note carried
a debt discount of $1.2 million and $1.5 million respectively. The debt discount
was attributable to the value associated with the detachable warrants issued in
conjunction with the Senior Debt. The debt discount is amortized to interest
expense and recorded over the term of the note. For the years ended June 30,
2005 and 2004, the Company recorded interest expense of $.3 million and $.1
million, respectively, related to the amortization of the debt discount.
The senior note agreement contains covenants, including limitations on
incurrence of debt, granting of liens, capital expenditures, mergers and
consolidations. In addition, the Company may not exceed specified fixed charge
coverage, total debt-to-profit, senior debt-to-profit and debt-to-equity ratios.
These covenants apply in some cases to the unit level operations and in other
cases to the consolidated operations, all effective for periods subsequent to
June 30, 2004. As of November 29, 2005 the Company has obtained compliance
waivers from TICC for all
F-16
covenant tests required for the year ended June 30, 2005 and the quarter ended
October 1, 2005. Further, new covenants were established for the next four
fiscal quarters.
The senior note is collateralized by the assets as outlined in the Pledge and
Security agreement dated April 1, 2004. The collateral for this note includes
financial instruments, goods (inventory, equipment, fixtures, etc.), deposit
accounts, letter of credit rights, investment securities and general intangible
assets.
(b) - Senior Subordinated Debt
On November 4, 2003, the Company borrowed $13.3 million from L Capital under a
subordinated convertible promissory note due on November 4, 2010. This note is
subordinated to the senior debt borrowed from TICC. The proceeds from this note
were utilized for three purposes: 1) to purchase three salon and spa facilities
in the Florida market, 2) complete renovation and expansion of two salon and spa
facilities and 3) general working capital needs of the Company. The three salon
and spa facilities acquired were 1) Wild Hare Salon in Boca Raton, FL, 2)
Anushka Boca Spa in Boca Raton, FL and 3) Anushka Spa and Sanctuary in Palm
Beach Gardens, FL.
The Company is obligated to pay interest at a rate of 10% per annum with a
minimum of $66,500 payable quarterly in cash. The remainder of the interest can
be deferred at the option of the Company until either the maturity of the note
or the conversion of the note to common stock. As of June 30, 2005 and 2004, the
Company had $1.1 million and $.8 million, respectively, of accrued interest on
the Consolidated Balance Sheet related to this note. Accumulated but unpaid
interest shall only be paid to the extent necessary, upon the occurrence of an
exit event, to increase the internal rate of return of the investor to a 25%
annual return over five years with respect to its investment in this note after
giving effect to a calculation for the value of this note including interest
paid in cash as of the occurrence of an exit event. The note and any unpaid
interest are convertible into 5,966,444 shares of common stock at anytime at the
option of the note holder.
The Company recognized a debt discount in the amount of $1.6 million due to
beneficial conversion features associated with this note. As of June 30, 2005
and 2004, this note carried a debt discount of $1.2 million and $1.4 million
respectively. The debt discount is amortized to interest expense and recorded
over the term of the note. The Company recorded interest expense of $.2 million
for each of the years ended June 30, 2005 and 2004, related to the amortization
of the debt discount.
(c) - Other Long Term Debt
On June 29, 2003, the Company executed a promissory note for $5.9 million to
Kidd and Company due on July 1, 2010. Kidd & Company (KCO) paid expenses and
deposits for acquisitions on behalf of AAI in connection with the formation and
capitalization of the Company. The Company is obligated for 6% interest for the
first year and 12% thereafter, compounded annually, through the term of the
note. The Company utilizes the effective interest method to calculate interest
expense for this loan. As a result of the use of this method, $.7 million of
non-cash interest expense related to this note was recorded for each of the
years ending June 30, 2005 and 2004, respectively. The interest can be accrued
or paid at the option of
F-17
the Company. The Company has chosen to accrue the interest until such time that
the cash flow from operations can support payment of the interest to the note
holder.
Pursuant to its terms, this note will be paid in eight separate installments
equal to one-eighth of the principal plus one-eighth of the interest accrued on
such date. Pursuant to an agreement between Kidd & Company, the Company, and L
Capital, the first installment will be due as soon as the trailing twelve month
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) on a
consolidated basis has reached or exceeds $5.0 million. An additional
installment will also be due for each additional $1.0 million of trailing twelve
month EBITDA on a consolidated basis. If the Company does not achieve any of the
trailing twelve month EBITDA hurdles then the note will not be paid back to the
note holder. The agreement limiting the payments under the note will terminate
at such time that L Capital will convert into AAI common stock or otherwise
cease to hold the L Capital note or its shares of Series D preferred stock.
On June 29, 2003, the Company executed a secured note for $1.3 million to Cosmo
Dischino due on June 30, 2006. The note was issued to Cosmo Dischino as part of
the acquisition consideration to purchase the Dischino Corporation. The Company
is obligated for 5% interest for the first year, 10% interest for the second
year and 15% interest thereafter through the term of the note. The Company
utilizes the effective interest method to calculate interest expense for this
loan. As a result of the use of this method, $.1 million of non-cash interest
expense related to this note was recorded in each of the years ended June 30,
2005 and 2004, respectively. All interest is compounded annually and payable
quarterly. On December 1, 2003 the Company pre-paid $.8 million in principal
back to the note holder. As of June 30, 2005. the principal balance of $.6
million remained outstanding. This note payable is secured and collateralized by
the fixed assets of the West Palm Beach facility as outlined in Schedule A of
the Security Agreement dated July 1, 2003.
On November 26, 2003, the Company executed a note to the shareholders of Anushka
Palm Beach Gardens for $.4 million due on May 25, 2005. The note was issued to
the shareholders of Anushka Palm Beach Gardens as part of the acquisition
consideration to purchase the Anushka Spa and Sanctuary in Palm Beach Gardens,
FL. The Company is obligated for 5% interest annually through the term of the
note. All interest is compounded annually and payable quarterly.
On April 23, 2004, the Company executed a note to the Pyle Group for $1.0
million due on April 23, 2007. The note was issued to the Pyle Group as part of
the acquisition consideration to purchase Georgette Klinger Inc. The Company is
obligated for 5% interest annually through the term of the note. All interest is
compounded annually and payable quarterly. As of June 30, 2005, the note was
reissued to Judith Pyle in the amount $.5 million and Thomas Pyle in the amount
$.5 million, individually under the same terms.
Redemption of Other Long Term Debt
In July 2005, the Company repaid the remaining balance of the secured note
issued to Cosmo Dischino in the amount of $.5 million. In addition, in July
2005, the Company also redeemed the balance of the note payable issued to the
shareholders of Anushka Palm Beach Gardens in the amount of $.4 million.
F-18
Accrued interest of $3.6 and $1.8 million is included in accrued expenses as of
June 30, 2005 and 2004, respectively.
Aggregate maturities of debt, gross of debt discounts for the next five years,
are as follows:
(Dollars in thousands) For the Years
Ended June 30,
---------------------------------------------------------
2006 $ 1,285
2007 2,289
2008 855
2009 10,908
2010 964
8. Commitments and Contingencies
Litigation
The Company is a party to a number of legal actions, proceedings or claims.
While any action, proceeding or claim contains an element of uncertainty,
management believes that the outcome of such actions, proceedings or claims will
not have a material adverse effect on the business, financial condition or
results of operations.
Employment Agreements
The Company has entered into employment agreements with certain former owners of
companies which were acquired in the year ended June 30, 2004. Under the terms
of the agreements these employees and certain senior executives are entitled to
severance benefits should their employment be involuntarily terminated. The
obligation under these contracts for severance benefits is approximately $1.4
million and $1.0 million for the years ended June 30, 2005 and 2004. Further,
the Company entered into an agreement with another former owner of an acquired
company whereby the employee is entitled to a guaranteed salary until such time
as a note for $1.3 million is repaid by the Company to the employee. In
addition, should the note not be repaid within 18 months of its execution, the
employee is entitled to a minimum salary of twice his guaranteed salary until
such time as the note is repaid in full. The potential obligation of the Company
is $.5 million per year.
Capital Leases
The Company is committed under four non-cancelable capital leases for medical
equipment, and furniture and fixtures at four of the twelve operating
facilities. The terms of these leases range from one year to five years which
expire over the next three years. All four leases have bargain purchase options
that the Company expects to exercise at the termination of each lease. Capital
lease assets totaled $.3 as of June 30, 2005 and 2004, respectively, net of
depreciation, and capital lease obligations totaled $.1 and $.2 million,
respectively.
F-19
Operating Leases
The Company is committed under non-cancelable operating leases for all twelve of
its operating facilities and three corporate office locations. The original
terms of the leases range from one to ten years with many leases renewable for
an additional five to ten year term at the option of the Company. Certain leases
contain escalation provisions and percentage rent provisions.
Total rent expense, including real estate taxes and other expenses in the
Consolidated Statement of Operations for the years ended June 30, 2005 and 2004
was $4.7 million and $1.5 million, respectively.
As of June 30, 2005 future minimum lease payments (excluding percentage rents
based upon revenues) due under existing non-cancelable leases with remaining
terms of greater than one year are as follows:
(Dollars in thousands)
---------------------------------------------------------------
Operating lease Capital lease Total lease
Fiscal year payments payments payments
----------------------------------------- ----------------- ------------------ -------------------
2006 $ 3,106 $ 56 $ 3,162
2007 2,189 1 2,190
2008 1,591 - 1,591
2009 1,302 - 1,302
2010 1,318 - 1,318
Thereafter 3,495 - 3,495
----------------- ------------------ -------------------
Total minimum lease payments $ 13,001 57 $ 13,058
================= ===================
Less: Imputed interest 2
------------------
Present value of
capital lease obligations $ 55
==================
9. Income Taxes
The components of the deferred income tax assets as of June 30, 2005 and 2004
are as follows:
F-20
As of June 30,
----------------------------
2005 2004
----------------------------
Net operating losses $ 13,917 $ 3,931
Accrued liabilities and reserves 1,162 910
Accrued interest 940 373
Accrued management fees 533 174
Property and equipment 482 102
Amortization of Goodwill and intangible assets 294 173
----------------------------
Total Deferred Tax Assets 17,328 5,663
Valuation Allowance (17,328) (5,663)
----------------------------
Net Deferred Tax Assets $ - $ -
============================
The Company's ability to utilize the cumulative tax net operating loss
carry-forward of approximately $28 million at June 30, 2005 against future
taxable income will expire on June 30, 2025, and may be subject to certain
limitations upon a "change in control" as defined by Section 382 of the Internal
Revenue Code of 1986.
The provision for income taxes differs from the amount of income tax determined
by applying the applicable statutory rate to the loss before income taxes. This
difference, as shown in the following table, is due to a full reserve of our
benefit for the utilization of net operating losses since utilization cannot be
determined to be more likely than not per FASB 109.
As of June 30,
--------------------------------
2005 2004 2003
--------------------------------
Statutory Income Tax Rate 35% 35% 35%
State Income Taxes, net of federal tax benefit 6% 5% 5%
--------------------------------
Subtotal 41% 40% 40%
Valuation Allowance (41%) (40%) (40%)
--------------------------------
Total effective tax rate - - -
================================
10. Shareholders' Deficit
Common Stock
General. The Company's Certificate of Incorporation authorizes the issuance of
up to 30,000,000 shares of common stock. Subsequent to year end, the number of
shares of common stock the Company is authorized to issue was increased to
70,000,000. Each share of stock will have voting rights on all matters requiring
a vote of shareholders. Each share of common stock issued and outstanding will
be identical in all respects. Except for and subject to those rights expressly
granted to the holders of preferred stock, or except as may be provided by the
laws of the State of Delaware, the holders of common stock have exclusively all
other rights of our stockholders.
F-21
Dividends. The holders of common stock are entitled to receive, ratably,
dividends when declared by the Board of Directors out of funds legally available
after provision is made for each class of stock, if any, having preference over
the common stock.
Liquidation Preference. In the event of liquidation, dissolution or winding up,
the holders of common stock are entitled, subject to the rights of holders of
preferred stock, if any, to share ratably in all assets remaining available for
distribution to them after payment of all liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
Conversion. The holders of common stock have no conversion rights and they are
not subject to further calls or assessments by the Company.
Preemptive Rights. The holders of common stock have no preemptive rights.
Voting Rights. The holders of common stock are entitled to one vote for each
share held of record on all matters on which the holders of common stock are
entitled to vote.
Redemption. There are no redemption or sinking fund provisions applicable to the
common stock. The outstanding shares of common stock are duly authorized, fully
paid and non-assessable.
Series A Convertible Preferred Stock
General. The Company's Certificate of Designation of Series A Preferred Stock
designates 20,000 shares of preferred stock as shares of Series A Preferred
Stock ("Series A Preferred").
Dividends. The holders of shares of Series A Preferred are entitled to receive,
out of the assets of the Company legally available dividends on each share of
Series A Preferred at an annual rate of $40. All dividends will accumulate and
not be paid in cash unless otherwise determined by the Board of Directors.
Dividends may not be paid on the Series A Preferred unless, at the time of such
payment, any and all dividends then accrued and payable on the shares of any
senior stock shall have been paid in full.
Liquidation Preference. In the event of a liquidation, dissolution or winding
up, the holders of Series A Preferred are entitled, subject to the rights of
holders of senior stock, if any, to receive $1,000 with respect to each share
plus all accumulated but unpaid dividends thereon and upon receipt of such
liquidation preference the holders of Series A Preferred shall not be entitled
to any further participation in any distribution of assets of the Company with
respect to the Series A Preferred held by them.
Conversion. The holders of Series A Preferred have the right to convert their
shares into 50 shares of the common stock of the Company, subject to adjustment
for stock split and other events.
Preemptive Rights. The holders of Series A Preferred have no preemptive rights.
Voting Rights. Each share of Series A Preferred entitles the holder thereof to
vote on all matters voted on by holders of common stock, voting together as a
single class with the holders of the
F-22
common stock and all other shares entitled to vote thereon as a single class
with the common stock, other than the election of directors of the Company as to
which the Series A Preferred shall not be entitled to vote. With respect to any
such matters as to which holders of the Series A Preferred shall be entitled to
vote, each issued and outstanding share of Series A Preferred shall entitle the
holder thereof to cast that number of votes per share as is equal to the number
of votes that such holder would be entitled to cast had such holder exercised
such holder's warrants for the common stock issuable upon exercise thereof on
the record date for determining the stockholders of the Company eligible to vote
on any such matters.
Redemption. The Company has the right, at any time following the earlier to
occur of (i) an Initial Public Offering in which the price to the public is $20
per share or more and (ii) two years from the issue date, to redeem in cash, the
shares of Series A Preferred, in whole or in part, on not less than 15 days
prior written notice of the date of redemption at a price per share equal to
$1,000 with respect to each share plus all accumulated but unpaid dividends
thereon.
Series B Preferred Stock
General. The Company's Certificate of Designation of Series B Preferred Stock
designates 600,000 shares of preferred stock as shares of Series B Preferred
Stock ("Series B Preferred").
Dividends. The holders of shares of Series B Preferred are entitled to receive,
out of the assets of the Company legally available therefore, dividends on each
share of Series B Preferred at the rate of $100 per annum with respect to the
first twelve months following the date on which the Series B Preferred is first
issued, which rate shall increase, on a retroactive basis, to $150 per annum
commencing on the first anniversary of the date on which the Series B Preferred
Stock is first issued (but in no event to exceed 10% per annum). Of the
foregoing dividends, 50% will be paid in cash and 50% will accumulate and not be
paid in cash unless otherwise determined by the Board of Directors. Dividends
may not be paid on the Series B Preferred unless, at the time of such payment,
any and all dividends then accrued and payable on the shares of any senior stock
shall have been paid in full.
Liquidation Preference. In the event of a liquidation, dissolution or winding
up, the holders of Series B Preferred are entitled, subject to the rights of
holders of senior stock, if any, to receive $1,000 with respect to each share
plus all accumulated but unpaid dividends thereon and upon receipt of such
liquidation preference the holders of Series B Preferred shall not be entitled
to any further participation in any distribution of assets of the Company with
respect to the Series B Preferred held by them.
Conversion. The holders of Series B Preferred have no conversion rights and they
are not subject to further calls or assessments by the Company.
Preemptive Rights. The holders of Series B Preferred have no preemptive rights.
Voting Rights. Each share of Series B Preferred shall entitle the holder thereof
to vote on all matters voted on by holders of common stock, voting together as a
single class with the holders of the common stock and all other shares entitled
to vote thereon as a single class with the common stock, other than the election
of directors of the Company as to which the Series B Preferred shall not be
entitled to vote. With respect to any such matters as to which holders of
F-23
the Series B Preferred shall be entitled to vote, each issued and outstanding
share of Series B Preferred shall entitle the holder thereof to cast that number
of votes per share as is equal to the number of votes that such holder would be
entitled to cast had such holder exercised such holder's warrants for the common
stock issuable upon exercise thereof on the record date for determining the
stockholders of the Company eligible to vote on any such matters.
Redemption. The Company has the right to redeem in cash the shares of Series B
Preferred, in whole or in part, on not less than 15 days prior written notice of
the date of redemption at a price per share equal to $1,000 with respect to each
share plus all accumulated but unpaid dividends thereon. On December 1, 2003,
the Company redeemed $.8 million of Series B Preferred stock.
Detachable Warrants. Series B holders were issued 545,000 detachable warrants,
to purchase common stock, at an exercise price of $.01 per share with a ten year
term. Management allocated $.9 million for the value of these warrants utilizing
the Black-Scholes Option Pricing Model.
Series C Convertible Preferred Stock
General. The Company's Certificate of Designation of Series C Preferred Stock
designates 20,000 shares of preferred stock as shares of Series C Preferred
Stock ("Series C Preferred").
Dividends. The holders of shares of Series C Preferred are entitled to receive,
out of the assets of the Company legally available therefore, dividends on each
share of Series C Preferred at an annual rate of $40. All dividends will
accumulate and not be paid in cash unless otherwise determined by the Board of
Directors. Dividends may not be paid on the Series C Preferred unless, at the
time of such payment, any and all dividends then accrued and payable on the
shares of any senior stock shall have been paid in full.
Liquidation Preference. In the event of a liquidation, dissolution or winding
up, the holders of Series C Preferred are entitled, subject to the rights of
holders of senior stock, if any, to receive $1,000 with respect to each share
plus all accumulated but unpaid dividends thereon and upon receipt of such
liquidation preference the holders of Series C Preferred shall not be entitled
to any further participation in any distribution of assets of the Company with
respect to the Series C Preferred held by them.
Conversion. The holders of Series C Preferred have the right to convert their
shares into 100 shares of the common stock of the Company, subject to adjustment
for stock split and other events.
Preemptive Rights. The holders of Series C Preferred have no preemptive rights.
Voting Rights. Each share of Series C Preferred shall entitle the holder thereof
to vote on all matters voted on by holders of common stock, voting together as a
single class with the holders of the common stock and all other shares entitled
to vote thereon as a single class with the common stock, other than the election
of directors of the Company as to which the Series C Preferred shall not be
entitled to vote. With respect to any such matters as to which holders of the
Series C Preferred shall be entitled to vote, each issued and outstanding share
of Series C Preferred shall entitle the holder thereof to cast that number of
votes per share as is equal to the number of votes that such holder would be
entitled to cast had such holder exercised such
F-24
holder's warrants for the common stock issuable upon exercise thereof on the
record date for determining the stockholders of the Company eligible to vote on
any such matters.
Redemption. The Company has the right, at any time following the earlier to
occur of (i) an IPO in which the price to the public is $20 per share or more
and (ii) two years from the issue date, to redeem in cash, the shares of Series
C Preferred, in whole or in part, on not less than 15 days prior written notice
of the date of redemption at a price per share equal to $1,000 with respect to
each share plus all accumulated but unpaid dividends thereon.
Series D Convertible Preferred Stock
General. The Company's Certificate of Designation of Series D Preferred Stock
designates 8,200 shares of preferred stock as shares of Series D Preferred Stock
("Series D Preferred").
Dividends. The holders of shares of Series D Preferred are entitled to receive
annual dividends of $100 on each share of Series D Preferred. All such dividends
shall accrue and be cumulative and be compounded annually at the rate of 10% per
annum until paid. Accumulated but unpaid dividends shall only be paid to the
extent necessary, upon the occurrence of an Exit Event (as defined in the
Certificate of Designation), to increase the IRR of the Investor to a maximum of
25% with respect to its investment in the Series D Preferred. Upon conversion or
redemption of any shares of Series D Preferred, all accumulated but unpaid
dividends thereon shall, at the option of the Company, be paid: (i) in cash; or
(ii) by issuance of the Five-Year Note (as defined in the Certificate of
Designation).
Liquidation Preference. In the event of or liquidation, dissolution or winding
up, the holders of Series D Preferred are entitled, subject to the rights of
holders of senior stock, if any, to receive $1,000 with respect to each share
plus all accumulated but unpaid dividends thereon and upon receipt of such
liquidation preference the holders of Series D Preferred shall not be entitled
to any further participation in any distribution of assets of the Company with
respect to the Series D Preferred held by them.
Conversion. Each share of Series D Preferred shall be convertible, at the option
of the holder, into 448.60 (subject to certain adjustments) fully paid and
non-assessable shares of common stock. Upon the consummation of such Threshold
Transaction (as defined in the Certificate of Designation), each outstanding
share of Series D Preferred shall be automatically converted into shares of
common stock.
Beneficial Conversion. The Company recognized preferred dividends in the amount
of $1.0 million due to beneficial conversion features associated with the Series
D convertible preferred stock. Beneficial Conversion was deemed necessary by
management as the conversion price of the Series D convertible preferred stock
to common stock of $2.23 per share was considered below fair market value at the
time of issuance.
Preemptive Rights. The holders of Series D Preferred have no preemptive rights.
Voting Rights. Each share of Series D Preferred shall entitle the holder thereof
to vote on all matters voted on by holders of common stock, voting together as a
single class with the holders of the common stock and all other shares entitled
to vote thereon as a single class with the common stock. Each issued and
outstanding share of Series D Preferred shall entitle the holder
F-25
thereof to cast that number of votes per share as is equal to the number of
shares of common stock issuable upon conversion thereof. The affirmative vote of
the holders of more than 50% of the outstanding shares of Series D Preferred,
voting separately as a single class shall be required to: (i) authorize,
increase the number of authorized shares of, or issue any shares of any class or
series of senior stock; or (ii) amend, alter or repeal (by merger,
consolidation, combination, reclassification or otherwise) any provision of the
Company's certificate of incorporation or bylaws so as to adversely affect the
preferences, rights or powers of the Series D Preferred.
Redemption. Upon the occurrence of an Exit Event (liquidation of the company,
IPO or sale of the business) both the holder and the Company shall have, subject
to certain limitations, the right to cause the redemption of the Series D
Preferred.
Series E Convertible Preferred Stock
General. The Company's Certificate of Designation of Series E Preferred Stock
designates 500 shares of preferred stock as shares of Series E Preferred Stock
("Series E Preferred").
Dividends. The holders of shares of Series E Preferred are entitled to receive,
out of the assets of the Company legally available therefore, dividends on each
share of Series E Preferred at an annual rate of $40. All dividends will
accumulate and not be paid in cash unless otherwise determined by the Board of
Directors. Dividends may not be paid on the Series E Preferred unless, at the
time of such payment, any and all dividends then accrued and payable on the
shares of any senior stock shall have been paid in full.
Liquidation Preference. In the event of a liquidation, dissolution or winding
up, the holders of Series E Preferred are entitled, subject to the rights of
holders of senior stock, if any, to receive $1,000 with respect to each share
plus all accumulated but unpaid dividends thereon and upon receipt of such
liquidation preference the holders of Series E Preferred shall not be entitled
to any further participation in any distribution of assets of the Company with
respect to the Series E Preferred held by them.
Conversion. The holders of Series E Preferred have the right to convert their
shares into 50 shares of the common stock of the Company, subject to adjustment
for stock split and other events as well as upon the issuance of certain
additional shares of common stock of the Company.
Preemptive Rights. The holders of Series E Preferred have no preemptive rights.
Voting Rights. Each share of Series E Preferred shall entitle the holder thereof
to vote on all matters voted on by holders of common stock, voting together as a
single class with the holders of the common stock and all other shares entitled
to vote thereon as a single class with the common stock, other than the election
of directors of the Company as to which the Series E Preferred shall not be
entitled to vote. With respect to any such matters as to which holders of the
Series E Preferred shall be entitled to vote, each issued and outstanding share
of Series E Preferred shall entitle the holder thereof to cast that number of
votes per share as is equal to the number of votes that such holder would be
entitled to cast had such holder exercised such holder's warrants for the common
stock issuable upon exercise thereof on the record date for determining the
stockholders of the Company eligible to vote on any such matters.
F-26
Redemption. The Company has the right, at any time following the earlier to
occur of (i) an IPO in which the price to the public is $20 per share or more
and (ii) two years from the issue date, to redeem in cash the shares of Series E
Preferred, in whole or in part, on not less than 60 days prior written notice of
the date of redemption at a price per share equal to $1,000 with respect to each
share plus all accumulated but unpaid dividends thereon.
11. Stock-Based Compensation Plan
On July 1, 2003, the shareholders of Advanced Aesthetics adopted the Advanced
Aesthetics 2003 Stock Option Plan which allows the Company to grant nonqualified
stock options to employees, vendors and contractors that have affiliations with
the Company.
Under the 2003 Stock Option Plan, the Company is authorized to issue options to
acquire 2,000,000 shares of common stock for a term not to exceed ten years from
the date of grant.
The 2003 Stock Option Plan contains restrictions on transferability, time of
exercise, exercise price and on disposition of any shares acquired through
exercise of the options. Stock options are granted at not less than fair market
value, which is determined as of the grant date utilizing the Black-Scholes
Option Pricing Model. The Board of Directors determines the 2003 Stock Option
Plan participants and establishes the terms and conditions of each option.
In addition to grants of stock options which were issued during the years ended
June 30, 2005 and 2004, the Company has promised to grant options to employees
pursuant to employee agreements. Although these options have not yet been
granted, the requisite service periods related to these options commenced at the
inception of employment. As a result, the Company has calculated the estimated
fair value of these options, and recognized that fair value as expense in the
Statement of Operations to the extent that the requisite service has been
rendered. These awards will be remeasured at each period end until granted.
A summary of the Company's share option activity and related information during
the years ended June 30, 2005 and 2004 are as follows:
As of June 30, 2005, the weighted average exercise prices and remaining
contractual lives of stock options are as follows:
Options outstanding Options exercisable
---------------------------------------------- -----------------------------
Number of Weighted average
options remaining Weighted Number
outstandingas contractual life average exercisable as Weighted
Range of exercise prices of 6/30/05 (in years) exercise price of 6/30/05 average price
---------- ---------- -------------- ---------- -------------
Stock options issued @$4.00 1,059,600 9.01 $4.00 692,587 $4.00
Warrants outstanding as of June 30, 2005 are as follows:
F-28
Warrants outstanding
---------------------------------------
Weighted Average
Shares Exercise Price
---------------- -------------------
Warrants granted during 2003 and
outstanding as of June 30, 2003 545,000 $0.01
Granted 618,789 0.01
Cancelled - -
Exercised - -
---------------- -------------------
Outstanding, June 30, 2004 1,163,789 0.01
Granted 81,750 0.01
Cancelled - -
Exercised - -
---------------- -------------------
Outstanding, June 30, 2005 1,245,539 $0.01
================ ===================
At June 30, 2005, the weighted average exercise prices and remaining contractual
lives of stock options are as follows:
Warrants outstanding Warrants exercisable
-------------------------------------------------------- ------------------------------------------
Weighted
Number of average Weighted
warrants remaining average Number Weighted
outstanding contractual life exercise exercisable average
Range of exercise prices as of 6/30/05 (in years) price as of 6/30/05 price
------------------------ ------------- ---------- ----- ------------- -----
Warrants issued @ $.01 1,245,539 5.40 $0.01 1,245,539 $0.01
The stock options to be issued vest at a range of 25-33% per year over a period
of two to four years. All options to be granted relate to the stock option plan
approved by the shareholders of the Company. The fair value of each stock option
grant was estimated using the Black-Scholes Option Pricing Model assuming a 0%
dividend yield, 30% -36% expected volatility, a risk free interest rate of 3.56%
- 4.61% and expected life of the options of 5 years. Total shares underlying
future options for which requisite service periods have begun are 2,447,650,
769,000, and 0 for the years ended June 30, 2005, 2004, and 2003, respectively.
For June 30, 2005 and 2004, the Company recorded expense of $.2 million and $.3
million respectively in its Consolidated Statement of Operations, which reflects
the value of vested stock options in accordance with FAS 123R. Unearned
compensation related to stock options to be granted was approximately $1.0
million as of June 30, 2005.
F-29
12. Related Party Transactions
West Palm Beach Facility Lease
The Company leases its West Palm Beach facility from Christal Inc. The majority
owner of Christal Inc. is an Advanced Aesthetics employee at the West Palm Beach
facility. Total rent expense to this related party amounted to $.3 million and
$.2 million for the years ended June 30, 2005 and 2004.
Kidd & Company
AAI was formed by principals of KCO, a Greenwich, Connecticut based investment
firm. In connection with the formation and capitalization of the Company, KCO
paid expenses and deposits for acquisitions on behalf of AAI for an aggregate
sum of approximately $5.9 million. In addition, affiliates of KCO including
Seapine Investments, LLC ("Seapine"), trusts for the benefit of the children of
William and Carla Kidd ("Kidd Trusts"), Richard Rakowski and Andrew Lipman
(collectively "KCO Affiliates"), invested an aggregate of $2 million in the
Company and received shares of Series B Preferred Stock, common stock and
warrants to acquire common stock of the Company.
On November 25, 2003 AAI entered into a five-year Advisory Services Agreement
with KCO pursuant to which KCO performed and will continue to perform advisory
services for the Company. Under the Agreement, the Company is required to pay
KCO an annual advisory fee, payable in quarterly installments in arrears, equal
to the higher of (a) $425,000 and (b) 1% of its gross revenues for such year.
For the years ended June 30, 2005 and 2004, advisory fees of $.4 million and $.3
million, respectively were recorded in the selling, general and administrative
section of the Consolidated Statement of Operations. As of June 30, 2005, and
2004, $.6 million and $.2 million remain unpaid and accrued for in accrued
expenses on the Consolidated Balance Sheet, respectively.
L Capital
In November 2003, L Capital invested $13,300,000 and received a subordinated
convertible promissory note (convertible into shares of the common stock of the
Company) and entered into a Securityholders Agreement and Registration Rights
Agreement with the Company and KCO. L Capital also entered into a Share Transfer
Agreement with the KCO Affiliates and other affiliates of KCO (collectively the
"KCO Investors") whereby a portion of the shares of common stock held by the KCO
Investors is subject to a clawback in favor of L Capital if L Capital does not
recognize an investment rate of return (IRR) of 25% within five years of its
investment in AAI.
In June 2004 L Capital invested an additional $8.2 million and acquired shares
of the Series D Convertible Preferred Stock of the Company (convertible into
shares of common stock of the Company) and concurrently entered into an
amendment to the Share Transfer Agreement with the KCO Investors which increased
the percentage of shares of the common stock of the Company subject to clawback
in favor of L Capital.
On November 25, 2003 AAI entered into a five-year Consulting Services Agreement
with L Capital pursuant to which L Capital performed and will continue to
perform consulting services
F-30
for the Company. Under the Agreement, the Company is required to pay L Capital
an annual consulting fee, payable in quarterly installments in arrears, equal to
the higher of (a) $445,000 and (b) 1% of our gross revenues plus $20,000 for
such year. For the years ended June 30, 2005 and 2004, advisory fees of $.4
million and $.3 million were recorded, respectively, in the selling, general and
administrative section of the Consolidated Statement of Operations. As of June
30, 2005, and 2004, $.7 million and $.3 million respectively remain unpaid and
accrued for in accrued expenses on the Consolidated Balance Sheet, respectively.
13. Material Agreements
Agreements with Johns Hopkins
On November 21, 2003 AAI entered into a Consulting Services Agreement with Johns
Hopkins Medicine, acting through Johns Hopkins Health System Corporation, and
the Johns Hopkins University. Under the Agreement, Johns Hopkins agreed to
provide consulting services to AAI consisting of: (i) review and assessment of
its medical delivery protocol document and (ii) consultation on the development
of outcomes studies methodologies. The agreement also sets forth the conditions
for the use of the Johns Hopkins Trademark. The term of the agreement is until
November 21, 2008. The agreement may be terminated by either party at any time
with 120 days of written notice.
The consideration for the review and assessment services provided by Johns
Hopkins is $5,000 per day. The consideration for the limited use of the Johns
Hopkins mark is $.3 million per year payable in quarterly installments and 500
shares of our series E preferred Stock. The Johns Hopkins agreement is carried
on the balance sheet at the present value of all future payments to Johns
Hopkins and amortized over the term of the agreement. The carrying value of this
asset was $4.6 million as of June 30, 2005 and $1.3 million as of June 30, 2004.
The amount is reported as a component of Intangible Assets.
On March 23, 2005, AAI signed an amendment to the Consulting Services Agreement
with Johns Hopkins Medicine, acting through Johns Hopkins Health System
Corporation, and the Johns Hopkins University. The effective date of this
amendment is June 1, 2005. The purpose of this amendment was to expand the
oversight function that Johns Hopkins would perform for the Company to include
increased medical protocol review, medical facility design and physician
credentialing. In addition, the agreement expanded the use by the Company of the
Johns Hopkins trade name. For the increased oversight and review services
provided by Johns Hopkins, the Company agreed to increase the consideration paid
to Johns Hopkins from $.3 million to $1.0 million in the first year of the
contract, $1.5 million in the second year of the contract and $1.0 million
annually thereafter until the term of the contract is reached. The term of the
agreement is until June 1, 2010. The agreement may be terminated by either party
at any time with 120 days of written notice.
Agreement with Sephora
In December 2004, the Company entered into a Retail Alliance Agreement with
Sephora USA, LLC. Pursuant to the agreement the Company granted Sephora the
rights to: (i) sell its Cosmedicine products in the Sephora retails stores,
through its website and any other retail channel, (ii) to utilize certain of its
intellectual property and methods in order to operate the AAI
F-31
stores within the Sephora stores, (iii) develop with the Company the adjacent
AAI facilities and (iv) sublease retails space from the Company for the purpose
of constructing and operating a Sephora store within the Company's centers. The
term of the agreement is until December 31, 2010.
Upon execution of the agreement, Sephora deposited a performance deposit in an
amount of $5 million with an escrow agent, which was subsequently paid to the
Company. If Sephora, pursuant to the terms of the agreement, terminates the
agreement with the Company it may have the right to recover a portion of the $5
million performance deposit. Sephora will also have the right to earn back its
performance deposit if the arrangement is successful. The Company will be
required to return to Sephora 50% of the performance deposit at such time that
the "Net Revenues" of Sephora relating to the sale of Cosmedicine products plus
Sephora "Capital Expenditures" (each as defined in the agreement) equals $30
million and the remaining performance deposit at such time that such "Net
Revenues" plus "Capital Expenditures" equals $60 million. The Company has
recorded $5 million as other long term liabilities on the Consolidated Balance
Sheet as of June 30, 2005.
Sephora, with whom the Company has a strategic relationship, is a subsidiary of
LVMH, SA and L Capital is a private equity fund sponsored by LVMH, SA and, as a
result, Sephora and L Capital are affiliates. The Company's decision to enter
into a strategic alliance with Sephora was made independent of its relationship
with L Capital and all arrangements with Sephora have been negotiated on an arms
length basis.
14. Subsequent Events
Series F convertible preferred stock financing
In July of 2005, the Company raised $5.0 million in the form of series F
convertible preferred stock through a private placement. During September 2005,
the series F shareholders exchanged all of their shares of series F convertible
preferred stock and all of the warrants issued in connection with the series F
stock for shares of a newly created series H convertible preferred stock and new
warrants.
Series G convertible preferred stock financing
In September of 2005, the Company raised an additional $10.775 million [gross]
in the form of series G convertible preferred stock through a private placement.
The series G holders have the right to convert each share of series G preferred
stock into approximately 444 shares of common stock at $2.25 per share. In
addition, the Company issued warrants to the series G holders that are
exercisable for thirty percent (30%) of the number of shares of common stock
issuable to series G holders upon conversion of their shares of series G
preferred stock. The warrants are exercisable for five years from the date of
issuance and have an exercise price equal to $2.70 per share.
The following statements are brief summaries of certain provisions relating to
the series G convertible preferred stock.
F-32
General. The Certificate of Designation of the series G convertible preferred
stock designates 12,000 shares of preferred stock as shares of series G
convertible preferred stock ("series G convertible preferred").
Liquidation Preference. In the event of any liquidation, dissolution or winding
up of the Company, the holders of the series G convertible preferred (together
with the holders of the shares of series D convertible preferred stock and
series H convertible preferred stock of the Company) will receive in preference
to the holders of any other class or series of capital stock of the Company, a
per share amount equal to the original purchase price of a share of series G
convertible preferred, plus any accrued and unpaid dividends.
Dividends. 8% per annum dividends, when, as and if declared by the Company's
board of directors, prior to any dividends being paid on the common stock of the
Company except that from and after the date of a Public Transaction, such rate
shall be 4% per annum. At the time of conversion of any series G convertible
preferred into common stock, the holder of such series G convertible preferred
shall be entitled to receive payment of all accrued and unpaid dividends thereon
in the form of such number of additional shares of common stock equal to (a) the
amount of such dividends, divided by (b) the then applicable conversion price of
the series G convertible preferred.
Voting Rights. The series G convertible preferred will vote with the common
stock as a class on an as converted basis.
Conversion Rights. The series G holders have the right to convert each share of
its series G convertible preferred into approximately 444 shares of common stock
($2.25/share conversion price).
Mandatory Conversion. The series G convertible preferred will be automatically
converted into common stock at such time as the shares of common stock into
which the series G convertible preferred is converted (and/or exchanged) are
registered for resale with the SEC.
Anti-Dilution Protection. Proportional adjustments of the series G convertible
preferred conversion rate will be made for splits, combinations, stock
dividends, recapitalizations and the like. Additionally, in the event that the
Company shall issue any additional shares of common stock or common stock
equivalents at a issuance price (or deemed issuance price) less than the then
effective conversion price of the series G convertible preferred, the conversion
price for the Series G convertible preferred shall be subject to a
weighted-average anti-dilution adjustment.
Protective Provisions. Consent of the holders of a majority of the outstanding
series G convertible preferred shall be required for the consummation of the
Public Transaction or any amendment or change of the rights, preferences,
privileges or powers of, or the restrictions provided for the benefit of, the
series G convertible preferred.
Redemption. Each holder of series G convertible preferred shall have the right,
but not the obligation, to require the Company to redeem any or all of such
holder's series G convertible preferred upon the earliest to occur of: (i) the
liquidation or dissolution of the Company, (ii) an IPO of the Company, (iii) the
sale of all or substantially all the assets of the Company, (iv) a merger,
consolidation or business combination of the Company (except for the Public
F-33
Transaction) and (v) a change of control of the Company, and the Company shall
have such right as long as the Series G Investors would receive 2x its original
investment upon such redemption or in such other transaction.
Detachable Warrants. The Company issued warrants to the series G holders that
are exercisable for the number of shares of common stock equal to thirty percent
(30%) of the number of shares of common stock issuable to such Series G holders
upon conversion of its shares series G convertible preferred. The warrants are
exercisable for five (5) years from the date of issuance and will have an
exercise price equal to 120% of the Conversion Price ($2.70 per share of Company
common stock). The warrants do not confer upon holders thereof any voting,
dividend or other rights as stockholders of the Company.
Series H convertible preferred stock financing
During September 2005, the series F shareholders exchanged all of their shares
of series F convertible preferred stock and all of the warrants issued in
connection with the series F stock for shares of a newly created series H
convertible preferred stock and new warrants. The series H holders have the
right to convert each share of series H convertible preferred stock into
approximately 444 shares of ccommon stock at $2.25 per share. In addition, the
Company issued warrants to the series H holders that are exercisable for thirty
percent (30%) of the number of shares of common stock issuable to series H
holders upon conversion of their series H preferred stock. The warrants will be
exercisable for five years from the date of issuance and will have an exercise
price equal to $2.70 per share.
The terms of the series H convertible preferred stock are identical to the terms
of the series G convertible preferred stock except that for series H, dividends
accrue as of July 7, 2005, the date when the series F convertible preferred
stock investment was made. The warrants issued to the holders of the series H
convertible preferred stock are also identical to the warrants issued to the
series G holders.
The following statements are brief summaries of certain provisions relating to
both the series H convertible preferred stock.
General. The Certificate of Designation of series H convertible preferred stock
designates 5,000 shares of preferred stock as shares of series H convertible
preferred stock ("series H convertible preferred stock").
Liquidation Preference. In the event of any liquidation, dissolution or winding
up of the Company, the holders of the series H convertible preferred stock
(together with the holders of the shares of series D convertible preferred stock
and series G convertible preferred stock of the Company) will receive in
preference to the holders of any other class or series of capital stock of the
Company, a per share amount equal to the original purchase price of a share of
series H convertible preferred stock, plus any accrued and unpaid dividends.
Dividends. 8% per annum dividends, when, as and if declared by the Company's
board of directors, prior to any dividends being paid on the common stock of the
Company except that from and after the date of a public transaction, such rate
shall be 4%. At the time of any conversion of any series H convertible preferred
stock into common stock, the holder of such
F-34
series H convertible preferred stock shall be entitled to receive payment of all
accrued and unpaid dividends thereon in the form of such number of additional
shares of common stock equal to (a) the amount of such dividends, divided by (b)
the then applicable conversion price of the series H convertible preferred
stock.
Voting Rights. The series H convertible preferred stock will vote with the
common stock as a class on an as converted basis.
Conversion Rights. The holders have the right to convert each share of its
series H convertible preferred stock into approximately 444 shares of common
stock ($2.25/share conversion price).
Mandatory Conversion. The series H convertible preferred stock will be
automatically converted into common stock at such time as the shares of common
stock into which the series H convertible preferred stock is converted (and/or
exchanged) are registered for resale with the SEC.
Anti-Dilution Protection. Proportional adjustments of the series H convertible
preferred stock conversion rate will be made for splits, combinations, stock
dividends, recapitalizations and the like. Additionally, in the event that the
Company shall issue any additional shares of common stock or common stock
equivalents at a issuance price (or deemed issuance price) less than the then
effective conversion price of the series H convertible preferred stock, the
conversion price for the series H convertible preferred stock shall be subject
to a weighted-average anti-dilution adjustment.
Protective Provisions. Consent of the holders of a majority of the outstanding
series H convertible preferred stock shall be required for the consummation of
the public transaction or any amendment or change of the rights, preferences,
privileges or powers of, or the restrictions provided for the benefit of, the
series H convertible preferred stock.
Redemption. Each holder of series H convertible preferred stock shall have the
right, but not the obligation, to require the Company to redeem any or all of
such holder's series H convertible preferred stock upon the earliest to occur
of: (i) the liquidation or dissolution of the Company, (ii) an IPO of the
Company, (iii) the sale of all or substantially all the assets of the Company,
(iv) a merger, consolidation or business combination of the Company (except for
the Public Transaction) and (v) a change of control of the Company, and the
Company shall have such right as long as the holder would receive 2x its
original investment upon such redemption or in such other transaction.
Detachable Warrants. The Company issued to the holders of the series H
convertible preferred stock, warrants exercisable for 666,667 shares in exchange
for their existing warrants. The warrants are exercisable for 5 years from July
7, 2005 and have an exercise price equal to 120% of the conversion price ($2.70
per share of the Company's common stock). The warrants do not confer upon
holders thereof any voting, dividend or other rights as stockholders of the
Company.
In connection with these financings, the Company incurred a finder fee which the
Company netted against the gross proceeds of the above financings. Further, the
Company has agreed to increase prefunded interest into the escrow account which
is held for the sole purpose of paying interest to TICC. The Company has agreed
to pay $2.0 million of principal to TICC.
F-35
Public Transaction and Escrow Agreement
In the near term the Company and its shareholders expect to execute a definitive
share exchange agreement, (the "Public Transaction"), with a to-be-named public
company ("Newco") acceptable to the Company and the holders of the series H
convertible preferred stock and series G convertible preferred stock. As a
result, the Company would become a subsidiary of Newco and shareholders of the
Company would receive shares of common stock of Newco in exchange for their
equity in the Company. It is anticipated that this will be recorded as a reverse
merger for accounting purposes.
At the closing of the Public Transaction, it is anticipated that the AAI
Security holders that own any series of preferred stock, except Series E, will
convert their shares into shares of Company common stock and subsequently
receive newly issued shares of Newco stock. In addition, it is anticipated that
the KCO note and L Capital senior subordinated debt will be converted into
common stock of the Company, and subsequently exchanged for shares of Newco.
In September of 2005, the Company raised an additional $15 million in gross
proceeds with the affiliates of North Sound Capital ("North Sound Investors").
These funds are currently in escrow and will be released from escrow upon the
Company's completion of the public transaction described above and the
finalization of the transaction documents with the North Sound investors.
The North Sound investment will be an investment directly into Newco and will be
based upon a $2.50 per share price of AAI common stock and 30% warrant coverage
with each warrant having an exercise price of $3.00 per share. The warrants to
be issued to the North Sound Investors will be substantially the same as the
series G warrants and the North Sound Investors will receive similar
registration rights. The North Sound Investors will also have the right to
approve the Public Transaction.
Leases
Beverly Hills Lease
On July 1, 2005, the Company entered into a lease agreement to extend the lease
on the Beverly Hills facility. The termination date on this lease agreement is
September 30, 2015 and the lease does not contain any future renewable option
clauses. The lease contains a free rent provision for the first six months of
the lease and also contains a landlord allowance in the amount of $.6 million
that must be utilized by the Company by June 30, 2006. As a condition to the
lease, the Company is required to put up a letter of credit with varying amounts
for each year of the lease as a guarantee for future rental payments. The
straight lined annual rental payment commitment is $.4 million per year.
Chevy Chase Lease
The Company entered into a lease agreement on a new facility in Chevy Chase,
Maryland with a commencement date of April 1, 2006. The termination date on this
lease agreement is March 31, 2021. Prior to payment of any tenant allowance,
however, the Company must provide the landlord with a security deposit in the
amount of $.6 million in the form of a letter of credit or cash. The straight
lined annual rental payment commitment is $.3 million per year and the lease
F-36
contains a percentage rent clause in the amount of 6% of the facility's revenue
over the breakpoint of $4.4 million.
Merritt 7 Lease
The Company entered into a lease agreement on a new facility in Norwalk,
Connecticut on October 5, 2005. The term of the lease is 10 years with a total
square footage of 13,240. The commencement of the lease is anticipated for
November 1, 2005 for the initial 5,740 square feet of space, with the remaining
space being commenced on January 1, 2006. The Company has the option to renew
the lease for an additional 5 years at a fair market rental rate. The Company is
obligated for security deposits over the term of the lease. The security deposit
terms are as follows:
$680,595 through the 5th lease year;
$453,730 through the 6th lease year;
$340,279 through the seventh lease year; and
$226,854 from the commencement of the eight lease year through the end
of the lease.
Agreements
In September the Company entered into a non-binding letter of intent relating to
a potential sale of the Company to another company in consideration for shares
of the acquiring company. No assurance can be given that the sale will be
consummated. The terms of the acquisition, if consummated would not constitute a
change of control.
In October the Company entered into an agreement with Mandalay Integrated Media
Entertainment, LLC, (MIME), whereby MIME will provide certain media consulting
services in consideration for common shares of AAI.
Royalties
In August 2005 the Company executed an agreement for the exclusive rights to an
ingredient to be used in the manufacture of a skin care line. In consideration
for such rights the Company agreed to royalty payments of 2.5% of its sales to
Sephora with minimum payments of $17,000, $250,000, and $312,000 for calendar
years 2006, 2007 and 2008 respectively.
F-37
Unaudited Financial Statements for Advanced Aesthetics, Inc.
and the accompanying notes thereto.
For the quarter ended October 1, 2005 and September 30, 2004
Advanced Aesthetics, Inc.
Consolidated Balance Sheets
As of October 1,
2005 As of
In thousands, except share and per share amounts (unaudited) June 30, 2005
--------------------------------------------------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 8,992 $ 133
Restricted cash, current portion 1,542 1,228
Inventories 1,874 2,120
Other current assets 901 704
------------------------------------------------------------------------------------------------------------------
Total current assets 13,309 4,185
Property and equipment, net 7,048 6,561
Other assets 447 392
Deferred financing costs, net 309 330
Restricted cash, non-current portion 169 369
Goodwill 18,072 18,072
Other intangibles, net 6,570 7,115
------------------------------------------------------------------------------------------------------------------
Total assets $ 45,924 $ 37,024
================ ============
Liabilities and Shareholders' deficit:
Liabilities:
Current liabilities:
Cash overdraft $ - $ 162
Accounts payable 5,335 3,632
Accrued expenses and other current liabilities 7,860 8,210
Deferred revenue 8,919 8,882
Current portion of long term debt 1,161 744
------------------------------------------------------------------------------------------------------------------
Total current liabilities 23,275 21,630
Senior debt (net of debt discount of $1.087
million and $1.164 million 8,913 8,836
as of October 1, 2005 and June 30, 2005, respectively )
Senior subordinated debt (net of debt discount of $1,176
and $1.234 million ) as of October 1, 2005 and June 30,
2005 respectively ) 12,124 12,066
Other long term debt (net of current portion) 5,744 7,061
Other long term liabilities 9,600 9,780
------------------------------------------------------------------------------------------------------------------
Total liabilities 59,656 59,373
------------------------------------------------------------------------------------------------------------------
Commitments and contingencies - -
Shareholders' deficit:
Preferred stock, series A, cumulative, convertible, 2,130 2,130
redeemable, par value $.01, authorized 20,000
shares, issued and outstanding 7,950 shares
(liquidation preference of $7,950)
Preferred stock, series B, cumulative, redeemable, 965 965
par value $.01, authorized 600,000 shares, issued
and outstanding 1,900 shares (liquidation
preference of $1,900)
Preferred stock, series C, cumulative, convertible, 350 350
redeemable, par value $.01, authorized 20,000
shares, issued and outstanding 1,300 shares
(liquidation preference of $1,300)
Preferred stock, series D, cumulative, convertible, 8,146 8,146
redeemable, par value $.01, authorized as of
October 1, 2005 and June 30, 2005, 8,146 shares,
issued and outstanding 8,146 shares (liquidation
preference of $8,146 )
Preferred stock, series E, cumulative, convertible, 135 135
redeemable, par value $.01, authorized as
2005,tober 5002005 and June 30, shares, issued and
outstanding 500 shares (liquidation preference of $500)
Preferred stock, series G, cumulative, convertible, 9,702 -
redeemable, par value $.01, authorized as of
October 1, 2005 10,775 shares, issued and
outstanding 10,775 shares(liquidation preference of $10,775)
Preferred stock, series H, cumulative, convertible, 4,539 -
redeemable, par value $.01, authorized as of
October 1, 2005 5,000 shares, issued and
outstanding 5,000 shares (liquidation preference of $5,000)
Common stock, par value $.01, authorized 30,000,000 93 93
shares, issued and outstanding 9,268,609 shares
Additional paid-in capital 5,408 3,765
Accumulated deficit (45,200) (37,933)
------------------------------------------------------------------------------------------------------------------
Total shareholders' deficit (13,732) (22,349)
------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 45,924 $ 37,024
================ ============
The accompanying notes are an integral part of the consolidated financial statements.
F-38
Advanced Aesthetics, Inc.
Consolidated Statements of Operations
(unaudited)
For the Three Months Ended
-------------------------------------------------------------------------- ---------------------------- ----------------------------
In thousands, except share and per share amounts October 1, 2005 September 30, 2004
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Revenues:
Service $ 5,863 $ 5,633
Retail 1,902 2,074
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Total Revenue 7,765 7,707
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Cost of Revenue:
Service 3,388 3,423
Retail 788 743
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Total Cost of Revenue 4,176 4,166
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Gross margin 3,589 3,541
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Selling, general and administrative expenses 7,208 6,095
Depreciation and amortization 1,109 871
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Total operating expenses 8,317 6,966
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Operating loss (4,728) (3,425)
Interest expense, net 1,004 927
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Loss before income tax provision (5,732) (4,352)
Income tax provision (benefit) - -
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Net loss (5,732) (4,352)
Dividends on preferred stock 463 271
-------------------------------------------------------------------------- ---------------------------- ----------------------------
Net loss applicable to common shareholders $ (6,195) $ (4,623)
========================================================================== ============================ ============================
Basic and diluted loss per common share: $ (0.67) $ (0.50)
============================ ============================
Weighted average common shares outstanding, basic and diluted 9,268,609 9,268,609
============================ ============================
The accompanying notes are an integral part of the consolidated financial statements
F-38
Advanced Aesthetics, Inc.
Consolidated Statements of Cash Flows
(unaudited)
For the Three Months ended
------------------------------------------------------------------------------ ---------------------------- ------------------------
In thousands, except share and per share amounts October 1, 2005 September 30, 2004
------------------------------------------------------------------------------ ---------------------------- ------------------------
Cash flows used in operating activities:
Net loss $ (5,732) $ (4,352)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,109 871
Non-cash interest expense 135 -
Changes in operating assets and liabilities:
Inventories 246 (181)
Other current assets (197) (1,290)
Other assets (55) -
Accounts payable 1,703 (152)
Accrued expenses (813) 1,243
Deferred revenue 37 392
------ ----------------------------------------------------------------------- ---------------------------- ------------------------
Net cash used in operating activities (3,567) (3,469)
------ ----------------------------------------------------------------------- ---------------------------- ------------------------
Cash flows used in investing activities:
Capital expenditures (979) (983)
Purchase of intangible asset (51) -
------ ----------------------------------------------------------------------- ---------------------------- ------------------------
Net cash used in investing activities (1,030) (983)
------ ----------------------------------------------------------------------- ---------------------------- ------------------------
Cash flows provided by financing activities:
Cash overdraft (162) -
Proceeds of Issuance of long term debt net of deferred financing costs - 2,100
Redemption of long term debt (900) (225)
Other long-term liabilities (180) (1,114)
Net proceeds from issuance of series G preferred stock,net of
issuance costs 10,059 -
Net proceeds from issuance of series F preferred stock, net of
issuance costs 4,753 -
Restricted cash (114) 594
------ ----------------------------------------------------------------------- ---------------------------- ------------------------
Net cash provided by financing activities 13,456 1,355
------ ----------------------------------------------------------------------- ---------------------------- ------------------------
Increase(decrease) in cash and cash equivalents 8,859 (3,097)
Cash and cash equivalents - beginning of period 133 6,689
------------------------------------------------------------------------------ ---------------------------- ------------------------
Cash and cash equivalents - end of period $ 8,992 $ 3,592
============================================================================== ============================ ========================
Supplemental cash flow information
Non-cash financing activities:
Preferred stock dividends $ 463 $ 380
============================ ========================
Issuance of warrants with Series G and Series H preferred stock 1,536 -
============================ ========================
Beneficial conversion feature on preferred stock 1,535 -
============================ ========================
Conversion of Series F preferred stock into Series H preferred
stock 4,539 -
============================ ========================
The accompanying notes are an integral part of the consolidated financial statements
F-39
Advanced Aesthetics, Inc.
Consolidated Statements of Shareholders' Deficit
Additional
Preferred Stock Common Stock Paid Accumulated
In thousands, except share amounts Shares Amount Shares Amount In Capital Deficit Total
------------------------------------------------------- ---------- --------- ---------- -------------- -------------- --- ----------
------------------------------------------------------- ---------- --------- ---------- -------------- -------------- --- ----------
Balance at June 30, 2005 19,796 $11,726 9,268,609 $ 93 $ 3,765 $ (37,933) # $(22,349)
------------------------------------------------------- ---------- --------- ---------- -------------- -------------- --- ----------
Issuance of series G preferred stock, net
of issuance costs 10,775 10,775 (717) 10,058
Issuance of series F preferred stock, net
of issuance costs 5,000 5,000 (709) 4,291
Beneficial Conversion associated with
series G preferred stock 1,073 (1,073) -
Beneficial Conversion associated with
series H preferred stock 462 (462) -
Warrant in connection with series G (1,073) 1,073 -
Warrant in connection with series H (462) 462 -
Net Loss (5,732) (5,732)
------------------------------------------------------- ---------- --------- ---------- -------------- -------------- --- ----------
Balance at October 1, 2005 35,571 $25,966 9,268,609 $ 93 $ 5,409 $(45,200) $(13,732)
------------------------------------------------------- ---------- --------- ---------- -------------- -------------- --- ----------
The accompanying notes are an integral part of the consolidated financial statements
F-40
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
Advanced Aesthetics, Inc. (the "Company" or "AAI") was formed in 2003 by Kidd &
Company, LLC ("KCO"), a Greenwich, Connecticut based investment firm. In
addition to KCO, the Company's other major investor is L Capital, a $300 million
private equity fund ("L Capital") sponsored by Moet Hennessy Louis Vuitton SA.
Technology Investment Capital Corp. ("TICC"), a publicly traded business
development company also assisted in the financing of the Company.
AAI offers both cosmetic services and medical procedures to customers under one
delivery system in facilities being rolled out across the United States. AAI
brings cosmetic surgery, cosmetic dentistry, cosmetic dermatology and salon and
spa services together under a single brand; giving clients access to top service
providers, unique treatments and predictable results in a state-of-the-art
environment. AAI co-brands its trade name with the trade names of the salons and
spas AAI has acquired. AAI's salons and spas share certain corporate resources
such as senior management and administrative services of AAI. As of October 1,
2005, the Company had 525 employees.
The accompanying financial statements have been prepared on the going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Since its inception, the Company
has experienced operating losses and negative cash flow from operations. As of
October 1, 2005, the Company had a cumulative deficit of $45.2 million and a
working capital deficiency of $10.3 million. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern is ultimately dependent on its ability to
increase sales and reduce expenses to a level that will allow it to operate
profitably and sustain positive operating cash flows.
In July of 2005, the Company successfully raised $5.0 million in gross proceeds
in the form of series F convertible preferred stock, that were subsequently
exchanged for shares of Series H preferred stock. This financing was completed
through a private placement of equity. In September of 2005, the Company
successfully raised an additional $10.775 million in gross proceeds in the form
of series G convertible preferred stock. This financing was also completed
through a private placement of equity. In September of 2005, the Company raised
an additional $15.3 million in gross proceeds that is currently in escrow to
purchase Convertible Preferred Stock (the "Preferred Stock") convertible into
the Company's common stock (the "Common Stock") at the Conversion Price set
forth below, and Warrants to purchase a number of shares of Common Stock equal
to 30% of the number of shares of Common Stock that the Preferred Stock is
convertible into on the date of issuance of such Preferred Stock. The Warrants
shall be exercisable for the Company's Series B Preferred Stock until sufficient
common stock is authorized.[See Note 14] The funds will be released from escrow
for the purchase of common stock upon the Company's completion of a planned
share exchange transaction expected to be completed by December of 2005 and the
finalization of transaction documents with the investors.
There is no assurance that the recent financings will be sufficient to fund
operations until sales and profitability improves to the point that the Company
is able to operate from internally
F-41
generated cash flows. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern. The ability of
the Company to continue as a going concern is dependent upon executing the
expansion plans per the business plan and obtaining additional capital and debt
financing. However, there can be no assurance that these sources will provide
sufficient cash inflows to enable the Company to achieve its operational
objectives. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
2. Basis of Presentation
Beginning in fiscal year 2006, the Company will now follow the standard fiscal
year of the retail industry, which is a 52 or 53 week period ending on the
Saturday closest to June 30.
The accompanying consolidated financial statements are unaudited but, in the
opinion of management, contain all adjustments (which are of a normal recurring
nature) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. All significant
intercompany accounts and transactions have been eliminated. The interim results
are not necessarily indicative of the full year results.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No.
104 (SAB 104" Revenue Recognition") at the time the customer either receives
services or takes possession of merchandise and pays for such service or
merchandise with cash, check, gift card or a credit card.
When the Company receives payment from customers before the services have been
performed or the customer has taken possession of the merchandise, which
principally relates to the sale of gift cards, the amount received is recorded
as deferred revenue on the Company's consolidated balance sheet. The liability
remains on the balance sheet until the earlier of redemption, escheatment, or 36
months. It is the Company's and its predecessors' historical experience that the
likelihood of redemption after 36 months is remote. After 36 months, 80% of the
remaining liability is relieved and recognized as revenue. After 48 months, an
additional 10% of the remaining liability is relieved and recognized as revenue.
After 60 months, the last 10% of the remaining liability is relieved and
recognized as revenue. For the quarters ended October 1, 2005 and September 30,
2004, the Company did not record any income related to unredeemed gift cards.
As of October 1, 2005 and June 30, 2005 deferred revenue totaled $8.919 million
and $8.882 million respectively.
3. Material Agreements
In September the Company entered into a non-binding letter of intent relating to
a potential sale of the Company to another company in consideration for shares
of the acquiring company. No assurance can be given that the sale will be
consummated. The terms of the acquisition, if consummated would not constitute a
change of control.
F-42
In October 2005 the Company entered into an agreement with Mandalay Integrated
Media Entertainment, LLC, (MIME), whereby MIME will provide certain media
consulting services in consideration for common shares of AAI.
4. Shareholders' Deficit
Series G convertible preferred stock financing
In September of 2005, the Company raised an additional $10.775 million [gross]
in the form of series G convertible preferred stock through a private placement.
The series G holders have the right to convert each share of series G preferred
stock into approximately 444 shares of common stock at $2.25 per share. In
addition, the Company issued warrants to the series G holders that are
exercisable for thirty percent (30%) of the number of shares of common stock
issuable to series G holders upon conversion of their shares of series G
preferred stock, or 4,788.889 shares. The warrants are exercisable for five
years from the date of issuance and have an exercise price equal to $2.70 per
share. The value ascribed to the warrants was $1.1 million, and was determined
using the Black-Scholes pricing model and the following assumptions: risk free
rate of return - 4%; volatility - 30%; term - five years; and expected dividends
- 0%. The proceeds from this financing were allocated to the series G preferred
stock and the warrant based on their respective fair values. The allocation of
proceeds to the series G preferred stock resulted in a beneficial conversion
feature, which was determined to be $1.1 million and was recorded as additional
yield to the shareholders.
The following statements are brief summaries of certain provisions relating to
the series G convertible preferred stock.
General. The Certificate of Designation of the series G convertible preferred
stock designates 12,000 shares of preferred stock as shares of series G
convertible preferred stock ("series G convertible preferred").
Liquidation Preference. In the event of any liquidation, dissolution or winding
up of the Company, the holders of the series G convertible preferred (together
with the holders of the shares of series D convertible preferred stock and
series H convertible preferred stock of the Company) will receive in preference
to the holders of any other class or series of capital stock of the Company, a
per share amount equal to the original purchase price of a share of series G
convertible preferred, plus any accrued and unpaid dividends.
Dividends. 8% per annum dividends, when, as and if declared by the Company's
board of directors, prior to any dividends being paid on the common stock of the
Company except that from and after the date of a Public Transaction, such rate
shall be 4% per annum. At the time of conversion of any series G convertible
preferred into common stock, the holder of such series G convertible preferred
shall be entitled to receive payment of all accrued and unpaid dividends thereon
in the form of such number of additional shares of common stock equal to (a) the
amount of such dividends, divided by (b) the then applicable conversion price of
the series G convertible preferred.
Voting Rights. The series G convertible preferred will vote with the common
stock as a class on an as converted basis.
F-43
Conversion Rights. The series G holders have the right to convert each share of
its series G convertible preferred into approximately 444 shares of common stock
($2.25/share conversion price).
Mandatory Conversion. The series G convertible preferred will be automatically
converted into common stock at such time as the shares of common stock into
which the series G convertible preferred is converted (and/or exchanged) are
registered for resale with the SEC.
Anti-Dilution Protection. Proportional adjustments of the series G convertible
preferred conversion rate will be made for splits, combinations, stock
dividends, recapitalizations and the like. Additionally, in the event that the
Company shall issue any additional shares of common stock or common stock
equivalents at a issuance price (or deemed issuance price) less than the then
effective conversion price of the series G convertible preferred, the conversion
price for the Series G convertible preferred shall be subject to a
weighted-average anti-dilution adjustment.
Protective Provisions. Consent of the holders of a majority of the outstanding
series G convertible preferred shall be required for the consummation of the
Public Transaction or any amendment or change of the rights, preferences,
privileges or powers of, or the restrictions provided for the benefit of, the
series G convertible preferred.
Redemption. Each holder of series G convertible preferred shall have the right,
but not the obligation, to require the Company to redeem any or all of such
holder's series G convertible preferred upon the earliest to occur of: (i) the
liquidation or dissolution of the Company, (ii) an IPO of the Company, (iii) the
sale of all or substantially all the assets of the Company, (iv) a merger,
consolidation or business combination of the Company (except for the Public
Transaction) and (v) a change of control of the Company, and the Company shall
have such right as long as the Series G Investors would receive 2x its original
investment upon such redemption or in such other transaction.
Series H convertible preferred stock financing
In July of 2005, the Company raised $5.0 million in the form of series F
convertible preferred stock through a private placement. During September 2005,
the series F shareholders exchanged all of their shares of series F convertible
preferred stock and all of the warrants issued in connection with the series F
stock for shares of a newly created series H convertible preferred stock and new
warrants. The total gross proceeds of this transaction were $5 million [gross].
The series H holders have the right to convert each share of series H
convertible preferred stock into approximately 444 shares of ccommon stock at
$2.25 per share. In addition, the Company issued warrants to the series H
holders that are exercisable for thirty percent (30%) of the number of shares of
common stock issuable to series H holders upon conversion of their series H
preferred stock, or 2,222,222 shares. The warrants will be exercisable for five
years from the date of issuance and will have an exercise price equal to $2.70
per share. The value ascribed to the warrants was $0.5 million, and was
determined using the Black-Scholes pricing model and the following assumptions:
risk free rate of return - 3.8%; volatility - 30%; term - five years; and
expected dividends - 0%. The proceeds from this financing were allocated to the
series G preferred stock and the warrant based on their respective fair values.
The allocation of proceeds to the series G preferred stock resulted in a
beneficial conversion feature, which was determined to be $0.5 million and was
recorded as additional yield to the shareholders.
F-44
The terms of the series H convertible preferred stock are identical to the terms
of the series G convertible preferred stock except that for series H, dividends
accrue as of July 7, 2005, the date when the series F convertible preferred
stock investment was made.
F-45
Audited Financial Statements of Georgette Klinger, Inc.
and the accompanying notes thereto.
For the period from July 1, 2003 through April 22, 2004
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Georgette Klinger, Inc.:
We have audited the statement of operations and cash flow statement of Georgette
Klinger, Inc. (the "Company") for the period from July 1, 2003 through April 23,
2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows for Georgette
Klinger, Inc. for the period from July 1, 2003 through April 23, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the financial statements, the Company's business was
acquired on April 23, 2004 by Advanced Aesthetics, Inc.
/s/ Amper, Politziner & Mattia, P.C.
Edison, New Jersey
November 30, 2005
F-46
Georgette Klinger, Inc.
Statement of Operations
July 1, 2003 to
In thousands April 23, 2004
-----------------------------------------------------------------------------
Net revenue $ 13,375
Cost of revenue 6,191
-----------------------------------------------------------------------------
Gross margin 7,184
-----------------------------------------------------------------------------
Selling, general and administrative expenses 8,733
Depreciation and amortization 866
-----------------------------------------------------------------------------
Total operating expenses 9,599
-----------------------------------------------------------------------------
Operating loss (2,415)
Interest expense, net 1,377
-----------------------------------------------------------------------------
Loss before income tax provision (3,792)
Income tax provision 2
-----------------------------------------------------------------------------
Net loss $ (3,794)
=============================================================================
The accompanying notes are an integral part of the financial statements
F-47
Georgette Klinger, Inc.
Statement of Cash Flows
------------------------------------------------------------------------------------------
July 1, 2003 to
In thousands April 23, 2004
------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (3,794)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 866
Changes in working capital 845
------------------------------------------------------------------------------------------
Net cash used in operating activities (2,083)
------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (424)
------------------------------------------------------------------------------------------
Net cash used in investing activities (424)
------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long term debt 2,570
Net cash provided by financing activities 2,570
------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 63
Cash and cash equivalents - beginning of period (9)
------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 54
==========================================================================================
Supplemental cash flow information
Cash paid during the year to:
Income taxes $ 2
The accompanying notes are an integral part of the financial statements
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General Information and Summary of Significant Accounting Policies
Organization and Business Activity: Georgette Klinger, Inc. (the "Company")
offers spa services and retail product to customers and consisted of a chain of
nine spa facilities operating in seven states across the United States. On April
23, 2004, the Company's business was acquired by Advanced Aesthetics, Inc.
Use of Estimates: In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant management
estimates are useful lives of property and equipment, provisions for inventory
obsolescence, deferred revenue expirations and various contingencies. Actual
results could differ from those estimates. Changes in facts and circumstances
may result in revised estimates, which are recorded in the period in which they
become known.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of ninety days or less.
Inventories: Inventories consist principally of hair care and skin care products
held either for retail sale or for use in spa services. Inventories are stated
at the lower of cost or market on a first-in, first-out basis.
Property & Equipment: Property and equipment are carried at cost, less
accumulated depreciation and amortization. Property, equipment and improvements
to leased premises are depreciated and amortized using the straight-line method
over the estimated useful lives of the assets or when applicable, the term of
the lease, whichever is shorter. Estimated useful lives generally range from 5
to 15 years for leasehold improvements and 3 to 10 years for fixtures and
equipment. Repair and maintenance expenses, which do not improve or extend the
life of the respective assets, are charged directly to expense as incurred. The
Company maintains a policy to capitalize all property and equipment purchases in
excess of $1,000. The assets and related depreciation and amortization accounts
are adjusted for property retirements and disposals with the resulting gain or
loss included in operations. Fully depreciated assets remain in the accounts
until retired from service.
Revenue Recognition: The Company recognizes revenue at the time the customer
either receives services or takes possession of merchandise and pays for such
service or merchandise with cash, check, gift card or a credit card. When the
Company receives payment from customers before the services have been performed
or the customer has taken possession of the merchandise, which principally
relates to the sale of gift cards, the amount received is recorded as deferred
revenue on the Company's consolidated balance sheet.
Cost of Revenue: Cost of sales for services include salaries associated with
employees that are directly related to providing various services to clients.
These services include facials, waxing, massages, pedicures and manicures. In
addition, the cost of products utilized as part of the service is also included
in cost of revenues. Product costs are determined by utilizing the specific cost
that the product was acquired for from various vendors and manufacturers.
F-49
Significant changes in product costs, product pricing, revenue mix, shrinkage
and vendor allowances and rebates could have a material impact on our gross
margin.
Selling, General and Administrative Costs: Included in selling, general and
administrative costs are salaries and related benefit costs for all corporate
personnel and facility level personnel that are not directly associated with
performing services for our clients. Selling, general and administrative costs
also include all occupancy, insurance, supplies, telephone, advertising, travel,
professional fees and cleaning expenses.
Advertising Costs: Advertising costs include costs related to public relations,
agency fees, promotional programs, and the cost of in store marketing materials.
All advertising costs are expensed as incurred.
Income Taxes: The Company provides for federal and state income taxes currently
payable, as well as for those deferred due to temporary differences between
reporting income and expenses for financial statement purposes versus tax
purposes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled. Realization of
deferred tax assets is ultimately dependent upon future taxable income. The
effect of a change in tax rates is recognized as income or expense in the period
of the change. A full valuation allowance was provided for deferred tax assets
as management believes that it is more likely than not that the Company will not
utilize the deferred tax asset.
F-50
Audited Financial Statements of Wild Hare Salon
and the accompanying notes thereto.
For the period from July 1, 2003 through November 26, 2003
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Wild Hare South, Inc.:
We have audited the statement of operations and cash flow statement of Wild Hare
South, Inc. (the "Company") for the period from July 1, 2003 through November
26, 2003. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Wild Hare
South, Inc. for the period from July 1, 2003 through November 26, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the financial statements, the Company's business was
acquired on November 26, 2003 by Advanced Aesthetics, Inc.
/s/ Amper, Politziner & Mattia, P.C.
Edison, New Jersey
November 30, 2005
F-51
Wild Hare South, Inc.
Statement of Operations
-------------------------------------------------------------------------------
July 1, 2003 to
In thousands November 26, 2003
-------------------------------------------------------------------------------
Net revenue $ 1,332
Cost of revenue 655
-------------------------------------------------------------------------------
Gross margin 677
-------------------------------------------------------------------------------
Selling, general and administrative expenses 629
Depreciation and amortization 10
-------------------------------------------------------------------------------
Total operating expenses 639
-------------------------------------------------------------------------------
Operating profit 38
-------------------------------------------------------------------------------
Net Income $ 38
===============================================================================
The accompanying notes are an integral part of the financial statements
F-52
Wild Hare South, Inc.
Statement of Cash Flows
--------------------------------------------------------------------------------------
July 1, 2003 to
In thousands November 26, 2003
--------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 38
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 10
Changes in working capital (75)
--------------------------------------------------------------------------------------
Net cash used in operating activities (27)
--------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (27)
Cash and cash equivalents - beginning of period 27
--------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ -
======================================================================================
The accompanying notes are an integral part of the financial statements
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General Information and Summary of Significant Accounting Policies
Organization and Business Activity: Wild Hare South, Inc. (the "Company") offers
salon services and retail product to customers and is located in Boca Raton,
Florida. On November 26, 2003, the Company's business was acquired by Advanced
Aesthetics, Inc.
Use of Estimates: In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant management
estimates are the useful lives of property and equipment, provisions for
inventory obsolescence, deferred revenue expirations and various contingencies.
Actual results could differ from those estimates. Changes in facts and
circumstances may result in revised estimates, which are recorded in the period
in which they become known.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of ninety days or less.
Inventories: Inventories consist principally of hair care and skin care products
held either for retail sale or for use in spa services. Inventories are stated
at the lower of cost or market on a first-in, first-out basis.
Property & Equipment: Property and equipment are carried at cost, less
accumulated depreciation and amortization. Property, equipment and improvements
to leased premises are depreciated and amortized using the straight-line method
over the estimated useful lives of the assets or when applicable, the term of
the lease, whichever is shorter. Estimated useful lives generally range from 5
to 15 years for leasehold improvements and 3 to 10 years for fixtures and
equipment. Repair and maintenance expenses, which do not improve or extend the
life of the respective assets, are charged directly to expense as incurred. The
Company maintains a policy to capitalize all property and equipment purchases in
excess of $1,000. The assets and related depreciation and amortization accounts
are adjusted for property retirements and disposals with the resulting gain or
loss included in operations. Fully depreciated assets remain in the accounts
until retired from service.
Revenue Recognition: The Company recognizes revenue at the time the customer
either receives services or takes possession of merchandise and pays for such
service or merchandise with cash, check, gift card or a credit card. When the
Company receives payment from customers before the services have been performed
or the customer has taken possession of the merchandise, which principally
relates to the sale of gift cards, the amount received is recorded as deferred
revenue on the Company's consolidated balance sheet.
Cost of Revenue: Cost of sales for services include salaries associated with
employees that are directly related to providing various services to clients.
These services include hair cuts, hair coloring, pedicures and manicures. In
addition, the cost of products utilized as part of the service is also included
in cost of revenues. Product costs are determined by utilizing the specific cost
that the product was acquired for from various vendors and manufacturers.
Significant changes in product costs, product pricing, revenue mix, shrinkage
and vendor allowances and rebates could have a material impact on our gross
margin.
F-54
Selling, General and Administrative Costs: Included in selling, general and
administrative costs are salaries and related benefit costs for all corporate
personnel and facility level personnel that are not directly associated with
performing services for our clients. Selling, general and administrative costs
also include all occupancy, insurance, supplies, telephone, advertising, travel,
professional fees and cleaning expenses.
Advertising Costs: Advertising costs include costs related to public relations,
agency fees, promotional programs, and the cost of in store marketing materials.
All advertising costs are expensed as incurred.
Income taxes: No provision or benefit for income taxes is included in the
financial statements. Income taxes, if any, are the responsibility of the
individual Shareholders.
F-55
Audited Financial Statements of
Anushka PBG Sanctuary
and accompanying notes thereto.
For the period from July 1, 2003 through November 26, 2003
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Lord & Foursight, LLC:
We have audited the statement of operations and cash flow statement of Lord &
Foursight, LLC (the "Company") for the period from July 1, 2003 through November
26, 2003. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows for Lord &
Foursight, LLC for the period from July 1, 2003 through November 26, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the financial statements, the Company's business was
acquired on November 26, 2003 by Advanced Aesthetics, Inc.
/s/ Amper, Politziner & Mattia, P.C.
Edison, New Jersey
November 30, 2005
F-56
Lord & Foursight, LLC
Statement of Operations
------------------------------------------------------------------------------
July 1, 2003 to
In thousands November 26, 2003
------------------------------------------------------------------------------
Net revenue $ 1,807
Cost of revenue 844
------------------------------------------------------------------------------
Gross margin 963
------------------------------------------------------------------------------
Selling, general and administrative expenses 698
Depreciation and amortization 13
------------------------------------------------------------------------------
Total operating expenses 711
------------------------------------------------------------------------------
Operating profit 252
------------------------------------------------------------------------------
Net Income $ 252
==============================================================================
The accompanying notes are an integral part of the financial statements
F-57
Lord & Foursight, LLC
Statement of Cash Flows
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
July 1, 2003 to
In thousands November 26, 2003
-------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 252
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 13
Changes in working capital (332)
-------------------------------------------------------------------------------------
Net cash used in operating activities (67)
-------------------------------------------------------------------------------------
Increase in cash and cash equivalents (67)
Cash and cash equivalents - beginning of period 67
-------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ -
=====================================================================================
The accompanying notes are an integral part of the financial statements
F-58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General Information and Summary of Significant Accounting Policies
Organization and Business Activity: Lord & Foursight, LLC, d.b.a. Anushka Spa &
Sanctuary (the "Company), offers salon and spa services and retail product to
customers and is located in Palm Beach Gardens, Florida. On November 26, 2003,
the Company's business was acquired by Advanced Aesthetics, Inc.
Use of Estimates: In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant management
estimates are useful lives of property and equipment, provisions for inventory
obsolescence, deferred revenue expirations and various contingencies. Actual
results could differ from those estimates. Changes in facts and circumstances
may result in revised estimates, which are recorded in the period in which they
become known.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of ninety days or less.
Inventories: Inventories consist principally of hair care and skin care products
held either for retail sale or for use in spa services. Inventories are stated
at the lower of cost or market on a first-in, first-out basis.
Property & Equipment: Property and equipment are carried at cost, less
accumulated depreciation and amortization. Property, equipment and improvements
to leased premises are depreciated and amortized using the straight-line method
over the estimated useful lives of the assets or when applicable, the term of
the lease, whichever is shorter. Estimated useful lives generally range from 5
to 15 years for leasehold improvements and 3 to 10 years for fixtures and
equipment. Repair and maintenance expenses, which do not improve or extend the
life of the respective assets, are charged directly to expense as incurred. The
Company maintains a policy to capitalize all property and equipment purchases in
excess of $1,000. The assets and related depreciation and amortization accounts
are adjusted for property retirements and disposals with the resulting gain or
loss included in operations. Fully depreciated assets remain in the accounts
until retired from service.
Revenue Recognition: The Company recognizes revenue at the time the customer
either receives services or takes possession of merchandise and pays for such
service or merchandise with cash, check, gift card or a credit card. When the
Company receives payment from customers before the services have been performed
or the customer has taken possession of the merchandise, which principally
relates to the sale of gift cards, the amount received is recorded as deferred
revenue on the Company's consolidated balance sheet.
Cost of Revenue: Cost of sales for services include salaries associated with
employees that are directly related to providing various services to clients.
These services include hair cuts, hair coloring, facials, waxing, massages,
pedicures and manicures. In addition, the cost of products utilized as part of
the service is also included in cost of revenues. Product costs are determined
by utilizing the specific cost that the product was acquired for from various
vendors and
F-59
manufacturers. Significant changes in product costs, product pricing, revenue
mix, shrinkage and vendor allowances and rebates could have a material impact on
our gross margin.
Selling, General and Administrative Costs: Included in selling, general and
administrative costs are salaries and related benefit costs for all corporate
personnel and facility level personnel that are not directly associated with
performing services for our clients. Selling, general and administrative costs
also include all occupancy, insurance, supplies, telephone, advertising, travel,
professional fees and cleaning expenses.
Advertising Costs: Advertising costs include costs related to public relations,
agency fees, promotional programs, and the cost of in store marketing materials.
All advertising costs are expensed as incurred.
Income taxes: Income taxes: No provision or benefit for income taxes is included
in the financial statements. Income taxes, if any, are the responsibility of the
individual members.
F-60
Audited Financial Statements of Anushka Boca Spa
and the accompanying notes thereto.
For the period from July 1, 2003 to November 26, 2003
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Forelle LTD, Inc.:
We have audited the statement of operations and cash flow statement of Forelle
LTD, Inc. (the "Company") for the period from July 1, 2003 through November 26,
2003. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows for Forelle LTD,
Inc. for the period from July 1, 2003 through November 26, 2003 in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Company's business was
acquired on November 26, 2003 by Advanced Aesthetics, Inc.
/s/ Amper, Politziner & Mattia, P.C.
Edison, New Jersey
November 30, 2005
F-61
Forelle LTD, Inc.
Statement of Operations
--------------------------------------------------------------------------------
July 1, 2003 to
In thousands November 26, 2003
--------------------------------------------------------------------------------
Net revenue $ 653
Cost of revenue 273
--------------------------------------------------------------------------------
Gross margin 380
--------------------------------------------------------------------------------
Selling, general and administrative expenses 379
Depreciation and amortization 3
--------------------------------------------------------------------------------
Total operating expenses 382
--------------------------------------------------------------------------------
Operating loss (2)
Interest expense, net 12
--------------------------------------------------------------------------------
Net loss $ (14)
================================================================================
The accompanying notes are an integral part of the financial statements
F-62
Forelle LTD, Inc.
Statement of Cash Flows
--------------------------------------------------------------------------------------
July 1, 2003 to
In thousands November 26, 2003
--------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (14)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 3
Changes in working capital (24)
--------------------------------------------------------------------------------------
Net cash used in operating activities (35)
--------------------------------------------------------------------------------------
Increase in cash and cash equivalents (35)
Cash and cash equivalents - beginning of period 35
--------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ -
======================================================================================
Supplemental cash flow information
Cash paid during the year to:
Interest paid $12
The accompanying notes are an integral part of the financial statements
F-63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General Information and Summary of Significant Accounting Policies
Organization and Business Activity: Forelle LTD, Inc., d.b.a. Anushka Boca Spa
(the "Company"), offers spa services and retail product to customers and is
located in Boca Raton, Florida. On November 26, 2003, the Company's business was
acquired by Advanced Aesthetics, Inc.
Use of Estimates: In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant management
estimates are the useful lives of property and equipment, provisions for
inventory obsolescence, deferred revenue expirations and various contingencies.
Actual results could differ from those estimates. Changes in facts and
circumstances may result in revised estimates, which are recorded in the period
in which they become known.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of ninety days or less.
Inventories: Inventories consist principally of hair care and skin care products
held either for retail sale or for use in spa services. Inventories are stated
at the lower of cost or market on a first-in, first-out basis.
Property & Equipment: Property and equipment are carried at cost, less
accumulated depreciation and amortization. Property, equipment and improvements
to leased premises are depreciated and amortized using the straight-line method
over the estimated useful lives of the assets or when applicable, the term of
the lease, whichever is shorter. Estimated useful lives generally range from 5
to 15 years for leasehold improvements and 3 to 10 years for fixtures and
equipment. Repair and maintenance expenses, which do not improve or extend the
life of the respective assets, are charged directly to expense as incurred. The
Company maintains a policy to capitalize all property and equipment purchases in
excess of $1,000. The assets and related depreciation and amortization accounts
are adjusted for property retirements and disposals with the resulting gain or
loss included in operations. Fully depreciated assets remain in the accounts
until retired from service.
Revenue Recognition: The Company recognizes revenue at the time the customer
either receives services or takes possession of merchandise and pays for such
service or merchandise with cash, check, gift card or a credit card. When the
Company receives payment from customers before the services have been performed
or the customer has taken possession of the merchandise, which principally
relates to the sale of gift cards, the amount received is recorded as deferred
revenue on the Company's consolidated balance sheet.
Cost of Revenue: Cost of sales for services include salaries associated with
employees that are directly related to providing various services to clients.
These services include facials, waxing, massages, pedicures and manicures. In
addition, the cost of products utilized as part of the service is also included
in cost of revenues. Product costs are determined by utilizing the specific cost
that the product was acquired for from various vendors and manufacturers.
F-64
Significant changes in product costs, product pricing, revenue mix, shrinkage
and vendor allowances and rebates could have a material impact on our gross
margin.
Selling, General and Administrative Costs: Included in selling, general and
administrative costs are salaries and related benefit costs for all corporate
personnel and facility level personnel that are not directly associated with
performing services for our clients. Selling, general and administrative costs
also include all occupancy, insurance, supplies, telephone, advertising, travel,
professional fees and cleaning expenses.
Advertising Costs: Advertising costs include costs related to public relations,
agency fees, promotional programs, and the cost of in store marketing materials.
All advertising costs are expensed as incurred.
Income taxes: No provision or benefit for income taxes is included in the
financial statements. Income taxes, if any, are the responsibility of the
individual Shareholders.
F-65
Unaudited Pro Forma Consolidated Statement of
Operations for Advanced Aesthetics, Inc.
For the Year ended June 30, 2004
Unaudited Pro Forma Condensed Combined
Consolidated Statement of Operation
The following unaudited pro forma condensed combined statement of operations
give effect for all four acquisitions as if they all occurred on July 1, 2003.
These acquisitions were accounted for under the purchase method of accounting in
accordance with Statement of Financial Accounting Standard (SFAS) No. 141,
"Business Combinations." Under the purchase method of accounting, the total
purchase price was allocated to the assets acquired and liabilities assumed of
each acquisition based upon the fair values as of the completion of the
acquisitions.
The unaudited pro forma condensed combined statement of operations has been
prepared for illustrative purposes only and are not necessarily indicative of
the condensed consolidated results of operations in future periods or the
results that actually would have been realized had all four acquisitions
actually occurred on July 1, 2003. The pro forma adjustments are based on the
information available at the time of the preparation of this document.
The unaudited pro forma condensed combined statement of operations, including
the notes thereto, are qualified in their entirety by reference to, and should
be read in conjunction with, the audited consolidated financial statements of
Advanced Aesthetics, Inc. as of and for the year ending June 30, 2004.
Advanced Aesthetics, Inc.
Pro Forma Statement of Operations
For the year ended June 30, 2004
From July 1, 2003 to Acquisition Date
-------------------------------------------------- -----------------------------------------------------------------------
Anushka Spa Anushka Wild Hare
& Sanctuary Boca Spa Salon
Acquisition Acquisition Acquisition
(From July 1, 2003 (From July 1, 2003 (From July 1, 2003
In thousands, except share and per share amounts to Nov. 26, 2003) to Nov. 26, 2003) to Nov. 26, 2003)
-------------------------------------------------- -----------------------------------------------------------------------
Net revenue $ 1,807 $ 653 $ 1,332
Cost of revenue 844 273 655
-------------------------------------------------- -----------------------------------------------------------------------
Gross margin 963 380 677
-------------------------------------------------- -----------------------------------------------------------------------
Selling, general and administrative expenses 698 379 629
Depreciation and amortization 13 3 10
-------------------------------------------------- -----------------------------------------------------------------------
Total operating expenses 711 382 639
-------------------------------------------------- -----------------------------------------------------------------------
Operating profit/(loss) 252 (2) 38
Interest expense, net - 12 -
-------------------------------------------------- -----------------------------------------------------------------------
Income/(loss) before income tax provision 252 (14) 38
Income tax provision - - -
-------------------------------------------------- -----------------------------------------------------------------------
Net Income/(loss) 252 (14) 38
Dividends on preferred stock - - -
-------------------------------------------------- -----------------------------------------------------------------------
Net Income/(loss) available to common shareholders $ 252 $ (14) $ 38
================================================== =======================================================================
Basic and diluted loss per common share
Weighted average common shares outstanding, basic and diluted
F-66
From July 1, 2003 to Acquisition Date
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Georgette Klinger
Acquisition Audited Pro Forma
(From July 1, 2003 to Financials Pro Forma Condensed
In thousands, except share and per share amounts April 23, 2004) Total As Reported Adjustments Combined
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Net revenue $ 13,375 $ 17,167 $ 13,309 $ - $ 30,476
Cost of revenue 6,191 7,963 7,608 - 15,571
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Gross margin 7,184 9,204 5,701 - 14,905
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Selling, general and administrative expenses 8,733 10,439 15,683 - 26,122
Depreciation and amortization 866 892 1,679 - 2,571
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Total operating expenses 9,599 11,331 17,362 - 28,693
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Operating profit/(loss) (2,415) (2,127) (11,661) - (13,788)
Interest expense, net 1,377 1,389 2,173 348 (A) 3,910
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Income/(loss) before income tax provision (3,792) (3,516) (13,834) (348) (17,698)
Income tax provision 2 2 - - 2
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Net Income/(loss) (3,794) (3,518) (13,834) (348) (17,700)
Dividends on preferred stock - - 488 - 488
-------------------------------------------------- ------------------------------------ ------------- ------------ ----------
Net Income/(loss) attributable to common shareholders $ (3,794) $ (3,518) $ (14,322) $ (348) $ (19,185)
================================================== ==================================== ============= ============ ==========
Basic and diluted loss per common share $ (2.07)B
=========
Weighted average common shares outstanding, basic and diluted 9,268,609B
==========
(A) To reflect the interest expense for the senior debt and senior
subordinated debt as if both financings occurred on July 1, 2003.
(B) Pro forma basic and diluted net loss per share for the twelve months
ended June 30, 2004 is computed by dividing the pro forma net loss
attributable to Common Shareholders for the period by the Weighted
Average Common Shares outstanding for the period.
F-67
The unaudited Pro Forma Consolidated Statements of Operations for
Advanced Aesthetics, Inc. for the twelve months ended
June 30, 2005 and the three months ended October 1, 2005 and the
unaudited Pro-forma consolidated balance sheet as of October 1, 2005.
On December 20, 2005, TrueYou.com, Inc. (the "Registrant") entered into a Share
Exchange Agreement (the "Share Exchange Agreement") with Advanced Aesthetics,
Inc., a Delaware corporation ("AAI"), and the securityholders of AAI (the "AAI
Securityholders") pursuant to which the AAI Securityholders received newly
issued securities of the Registrant in exchange for their securities of AAI. The
merger of TrueYou.com and AAI has been accounted for as a reverse merger with
AAI determined to be the acquiring entity .
The unaudited pro forma consolidated balance sheet has been prepared to reflect
the merger as if it had occurred on October 1, 2005. The unaudited pro forma
statements of operations have been prepared to reflect the consolidated results
of operations of TrueYou.com and AAI for the three months ended October 1, 2005
and the year ended June 30, 2005, as if the merger had taken place on July 1,
2004.
The unaudited pro forma consolidated balance sheet and unaudited pro forma
consolidated statements of operations should be read in conjunction with the
historical financial statements and notes thereto of TrueYou.com and AAI,
included elsewhere herein.
F-68
Advanced Aesthetics, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
As of October 1, 2005
(Unaudited)
Advanced
Aesthetics, Inc TrueYou.com Inc
As of October 1, As of September 30,
In thousands, except share and per share amounts 2005 2005
-------------------------------------------------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 8,992 $ 42
Restricted cash, current portion 1,542 -
Inventories 1,874 -
Other current assets 901 1
-------------------------------------------------------------------------------------------------------------------------------
Total current assets 13,309 43
Property and equipment, net 7,048 -
Other assets 447 -
Deferred financing costs, net 309 -
Restricted cash, non-current portion 169 -
Goodwill 18,072 -
Other intangibles, net 6,570 -
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 45,924 $ 43
===============================================================================================================================
Liabilities, Redeemable Preferred Stock and Shareholders' Deficit:
Liabilities:
Current liabilities:
Cash overdraft $ - $ -
Accounts payable 5,335 -
Accrued expenses and other current liabilities 7,860 12
Deferred revenue 8,919 -
Current portion of long term debt 1,161 -
-------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 23,275 12
Senior debt (net of debt discount of $1.087 million and $1.164 million 8,913 -
as of October 1, 2005 and June 30, 2005, respectively )
Senior subordinated debt (net of debt discount of $1,176 and $1.234 million ) 12,124 -
as of October 1, 2005 and June 30, 2005 respectively )
Other long term debt (net of current portion) 5,744 -
Other long term liabilities 9,600 -
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities 59,656 12
Commitments and contingencies - -
Redeemable preferred stock
Preferred stock, new series C, cumulative, convertible, redeemable par
value $0.001 - -
Preferred stock, new series D, cumulative, convertible, redeemable par
value $0.001 - -
Shareholders' deficit:
Preferred stock, series A, cumulative, convertible, redeemable, par value $.01 2,130 100
Preferred stock, series B, cumulative, redeemable, par value $.01 965 -
Preferred stock, series C, cumulative, convertible, redeemable, par value $.01 350 -
Preferred stock, series D, cumulative, convertible, redeemable, par value $.01 8,146 -
Preferred stock, series E, cumulative, convertible, redeemable, par value $.01 135 -
Preferred stock, series G, cumulative, convertible, redeemable, par value $.01 9,702 -
Preferred stock, series H, cumulative, convertible, redeemable, par value $.01 4,539 -
Common stock, par value $.001 93 13
Additional paid-in capital 5,408 3,243
Accumulated deficit (45,200) (3,325)
---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' (deficit)/equity (13,732) 31
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 45,924 $ 43
=================================================================================================================================
Pro-Forma
Consolidated
Adjustment As of October 1,
In thousands, except share and per share amounts Reference Adjustment 2005
------------------------------------------------------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents (1) $ 14,550 $ 23,584
Restricted cash, current portion 1,542
Inventories 1,874
Other current assets 902
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 14,550 27,902
Property and equipment, net 7,048
Other assets 447
Deferred financing costs, net 309
Restricted cash, non-current portion 169
Goodwill 18,072
Other intangibles, net 6,570
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 14,550 $ 60,517
==================================================================================================================================
Liabilities, Redeemable Preferred Stock and Shareholders' Deficit:
Liabilities:
Current liabilities:
Cash overdraft $ - $ -
Accounts payable 5,335
Accrued expenses and other current liabilities (4) (5) (2,620) 5,252
Deferred revenue 8,919
Current portion of long term debt (4) (161) 1,000
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities (781) 20,506
Senior debt (net of debt discount of $1.087 million and $1.164 million 8,913
as of October 1, 2005 and June 30, 2005, respectively )
Senior subordinated debt (net of debt discount of $1,176 and $1.234 million ) (4),(6) (12,124) -
as of October 1, 2005 and June 30, 2005 respectively )
Other long term debt (net of current portion) (4) (5,744) -
Other long term liabilities 9,600
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities (20,649) 39,019
Commitments and contingencies
Redeemable preferred stock
Preferred stock, new series C, cumulative, convertible, redeemable
par value $0.001 (9) 14,241 14,241
Preferred stock, new series D, cumulative, convertible, redeemable
par value $0.001 (1) 14,550 14,550
Shareholders' deficit:
Preferred stock, series A, cumulative, convertible, redeemable, par value $.01 (4) (2,230) -
Preferred stock, series B, cumulative, redeemable, par value $.01 (4) (965) -
Preferred stock, series C, cumulative, convertible, redeemable, par value $.01 (4) (350) -
Preferred stock, series D, cumulative, convertible, redeemable, par value $.01 (4) (8,146) -
Preferred stock, series E, cumulative, convertible, redeemable, par value $.01 (4) - 135
Preferred stock, series G, cumulative, convertible, redeemable, par value $.01 (9) (9,702) -
Preferred stock, series H, cumulative, convertible, redeemable, par value $.01 (8),(9) (4,539) -
Common stock, par value $.001 (4),(8) (62) 44
Additional paid-in capital (1),(2),(3),(4),(7) 30,901 39,552
Accumulated deficit (3),(5),(6),(7) 1,501 (47,024)
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' (deficit)/equity 6,408 (7,293)
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 14,550 $ 60,517
===================================================================================================================================
Adjustments (in thousands):
(1) Adjustment to release funds from escrow and record the issuance of
series D preferred stock as a result of the merger with Trueyou.com.,
net of issuance costs of $750.
(2) Adjustment to record the value of the warrant issued with new Series D
Preferred Stock ($1,295).
(3) Adjustment to record the value of the beneficial conversion feature on
new Series D Preferred Stock ($1,295).
(4) Adjustment to convert Series A Preferred Stock ($2,130), Series B
Preferred Stock ($965), Series C Preferred Stock ($350), Series D
Preferred Stock ($8,146), Senior Subordinated Debt ($13,300), other
long term debt ($5,905), cumulative dividends on Series B Preferred
Stock ($500) and accrued management fees ($1,474) of AAI into new
series B preferred stock and the subsequent conversion into common
stock. Although as of the date of the merger there are not sufficient
shares of common stock authorized into which the AAI seires A, B, C, D
and E preferred stock, common stock, accrued dividends and management
fees could convert, there is a requirement for the Company to amend its
articles of incorporation immediately following the merger so that
these amounts will ultimately be converted. This pro-forma balance
sheet has been prepared to give effect to the ultimate conversion of
all of these amounts into common stock.
(5) Adjustment to record the forfeiture of cumulative dividends on Series A
Preferred Stock ($529), and Series C Preferred Stock ($117).
(6) Adjustment to fully amortize the discount on senior subordinated debt
($1,474).
(7) Adjustment to eliminate the accumulated deficit of TruYou.com
(8) Adjustment to convert the Trueyou.com preferred stock ($100) into
common stock
(9) Adjustment to record the conversion of AAI series G ($9,702) and series
H ($4,539) preferred stock into new series C.
Note: The Company has not estimated the respective fair values for the AAI
series A, B, C, and D preferred stock and the new seried B which was
exchanged for that stock. No effect for any differences between the
fair values of the instruments exchange has been recorded in this
pro-forma balance sheet.
F-69
Advanced Aesthetics, Inc.
Unaudited Pro-Forma Consolidated Statements of Operations
For the three months ended October 1, 2005
Advanced Aesthetics, Inc TrueYou.com Inc
For three months For three months
ended Oct 1, ended Sept 30, Adjustment
In thousands, except share and per share amounts 2005 2005 Reference
-----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Service $ 5,863 $ -
Retail 1,902 -
-----------------------------------------------------------------------------------------------------------------------------------
Total Revenue 7,765 -
-----------------------------------------------------------------------------------------------------------------------------------
Cost of Revenue:
Service 3,388 -
Retail 788 -
-----------------------------------------------------------------------------------------------------------------------------------
Total Cost of Revenue 4,176 -
-----------------------------------------------------------------------------------------------------------------------------------
Gross margin 3,589 -
-----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 7,208 20 (3), (4)
Depreciation and amortization 1,109 1,109
-----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 8,317 20
-----------------------------------------------------------------------------------------------------------------------------------
Operating loss (4,728) (20)
Interest expense (interest income), net 1,004 (0) (1), (2)
-----------------------------------------------------------------------------------------------------------------------------------
Loss before income tax provision (5,732) (20)
Income tax provision (benefit) - -
-----------------------------------------------------------------------------------------------------------------------------------
Net loss (5,732) (20)
-----------------------------------------------------------------------------------------------------------------------------------
Dividends on preferred stock 464 - (5), (6)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (6,196) $ (20)
===================================================================================================================================
Basic and diluted loss per common share: $ (0.67) $ (0.00)
============================================================
Weighted average common shares outstanding, basic and diluted 9,268,609 12,970,515
============================================================
Pro-Forma Consolidated
For the three months
ended Oct 1,
In thousands, except share and per share amounts Adjustment 2005
------------------------------------------------------------------------------------------------------------
Revenues:
Service $ 5,863
Retail 1,902
------------------------------------------------------------------------------------------------------------
Total Revenue - 7,765
------------------------------------------------------------------------------------------------------------
Cost of Revenue:
Service 3,388
Retail 788
------------------------------------------------------------------------------------------------------------
Total Cost of Revenue - 4,176
------------------------------------------------------------------------------------------------------------
Gross margin - 3,589
------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses (217) 7,011
Depreciation and amortization
------------------------------------------------------------------------------------------------------------
Total operating expenses (217) 8,120
------------------------------------------------------------------------------------------------------------
Operating loss 217 (4,531)
Interest expense (interest income), net (264) 740
------------------------------------------------------------------------------------------------------------
Loss before income tax provision 481 (5,271)
Income tax provision (benefit) - -
------------------------------------------------------------------------------------------------------------
Net loss 481 (5,271)
------------------------------------------------------------------------------------------------------------
Dividends on preferred stock 13 477
------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ 468 $(5,748)
============================================================================================================
Basic and diluted loss per common share: $ - $ (0.02)
=========================================
Weighted average common shares outstanding, basic and diluted - 294,235,203
=========================================
Adjustments (in thousands):
(1) To eliminate interest expense on L Capital Debt of $57 that was
converted into common stock
(2) To eliminate interest expense on KCO Note Payable of $207 that was
converted into common stock
(3) To eliminate KCO Management fees of $106 that were converted into
common stock
(4) To eliminate L Capital Management fees of $111 that were converted into
common stock.
(5) To eliminate dividends on series A,B and C preferred stock of $140, as
a result of their conversion into common stock.
(6) To record cumulative dividends on the New Series C preferred stock of
$153
F-70
Advanced Aesthetics, Inc.
Unaudited Pro-Forma Consolidated Statements of Operations
For the twelve months ended October 1, 2005
Advanced Aesthetics, Inc TrueYou.com Inc
For the twelve months For the twelve months
ended June 30, ended June 30, Adjustment
In thousands, except share and per share amounts 2005 2005 Reference
---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Service $ 25,731 $ 0
Retail 7,202 -
---------------------------------------------------------------------------------------------------------------------------------
Total Revenue 32,933 0
---------------------------------------------------------------------------------------------------------------------------------
Cost of Revenue:
Service 13,572 -
Retail 2,886 -
---------------------------------------------------------------------------------------------------------------------------------
Total Cost of Revenue 16,458 -
---------------------------------------------------------------------------------------------------------------------------------
Gross margin 16,475 0
---------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 26,837 62 (3), (4)
Depreciation and amortization 3,725 4
---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 30,562 66
---------------------------------------------------------------------------------------------------------------------------------
Operating loss (14,087) (66)
Interest expense (interest income), net 4,026 (23) (1), (2)
---------------------------------------------------------------------------------------------------------------------------------
Loss before income tax provision (18,113) (43)
Income tax provision (benefit) - -
---------------------------------------------------------------------------------------------------------------------------------
Net loss (18,113) $ (43)
Dividends on preferred stock 1,400 - (5), (6)
---------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (19,513) $ (43)
=================================================================================================================================
Basic and diluted loss per common share: $ (2.11) $ (0.00)
==========================================================
Weighted average common shares outstanding, basic and diluted 9,268,609 12,970,515
==========================================================
Pro-Forma Consolidated
For the twelve months
ended June 30,
In thousands, except share and per share amounts Adjustment 2005
-----------------------------------------------------------------------------------------------------------
Revenues:
Service $ 25,731
Retail 7,202
-----------------------------------------------------------------------------------------------------------
Total Revenue - 32,933
-----------------------------------------------------------------------------------------------------------
Cost of Revenue:
Service 13,572
Retail 2,886
-----------------------------------------------------------------------------------------------------------
Total Cost of Revenue - 16,458
-----------------------------------------------------------------------------------------------------------
Gross margin 16,475
-----------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses (870) 26,029
Depreciation and amortization 3,729
-----------------------------------------------------------------------------------------------------------
Total operating expenses (870) 29,758
-----------------------------------------------------------------------------------------------------------
Operating loss 870 (13,283)
Interest expense (interest income), net (975) 3,028
-----------------------------------------------------------------------------------------------------------
Loss before income tax provision 1,845 (16,311)
Income tax provision (benefit) -
-----------------------------------------------------------------------------------------------------------
Net loss 1,845 (16,311)
Dividends on preferred stock 52 1,452
-----------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ 1,793 $ (17,763)
===========================================================================================================
Basic and diluted loss per common share: $ - $ (0.06)
==========================================
Weighted average common shares outstanding, basic and diluted - 294,235,203
==========================================
Adjustments (in thousands):
(1) To eliminate interest expense on L Capital Debt of $231 as a result of
conversion to common stock
(2) To eliminate interest expense on KCO Note Payable of $744 as a result
of conversion to common stock
(3) To eliminate KCO Management fees of $425 as a result of conversion to
common stock
(4) To eliminate L Capital Management fees of $445 as a result of
conversion to common stock
(5) To eliminate dividends on series A,B and C preferred stock of $560, as
a result of their conversion into common stock.
(6) To record cumulative dividends on the New Series C preferred stock of
$612
F-71
515,188,042 Shares
TrueYou.Com, Inc.
Common Stock
PROSPECTUS
[ ], 2006
75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Company in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee.
SEC Registration Fee................................................. $17,640
Printing Costs........................................................ 0
Legal Fees and Expenses............................................... 50,000
Accounting Fees and Expenses.......................................... 20,000
Transfer Agent and Registrar Fees..................................... 0
Miscellaneous ........................................................ 0
Total................................................................. $87,640
-------
Item 14. Indemnification of Directors and Officers.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
the personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) of the General Corporation Law of the State of Delaware, or (iv)
for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that no director shall have any
personal liability to us or to any of our stockholders for monetary damages for
breach of fiduciary duty as a director; provided, however, that this provision
eliminating personal liability of a director shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
us or our stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
section.174 of the General Corporation Law of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit.
Our certificate of incorporation and bylaws also provide that we may
indemnify, to the fullest extent permitted by law, any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was our director or officer,
or is or was serving at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), liability, loss, judgment, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner reasonably believed to be in or not opposed to our best interests, and,
with respect to any criminal action or proceedings, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, upon a plea of
nolo contendere or equivalent shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to our best interests, and, with respect of any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Under Section 145 of the General Corporation Law of the State of Delaware,
in the case of actions by or in the right of Company, we are required to
indemnify any director or officer and may indemnify any other person who was or
is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was our director,
officer, employee, or agent, or is or was serving at our request as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in
II-1
good faith and in a manner he reasonably believed to be in or not opposed to our
best interests and except that no indemnification shall be made in respect of
any claim, issue, or matter as to which such person shall have been adjudged to
be liable to us unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the Court of Chancery or such other court shall deem proper.
Our bylaws also require expenses incurred in defending a civil or criminal
action, suit, or proceeding to be paid by us in advance of the final disposition
of the action, suit, or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee, or agent to repay the amount advanced
if it shall ultimately be determined that he is not entitled to be indemnified
by us under the bylaws.
Item 15. Recent Sales of Unregistered Securities.
On February 14, 2003, the Alan Gelband Company Defined Contribution Pension
Plan & Trust made a loan of $220,000 to TrueYou with interest at a rate of 10%
per annum. As of June 30, 2004 the principal amount of this note with accrued
interest was $250,266. This debt was converted into 2,502,660 shares of Common
Stock at such time. In issuing such shares of Common Stock, TrueYou relied upon
the exemption provided by Section 3(a)(9) of the Securities Act.
During 2004, the Alan Gelband, individually made three separate loans to
TrueYou in the aggregate principal amount of $5,254 with interest at 10%. As of
June 30, 2004 the aggregate principal amount plus accrued interest due under the
three notes was $5,870. Alan Gelband converted this debt into 58,700 shares of
Common Stock at such time. In issuing such shares of Common Stock, TrueYou
relied upon the exemption provided by Section 3(a)(9) of the Securities Act.
On July 1, 2004, the Alan Gelband Company Defined Contribution Pension Plan
and Trust purchased, for $50,000, 1,000 shares of TrueYou's Series A Preferred
Stock convertible into 1,000,000 shares of Common Stock. TrueYou issued these
shares in a transaction exempt from the registration requirements of the
Securities Act under the exemption provided by Section 4(2) thereof.
On July 1, 2004 Mark Bieler purchased, for $50,000, 1,000 shares of
TrueYou's Series A Preferred Stock convertible into 1,000,000 shares of Common
Stock. TrueYou issued these shares in a transaction exempt from the registration
requirements of the Securities Act under the exemption provided by Section 4(2)
thereof.
On December 20, 2005, TrueYou issued to the KAAI Securityholders: (i)
27,926.4689 newly issued shares of Series B Preferred Stock, each of which is
convertible into 279,264,689 shares of TrueYou's Common Stock, (ii) 8,452.0222
newly issued shares of Series C Preferred Stock, each of which is convertible
into 84,520,222 shares of TrueYou's Common Stock, and (iii) newly issued
Warrants to purchase 3,969.0363 shares of Series B Preferred Stock. The Shares
issues to the KAAI Security Holders u
Next Section
Previous Section