As filed with the Securities and Exchange
Commission on November 22, 1999
CIK No. 0001086500
Registration No. 333-78549
______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 4 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HealthandBeautyDirect.com, Inc.
Delaware (State or jurisdiction of incorporation or organization)
5961 (Primary Standard Industrial Classification Code Number)
52-2181967 (I.R.S. Employer Identification No.)
2328 West Joppa Road, Suite 100
Baltimore, MD 21093
(800) 797-5335
(Address and telephone number of principal executive offices and
principal place of business)
Brian M. Fraidin, Chief Executive Officer
HealthandBeautyDirect.com, Inc.
2328 West Joppa Road, Suite 100
Baltimore, MD 21093
(800) 797-5335
(Name, address and telephone of agent for service)
Copies to:
Drew Field
534 Pacific Avenue
San Francisco, CA 94133
(415) 296-9795
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration
statement.
The securities on this form are to be offered on a delayed or
continuous basis
as described in Rule 415 under the Securities Act of 1933.
CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed Amount
each class Amount to be maximum maximum of
of securities registered offering aggregate registration
to be price offering fee
registered per share
_______________________________________________________________________
common stock,
$.01 par value 600,000 $10.00 $6,000,000 --
_______________________________________________________________________
The registrant amends this registration statement on the date or
dates as may be necessary to delay its effective date until the
registrant files a further amendment which specifically states that
this registration statement is effective in accordance with Section
8(a) of the Securities Act of 1933 or until the registration statement
becomes effective on the date the commission, acting in accordance with
Section 8(a), may determine.
April 12, 1999
Mr. Brian M. Fraidin
Chief Executive Officer
Health and Beauty Direct, Inc.
7 West Aylesbury Road, Suite S
Baltimore, Maryland 21093
Re: Listing on Chicago Stock Exchange
Dear Mr. Fraidin:
This notice is to certify that the Chicago Stock Exchange Inc.
("Exchange") has approved the Common Stock ("Issue") of Health
and Beauty Direct, Inc. for listing. This approval and
subsequent admission of the Issue to trading on the Exchange are
subject to the following:
1. Completion and submission of an originally executed
Application for Listing, all required supporting documentation
and payment of appropriate listing fees. Please note that
distribution schedules and a Certificate Attesting to the
Establishment of an Audit Committee are required to be filed
within 90 calendar days of the admission of the Issue to trading
on the Exchange.
2. Submission to the Exchange and the Securities and Exchange
Commission ("SEC") of the appropriate Registration Statement
under the Securities Exchange Act of 1934 (the "1934 Act") and
notice of effectiveness thereof from the SEC.
3. Completion and closure of the Company's initial public
offering (the "Offering") as defined in the draft prospectus
dated March 10, 1999. We understand that the Company anticipates
filing a registration statement under the Securities Act of 1933
and reserve the right to review the Company's qualifications for
listing again based on such filing and subsequent amendments to
such filing, if any.
4. Confirmation of the issuance and distribution, within two
calendar days of the day the Company ceases the sale of stock in
the Offering, of all stock certificates to all persons purchasing
shares of the Issue in the Offering.
5. Receipt by the Exchange, prior to admission to trading, of a
representation from the Company that a CUSIP number identifying
the Issue has been included in the file of eligible securities
maintained by a securities depository (namely, Depository Trust
Company) registered as a clearing agency under Section 17A of the
1934 Act.
6. Confirmation that, after closure of the Offering, the
proceeds of the Offering are sufficient to cause the Company's
Net Tangible Assets ("NTA," as defined in Exchange Rules, Article
XXVIII, Rule 1(b)(iv)) to meet or exceed the Exchange's Tier II
NTA requirement of $2,000,000.
7. Confirmation that, as a result of the Offering, there are at
least 250,000 publicly held shares (as defined in Exchange Rules,
Article XXVIII, Rule 1(b)(v)) of the Issue outstanding.
8. Receipt, within 90 calendar days of the admission of the
Issue to trading on the Exchange, of certified Schedules of
Distribution indicating that there are at least 500 public
beneficial holders of the Issue. If the Company is unable to
demonstrate that there are at least 500 public beneficial holders
of the Issue, the Issue may be suspended from trading.
9. Confirmation that, within 90 calendar days of the admission
of the Issue to trading on the Exchange, the Company has a
minimum of two independent directors (as defined in the
Exchange's Rules, Article XXVIII, Rule 21(2)) on its Board of
Directors.
10. Receipt, within 90 calendar days of the admission of the
Issue to trading on the Exchange, of a certificate attesting to
the establishment of an Audit Committee. A majority of the
members of such Audit Committee must be independent directors as
defined in the Exchange's Rules, Article XXVIII, Rule 21(2).
Please be advised that, while the Company is listed, the
Exchange, pursuant to its Tier II voting rights policy, must
review any action by the Company, that may affect the voting
rights of the holders of the Issue.
Failure to comply with the above, as well failure to comply with
all other Exchange Rules, may prevent the Exchange from admitting
the Issue to trading, or, if the Issue is admitted to trading,
may result in suspension of the Issue from trading and the
commencement of a delisting proceeding. A copy of Exchange
Rules, Article XXVIII is enclosed for your reference.
Rule 104 of Regulation M promulgated under the Securities
Exchange Act of 1934 governs stabilizing and other activities in
connection with an offering of the security. Please note that
the rule requires that the Exchange be notified prior to certain
transactions in Health and Beauty Direct, Inc's stock. In
particular, any person displaying or transmitting a bid that the
person knows is for the purpose of stabilizing must provide prior
notice to the market on which such stabilizing will be effected.
In addition, any person effecting a syndicate covering
transaction or imposing a penalty bid must provide prior notice
to the self-regulatory organization with direct authority over
the principal market for Health and Beauty Direct, Inc.'s stock.
Please do not hesitate to contact me at (312) 663-2423 with any
question or concern you may have.
Sincerely,
S/Craig A. Gray
Supervisor, Listing Department
Enclosure
cc: Mr. Drew Field, 534 Pacific Avenue, San Francisco,
California 94133
Mr. Paul O'Kelly (without enclosure)
Ms. Susan Schwartzwald (without enclosure)
Subject to completion, dated November 22, 1999
600,000 SHARES
logo - HBD initials with an arrow symbol and the name of the company
spelled out]
HealthandBeautyDirect.com, Inc.
COMMON STOCK
________________
This is the initial public offering of shares of our common stock. The
offering is on a best efforts minimum/maximum basis. All amounts
received will be held in a bank escrow account until the minimum of
200,000 shares is sold. If we have not sold at least 200,000 shares
when the offering ends, all amounts paid will be promptly refunded in
full, with interest, and without any deduction for expenses. The
offering will end when all 600,000 shares are sold or earlier, if we
decide to close it, but no later than June 30, 2000.
The shares have been approved for listing on the Chicago Stock
Exchange after completion of this offering.
This investment involves a high degree of risk. See "Risk factors" on
pages 3-4.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities; or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
________________
Estimated
Price to selling Proceeds to
public commissions HBD
Per share $10.00 $1.00 $9.00
Total minimum
(200,000 shares $2,000,000 $200,000 $1,800,000
Total maximum
(600,000 shares) $6,000,000 $600,000 $5,400,000
The date of this prospectus is November 22, 1999
Outside back cover
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any jurisdiction in
which such offer or solicitation is unlawful.
TABLE OF CONTENTS
Page
Prospectus summary 2
Risk factors 3
Use of proceeds 5
Dividend policy 6
Dilution 6
Management's discussion & analysis of financial
condition and results of operations 7
Business 11
Management 17
Certain transactions 19
Principal shareholders 20
Description of capital stock 21
Shares eligible for future resale 23
Plan of distribution 23
Legal matters 24
Experts 25
Additional information 25
Index to financial statements F-1
______________________
Until _(90 days after date of prospectus)_, 1999 all dealers effecting
transactions in the registered securities, whether or not participating
in this distribution, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUMMARY
OUR BUSINESS
We market health and beauty-related products through direct to consumer
channels of distribution such as television, direct mail, the Internet
and radio. Our business has been organized as a partnership since
1994. Upon sale of the minimum number of shares in this offering, we
will change to the corporate form and terminate the partnership. We
plan to use the proceeds of this offering to expand our direct to
consumer marketing efforts, Internet web site, regional service centers
and product lines. The terms "HealthandBeautyDirect.com", "HBD", "we"
or "our" mean the corporation and its predecessor partnership.
THIS OFFERING OF SHARES
We are offering shares of our common stock directly to our customers
and others who have relationships with our management and current
owners. We may also offer shares through securities broker-dealers to
their customers. There are no commitments by anyone to purchase any
number of shares.
Minimum number to be sold, or amounts paid
will be refunded 200,000 shares
Maximum shares of common stock offered 600,000 shares
Common stock to be outstanding after the offering
If minimum is sold 8,100,000 shares
If maximum is sold 8,500,000 shares
Minimum investment is 50 shares at $10 per share or $500. All payments
for shares will be deposited into an escrow account at Bank of America,
until we have sold 200,000 shares. If we have not sold the minimum
number of shares by the termination date, all amounts paid will be
promptly refunded in full, with interest, and without any deduction for
expenses. The offering will end upon the earlier of: the sale of the
maximum of 600,000 shares, June 30, 2000, or the earlier date on which
we decide to close the offering. We reserve the right to reject any
subscription in full or in part.
HOW TO CONTACT US
Our offices are located at 2328 West Joppa Road, Suite 100, Baltimore,
MD 21093. Our telephone number is (800) 797-5335, our fax number is
(800) 410-5858 and our web site address is
www.healthandbeautydirect.com.
RISK FACTORS
OUR EXPANSION STRATEGY WILL ADD COSTS BEFORE WE RECEIVE ANY INCREASE IN
INCOME. IF WE FAIL TO GENERATE SUFFICIENT SALES TO JUSTIFY THESE
EXPENDITURES, WE MAY NOT CONTINUE TO BE PROFITABLE.
We are increasing our costs by adding employees and equipment to handle
increased volume of sales and more products. Our continued growth and
profitability will depend upon our ability to implement our business
strategy and successfully expand our channels of distribution. If we
are unable to execute the necessary strategic partnerships and
acquisitions, we may be unable to generate sales sufficient to cover
our expansion costs. These elements are described later in this
prospectus, under the caption "Business: General
business strategy."
OUR WEB SITE MAY NOT ACHIEVE THE BRAND NAME RECOGNITION NECESSARY FOR
OUR E-COMMERCE BUSINESS TO BECOME SUCCESSFUL IN THE HIGHLY COMPETITIVE
HEALTH AND BEAUTY-RELATED MARKET.
We believe that broad recognition and a favorable consumer perception
of the HealthandBeautyDirect.com brand are essential to our future
success. We face a significant competitive challenge from other
companies in the health and beauty-related markets. If we fail to
attract and retain a large customer base and our competitors succeed in
doing so, we will not be able to grow our business.
WE HAVE A LIMITED HISTORY WITH OUR SERVICE CENTERS AND WE MAY NOT BE
ABLE TO OPERATE NEW SERVICE CENTERS PROFITABLY.
We need to effectively execute our plan to open service centers and
develop a direct sales network in new geographic markets. We cannot be
certain that our service center model will be successful or that we
will be able to meet the challenges connected with their operation.
OUR INCOME DEPENDS HEAVILY ON OUR PRINCIPAL PRODUCT AND ITS CREATOR.
Our revenues have been dependent upon the marketing of a limited number
of products and services. A significant portion of our revenues and
net income to date has been from distribution of the Natural Cover
cosmetic products. Our revenues and net income in the short term will
continue to be closely tied to the success of this product line. The
marketing strategy for the Linda Seidel Natural Cover product line is
to emphasize the performance qualities of the foundation system and
Linda Seidel's public image as a credible and authoritative source on
the use of cosmetics. Product liability claims or unfavorable press
about Natural Cover and Ms. Seidel, or the loss of her services would
have a material adverse effect on HBD.
WE DO NOT MAINTAIN LONG-TERM CONTRACTS WITH ANY OF OUR DIRECT MARKETING
SERVICE CLIENTS AND WE MAY NOT BE ABLE TO ENTER INTO NEW RELATIONSHIPS
IN THE FUTURE.
We anticipate that our results of operations in any given period will
continue to depend to a significant extent upon revenues from a small
number of clients. Achievement of our long-term goals will require us
to obtain additional clients on an ongoing basis. The loss of one or
more clients or our inability to enter into new client relationships
during a particular period could have a material adverse effect on our
business, financial condition and results of operations.
IF OUR DIRECT MARKETING CAMPAIGNS ARE UNSUCCESSFUL, WE MAY NOT BE ABLE
TO RECOUP ADVANCE EXPENDITURES AND WE MAY SUFFER SIGNIFICANT LOSSES.
Most businesses obtain products and services on thirty or sixty day
terms. Direct marketing businesses must pay in advance for services
such as production of marketing materials and media purchases for the
Internet and television. These expenditures cannot be adjusted based
upon actual performance of the marketing campaigns. In addition,
direct marketing operations involve significant expenditures for the
purchase of merchandise and the expenses associated with our order
processing, fulfillment and management information systems. If our
direct marketing campaigns are unsuccessful, we may not be able to
recoup these advance expenditures, which could have a material adverse
effect on our business, financial condition and results of operations.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR SUPPLIERS AND THEY COULD
SUDDENLY STOP SERVING US OR CHARGE US HIGHER RATES.
Our operations rely on outside manufacturers, telemarketing companies,
credit card processing firms, marketing professionals, fulfillment
houses and delivery companies. We have no long-term contractual
assurances of continued supply, pricing or access to these suppliers.
Our existing relationships are based on short-term contracts that may
be terminated by either party with little or no notice. In addition,
we must compete with other companies for the services provided by these
vendors. Any interruption in services from these suppliers, could have
a material adverse effect on our business, operating results and
financial condition.
OUR LIBERAL MERCHANDISE RETURN POLICIES AND EXPANSION PLANS COULD CAUSE
SUCH HIGH RETURN RATES THAT WE COULD LOSE OUR CREDIT CARD PROCESSORS.
Part of our marketing and advertising strategy focuses on providing
liberal merchandise return policies of up to sixty days during which
customers may return products and obtain an unconditional full refund
of the purchase price less shipping and handling. Credit card
processing companies provide customers with up to six months to request
and receive a credit card charge back for their purchases. As we
expand our revenues through new channels of distribution and
new product introductions, our return rates could increase. Our
currentreserves for returns and credit card charge backs could become
inadequate to cover these claims. In order to continue accepting
electronic payment by credit card, we must maintain a merchant account
with a bank or finance company. Maintaining a merchant account is
dependent upon our credit rating and percentage of customer
credit card charge backs. The loss of our merchant account, and the
inability to secure another merchant account, would have a material
adverse effect on our business and financial condition.
BECAUSE WE MARKET HEALTH AND BEAUTY-RELATED PRODUCTS, WE RISK CONSUMER
CLAIMS FOR HARMFUL EFFECTS, WHICH OUR INSURANCE MAY NOT COVER.
Selling health and beauty-related products carries the risk of consumer
claims for harmful effects. Though not regulated or required by any
government agency, the health and beauty products we sell have been
appropriately tested and we make ingredient lists available to
customers in literature and on labels. In addition, we maintain
general liability and business interruption insurance.
However, the loss of insurance coverage, or claims in excess of the
insurance coverage, could have a material adverse effect on our
business, operating results and financial condition.
WE MAY IDENTIFY INTERNAL SYSTEMS THAT PRESENT A YEAR 2000 COMPLIANCE
RISK, WHICH COULD DISRUPT OUR BUSINESS.
The Year 2000 issue is the result of computer programs written using
year identifiers, consisting of two digits, rather than four. Use of
two digits to identify years may cause a computer operating system to
recognize a date using "00" as the year 1900, rather than the year
2000. The year 2000 issue could result in system failures or
miscalculations causing disruption to the operation of many businesses.
We have formed a Year 2000 Project Group to identify and
correct potential compliance problems. At this time, testing has been
completed and all of our internal systems are Year 2000 compliant.
However, as we continue to monitor and analyze our internal systems
through the year end, we may identify a Year 2000 risk that may have a
material adverse effect on our business, financial condition and
results of operations.
WE MAY IDENTIFY THIRD PARTY SYSTEMS THAT PRESENT A YEAR 2000 COMPLIANCE
RISK, WHICH COULD DISRUPT OUR BUSINESS.
Since we rely upon governmental agencies, telecommunication service
companies, utility companies and other service providers outside of our
control and for whom there are no secondary providers, we cannot
guarantee that consumers will be able to visit our web site without
serious disruptions arising from the Year 2000 problem. Additionally,
the Internet could face serious disruptions arising from the Year 2000
problem. Given the pervasive nature of the Year 2000 problem, we cannot
guarantee that disruptions in other industries and market segments will
not adversely affect our business. Any year 2000 compliance problem
involving HBD, our current or any future strategic marketing partners,
our vendors or our users could have a material adverse effect on our
business, financial condition and results of operations.
We have received assurances from many of our suppliers that they are or
will become Year 2000 compliant in a timely manner. In the event that
any of our major suppliers fails to become Year 2000 compliant, we have
developed a contingency plan to address the issues that may arise as a
result. The plan includes adding extra inventory of the products we
sell and engaging multiple vendors for services such as credit card
processing and telemarketing. We will continue to monitor and test our
systems as the year end approaches.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET
TANGIBLE BOOK VALUE OF YOUR SHARES AND PAY A HIGHER PRICE THAN EXISTING
SHAREOWNERS.
At the public offering price of $10.00, the dilution in net tangible
book value will be $9.60, or 96%, if the minimum number of shares is
sold in this offering and $9.19, or 91.9%, if the maximum is sold.
Please see the "Dilution" section for more detailed information on
dilution resulting from this offering.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SUGGESTED BY OUR
FORWARD-LOOKING STATEMENTS.
The statements contained in this Prospectus that are not purely
historical are forward-looking statements. They include our
expectations, hopes, beliefs, intentions or strategies for the future.
Forward-looking statements often use words like "expects," "will,"
"may," "anticipates," "believes," "intends" and "seeks." Examples
include statements about increasing our channels of distribution and
developing new products.
HOW WE INTEND TO USE THE PROCEEDS OF THIS OFFERING
We estimate that the net proceeds to HBD will be $1,615,000 from the
sale of the minimum number of shares, $3,415,000 from sale of the
midpoint number of shares, and $5,215,000 from sale of the maximum
number of shares, after deducting estimated offering expenses and commissions
payable by HBD. The table below shows how we intend to use
the estimated net proceeds from this offering, for the minimum, the
maximum and a selected mid-point of sales.
Approximate Amount and Percentage
Category Description 200,000 shares 250,000 shares 500,000 shares
Direct Response
Marketing (1) $600,000 37.2% $1,200,000 35.1% $1,500,000 28.8%
Web Site Development(2) $500,000 31.0% $750,000 22.0% $1,000,000 19.2%
Regional Service
Centers (3) $250,000 15.5% $500,000 14.6% $ 750,000 14.4%
Product Line
Expansion(4) $165,000 10.2% $300,000 8.8% $ 650,000 12.5%
Management Personnel(5) $100,000 6.2% $300,000 8.8% $ 600,000 11.5%
Capital Equipment(6) $ 0 00.0% $200,000 5.9% $ 400,000 7.7%
Inventory(7) $ 0 00.0% $165,000 4.8% $ 315,000 6.0%
--------- ----- -------- ------ --------- -----
Total Use of
Net Proceeds $1,615,000 100.0% $3,415,000 100.0% $5,215,000 100.0%
The categories for expenditure are described as follows:
1. Direct response marketing is our single largest expenditure and
includes expenses related to production of print, television, audio and
video marketing materials, media buying and the distribution costs
associated with direct to consumer marketing campaigns.
2. Web site implementation includes expenditures for graphic design,
technical design, content development, hosting, marketing and
maintenance. In addition, it is anticipated that funds will be
required to bring the computer and operational systems for new clients'
products on-line for distribution.
3. Expansion of our regional service centers will require expenditures
on new site development, physical location build-out, office furniture,
computer equipment, personnel recruitment, training, marketing
materials and initial advertising campaigns.
4. Product line development and expansion for distribution through our
web site, service centers and direct response marketing efforts will be
required to provide our customers with a comprehensive selection of
products and services.
5. Additional management personnel will be hired to oversee the
operations of HBD's expanded marketing efforts in such areas as our web
site, regional service centers and new product expansion.
6. The introduction and expansion of our channels of distribution will
involve continued capital investment in areas such as
telecommunications, computer equipment and design systems.
7. The introduction of new products will require additional investment
in inventory of these products at our fulfillment centers for timely
and efficient delivery to our customers.
From time to time, we expect to evaluate possible acquisitions of or
investments in businesses, products and technologies that are
complementary to those of HBD, for which a portion of the net proceeds
of this offering may be used. We are routinely contacted by product
developers, and in such capacity evaluate new product proposals, and we
make new business presentations as part of ordinary course of business.
We presently have no commitments or understandings for any such
acquisitions or investments, and are not presently engaged in any
serious negotiations. No portion of the net proceeds has been allocated
for any specific acquisition or investment. Our future growth and
profitability could be affected by decisions on any acquisitions of or
investments in businesses, products and technologies. Management will
be able to make those decisions without a vote by the shareholders.
We believe that the proceeds of this offering, together with projected
cash flow from operations and available cash resources, including our
Bank of America line of credit, will be sufficient to satisfy our cash
requirements for at least 12 months following this offering. We
believe that the effect of raising less than the maximum amount in this
offering would be to limit the rate at which we might invest for
expansion. If, we are unable to implement our strategy as currently
projected for reasons such as changes in market conditions, competitive
factors, unanticipated expenses, or operating difficulties, we may
reallocate a portion of the proceeds within the categories listed
above. For example, if our direct response marketing is more effective
than projected, we may reduce the amount to be spent for direct
response marketing and reallocate it to building inventory to handle
the resulting higher sales volume. And while we may also seek
additional financing, it is possible that financing may not be
available on commercially reasonable terms, or at all.
We will invest the proceeds not immediately required for the purposes
described above principally in United States government securities,
short-term certificates of deposit, money market funds or other short-
term interest-bearing investments.
DIVIDEND POLICY
We do not expect to pay any cash dividends on the common stock in the
foreseeable future. The board of directors currently plans to retain
earnings for the development and expansion of our business. Any future
determination as to the payment of dividends will be at the discretion
of the board of directors and will depend on a number of factors
including future earnings, capital requirements and financial
condition.
Through December 31, 1998, HBD was treated for federal and state income
tax purposes as a general partnership under the Internal Revenue Code.
As a result, our earnings were subject to taxation at the partner
rather than the corporate level for federal and state income tax
purposes.
DILUTION
On September 30, 1999, HBD had a net tangible book value of $1,661,481
or $0.21 per share. The net tangible book value per share is equal to
our total tangible assets, less total liabilities and divided by total
number of shares of common stock outstanding. After giving effect to
the sale of the minimum and maximum number of shares being offered and
the application of the estimated net proceeds, HBD's pro forma net
tangible book value as of September 30, 1999 would have been $3,276,481
after sale of the minimum and $6,876,481 after sale of the maximum
number of shares, or $0.40 per share and $0.81 per share. This
represents an immediate increase in net tangible book value to present
owners of $0.19 per share at the minimum and $0.60 per share at the
maximum. It represents an immediate dilution to new investors
purchasing shares in this offering of $9.60 per share at the minimum
and $9.19 per share at the maximum. The following table illustrates
the per share dilution in net tangible book value per share to new
investors:
Minimum Maximum
(200,000 shares) (600,000 shares)
Public offering price per share $10.00 $10.00
Net tangible book value per share
On September 30, 1999 $0.21 $0.21
Increase in net tangible book
value per share attributed to
present owners $0.19 $0.60
Pro forma net tangible book value per share
as of September 30, 1999 $0.40 $0.81
Net tangible book value dilution per share
to new investors $9.60 $9.19
This table shows what the present owners paid for their ownership of
the business in 1994 and 1995, compared to the price of shares in this
offering, assuming that the minimum number of shares are sold in this
offering:
Shares owned Percent Amounts paid Percent
Price/share
Present owners 7,900,000 97.5% $1,661,481 45.4% $ 0.21
New investors 200,000 2.5% $2,000,000 54.6% $10.00
The following table shows the same information, assuming that a
midpoint number of shares are sold in this offering:
Shares owned Percent Amounts paid Percent
Price/share
Present owners 7,900,000 95.2% $1,661,481 29.3% $ 0.21
New investors 400,000 4.8% $4,000,000 70.7% $10.00
The following table shows the same information, assuming that the
maximum number of shares are sold in this offering:
Shares owned Percent Amounts paid Percent
Price/share
Present owners 7,900,000 92.9% $1,661,481 21.7% $ 0.21
New investors 600,000 7.1% $6,000,000 78.3% $10.00
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
HBD provides direct marketing services for specialty health and beauty-
related products. Since our inception, we have focused our efforts on
developing a direct response operating infrastructure and marketing
capabilities. These capabilities have enabled us to market our
principal products under the Linda Seidel Natural Cover brand name as
well as offer similar direct response marketing services to third party
clients. In addition, we have begun to expand our multiple direct
response channels of distribution. We have experienced an increase in
net sales from $7.69 million in 1997 to $9.55 million in 1998, an
increase of 24%. During the first nine months of 1999, we experienced
a 5% increase in net sales to $7.62 million from $7.24 for the first
nine months of 1998.
We have invested significant resources in terms of capital and senior
management time in developing our direct response infrastructure
including upgrading our proprietary management information systems to
support our customer service and fulfillment departments, enhanced
telecommunications equipment, media buying capabilities and
streamlining operating facilities to handle growth in net sales. This
integrated operating infrastructure enables us to significantly
influence the execution of our marketing strategy, advertising
expenditures and fulfillment of customer purchases, while maintaining
valuable direct customer relationships.
Our net sales are generated through use of direct response advertising
techniques to market our products or the products of our clients. As
we have expanded our product lines and client base, we believe we have
been able to leverage our operating infrastructure and marketing
capabilities. We are executing a phased expansion of our channels of
distribution, including television, the Internet, direct mail, medical
professional network, and regional service centers.
Our marketing strategy has been to reduce HBD's reliance on any one
product or any one channel of distribution. In 1997, purchases of
Linda Seidel's Natural Cover products directly from television
accounted for approximately 68% of net sales, purchases of Linda Seidel
Natural Cover products from other channels of distribution such as
medical offices and reorder customers accounted for approximately 10%
of net sales and direct response media sales and services to
third party clients accounted for approximately 22% of net sales. This
diversification of net sales continued during 1998 with purchases from
television of Linda Seidel's Natural Cover products accounting for
approximately 41% of net sales, purchases of Linda Seidel Natural Cover
products from other channels of distribution accounting for
approximately 12% of net sales and direct response media sales and
services to third party clients accounting for approximately 47% of net
sales.
The prevailing market conditions, in addition to the successful
development and testing of our marketing materials and those of our
clients, have caused the volume and timing of our direct response
advertising efforts to vary. As a result, our financial results have
fluctuated significantly from quarter-to-quarter and year-to-year, and
may continue to do so in the future.
We generally recognize revenues on product purchases when they are
shipped to customers and on direct response media sales and services
when they are provided to clients. We have created a reserve for
product refunds and bad debts associated with product sales and credit
card receivables based on historical statistical trends. Third party
clients prepay for direct response media sales and services. HBD
accounts for these prepayments as a current liability until
the services are provided. Our gross profit margin has fluctuated from
year-to-year based on a combination of changes in the cost of goods
percentage associated with our product mix, development of various
channels of distribution, increased revenues from direct response media
sales and services to clients and economies of scale achieved from our
vendors.
We capitalize the production costs for development of our direct
response marketing materials. At December 31, 1997, we had unamortized
production costs associated with direct response marketing materials of
$338,449. There were unamortized production costs associated with
direct response marketing materials of $453,560 at December 31, 1998.
At September 30, 1999, we had unamortized production costs for direct
response marketing materials of $482,864. These costs are being
amortized over their expected useful life based on management's
current estimates.We expense direct response advertising costs in
proportion to the total future economic benefits directly attributable
and traceable to those costs. For the year ending 1997, we expensed
$2,367,232 and capitalized $256,927 of direct response advertising
costs associated with the Linda Seidel Natural Cover product line. For
the year ending 1998, we expensed $1,924,877 and capitalized $393,379
of direct response advertising costs associated with the Linda
Seidel Natural Cover product line. Capitalized direct response
advertising costs are being amortized over their estimated future
economic benefits, based on management's current estimates.
Since inception, we have operated as a general partnership, and as a
result, have not been subject to federal or state income taxes. Upon
the transfer of the assets and liabilities of the partnership, we will
become subject to federal and state income taxes. HBD is the successor
to the business operated by Transforming Cosmetics, a partnership. The
pro forma effect of the transfer of Transforming Cosmetics, are
organization of entities under common control, will not be materially
different than the September 30, 1999 historical financial
statements.
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, major line items
from HBD's statements of income as a percentage of net sales. Any
trends reflected in the following table may not be indicative of future
results.
Year ended Nine months ended
December 31, September 30
1997 1998 1998 1999
Net sales................ 100.0% 100.0% 100.0% 100.0%
Cost of sales............ 73.3 77.8 78.7 84.6
-------- -------- ------- -------
Gross profit............. 26.7 22.2 21.3 15.4
Marketing and selling
expenses............... 13.1 9.9 10.3 6.1
General and
administrative expenses... ..9.3 6.0 6.5 6.6
------- ------- ------- ------
Income from continuing
operations..... 4.4 6.3 4.4 2.7
Non-operating, expense
income, net........ (0.1) 0.1 0.1 0.1
-------- ----- ------- -------
Net Income before taxes 4.3% 6.4% 4.5% 2.7%
------- ------ ------ ------
COMPARISON OF 9 MONTHS ENDING SEPTEMBER 30, 1999 AND SEPTEMBER 30,
1998
Net sales. Net sales increased approximately 5% to $7.62 million for
the nine months ended September 30, 1999 from $7.24 million for the
nine months ended September 30, 1998. Net sales increased due to
growth in direct response media sales and services to third party
clients. Net sales are computed by deducting the product returns from
the gross sales.
Gross profit. Gross profit decreased 24% to $1.17 million for the nine
months ended September 30, 1999 from $1.54 million for the nine months
ended September 30, 1998. As a percentage of net sales, gross profit
declined to 15.4% for the nine months ended September 30, 1999 from
21.3% for the nine months ended September 30, 1998. The decrease in
gross profit dollars and gross profit as a percentage of net sales is
due to both an increase in amortization and depreciation charges and an
increase in net sales from direct response media sales and services,
which have a lower gross profit percentage than our product sales.
Marketing and selling expenses. Marketing and selling expenses
decreased 63% to $0.47 million for the nine months ended September 30,
1999 from $0.75 million for the nine months ended September 30, 1998.
The decrease in marketing and selling expenses is due to a reduction in
telemarketing fees, credit card processing charges and postage
associated with a lower volume of introductory product kits sold during
the first nine months of 1999 than were sold during the
same period of 1998. As a percentage of net sales, marketing and
selling expenses decreased to 6.1% from 10.3%.
General and administrative expenses. General and administrative expenses
increased $31,776 or 7% to $0.51 million for the nine months ended September
30, 1999 from $0.35 million for the nine months ended September 30, 1998.
As a percentage of net sales, general and administrative expenses increased
to 6.6% for the nine months ended September 30, 1999 from 6.5% for the
nine months ended September 30, 1998.
Other non-operating items. Non-operating items accounted for
approximately 0.1% income for the nine months ended September 30, 1998
and approximately 0.1% income for the nine months ended September 30,
1998. The non-operating items did not have a significant effect on us
during either nine-month period.
Provision for income taxes. During the first nine months of 1999 and
1998, we operated as a general partnership and as a result were not
subject to federal or state income taxes.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Net sales. Net sales increased 24% to $9.55 million in the year ended
December 31, 1998 from $7.69 million in the year ended December 31,
1997. Net sales increased primarily due to growth in direct response
media sales and services to third party clients to approximately
$4,300,000 in 1998 from approximately $1,700,000 in 1997. Net sales are
computed by deducting the product returns from the gross sales.
Gross profit. Gross profit increased 4% to $2.14 million in 1998 from
$2.06 million in 1997. As a percentage of net sales, gross profit
declined to 22.2% in 1998 from 26.7% in 1997. The increase in gross
profit dollars is due to higher net sales. The decrease in gross
profit as a percentage of net sales is primarily due to the increase in
net sales from direct response media sales and services which have a
lower gross profit percentage than HBD's product sales.
Marketing and selling expenses. Marketing and selling expenses
decreased 5.8% to $0.95 million in 1998 from $1.01 million in 1997.
The decrease in marketing and selling expenses is due to a reduction in
bad debt expense, telemarketing fees, credit card processing charges
and postage associated with a lower volume of higher priced
introductory product kits sold during 1998 than were sold during 1997.
As a percentage of net sales, marketing and selling expenses
decreased to 9.9% in 1998 from 13.1% in 1997 due to the increase in net
sales in 1998.
General and administrative expenses. General and administrative
expenses decreased $142,133 or 24.9% to $0.57 million in 1998 from
$0.71 million in 1997. As a percentage of net sales, general and
administrative expenses decreased to 6.0% in 1998 from 9.3% in 1997
reflecting the economies of scale of our operating infrastructure
associated with the our higher net sales in 1998.
Other non-operating items. Non-operating items accounted for
approximately 0.1% income in 1998 and approximately 0.1% expense in
1997. The non-operating items did not have a significant effect on us
in either year ending 1997 or year ending 1998.
Provision for income taxes. During 1998 and 1997 HBD was operated as a
general partnership and as a result was not subject to federal or state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have met our operating and cash requirements
through funds generated from operations, vendor credit terms, a line of
credit from Bank of America and Venture Media Limited Partnership's
initial investment. We had cash and cash equivalents of $291,759 as of
September 30, 1999, $634,108 as of December 31, 1998 and $226,956 as of
December 31, 1997.
Net cash provided by operating activities in the year ended December
31, 1998 was $1.4 million, consisting primarily of net income adjusted
for noncash charges related to depreciation, amortization and provision
for bad debts, decreases in accounts receivable, prepaid expenses and
deposits, and an increase in advanced client media deposits, offset in
part by a reduction in accounts payable, accrued expenses, due to
affiliates, and the reserve for sales refunds and an increase in
inventory. At year ended December 31, 1998 we received advanced client
media deposits of $541,983 for direct response media sales and
services to be provided in January 1999 which were included in the cash
balance and accounted for as a current liability. Net cash provided by
operating activities in the year ended December 31, 1997 was $496,292,
consisting primarily of net income adjusted for noncash charges related
to depreciation, amortization and provision for bad debts, a decrease
in deposits, a net increase in current liabilities and an increase in
the reserve for sales refunds, offset by increases in accounts
receivable, inventory and prepaid expenses.Cash used for investment in
the production of marketing materials, development of management
information systems, purchases of direct response advertising, disposal
of fixed assets and expansion of property, plant and equipment
was $671,058 in 1998 and $626,947 in 1997. We plan to continue to
invest significant amounts on these various long-term assets as
necessary to expand our net sales.
Cash advanced to employees/affiliates for the year ended December 31,
1998 was $61,113, compared to cash received from employees/affiliates
for the year ended December 31, 1997 of $474,230. The amounts received
during 1997 from employees/affiliates primarily consisted of cash held
in bank accounts and credit card processing facilities in the name of
the general partner, Venture Media Limited Partnership, which were
changed during 1997 into HBD's name.
We believe that our cash on hand, together with cash generated by
operations and the net proceeds of this offering, will be sufficient to
meet our capital requirements through the end of the third quarter of
2000. The amount and timing of our future capital requirements will
depend on numerous factors including, without limitation, the costs and
timing of new product development and introduction, development and
expansion of our web site, potential strategic acquisitions or joint
ventures and the success of HBD's marketing, sales and distribution
efforts. As of December 31, 1997, we had a secured $500,000 revolving
inventory and receivable credit line at Bank of America. As of
December 31, 1998, the credit line had been increased to $1,000,000.
As of the date of this offering, the bank line of credit has been
increased to $2,000,000 and has never been accessed since its
inception. There can be no assurance that if additional funds are
required they will be available to HBD on favorable terms, if at all.
INFLATION
We do not believe that inflation, which has been limited for our entire
operating history, has had a material effect to date on our net sales
or results of operations.
SEASONALITY
We do not believe that seasonality has had a material effect to date on
our net sales or results of operations. Seasonality may have an
influence on our net sales or results of operation in the future
because we may provide our direct marketing services to clients whose
products or services have a seasonal nature.
YEAR 2000 COMPLIANCE
During 1998, we formed a Year 2000 Project Group to identify and
address Year 2000 compliance matters. Our systems have all passed the
initial testing and a contingency plan has been developed to cover
possible vendor shortages. System evaluation, hardware and software
upgrades and the development of the contingency plan have cost
approximately $60,000 to date. By year end, a total of $75,000 in
management time and resources may be spent to ensure that our
internal systems and those of key vendors will make a smooth transition
to the Year 2000.
BUSINESS
We market health and beauty-related products through direct to consumer
channels of distribution such as television, direct mail, the Internet
and radio. Our revenues are generated from sales of products that we
own and by providing direct to consumer marketing services for our
clients' products. Our business includes developing marketing
campaigns, purchasing direct response advertising and handling product
fulfillment.
BACKGROUND OF THE BUSINESS
We started as a partnership in April of 1994, under the name
Transforming Cosmetics. HealthandBeautyDirect.com, Inc. is a Delaware
corporation formed on March 18, 1999 as a more suitable form of public
ownership than the current partnership. After the minimum number of
shares is sold in this offering, all of the assets and liabilities of
Transforming Cosmetics will be transferred to HBD in exchange for
7,900,000 shares. All of these shares will be distributed to the
partners of Transforming Cosmetics, including Venture Media
Limited Partnership, who will distribute shares to its limited partners.
Transforming Cosmetics will not continue to exist after the transfer.
INDUSTRY OVERVIEW
In recent years, retailing in the United States has been rapidly
shifting to non-store retail sales or "direct to consumer sales,"
through such media as direct mail catalogs, television, home shopping
channels, infomercials, and, recently, the Internet. In particular, the
Internet has experienced unprecedented growth in recent years and this
growth is expected to continue. According to the Boston Consulting
Group, on-line revenues generated by North American Retailers totaled
$14.9 billion in 1998 and are expected to exceed $36 billion in 1999.
And, according to the International Data Corporation, the number of
people who make purchases over the Web will increase from 31 million
in 1998 to more than 183 million in 2003.
These are the categories of products that we expect to market through
our multiple direct to consumer channels of distribution:
- - Beauty and Fashion which includes cosmetics, bath & body, skin care,
hair, fragrances, nails, etc.;
- - Exercise and Fitness which includes equipment, videos, health clubs,
etc.;
- - Diet and Nutrition which includes vitamins, supplements, diet
programs, etc.;
- - Cosmetic Surgery which includes surgery for the face, eyes, neck,
hair, eyes, body, etc.; and
- - Health and Pharmacy which includes prescription/non-prescription
medicine, personal care, etc.
COMPETITION
We specifically compete through use of direct marketing techniques in
the health and beauty-related industry with various products that we
market and distribute. The health and beauty-related industry is
fragmented and highly competitive. Participants in the industry compete
primarily on price, quality, access to distribution, brand name
recognition, image, inventory availability and product performance.
Within each of our specific health and beauty-related product
categories we compete against many companies who may have longer
operating histories, larger financial resources, broader management
depth, more sophisticated technology, greater name recognition and
access to various other critical resources.
Our direct marketing web site, HealthandBeautyDirect.com, is currently
under development and faces competition from numerous other web sites.
Some of these web sites include women.com, iVillage.com, drugstore.com,
planetrx.com, healthshop.com, phys.com, beauty.com, indulge.com,
gloss.com,ibeauty.com, eve.com,reflect.com,mothernature.com, webmd.com and
drkoop.com. Hundreds of other competitive web sites currently exist; and in
the future, many new competitive web sites are likely to be developed. Our
web site may also indirectly compete with web retrieval and web portal
companies such as America Online, Yahoo, MSN, Infoseek and Excite, who
direct consumer traffic to many other competitors.
Our Linda Seidel Natural Cover product line of cosmetics competes in
the industry segment known as "corrective makeup." There are several
competitors in this segment. One competitor, Derma Blend, has greater
sales than Natural Cover and has successfully distributed its products
through various well-known retailers. In addition, most major cosmetic
companies provide a "concealer" line of foundation products targeted
for consumers with minor skin imperfections. Any one of these
companies, or some other business, could quickly become our direct
competitor.
We expect that we will face additional competition from new market
entrants and current competitors as they expand their direct marketing
business models. To be competitive, we must respond promptly and
effectively to the challenges of technological change, evolving
standards and our competitors' innovations.
GENERAL BUSINESS STRATEGY
Our objective is to become the country's leading direct to consumer
marketer and distributor of health and beauty-related products. We
plan to accomplish this objective by:
- - capitalizing on our direct to consumer marketing expertise, which
includes the production of direct response videos and printed
marketing campaigns and the purchase of direct response advertising;
- - expanding our direct to consumer channels of distribution to include
sales through our Internet web site, service centers, medical
professional network and international markets;
- - building upon our cost effective integrated operating infrastructure;
and
- - developing marketing relationships with health and beauty-related
companies.
Detailed descriptions of these four steps are outlined below:
CAPITALIZING ON OUR DIRECT TO CONSUMER MARKETING EXPERTISE
Our primary channel of distribution is direct to consumer advertising
through cable and broadcast television, cataloggues and direct mail.
We use direct to consumer marketing, rather than traditional retail
distribution because:
- - we can analyze and monitor the efficiency of advertising
expenditures;
- - it is a low cost method to test and fine tune new product
introductions;
- - we can use our cost effective operational infrastructure to
nationally distribute consumer products;
- - we build and own a proprietary customer database for future marketing
efforts; and
- - we have direct interaction with customers to provide them with
exceptional customer service.
To efficiently execute our direct to consumer marketing strategy, we
have developed the capabilities to produce a variety of marketing
materials including television and radio commercials, video mailers,
catalogues and direct mail. In addition, we are also able to manage
the associated direct to consumer advertising campaigns. Traditionally,
these services are performed on a contract basis with outside third
party vendors. However, we execute mmany of these tasks in-house by
utilizing our staff and the services of free-lance professionals.
Production of direct to consumer marketing materials. Typically, a
marketer would contract with an advertising agency to develop, manage
and execute a marketing strategy for its products. The agency would in
turn hire writers, directors, producers, videographers, graphic
designers, photographers, printers and other professionals to produce
the required marketing materials. By bringing the development and
management of the marketing materials in-house and utilizing
our network of free-lance creative production professionals, we are
able to produce effective marketing materials at significantly lower
costs, respond quickly to changes in the marketplace and manage
several projects simultaneously. These creative and technical skills
will be utilized to market and develop our web site and service
centers.
Media buying. The purchase of advertising is the single largest
expenditure associated with our business to date. Our media buying
strategy is made with a concentrated focus on each campaign's
profitability. We have developed a fully integrated approach to
managing each of our marketing campaigns including media buying,
financial analysis and project management. Our media team has
over 20 years of combined experience in the field of direct to consumer
media management. We have purchased advertising on every major national
and regional cable station, on hundreds of broadcast stations in all 50
states, and on various nationally syndicated programs. Media is
purchased in numerous weekday, weekend and overnight time slots based
on its availability and cost. We maintain a comprehensive proprietary
database of media costs and performance results from our campaigns. A
computer simulated financial model of each direct to consumer
campaign is developed to provide management with appropriate financial
reports and projections. It measures the impact on our campaigns from
the cost of media time, manufacturing, credit card processing,
telemarketing, fulfillment, returns, payments by check and other unique
costs of a project.
In addition, we have assembled a team of service providers to assist in
maintaining a cost effective operating structure. We have established
and maintained relationships with the industry leaders in the areas of
tape duplication and video trafficking, inbound telemarketing and
credit card processing. Media buying will be one of the key components
to the success of our business and we plan to expand our capabilities
through a series of personnel additions and limited strategic
acquisitions.
EXPANDING OUR DIRECT TO CONSUMER CHANNELS OF DISTRIBUTION
We are expanding our customer database through development of multiple
direct to consumer channels of distribution including the Internet,
service centers, alternative channels and an international network. We
believe that by maintaining significant control over our channels of
distribution we have the ability to:
- - leverage investments in advertising and marketing programs across
multiple distribution channels to build national consumer brand
names;
- - enhance customer satisfaction by offering greater accessibility and
providing professionally trained staff to interact directly with
customers in person or via the telephone; and
- - utilize information gathered from each channel of distribution to
develop and support the others.
INTERNET SALES. The objective of our web site will be to provide our
customers with an efficient way to gain valuable information on
numerous products and services available in the health and beauty-
related industries and a cost effective means to purchase our products
and services through electronic commerce. The following categories of
products will be available to customers through
HealthandBeautyDirect.com:
- - Beauty and Fashion
- - Exercise and Fitness
- - Diet and Nutrition
- - Cosmetic Surgery
- - Health and Pharmacy
- - Alternative Medicine
Our web site will offer electronic distribution of products and
information for:
- - owners of unique entrepreneurial health and beauty-related products
who typically do not have access to the traditional retail channels
of distribution;
- - major consumer product manufacturers who view the Internet as a
complementary channel of distribution to their existing retail
platform; and
- - specialized health and beauty-related service providers who would
benefit from a coordinated national direct to consumer marketing
campaign.
Based on our internal development projections, we expect that sections
of our HealthandBeautyDirect.com web site will be completed and made
available for use by our customers within the next three months. The
execution steps for completion of our web site are:
- - completion of the graphic and navigational design;
- - implementation of the textual, audio, video and interactive elements;
- - technical development of the internal structure to transact e-
commerce;
- - coordination with various information content providers; and
- - arranging for product and service providers.
During this offering, prospective investors will be able to view the
current stage of development for our web site by visiting
www.healthandbeautydirect.com. Once we have completed development of
sections of our web site and have made them available to our customers,
one of our most significant challenges will be to promote our web site.
We believe that our most cost effective mechanism for driving traffic
to our web site will be implementing various forms of direct to
consumer advertising.
Although Internet sales will represent only a small segment of our
total sales in the near future, marketing products directly to
consumers through other channels of distribution has enabled us to
build the basic corporate infrastructure necessary to capitalize on the
business opportunity presented by the Internet. Our preparation for
effective use of the Internet includes our approach to handling toll-
free 800 and 888 number customer service, management information
systems, credit card processing capabilities, development
of video and print marketing materials, tracking and analysis of
effective advertising expenditures and flexible entrepreneurial
management. As more consumers accept the Internet as a safe,
convenient way to purchase goods, we expect that sales through our web
site will contribute significantly to our overall direct to
consumer channels of distribution. The ability of the Internet to
develop systems that can cope with increased traffic and demands for
speed, data capacity and security will impact on every business seeking
to utilize the Internet.
We currently hold the domain name "healthandbeautydirect.com" and a
number of other related names.
SERVICE CENTERS. Our direct to consumer strategy includes building a
nationwide network of service centers to reach those consumers who
typically purchase their health and beauty-related products and
services through traditional retail channels of distribution rather
than television, direct mail, or the Internet. The average service
center will be located in a medical or office complex, require 750
square feet of space and employ one service professional.
Our service centers will provide customers with a cost effective way to
receive professional consultations while experiencing our products
first hand. Customers will also be able to purchase products and
receive a demonstration of how products can be ordered at our web site
or through one of our catalogs. Customer names will be maintained in
our proprietary database for future marketing opportunities. Upon
completion, this network will provide us with a platform to
introduce and test market new health and beauty-related products. We
currently operate one service center location.
ALTERNATIVE CHANNELS OF DISTRIBUTION. We currently distribute our
products to a network of over 600 plastic surgery and dermatology
professionals in the United States. This network provides us with an
additional method of selling our products and building a loyal customer
database. Professionals are furnished with informational videos and
literature to distribute free of charge to their patients. Patients
may purchase products from their medical professionals or they may
order products directly from us via our toll-free numbers. In
addition, patients have direct access to our trained staff from the
privacy of their homes during their recovery period.
INTERNATIONAL DIRECT RESPONSE DISTRIBUTION NETWORK. The demographic
and technological trends that are driving the retail consumer shift to
non-store shopping in the United States are also present in many
international markets. We currently sell products to wholesale accounts
in the United States who resell in Canada, Taiwan and Australia. In
addition, we have produced foreign language marketing materials
targeted for the Hispanic consumer market.
BUILDING UPON OUR COST EFFECTIVE INTEGRATED OPERATING INFRASTRUCTURE
We have developed a vertically integrated operating infrastructure with
sufficient flexibility to handle the intricacies of direct to consumer
marketing. Its effectiveness is based on our management information
system and specialized vendor relationships. We anticipate that as
sales volume increases, we will use our operating infrastructure over
larger volumes of business to reduce our marginal costs per order. As
we expand our web site, we will need to address the particular
intricacies of conducting e-commerce.
We have developed a proprietary management information system that
integrates our order entry, credit card processing and product
fulfillment operations. Effective operation of both the existing
management information systems as well as newly developed systems to
manage our growth will be critical to our success. The key features are
described below:
Proprietary customer database. Our proprietary customer database
contains a profile of each customer detailing such information as
mailing address, telephone number, credit card number and payment
history. In addition, it provides relevant personal information on
product usage, order history, marketing source codes and notes of prior
contacts with the customer made by phone, fax or mail. After an order
has been entered into the database, it is processed, invoiced and
printed for product fulfillment.
Electronic credit card processing. Our management information system
downloads orders daily from several inbound telemarketing firms located
throughout the country. A credit card processor verifies and authorizes
the customer's credit card charges. The verified credit card
information is transmitted back from the credit card processor and
updates our customer database. The funds are then electronically
transferred to our bank accounts, typically within three business
days.
Inbound telemarketing. One of our direct response television campaigns
can generate from 50 to 2,000 calls per commercial. We have contracted
with inbound telemarketing vendors across the country to ensure that
when customer call volumes are highest, customer information and orders
can be captured successfully. We have also enlisted the services of
vendors for customers who require Spanish speaking operators.
Customer service. We provide our customers with toll-free telephone
access toour in-house customer service department. During non-business
hours callers are invited to select the option of placing orders with
an express order processing service provided by a third party vendor.
In-house customer service representatives can process orders directly
into our proprietary management information system. The representatives
are authorized to resolve most customer service issues immediately,
including technical product advice, billing questions, product
exchanges and issuing return authorizations.
Manufacturing. HBD subcontracts with a variety of domestic and
international companies for the manufacture of our packaging and
products. Products are developed and manufactured according to our own
specifications. In-house specialists work with chemists to produce new
products based on input received directly from customers who use our
products personally and professionally.
Warehousing. We maintain a warehouse facility that houses our product
and finished goods inventories. As customer orders are received, we
pick and pack the products for shipment in accordance with the
customer's delivery schedule.
Shipping. Our management information system processes customer orders
and generates an invoice that is sent to fulfillment for assembly and
shipment. The system is specifically designed with a number of quality
control features to help ensure the accuracy of each order. Since the
UPS strike in 1997, substantially all of the shipments have been
transferred to the USPS Priority Mail Service. Federal Express,
Airborne and Express Mail overnight services are available by request.
Developing marketing relationships with health and beauty-related
companies One of our principle objectives is to build a portfolio of
unique health and beauty-related products. To accomplish this
objective, we intend to pursue partnerships, joint ventures and
licensing agreements with entrepreneurs who have developed these types
of products. We believe that HBD will be an attractive partner for many
of these entrepreneurs because of the experience our management team
has gained by successfully building the Linda Seidel Natural Cover
cosmetics brand.
Our first partnership began with the acquisition of the marketing
rights to distribute the Linda Seidel line of cosmetic products. These
products consisted of Natural Cover foundation concealers, glamour
enhancers and a skin conditioning system. The entrepreneurs had been in
business for approximately fifteen years and had annual sales of less
than $400,000. By implementing our direct to consumer marketing
techniques, we have built their business to over $4,000,000 in annual
sales for both calendar years 1997 and 1998. In addition to providing
our marketing expertise, we offer entrepreneurs:
- - access to multiple direct to consumer channels of distribution;
- - direct to consumer marketing expertise;
- - a vertically integrated operating infrastructure;
- - capital to develop, advertise and build their line of products; and
- - the ability to cross-market their products to our existing customer
database.
We have provided direct to consumer marketing services to clients who
market an acne treatment system, an air bed mattress and vitamin
supplements. We are in discussions with specific entrepreneurs to test-
market and distribute their products, including a dermatologist
developed skin care product, a specialty line of fragrances, a bath and
body treatment system and a cosmetic plastic surgery network.
EMPLOYEES
As of September 30, 1999, we had 14 full-time and 8 part-time
employees. At various times during the year temporary employees are
utilized for fulfillment and administrative functions. None of our
employees is currently covered by collective bargaining agreements. We
consider our employee relations to be good.
FACILITIES
We currently operate a 2,635 square foot office facility and a 2,700
square foot warehouse distribution facility in Baltimore, Maryland.
The office facility is under a lease that expires June 30, 2004 and the
warehouse distribution facility lease expires June 30, 2000. Both
leases contain renewal options and the office facility lease contains a
termination option on June 30, 2002 at the request of HBD. These
facilities include our warehousing and fulfillment operations,
customer service, management information systems, marketing and
administrative offices. We also maintain a month-to-month office
sublease in Herndon,Virginia.
REGULATORY MATTERS
Under Title 21, the Federal Food, Drug and Cosmetic Act, cosmetics and
their ingredients are not required to undergo approval before they are
sold to the public. Cosmetics and other beauty-related products are
regulated after these products have been released to the marketplace.
Food and Drug Administration regulations pertain principally to the
ingredients, labeling, packaging and marketing of our products. We are
also subject to various federal, state, local and foreign rules
governing the discharge of materials hazardous to the environment.
Since we currently do no manufacturing, processing or packaging, we
have not encountered any significant environmental law compliance
issues.
We are not required to have any additional licenses or regulatory
supervision because we market health and beauty-related products. Any
claims made in print, television or radio that may be unfair or
deceptive fall under the authority of the Federal Trade Commission. As
we expand the number and variety of products we market, we may become
subject to other regulation. In addition, individual states may impose
their own labeling or safety requirements that differ from or add
toexisting federal requirements.
Regulations relating to marketing, commerce, privacy and pricing on the
Internet are evolving. Any new laws or regulations directly related to
use of the Internet as a marketing, sales and distribution channel
could have a direct impact on our business. It is possible that the
future regulation of the Internet by any governmental agency could add
substantially to our operating costs.
We collect sales and use taxes on sales to residents in Maryland only.
Opening of service centers in other states may necessitate collection
of taxes on sales to their residents. After the current three-year
Congressional moratorium, one or more states may seek to impose sales
and use tax collection obligations on out-of-state companies such as
ours, which engage in electronic commerce. If we were required to
collect additional sales or use taxes, it would increase our
administrative costs. State tax authorities could conduct a nexus
audit of HBD, which could give rise to a retroactive assessment for tax
liabilities. State sales and use tax laws typically provide for a
lengthy statute of limitations, and any assessment amount could be
damaging.
LEGAL PROCEEDINGS
We are periodically involved in legal proceedings or litigation incident
to the ordinary course of our business operations. Our business exposes us
to potential product liability risks that are inherent in the marketing and
sale of health and beauty-related products. We are not a party to any
litigation or other legal proceeding that, in the opinion of management,
could have a material adverse effect on our business, financial condition
or results of operations. In the past, securities class action litigation
has often been brought against a company following periods of volatility in
the market price of their securities. We may in the future be the target of
similar litigation. Securities litigation could result in substantial costs
and divert management's attention and resources.
MANAGEMENT
Executive officers, directors and principal shareholders
HBD's executive officers, directors and principal shareholders of the
general partner of Venture Media Limited Partnership, and their ages,
as of December 31, 1998 are as follows:
Brian Fraidin 34 Chief Executive Officer, Chief Financial
Officer, Director
David Dougherty 49 Director, shareholder, general partner of
Venture Media Limited Partnership
Ananth Krishnamurthy 33 Shareholder, general partner of Venture Media
Limited Partnership
Alejandro Mendoza 42 Management Information Systems Director
Vipul Munjal 32 Comptroller
Marion Jacques 34 Hispanic Marketing Director, Secretary
Steven Zwagil 41 Director
Todd Foreman 34 Director
Linda Seidel 50 Director
All officers are expected to work for us approximately forty hours per
week. Each director serves for a period of one year. The current
directors have served since the filing of this prospectus and will
serve until the meeting of the shareholders in the year 2000.
BRIAN FRAIDIN has served as chief executive officer since April 1994
and is a director of HBD. In this capacity Mr. Fraidin provides
strategic, marketing and financial planning direction for the business
and is responsible for overseeing all day-to-day operations. He is
President of VenTech, Inc., the general partner of Venture Media
Limited Partnership, the majority shareholder of
HealthandBeautyDirect.com, Inc. Venture Media Limited Partnership is a
private equity fund based in Baltimore, Maryland. Mr. Fraidin is a 1986
graduate of the University of Pennsylvania, Wharton School of Finance.
He earned his CPA in 1986 and graduated from University of Baltimore
Law School with a Juris Doctor degree in 1997.
DAVID DOUGHERTY is a director of HBD and shareholder of VenTech, Inc.,
the general partner of Venture Media Limited Partnership. Venture
Media Limited Partnership is the majority shareholder of
HealthandBeautyDirect.com, Inc. Since 1991, he has been a partner in
Dougherty and Company, Inc., a firm providing U.S. mergers,
acquisitions and general corporate finance advice to U.S. and
international firms and entrepreneurs. Mr. Dougherty's career, which
spans more than 25 years, includes senior level positions with Kidder,
Peabody and Company, Inc. and Bankers Trust Company. At Bankers Trust
Company from 1980-1990 his positions included managing director and
head of the Mergers and Acquisitions and Merchant Banking groups. At
Kidder, Peabody he was vice president of Public Finance through 1980.
Mr. Dougherty is a 1971 graduate of Georgetown University
and holds a Juris Doctor degree from Temple University.
ANANTH KRISHNAMURTHY is a shareholder of VenTech, Inc., the general
partner of Venture Media Limited Partnership. Venture Media Limited
Partnership is the majority shareholder of HealthandBeautyDirect.com,
Inc. He is currently involved in the investment banking industry,
responsible for structured finance transactions with US corporations in
the context of corporate mergers and restructurings. Between 1991-
1995, Mr. Krishnamurthy held senior positions with Wasserstein Perella
& Co. and The Goldman Sachs Group where he was involved in the
investment banking industry, including strategic, transactional and
financing aspects of mergers and acquisitions engagements. He is a 1987
graduate of the University of Pennsylvania, Wharton School of Finance
and received his MBA from The Wharton School in 1988.
ALEJANDRO MENDOZA has served as director of Management Information
Systems since April 1994. He is responsible for coordinating the
development and maintenance of all aspects of our customer database
management, order processing and fulfillment systems. Mr. Mendoza
received his Masters of Science in computers and graphic design from
The Pratt Institute of New York in 1986 and graduated from the
University of Florida, Gainesville in 1978.
VIPUL MUNJAL has served as comptroller since June 1995. He is
responsible for overseeing all accounting and financial analysis for
HBD. From 1993 to May 1995, Mr. Munjal served as the assistant
comptroller for National Shipping Company of Saudi Arabia America,
Inc., where he provided accounting and financial planning for a variety
of international transactions. Mr. Munjal received his MBA from
University of Baltimore in 1993 and is a 1991 graduate of Edinboro
University of Pennsylvania.
MARION JACQUES has served as director of Hispanic Marketing since
November 1996 and is the secretary for HBD. She is responsible for
coordinating efforts with wholesale accounts in the United States who
resell our products internationally and overseeing our domestic
Hispanic marketing efforts. From 1989 to October 1996, Ms. Jacques was
employed at SunTrust Bank, Miami where she served as vice
president in the commercial real estate lending division. In this
capacity she participated in loan origination, underwriting,
presentation to credit committee and construction project oversight.
Ms. Jacques is a 1987 graduate of the University of Pennsylvania,
Wharton School of Finance.
STEVEN ZWAGIL is a director of HBD and chairman of the audit committee.
In this capacity he will oversee our auditing procedures and strategic
financial planning for the business. From 1998 to the present, Mr.
Zwagil has served as the chief financial officer for DPI Business
Information Systems. From 1996 to 1997, he served as chief financial
officer of Fidelity First Financial Corporation. Mr. Zwagil was a
senior partner with the accounting firm of Levin, Zwagil & Block, P.A.
from 1988 to 1996 where he was responsible for the firm's litigation
support, business valuation and taxation groups. He has been
a practicing certified public accountant since 1980.
TODD FOREMAN is a director of HBD and chairman of the compensation
committee. In this capacity he will review our compensation, benefit
and stock option plans. From 1993 to the present, Mr. Foreman has been
the chief financial officer for United Communications Group, a business
information services company based in Rockville, Maryland. He is a
1986 graduate from Emory University, earned his CPA in 1987 and
received his MBA from George Washington University in 1995.
LINDA SEIDEL is a director of HBD. Ms. Seidel has been employed full-
time as spokesperson for the Linda Seidel Natural Cover cosmetic brand
for the past five years. She is prominently featured in the printed
marketing materials and television advertisements. She lectures
frequently throughout the country and has an extensive network of
relationships with professionals in the medical and cosmetics field.
She has been personally assisting clients through the
use of corrective make-up and application techniques for over 25 years
and is a licensed cosmetician.
The management experience and abilities of the existing shareholders of
the general partner of Venture Media Limited Partnership, the majority
shareholder of HealthandBeautyDirect.com will be key factors in the
successful execution of our business strategy. Brian M. Fraidin is
responsible for overseeing all the day-to-day operating decisions for
the business and other shareholders of the general partner of Venture
Media Limited Partnership participate in the strategic, financial and
legal decision-making. Venture Media Limited Partnership currently
maintains a key man life insurance policy on Mr. Fraidin
in the amount of $2,500,000. This policy will be transferred or
reissued in the name of HBD upon the closing of this offering.
DIRECTOR COMPENSATION
Directors who are officers or employees of HBD or any subsidiary of HBD
will receive no additional compensation for serving on the board of
directors or any of its committees. Upon the closing of this offering,
directors who are not executive officers of HBD will receive an option
to purchase 5,000 shares of common stock for a purchase price equal to
100% of the fair market value of the stock on the date of grant. Each
option is expected to have a term of 3 years and to vest in 3 equal
installments beginning on the first anniversary of the date of the
grant. Directors who are not executive officers of HBD will receive
a single annual retainer of $2,500 for service on HBD's board and may
receive an additional fee for serving as chair on one of the committees
of the board of directors. All directors will be reimbursed for travel
expenses incurred in connection with attending board and committee
meetings.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the offering, HBD's board of directors will
establish an audit committee and a compensation committee. Each
committee will consist of at least two directors, neither of whom will
be an officer or employee of HBD.
The members of the audit committee will be Steven Zwagil, Todd Foreman
and Brian Fraidin. Their duties will be the following:
- - recommend the selection of independent certified public accountants
to the entire board of directors;
- - perform an audit of the financial statement of HBD;
- - review the activities and report of the independent certified public
accountants;
- - report the results of such review to the entire board of directors;
and
- - monitor the internal controls of HBD.
The members of the compensation committee will be Todd Foreman, Steven
Zwagil and David Dougherty. The duties of the compensation committee
will be to provide a general review of HBD's compensation and benefit
plans to ensure that they meet corporate objectives and to administer
or oversee HBD's stock option plan and other employee benefit plans. In
addition, the compensation committee will review the compensation of
the officers of HBD, the recommendations made by the chief executive
officer regarding compensation of all HBD employees and any major
changes in HBD's compensation policies and practices.
STOCK OPTION PLAN
We expect to adopt an incentive stock option plan for our employees,
officers, directors and consultants. We have reserved 1,000,000 shares
for issuance on exercise of these options, which is 12% of the shares
that will be outstanding upon sale of the minimum in this offering.
Options must have an exercise price of at least 85% of the fair market
value of the shares on the date the options were granted.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS.
Our certificate of incorporation and bylaws substantially limit the
personal liability of our officers and directors. They also require
indemnification and advance payment of expenses incurred in defending
any claim. These provisions could make it more difficult for
shareholders to recover any losses on their
investment from claims against our officers or directors.
EXECUTIVE COMPENSATION
We have not paid any of our employees or directors more than $100,000 a
year. Brian Fraidin, the president of the general partner of Venture
Media Limited Partnership, the predecessor's majority partner, has
served as our acting chief executive officer since 1994. His management
services have been provided in return for distributions made by HBD to
Venture Media Limited Partnership. During 1998 and 1997 the
distributions were $243,535 and $24,336, respectively. No separate
amount was paid to Mr. Fraidin or to Venture Media Limited
Partnership in return for management services.
Executive management services provided to HBD will be covered by a
management services agreement with Direct Marketing Services Group,
LLC. This entity is owned by Brian Fraidin and various partners of and
advisors to Venture Media Limited Partnership who have provided
management services to us in the past. Through this agreement, they
will continue to provide executive management services in the future.
HBD will pay Direct Marketing Services Group, LLC $175,000 for services
to be provided for the twelve months following the closing of this
offering. The management services agreement will be automatically
renewed annually under similar terms and conditions subject to approval
of HBD and Direct Marketing Services Group, LLC. The nature of
services provided and compensation will be determined and approved by
directors of HBD who are independent of Direct Marketing Services
Group, LLC.
EMPLOYMENT AGREEMENTS
We have an employment services agreement with Ms. Linda Seidel, a
director of HBD. It is our only employment agreement. Ms. Seidel's
employment services agreement ends on December 31, 2003 and may be
renewed for an additional 5 year term. Ms. Seidel receives compensation
in the form of a base salary of $65,000 per year, appearance fees for
seminars and makeup consultation fees. Ms. Seidel, through her
management company, Corky, Inc., also owns 200,000 shares of common
stock in HBD. As a director of HBD, Ms. Seidel is entitled to benefits
that HBD's board of directors or its compensation committee may
determine.
CERTAIN TRANSACTIONS
Upon sale of the minimum number of shares in this offering, a total of
7,900,000 shares will be issued in exchange for all the partners' right
in the predecessor business, Transforming Cosmetics. The partners'
names and the shares to be issued to them are: Venture Media Limited
Partnership, 7,500,000 shares, Corky, Inc., 200,000 shares and World
Net Communications, LLC, 200,000 shares. Of the shares distributed to
Venture Media Limited Partnership, 1,811,390 were distributed directly
to 35 of its limited partners.
Our founders will receive substantial benefits from this offering,
including a possible public trading market for their shares. They will
receive shares at costs substantially below the offering price, as
shown in the "Dilution" section of the prospectus. Upon completion of
this offering we will seek to restructure our lines of credit with Bank
of America which may result in the release of personal guarantees of
the founders.
During 1998 and 1997, we made distributions of $243,535 and $24,336,
respectively, to Venture Media Limited Partnership. Executive
management services will be provided by Direct Marketing Services
Group, LLC as covered by a management services agreement. This entity
is owned by various partners of and advisors to Venture Media Limited
Partnership who have provided us with management services in the past.
HBD will pay Direct Marketing Services Group, LLC $175,000 for services
to be provided for the twelve months following the closing of this
offering. The agreement will be automatically renewed annually under
similar terms and conditions subject to approval by both parties.
During 1998, we made accrued royalty payments to Ms. Linda Seidel of
$80,000 and purchased direct response media buying assets from the
partners of Venture Media Limited Partnership for $200,000. During
1997, we sold approximately $1,700,000 in direct response media at
approximately cost to clients of Venture Media Limited Partnership. The
general partner of Venture Media Limited Partnership, VenTech, Inc.,
and Brian Fraidin are guarantors on our $2,000,000 revolving line
of credit with Bank of America. In addition, various limited partners
of Venture Media Limited Partnership have historically provided vendor
services to HBD. These vendor services have included computer design,
video production, leasehold improvements, short-term financing, legal
counsel, office cleaning and printing. In our financial statements, we
have accounted for these vendor services as expenses in the ordinary
course of business. We believe that these related party transactions
were on terms at least as favorable to HBD as those available from non-
related parties.
We were a partnership at the time of these transactions, so they were
not ratified by any independent corporate directors. After sale of the
minimum in this offering, we will maintain at least two independent
directors on our board. All future material affiliated transactions and
loans, and any forgiveness of loans, will be made or entered into on
terms that are no less favorable to HBD than those that can be obtained
from unaffiliated third parties. They must all be approved by a
majority of our independent directors who do not have an interest in
the transactions and who had access, at our expense, to HBD's or
independent legal counsel.
PRINCIPAL SHAREHOLDERS
The following table shows information about the ownership of HBD's
common stock, after transfer of ownership of the business from the
partnership ,Transforming Cosmetics, to the corporation,
HealthandBeautyDirect.com, and issuance of HBD shares to the partners
of Transforming Cosmetics. The table also reflects the distribution of
HBD shares through Transforming Cosmetics to Venture Media Limited
Partnership and, through it, to its limited partners. The
information is provided for:
- - each person who would own beneficially more than five percent of
HBD's common stock;
- - each of HBD's officers and directors; and
- - all officers and directors as a group.
The table shows percentage ownership of the total HBD shares that would
be outstanding after both the minimum and maximum sale of shares in
this offering. Except as otherwise indicated, to the knowledge of HBD,
each person listed has sole voting power and investment power with
respect to the common stock they beneficially own.
Minimum sold in offering Maximum sold in Offering
Name and Address of Number of Percent Number of Percent
Beneficial Owner Shares Owned Owned Shares Owned Owned
------------ ------- ------------- -------
Venture Media
Limited Partnership (1) 5,688,610 70.23% 5,688,610 66.92%
3406 Fielding Road
Baltimore, MD 21208
Corky, Inc. (2) 200,000 2.47% 200,000 2.53%
2311 Falls Gable Lane
Baltimore, MD 21209
Alejandro Mendoza (3) 37,659 0.46% 37,659 0.44%
Roberto del Rio 1839
Providencia, Santiago, Chile
Vipul Munjal (4) 16,300 0.20% 16,300 0.19%
29 Winter Berry Court
Hunt Valley, MD 21030
Marion Jacques (5) 18,175 0.22% 18,175 0.21%
7200 SW 110th Terrace
Pinecrest, FL 33156
Steven Zwagil (6) 14,941 0.18% 14,941 0.18%
2215 Sugarcone Road
Baltimore, MD 21209
Todd Foreman (7) 34,425 0.43% 34,425 0.41%
10736 Brewer House Road
Rockville, MD 20852
Brian Fraidin (8) 0 0.00% 0 0.00%
3406 Fielding Road
Baltimore, MD 21208
David E. Dougherty (9) 0 0.00% 0 0.00%
2 Fairway Lane
Greenwich, CT 06830
Linda Seidel (10) 0 0.00% 0 0.00%
2311 Falls Gable Lane
Baltimore, MD 21209
All Officers
and Directors (11) 6,010,110 74.20% 6,010,110 70.71%
as a group
(8 persons)
1) Messr.'s Fraidin, Dougherty and Krishnamurthy are the principal
shareholders of the general partner of Venture Media Limited
Partnership, the majority shareholder of HBD. No other partner
will own in excess of 5%.
(2) Ms. Seidel is the president and the principal shareholder of
Corky, Inc.
(3) Mr. Alejandro Mendoza is the director of management information
services for HBD.
(4) Mr. Vipul Munjal is the comptroller for HBD.
(5) Ms. Marion Jacques is the director of hispanic marketing and
secretary for HBD.
(6) Mr. Steven Zwagil is a director of HBD.
(7) Mr. Todd Foreman is a director of HBD.
(8) Mr. Brian Fraidin is the chief executive officer and a director of
HBD. Does not include beneficial ownership of shares owned in the
general partner of Venture Media Limited Partnership.
(9) Mr. David Dougherty is a director of HBD. Does not include
beneficial ownership of shares owned in the general partner of
Venture Media Limited Partnership.
(10) Ms. Linda Seidel is a director of HBD. Does not include
beneficial ownership of shares in Corky, Inc.
(11) Includes beneficial ownership of shares as described in the notes
above.
As shown by this table, Venture Media Limited Partnership will
continue, after this offering, to own or control in excess of 50% of
the common stock of HealthandBeautyDirect.com. Venture Media Limited
Partnership will be in a position to elect our board of directors and
officers, control the operations of the business and determine the
outcome of matters submitted for shareholder approval, including
mergers, consolidations, the sale of assets or a change in control of
HBD.
DESCRIPTION OF CAPITAL STOCK
The following summary description of HBD's capital stock is qualified
in its entirety by reference to HBD's certificate of incorporation and
bylaws, copies of which are filed as exhibits to the registration
statement of which this prospectus is a part. HBD's authorized capital
stock consists of 9,800,000 shares of common stock, $0.01 par value per
share, and 200,000 shares of preferred stock, $0.01 par value per
share.
COMMON STOCK
Upon sale of the minimum in this offering, it is expected that the
7,900,000 shares of common stock will be issued in exchange for the
contribution of the business. These shares will be held by 38 persons
of record. There will be 8,100,000 shares of common stock outstanding
if the minimum is sold in this offering and 8,500,000 shares
outstanding if the maximum is sold.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. They are entitled to
receive their proportion of any dividends as may be declared from time
to time by the board of directors out of legally available funds,
subject to preferences that may be applicable to any preferred stock
outstanding at the time. Common shareholders are entitled to share
proportionately in all assets remaining after payment of
HBD's liabilities and the liquidation preference, if any, of any
outstanding shares of preferred stock in the event of a liquidation,
dissolution or winding up of HBD. Common shareholders have no
preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common
stock. All the shares of common stock now outstanding are, and the
shares to be issued in this offering will be fully paid and
nonassessable. The rights, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of preferred stock that HBD
may designate and issue in the future.
PREFERRED STOCK
No shares of preferred stock have been issued and HBD's board of
directors does not presently intend to issue preferred stock. The board
has the authority to issue up to 200,000 shares of preferred stock in
one or more series and to fix the shares' rights, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares in each series, without any
further vote or action by HBD's shareholders. The issuance
of preferred stock could have one or more of the following effects:
- - restrict common stock dividends if preferred stock dividends have not
been paid;
- - dilute the voting power and equity interest of holders of common
stock to the extent that any series of preferred stock has voting
rights or is convertible into common stock; or
- - prevent current holders of common stock from participating in HBD's
assets upon liquidation until any liquidation preferences granted to
holders of preferred stock are satisfied.
In addition, the issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of HBD. For
example, granting voting rights to holders of preferred stock that
require approval by the separate vote of the holders of preferred stock
for any amendment to the certificate of incorporation or any
reorganization, consolidation, merger or other similar transaction
involving HBD could result in such a situation. As a result, the
issuance of preferred stock may discourage bids for HBD's common
stock at a premium over the market price and could have a material
adverse effect on the market value of the common stock. We will not
issue any preferred stock without either a vote of the common stock
shareholders or approval by a majority of our independent directors who
do not have an interest in the transaction and who have access, at our
expense, to HBD's or independent legal counsel.
CERTAIN PROVISIONS OF DELAWARE LAW
HBD will be subject to the "Business Combination" provisions of the
Delaware General Corporation Law. In general, they prohibit a publicly
held Delaware corporation from engaging in various "business
combination" transactions with any "interested shareholder" for a
period of three years after the date of the transaction in which the
person became an "interested shareholder," unless
- - the transaction is approved by the board of directors prior to the
date the "interested shareholder" obtained that status;
- - upon consummation of the transaction which resulted in the
shareholder becoming an "interested shareholder," the "interested
shareholder" 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 those shares
owned by persons who are directors and also officers, and 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
- - on or subsequent to such date the "business combination" is approved
by the board of directors and authorized at an annual or special
meeting of shareholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock, which is not owned by the"interested
shareholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a shareholder. In
general, an "interested shareholder" is a person who, together with
affiliates and associates, owns, or within three years, did own 15% or
more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts and,
accordingly, may discourage attempts to acquire HBD.
Limitation and indemnification of liability of officers and directors
HBD's certificate of incorporation provides that, to the fullest extent
permitted by Delaware corporation law, a director of HBD will not be
personally liable to HBD or its shareowners for money damages for
breach of fiduciary duty as a director. The certificate also allows
HBD to indemnify, to the fullest extent permitted by law, any of its
directors, officers and employees, as well as anyone serving as a
director or officer of another enterprise at HBD's request. HBD's
bylaws provide that HBD shall, to the maximum extent permitted by
Delaware corporation law, indemnify each of its directors and officers,
including persons who serve at its request as directors or officers of
another enterprise, against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed
proceeding in which the person was or is a party or is threatened to be
made a party because of being a director or officer. HBD is required
to pay the expenses, including attorney's fees, incurred by a director
or officer in connection with the defense or disposition
of any proceeding, in advance of the final disposition, if the person
agrees to repay them and it is ultimately determined that the person
was not entitled to indemnification. HBD's bylaws also permit it to
indemnify other employees and agents of HBD, including persons who
serve at its request as employees or agents of another enterprise. HBD
has been informed that, in the opinion of the Securities and Exchange
Commission, any indemnification for liabilities arising
under the Securities Act is unenforceable, as against public policy
expressed in the Securities Act.
TRANSFER AGENT
The transfer agent for HBD's securities will be The Registrar and
Transfer Company with offices located in Cranford, New Jersey.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for HBD's
securities. The shares have been approved for listing on the Chicago
Stock Exchange after completion of this offering. However, this will be
an auction market and the ability to sell shares will depend upon the
Exchange specialist having bids to buy shares. We cannot make a
prediction as to the effect, if any, that market sales of shares of
common stock or the availability of shares for sale will have on the
market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the
public market, including any sales after the lapse of the restrictions
described below, could adversely affect the prevailing market price and
the ability of HBD to raise equity capital in the future.
Upon completion of the offering, HBD would have 8,100,000 shares of
common stock outstanding if the minimum was sold and 8,500,000 if the
maximum was sold. Shares sold in this offering will be freely tradable
without restriction under the Securities Act, except for any shares
which may be acquired by an affiliate of HBD. An affiliate is defined
under Rule 144 as a person that controls, is controlled by or is under
common control with HBD. Any shares acquired by an affiliate will be
subject to the volume limitations and other restrictions of
Rule 144 as described below. An aggregate of 6,210,110 shares of
common stock held by existing shareholders of HBD upon completion of
the offering will be restricted securities. According to Rule 144,
these shares are restricted securities because they were issued in
private transactions not involving a public offering and may not be
resold in the absence of registration under the Securities Act or an
exemption from registration, including the exemption provided by Rule
144.
In general, under Rule 144 a person, or persons whose shares are
aggregated, who has beneficially owned shares for at least one year is
entitled to sell within any three-month period, beginning 90 days after
the date of this prospectus, a number of shares that is not more than
the greater of 1% of the then outstanding shares of common stock and
the average weekly trading volume during the four calendar weeks
preceding the sale. Owners of restricted securities who have not
been affiliates of HBD at any time during the 90 days immediately
preceding their sale, who have beneficially owned their shares for at
least two years may sell those shares under Rule 144(k) without regard
to the limitations described above. Affiliates must always sell under
Rule 144, even after the applicable holding periods have been
satisfied. HBD is unable to estimate the number of shares that will be
sold under Rule 144, which depends on the market price of the common
stock, the personal circumstances of the sellers and other
factors.
The three largest shareholders of common stock have entered into a
"lock-in agreement" with HBD, further restricting the sale or other
transfer of their shares for a period of 2 years after the completion
of this offering. A total of 6,210,110 shares of common stock are
subject to this agreement. None of these shares can be transferred
during the first year after completion of this offering. During the
second year after completion of this offering, an aggregate of 2-1/2% of
these shares may be sold or transferred during each calendar quarter.
PLAN OF DISTRIBUTION
We are offering to sell the shares directly to our customers and
others who have relationships with HBD or its officers. We may also pay
registered securities broker-dealers a commission of up to 10% for shares
they sell, on a "best efforts" basis. We have applied to register this
offering, or are relying upon an exemption from registration, in every
one of the United States. ^We will deliver a copy of this prospectus to
those who request it, together with the share purchase order. All shares
will be sold at the public offering price of $10.00 per share and a minimum
purchase of 50 shares is required. We reserve the right to reject any
subscription or share purchase agreement in full or in part. The persons
shown in the prospectus under "Principal shareholders" have the right to
purchase shares for the purpose of meeting the minimum of 200,000 shares.
All of those shares would be subject to the "lock-in agreement" described
in the previous section of this prospectus, "Shares eligible for future
sale."
HBD will effect offers and sales of shares only through Brian M.
Fraidin, its chief executive officer, who has not previously
participated in effecting offers and sales in a public offering. Only
Mr. Fraidin will sign acceptances of share purchase orders on behalf of
HBD and he will be the only individual to conduct activities that
involve making oral solicitations or approval of written
communications. Under Rule 3a4-1 of the Exchange Act, Mr. Fraidin will
not be deemed a "broker" solely by reason of participation in this
offering, because:
1. he is not subject to any of the statutory disqualifications
described in Section 3(a)(39) of the Exchange Act;
2. in connection with the sale of the shares being offered, he
will not receive, directly or indirectly, any commissions or
other remuneration based either directly or indirectly on
transactions in securities;
3. he is not an associated person, such as a partner, officer,
director or employee, of a broker or dealer; and
4. he meets all of the following conditions:
4.1 primarily performs substantial duties for HBD
otherwise than in connection with transactions in
securities;
4.2 was not a broker or dealer, or as an associated person
of a broker or dealer, within the preceding 12 months;
and
4.3 will not participate in selling an offering of
securities for any issuer more than once every 12
months.
The methods to be employed in the solicitation of potential investors
include printed and electronic announcements to our customer database,
distribution of the prospectus via the Internet, personal meetings with
business contacts of existing investors, follow-up by telephone with
interested parties and other announcements of the "tombstone" variety.
DETERMINATION OF OFFERING PRICE
Because there has been no market for the common stock of HBD, the
public offering price has been determined by HBD's board of directors.
This price per share also reflects the value of the shares to be issued
to the former general partners of Transforming Cosmetics upon sale of
the minimum in this offering. Among the factors considered were HBD's
results of operations, its current financial condition, its future
prospects, the state of the markets for its products and services, the
experience of management and the economics of the industry segment in
general. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in
the public market subsequent to this offering at or above the initial
public offering price.
ESCROW OF MINIMUM PROCEEDS
We are making this offering on a best efforts minimum/maximum basis
subject to subscription and payment for not less than the minimum
200,000 shares and not more than the maximum 600,000 shares. All
subscription payments will be deposited into an escrow account at Bank
of America. No securities dealer is buying all of the shares in this
offering, so less than the maximum amount may be raised. If the minimum
is not sold in this offering by the termination date, all proceeds
deposited in the escrow account will be promptly refunded in full,
with interest, but without any deduction for expenses.
During the escrow period, all subscription payments for shares must be
delivered with a completed share purchase order to the escrow agent.
HBD will mail a copy of the share purchase order to each purchaser
within fifteen business days of acceptance by HBD. Stock certificates
will not be issued to subscribers until the minimum has been sold.
Until then, purchasers will be subscribers and not security holders of
HBD. During the escrow period, subscribers will have no right to a
return of their payment.
After the minimum has been fully subscribed, HBD will continue to offer
the shares, not subject to payment for any further minimum amount, but
not for more than a total of 600,000 shares. This offering will end
upon the earlier of the following: the sale of the maximum amount, June
30, 2000 or the date on which HBD decides to close the offering. HBD
reserves the right to reject any subscription or share purchase
agreement in full or in part and to terminate the offering at any time
prior to the sale of all the shares being offered.
LEGAL MATTERS
The validity of shares of common stock offered will be passed upon for
HBD by Whiteford, Taylor & Preston LLP.
EXPERTS
The financial statements of HBD as of December 31, 1998 and December
31, 1997 have been included in this prospectus and elsewhere in the
registration statement in reliance on the audit reports of Naden/Lean,
LLC, independent certified public accountants, given on the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933
for the shares being offered by this prospectus. This prospectus does
not contain all of the information that is in the registration
statement and the attached exhibits. For further information about HBD
and the securities offered, see the registration statement and to the
exhibits filed. The statements contained in this prospectus about the
contents of any contract or other document identified as exhibits in
this prospectus are not necessarily complete, and in each instance,
reference is made to a copy of the contract or document filed as
exhibit to the registration statement, each statement being qualified
in any and all respects by this reference. The registration statement,
including exhibits, may be inspected without charge at the principal
reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's Regional Office,
located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any part may be
obtained from the Commission upon payment of fees prescribed by the
Commission from the Public Reference Section of the Commission at its
principal office in Washington, D.C. The telephone number for the
Public Reference Section is 800-SEC-0330. The Commission maintains a
web site on the Internet that will contain all future reports, proxy
and information statements and other information that HBD is
required to file electronically with the Commission. The address of
the Commission's web site is http://www.sec.gov.
We will furnish our shareholders with annual reports containing audited
financial statements after the end of each fiscal year.
INDEX TO FINANCIAL STATEMENTS FOR TRANSFORMING COSMETICS
Page
Table of contents F-1
Independent auditors' report F-2
Balance sheets F-3-4
Statements of income and partners' capital F-5
Statements of cash flows F-6
Notes to financial statements F-7-12
F-1
INDEPENDENT AUDITORS' REPORT
To the Partners
Transforming Cosmetics
We have audited the accompanying balance sheets of Transforming
Cosmetics (a Partnership), as of December 31, 1997 and 1998, and the
related statements of income and partners' capital, and cash flows for
the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Transforming Cosmetics, as of December 31, 1998 and December 31, 1997,
and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
S/Naden/Lean, LLC
Baltimore, Maryland
February 5, 1999
F-2
TRANSFORMING COSMETICS
BALANCE SHEETS
AS OF
ASSETS
December 31, September 30,
1997 1998 1999
(unaudited)
CURRENT ASSETS
Cash $ 226,956 $ 634,108 $ 291,759
Accounts receivable:
Trade - net 312,300 123,467 79,936
Credit card processor 151,328 53,185 27,226
Employees and affiliates 26,861 87,974 33,500
Inventory 687,246 724,355 629,319
Prepaid expenses 136,937 70,387 61,639
Total Current Assets 1,541,628 1,693,476 1,179,106
PROPERTY, PLANT
& EQUIPMENT - AT COST NET 182,451 210,135 182,038
OTHER ASSETS
Marketing materials
& other - net 338,449 453,560 390,385
Direct response advertising 256,927 512,538 482,864
Deposits 17,161 13,661 21,668
Total Other Assets 612,537 979,759 894,917
TOTAL ASSETS $2,336,616 $2,883,370 $2,256,061
LIABILITIES AND PARTNERS' CAPITAL
December 31, September 30,
1997 1998 1999
(unaudited)
CURRENT LIABILITIES
Accounts payable
& accrued expenses $662,820 $562,505 $524,130
Notes payable 5,026 - -
Advanced client media deposits - 541,983 44,128
Obligations under capital lease 8,084 9,842 -
Due to affiliates 80,000 - -
Reserve for sales refunds 228,424 70,293 26,322
Total Current Liabilities 984,354 1,184,623 594,580
NON-CURRENT LIABILITIES
Note payable 8,947 - -
Obligations under
capital lease 12,620 2,778 -
Total Non-Current
Liabilities 21,567 2,778 -
TOTAL LIABILITIES 1,005,921 1,187,401 594,580
PARTNERS' CAPITAL 1,330,695 1,695,969 1,661,481
TOTAL LIABILITIES
& PARTNERS' CAPITAL $2,336,616 $2,883,370 $2,256,061
See Independent Auditor's Report and Accompanying Notes.
F-3
TRANSFORMING COSMETICS
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
FOR THE PERIODS INDICATED
Years ended Nine Months
December 31, ended September 30,
1997 1998 1998 1999
(unaudited) (unaudited)
SALES - net of
sales refunds $7,687,626 $9,552,994 $7,237,574 $7,620,019
COST OF GOODS SOLD 5,631,565 7,429,250 5,698,034 6,446,223
GROSS PROFIT 2,056,061 2,123,744 1,539,540 1,173,796
OPERATING EXPENSES
Selling 1,004,219 949,657 745,179 466,138
General &
administrative 713,914 571,781 473,230 505,006
TOTAL OPERATING
EXPENSES 1,718,133 1,521,438 1,218,409 971,143
INCOME FROM OPERATIONS
BEFORE OTHER INCOME
& EXPENSES 337,928 602,306 321,130 202,652
OTHER INCOME AND EXPENSES
Interest income 4,496 698 6,503 4,912
Gain (Loss) on
disposal of fixed
asset (14,430) 5,805 - -
Miscellaneous income 1,775 - - -
---------- ---------- ---------- ------
TOTAL OTHER INCOME
& EXPENSES (8,159) 6,503 6,503 4,912
NET INCOME 329,769 608,809 327,633 207,564
PARTNER'S CAPITAL
- BEGINNING OF YEAR 1,025,262 1,330,695 1,330,695 1,695,969
DISTRIBUTIONS (24,336) (243,535) (243,535) (242,051)
PARTNERS' CAPITAL
- END OF YEAR $1,330,695 $1,695,969 $1,414,793 1,661,481
See Independent Auditor's Report and Accompanying Notes.
F-4
TRANSFORMING COSMETICS
CASH FLOW STATEMENTS
FOR THE PERIODS INDICATED
Years ended Six months
December 31, September 30,
1997 1998 1998 1999
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $329,769 $608,809 $327,633 207,564
Adjustments to reconcile
net income to net cash
Provided by operating
activities:
Depreciation
& amortization 116,152 278,457 208,681 257,657
Provision for bad debts 37,038 33,175 24,963 15,789
(Gain)Loss on disposal
of fixed asset 14,430 (5,805) (5,805) 20,698
(Increase) decrease
in operating assets:
Accounts receivable (343,594) 253,801 277,757 53,701
Inventory (143,564) (37,109) ( 54,646) 95,039
Prepaid expenses (3,342) 66,550 125,868 (46,982)
Deposits 2,839 3,500 10,806 (8,007)
Increase (decrease)
in operating liabilities:
Overdraft (85,724) - - -
Accounts payable
and accrued expenses 465,554 (100,315) 335,775 (38,375)
Advanced client
media deposits - 541,983 - (497,855)
Due to affiliates - (80,000) (80,000) -
Reserve for sales
refunds - (158,131) (145,786) (43,971)
Other liabilities 121,734 - - -
---------- ------------ -------- --------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 511,292 1,404,915 1,025,237 15,257
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property
and equipment (102,102) (90,624) (70,126) (43,137)
Proceeds from disposal
of fixed asset - 16,878 16,878 -
Investment in
marketing materials (267,918) (203,933) (148,349) (20,148)
Investment in direct
response advertising (256,927) (393,379) (343,027) (20,148)
Net cash advanced to
employees/affiliates 474,230 (61,113) 473 54,474
NET CASH USED IN
INVESTING ACTIVITIES (152,717) (732,171) (544,151)(102,935)
CASH FLOWS FROM
FINANCING ACTIVITIES
Distributions (24,336) (243,535) (243,535)(242,051)
Net cash paid
to affiliates (91,043) - - -
Principal payments
on notes payable (10,712) (13,973) (13,973) -
Principal payments
on obligations
under capital leases (5,528) (8,084) (5,912) (12,620)
NET CASH USED IN
FINANCING ACTIVITIES (131,619) (265,592) (263,420)(254,671)
NET INCREASE IN CASH
& CASH EQUIVALENTS 226,956 407,152 217,666 (342,349)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR - 226,956 226,956 634,108
----------- ------------ ------------ -----
CASH AND CASH EQUIVALENTS,
END OF YEAR $226,956 $634,108 $444,622 $291,759
See Independent Auditor's Report and Accompanying Notes.
F-5
TRANSFORMING COSMETICS
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Transforming Cosmetics (the Company) was formed as a Maryland general
partnership in April 1994. The Company markets and distributes a line
of cosmetic products under the name "Linda Seidel's Natural Cover"
throughout the United States. These products are marketed primarily
through direct response advertising campaigns. In addition, the
Company purchases and sells media on behalf of third party clients
for use in their direct response advertising campaigns.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
investments purchased with a maturity of three months or less to be
cash equivalents.
Accounts Receivable
Accounts Receivable - Trade consists primarily of second and third
installments from customers who have elected to pay in three
installments. The Company uses the allowance method for recognition of
uncollectible accounts rreceivable. Theallowance for uncollectible
accounts as of December 31, 1998 and 1997 was $41,090 and $63,635,
respectively.
Inventory
Inventory is stated at the lower of cost or market, using the first in,
first out (FIFO) method. The inventory consists primarily of various
cosmetic components included in kits, which are sold to customers.
Additionally, inventory includes packaging and printed marketing
materials.
Prepaid Expenses
Prepaid Expenses consist primarily of cash payments to media vendors
for direct response advertising, typically made 15-45 days in advance
to secure placement.
Property and Equipment
Property and equipment is recorded at cost. Depreciation expense is
recognized using accelerated methods over the estimated useful lives of
the specific assets, which range from 3 to 39 years. Repairs and
maintenance of property and equipment are charged to operations when
incurred. Betterments and renewals are capitalized and depreciated over
the estimated useful lives of the respective improvements. Revenue
Recognition
Revenues from the sale of cosmetic products are recognized when the
goods are shipped. Revenues from the sale of media are recognized when
the media is aired on television. Payments received in advance are
deferred until such time as the media is aired. As of December 31,
1997 and 1998, the Company's deferred revenues were $0 and $541,983,
respectively.
Marketing Materials
Marketing Materials are recorded at cost. Amortization expense is
recognized based on a cost-pool-by-cost-pool basis, over the period
during which the future benefits are expected to be received. The
amortization is computed using the ratio that current period gross
revenues for the production cost pool bear to the total
of the current and estimated future period gross revenues for the
production cost pool. The estimated gross revenues for each production
cost pool range from $1 million to $34 million. The estimated gross
revenues for a cost pool may increase or decrease over time as a result
of more accurate estimates based on current data. As a result, the
ratio is recalculated with adjustments accounted for in the current and
prospective periods.
F-7
TRANSFORMING COSMETICS
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Computer Software Costs
The Company has internally developed a computer database to process and
track customer orders and to initiate and facilitate collections.
These costs are to be amortized using the straight-line basis over five
(5) years. As of December 31, 1997 and 1998, the Company has
capitalized costs associated with the development of this system of
$46,000 and $106,500, respectively. The system was operational in
December 1998 and has started to be amortized.
Design, Packaging, Organizational and Other Costs
Design, packaging, organizational and other costs are amortized on the
straight-line basis over five (5) years.
Reserve For Sales Refunds
Under the Company's sales policy, customers may return goods ordered
for up to 60 days after a sale is made. Accordingly, the Company has
established a reserve for sales refunds as of December 31, 1997 and
1998 based on historical trends.
Income Taxes
Pro rata income from the partnership is combined with the income and
expenses of the partners from other sources and reported in the
partners' individual federal and state tax returns. The partnership is
not a tax-paying entity for purposes of federal and state income taxes,
and thus, no income taxes have been recorded in the accompanying
statements.
Concentration of Credit Risk
The Company occasionally maintains deposits in excess of federally
insured limits. Statement of Financial Accounting Standards No. 105
identifies these items as a concentration of credit risk requiring
disclosure, regardless of the degree of risk. The risk is managed by
maintaining all deposits in high quality financial institutions.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
Interim Financial Statements
The accompanying statements of operations and cash flows for the nine
months ended September 30, 1998 and 1999 are unaudited. In the opinion
of management, the unaudited financial statements have been prepared on
the same basis as the audited financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for
fair presentation of the results of operations and cash flows for the
interim period. The results of operations for the nine months ended
September 30, 1998 and 1999 are not necessarily indicative of the
results to be expected for the entire year.
F-8
TRANSFORMING COSMETICS
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1997 1998
Furniture, fixtures, equipment,
and computer software $156,545 $241,923
Transportation equipment 53,180 29,448
Leasehold improvements 34,234 34,235
Equipment held under capital lease 26,232 26,232
-------- --------
270,191 331,838
Less: accumulated depreciation (87,740) (121,703)
Property and Equipment - Net $182, $210,135
Depreciation expense for the years ended December 31, 1997 and 1998 was
$43,905 and $51,867, respectively.
NOTE 3 - MARKETING MATERIALS AND OTHER
Marketing materials and other consist of the following at December 31.
Direct response marketing materials include the Company's television,
radio and printed marketing campaigns. Each of these campaigns
includes a toll-free 800 or 888 number that enables the Company to
specifically identify and track the customers who order its products.
1997 1998
Direct response marketing materials $733,007 $903,292
Design, packaging,
organizational and other 99,037 136,270
-------- ---------
832,044 1,039,562
Less: accumulated amortization (493,595) (586,002)
Marketing Materials and Other - Net $338,449 $453,560
Amortization expense for the years ended December 31, 1997 and 1998 was
$72,247 and $88,822, respectively.
NOTE 4 - DIRECT RESPONSE ADVERTISING
The company expenses the media costs of advertising the first time the
advertising takes place, except for direct response advertising, which
is capitalized and amortized over its expected period of future
benefits. Direct response advertising consist primarily of television
infomercials that include a specific toll-free number to order the
Company's products. The capitalized costs of the direct response
advertising are amortized based on the ratio of the cumulative
revenue generated to date versus the total cumulative revenue estimated
to be generated by the direct response advertising. The total
anticipated economic benefit from direct response advertising, as of
December 31, 1997 and 1998, is estimated to be $6,256,000 and
$11,759,500 respectively. Revenue generated as of December 31, 1997
and 1998 was approximately $5,643,000 and $10,482,000, respectively.
At December 31, 1997 and 1998, unamortized direct response advertising
cost of $256,927 and $512,538, respectively, was reported in the
accompanying balance sheet as other assets. For the years ending
December 31, 1997 and 1998, amortization expense applicable to direct
response advertising totaled $2,367,232 and $1,924,877, respectively.
F-9
TRANSFORMING COSMETICS
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 5 - SALES
In addition to sales of cosmetic products, the company provided various
direct response media buying services to third party clients. During
1998, approximately $4,500,000 of media sales are included in the net
sales of $9,552,994 which were sold at approximately 5% gross profit.
During 1997, approximately $1,700,000 of media sales are included in
the net sales of $7,687,626 that were sold at approximately cost (see
Note 9).
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
1997 1998
Term note, payable in monthly
installments of $453,
including Interest at 15.75% per year
secured by an automobile. $ 12,652 $ -
Term note, payable in monthly
installments of $667,
including interest at 8.5% per
year secured
by an automobile. 1,321 -
-------- ------
Total 13,873 -
Less: current maturities 5,026 -
--------- ------
Notes payable - noncurrent $ 8,947 $ -
NOTE 7 - OBLIGATION UNDER CAPITAL LEASE
In 1997, the company entered into a lease agreement for a telephone
system expiring in the year 2000 that qualified as a capital lease.
The asset has been recorded at the present value of future minimum
lease payments, discounted using an interest rate of 19.8%. The
capitalized cost of $26,232 less accumulated depreciation of $13,640 is
included in property and equipment (Note 2- Property and Equipment).
Depreciation expense for the system for the years ended December
31, 1997 and 1998 was $5,246 and $8,394, respectively. Interest expense
for the years ended December 31, 1997 and 1998 was $3,084 and $3,398,
respectively.
Future minimum lease payments under the capital lease are as follows:
Year ending December 31, 1999 $11,482
2000 2,871
--------
Total future minimum lease payments 14,353
Less: Amount representing interest (1,733)
------
Present value of future minimum lease payments 12,620
Less: Current portion 9,842
--------
Long Term Portion $2,778
F-9
TRANSFORMING COSMETICS
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 8 - COMMITMENTS
Operating Lease
On January 31, 1997, the company entered into a five year operating
lease for its office space, which expires January 31, 2002. The lease
provides for base annual rental of $80,000 for the first two years and
increases to $90,000 for the final three years. Additionally, the
lease provides that the company pays its proportionate share of any
increase in real estate taxes and insurance over the base year costs.
The lease contains a 5-year renewal option. The company also rents
various other space on a month to month basis. Rent expense for the
years ended December 31, 1997 and 1998 was $71,648 and $94,260,
respectively.
Line of Credit
In July 1998, the company's line of credit was renewed and increased to
$1,000,000. The Note provides for interest at the Libor Rate plus
3.75%, applied to balances borrowed against the line of credit. The
Note is secured by accounts receivable, inventory and prepaid media
purchases, and was guaranteed by the general partner. The Note has a
maturity date of May 2000 and has never been borrowed against as of
December 31, 1998.
NOTE 9 - RELATED PARTY TRANSACTIONS
The company transacts business with several of its general partners and
their affiliates as summarized below:
1997 1998
Nature of Transaction Nature of Relationship Amount Amount
Purchase of direct
response media Partners and Affiliates $1,704,215 $0
Purchase of media
business assets Partners and Affiliates $0 $200,000
Operating expenditures
including rent, office
cleaning, royalties, carpet
purchase, and
computer design. Partners and Affiliates $59,929 $88,744
The company's operating agreement provides for certain management
services to be provided by the general partner. No payments are due or
payable to the general partner for these services.
Balance due to/from related parties at December 31 are as follows:
1997 1998
Due from employees and affiliates $ 26,861 $ 87,974
Accrued royalties due general partner $ 80,000 $ 0
These transactions are payable on demand and without interest.
F-10
TRANSFORMING COSMETICS
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest expense paid by the company for the years-ended December
31,1997 and 1998 was $5,808 and $4,473, respectively
Schedule of non-cash financing and investing activities for the year
ended December 31, 1997:
Purchase of property and equipment $ 128,334
Less: capital lease assumed 26,232
----------
Cash paid for purchase of property and equipment $ 102,102
F-11
INDEX TO FINANCIAL STATEMENTS FOR
HealthandBeautyDirect.com, Inc.
Page
Independent auditors' report 1
Financial statements
Balance sheet 2
Notes to financial statements 3
INDEPENDENT AUDITORS' REPORT
To Board of Directors
HealthandBeautyDiret.com, Inc.
Baltimore, Maryland
We have audited the accompanying balance sheet of
HealthandBeautyDirect.com, Inc. as of July 14, 1999. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet
presentation. We believe our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of
HealthandBeautyDirect.com, Inc. as of July 14, 1999 in conformity with
generally accepted accounting principles.
S/Naden/Lean, LLC
Timonium, Maryland
August 27, 1999
- -1-
HealthandBeautyDirect.com, Inc.
BALANCE SHEET
JULY 14, 1999
ASSETS
CURRENT ASSETS:
Cash 500
TOTAL ASSETS 500
LIABILITIES AND STOCKHOLDER'S EQUITY
TOTAL LIABILITIES -
STOCKHOLDER'S EQUITY: 500
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 500
See Independent Auditor's Report and Accompanying Notes
- -2-
HealthandBeautyDirect.com, Inc.
NOTES TO FINANCIAL STATEMENTS
JULY 14, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
HealthandBeautyDirect.com, Inc. (the Company) was formed as a Delaware
corporation in March 1999. It is anticipated that the assets,
liabilities and business of Transforming Cosmetics, a Maryland general
partnership, will be transferred to the Company. Transforming
Cosmetics provides direct response marketing services to
various clients and distributes its own line of cosmetics under the
brand name Linda Seidel Natural Cover.
Cash and Cash Equivalents
For purposes of the balance sheet, the Company considers all
investments purchased with a maturity of three months or less to be
cash equivalents.
Estimates
The preparation of a balance sheet in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the balance sheet. Actual results could differ from those
estimates.
NOTE 2 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 10,000,000 shares, par value $.01 of
stock. The number of shares of common stock authorized is 9,800,000.
The company is also authorized to issue 200,000 shares of preferred
stock, however, there is no preferred stock issued or outstanding as of
July 14, 1999.
The Company issued one share of common stock for $500 on June 30, 1999.
- -3-
HEALTHANDBEAUTYDIRECT.COM, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF:
PART I -- INFORMATION REQUIRED IN PROSPECTUS
Form SB-2 Item Number and Caption Caption in Prospectus
1. Front of registration statement and
outside front cover of prospectus Outside front cover page of
prospectus
2. Inside front and outside back cover
pages of prospectus Inside front cover page of
Prospectus
3. Summary information and risk factors Prospectus summary; risk
factors
4. Use of proceeds How we intend to use the
proceeds of this offering
5. Determination of offering price Plan of distribution -
determination of offering
price
6. Dilution Dilution
7. Selling security holders Not applicable
8. Plan of distribution Plan of distribution
9. Legal proceedings Business -- legal
proceedings
10. Directors, executive officers,
promoters and control persons Management
11. Security ownership of certain
beneficial owners and management Principal shareholders
12. Description of securities Description of capital
stock
13. Interest of named experts and counsel Not applicable
14. Disclosure of commission position on Management -- limitation
indemnification for securities act and indemnification of
liability of
officers and directors
15. Organization within last five years Business - organization of
HBD
16. Description of business Prospectus summary; risk
factors;
business; certain
transactions
17. Management's discussion and analysis
or plan of operation Management's discussion and
analysis of financial
condition
and results of operations
18. Description of property Business - facilities
19. Certain relationships and related
transactions Certain transactions
20. Market for common equity and related
shareholder matters Risk factors; shares
eligible for future sale
21. Executive compensation Management: executive
compensation
22. Financial statements Index to financial
statements
23. Changes in and disagreements with
accountants on accounting and
financial disclosure Not applicable
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation, Article Ninth,
provide that a director of the Registrant shall not be liable to
the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, to the fullest extent permitted by
Delaware law. The Article also provides that the Registrant may
indemnify anyone who is or was an officer, director or employee of the
Registrant, or who is or was an officer, director or employee of any
other enterprise at the request of the Registrant, to the full extent
permitted by Delaware law.
Insofar as indemnification for liabilities arising under the
Securities Act, indemnification may be permitted to directors, officers
or persons controlling the Registrant as described in the foregoing
section. The Registrant has been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses of the Registrant in connection with the issuance and
distribution of the securities being registered are estimated as
follows, assuming the Maximum offering amount is sold:
Securities and Exchange Commission filing fee $ 1,668
Blue sky fees and expenses 12,000
Accountant's fees and expenses 25,000
Special counsel's fees and expenses 50,000
General counsel's fees and expenses 7,500
Printing 14,000
Postage 14,000
Marketing expenses 45,000
Chicago Stock Exchange listing fees 15,000
Miscellaneous 832
Total $ 185,000
(The Registrant will bear all expenses shown above.)
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has not sold any securities within the past three years.
ITEM 27. EXHIBITS
The exhibits listed below are filed as part of this Registration
Statement as described in Item 601 of Regulation S-B.
Exhibit No. Description
* 3.1 Amended and Restated Certificate of Incorporation
* 3.2 Corporate By-laws
* 4.1 Article II, pages 1-6, of the By-laws (Reference is made to
Exhibit 3.2)
* 4.2 Text and description of the form of certificate of common
stock certificate
* 5 Opinion and consent of counsel
* 10.1 Employment Contract with Linda Seidel
* 10.2 Management Services Agreement
** 23.1 Consent of Naden/Lean, LLC.
* 23.2 Consent of counsel (reference is made to Exhibit 5)
* 24 Power of Attorney
** 27 Financial Data Schedule
* 99.1 Share Purchase Order Agreement
** 99.2 Impound Agreement
** 99.3 Lock-In Agreement
* Filed with the original SB-2 and previous amendments
** Filed with this amendment no. 4
ITEM 28. UNDERTAKINGS.
(a) The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant as described in the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized
this pre-effective amendment number 4 to the registration statement to
be signed on its behalf by the undersigned, in the County of Baltimore,
State of Maryland, on November 22, 1999.
HealthandBeautyDirect.com, Inc.
By S/Brian M. Fraidin,
Chief Executive Officer & Director
In accordance with the requirements of the Securities Act of 1933, this
pre-effective amendment number 4 to the registration statement was
signed by the following persons in the capacities and on the dates
stated.
Signature Title Date
S/Brian M. Fraidin Chairman of the Board November 22, 1999
of Directors
S/Brian M. Fraidin Principal Executive Officer November 22, 1999
and Director
S/Brian M. Fraidin Principal Financial Officer November 22, 1999
S/Vipul Munjal Principal Accounting Officer November 22, 1999
S/Steven Zwagil Director November 22, 1999
S/Linda Seidel Director November 22, 1999
S/David Dougherty Director November 22, 1999
S/Todd Foreman Director November 22, 1999
S/Brian M. Fraidin November 22, 1999
Attorney in Fact
II-1
IMPOUND AGREEMENT
This agreement dated November , 1999 is between Bank of America.
(the "Impound Agent") and HealthandBeautyDirect.com, Inc., a Delaware
corporation (the "Company").
The Company proposes to offer directly for sale to investors (the
"Offering") up to 600,000 shares of its Common Stock (the "Shares") at
a price of $10.00 per share (the "Proceeds") as described in its
Prospectus. The Company desires to establish an escrow account in
which funds received from investors will be deposited pending completion
of the escrow period. Bank of America agrees to serve as Impound Agent
in accordance with the terms and conditions of this agreement and
certifies that it is not affiliated with the Company.
1. Establishment of Escrow Account. Effective as of the date of
the commencement of the Offering, the Company establishes an
interest bearing escrow account with the Impound Agent, entitled
"Bank of America Escrow Account No. ____________" (the "Escrow
Account").
2. Impound Period. The Impound Period shall begin with the
commencement of the Offering and shall terminate upon the earlier to
occur of: (a) the date upon which the Impound Agent has received in
the Escrow Account gross proceeds of $2,000,000 in deposited funds
(the "Minimum"), (b) June 30, 2000, or (c) the date upon which a
determination is made by the Company to terminate the offering prior
to the sale of the Minimum.
3. Deposits into the Escrow Account. The Company agrees that it shall
properly deliver, within 48 hours of its receipt, all monies
received from investors for the payment of the Shares to the Impound
Agent for deposit in the Escrow Account, accompanied with a copy of
the attached form of "Share Purchase Order," executed by the Company
and the investor. Checks payable to the Company shall be endorsed
by the Company for deposit to the Escrow Account. If checks are
delivered to the Impound Agent unendorsed, the Impound Agent may
supply the Company's endorsement and deposit them into the Escrow
Account. All payments to the Company by reason of credit card
purchases of the Shares shall be forwarded into the Escrow Account.
The Company shall date and number-stamp each Share Purchase Order
and shall also provide the Escrow Agent with, and maintain for its
own records, a copy of the form of consideration.
4. Disbursements from the Escrow Account.
A. In the event the Impound Agent does not receive the Minimum
deposits totaling $2,000,000 prior to the termination of the
Impound Period, the Impound Agent shall promptly refund to each
investor the amount received from such investor, without
deduction, penalty or expense to such investor, and the Impound
Agent shall notify the Company of such distribution. The purchase
money returned to each investor shall be free and clear of any and
all claims of the Company or any of its creditors.
B. In the event the Impound Agent receives the Minimum prior to
the terminationof the Impound Period, the funds in the Escrow
Account will not be released to the Company until such amount is
received by the Impound Agent in collected funds. For purposes of
this Agreement, the term "collected funds" shall mean all funds
received by the Impound Agent which have cleared normal banking
channels and are in the form of cash, plus any interest accrued on
such funds. The Minimum may be met by funds that are deposited
from the effective date of the offering up to and including the
date on which the contingency must be met.
C. Upon the return or release of funds in the Escrow Account, the
Impound Agent shall notify the Pennsylvania Securities Commission,
1010 North Seventh Street, 2nd floor, Harrisburg, PA 17102-1410.
That Commission has the right to inspect and make copies of the
records of the Impound Agent at any reasonable time wherever the
records are located.
5. Collection Procedure. The Company agrees that if a deposited check
is returned unpaid for any reason, the Impound Agent may charge the
Escrow Account for the amount of the check. However, the Impound Agent
may represent a returned check for payment by the financial institution
on which it is drawn, but the Impound Agent is not required to do so.
The Impound Agent may represent the check without notifying the Company
that it is doing so or that the check was not paid. Any check returned
unpaid to the Impound Agent shall be returned to the Company.
6. Interest on Funds in Escrow Account. Refunds to investors pursuant
to paragraph 4A shall include each investor's pro-rata share of any
interest earned while the investor's funds were on deposit.
7. Records to be Maintained by the Impound Agent. Records and accounts
of the transactions kept by the Impound Agent shall include records of
all transactions in the Escrow Account and copies of all Share Purchase
Orders. The Company shall maintain the original Share Purchase Orders
and copies of all checks, along with any other records of transactions
for a period of five years after the termination of the Impound Period.
8. Compensation of Impound Agent. The Company shall pay the Impound
Agent a fee for its escrow services in an amount of $___________. If it
is necessary for the Impound Agent to return funds to investors, the
Company shall pay to the Impound Agent an additional amount sufficient
to reimburse it for its actual cost for disbursing such funds.
9. Protection of the Impound Agent from Liability. The Impound Agent
may conclusively rely on, and shall be protected, when it acts in good
faith upon, a writing signed by Brian M. Fraidin, Chief Executive
Officer of the Company. Provided it uses due care, the Impound Agent
shall have no duty or liability to verify any such statement,
certificate, notice, request, consent, order or other document and its
sole responsibility shall be to act only as expressly set forth in this
Agreement. The Impound Agent shall be under no obligation to institute
or defend any action, suit or proceeding in connection with the
Agreement unless it is indemnified to its satisfaction. The Impound
Agent may consult counsel in respect of any questions arising under this
Agreement and the Impound Agent shall not be liable for any action
taken, or omitted, in good faith upon advise of such counsel.
10. Indemnification of the Impound Agent. The Company hereby agrees to
defend, indemnify, and to hold the Impound Agent harmless against, any
loss, liability or expense incurred without gross negligence or bad
faith on the part of Impound Agent arising out of or in connection with
its entering into this Agreement and carrying out its duties hereunder,
including the cost and expense of defending itself against any claim or
liability.
11. Direction by Court. In the event the Impound Agent shall be
uncertain as to its duties or rights hereunder or it shall receive
instructions, claims or demands from any of the parties hereto or from
third parties with respect to the property held hereunder, which, in its
opinion, are in conflict with any provision of this Agreement, it shall
be entitled to refrain from taking any action (other than to keep safely
the funds in the Escrow Account) until it shall be directed to act by
order or judgment of a court of competent jurisdiction.
12. Escrow Funds not Subject to Claims. During the Impound Period, the
Company is aware and understands that it is not entitled to any funds
received into the Escrow Account, such funds are not assets of the
Company and no amounts deposited in the Escrow Account shall become
property of the Company or any other entity, or be subject to the debts
of the Company or any other entity. The funds in the Escrow Account are
not subject to claims by creditors of the Company, or any of its
affiliates, associates or underwriters until the funds have been
released to the Company pursuant to the terms of this Agreement.
13. Binding upon Successors. This Agreement shall be binding upon, and
inure to, the benefit of the parties hereto, their heirs, successors and
assigns.
14. Termination of Agreement. This agreement shall terminate in its
entirety when all funds in the Escrow Account have been distributed as
provided in paragraph 4., above.
15. Notices. All statements and other notices produced by the Impound
Agent related to the Escrow Account shall be mailed to the Company at:
2328 West Joppa Road, Suite 100
Baltimore, MD 21093
Attn: Brian M. Fraidin, Chief Executive Officer
Except for deposits, all notices and other communications from the
Company shall be made to the Impound Agent as follows:
Bank of America
10 Light Street
MD4-30216-06
Baltimore, Maryland 21202-1499
Attn: Mary K. Giermek, Vice President
The Impound Agent shall be entitled to rely on all notices and
instructions received from Brian M. Fraidin, Chief Executive Officer of
the Company.
16. Governing Law. This Agreement shall be governed by Maryland law
and any action or proceeding, including arbitration, arising in
connection with this Agreement shall be brought and held in Maryland.
Bank of America HealthandBeautyDirect.com, Inc.
By: By:
Mary K. Giermek Brian M. Fraidin
Vice President Chief Executive Officer
Page 1
Naden/Lean, LLC
A PROFESSIONAL SERVICES COMPANY OF
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
November 22, 1999
We consent to the use of our report for Transforming Cosmetics dated
February 5, 1999 and for HealthandBeautyDirect.com, Inc. dated August
27, 1999 and to the reference to our firm under the caption "Experts"
in the Registration Statement (Form SB-2) and related
Prospectus of HealthandBeautyDirect.com, Inc.
S/Naden/Lean, LLC
Certified Public Accountants
Timonium One, 1966 Greenspring Drive, Suite 405 Timonium MD 21093
(410) 453-5500 National (800) 772-1065
Washington, D.C., (301) 982-1082 Fax (410) 453-5522
Email [email protected]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
company's financial statements for the period ending September 30 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 579,263
<SECURITIES> 0
<RECEIVABLES> 152,970
<ALLOWANCES> 12,308
<INVENTORY> 629,319
<CURRENT-ASSETS> 1,179,106
<PP&E> 232,573
<DEPRECIATION> 50,535
<TOTAL-ASSETS> 2,256,061
<CURRENT-LIABILITIES> 594,580
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,661,481
<TOTAL-LIABILITY-AND-EQUITY> 2,256,061
<SALES> 0
<TOTAL-REVENUES> 7,620,019
<CGS> 6,446,223
<TOTAL-COSTS> 971,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,912
<INCOME-PRETAX> 207,564
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207,564
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
LOCK-IN AGREEMENT
I. This Promotional Shares Lock-In Agreement ("Agreement"), which was
entered into on the 22nd day of November, 1999, by and between
HealthandBeautyDirect.com ("Issuer"), whose principal place of
business is located in Baltimore, Maryland, and Venture Media Limited
Partnership, Corky, Inc., World Net Communications, LLC., Alejandro
Mendoza, Vipul Munjal , Marion Jacques, Steven Zwagil, Todd Foreman,
Brian Fraidin, David E. Dougherty , Linda Seidel ("Security Holders")
witnesses that:
A. The Issuer has filed an application with the Securities
Administrators of the States shown on the attached Form CER-1
("Administrators") to register certain of its Equity Securities for
sale to public investors who are residents of those states
("Registration");
B. The Security Holder is the owner of the shares of common stock
or similar securities and/or possesses convertible securities,
warrants, options or rights which may be converted into, or
exercised to purchase shares of common stock or similar securities
of Issuer.
C. As a condition to Registration, the Issuer and Security Holder
("Signatories") agree to be bound by the terms of this Agreement.
II. THEREFORE, the Security Holder agrees not to sell, pledge,
hypothecate, assign, grant any option for the sale of, or otherwise
transfer or dispose of, whether or not for consideration, directly or
indirectly, PROMOTIONAL SHARES as defined in the North American
Securities Administrators Association ("NASAA") Statement of Policy
on Corporate Securities Definitions and all certificates representing
stock dividends, stock splits, recapitalizations, and the like, that
are granted to, or received by, the Security Holder while the
PROMOTIONAL SHARES are subject to this Agreement ("Restricted
Securities").
Beginning one year from the completion date of the public
offering, two and one-half percent (2 1/2%) of the Restricted
Securities may be released each quarter pro rata among the Security
Holders. All remaining Restricted Securities shall be released from
escrow on the anniversary of the second year from the completion date
of the public offering.
III. THEREFORE, the Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the Issuer's
assets or securities (including by way of tender offer), or any
other transaction or proceeding with a person who is not a
Promoter, which results in the distribution of the Issuer's assets
or securities ("Distribution"), while this Agreement remains in
effect that:
1. All holders of the Issuer's EQUITY SECURITIES will initially
share on a pro rata, per share basis in the Distribution, in
proportion to the amount of cash or other consideration that they
paid per share for their EQUITY SECURITIES (provided that the
Administrator has accepted the value of the other consideration),
until the shareholders who purchased the Issuer's EQUITY SECURITIES
pursuant to the public offering ("Public Shareholders") have
received, or have had irrevocably set aside for them, an amount
that is equal to one hundred percent (100%) of the public
offering's price per share times the number of shares of EQUITY
SECURITIES that they purchased pursuant to the public offering and
which they still hold at the time of the Distribution, adjusted for
stock splits, stock dividends recapitalizations and the like; and
2. All holders of the Issuer's EQUITY SECURITIES shall thereafter
participate on an equal, per share basis times the number of shares
of EQUITY SECURITIES they hold at the time of the Distribution,
adjusted for stock splits, stock dividends, recapitalizations and
the like.
3. The Distribution may proceed on lesser terms and conditions
than the terms and conditions stated in paragraphs 1 and 2 above if
a majority of the EQUITY SECURITIES that are not held by Security
Holders, officers, directors, or Promoters of the Issuer, or their
associates or affiliates vote, or consent by consent procedure, to
approve the lesser terms and conditions.
B. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the Issuer's
assets or securities (including by way of tender offer), or any
other transaction or proceeding with a person who is a Promoter,
which results in a Distribution while this Agreement remains in
effect, the Restricted Securities shall remain subject to the terms
of this Agreement.
C. Restricted Securities may be transferred by will, the laws of
descent and distribution, the operation of law, or by order of any
court of competent jurisdiction and proper venue.
D. Restricted Securities of a deceased Security Holder may be
hypothecated to pay the expenses of the deceased Security Holder's
estate. The hypothecated Restricted Securities shall remain subject
to the terms of this Agreement. Restricted Securities may not be
pledged to secure any other debt.
E. Restricted Securities may be transferred by gift to the
Security Holder's family members, provided that the Restricted
Securities shall remain subject to the terms of this Agreement.
F. With the exception of paragraph A.3 above, the Restricted
Securities shall have the same voting rights as similar EQUITY
SECURITIES not subject to the Agreement.
G. A notice shall be placed on the face of each stock certificate
of the Restricted Securities covered by the terms of the Agreement
stating that the transfer of the stock evidenced by the certificate
is restricted in accordance with the conditions set forth on the
reverse side of the certificate; and
H. A typed legend shall be placed on the reverse side of each
stock certificate of the Restricted Securities representing stock
covered by the Agreement which states that the sale or transfer of
the shares evidenced by the certificate is subject to certain
restrictions until two years from the close of the offering pursuant
to an agreement between the Security Holder (whether beneficial or of
record) and the Issuer, which agreement is on file with the Issuer and
the stock transfer agent from which a copy is available upon request
and without charge.
I. The term of this Agreement shall begin on the date that the
Registration is declared effective by the Administrators
("Effective Date") and shall terminate:
1. On the anniversary of the second year from the completion date
of the public offering; or
2. On the date the Registration has been terminated if no
securities were sold pursuant thereto; or
3. If the Registration has been terminated, the date that checks
representing all of the gross proceeds that were derived therefrom
and addressed to the public investors have been placed in the U.S.
Postal Service with first class postage affixed; or
4. On the date the securities subject to this Agreement become
"Covered Securities," as defined under the National Securities
Markets Improvement Act of 1996.
J. This Agreement to be modified only with the written approval of
the Administrators.
IV. THEREFORE, the Issuer will cause the following:
A. A manually signed copy of the Agreement signed by the
Signatories to be filed with the Administrators prior to the
Effective Date;
B. Copies of the Agreement and a statement of the per share
initial public offering price to be provided to the Issuer's stock
transfer agent;
C. Appropriate stock transfer orders to be placed with the
Issuer's stock transfer agent against the sale or transfer of the
shares covered by the Agreement prior to its expiration, except as
may otherwise be provided in this Agreement;
D. The above stock restriction legends to be placed on the
periodic statement sent to the registered owner if the securities
subject to this Agreement are uncertificated securities.
Pursuant to the requirements of this Agreement, the Signatories have
entered into this Agreement, which may be written in multiple
counterparts and each of which shall be considered an original. The
Signatories have signed the Agreement in the capacities, and on the
dates, indicated.
IN WITNESS WHEREOF, the Signatories have executed this Agreement.
HEALTHANDBEAUTYDIRECT.COM, INC.
S/Brian M. Fraidin, Chief Executive Officer November 22, 1999
S/Vipul Munjal, Chief Accounting Officer November 22, 1999
S/Alejandro Mendoza, Director November 22, 1999
S/Marion Jacques, Director and secretary November 22, 1999
S/Steven Zwagil, Director November 22, 1999
S/Todd Foreman, Director November 22, 1999
S/David E. Dougherty, Director November 22, 1999
S/Linda Seidel, Director November 22, 1999
VENTURE MEDIA LIMITED PARTNERSHIP
S/Brian M. Fraidin, Managing Partner and President November 22, 1999
CORKY, INC.
S/Linda Seidel, President November 22, 1999
WORLD NET COMMUNICATIONS, LLC.
S/Michael Seidel, President November 22, 1999
