As filed with the Securities and Exchange Commission on July 30, 1999
CIK No. 0001086500
Registration No. 333-78549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HealthandBeautyDirect.com, Inc.
(Name of small business issuer in its charter)
Delaware
(State or jurisdiction of incorporation or organization)
5961
(Primary Standard IndustrialClassification 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 pursuant to 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 500,000 $12.00 $6,000,000 --
_______________________________________________________________________
The registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states
that this registration statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
Subject to Completion, Dated July 30, 1999
500,000 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. Immediately prior to the closing of the sale of the
minimum of __,___ shares in this offering, we will acquire
all of the assets and liabilities of a direct response health
and beauty products and services marketing business currently
being operated as a partnership. The shares have been approved for
listing on the Chicago Stock Exchange after completion of
this offering.
All payments for shares will be deposited into an escrow
account at NationsBank, until we have sold _________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 500,000 shares, _________, 2000, or the
earlier date on which we decide to close the offering. A
minimum purchase of 50 shares is required. We reserve the
right to reject any subscription in full or in part.
This investment involves a high degree of risk. See "Risk
Factors" on pages 4 - 12.
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.
The shares are being sold directly by the HBD's chief
executive officer. He will be registered as a sales
representative, where required and will not receive any
commissions. The table assumes the maximum price of $12.00
per share and represents the proceeds to HBD before deducting
estimated expenses of $185,000 payable by the company,
including registration fees, legal and accounting fees, costs
of printing, copying and postage and other offering costs.
____________________________________________________________________
Underwriting
Price to Discounts and Proceeds
Public Commissions to HBD
____________________________________________________________________
Per Share $8.00 - None $8.00 -
$12.00 $12.00
_____________________________________________________________________
Total Minimum
(__,___ shares) $________ None $________
Total Maximum
(500,000 shares) $6,000,000 None $6,000,000
The date of this prospectus is July 30, 1999
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 4
Risk Factors 5
Use of Proceeds 11
Dividend Policy 12
Dilution 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Business 17
Management 27
Certain Transactions 29
Principal Shareholders 30
Description of Capital Stock 31
Shares Eligible for Future Resale 33
Plan of Distribution 33
Legal Matters 35
Experts 35
Additional Information 35
Index to Financial Statements 36
______________________
The terms "HealthandBeautyDirect.com", "HBD", "the company", "we" or
"our" mean the corporation and its predecessor partnership.
We will furnish our shareholders with annual reports containing audited
financial statements after the end of each fiscal year. Our corporate
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 is www.healthandbeautydirect.com.
Until ______________, 1999 (90 days after the date of this prospectus)
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
I. Our objective
At HealthandBeautyDirect.com, we market and distribute health and
beauty-related products and services directly to consumers through use
of direct response advertising channels such as television, direct
mail, the Internet, radio and direct sales. We provide comprehensive
direct response management services, including development of marketing
campaigns, media placement and product fulfillment. In addition to
marketing products for clients, we also market and distribute our own
cosmetic products under the brand name Linda Seidel Natural Cover.
Our objective is to become the country's leading direct response
marketer and distributor of high-quality health and beauty-related
products and services. We plan to accomplish this objective by:
1. Capitalizing on our existing direct response marketing
expertise, which includes the production of direct response video,
audio and printed marketing campaigns and the purchase and analysis of
direct response media.
2. Expanding our direct response channels of distribution to
include sales through our Internet web site and new service centers,
and adding to our medical and direct sales networks.
3. Developing business relationships with various health and
beauty-related companies through a series of marketing partnerships,
joint ventures, licensing agreements and acquisitions.
4. Realizing economies of scale by utilizing our cost-
effective operational infrastructure, which includes management
information systems, order processing, customer service and product
fulfillment.
II. Structure of the business
1. The company was formed in 1994 as a partnership under the
name Transforming Cosmetics.
2. Venture Media Limited Partnership provided the initial
capital and management services for formation and development of the
business. Linda Seidel contributed her product formulations, know-how
and a long-term employment contract.
3. In 1998, Transforming Cosmetics purchased the assets of
Venture Media Buying Service, a direct response media buying and
marketing business.
4. On March 18, 1999 HealthandBeautyDirect.com, Inc., a
Delaware corporation, was formed to acquire all of the assets,
liabilities and business of Transforming Cosmetics. This entity was
formed because a corporation is a more suitable form for public share
ownership than a partnership. This transaction will be
completed after the minimum number of shares is sold.
5. A total of 7,000,000 shares of common stock will be issued
to the partners of Transforming Cosmetics in exchange for the business
acquired. There will be a total of ______shares outstanding if the
minimum amount is sold, and 7,500,000 if the maximum amount is sold.
HOW TO BECOME A SHAREHOLDER
We are offering shares of our common stock directly to selected
investors, for a minimum investment of __ shares at $_____ per share or
$_______. You may become a shareholder by filling out the Share Order
Form and returning it with your check for the amount of your
investment. When your order has been accepted, you will receive a
signed copy and an acknowledgment letter. Share certificates will be
sent, beginning shortly after sale of the minimum number of shares.
HOW TO CONTACT US
Our corporate 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
We may be unable to implement our business strategy.
We have experienced substantial growth in revenues, number of employees
and assets since beginning operations in April 1994. Our continued
growth and profitability will depend, in part, upon our ability to
implement our business strategy and successfully expand our channels of
distribution. This strategy is principally dependent upon our ability
to cost effectively acquire new customers through the use of various
forms of direct response marketing, including our web site currently
under development. Continued implementation of this strategy will
depend in large part on:
- - the level of customer acceptance of our products and services;
- - our ability to create product and brand name awareness;
- - the effectiveness and efficiency of our direct response advertising;
- - our ability to identify health and beauty-related companies and
either acquire or form joint venture marketing relationships with these
companies;
- - our ability to successfully identify and respond to emerging trends
in the health and beauty-related industry;
- - developing internally, through joint venture or by acquisition,
expansion of our direct response infrastructure which includes media
buying, management information systems, telemarketing, fulfillment and
creative production;
- - our ability to continue to expand in the face of increasing
competition from other companies in the distribution of health and
beauty-related products and services;
- - successful hiring, training and retaining skilled employees, and
- - general economic conditions and consumer confidence.
If we are unable to achieve our goals, our business, financial
condition and results of operations may be materially and adversely
affected.
There is currently no public market for our shares and the market price
is likely to fluctuate.
Prior to this offering there has been no public market for our shares.
Our board of directors determined the public offering price for our
shares. Our shares have been approved for listing on the Chicago Stock
Exchange after completion of this offering. Upon completion of our
offering, there may be limited trading and the market price of our
shares is likely to be highly volatile. The volatility may result from
factors including:
- - fluctuations in our operating results;
- - changes in stock market analysts' recommendations regarding our
business, similar companies in our industry or general market and
economic conditions;
- - changes in market valuations of Internet, online service or direct
marketing companies;
- - announcements of technological innovations or new services by us or
our competitors;
- - announcements of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments; and
- - additions or departures of our key personnel.
The market prices for stocks following an initial public offering,
frequently reach levels that bear no relationship to their operating
performance. Such market prices generally are not sustainable and are
subject to wide variations. If our shares trade to such levels
following this offering, it is likely they will later experience a
material decline in share price.
The proceeds from the sale of the shares may be held in an escrow
account up to _______, 2000. During this time, investors cannot demand
return of their subscription proceeds. If we do not sell the minimum
number of shares, the investors will be refunded their investment in
full with interest.
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.
To grow and be profitable, we must keep acquiring new customers and new
products to sell to them.
We are increasing our costs by adding employees and equipment to handle
increased volume of sales and more products. Our ability to increase
sales enough to pay for these greater costs, and make a profit, will
depend in large part upon:
- - continuing to make our direct response advertising more effective
and efficient;
- - creating or acquiring new products;
- - acquiring or joint venturing with other health and beauty-related
companies;
- - identifying and responding to emerging trends in the health and
beauty-related industry; and
- - expanding our direct response infrastructure, which includes media
buying, management information systems, telemarketing, fulfillment and
creative production.
We need to develop our web site brand and create brand name awareness.
We believe that broad recognition and a favorable consumer perception
of the HealthandBeautyDirect.com brand are essential to our future
success. This positioning of our brand will largely depend on:
- - the success of our advertising and promotional efforts;
- - a substantial number of e-commerce transactions conducted on our web
site;
- - provision of high quality customer service and technical support;
and
- - multiple visits to our web site by loyal customers.
We will need to spend significant amounts on advertising and
promotions. The number of new customers or the number of transactions
on our web site may not justify our advertising and promotional
expenditures.
Our web site must increase sales and reduce costs enough to pay for its
development and operation.
Some of the challenges to our building and operating a profitable web
site are to:
- - complete development and testing of our web site within the next six
months;
- - cost effectively drive traffic to our web site;
- - develop an interesting and easy to navigate web site;
- - attract and retain leading product manufacturers and service
providers as participants;
- - develop strategic alliances for product development, marketing and
distribution;
- - maintain and enhance recognition of our web site brand name;
- - provide consumers with valuable information so that they continue to
frequent our web site;
- - manage the interaction among our web site and other direct response
channels of distribution;
- - continue to develop and upgrade our technology and information-
processing systems; and
- - provide superior customer service.
We are likely to experience losses as we develop and expand the web
site.
Although we have profitably managed the growth of our direct response
marketing business during the last two years, we are likely to
experience losses as we aggressively develop and expand our web site
and build the HealthandBeautyDirect.com brand name. These losses, if
incurred, could be caused by:
- - hiring additional people to develop, maintain and expand our web
site;
- - advertising and promotional efforts to drive traffic to our web
site;
- - finding new health and beauty-related products and services to offer
on our web site;
- - developing marketing materials to sell our new health and beauty-
related products and services;
- - purchasing computers, telecommunications and other infrastructure
equipment; and
- - expanding our general office and administrative overhead.
We expect intense competition for our web site concept.
There is a continuing rapid increase in the number of web sites
competing for the attention and spending of consumers and advertisers.
We will compete particularly with the following types of companies:
- - online services or web sites that target consumers in search of
health and beauty-related products or services, such as women.com,
drugstore.com, iVillage.com, planetrx.com, cosmeticscounter.com and
many others;
- - web retrieval and other web "portal" companies, such as AOL,
Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc., Yahoo! Inc. and
many others; and
- - publishers and distributors of traditional media, such as
television, radio and print.
Increased competition could result in price reductions, reduced margins
or loss of market share, any of which couuld hurt our business. To be
competitive, we must respond promptly and effectively to the challenges
of technological change, evolving standards and our competitors'
innovations by continuing to enhance our services, as well as our sales
and marketing channels. Competition is likely to increase
significantly as new companies enter the market and current competitors
expand their services. Many of these potential competitors are likely
to enjoy substantial competitive advantages, including:
- - larger technical staffs;
- - greater name recognition;
- - larger customer bases; and
- - substantially greater financial, marketing, technical and other
resources.
Our web site strategy depends upon Internet technology and consumer
acceptance of e-commerce.
For us to expand, consumers who have historically used traditional
means of commerce will instead need to elect to purchase health and
beauty-related products and services online. Very few products and
services have been profitably sold over the Internet. A sufficiently
broad base of consumers may not adopt, or continue to use, the Internet
as a medium of commerce.
Our success will also depend upon the development and maintenance of
the Internet's infrastructure to cope with increased traffic. This will
require a reliable infrastructure with the necessary speed, data
capacity and security. The Internet has experienced a variety of
outages and delays as a result of damage to portions of its
infrastructure. Future outages and delays would be likely to affect
the level of Internet usage and the processing of transactions on our
web site. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards to handle
increased levels of activity or due to increased government regulation.
The adoption of new standards or government regulation may require us
to incur substantial compliance costs.
We may have problems operating our web site.
If our computer or telecommunications systems fail to perform or we
cannot expand our systems to cope with increased demand, we could
experience:
- - unanticipated disruptions in service;
- - slower response times;
- - decreased customer service and customer satisfaction; or
- - delays in the introduction of new products and services;
Any of these problems could impair our reputation and damage our web
site brand name.
Our web site brand name could be lost or damaged.
We currently hold the Internet domain name "healthandbeautydirect.com,"
and a number of other related names. We could be unable to prevent third
parties from acquiring domain names that infringe or otherwise decrease the
value of our trademarks and other proprietary rights. The regulation of domain
names in the United States and in foreign countries is subject to change.
Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding
domain names. As a result, we may not acquire or maintain the
"healthandbeautydirect.com" domain name in all of the countries in which
we may desire to conduct business. In addition, the relationship between
regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear.
Our service center and direct sales operations will be important for
our expansion and we have only a limited history with them.
We need to effectively execute our plan to open service centers and
develop a direct sales network in new geographic markets. Some of the
challenges are to:
- - recruit, hire, train, manage and retain health and beauty
professionals;
- - manage the interaction among our multiple channels of distribution;
- - negotiate acceptable lease and operational terms;
- - generate additional direct marketing inquiries; and
- - refer selected direct marketing inquiries to our service centers and
direct sales network.
We heavily rely on our principal product and its developer.
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 its foundation system and to maintain and enhance Linda
Seidel's public image as a credible and authoritative source on the use
of cosmetics. The loss of the services of Ms. Seidel, or a decline in
her public image, would have a material adverse effect on HBD.
Our revenues are dependent on a limited number of products and
services.
Our revenues have been dependent upon the marketing of a limited number
of products and services. Although we have continued to expand our
revenues by providing various direct marketing services to third party
clients, there is no assurance that we will be able to continue to
successfully do so in the future. We do not maintain long-term
contracts with our clients. 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. In addition, we
anticipate that such clients will continue to vary over time, so that
the 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.
We need to develop new products and enhancements.
Our growth and success will depend, in a significant part, upon our
ability to enhance existing products and services, to develop new
products and services and to assist new clients in marketing their
products and services. Each of our product and service offerings must
be responsive to customer needs to successfully achieve market
acceptance. We will incur substantial expense and use significant
resources as we expand the type and range of the products and services
that we offer. However, we may not be able to attract sellers to
provide such products and services or consumers to purchase such
products and services through our channels of direct response
distribution. In addition, if we launch new products or services that
are not favorably received, our reputation and the value of our brand
name, HealthandBeautyDirect.com, could be damaged and have a material
adverse effect on our business and financial condition.
We offer a liberal product return policy and rely on credit card
processing.
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 current
reserves 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.
The timing of our expenditures may not match with or result in
sufficient generation of revenues.
Our business involves a number of risks inherent in the operation of a
direct marketing business. The production of marketing materials and
media purchases for the Internet and television involve significant
advance expenditures. These expenditures cannot be adjusted based upon
actual performance. 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 are dependent on manufacturers, vendors and suppliers.
We use various domestic and foreign suppliers to manufacture our
products and provide us with packaging components. In addition, our
operations rely on a number of different outside service providers,
such as 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 components with these manufacturers, vendors or suppliers
necessary for the operation of our business. The existing
relationships are based on short-term service 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. Certain components used in our products are available from a
limited number of sources. If alternative suppliers were needed in the
future, or if sufficient supplies could not be obtained from the
existing sources, there could be delays in shipments or cost increases.
In light of our emphasis on exceptional customer service, the efficient
and uninterrupted operation of our order processing and fulfillment
functions are critical to our business. Moreover, the successful
operation of our direct marketing business is dependent upon the timely
and efficient preparation of marketing materials and media purchases.
Any interruption in services from outside service providers, including
delays or disruptions resulting from labor disputes, such as the 1997
UPS strike, power outages, human error, adverse weather conditions or
natural disasters, could have a material adverse effect on our
business, operating results and financial condition.
We may be unable to control external costs.
Our business is affected by a number of external costs that are beyond
our control which have increased significantly and unexpectedly.
Examples of costs include direct response media prices, telemarketing
fees, commercial production rates and postage charges which have
steadily increased. We expect them to continue to increase in the
future.
We are dependent on management information systems.
Our business is largely dependent upon management information systems
that assist in processing orders, electronically charging customer
credit cards, analyzing direct response media results, shipping
merchandise on a timely basis, responding to customer service inquiries
and analyzing data on the operation of the business. 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. If we experience difficulties in implementing or operating
our management information systems, this could have a material adverse
effect on our business, operating results and financial condition.
Additional sales and other taxes may be imposed and required to be
collected.
We collect sales and use taxes on transactions with residents of
Maryland only. In the future, we may have to collect taxes on sales to
residents of other states. In addition, after the current three-year
Congressional moratorium, one or more states or localities may seek to
impose sales and use tax collection obligations on out-of-state
companies that engage in electronic commerce. If we were required to
collect additional sales or use taxes, it would become more expensive
to purchase our products and would increase our administrative costs.
We may have fluctuations in our quarterly results.
Variations in the costs of direct response media, the dollar amount of
direct response media purchases and the dollar amount of direct
response media sales to third parties throughout the year can result in
significant increases or decreases in oour revenues and profits from
quarter to quarter. In addition, other quarterly influences may
develop which could impact our quarterly results. Some of these
influences are:
- - increases in return rates;
- - the timing of expenses;
- - our ability to attract and retain users at our web site;
- - our ability to upgrade and develop our operating infrastructure;
- - increases in competition;
- - disruptions in manufacturing and other third party suppliers;
- - Internet system downtime; and
- - general economic conditions.
Any of these influences could have a material adverse effect on our
business, operating results and financial condition.
Our growth will depend on existing and additional key management
personnel.
Our success will be dependent on the experience and abilities of the
existing shareholders of the General Partner of Venture Media Limited
Partnership, the majority shareholder of HealthandBeautyDirect.com,
Inc. The loss of these services could have a material adverse effect
on our future growth. Brian M. Fraidin is a shareholder in the General
Partner of Venture Media Limited Partnership and is the chief executive
officer of HealthandBeautyDirect.com. In this capacity he is
responsible for overseeing all the day-to-day operating decisions for
the business. Other shareholders of the General Partner of Venture
Media Limited Partnership participate in the strategic, financial and
legal decision-making. They are not employees of
HealthandBeautyDirect.com and each of them is actively involved with
various other business investments. The services of Mr. Fraidin and the
other shareholders of the General Partner of Venture Media Limited
Partnership will be provided to HealthandBeautyDirect.com through a
management services agreement with Direct Marketing Services Group,
LLC. This entity is owned by various partners of and advisors to
Venture Media Limited Partnership who have provided management services
to the company. Our only employment agreement is with Linda Seidel.
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 the company upon
the closing of this offering. There can be no assurance that we will be
able to maintain such key man life insurance in the future.
In addition, our performance is substantially dependent on:
- - the continued employment and performance of our current operating
management team;
- - our ability to retain and motivate our key employees; and
- - our ability to identify, hire, train, retain and motivate additional
highly skilled technical, managerial and marketing personnel.
Competition for personnel in our industry is intense. If we do not
succeed in attracting new personnel or retaining and motivating our
current personnel, the financial condition and operating results of our
business could suffer significantly.
Government regulation may adversely affect our business.
Our products, and our marketing and advertising practices, are subject
to regulation by various federal, state and local regulatory
authorities, including the Federal Trade Commission, Federal
Communications Commission and the U.S. Food and Drug Administration.
We are also subject to other federal, state and local regulatory
requirements, including federal, state and local environmental
regulation and regulations issued by the U.S. Occupational Safety and
Health Administration. As we begin to market a broader variety of
products and services, we may become subject to regulation by agencies
other than those listed above. An alleged violation of any of these
regulations could have a serious adverse financial effect on us and
cause a major change or discontinuance of our business.
We are exposed to product liability risks.
Our business exposes us to potential product liability risks that are
inherent in the marketing and sale of health and beauty-related
products and services. 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.
Preferred stock could be issued without a shareholder vote.
Our Board of Directors have no present intention to issue any shares of
authorized preferred stock. They could do so, however, without further
vote or action by the shareholders. They are also authorized to fix
the terms and provisions of each series including dividend rights,
preferences over dividends on our common stock, conversion rights,
voting rights, (which may be senior to the voting rights of the common
stock), redemption rights, terms of any sinking fund, and rights upon
liquidation, including preferences over our common stock. These
provisions could limit the price that investors might be willing to pay
in the future for shares of our common stock.
Shares eligible for future sale.
Sales of significant amounts of common stock by current shareholders in
the public market after this offering could adversely affect the market
price of the common stock. Of the 7,000,000 shares to be issued to our
present owners, 5,477,216 shares are subject to a "lock-in agreement"
which restricts their transfer during the two years following
completion of this offering.
We may identify internal systems that present a Year 2000 compliance
risk.
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 certain systems 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. As our analysis of our internal systems proceeds, we may
identify systems that present a Year 2000 risk and 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.
We have received assurances from many of our suppliers that they are or
will become Year 2000 compliant in a timely manner. We also rely upon
governmental agencies, telecommunication service companies, utility
companies and other service providers outside of HBD's control.
Additionally, the Internet could face serious disruptions arising from
the Year 2000 problem. Significant uncertainty exists concerning the
potential costs and effects associated with any year 2000 compliance.
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 also cannot guarantee that consumers will be
able to visit our web site without 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. Moreover, the costs
related to Year 2000 compliance could be significant.
Intellectual property protection.
We currently hold the Internet domain name "healthandbeautydirect.com,"
and various other related names. Internet regulatory bodies generally
regulate domain names. The regulation of domain names in the United
States and in foreign countries is subject to change. Regulatory bodies
could establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As
a result, we may not acquire or maintain the
"healthandbeautydirect.com" domain name in all of the countries in
which we may desire to conduct business. In addition, the relationship
between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names
that infringe or otherwise decrease the value of our trademarks and
other proprietary rights.
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. Our actual results could differ materially
from those suggested by our forward-looking statements.
HOW WE INTEND TO USE THE PROCEEDS OF THIS OFFERING
We estimate that the net proceeds to HBD will be $_______ from the sale
of the minimum number of shares and $5,815,000 from sale of the maximum
number of shares, after deducting estimated offering expenses payable
by HBD. The table below shows how we intend to use the estimated net
proceeds from this offering. The first funds received will be used for
Direct Response Marketing and Web Site Development.
Approximate Amount and Percentage
Category Description Minimum Maximum
Direct Response Marketing (1)...$________ 00.0% $1,600,000 27.5%
Web Site Development (2)...$________ 00.0% $1,200,000 20.6%
Service Centers
& Direct Sales (3)...$________ 00.0% $800,000 13.8%
Product Line Expansion (4)...$________ 00.0% $750,000 12.9%
Management Personnel (5)...$________ 00.0% $600,000 10.3%
Capital Equipment (6)...$________ 00.0% $450,000 7.7%
Inventory (7)...$________ 00.0% $415,000 7.1%
------- ----- ---------- -----
Total Use of Net Proceeds $________ 00.0% $5,815,000 100.0%
If at least the minimum, but less than the maximum number of shares are
sold in this offering, the proceeds in excess of the minimum will be
allocated in proportion to the use of maximum proceeds. 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 service centers and direct sales force will
require expenditures on new site deevelopment, 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 the Company's expanded marketing efforts in such areas as
our web site, service centers, direct sales 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
NationsBank 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
This table shows what the former partners 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
Former
Partners 7,000,000 00.0% $1,695,969 00.0% $ 0.24
New
investors 000,000 00.0% $0,000,000 00.0% $ 12.00
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
Former
partners 7,000,000 93.3% $1,695,969 22.0% $ 0.24
New
investors 500,000 6.7% $6,000,000 78.0% $ 12.00
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with HBD's Financial Statements and their Notes included in this
prospectus. This discussion contains certain forward-looking
statements that involve known and unknown risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions.
Our actual results and the timing of certain events could differ
materially from those anticipated in the forward-looking statements.
Factors that could cause or contribute to such differences include, but
are not limited to, those discussed below and in the section entitled
"Forward-Looking Statements."
Overview
HBD provides direct marketing services for specialty health and beauty-
related products and services. 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 (gross sales less product returns) from $7.69
million in 1997 to $9.55 million in 1998, an increase of 24%. During
the first six months of 1999, we experienced a 6% increase in net sales
to $5.58 million from $5.38 for the first six 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, specialty service centers and independent
distributors.
Prior to 1997, the Linda Seidel Natural Cover product line accounted
for 100% of our net sales. Recently, we have expanded by providing
direct response marketing services to third party clients, and these
new clients have represented an increased percentage of our net sales.
The Linda Seidel Natural Cover product line accounted for approximately
78% of net sales in 1997 and approximately 53% of net sales in 1998.
During 1999 it is anticipated that this product line will represent
less than 30% of net sales.
In addition, our marketing and sales strategy has been to expand our
product offerings and channels of distribution with the objective of a
balance of net sales among various products and channels of
distribution. This will 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 June 30, 1999, we had unamortized production costs for direct
response marketing materials of $422,043. 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 certain state income taxes.
Upon incorporation and the acquisition of the business of the general
partnership, we will become subject to federal and state income taxes.
Results of operations
The following table sets forth, for the periods indicated, certain
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 Six Months
December 31, Ended June 30
1997 1998 1998 1999
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.3 77.8 81.1 86.8
------ ------ ------ ------
Gross profit 26.7 22.2 18.9 13.2
Marketing and selling expenses 13.1 9.9 9.4 5.5
General and administrative expenses 9.3 6.0 6.6 5.5
------ ------ ------ ------
Income from continuing operations 4.4 6.3 2.9 2.2
Non-operating (expense) income, net (0.1) 0.1 0.1 0.1
------ ------ ------ ------
Net Income before taxes 4.3% 6.4% 3.0% 2.3%
------ ------ ----- ------
Comparison of 6 months ending June 30, 1999 and June 30, 199
Net sales (gross sales less product returns). Net sales increased
approximately 6% to $5.68 million for the six months ended June 30,
1999 from $5.38 million for the six months ended June 30, 1998. Net
sales increased due to growth in direct response media sales and
services to third party clients.
Gross profit. Gross profit decreased 26% to $0.75 million for the six
months ended June 30, 1999 from $1.0 million for the six months ended
June 30, 1998. As a percentage of net sales, gross profit declined to
13.2% for the six months ended June 30, 1999 from 18.9% for the six
months ended June 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 65% to $0.31 million for the six months ended June 30, 1999
from $0.51 million for the six months ended June 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 six months of 1999 than were sold during the same period of
1998. As a percentage of net sales, marketing and selling expenses
decreased to 5.5% from 9.4%.
General and administrative expenses. General and administrative
expenses decreased $40,818 or 13% to $0.31 million for the six months
ended June 30, 1999 from $0.35 million for the six months ended June
30, 1998. As a percentage of net sales, general and administrative
expenses decreased to 5.5% for the six months ended June 30, 1999 from
6.6% for the six months ended June 30, 1998.
Other non-operating items. Non-operating items accounted for
approximately 0.1% income for the six months ended June 30, 1998 and
approximately 0.1% income for the six months ended June 30, 1998. The
non-operating items did not have a significant effect on us during
either six-month period.
Provision for income taxes. During the first six months of 1999 and
1998 the company was operated as a general partnership and as a result
was not subject to federal or certain state income taxes.
Comparison of years ended December 31, 1998 and December 31, 1997
Net sales (gross sales less product returns). 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.
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
certain 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 NationsBank and Venture Media Limited Partnership's initial
investment. We had cash and cash equivalents of $579,263 as of June
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 to the name of the Company.
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 NationsBank. As of December 31,
1998, the credit line had been increased to $1,000,000. As of June 30,
1999, this bank line of credit 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. The Year 2000 Project Group is
currently in the process of identifying all material Year 2000 issues
with our systems. In addition, we have initiated discussions with our
significant suppliers regarding their plans for Year 2000 material
issues. We have received assurances from many of our suppliers that
they are or will become Year 2000 compliant in a timely manner. We
also rely upon governmental agencies, utility companies,
telecommunication service companies and other service providers outside
of our control. There can be no assurance that such governmental
agencies or other third parties will not suffer a Year 2000 business
disruption that could have a material adverse effect on our business,
financial condition and operating results.
As the process of evaluating our systems proceed, we may identify
systems that present a Year 2000 risk. In addition, if any third
parties who provide goods or services essential to our business
activities fail to appropriately address their Year 2000 issues, such
failure could have a material adverse effect on our business, financial
condition and operating results. Examples could include a Year 2000
related disruption on the part of the telemarketing firms which handle
customer credit card purchases, the financial institutions which
process these credit card purchases or various providers of aspects of
our web site. The Year 2000 Project Group's initiatives include the
development of contingency plans in the event we or one of our
suppliers has not adequately addressed Year 2000 issues in a timely
manner. We have allocated approximately $50,000 in management time and
resources evaluating our systems thus far, and expect that the entire
Y2K compliance project will have cost $75,000 by the time we conclude
development of a contingency plan in September of 1999.
BUSINESS
At HealthandBeautyDirect.com, we market and distribute health and
beauty-related products and services directly to consumers through use
of direct response advertising channels such as television, direct
mail, the Internet, radio and direct sales. We provide comprehensive
direct response management services, including development of marketing
campaigns, media placement and product fulfillment. In addition to
marketing products for clients, we also market and distribute our own
cosmetic products under the brand name Linda Seidel Natural Cover.
Management's strategy for the company's future is described below.
Background of the Business
Our company was formed in April 1994 as a partnership under the name of
Transforming Cosmetics. Venture Media Limited Partnership provided the
initial capital and management services for formation and development
of the business. Linda Seidel contributed her product formulations,
know-how and a long-term employment contract. In 1998, Transforming
Cosmetics purchased the assets of Venture Media Buying Service, a
direct response media buying and marketing business.
Incorporation of the Business
HealthandBeautyDirect.com, Inc. is a Delaware corporation formed on
March 18, 1999 to acquire all of the assets, liabilities and business
of Transforming Cosmetics. HBD's corporate address is 2328 West Joppa
Road, Suite 100, Baltimore, Maryland 21093. Our toll free telephone
number is (800) 797-5335 and our fax number is (800) 410-5858. We have
formed a corporation as a more suitable form for public ownership than
the current partnership. At the moment, the corporation has no
significant assets or liabilities. After the minimum number of shares
are sold in this offering, all of the assets and liabilities of
Transforming Cosmetics will be transferred to the corporation.
7,000,000 shares of our common stock will be issued to the partners of
Transforming Cosmetics in exchange for the business acquired. There
will be a total of ______ shares outstanding after this offering if the
minimum amount is sold, and 7,500,000 if the maximum amount is sold.
Our Board of Directors determined the public offering price, based upon
our revenue growth since organization, the industry in which we
operate, our business potential and earning prospects, and the general
condition of the securities markets at the time of this offering. The
price at which our shares may trade at any time after this offering
could vary considerably from the offering price.
Competitive industry overview
In recent years, retailing in the United States has been characterized
by a rapidly growing shift to non-store retail sales or "direct to
consumer sales" through such media as direct mail catalogs, television
infomercials, home shopping channels and, recently, the Internet.
These alternative forms of non-store retailing, which in 1997 accounted
for approximately $382 billion in sales, are expected to grow
approximately 8% per year for the next five years according to the
Direct Marketing Association. In particular, the Internet has
experienced unprecedented growth in recent years and this growth is
expected to continue. According to International Data Corporation,
business to consumer commerce on the Internet will grow from
approximately $5 billion in 1997 to approximately $95 billion in 2002.
And the number of Internet users worldwide will grow from an estimated
100 million in 1998 to an estimated 320 million in 2002. This growth
in direct to consumer marketing is attributed to the convenience of
alternative forms of shopping for time-constrained, dual-career
consumer households, the increasingly high level of customer service
and reliability offered by leading direct marketing firms and the
expansion of the Internet driven by continued advancements in computer
technology.
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 other direct marketing web
sites such as women.com, drugstore.com, iVillage.com, planetrx.com,
health4her.com cosmeticscounter.com and many others. Our web site may
also indirectly compete with web retrieval and web "portal" companies,
such as America Online, Yahoo, Infoseek, and Excite, who direct
consumer traffic to many other competitors. In addition, our Linda
Seidel's 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
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. Increased competition
could result in price reductions, reduced margins or loss of market
share, any of which could adversely affect our business, financial
condition and operating results.
General business strategy
Our objective is to be the country's leading direct response marketer
and distributor of high-quality health and beauty-related products and
services. We plan to accomplish this objective by:
- - capitalizing on our direct response marketing expertise to grow
sales;
- - expanding our direct response channels of distribution;
- - employing our cost effective integrated operational infrastructure;
- - growing our loyal customer database; and
- - developing marketing relationships with health and beauty-related
companies.
Detailed descriptions of these five steps are outlined below:
Capitalizing on our direct response marketing expertise to grow sales
Advertising through a variety of mass-market direct response media
venues such as cable and broadcast television, catalogues and direct
mail is our primary channel of distribution. We utilize direct
response marketing as a means for distributing our products and we
provide our direct response marketing services to various clients. We
have utilized direct response marketing channels of distribution versus
the traditional retail channel of distribution for the following
business reasons:
- - sophisticated analysis and monitoring of the efficiency of
advertising expenditures;
- - low cost method to test and fine tune new product introductions;
- - cost effective operational infrastructure to nationally distribute
consumer products;
- - ownership of a proprietary customer database for future marketing
efforts; and
- - direct interaction with customers to provide them with exceptional
customer service.
Our direct response advertising expenditures accounted for
approximately 65% and 52% of revenues in 1998 and 1997, respectively.
We expect these expenditures to continue to represent a significant
percentage of revenues for the foreseeable future. Our future growth
and profitability will be dependent in part on the efficiency of our
advertising expenditures, our ability to develop effective marketing
messages and our ability to maintain acceptable costs per inquiry,
costs per order and operating margins. Historically, our advertising
expenditures have generated revenue benefits beyond the actual duration
of the advertisements. HBD may not experience similar benefits from
advertising expenditures in the future.
We intend to continue to pursue opportunities to leverage our unique
direct response marketing infrastructure and expertise as we expand our
presence on the Internet, establish our service centers, develop
alternative channels of distribution and build our international
distribution network.
Direct response marketing services. We spend a significant portion of
our net sales on advertising because of our direct response marketing
methods of consumer product distribution. In an effort to maintain the
lowest possible marketing costs per customer order, we have developed
the capabilities to produce a variety of direct response marketing
materials including television and radio commercials, video mailers and
printed materials. In addition to creative production, we are also
able to execute the associated direct response media advertising
campaigns. Traditionally, these services are performed on a contract
basis with outside vendors. However, we have developed the expertise
to execute many of these tasks in-house by utilizing our staff and the
services of cost-effective free-lance professionals.
Production of direct response video, print marketing materials and web
sites. Typically, a company would contract with a creative agency to
develop, manage and execute a marketing strategy for its products. The
agency would in turn hire writers, directors, graphic designers,
videographers and other professionals to produce the required marketing
videos, print pieces, web sites or radio commercials. By bringing the
development and management of the marketing strategy in-house and
utilizing free-lance professional production staff, we are able to
produce effective marketing materials at significantly lower costs. In
addition, a dedicated in-house staff and a large network of free-lance
professionals affords us the increased flexibility to respond quickly
to changes in the marketplace with new marketing materials when
necessary. Various post-production facilities utilizing the services
of an editor and video editing equipment produce HBD's final video
marketing materials.
As with video production, print production involves the services of
several vendors to develop printed marketing materials. We maintain a
working relationship with a group of graphic artists, photographers,
printers and paper suppliers to produce the required materials at the
lowest possible costs. Brochures, postcards, newsletters and other
direct mail pieces are produced in-house utilizing a variety of
software packages.
The creative and technical skills developed by our internal staff and
free-lance professionals in the direct response world of commercial
television and print marketing have positioned us well to capitalize on
direct to consumer marketing over the Internet. Although new computer
technologies and business strategies are being developed and tested to
determine how to successfully generate e-commerce, many of the same
design and marketing fundamentals of communication will be utilized.
These talents will be applied as we develop and expand our
HealthandBeautyDirect.com web site.
Direct response media buying. The purchase of direct response
advertising time is the largest expenditure associated with our
business to date. Our media buying strategy is made with a
concentrated focus on each campaign's profitability and long-term
corporate objectives. The key to the success of our direct response
media campaigns is micro-management of the entire process. We have
developed a fully integrated approach to managing each of our direct
response marketing campaigns including media buying, financial analysis
and project management.
Effective media buying requires a combination of established industry
relationships and creative negotiation of advertising rates. We have
purchased television media time 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. In addition, we maintain a comprehensive
proprietary database of media costs and performance results from our
direct response campaigns.
Comprehensive financial analysis of direct response advertising
requires consideration of many factors. Our analysis includes the
impact on our direct response campaigns from costs such as media time,
manufacturing, credit card processing, inbound telemarketing,
fulfillment, shipping, product returns, delinquent accounts receivable,
payments by check and other costs that are unique to each project. A
computer simulated financial model of each direct response campaign is
developed to provide management with appropriate reports, financial
statements and projections.
We have assembled a competent team of service providers to maintain a
cost-effective operating structure to execute our various direct
response media campaigns. Project management requires effective
coordination among each of these service providers. 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.
Our comprehensive direct response media capabilities provide us with
the ability to effectively manage the advertising costs associated with
our various campaigns. In addition, we can efficiently interpret the
results of our media purchases to limit financial exposure or measure
financial profitability. Our expertise in direct response media buying
will be one of the key components to our successful expansion through a
variety of marketing partnerships and joint ventures. Over the next
few years, we plan to expand our direct response media buying
capabilities through a series of personnel additions and strategic
acquisitions.
Expanding our direct response channels of distribution.
We are expanding our customer database through development of multiple
direct response channels of distribution including the Internet,
service centers, alternative distribution channels and an international
distribution network. These channels of distribution provide customers
with greater accessibility and convenience in their purchase of our
health and beauty-related products and services. HBD believes
maintaining significant control over its various channels of
distribution provides competitive advantages that include the ability
to:
- - leverage investments in advertising and marketing programs across
multiple distribution channels to build national consumer brand names;
- - enhance customer satisfaction by 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. As part of our direct to consumer business strategy,
we are developing HealthandBeautyDirect.com as a marketing and
distribution mechanism to facilitate growth in sales of our products
and services. Similar to the development and growth of catalog and
television direct to consumer sales over the last two decades, we
believe that the Internet offers us unique opportunities for sales
growth in the future. Several factors have contributed to the growth of
direct to consumer marketing on the Internet including:
- - a large installed base of personal computers in homes;
- - improvements in the network infrastructure;
- - easy, low-cost access to the Internet;
- - awareness of the Internet among consumers; and
- - the rapidly expanding availability of online content and commerce.
As a result, the Internet is dramatically affecting the methods by
which consumers are evaluating and buying goods and services because it
provides consumers with a broad selection, increased pricing power and
unparalleled convenience. 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.
It is anticipated that our web site will provide distribution of a
broad range of health and beauty-related products and services over the
Internet to the following:
- - 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 the advertising economies of scale of a coordinated
national direct response marketing campaign.
The following categories of products and services are samples of what
we expect to be available to our customers through
HealthandBeautyDirect.com:
- - Beauty and Fashion - Cosmetics, Bath & Body, Skin Care, Hair,
Fragrances, Nails, Makeup Advice, etc.;
- - Cosmetic Surgery - Face, Eyes, Neck, Hair, Body, Consultations,
etc.;
- - Exercise and Fitness - Equipment, Videos, Health Clubs, Personal
Trainers, etc;
- - Diet and Nutrition - Vitamins, Herbs, Supplements, Diet Programs,
Health Foods, Nutritionists, etc.;
- - Medical Alternatives - Wellness Centers, Herbalists, Aromatherapy,
Homeopathy, Acupuncturists, etc.; and
- - Health and Pharmacy - Prescription and non-prescription
pharmaceuticals, Personal Care, etc.
Based on our internal development projections, sections of our
HealthandBeautyDirect.com web site will be completed and made available
for use by our customers within the next six months. The execution
steps for the timely completion of our web site are detailed below:
- - 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
- - arrangements for availability from multiple 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 cost effectively
drive traffic to HealthandBeautyDirect.com. We believe that our most
effective mechanism for driving traffic to our web site will be
utilizing various forms of direct response marketing techniques.
The core of our advertising strategy is to capitalize on the
experiences and capabilities of our personnel, clients and vendors who
have successfully marketed products and services in the direct response
television, print, radio and database management industries. Our goal
will be to develop unique cost effective direct response advertising
campaigns to promote the HealthandBeautyDirect.com web site. As with
all direct response marketing campaigns, our challenge will be to
develop clear marketing messages, design marketing materials that
communicate our message, test the effectiveness of these marketing
materials in the media and analyze the financial results of our media
expenditures. Based on the results of our analysis, we will evaluate
how we can fine tune our marketing message, marketing materials and
media purchases to cost effectively increase our ability to drive
customers to our web site.
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
the Internet continues to develop, and more consumers accept it as a
safe, convenient way to purchase goods, we expect that sales through
our web site, HealthandBeautyDirect.com, will contribute significantly
to our overall direct to consumer business model.
In the United States through all channels of distribution, these
categories of health and beauty-related products and services represent
in excess of $150 billion in sales annually according to the following
industry sources:
- - Cosmetic, Hair and Personal Care - $13 billion, Goldman Sachs
Investment Research;
- - Diet, Weight Loss & Nutrition - in excess of $30 billion, Center for
Science in Public Interest;
- - Health & Fitness - Greater than $50 billion, Standard and Poor's
Industry Reports;
- - Cosmetic Surgery - in excess of $2 billion, American Society of
Plastic & Reconstructive Surgeons; and
- - Pharmaceutical - in excess of $100 billion, Standard and Poor's
Industry Reports.
These numbers are estimates, are available in the public marketplace
and should only be used for a general understanding of the size of the
health and beauty-related industry. We have not independently verified
these estimates and have not requested permission from their sources to
publish them in this prospectus.
Service centers. Our direct to consumer strategy also involves
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. By
combining the unique benefits of direct response marketing, with
service center locations, we plan to provide our customers with a cost-
effective way to receive professional consultations while experiencing
our products and services first hand. Once developed, a network of
service centers will provide us with a unique platform to introduce and
test market new health and beauty-related products and services. At the
present time, we operate one service center location and are scheduled
to secure two new locations by year end 1999.
It is anticipated that while visiting our service centers, customers
will be introduced to the ways they can transact business with us in
the future at our HealthandBeautyDirect.com web site, via our toll-free
numbers and through our catalogs. The successful implementation of our
service center distribution concept will incorporate the following
strategies.
- - We will use our unique expertise in purchasing advertising and
developing effective video and printed marketing materials to educate
customers as we develop new service center locations.
- - Our HealthandBeautyDirect.com web site will provide information
about new service center locations and how consumers may schedule an
appointment for a personal consultation.
- - Service center locations will be staffed with professionals focused
on educating consumers about our products and services as well as
establishing personal relationships with local customers in their
community.
- - Each service center location will be structured to incorporate our
efficient operational procedures to minimize overhead costs.
- - Customer names will be maintained in our proprietary management
information database to provide us with long-term marketing
opportunities.
Alternative channels of distribution. Over the last two years, we have
made an effort to develop alternative channels of distribution for our
health and beauty-related products. Our Medical Professional Network
and our Direct Sales Network are currently being expanded to provide us
with additional methods of selling our products and services. We have
focused some of our marketing efforts on developing these channels of
distribution because they provide us with the opportunity to control
our own distribution as well as build a loyal customer database.
Medical professionals. We currently distribute our products to over 600
plastic surgery and dermatology professionals in the
United States. These professionals are able to provide our products
directly to their patients as part of their post-operative procedures.
They are also furnished with informational videos and literature to
distribute free of charge to their patients. The patients may purchase
products from their medical professional or they may order products
directly from us via our toll-free numbers. In addition, the patients
have direct access to our trained staff from the privacy of their homes
during their recovery period.
Direct sales. We began test marketing a new consumer distributor
network in March of 1999. The marketing program has focused on
evaluating whether there are customers within our database who would be
interested in distributing our products and services. If successful,
this may represent an opportunity for us to develop a means to generate
new customers through distributors utilizing our HealthandBeauty.com
web site to transact e-commerce. It is anticipated that expansion of
our consumer distributor network will be coordinated with openings of
new service center locations.
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 marketing materials in Spanish targeted for
the Hispanic consumer market and have begun negotiations with wholesale
accounts in the United States who may market our products in Central
and South America.
Employing 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. This operating infrastructure includes an internal
professional business management team, combined with specialized vendor
relationships. Its effectiveness is based on our management information
systems which enable us to handle toll-free calls, order taking,
electronic credit card processing, product fulfillment and shipping,
customer service inquiries and financial reporting.
We anticipate that as sales volume increases through marketing
partnerships, joint ventures and strategic acquisitions of other health
and beauty-related products, we will use our specialized operating
infrastructure over larger volumes of business to reduce our marginal
costs per order. As we expand our web site marketing efforts and
realize sales volume increases, we will need to adapt our current
management information systems and develop new management information
systems to address the particular intricacies of conducting e-commerce.
Management information systems. We have developed a proprietary
management information system that integrates our order entry, credit
card processing and product fulfillment operations. We believe that
this system enables us to operate efficiently and provide enhanced
customer service. The key features of this management information
system are its ability to:
- - rapidly process credit card orders;
- - increase the efficiency of the fulfillment and the shipping process;
- - provide customer service representatives with real-time information;
and
- - provide accurate reporting for marketing and financial analysis.
Proprietary customer database. Our proprietary customer database
contains a profile of each customer detailing such information as
products ordered, mailing address, telephone number, credit card number
and payment history. The management information system provides access
to the records of prior contacts with our customers, including relevant
personal information on product usage, order history, marketing source
codes and notes of prior contact with the customer made by phone, fax
or mail. After an order has been entered into the database by a
customer service representative or by electronic file transfer from one
of several telemarketing vendors, the order is processed, invoiced and
printed for product fulfillment.
Electronic credit card processing. The management information system
downloads orders daily from several inbound telemarketing firms located
throughout the country. We then utilize the services of a credit card
processor to verify and authorize the customer's credit card charges.
The verified credit card information is transmitted back from the
credit card processor and automatically updates our customer database.
The funds are then electronically transferred to our bank accounts,
typically within three business days.
Customer service. We believe that our ability to establish and
maintain long-term relationships with our customers and encourage
repeat purchases depends on the satisfaction of our customers.
Delivering high quality, courteous customer service has been a
cornerstone of our strategy since inception. We believe that we will
increase our ability to attract and retain customers by consistently
providing them education on the benefits of superior products,
responding quickly to their requests and offering individualized
service.
Inbound telemarketing. A successful direct response television
campaign can generate from 50 to 2,000 calls per television commercial.
The services of a large inbound telemarketing call center are required
to handle this volume of calls. We have contracted with inbound
telemarketing vendors to ensure that when customer call volumes are
highest, customer information and orders can be captured successfully.
We have also enlisted the services of inbound telemarketing providers
for callers who require Spanish speaking operators.
Customer service. We provide our customers with toll-free telephone
access to our 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. This system provides customer order history, product
availability, shipping dates and promotional offers. The
representatives are authorized to resolve most customer service issues
immediately, including technical product advice, billing questions,
product exchanges and issuing return authorizations.
Product fulfillment. Cost-effective fulfillment is accomplished
through management of the costs associated with product manufacturing,
assembly and shipment. Maintaining in-house warehouse and shipping
facilities enables our staff to receive product shipments, maintain
inventory, pack orders, adhere to company quality control standards and
process customized product orders.
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
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 which 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 special
request.
Growing our loyal customer database
We believe that building a large and loyal customer base is critical to
our long term growth strategy. We grow our customer database through
direct response name acquisition advertising campaigns using various
forms of mass market advertising such as television, the Internet,
radio, direct mail and print advertising. We are building the sales
and productivity of our customer database by focusing on expanding
product offerings, developing additional channels of distribution, use
of catalog mailings and forming strategic marketing alliances with
companies that manufacture complementary health and beauty-related
products.
Build life-long customer relationships. Our marketing strategy is
based upon building a database of life-long customers that will enable
us to develop profitable national consumer brands in the health and
beauty-related industries. Critical to achieving this objective are
the introduction of high quality products, excellent customer service,
an efficient operating infrastructure and effective channels of
distribution. This customer database will also enable us to cost
effectively test market new health and beauty-related products and
services developed from our strategic marketing alliances with other
companies.
Market unique quality products and services. In order to continue to
expand our customer database, we actively search for entrepreneurs with
unique, high quality health and beauty-related products and services.
We currently provide our direct response marketing services to several
clients in the health and beauty-related industry. The primary product
we have marketed is the Linda Seidel Natural Cover line of cosmetics.
These marketing efforts have produced a database of loyal, repeat
customers who regularly purchase the Linda Seidel cosmetic brand.
Developing marketing relationships with health and beauty-related
companies.
The direct marketing industry in the United States is highly
fragmented, consisting of thousands of companies, many of which are
undercapitalized and lack the operational infrastructure and management
expertise to effectively grow their businesses. In addition to our own
internal growth in net sales, we believe we are well-positioned to
pursue partnerships, joint ventures and acquisitions of other
entrepreneurial companies marketing health and beauty-related products
and services. To successfully establish these business relationships,
we will need to find companies that:
- - will benefit from utilizing direct response marketing;
- - possess a quality product or service with a unique marketing
platform;
- - provide exceptional customer service; and
- - present substantial opportunity for sales growth.
We believe that HBD will be an attractive marketing partner for many
entrepreneurial companies because of the experience our management team
has gained by successfully building the Linda Seidel Natural Cover
brand from a local family business to a nationally recognized line of
cosmetics. Additionally, we can offer entrepreneurs:
- - access to various direct to consumer channels of distribution;
- - direct response marketing expertise;
- - a vertically integrated operating infrastructure;
- - investment capital necessary to develop, advertise and build their
products; and
- - the ability to cross-market their products to our existing customer
database.
One of our principle objectives is to build an equity portfolio of
unique health and beauty-related investments. Outlined below is a
description of our Linda Seidel Natural Cover line of cosmetics, our
first investment. In 1994 we invested approximately $850,000 for the
ownership rights to market this line of cosmetic products. When we
acquired these rights, the entrepreneurs had been in business for
approximately fifteen years and had annual sales of less than $400,000.
Through implementation of our direct response marketing techniques, we
have built their business to over $4,000,000 in annual sales for both
calendar years 1997 and 1998. We believe that the expansion of the
Natural Cover product line is indicative of what we might experience
with other equity investments in entrepreneurial companies, therefore,
an overview of the Linda Seidel cosmetics brand has been included as an
example.
LINDA SEIDEL COSMETICS BRAND
Strategy for marketing Linda Seidel Natural Cover
Linda Seidel. The credibility and expertise of Linda Seidel is central
to the marketing strategy and positioning of the Natural Cover brand of
cosmetics. As the creator of Natural Cover, Ms. Seidel is widely
recognized in the cosmetics industry as the pioneer in the development
and application of corrective makeup. Ms. Seidel has conducted training
seminars and lectures at medical institutions such as Johns Hopkins
Hospital and the Mayo Clinic. As a world renowned makeup artist and co-
author of the book The Art of Corrective Makeup, Ms. Seidel's advice
and expertise has been the focus of articles in major magazines such as
Vogue, Glamour, People, Cosmopolitan and McCall's. In addition, the
unique relationship she forms with her clients has been featured in
interviews with Oprah Winfrey, Sally Jessy Raphael and Maury Povich.
Natural Cover products. The second element of our marketing strategy
was to emphasize the performance qualities of the cosmetic products.
Natural Cover is a cosmetic foundation that was initially developed for
use by plastic surgeons and others within the medical community
throughout the United States. This unique foundation was created to
completely conceal any skin discoloration, perfectly match any skin
tone and look natural on the skin. Its highly concentrated formula is
hypoallergenic, non-irritating and gentle enough to conceal bruising
associated with sensitive, post-operative skin. When combined with
Performing Powder, Natural Cover is 100% waterproof and durable enough
to last all day without the need for touchups, an attribute that is
desirable to the average cosmetic consumer. The Linda Seidel product
line consists of three main product categories: Natural Cover
foundations, Glamour Enhancers and a Skin Conditioning System.
Demonstrable customer testimonials. The third component of the
marketing strategy was client testimonials. One of the primary reasons
for the success of Linda Seidel's direct response advertising campaign
has been the emotional impact and credibility of her client
testimonials. The ability to demonstrate Natural Cover's performance,
supported by real-life testimonials, provides HBD with a unique, cost-
effective marketing message. The consistent, simple message conveyed by
each testimonial to the targeted customer is: "if Natural Cover works
for me, it will work for you."
The target audience for Natural Cover
The typical Linda Seidel customer is female, perceives that she has a
minor skin imperfection such as dark under eye circles, sun damage, age
spots or a blotchy uneven skin tone which she would like to conceal. A
sampling of our current customer database suggests that over 90% of
these women purchase Linda Seidel's products using a credit card. Our
customers represents all major ethnic backgrounds and all fifty states,
with the highest concentrations in California, Texas and Florida.
In addition to the general market, one niche group of customers our
marketing efforts have targeted are Hispanic women. The Natural Cover
shade selection provides many options for the wide variety of Hispanic
skin tones, ranging from very light olive shades to the deepest brown
shades. The product line also performs well in the demanding hot
weather conditions of Texas, Florida, California, New Mexico and
Arizona, where a significant portion of the Hispanic population
resides. We have also developed a marketing campaign directed toward
medical professionals providing cosmetic laser surgery. These
professionals either provide or refer the Natural Cover line of
cosmetics for their patients.
Channels of distribution
Direct response. We utilize various forms of mass market advertising
media such as television, direct mail, the Internet, radio, print and
catalogs to generate new customer orders. To date, most new customer
orders have been generated through two thirty-minute television
infomercials. The primary benefit of the direct response channel of
distribution is the ownership and control of the customer names that
are maintained in a proprietary database and available for cost-
effective secondary marketing efforts.
Hispanic distribution. Our Hispanic distribution strategy targets
Spanish speaking customers via direct response marketing. We believe
this niche market represents a viable and profitable channel of
distribution because of the combination of higher per capita usage of
cosmetics by Hispanic women, limited direct response advertising by
competitors and the growth in spending power by this demographic group.
During 1998, HBD began to market to the Hispanic consumer. These
marketing efforts have included production of two television
commercials, direct mail pieces in Spanish and the implementation of
specialized inbound telemarketing programs to process new customer
orders. During 1999, we will expand our direct response marketing
campaign in the United States. Beginning in 2000, we plan to use these
efforts in the United States as a platform to market the Linda Seidel
product line in countries throughout Central and South America via
wholesale accounts.
Medical distribution. We distribute products through a network of
plastic surgeons and dermatologists throughout the United States.
During 1997, we launched a comprehensive outbound telemarketing and
direct mail campaign that targeted the growing cosmetic laser surgery
industry within the medical community. As of December 1998, the
marketing campaign has resulted in over 600 new medical professionals
either distributing or referring the Natural Cover line of cosmetics.
The benefits to the medical professional include a source of
incremental revenue, cosmetics products that effectively conceal post-
operative effects, and access to the company's trained makeup artists.
The medical channel of distribution offers several opportunities for
HBD. The first includes a continual source of new customers that may
be developed into long-term reorder customers. Secondly, support from
the established medical community is utilized throughout HBD's
marketing materials to build upon the credibility of Linda Seidel and
the Natural Cover line of cosmetics. Lastly, as the traditional lines
between the cosmetic industry and medical industry continue to become
blurred, the Linda Seidel brand name will be positioned to effectively
take advantage of the shift in consumer demand.
Service centers. Our first service center location opened in late 1997
as an extension to our existing facilities. This service center
utilizes approximately 600 square feet of space which includes a
professional makeup studio for personalized client consultations by
appointment and a product testing area where customers can freely
sample our cosmetic products. Two new locations are scheduled to be
secured by year end 1999.
International sales. Natural Cover is sold to wholesale accounts in
the United States who resell in Canada, Taiwan and Australia. We are
contacted periodically by similar firms. We evaluate these business
opportunities on a case-by-case basis.
Catalog. Each of the previously described Linda Seidel channels of
distribution provide initial customer name acquisition. Once a
customer purchases the Natural Cover line of products, their name, and
all relevant information concerning their account including address,
telephone number and credit card information, are logged into a
proprietary customer database. This information provides the backbone
for our catalog reorder business. Each new customer is provided with
one of our catalogs which details the extensive product line. As we
build our multiple channels of distribution, this annuity reorder
business should continue to grow and contribute significantly in terms
of both revenues and operating profitability. Due to the operating
efficiencies within the existing infrastructure and the minimal
incremental marketing costs associated with each catalogue reorder, the
reorder business represents a valuable source of operating profits.
Competition
We market and distribute Linda Seidel Natural Cover line of cosmetics,
which competes in the industry segment known as "corrective makeup."
This product line competes in an industry that is fragmented and highly
competitive. Participants in this industry compete primarily on price,
quality, brand name recognition, image, product availability and
product performance. One competitor, Derma Blend, distributes its
products through various well-known retailers. There are several other
companies in this segment that compete directly with the Linda Seidel
brand. In addition, major cosmetic companies all provide a "concealer"
line of products for minor skin imperfections. Any of them, or some
other business, could quickly become a direct competitor. Increased
competition may result in price reductions, reduced margins or loss of
market share.
Employees
As of June 30, 1999, the company 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 the
company's 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
Our products and marketing and advertising practices are subject to
regulation by various federal, state and local regulatory authorities,
including the Federal Trade Commission, Federal Communications
Commission and the U.S. Food and Drug Administration. We are also
subject to other federal, state, and local regulatory requirements,
including federal, state and local environmental regulations issued by
the U.S. Occupational Safety and Health Administration. As we begin
to market a broader variety of products and services, we may become
subject to regulation by agencies other than those listed above. The
effect of an alleged violation of any of these regulations could cause
a major change in or discontinuance of our business. Since we
currently do no manufacturing, processing or packaging, we have not
encountered any significant environmental law compliance issues.
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 such
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
respective 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 approximately forty hours per week
for the Company. 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
undergraduate 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 iss 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. In this capacity, he acts as an advisor to the Company. 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 Management Information Systems Director
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.
In this capacity 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 Hispanic Marketing Director 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 Assistant Vice President in
the commercial real estate lending division. In such 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 1997 and
received his MBA from George Washington University in 1995.
Linda Seidel is a Director of HBD. Ms. Seidel has been employed full-
time by the Company 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 the over 25 years and is a
licensed cosmetician.
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 and have reserved 1,000,000 shares
for issuance on exercise of these options. 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
The Company has not paid any of its 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 the company's acting chief executive officer
since 1994. His management services, and the management services of
other shareholders of the General Partner of Venture Media Limited
Partnership, have been provided in return for distributions made by the
Company. During 1998 and 1997 the distributions to Venture Media
Limited Partnership were $243,535 and $24,336, respectively. All
partners received distributions in proportion to their partnership
interest. Other than through this partnership interest, 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 various partners of and advisors to
Venture Media Limited Partnership who have provided management services
to the company in the past. Through this agreement, they will continue
to provide executive management services to the company in the future.
HBD will pay Direct Marketing Services Group, LLC $175,000 for services
to be provided for the twelve (12) 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 both parties. The nature of services to be provided and the
compensation for those services will be determined and approved by
directors of HBD who are independent of Direct Marketing Services
Group, LLC.
Employment agreements
The Company has an employment services agreement with Ms. Linda Seidel,
a director of HBD. It is the Company's 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 from the company in the form of a base salary of $60,000
per year, appearance fees for seminars and makeup consultation fees.
Ms. Seidel, through her management company, Corky, Inc., also owns
350,000 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
A total of 7,000,000 shares will be issued in exchange for all the
partners' right in the predecessor business, Transforming Cosmetics,
upon sale of the minimum number of shares in this offering. The
partners' names and the shares to be issued to them are: Venture Media
Limited Partnership, 6,335,000 shares, Corky, Inc., 350,000 shares and
World Net Communications, LLC, 315,000 shares. Of the shares
distributed to Venture Media Limited Partnership, 1,522,784 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
NationsBank which may result in the release of personal guarantees of
the founders.
During 1998 and 1997, distributions in the amounts of $243,535 and
$24,336, respectively, were made by the Company to Venture Media
Limited Partnership. Executive management services will be provided to
the Company 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
management services to the Company 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, the Company made accrued royalty payments to Ms. Linda
Seidel of $80,000 and purchased certain direct response media buying
assets from the partners of Venture Media Limited Partnership for
$200,000. During 1997, the Company 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 the
Company's $1,000,000 revolving line of credit with NationsBank. In
addition, various limited partners of Venture Media Limited Partnership
have historically provided vendor services to the Company. These
vendor services have included computer design, video production,
leasehold improvements, short-term financing, legal counsel, office
cleaning and printing. In its financial statements, the Company has
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 the Company as those available from non-
related parties.
The Company was 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 the Company 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 the
Company's expense, to the Company's or independent legal counsel.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this prospectus,
certain information regarding the ownership of HBD's common stock. The
table is based on the sale of the maximum number of shares assuming the
acquisition of the general partnership. If the minimum number of shares
are sold during this offering, the percentage ownership of any
shareholder would increase by less than 10% of the amount shown in the
table. The information is provided with respect to:
- - each person who is known by HBD to own beneficially more than five
(5%) percent of HBD's common stock;
- - each of HBD's officers and directors; and
- - all officers and directors as a group.
Except as otherwise indicated below, to the knowledge of HBD, each
person listed below has sole voting power and investment power with
respect to the common stock beneficially owned by such person.
Shares Owned Before Shares Owned After
Offering Offering
Name and Address of Number of Percent Number of Percent
Beneficial Owner Shares Owned Owned Shares Owned Owned
- ------------------- ------------ --------- ------------- ---------
Venture Media Limited
Partnership (1) 4,812,216 68.75% 4,812,216 64.16%
3406 Fielding Road
Baltimore, MD 21208
Corky, Inc. (2) 350,000 5.00% 350,000 4.67%
2311 Falls Gable Lane
Baltimore, MD 21209
Alejandro Mendoza (3) 36,773 0.53% 36,773 0.53%
Roberto del Rio 1839
Providencia, Santiago,
Chile
Vipul Munjal (4) 16,083 0.23% 16,083 0.21%
29 Winter Berry Court
Hunt Valley, MD 21030
Marion Jacques (5) 16,083 0.23% 16,083 0.21%
7200 SW 110th Terrace
Pinecrest, FL 33156
Steven Zwagil (6) 14,911 0.21% 14,911 0.20%
2215 Sugarcone Road
Baltimore, MD 21209
Todd Foreman (7) 34,195 0.49% 34,195 0.46%
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) 5,280,263 75.43% 5,280,263 70.40%
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.They are the only
principals holding in excess of 5%.
(2) Ms. Linda Seidel is the president and sole 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 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
HealthandBeautyDirect.com.
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
7,000,000 shares of common stock will be issued in exchange for the
contribution of the business. These shares will be held by 40 persons
of record. There will be _,___,___ shares of common stock outstanding
if the minimum is sold in this offering and 7,500,000 shares
outstanding if the maximum is sold.
The holders of common stock are entitled to one vote per share on
allmatters 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 prreferred 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, under certain
circumstances, 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 the company's
independent directors who do not have an interest in the transaction
and who have access, at the company's expense, to the company'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 eengaging 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 of HBD. 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 beeen no public market for HBD's
securities. The shares have been approved for listing on the Chicago
Stock Exchange after completion of this offering. 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 _,___,___ shares of
common stock outstanding if the minimum weere sold and 7,500,000 if the
maximum were 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, as that term is
defined in Rule 144 under the Securities Act. Any shares acquired by
an affiliate will be subject to the volume limitations and other
restrictions of Rule 144 described below. An aggregate of 5,595,263
shares of common stock held by existing shareholders of HBD upon
completion of the offering will be "restricted securities" as that
phrase is defined in Rule 144, 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 pursuant to Rule 144(k) without regard to
the limitations described above. Affiliates must always sell pursuant
to 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 principal 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 5,477,216 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 (r)% of
these shares may be sold or transferred during each calendar quarter.
PLAN OF DISTRIBUTION
We propose to offer and sell the shares directly to members of the
public residing in selected states. Announcements of this offering, in
the form prescribed by Rule 134 of the Securities Act, will be
communicated to selected persons who are customers or have other
relationships with HBD or its officers and who reside in certain parts
of the United States. We will deliver a copy of this prospectus to
those who request it, together with the share purchase order. Assuming
the maximum share price, all shares will be sold at the public offering
price of $12.00 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 impound agreements.
HBD will effect offers and sales of shares only through Brian M.
Fraidin, its chief executive officer. 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," as
defined in the Exchange Act, solely by reason of participation in this
offering, because:
1. he is not subject to any of the statutory disqualifications
set forth 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 (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 the company's 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.
Among the factors they 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 minimum/maximum basis subject to
subscription and payment for not less than __,___ shares (the
"minimum") and not more than 500,000 shares (the "maximum"). All
subscription payments will be deposited into an escrow account at
NationsBank. 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 500,000 shares. This offering will end
upon the earlier of the following: the sale of the maximum amount,
_______, 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. The three principal
shareholders of the Company may purchase shares in this offering and
the proceeds from those purchases may be used for the purpose of
completing sale of the minimum. 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."
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 the Company 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
HBD has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933,
as amended, with respect to the securities being offered hereby. This
prospectus does not contain all of the information set forth in the
registration statement and the attached exhibits. For further
information about HBD and the securities offered, reference is made to
the registration statement and to the exhibits filed. The statements
contained in this prospectus as to 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.
set forth above. 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.
INDEX TO FINANCIAL STATEMENTS
PAGE
Table of Contents F-1
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Income and Partners' Capital F-4
Statements of Cash Flows F-5
Notes to Financial Statements F6-11
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.
Naden/Lean, LLC
Baltimore, Maryland
February 5, 1999
F-2
TRANSFORMING COSMETICS
BALANCE SHEETS
AS OF
ASSETS
December 31, June 30,
1997 1998 1999
(unaudited)
CURRENT ASSETS
Cash $ 226,956 $ 634,108 $ 579,263
Accounts receivable:
Trade - net 312,300 123,467 34,090
Credit card processor 151,328 53,185 29,103
Employees and affiliates 26,861 87,974 55,689
Inventory 687,246 724,355 679,165
Prepaid expenses 136,937 70,387 61,639
Total Current Assets 1,541,628 1,693,476 1,438,949
PROPERTY, PLANT
& EQUIPMENT - AT COST NET 182,451 210,135 197,189
OTHER ASSETS
Marketing materials
& other - net 338,449 453,560 422,043
Direct response advertising 256,927 512,538 460,467
Deposits 17,161 13,661 21,668
Total Other Assets 612,537 979,759 904,178
TOTAL ASSETS $2,336,616 $2,883,370 $2,540,316
LIABILITIES AND PARTNERS' CAPITAL
December 31, June 30,
1997 1998 1999
(unaudited)
CURRENT LIABILITIES
Accounts payable
& accrued expenses $662,820 $562,505 $710,520
Notes payable 5,026 - 7,941
Advanced client media deposits - 541,983 123,033
Obligations under capital lease 8,084 9,842 -
Due to affiliates 80,000 - -
Reserve for sales refunds 228,424 70,293 20,000
Total Current Liabilities 984,354 1,184,623 861,494
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 1,187,401 861,494
PARTNERS' CAPITAL 1,330,695 1,695,969 1,678,822
TOTAL LIABILITIES
& PARTNERS' CAPITAL $2,336,616 $2,883,370 $2,540,316
See Independent Auditor's Report and Accompanying Notes.
F-3
TRANSFORMING COSMETICS
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
FOR THE PERIODS INDICATED
Years ended Six Months
December 31, ended June 30,
1997 1998 1998 1999
(unaudited) (unaudited)
SALES - net of
sales refunds $7,687,626 $9,552,994 $5,380,649 $5,680,455
COST OF GOODS SOLD 5,631,565 7,429,250 4,362,401 4,930,658
GROSS PROFIT 2,056,061 2,123,744 1,018,248 749,797
OPERATING EXPENSES
Selling 1,004,219 949,657 508,157 309,898
General &
administrative 713,914 571,781 354,252 313,434
TOTAL OPERATING
EXPENSES 1,718,133 1,521,438 862,409 623,332
INCOME FROM OPERATIONS
BEFORE OTHER INCOME
& EXPENSES 337,928 602,306 155,839 126,464
OTHER INCOME AND EXPENSES
Interest income 4,496 698 698 4,912
Gain (Loss) on
disposal of fixed
asset (14,430) 5,805 5,805 -
Miscellaneous income 1,775 - - -
---------- ---------- ---------- --------
TOTAL OTHER INCOME
& EXPENSES (8,159) 6,503 6,503 4,912
NET INCOME 329,769 608,809 162,342 131,376
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) (148,523)
PARTNERS' CAPITAL
- END OF YEAR $1,330,695 $1,695,969 $1,249,502 $1,678,822
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, June 30,
1997 1998 1998 1999
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $329,769 $608,809 $162,342 $131,376
Adjustments to reconcile
net income to net cash
Provided by operating
activities:
Depreciation
& amortization 116,152 278,457 167,486 187,393
Provision for bad debts 37,038 33,175 16,588 10,829
(Gain)Loss on disposal
of fixed asset 14,430 (5,805) (5,805) -
(Increase) decrease
in operating assets:
Accounts receivable (343,594) 253,801 117,343 102,630
Inventory (143,564) (37,109) (174,243) 45,190
Prepaid expenses (3,342) 66,550 121,443 8,748
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) 482,547 148,015
Advanced client
media deposits - 541,983 226,231 (418,950)
Due to affiliates - (80,000) (80,000) -
Reserve for sales
refunds - (158,131) (25,521) (50,293)
Other liabilities 121,734 - - -
---------- ------------ -------- ----------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 511,292 1,404,915 1,019,216 156,931
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property
and equipment (102,102) (90,624) (19,061) (20,201)
Proceeds from disposal
of fixed asset - 16,878 16,878 -
Investment in
marketing materials (267,918) (203,933) (140,528) (16,659)
Investment in direct
response advertising (256,927) (393,379) (393,425) (54,000)
Net cash advanced to
employees/affiliates 474,230 (61,113) 473 32,285
NET CASH USED IN
INVESTING ACTIVITIES (152,717) (732,171) (535,663) (58,574)
CASH FLOWS FROM
FINANCING ACTIVITIES
Distributions (24,336) (243,535) (243,535) (148,523)
Net cash paid
to affiliates (91,043) - - -
Principal payments
on notes payable (10,712) (13,973) (13,973) 7,941
Principal payments
on obligations
under capital leases (5,528) (8,084) (3,843) (12,620)
NET CASH USED IN
FINANCING ACTIVITIES (131,619) (265,592) (261,351) (153,202)
NET INCREASE IN CASH
& CASH EQUIVALENTS 226,956 407,152 222,202 (54,845)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR - 226,956 226,956 634,108
----------- ------------ ------------ ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $226,956 $634,108 $449,158 $579,263
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 receivable. The allowance 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-6
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 six
months ended June 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 six months ended
June 30, 1998 and 1999 are not necessarily indicative of the results to
be expected for the entire year.
F-7
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 $182,451 $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-8
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
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 and
Indemnification for Securities Act 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 aso 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 pursuant to 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 pursuant to Item 601 of Regulation S-B.
Exhibit
Number 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 this Pre-Effective Amendment #1
** Filed previously with SB-2
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 pursuant to 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 1 to the Registration Statement to
be signed on its behalf by the undersigned, in the County of Baltimore,
State of Maryland, on July 28, 1999.
HealthandBeautyDirect.com, Inc.
By
Brian M. Fraidin, Chief Executive Officer & Director
In accordance with the requirements of the Securities Act of 1933, this
Pre-Effective Amendment Number 1 to the Registration Statement was
signed by the following persons in the capacities and on the dates
stated.
Signature Title Date
Brian M. Fraidin Chairman of the Board July 28, 1999
of Directors
Brian M. Fraidin Principal Executive Officer July 28, 1999
and Director
Brian M. Fraidin Principal Financial Officer July 28, 1999
Vipul Munjal Principal Accounting Officer July 28, 1999
Steven Zwagil Director July 28, 1999
Linda Seidel Director July 28, 1999
Each person whose signature appears below appoints Brian M. Fraidin his
or her attorney-in-fact, with full power of substitution and
resubstitution, to sign any and all amendments, including post-
effective amendments, to this Pre-Effective Amendment Number 1 to the
Registration Statement on Form SB-2 of HealthandBeautyDirect.com, Inc.,
and to file them, with all their exhibits and other related documents,
with the Securities and Exchange Commission, ratifying and confirming
all that their attorney-in-fact and agent or his or her substitute or
substitutes may lawfully do or cause to be done by virtue of this
appointment.
David Dougherty Director July 28, 1999
Todd Foreman Director July 28, 1999
II-1
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made as
of the 28th day of July, 1999 by and between Direct Marketing Services
Group, LLC, a Maryland Limited Liability Company (the "Manager"), and
HealthandBeautyDirect.com, Inc., a Delaware corporation (the
"Company").
WHEREAS, the Members of the Manager consist of shareholders of
the general partner of Venture Media Limited Partnership, the Company's
majority shareholder, and other consultants/advisors to the Company's
predecessor partnership;
WHEREAS the Members of the Manager have heretofore provided
certain accounting, marketing, strategic planning and management
services to the Company's predecessor partnership and received
distributions therefor pursuant to informal arrangements;
WHEREAS, in connection with the proposed initial public offering
of the Company (the "Offering"), the parties desire to formalize a
management services relationship and establish a formal compensation
structure;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, and for other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Term
This Agreement shall become effective upon the closing of the
Offering and shall initially continue until the first anniversary of
such closing. Thereafter, this Agreement shall remain in effect for
successive one-year periods unless and until either party terminates
this Agreement pursuant to Section 4 hereof.
2. Appointment, Acceptance and Duties
The Company hereby retains the Manager to provide the Company and
its subsidiaries and affiliates with accounting, marketing, strategic
planning and management services. In performing the foregoing
services, the Manager shall carry out such duties and exercise such
powers pertaining to the management and operations of the Company as
may be determined from time to time by the Board of Directors of the
Company.
3. Management Fee
(a) For the provision of the services herein set forth, subject
to review as hereinafter provided, the Company shall pay to the Manager
in the aggregate a fee at an annual rate of $175,000. During the term
of this Agreement, the Company and the Manager agree that on or before
the anniversary of the closing of the Offering, and thereafter before
each subsequent year anniversary, the annual fee shall be reviewed by
the Manager and the Board of Directors of the Company with a view to
ensuring that the Manager's fee is fair and reasonable considering the
services to be provided.
(b) The Manager shall submit to the Company, quarterly in
arrears, an accurate written record (including receipts) of its
reasonable expenses actually and properly incurred by it in connection
with carrying out its duties hereunder. The Company agrees that it
shall reimburse the Manager for such reasonable expenses no later than
the 15th day of the month following the quarter in which the Manager
submitted its request.
4. Termination
Notwithstanding anything to the contrary herein, this Agreement
may be terminated by either party upon ninety (90) days prior written
notice.
5. Governing Law
This Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland applicable to contracts to be
performed entirely within the State of Maryland.
6. No Assignment
This Agreement may not be assigned without the prior written
consent of all of the parties hereto.
7. Successors
This Agreement shall be binding on and inure to the benefit of
the successors and permitted assigns of the Company and the Manager.
8. Amendments
This Agreement may only be amended by instrument in writing
executed by all of the parties hereto.
IN WITNESS THEREOF the parties have executed this Agreement on
the date first written above.
Direct Marketing Services Group, LLC
By: Brian Fraidin, Member
HEALTHANDBEAUTYDIRECT.COM, INC.
By: Vipul Munjal, Chief Accounting Officer
IMPOUND AGREEMENT
This agreement dated July , 1999 is between NationsBank, N.A.
(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 500,000 shares of its Common Stock (the
"Shares") at a price of $12.00 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.
NationsBank, N.A. 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
"NationsBank, N.A. 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 $_________ in
deposited funds (the "Minimum"), (b) one year after the
commencement of the Offering, 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
$______ 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 termination of the Impound Period, the funda 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 as follows:
HealthandBeautyDirect.com, Inc.
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:
NationsBank, N.A.
Attn:
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.
NationsBank, N.A.
By:
HealthandBeautyDirect.com, Inc.
By: Brian M. Fraidin
[title] Chief Executive Officer
Page 4
LOCK-IN AGREEMENT
I. This Promotional Shares Lock-In Agreement ("Agreement"), which was
entered into on the ____ day of ______, 1999, by and between
HealthandBeautyDirect.com ("Issuer"), whose principal place of
business is located in Baltimore, Maryland, and Venture Media Limited
Partnership, Corky, Inc. and World Net Communications, LLC., ("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 ______ (insert date of termination of the
Agreement) 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.
By: Brian M. Fraidin, Chief Executive Officer
By: Vipul Munjal, Chief Accounting Officer
Venture Media Limited Partnership
By: Brian M. Fraidin, Managing Partner and President
Corky, Inc.
By: Linda Seidel, President
World Net Communications, LLC.
By: Michael Seidel, President
Whiteford, Taylor & Preston, LLP
Seven Saint Paul Street
Baltimore, Maryland 21202-1626
410 347-8700
Fax 410 752-7092
www.wtplaw.com
July 28, 1999
Board of Directors
HealthandBeautyDirect.com, Inc.
2328 West Joppa Road, Suite 100
Baltimore, Maryland 21093
Ladies and Gentlemen:
Re: Registration Statement on Form SB-2
Registration No. 333-78549
Ladies and Gentlemen:
This opinion is being furnished in connection with the
Registration Statement on Form SB-2 (Registration No. 333-78549) of
HealthandBeautyDirect.com (the "Company"), under the Securities Act of
1933, as amended, for the registration of shares of common stock, par
value $0.01 (the "Shares"). The Registration Statement filed May 14,
1999, as amended by Amendment No. 1 thereto filed concurrently
herewith, is referred to herein as the "Registration Statement."
As counsel for the Company, we have examined and are familiar
with the following:
1. Certificate of Amendment and Restatement of the
Certificate of Incorporation of the Company as filed in the Office of
the Secretary of State of the State of Delaware;
2. Bylaws of the Company;
3. The proceedings of the board of directors of the Company
in connection with or with respect to the issuance and sale of the
Shares to be sold by the Company to the public; and
4. Such other documents, Company records, and matters of
law as we deemed to be pertinent.
Based upon our examination of such documents and our
familiarity with such proceedings, it is our opinion that:
a. The Company has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware.
Board of Directors
July 28, 1999
Page 2
b. The Shares covered by the Registration Statement to be
sold by the Company will, when the price therefor is approved by the
Board of Directors of the Company or the committee to which it has
delegated pricing authority, and when issued and delivered against
payment of the consideration therefor, as described in the Registration
Statement, be duly and validly issued, fully paid and non-assessable.
We hereby consent to the inclusion of this opinion as Exhibit
5.1 in the Registration Statement and to the reference to this firm
under the caption "Legal Matters" in the Prospectus. In giving this
consent we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules or regulations of the
Securities Exchange Commission promulgated thereunder.
Very truly yours,
WHITEFORD, TAYLOR & PRESTON L.L.P.
/s/ Whiteford, Taylor & Preston L.L.P.
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 1 to the Registration Statement to
be signed on its behalf by the undersigned, in the County of Baltimore,
State of Maryland, on July 28, 1999.
HealthandBeautyDirect.com, Inc.
By: Brian M. Fraidin,
Chief Executive Officer & Director
In accordance with the requirements of the Securities Act of 1933, this
Pre-Effective Amendment Number 1 to the Registration Statement was
signed by the following persons in the capacities and on the dates
stated.
Signature Title Date
Brian M. Fraidin Chairman of the Board of Directors July 28, 1999
Brian M. Fraidin Principal Executive Officer July 28, 1999
and Director
Brian M. Fraidin Principal Financial Officer July 28, 1999
Vipul Munjal Principal Accounting Officer July 28, 1999
Steven Zwagil Director July 28, 1999
Linda Seidel Director July 28, 1999
Each person whose signature appears below appoints Brian M. Fraidin his
or her attorney-in-fact, with full power of substitution and
resubstitution, to sign any and all amendments, including post-effective
amendments, to this Pre-Effective Amendment Number 1 to the
Registration Statement on Form SB-2 of HealthandBeautyDirect.com, Inc., and
to file them, with all their exhibits and other related documents, with the
Securities and Exchange Commission, ratifying and confirming all that their
attorney-in-fact and agent or his or her substitute or substitutes may
lawfully do or cause to be done by virtue of this appointment.
David Dougherty Director July 28, 1999
Todd Foreman Director July 28, 1999
II-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
company's financial statements for the period ended June 30 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 579,263
<SECURITIES> 0
<RECEIVABLES> 126,230
<ALLOWANCES> 7,348
<INVENTORY> 679,165
<CURRENT-ASSETS> 1,438,949
<PP&E> 197,189
<DEPRECIATION> 20,496
<TOTAL-ASSETS> 2,540,316
<CURRENT-LIABILITIES> 861,494
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,678,822
<TOTAL-LIABILITY-AND-EQUITY> 2,540,316
<SALES> 0
<TOTAL-REVENUES> 5,680,455
<CGS> 4,930,658
<TOTAL-COSTS> 623,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,912
<INCOME-PRETAX> 131,376
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131,376
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
